ANDOVER BANCORP INC, 10-K405, 1997-03-14

ANDOVER BANCORP INC
10-K405, 1997-03-14
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, 1996
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 aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on March 3, 1997 as reported by NASDAQ, was $144,000,976.

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

Class: Common Stock, par value $0.10 per share
Outstanding as of March 3, 1997: 5,142,892 shares

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Andover Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the 1997 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
Annual
Report
Page

Item 1 Business.......................................................... 2

Item 2 Properties........................................................ 9

Item 3 Legal Proceedings................................................ 10

Item 4 Submission of Matters to a Vote of Security Holders............. 10

Part II

Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 10

Item 6 Selected Financial Data............................................11

Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................12

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

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 1997 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.

Part IV

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

(a)(1) Financial Statements -

Independent Auditors' Report.................................34

Consolidated Balance Sheets as of December 31, 1996 and
1995.........................................................35

Consolidated Statements of Operations for each of the
years ended December 31, 1996, 1995 and 1994.................36

Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 31, 1996, 1995 and
1994.........................................................37

Consolidated Statements of Cash Flows for each of the
years ended December 31, 1996, 1995 and 1994..............38-39

Notes to Consolidated Financial Statements................40-63

<PAGE> 3

(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, 1996.

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 and restated, January 23, 1997.

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).

10.2 Special Termination Agreement between Andover, Andover Bank and Gerald T.
Mulligan, dated May 16, 1991, as amended and restated through January 23,
1997.

10.3 Special Termination Agreement between Andover, Andover Bank and Joseph F.
Casey, dated December 17, 1992, as amended and restated through January 23,
1997.

10.4 Special Termination Agreement between Andover, Andover Bank and Michael J.
Ecker, dated December 17, 1992, as amended and restated through January 23,
1997.

10.5 Special Termination Agreement between Andover, Andover Bank and John R.
Heerwagen, dated December 17, 1992, as amended and restated through January
23, 1997.

10.6 Special Termination Agreement between Andover, Andover Bank and Octavio C.
Bolivar, dated January 24, 1994, as amended and restated, January 23, 1997.

<PAGE> 4

10.7 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).

10.8 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).

10.9 Special Termination Agreement between Andover, Andover Bank and Raymond P.
Smith, dated December 12, 1995, as amended and restated, January 23, 1997.

10.10 Andover Bancorp, Inc. 1995 Stock Incentive Plan, dated February 16, 1995
(incorporated herein by reference to Exhibit 10.11 to Andover's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).

10.11 Deferred Compensation Plan for Directors of Andover Bancorp, Inc. and its
Subsidiaries, effective July 1, 1993, as amended and restated,
February 22, 1996 (incorporated herein be reference to Exhibit 10.12 to
Andover's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).

10.12 Andover Bancorp, Inc. Special Termination Plan, effective January 23,
1997.

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, 1996.

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. 1996 Annual Report, which, except for those portions
expressly incorporated herein by reference, is furnished only for the
information of the Securities and Exchange Commission and is not deemed to
be filed.

21 The Company has two subsidiaries, Andover Bank and 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, 1996.

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 14, 1997 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.

Signature Title Date
- --------- ----- ----

/s/Gerald T. Mulligan President, Chief March 14, 1997
- ------------------------ Executive Officer and
Gerald T. Mulligan Director (Principal
Executive Officer)

/s/Joseph F. Casey Chief Financial Officer March 14, 1997
- ------------------------ and Treasurer (Principal
Joseph F. Casey Financial and Accounting
Officer)

/s/Thomas F. Caffrey Director March 14, 1997
- ------------------------
Thomas F. Caffrey

/s/Naomi A. Gardner Director March 14, 1997
- ------------------------
Naomi A. Gardner

/s/Cornelius J. McCarthy Director March 14, 1997
- ------------------------
Cornelius J. McCarthy

/s/Clifford E. Elias Director March 14, 1997
- ------------------------
Clifford E. Elias

/s/Fred P. Shaheen Director March 14, 1997
- ------------------------
Fred P. Shaheen

<PAGE> 6

EXHIBITS TO FORM 10-K
Andover Bancorp, Inc.
---------------------

EXHIBIT INDEX
-------------

Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------

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

3.2 By-laws of Andover, as amended
and restated, January 23, 1997. 9

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). --

10.2 Special Termination Agreement between
Andover, Andover Bank and Gerald T.
Mulligan, dated May 16, 1991, as amended
and restated through January 23, 1997. 26

<PAGE> 7

10.3 Special Termination Agreement between
Andover, Andover Bank and Joseph F. Casey,
dated December 17, 1992, as amended and
restated through January 23, 1997. 32

10.4 Special Termination Agreement between
Andover, Andover Bank and Michael J.
Ecker, dated December 17, 1992, as
amended and restated through January
23, 1997. 38

10.5 Special Termination Agreement between
Andover, Andover Bank and John R.
Heerwagen, dated December 17, 1992, as
amended and restated through January
23, 1997. 44

10.6 Special Termination Agreement between
Andover, Andover Bank and Octavio C.
Bolivar, dated January 24, 1994 as
amended and restated, January 23, 1997. 50

10.7 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). --

10.8 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). --

10.9 Special Termination Agreement between
Andover, Andover Bank and Raymond P.
Smith, dated December 12, 1995, as
amended and restated, January 23,
1997. 56

10.10 Andover Bancorp, Inc. 1995 Stock
Incentive Plan, dated February 16, 1995
(incorporated herein by reference to
Exhibit 10.11 to Andover's Annual Report
on Form 10-K for the fiscalyear ended
December 31, 1995). --

<PAGE> 8

10.11 Deferred Compensation Plan for Directors
of Andover Bancorp, Inc. and its
Subsidiaries, effective July 1, 1993, as
amended and restated, February 22, 1996
(incorporated herein by reference to
Exhibit 10.12 to Andover's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995). --

10.12 Andover Bancorp, Inc. Special Termination
Plan, effective January 23, 1997. 62

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, 1996. --

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. 1996 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. 66

21 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, 1996. --

23.1 Consent of KPMG Peat Marwick LLP. 142

<PAGE> 1
Exhibit 3.2

ANDOVER BANCORP, INC.

BY-LAWS
(as amended and restated)

ARTICLE I
---------

Stockholders
------------

SECTION 1. ANNUAL MEETING. The annual meeting of stockholders shall be held
on the third Thursday in April in each year after 1987 (or if that be a legal
holiday in the place where the meeting is to be held, on the next succeeding
full business day) at the principal office of the Corporation in Massachusetts
at ten o'clock a.m., unless a different hour, date or place within or without
the United States is fixed by the Board of Directors, the Chairman of the Board,
if one is elected, or the President. If no annual meeting has been held on the
date fixed as above provided, a special meeting in lieu thereof may be held, and
such special meeting shall have, for the purposes of these By-laws or otherwise,
all the force and effect of an annual meeting.

SECTION 2. MATTERS TO BE CONSIDERED AT ANNUAL MEETING. At an annual meeting
of stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the annual
meeting (a) by, or at the direction of, a majority of the Board of Directors
(unless at the time of such action there is an Interested Stockholder, in which
case the affirmative vote of a majority of the Continuing Directors then in
office shall also be required) or (b) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2. For a proposal
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to, or
mailed and received at, the principal executive offices of the Corporation not
less than 60 days nor more than 150 days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments of that meeting to a
later date; provided, however, that if less than 70 days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by the stockholder to be timely must be so delivered or received not later than
the close of business on the 10th day following the earlier of (a) the day on
which such notice of the date of the scheduled annual meeting was mailed or (b)
the day on which public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (a) a brief description of the proposal desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (b) the name and address, as they appear on the
Corporation's stock transfer books, of the stockholder proposing such business
and of the beneficial owners (if any) of the stock registered in such
stockholder's name and the name and address of other stockholders known by such
stockholder to be supporting such proposal, (c) the class and number of shares
of the Corporation's capital stock which are beneficially owned by the
stockholder and beneficial owners (if any) on the date of such stockholder's
notice and by any other stockholders known by such

<PAGE> 2

stockholder to be supporting such proposal on the date of such stockholder's
notice, and (d) any financial interest of the stockholder in such proposal.

If the Board of Directors determines that any stockholder proposal was not
timely made in accordance with the terms of this Section 2, the Board of
Directors may determine that such stockholder proposal will not be acted upon at
the annual meeting. If the Board of Directors, or a designated committee
thereof, determines that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section in any material
respect, the Secretary of the Corporation shall promptly notify such stockholder
of the deficiency in the notice. The stockholder shall have an opportunity to
cure the deficiency by providing additional information to the Secretary within
such period of time, not to exceed 5 days from the date such deficiency notice
is given to the stockholder, as the Board of Directors or such committee shall
reasonably determine. If the deficiency is not cured within such period, or if
the Board of Directors or such committee determines that the additional
information provided by the stockholder, together with the information
previously provided, does not satisfy the requirements of this Section 2 in any
material respect, then the Board of Directors may determine that such
stockholder proposal will not be acted upon at the annual meeting. If there is
an Interested Stockholder, any determination to be made by the Board of
Directors or a designated committee thereof pursuant to the provisions of this
Section 2 shall also require the concurrence of a majority of the Continuing
Directors then in office. The Secretary of the Corporation shall notify a
stockholder in writing whether his proposal has been made in accordance with the
time and informational requirements of this Section 2.

Notwithstanding the procedure set forth in the preceding paragraph, if
neither the Board of Directors nor such committee makes a determination as to
the validity of any stockholder proposal, the presiding officer of the annual
meeting shall determine and declare at the annual meeting whether the
stockholder proposal was made in accordance with the terms of this Section 2. If
the presiding officer determines that a stockholder proposal was made in
accordance with the terms of this Section 2, he shall so declare at the annual
meeting and ballots shall be provided for use at the meeting with respect to any
such proposal. If the presiding officer determines that a stockholder proposal
was not made in accordance with the terms of this Section 2, he shall so declare
at the annual meeting and any such proposal shall not be acted upon at the
annual meeting.

This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, Directors and
committees of the Board of Directors, but in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.

SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders of the
Corporation may be called only in the manner provided in the Certificate of
Incorporation.

<PAGE> 3

SECTION 4. MATTERS TO BE CONSIDERED AT SPECIAL MEETINGS. Only those matters
set forth in the notice of the special meeting may be considered or acted upon
at such special meeting, unless otherwise provided by law.

SECTION 5. NOTICE OF MEETINGS; ADJOURNMENTS. Written notice of annual
meetings of stockholders stating the hour, date and place of such annual meeting
shall be given by the Secretary or an Assistant Secretary (or other person
authorized by these By-laws or by law) not less than 10 days nor more than 60
days before the meeting, to each stockholder entitled to vote thereat or to each
stockholder who, under the Certificate of Incorporation or under these By-laws,
is entitled to such notice, by delivering such notice to him or by mailing it,
postage prepaid, addressed to such stockholder at the address of such
stockholder as it appears on the Corporation's stock transfer books. Such notice
shall be deemed to be delivered when hand delivered to such address or deposited
in the mail so addressed, with postage prepaid.

Notice of special meetings of stockholders shall be given in the same
manner as provided for annual meetings of the stockholders, except that the
written notice of any special meeting shall state the purpose or purposes for
which the meeting has been called.

Notice of an annual or special meeting of stockholders need not be given to
a stockholder if a written waiver of notice is executed before or after such
meeting by such stockholder or such stockholder's authorized attorney, if
communication with such stockholder is unlawful, or if such stockholder attends
such meeting, unless such attendance was for the express purpose of objecting at
the beginning of the meeting, to the transaction of any business because the
meeting was not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any annual or special meeting of stockholders
need be specified in any written waiver of notice.

When any annual or special meeting of stockholders is adjourned to another
hour, date or place, notice need not be given of the adjourned meeting other
than an announcement at the meeting at which the adjournment is taken of the
hour, date and place to which the meeting is adjourned; provided, however, that
if the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote thereat.

SECTION 6. QUORUM. The holders of a majority in interest of all stock
issued, outstanding and entitled to vote, represented in person or by proxy,
shall constitute a quorum at any annual or special meeting of stockholders; but
if less than a quorum is present at a meeting, a majority in interest of the
stockholders present or the presiding officer may adjourn the meeting from time
to time, and the meeting may be held as adjourned without further notice, except
as provided in Section 5 of this Article I. At such adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. The stockholders present at a
duly constituted meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.

<PAGE> 4

SECTION 7. VOTING AND PROXIES. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the Corporation, unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting, or of any adjournment thereof, before being voted.
Except as otherwise limited therein, proxies shall entitle the persons
authorized thereby to vote at any adjournment of such meeting, but they shall
not be valid after final adjournment of such meeting. A proxy with respect to
stock held in the name of two or more persons shall be valid if executed by or
on behalf of any one of them unless at or prior to the exercise of the proxy the
Corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger.

SECTION 8. ACTION AT MEETING. When a quorum is present, any matter before
any annual or special meeting of stockholders shall be decided by vote of the
holders of a majority of the shares of stock voting on such matter, except where
a larger vote is required by law, by the Certificate of Incorporation or by
these By-laws. Any election by stockholders shall be determined by a plurality
of the votes cast, except where a larger vote is required by law, by the
Certificate of Incorporation or by these By-laws. The Corporation shall not
directly or indirectly vote any shares of its own stock except as to shares
which it holds in a fiduciary capacity or except as otherwise permitted by law.

SECTION 9. ACTION BY CONSENT. Any action required or permitted to be taken
by the stockholders of the Corporation at an annual or special meeting of such
stockholders may be effected without a meeting by a consent in writing signed by
the holders of all of the outstanding shares of stock entitled to vote thereon.

SECTION 10. STOCKHOLDER LISTS. The Secretary or an Assistant Secretary (or
the Corporation's transfer agent or other person authorized by these By-laws or
by law) shall prepare and make, at least 10 days before any annual or special
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the hour, date and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.

SECTION 11. PRESIDING OFFICER. The presiding officer at all annual or
special meetings of stockholders shall have the power, among other things, to
adjourn such meeting at any time and from time to time, subject to Sections 5
and 6 of this Article I. The order of business and all

<PAGE> 5

other matters of procedure at any meeting of the stockholders shall be
determined by the presiding officer.

ARTICLE II
----------

Directors
---------

SECTION 1. POWERS. The business, property and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors, which
shall have and may exercise all the powers of the Corporation except as
otherwise provided by the Certificate of Incorporation or required by law. In
the event of a vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.

SECTION 2. NUMBER AND TERMS. Except as otherwise fixed pursuant to the
provisions of Article 4 of the Certificate of Incorporation relating to the
rights of the holders of any class or series of preferred stock to elect
Directors, the number of Directors of the Corporation shall be fixed by
resolution duly adopted from time to time by the Board of Directors; provided,
however, that if at the time of such action there is an Interested Stockholder,
such action shall in addition require a majority of the Continuing Directors
then in office. The Directors, other than those who may be elected by the
holders of any class or series of preferred stock, shall be classified, with
respect to the term for which they severally hold office, into three classes, as
nearly equal in number as possible as determined by the Board of Directors, with
one class to be elected annually.

The initial Directors of the Corporation shall hold office as follows: the
first class of Directors shall hold office initially for a term expiring at the
annual meeting of stockholders to be held in l988, the second class of Directors
shall hold office initially for a term expiring at the annual meeting of
stockholders to be held in l989, and the third class of Directors shall hold
office initially for a term expiring at the annual meeting of stockholders to be
held in l990, with the members of each class to hold office until their
respective successors are elected and qualified. At each annual meeting of the
stockholders of the Corporation, the successors to the class of Directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election and until their respective successors are elected and
qualified.

SECTION 3. DIRECTOR NOMINATIONS. Nominations of candidates for election as
Directors of the Corporation at any annual meeting of stockholders may be made
(a) by, or at the direction of, a majority of the Board of Directors (unless at
the time of such action there is an Interested Stockholder in which case the
affirmative vote of a majority of the Continuing Directors shall also be
required), or (b) by any stockholder entitled to vote at such annual meeting.
Only persons nominated in accordance with the procedures set forth in this
Section 3 shall be eligible for election as Directors at an annual meeting of
stockholders.

<PAGE> 6

Nominations, other than those made by, or at the direction of, the Board of
Directors (and by the Continuing Directors, if required), shall be made pursuant
to timely notice in writing to the Secretary of the Corporation as set forth in
this Section 3. To be timely, a stockholder's notice shall be delivered to, or
mailed and received, at the principal executive offices of the Corporation not
less than 60 days nor more than 150 days prior to the date of the scheduled
annual meeting, regardless of postponements, deferrals, or adjournments of that
meeting to a later date; provided, however, that if less than 70 days' notice or
prior public disclosure of the date of the scheduled annual meeting is given or
made, notice by the stockholder to be timely must be so delivered or received
not later than the close of business on the 10th day following the earlier of
(a) the day on which such notice of the date of the scheduled annual meeting was
mailed or (b) the day on which such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a Director (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation's capital stock which are beneficially owned by such person on
the date of such stockholder notice and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as Directors, pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended (or any subsequent provisions replacing such
Act or the rules and regulations promulgated thereunder); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder and of the beneficial
owners (if any) of the stock registered in such stockholder's name and the name
and address of other stockholders known by such stockholder to be supporting
such nominees and (ii) the class and number of shares of the Corporation's
capital stock which are beneficially owned by such stockholder and beneficial
owners (if any) on the date of such stockholder notice and by any other
stockholders known by such stockholder to be supporting such nominees on the
date of such stockholder notice. At the request of the Board of Directors, any
person nominated by, or at the direction of, the Board of Directors for election
as a Director at an annual meeting shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee.

No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 3. Election of Directors at the annual meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such annual meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as Directors at
the annual meeting in accordance with the procedures set forth in this Section 3
shall be provided for use at the annual meeting.

The Board of Directors may reject any nomination by a stockholder not
timely made in accordance with the requirements of this Section 3. If the Board
of Directors, or a designated committee thereof, determines that the information
provided in a stockholder's notice does not satisfy the informational
requirements of this Section 3 in any material respect, the Secretary of

<PAGE> 7

the Corporation shall promptly notify such stockholder of the deficiency in the
notice. The stockholder shall have an opportunity to cure the deficiency by
providing additional information to the Secretary within such period of time,
not to exceed 5 days from the date such deficiency notice is given to the
stockholder, as the Board of Directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the Board of
Directors or such committee reasonably determines that the additional
information provided by the stockholder, together with the information
previously provided, does not satisfy the requirements of this Section 3 in any
material respect, then the Board of Directors may reject such stockholder's
nomination. If there is an Interested Stockholder, any determinations to be made
by the Board of Directors or a designated committee thereof pursuant to the
provisions of this Section 3 shall also require the concurrence of a majority of
the Continuing Directors then in office. The Secretary of the Corporation shall
notify a stockholder in writing whether his nomination has been made in
accordance with the time and informational requirements of this Section 3.

Notwithstanding the procedure set forth in the preceding paragraph, if
neither the Board of Directors nor such committee makes a determination as to
the validity of any nominations by a stockholder, the presiding officer of the
annual meeting shall determine and declare at the annual meeting whether a
nomination was made in accordance with the terms of this Section 3. If the
presiding officer determines that a nomination was made in accordance with the
terms of this Section 3, he shall so declare at the annual meeting and ballots
shall be provided for use at the meeting with respect to such nominee. If the
presiding officer determines that a nomination was not made in accordance with
the terms of this Section 3, he shall so declare at the annual meeting and such
nomination shall be disregarded.

SECTION 4. QUALIFICATION. No Director need be a stockholder of the
Corporation. Unless waived by a vote of the Board of Directors, no individual
may be nominated as a Director of the Corporation if he or she will have
attained the age of 70 at the time of election.

SECTION 5. VACANCIES. Any vacancy occuring on the Board of Directors,
including any newly created directorships resulting from an increase in the
number of Directors or any vacancy resulting from death, resignation,
disqualification, removal or other cause, shall be filled in the manner provided
in the Certificate of Incorporation.

SECTION 6. REMOVAL. Any Director may be removed from office in the manner
provided in the Certificate of Incorporation.

SECTION 7. RESIGNATION. A Director may resign at any time by giving written
notice to the Chairman of the Board, if one is elected, the President or the
Secretary. A resignation shall be effective upon receipt, unless the resignation
otherwise provides.

SECTION 8. REGULAR MEETINGS. The first meeting of the Board of Directors
next following the annual meeting of stockholders of the Corporation shall be
designated as the annual meeting of the Board. Other regular meetings of the
Board of Directors may be held at such hour,

<PAGE> 8

date and place as the Board of Directors may by resolution from time to time
determine without other notice than such resolution.

SECTION 9. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called, orally or in writing, by or at the request of a majority of the
Directors, the Chairman of the Board, if one is elected, or the President. The
person or persons calling any such special meeting of the Board of Directors may
fix the hour, date and place thereof.

SECTION 10. NOTICE OF MEETINGS. Notice of the hour, date and place of
special meetings of the Board of Directors shall be given to each Director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, by the President or by one of the Directors
calling the meeting. Notice of any special meeting of the Board of Directors
shall be given to each Director in person or by telephone or by telegram sent to
his business or home address at least 24 hours in advance of the meeting, or by
written notice mailed to his business or home address at least 48 hours in
advance of the meeting. Such notice shall be deemed to be delivered when hand
delivered to such address, read to such Director by telephone, deposited in the
mail so addressed, with postage thereon prepaid if mailed, or when delivered to
the telegraph company if sent by telegram.

When any Board of Directors meeting, either regular or special, is
adjourned for more than 30 days, notice of the adjourned meeting shall be given
as in the case of an original meeting. It shall not be necessary to give any
notice of the hour, date or place of any meeting adjourned for 30 days or less
or of the business to be transacted at such meeting, other than an announcement
at the meeting at which such adjournment is taken of the hour, date and place to
which the meeting is adjourned.

A written waiver of notice executed before or after a meeting by a Director
and filed with the records of the meeting shall be deemed to be equivalent to
notice of the meeting. The attendance of a Director at a meeting shall
constitute a waiver of notice of such meeting, except where a Director attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because such meeting is not lawfully called or
convened. Except as otherwise required by law, by the Certificate of
Incorporation or by these By-laws, neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.

SECTION 11. QUORUM. At any meeting of the Board of Directors, a majority of
the Directors then in office shall constitute a quorum for the transaction of
business, but if less than a quorum is present at a meeting, a majority of the
Directors present may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 10 of
this Article II. Any business which might have been transacted at the meeting as
originally noticed may be transacted at such adjourned meeting at which a quorum
is present.

<PAGE> 9

SECTION 12. ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate of Incorporation or by these Bylaws.

SECTION 13. ACTION BY CONSENT. Any action required or permitted to be taken
at any meeting of the Board of Directors may be taken without a meeting if all
members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.

SECTION 14. MANNER OF PARTICIPATION. Members of the Board of Directors or
of committees elected by the Board pursuant to Section 15 of this Article II may
participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by means of which all Directors
participating in the meeting can hear each other, and participation in a meeting
in accordance herewith shall constitute presence in person at such meeting for
purposes of these By-laws.

SECTION 15. COMMITTEES. The Board of Directors, by the affirmative vote of
a majority of the Directors then in office, may elect from its number one or
more committees, including an Executive Committee and an Audit Committee, and
may delegate thereto some or all of its powers except those which by law, by the
Certificate of Incorporation or by these By-laws, may not be delegated. Except
as the Board of Directors may otherwise determine, any such committee may make
rules for the conduct of its business, but unless otherwise provided by the
Board of Directors or in such rules, its business shall be conducted so far as
possible in the same manner as is provided by these By-laws for the Board of
Directors. All members of such committees shall hold such offices at the
pleasure of the Board of Directors. The Board of Directors may abolish any such
committee at any time. Any committee to which the Board of Directors delegates
any of its powers or duties shall keep records of its meetings and shall report
its action to the Board of Directors. The Board of Directors shall have power to
rescind any action of any committee, but no such rescission shall have
retroactive effect. With approval of the Board of Directors, the Chief Executive
Officer may appoint such other committees consisting of such Directors as the
Chief Executive Officer shall select. Any recommendations of such committees
appointed by the Chief Executive Officer shall be submitted to the Board of
Directors.

SECTION 16. COMPENSATION OF DIRECTORS. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors, provided that Directors who are serving the Corporation as
officers or employees and who receive compensation for their services as such,
shall not receive any salary or other compensation for their services as
Directors of the Corporation.

<PAGE> 10

ARTICLE III
-----------

Officers
--------

SECTION 1. ENUMERATION. The officers of the Corporation shall consist of a
President, a Treasurer, a Secretary and such other officers, including without
limitation a Chairman of the Board, one or more Vice-Presidents (including
Executive Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents,
Assistant Treasurers and Assistant Secretaries, as the Board of Directors may
determine.

SECTION 2. ELECTION. At the regular annual meeting of the Board following
the annual meeting of stockholders, the Board of Directors shall elect the
President, the Treasurer and the Secretary. Other officers may be elected by the
Board of Directors at such regular annual meeting of the Board of Directors or
at any other regular or special meeting.

SECTION 3. QUALIFICATION. No officer need be a stockholder or a Director;
provided, however, that the Chairman of the Board, if one is elected, and the
President shall be Directors. Any person may occupy more than one office of the
Corporation at any time. Any officer may be required by the Board of Directors
to give bond for the faithful performance of his duties in such amount and with
such sureties as the Board of Directors may determine.

SECTION 4. TENURE. Except as otherwise provided by the Certificate of
Incorporation or by these By-laws, each of the officers of the Corporation shall
hold office until the regular annual meeting of the Board of Directors following
the next annual meeting of stockholders and until his successor is elected and
qualified or until his earlier resignation or removal. Election or appointment
of an officer, employee or agent shall not of itself create contract rights. The
Board of Directors may, however, authorize the Corporation to enter into an
employment contract with any officer in accordance with law, but no such
contract right shall impair the right of the Board of Directors to remove any
officer at any time in accordance with Section 6 of this Article III.

SECTION 5. RESIGNATION. Any officer may resign by delivering his written
resignation to the Corporation addressed to the Chairman of the Board, if one is
elected, the President or the Secretary, and such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.

SECTION 6. REMOVAL. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the Directors then in office; provided, however, that if at the
time of such removal there is an Interested Stockholder, the affirmative vote of
a majority of the Continuing Directors then in office shall also be required,
and provided further that, if an officer is to be removed for cause, he may only
be removed after reasonable notice and an opportunity to be heard by the Board
of Directors.

<PAGE> 11

SECTION 7. ABSENCE OR DISABILITY. In the event of the absence or disability
of any officer, the Board of Directors may designate another officer to act
temporarily in place of such absent or disabled officer.

SECTION 8. VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.

SECTION 9. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the Board of Directors
and, if so designated by the Board of Directors, shall be the Chief Executive
Officer of the Corporation. If a Chairman of the Board is not elected or is
absent, the President shall preside at meetings of the Board of Directors. If
the Chairman of the Board is the Chief Executive Officer, he shall, subject to
the direction of the Board of Directors, have general supervision and control of
the Corporation's business and shall preside, when present, at all meetings of
the stockholders. The Chairman of the Board shall have such other powers and
shall perform such other duties as the Board of Directors may from time to time
designate. If the Chairman of the Board is not the Chief Executive Officer, he
shall also have such powers and perform such duties as the Chief Executive
Officer may from time to time designate.

SECTION 10. PRESIDENT. Unless the Board of Directors shall elect a Chairman
of the Board and designate such Chairman the Chief Executive Officer of the
Corporation, the President shall be the Chief Executive Officer of the
Corporation and shall, subject to the direction of the Board of Directors, have
general supervision and control of the Corporation's business and shall preside,
when present, at all meetings of the stockholders. If there is no Chairman of
the Board or if he is absent, the President shall preside, when present, at
meetings of the Board of Directors. If the President is not the Chief Executive
Officer, he shall have such powers and perform such duties as the Chief
Executive Officer may from time to time designate.

SECTION 11. VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS. Any Vice
President (including any Executive Vice President or Senior Vice President) and
Assistant Vice President shall have such powers and shall perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.

SECTION 12. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. He shall have custody of all funds, securities, and
valuable documents of the Corporation. He shall have such other duties and
powers as may be designated from time to time by the Board of Directors or the
Chief Executive Officer.

Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.

<PAGE> 12

SECTION 13. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall record
all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his absence from any such meeting, a temporary secretary chosen at the meeting
shall record the proceedings thereof. The Secretary shall have charge of the
stock ledger (which may, however, be kept by any transfer or other agent of the
Corporation). He shall have custody of the seal of the Corporation, and he, or
an Assistant Secretary, shall have authority to affix it to any instrument
requiring it, and, when so affixed, the seal may be attested by his signature or
that of an Assistant Secretary. He shall have such other duties and powers as
may be designated from time to time by the Board of Directors or the Chief
Executive Officer. In the absence of the Secretary, any Assistant Secretary may
perform his duties and responsibilities.

Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.

SECTION 14. OTHER POWERS AND DUTIES. Subject to these By-laws and to such
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.

ARTICLE IV
----------

Capital Stock
-------------

SECTION 1. CERTIFICATES OF STOCK. Unless otherwise provided by the Board of
Directors, each stockholder shall be entitled to a certificate of the capital
stock of the Corporation in such form as may from time to time be prescribed by
the Board of Directors. Such certificate shall bear the Corporation seal and
shall be signed by the Chairman of the Board, President or a Vice President and
by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary. The Corporation seal and the signatures by Corporation officers may
be facsimiles if the certificate is manually countersigned by an authorized
person on behalf of a transfer agent or registrar other than the Corporation or
its employee. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on such certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
and every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall contain such legend with respect thereto
as is required by law.

<PAGE> 13

SECTION 2. TRANSFERS. Subject to any restrictions on transfer and unless
otherwise provided by the Board of Directors, shares of stock may be transferred
only on the books of the Corporation by the surrender to the Corporation or its
transfer agent of the certificate therefor properly endorsed or accompanied by a
written assignment or power of attorney properly executed, with transfer stamps
(if necessary) affixed, and with such proof of the authenticity of signature as
the Corporation or its transfer agent may reasonably require.

SECTION 3. RECORD HOLDERS. Except as may otherwise be required by law, by
the Certificate of Incorporation or by these By-laws, the Corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these By-laws.

It shall be the duty of each stockholder to notify the Corporation of his
post office address and any changes thereto.

SECTION 4. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to receive notice of or to vote at any meeting of
stockholders or any adjournments thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than 60 days nor less than 10
days before the date of such meeting, nor more than 60 days prior to any other
action. In such case, only stockholders of record on such record date shall be
so entitled, notwithstanding any transfer of stock on the stock transfer books
of the Corporation after the record date.

If no record date is fixed: (a) the record date for determining
stockholders entitled to receive notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; and (b) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.

SECTION 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.

<PAGE> 14

ARTICLE V
---------

Indemnification
---------------

SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative, investigative or
otherwise (hereinafter a "Proceeding"), by reason of the fact that he or she is
or was (a) a Director of the Corporation, (b) an officer of the Corporation
elected or appointed by the stockholders or the Board of Directors, or (c)
serving, at the request of the Corporation as evidenced by a vote of the Board
of Directors prior to the occurrence of the event to which the indemnification
relates, as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (such persons described in (a), (b) and (c)
are sometimes hereinafter referred to as an "Indemnitee"), whether the basis of
such Proceeding is alleged action in an official capacity as such a Director or
officer of the Corporation or as such other director, officer, employee or agent
or in any other capacity while serving as such a Director or officer of the
Corporation or as such other director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including, but not limited to, attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith, and such indemnification
shall continue as to an Indemnitee who has ceased to be such a Director or
officer of the Corporation or as such other director, officer, employee or agent
and shall inure to the benefit of the Indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in Section 3 of this
Article V with respect to Proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such Indemnitee in connection with a Proceeding
(or part thereof) initiated by such Indemnitee only if such Proceeding (or part
thereof) was authorized or ratified by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article V shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any Proceeding in advance of its final
disposition (hereinafter an "Advancement of Expenses"); provided, however, that,
if the General Corporation Law of Delaware requires, an Advancement of Expenses
incurred by an Indemnitee in his or her capacity as a Director or officer of the
Corporation (but not in any other capacity in which service was or is rendered
by such Indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "Undertaking"), by or on behalf of such Indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"Final Adjudication") that such Indemnitee is not entitled to be indemnified for
such expenses under this Article V or otherwise.

<PAGE> 15

SECTION 2. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and to an Advancement of Expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article V.

SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this Article
V is not paid in full by the Corporation within sixty days after a written claim
has been received by the Corporation, except in the case of a claim for an
Advancement of Expenses, in which case the applicable period shall be twenty
days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If the Indemnitee is
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an Advancement of Expenses pursuant to the terms of an
Undertaking, the Indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
Indemnitee to enforce a right to an Advancement of Expenses) it shall be a
defense that the Indemnitee has not met the applicable standard of conduct set
forth in the General Corporation Law of Delaware. In addition, in any suit by
the Corporation to recover an Advancement of Expenses pursuant to the terms of
an Undertaking, the Corporation shall be entitled to recover such expenses upon
a Final Adjudication that the Indemnitee has not met the applicable standard of
conduct set forth in the General Corporation Law of Delaware. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or stockholders) to have made a determination prior to the commencement
of such suit that indemnification of the Indemnitee is proper in the
circumstances because the Indemnitee has met the applicable standard of conduct
set forth in the General Corporation Law of Delaware, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or stockholders) that the Indemnitee has not met such applicable
standard of conduct, shall create a presumption that the Indemnitee has not met
the applicable standard of conduct or, in the case of such suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an Advancement of Expenses hereunder,
or by the Corporation to recover an Advancement of Expenses pursuant to the
terms of an Undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such Advancement of Expenses, under this
Article V or otherwise shall be on the Corporation.

SECTION 4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to
an Advancement of Expenses conferred in this Article V shall not be exclusive of
any other right which any person may have or hereafter acquire under these
By-laws, the Certificate of Incorporation, or any statute, agreement, vote of
stockholders or disinterested Directors or otherwise.

SECTION 5. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, officer, employee or agent of the
Corporation or any director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Corporation would have the

<PAGE> 16

power to indemnify such person against such expense, liability or loss under the
General Corporation Law of Delaware.

ARTICLE VI
----------

Miscellaneous Provisions
------------------------

SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall end on
December 31 of each year.

SECTION 2. SEAL. The Board of Directors shall have power to adopt and alter
the seal of the Corporation.

SECTION 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without Director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Bank as the Board of Directors or Executive Committee may authorize.

SECTION 4. VOTING OF SECURITIES. Unless the Board of Directors otherwise
provides, the Chairman of the Board, if one is elected, the President or the
Treasurer may waive notice of and act on behalf of this Corporation, or appoint
another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.

SECTION 5. RESIDENT AGENT. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Corporation.

SECTION 6. CORPORATE RECORDS. The original or attested copies of the
Certificate of Incorporation, By-laws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock transfer
books, which shall contain the names of all stockholders, their record addresses
and the amount of stock held by each, may be kept outside the State of Delaware
and shall be kept at the principal office of the Corporation, at the office of
its counsel or at an office of its transfer agent or at such other place or
places as may be designated from time to time by the Board of Directors.

SECTION 7. DEFINITIONS. As used in these By-laws, the terms "Interested
Stockholder" and "Continuing Director" shall have the same respective meanings
assigned to them in the Certificate of Incorporation. Any determination of
beneficial ownership of securities under these By-laws shall be made in the
manner specified in the Certificate of Incorporation.

<PAGE> 17

SECTION 8. CERTIFICATE OF INCORPORATION. All references in these By-laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.

SECTION 9. AMENDMENTS. These By-laws may be altered, amended or repealed,
or new by-laws may be adopted, by the Board of Directors or by the stockholders
in the manner provided in the Certificate of Incorporation.

Adopted: February 11, l987
As amended: March 3, l987
As amended: April 21, 1988
As amended: July 21, 1994
As amended: January 23, 1997

<PAGE> 1
Exhibit 10.2

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 17, 1992, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
Gerald T. Mulligan (the "Executive"), an individual presently employed as an
officer of the Company and 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 Employers and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the Employers, the Employers are
willing to provide, subject to the terms of this Agreement, certain severance
benefits to protect the Executive from the consequences of a Change in Control
Terminating Event (as defined in Section 3) or a Merger of Equals Terminating
Event (as defined in Section 3) occurring subsequent to a Change in Control or a
Merger of Equals (as defined in Section 2), respectively.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

(a) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Act") (other than the Company,
any of its direct or indirect subsidiaries, or any trustee, fiduciary or
other person or entity holding securities under any employee benefit plan
or trust of the Company or any of its direct or indirect subsidiaries),
together with all "affiliates" and "associates" (as such terms are defined
in Rule 12b-2 under the Act) of such person, shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities having
the right to vote in an election of the Company's Board of Directors
("Voting Securities") (in such case other than as a result of an
acquisition of securities directly from the Company); or

(b) persons who, as of the date hereof, constitute the Company's Board
of Directors (the "Incumbent Directors") cease for any reason, including,
without limitation, as a result of a tender offer, proxy contest, merger or
similar transaction, to constitute at least a majority of the Board,
provided that any person becoming a director of the Company subsequent to
the date hereof whose election or nomination for election was approved by a
vote of at least a majority of the Incumbent Directors shall, for purposes
of this Agreement, be considered an Incumbent Director; or

(c) the shareholders of the Company shall approve (i) any
consolidation or merger of the Company or any subsidiary of the Company
where the shareholders of the Company, immediately prior to the
consolidation or merger, would not, immediately after the consolidation or
merger, beneficially own (as such term is defined in Rule 13d-3 under the
Act), directly or indirectly, shares representing in the aggregate a
majority of

<PAGE> 2

the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any),
(ii) any sale, lease, exchange or other transfer (in one transaction or a
series of transactions contemplated or arranged by any party as a single
plan) of all or substantially all of the assets of the Company, or (iii)
any plan or proposal for the liquidation or dissolution of the Company.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25 % or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

(B) as a result of the occurrence of any of the events enumerated in
the foregoing clauses (a), (b) or (c), if after such occurrence, the
Incumbent Directors constitute at least one-half of the Board of Directors
of the Company or any successor institution and the transaction is
designated a merger of equals transaction by the Incumbent Directors prior
to the occurrence of such event (a "Merger of Equals").

3. TERMINATING EVENT. A "Change in Control Terminating Event" shall mean
any termination by the Employers or by the Executive of the Executive's
employment for any reason. A "Merger of Equals Terminating Event" shall mean any
termination by the Employers of the Executive's employment for any reason other
than death or for Cause (as defined below). For purposes of this Agreement, the
term "Cause" shall mean (i) deliberate dishonesty of the Executive with respect
to either of the Employers or any subsidiary or affiliate of either, or (ii)
conviction of the Executive of a crime involving moral turpitude.

4. SEVERANCE PAYMENT. Subject to the provisions of Section 5 below, in the
event that a Change in Control Terminating Event occurs within two (2) years
after a Change in Control or a Merger of Equals Terminating Event occurs within
two (2) years after a Merger of Equals, the Employers 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.

5. Limitation on Benefits.
----------------------

(a) It is the intention of the Executive and of the Employers that no
payments by the Employers 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

<PAGE> 3

shall be non-deductible to the Employers 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 Employers in the aggregate, such
payments shall be reduced to the maximum amount which can be deducted by the
Employers. 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 Employers with interest thereon at the applicable
Federal Rate determined under Section 1274(d) of the Code, compounded annually,
or at such other rate as may be required in order that no such payments shall be
non-deductible to the Employers 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 Employers have sent
him written notice of the need for such reduction, the Employers may determine
the method of such reduction in their sole discretion.

(b) If any dispute between the Employers 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 Employers and the
Executive, either the Employers 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 Employers 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 Employers and the Executive. The
Employers 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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

8. WITHHOLDING. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers 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 Employers, 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

<PAGE> 4

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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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
5Co), except in the event that the Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

10. ASSIGNMENT; SUCCESSSORS AND ASSIGNS. ETC. Neither the Employers 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
Employers 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 Employers of all payments due to the
Executive under this Agreement, the Employers shall continue such payments to
the Executive's beneficiary designated in writing to the Employers prior to the
Executive's death (or to the Executive's estate, if the Executive fails to make
such designation).

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' 'taking
possession of the Bank pursuant to applicable laws and regulations.

12. WAIVER. No waiver of any provision 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 Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.

13. 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

<PAGE> 5

in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

14. ENTIRE AGREEMENT. This Agreement is complete, reflects the entire
agreement of the parties with respect to its subject matter, and supersedes all
previous written or oral negotiations, commitments and writings.

15. ELECTION OF REMEDIES. An election by the Executive to resign after a
Change in Control or a Merger of Equals under the provisions of this Agreement
shall not constitute a breach by the Executive of any employment agreement
between the Employers and the Executive and shall be deemed a voluntary
termination of employment by the Executive for the purpose of interpreting the
provisions of any of the Employers' 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 Employers,
PROVIDED, HOWEVER, that if there is a Change of Control Terminating Event or
Merger of Equals 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.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

17. ALLOCATION OF OBLIGATIONS BETWEEN EMPLOYERS. The obligations of the
Employers under this Agreement are intended to be the joint and several
obligations of the Bank and the Company and the Employers shall, as between
themselves, allocate these obligations in a manner agreed upon by them.

18. 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.

5
<PAGE> 6

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

ANDOVER BANCORP, INC

By: /s/ Joseph F. Casey
-----------------------------------------------
Title: Chief Financial Officer and Treasurer

ANDOVER BANK

By: /s/ Joseph F. Casey
-----------------------------------------------
Title: Chief Financial Officer and Treasurer

/s/ Gerald T. Mulligan
--------------------------------------------------
Executive: Gerald T. Mulligan

<PAGE> 1
Exhibit 10.3

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 23, 1993, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
Joseph F. Casey (the "Executive"), an individual presently employed as an
officer of the Company and the Bank.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

<PAGE> 2

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

5. LIMITATION ON BENEFITS.

2
<PAGE> 3

(b) If any dispute between the Employers 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 Employers and the Executive, either the
Employers 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 Employers 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 Employers and the Executive. The Employers 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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

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

<PAGE> 4

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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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 Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

10. ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC. Neither the Employers 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
Employers 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 Employers of all payments due to the
Executive under this Agreement, the Employers shall continue such payments to
the Executive's beneficiary designated in writing to the Employers prior to the
Executive's death (or to the Executive's estate, if the Executive fails to make
such designation).

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' taking possession
of the Bank pursuant to applicable laws and regulations.

<PAGE> 5

in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

18. 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.

5
<PAGE> 6

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

ANDOVER BANCORP, INC.

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

ANDOVER BANK

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

/s/Joseph F. Casey
-----------------------------------------------
Executive: Joseph F. Casey

<PAGE> 1
Exhibit 10.4

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 23, 1993, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
Michael J. Ecker (the "Executive"), an individual presently employed as an
officer of the Company and the Bank.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

5. LIMITATION ON BENEFITS.

<PAGE> 3

(b) If any dispute between the Employers 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 Employers and the Executive,
either the Employers 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 Employers 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 Employers and the Executive. The Employers
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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

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

<PAGE> 4

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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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 Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' taking possession
of the Bank pursuant to applicable laws and regulations.

<PAGE> 5

in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

18. 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.

<PAGE> 6

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

ANDOVER BANCORP, INC.

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

ANDOVER BANK

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

/s/Michael J. Ecker
-----------------------------------------------
Executive: Michael J. Ecker

<PAGE> 1
Exhibit 10.5

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 23, 1993, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
John R. Heerwagen (the "Executive"), an individual presently employed as an
officer of the Company and the Bank.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the
result of an acquisition of securities by the Company which, by
reducing the number of shares of Voting Securities outstanding,
increases the proportionate voting power represented by the
Voting Securities beneficially owned by any person to 25% or more
of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any person referred to in
the preceding clause shall thereafter become the beneficial owner
of any additional shares of Voting Securities (other than
pursuant to a stock split, stock dividend, or similar
transaction), then a Change in Control shall be deemed to have
occurred for purposes of the foregoing clause (a); or

(B) as a result of the occurrence of any of the events
enumerated in the foregoing clauses (a), (b) or (c), if after
such occurrence, the Incumbent Directors constitute at least
one-half of the Board of Directors of the Company or any
successor institution and the transaction is designated a merger
of equals transaction by the Incumbent Directors prior to the
occurrence of such event (a "Merger of Equals").

5. LIMITATION ON BENEFITS.

<PAGE> 3

(b) If any dispute between the Employers 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 Employers and the Executive, either the
Employers 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 Employers 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 Employers and the Executive. The Employers 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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

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

3
<PAGE> 4

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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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 Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' taking possession
of the Bank pursuant to applicable laws and regulations.

4
<PAGE> 5

in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

18. 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.

<PAGE> 6

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

ANDOVER BANCORP, INC.

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

ANDOVER BANK

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

/s/John R. Heerwagen
-----------------------------------------------
Executive: John R. Heerwagen

<PAGE> 1
Exhibit 10.6

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of January 24, 1994, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
Octavio C. Bolivar (the "Executive"), an individual presently employed as an
officer of the Company and the Bank.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

<PAGE> 2

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

5. LIMITATION ON BENEFITS.

<PAGE> 3

(b) If any dispute between the Employers 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 Employers and the Executive, either the
Employers 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 Employers 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 Employers and the Executive. The Employers 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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

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

<PAGE> 4

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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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 Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' taking possession
of the Bank pursuant to applicable laws and regulations.

4
<PAGE> 5

in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

18. 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.

<PAGE> 6

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

ANDOVER BANCORP, INC.

By:/s/Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

ANDOVER BANK

By:/s/ Gerald T. Mulligan
--------------------------------------------
Title: President and Chief Executive Officer

/s/ Octavio C. Bolivar
-----------------------------------------------
Executive: Octavio C. Bolivar

<PAGE> 1
Exhibit 10.9

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 21, 1995, as amended and restated as of
January 23, 1997, by and among ANDOVER BANCORP, INC., a Delaware corporation
(the "Company") and its subsidiary, ANDOVER BANK, a Massachusetts savings bank
with its main office in Andover, Massachusetts (the "Bank") (the Bank and the
Company shall be hereinafter collectively referred to as the "Employers"), and
Raymond P. Smith (the "Executive"), an individual presently employed as an
officer of the Bank.

2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred in any one of the following events:

<PAGE> 2

the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any),
(ii) any sale, lease, exchange or other transfer (in one transaction or a
series of transactions contemplated or arranged by any party as a single
plan) of all or substantially all of the assets of the Company, or
(iii) any plan or proposal for the liquidation or dissolution of the
Company.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

5. Limitation on Benefits.
----------------------

2
<PAGE> 3

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 January 23, 1997, and shall
terminate upon the termination of employment of the Executive for any reason
prior to a Change in Control or a Merger of Equals.

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

<PAGE> 4
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 Employers shall pay (or the
Executive shall be entitled to recover from the Employers, 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 Employers and the Executive cannot agree on
the selection of the accounting partner described in said section.

11. ENFORCEABILITY. 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. Notwithstanding anything to the contrary
herein, in no event shall any benefits be paid hereunder if the Executive's
employment is terminated (i) due to the removal, suspension or prohibition of
the Executive from participating in the conduct of the Employers' affairs by
order issued under applicable laws and regulations by a federal or state banking
agency having authority over the Employers, or (ii) 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 of Banks' taking possession
of the Bank pursuant to applicable laws and regulations.

<PAGE> 5
in writing with the Employers or, in the case of the Bank, at its main offices
attention of the Clerk or, in the case of the Company, at its main office,
attention of the Secretary.

16. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.

18. 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.

<PAGE> 6
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company, the Bank and the Executive as of the date first above
written.

ANDOVER BANCORP, INC.

By: /s/ GERALD T. MULLIGAN
----------------------------------------------
Title: President and Chief Executive Officer

ANDOVER BANK

By: /s/ GERALD T. MULLIGAN
----------------------------------------------
Title: President and Chief Executive Officer

/s/ RAYMOND P. SMITH
-------------------------------------------------
Executive: Raymond P. Smith

<PAGE> 1
Exhibit 10.12

ANDOVER BANCORP, INC.

Special Termination Plan
------------------------

1. Employees Covered

This Special Termination Plan shall apply to all permanent full-time and
part-time employees, including commissioned employees (each, a "Covered
Employee," collectively, the "Covered Employees"), of Andover Bancorp, Inc. (the
"Company"), Andover Bank and Andover Bank NH (collectively, the "Andover
Entities"). This Special Termination Plan shall not apply to employees hired by
the Andover Entities on a temporary basis.

2. Special Termination Benefits

Any Covered Employee whose employment is terminated within two years after
a Change in Control (as hereinafter defined), unless such termination is for
Cause (as hereinafter defined) or by reason of death, shall be provided with the
following Special Termination Benefits:

(a) Payment in one lump sum as of the date of termination of
employment of an amount equal to two weeks of Base Compensation (as
hereinafter defined) (or such greater amount to which the Covered Employee
is entitled under Section 2(d) below) for each year or partial year of
service with one or more of the Andover Entities, its predecessors and any
successor institution. For this purpose, "Base Compensation" shall mean (i)
the highest base salary of the Covered Employee during the period
commencing one year prior to the Change in Control and ending on the date
of termination, or (ii) in the case of commissioned-only employees, the
average commissions paid by the Covered Employee pursuant to the terms of a
written employment agreement during the period commencing one year prior to
the Change in Control and ending on the date of termination. In addition,
if authorized in writing by the Company with respect to a particular
Covered Employee, Base Compensation may include additional remuneration.

(b) Continuation of health, dental and life insurance benefits, to the
extent provided to the Covered Employee on the date of his or her
termination, for a period ending on the earlier of (i) one year after
termination of employment on the same terms and conditions as though the
Covered Employee had remained an active employee, and (ii) the date on
which the Covered Employee secures employment which provides health, dental
and life insurance benefits.

(c) COBRA benefits following the end of the period referred to in
Section 2(b) above, such benefits to be determined as though employment had
terminated at the end of such period.

(d) The minimum benefits under clause (a) above shall be:

<PAGE> 2

(i) All officers of the level of Assistant Vice President and
above shall receive at least 26 weeks of Base Compensation;

(ii) All other elected and appointed officers shall receive at
least 13 weeks of Base Compensation;

(iii) All other full-time employees shall receive at least 6
weeks of Base Compensation; and

(iv) All permanent part-time employees shall receive at least 4
weeks of Base Compensation as determined by their regularly
scheduled hours.

(e) The foregoing Special Termination Benefits are subject to Section
3 below.

3. Adjustments in Special Termination Benefits

The Special Termination Benefits payable pursuant to Section 2 above shall
be adjusted as follows:

(a) All payments shall be reduced by the amount of any severance pay
benefits or notice pay payable to any officer or employee under any
employment, change in control or special termination agreement or under any
"tin parachute," WARN or similar law.

(b) In the event that the Special Termination Benefits payable to any
Covered Employee pursuant to this Plan, together with any payments to or
for the benefit of the Covered Employee under any other agreement or plan
pursuant to which the Covered Employee is entitled to receive payments or
benefits, in the aggregate exceeds the amount that may be deducted by the
entity making the payment by reason of the operations of Section 280G of
the Internal Revenue Code of 1986, as amended, the amount of such payments
shall be reduced to the maximum which can be deducted by such entity.

4. Definition of "Change in Control"

A "Change in Control" shall be deemed to have occurred in any one of the
following events:

<PAGE> 3

or indirect subsidiaries), together with all "affiliates" and "associates"
(as such terms are defined in Rule 12b-2 under the Act) of such person,
shall become the "beneficial owner" (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote in an election of the
Company's Board of Directors ("Voting Securities") (in such case other than
as a result of an acquisition of securities directly from the Company); or

(c) the shareholders of the Company shall approve (A) any
consolidation or merger of the Company or any subsidiary of the Company
where the shareholders of the Company, immediately prior to the
consolidation or merger, would not, immediately after the consolidation or
merger, beneficially own (as such term is defined in Rule 13d-3 under the
Act), directly or indirectly, shares representing in the aggregate a
majority of the voting shares of the corporation issuing cash or securities
in the consolidation or merger (or of its ultimate parent corporation, if
any), (B) any sale, lease, exchange or other transfer (in one transaction
or a series of transactions contemplated or arranged by any party as a
single plan) of all or substantially all of the assets of the Company, or
(C) any plan or proposal for the liquidation or dissolution of the Company.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred:

(A) for purposes of the foregoing clause (a), solely as the result of
an acquisition of securities by the Company which, by reducing the number
of shares of Voting Securities outstanding, increases the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 25% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in the
preceding clause shall thereafter become the beneficial owner of any
additional shares of Voting Securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a Change in Control
shall be deemed to have occurred for purposes of the foregoing clause (a);
or

<PAGE> 4

5. Definition of "Cause"

The term "Cause" shall mean and include:

(a) deliberate dishonesty with respect to any of the Andover Entities
or any successor institution; or

(b) the conviction of any crime involving moral turpitude; or

(c) gross negligence of or refusal to perform any duty or
responsibility as an employee of any of the Andover Entities after written
notice to the Covered Employee, other than as a result of sickness,
accident, disability or similar cause beyond the control of the Covered
Employee.

Adopted: January 23, 1997

<PAGE> 1
Exhibit 13

[Graphic omitted -- the town of Methuen]

Andover Bancorp, Inc.

1996
-------------
ANNUAL
-------------
REPORT

<PAGE> 2

================================================================================
TABLE OF CONTENTS

President's Message Page i

Business 2

Market for the Company's
Common Stock 10

Selected Consolidated
Financial Data 11

Management's Discussion
and Analysis 12

Independent Auditors' Report 34

Consolidated Financial
Statements 35

Notes to Consolidated
Financial Statements 40

Andover Bancorp, Inc. is a $1.2 billion bank holding company,
headquartered in Andover, Massachusetts, approximately 25 miles
north of downtown Boston. Andover Bancorp, Inc. is the parent
company of Andover Bank and Andover Bank NH, both serving
consumers and businesses located in northeastern Massachusetts
and southern New Hampshire with a complete array of financial
products and services. Andover Bank, incorporated in 1834,
operates ten banking offices located throughout the Merrimack
Valley. Andover Bank NH, incorporated in 1995, has locations in
Salem and Londonderry, New Hampshire.

Cover illustration features
the town of Methuen
================================================================================

<TABLE>
FINANCIAL HIGHLIGHTS

<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
1996 1995 PERCENTAGE CHANGE
---- ---- -----------------
(Dollars in thousands, except per share data)

<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,204,813 $1,110,847 + 8%
Loans, net 857,806 756,933 +13
Deposits 824,311 743,205 +11
Stockholders' equity 95,846 85,165 +13
Non-performing assets 12,382 15,785 -22

OPERATING DATA:
Net interest and dividend income $ 35,294 $ 32,334 + 9%
Provision for loan losses 2,555 1,295 +97
Losses on real estate operations (1,542) (2,003) -23
Mortgage banking income 3,163 2,371 +33
Non-interest expense 20,888 19,860 + 5
Net income 12,479 9,338 +34

PER SHARE DATA:(1)
Net income $ 2.44 $ 1.85 +32%
Dividends declared 0.50 0.37 +35
Book value at end of period 18.67 16.75 +11
Book value(2) 18.61 16.71 +12

SELECTED FINANCIAL RATIOS:
Return on average assets 1.08% 0.87%
Return on average equity(2) 13.89 11.51
Net yield on average earning assets 3.16 3.14
Efficiency ratio 49.59 50.27
Average equity as a percentage
of average assets(2) 7.76 7.59

</TABLE>

<TABLE>
BOOK VALUE PER SHARE(1)(2)
At December 31,

[Chart]
<S> <C>
1992 $12.55
1993 $13.86
1994 $15.28
1995 $16.71
1996 $18.61

<FN>
(1) The per share data has been restated for all periods to reflect a 20% stock
dividend distributed on November 13, 1996.

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

</TABLE>
<PAGE> 3

DEAR SHAREHOLDERS:

I am pleased to report record earnings of $12.5 million for 1996. Those record
earnings are a reflection of a very good year in which Andover Bancorp achieved
its three important objectives for 1996. Our goals for 1996 were to provide
solid shareholder returns, to continue the Company's growth in all its business
lines and to increase core operating profitably.

We believe that the achievement of these important objectives is a validation of
the Company's business strategy and, in particular, its commitment to community
and customer focus. Our strategy is to position Andover Bancorp as an attractive
alternative to the large and distant regional banks in our market. The Company
has achieved dominant market share in its market and is, we believe, the premier
banking franchise in both Essex County and the Merrimack Valley.

SHAREHOLDER RETURNS

Our first objective was to improve shareholder returns and enhance long-term
shareholder value. Success in reaching our first objective is exhibited in
several statistics. Net earnings increased by 34%. This earnings growth resulted
primarily from increased net interest income, higher mortgage banking income and
reduced losses on real estate operations, all core activities which should bring
recurring future benefits.

<TABLE>
MORTGAGE MARKET SHARE(a)(b)
Twelve months ended December 31, 1996
- --------------------------------------------------------------------------------
<CAPTION>
TOWN RANK MARKET SHARE
-------------------------------------------------------
<S> <C> <C>
Andover 1. Andover Bancorp 15.1%
2. Bay Bank Boston, N.A. 8.0
3. First Essex Bancorp 4.4

TEWKSBURY 1. Andover Bancorp 7.2%
2. Stoneham Co-op 6.2
3. Bay Bank Boston, N.A. 4.1

North Andover 1. Andover Bancorp 10.3 %
2. Ipswich Savings 4.9
3. Bay Bank Boston, N.A, 4.6

Methuen 1. Andover Bancorp 10.7%
2. First Essex Bancorp 5.8
3. Lawrence Savings 5.0

Lawrence 1. Andover Bancorp 9.8%
2. Fleet Mortgage 8.1
3. Bank of Boston 6.9
- --------------------------------------------------------------------------------
<FN>
(a) Source: Banker & Tradesman: Customer Mortgage Market Share Report.
(b) Rank and Market Share based on number of mortgages closed.
</TABLE>

<TABLE>
DEPOSIT MARKET SHARE(a)
- --------------------------------------------------------------------------------
<CAPTION>
TOWN RANK MARKET SHARE
-------------------------------------------------------
<S> <C> <C>
Andover 1. Andover Bancorp 46.5%
2. Fleet 15.5
3. First Essex 11.7

Tewksbury 1. Andover Bancorp 41.1%
2. Fleet 25.7
3. Mass Bank 11.8

North Andover 1. Northmark 29.5%
2. Andover Bancorp 20.7
3. Fleet 14.3

Methuen 1. Andover Bancorp 27.4%
2. Lawrence Savings 22.1
3. First Essex 19.4

Lawrence 1. First Essex 42.2%
2. Fleet 21.3
3. Andover Bancorp 19.8
- --------------------------------------------------------------------------------
<FN>
(a) Source: PC Info/Bank Nationwide Branch Information System. Data obtained
from the Federal Home Loan Bank Board and the Federal Deposit Insurance
Corporation. Data as of June 30, 1996.
</TABLE>

Based on the favorable results and with confidence for the future, the Company
declared a 20% stock dividend in the fourth quarter. The cash dividend per share
was maintained at the same rate, for the net effect of a 20% increase in cash
dividends. Even with the increase in dividend payments, book value per share
grew by 11%.

Of even greater significance to stockholders was a 48% total return in Andover
Bancorp stock for 1996. While the stock market generally experienced strong
returns, the 48% total return for the Company's stock exceeded the stock market

================================================================================
[Graphic of Truck]
BUSINESS DEVELOPMENT

When the Delucca Fence Company came to Andover Bank to finance its banking
needs, our Corporate Banking Group provided this growing company with a term
loan and line of credit. Businesses throughout the Merrimack Valley and Southern
New Hampshire are turning to Andover Bank. These include not just medium sized
companies like Delucca Fence, but the smallest of businesses which can be served
through our new Community Business Banking Group. The formation of the Community
Business Banking Group and the expansion of our business banking product line
were designed specifically to provide small to medium sized businesses with the
support they deserve and the services they require. Now businesses of all sizes
can rely on Andover Bank to provide solutions for all their business banking
needs.

[Photo]

The Delucca Fence Company

(l. to r.) Barbara J. Delucca, Salvatore Delucca, Janet J. Delucca-Proulx,
James J. Delucca
================================================================================

<PAGE> 4
================================================================================
[Graphic]
NEW HAMPSHIRE
EXPANSION

In the Fall of 1996, just one year after the successful opening of our Salem,
New Hampshire Office, Andover Bank NH opened a second office in Londonderry.
While complementing our Salem location, and allowing us to provide additional
convenience to our existing southern New Hampshire customers, the Londonderry
branch is in a prime location to attract new business. Faced with a decline in
community banking options, local residents and businesses now find Andover Bank
NH is one of a few community based institutions left in the area. While we may
expand to pursue new growth opportunities, we remain committed to providing the
kind of personal service on which we have built our reputation.

[Photo]
Our newly opened branch
in Londonderry, NH
================================================================================

generally and banking industry indices in particular. The widely followed Keefe,
Bruyette and Woods Bank Stock Index recorded an advance of 38%. We believe our
total return, when compared with peer institutions, is a worthwhile measurement
of the Company's performance.

GROWTH

Our second objective, to continue the growth of the Company, was achieved across
all of our core businesses and was aided by the expansion of our New Hampshire
franchise. After little more than one year in operation, our New Hampshire
subsidiary has deposits of $40 million. Based on the success of our Salem, New
Hampshire office, in October, we opened a branch office in Londonderry, New
Hampshire.

<TABLE>
STOCK PRICE PERFORMANCE
At December 31,
[Chart]
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C>
$11.88 $17.60 $25.63
</TABLE>

To reduce our dependence on wholesale, borrowed funds, we strove to increase
deposits. The results of that ongoing effort have been gratifying. For the first
time in the Company's history, we have over 100,000 separate deposit accounts
with an increase in deposit balances of over 11% to $824 million at December 31,
1996.

Especially noteworthy in the face of intense competition for new loans, the
Company experienced 13% growth in total loans across all loan types, both retail
and commercial. Our success in generating new loans was the result of our
continued leadership in originating adjustable rate mortgages and of several
initiatives undertaken in 1996.

<TABLE>
LOAN GROWTH
At December 31,
(Outstanding in millions)

[Chart]
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C>
$645.0 $768.6 $870.0
</TABLE>

Our residential mortgage loan balances were increased by the purchase of $26.7
million in locally generated whole loans. We have also begun a small
correspondent program whereby we purchase whole loans and their servicing from a
few local, unaffiliated mortgage origination firms. Lastly, at the end of the
year, we increased the number and expanded the geographic coverage of our
commissioned, outside mortgage originators. These initiatives should continue to
provide future growth opportunities.

Our commercial loan balances also increased in 1996. The opening of our Salem
branch in 1995, and the expansion to Londonderry in 1996, gave the Company a
broadened geographic market to serve commercial customers conveniently. This
branch convenience aided the generation of all commercial

<PAGE> 5

lines of business. In addition to aggressive marketing and customer calling by
our commercial lenders, a new initiative was undertaken to meet the needs of
local, small businesses through the development of new competitively priced loan
and deposit products.

The Community Business Banking Group was established at the end of the year.
This group consists of calling officers dedicated solely to providing deposit
and lending services to the many smaller businesses within our market area. It
seems mandatory for all banks, no matter how large and geographically distant,
to tout their services to small businesses. Our difference is that we mean it,
not as part of a marketing image, but as a part of our core business in our
local market. We make no claims on large, multi-state or multi-national
businesses, but we believe that we can serve well the small businesses which
comprise the bulk of economic activity in the Merrimack Valley.

<TABLE>
RESIDENTIAL LOANS SERVICED
At December 31,
(In millions)
[Chart]
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C>
$965.9 $1283.1 $1426.0
</TABLE>

CORE PROFITABILITY

The third objective, increasing core profitability, sought to increase the
Company's net interest margin while improving the Company's operating
efficiency. Earnings are improved both by increasing revenues and lowering
costs. In our competitive banking environment, raising revenues is not done
easily. On the expense side, opportunities are also limited. The Company enjoys
one of the lowest efficiency ratios in the industry, indicating that the Company
operates with lower costs than competing institutions. I am pleased to report
that our already low efficiency ratio was lowered again in 1996.

We are pleased by the slight increase in the Company's net interest margin. This
was partially accomplished through a realignment of the balance sheet. Our
lowest yielding investment assets were sold and replaced by higher yielding lo
ans. On the liability side, the growth in deposit balances allowed us to reduce
our reliance on higher cost borrowings. The combination of higher yielding
assets and lower cost deposits acted positively upon our net interest spread.

In 1996, we also looked to increase mortgage banking income. In June, we
purchased servicing rights for $164 million of residential mortgage loans. The
combination of the June purchase and the retention of all of our own originated
servicing increased mortgage banking income by 33%.

Turning to the expense side, foreclosed properties declined 60% from $4.2 mill
ion to $1.7 million. This reduction in other real estate owned had the
beneficial effect of reducing expenses for real estate operations. Total
non-performing assets declined by 22% from $15.9 million to $12.4 million.
Further good news for

================================================================================
[Graphic]
BANKING CONVENIENCE

At Andover Bank we believe customers deserve the most up-to-date banking
conveniences available. That is why we added Bill Paying to our PC & Touchtone
Banking services. Andover Bank customers can now use their personal computer or
telephone to pay bills day or night. In 1996, we also introduced the Andover
Bank MasterMoneytrademark Card, which both allows customers ready access to any
ATM, and serves as a convenient payment alternative to cash or checks. While
still a local bank committed to personal service, Andover Bank is also committed
to offering innovative products and services that provide our customers with the
utmost in convenience.

[Photo]
The new Andover Bank
MasterMoney[trademark] Card.
================================================================================

iii

<PAGE> 6

================================================================================
[Graphic]
COMMUNITY SERVICE

Andover Bank and its employees are constantly looking for ways to contribute and
invest in our community. Lending funds for Central Catholic High School's recent
renovations, serving meals at the Lawrence Boys and Girls Club, collecting more
than 4,000 food items, and donating Bank and employee resources to the United
Way are just a few examples of our efforts. At Andover Bank, we believe in
investing not only our capital, but investing our hearts and hands.

[Photo]
From Central Catholic High School (l. to r.)
Jill Albano, Edwin Corporun, Mark Lisavich
================================================================================

the future is the 28% reduction in all overdue loans.

The goal of expense reduction must be measured against the need to invest in
technology for the future, not only to ensure growth, but also to remain
competitive with our products and services. The goal of such expenditures is to
provide enhancements to consumer transaction and savings products and to
increase customer convenience . As an example, in 1996, we introduced Andover
Bank Bill Paying, a service which allows the electronic payment of bills and the
retrieval of complete account information 24-hours a day.

<TABLE>
HOUSEHOLD PENETRATION BY TOWN

<CAPTION>
TOWN HOUSEHOLD MEDIAN
PENETRATION HOUSEHOLD
INCOME
-----------------------------------------
<S> <C> <C>
ANDOVER 56.0% $61,070
TEWKSBURY 47.0 52,573
NORTH ANDOVER 47.0 51,692
METHUEN 38.0 37,701
LAWRENCE 25.0 22,183
SALEM, NH 19.0 51,073

<FN>
Based on 1990 Census Information and information obtained from inhouse MCIF
relational database as of 12/31/96.
</TABLE>

Also developed and tested in 1996, and soon to be available to all customers, is
Andover Bank's MasterMoney[trademark] Card, a combined ATM and debit card which
withdraws purchase amounts directly from a checking account. This single card
allows easy access to cash and serves as a convenient payment alternative to
either cash or check. Andover Bank remains committed to offering new products
and services comparable to any offered by even the largest banks.

FUTURE

For the future, our focus will remain much as it has in the recent past. We will
seek avenues of organic and external growth, selectively and prudently, never
risking the fundamental strength of the institution. We will continue to
strengthen our core businesses and core profitability. We will continue our
commitment to technology to enhance service delivery and to improve basic
procedures. Lastly, we will continue to examine non-traditional businesses, as
opportunities and legislative changes allow.

Most of all, we will maintain a strong commitment to our customers and local
communities. In the face of increasingly concentrated and distant competition,
we believe that our focus and responsiveness to local consumers and small
businesses offer bright and improving prospects for Andover Bancorp. We
anticipate the future with enthusiasm.

As we look forward, we are mindful of, and grateful for, the past and continuing
support of our shareholders, customers, employees, and communities.

Very truly yours,

/s/ Gerald T. Mulligan
Gerald T. Mulligan
President and Chief Executive Officer

<PAGE> 7

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on March 3, 1997 as reported by NASDAQ, was $144,000,976.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date, is:

Class: Common Stock, par value $0.10 per share
Outstanding as of March 3, 1997: 5,142,892 shares

<PAGE> 8

PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This annual
report on Form 10-K contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the registrant's actual results to differ materially
from those contemplated by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Certain
Factors That May Affect Future Results."

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important
factors, among others, could cause actual results to differ materially from
those contemplated by forward-looking statements made in this annual report on
Form 10-K or presented elsewhere by management from time to time. Defined terms
used elsewhere in this annual report have the same meanings herein as therein. A
number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the Banks' continued ability to
originate quality loans, fluctuation of interest rates, real estate market
conditions in the Banks' lending areas, general and local economic conditions,
the Banks' continued ability to attract and retain deposits, the Company's
ability to control costs, new accounting pronouncements, and changing regulatory
requirements.

PART I

ITEM 1. BUSINESS

GENERAL

Andover Bancorp, Inc. ("Andover" or the "Company") is a Delaware
corporation that was organized in 1987. Although Andover has corporate authority
to engage in any activity permitted by the Delaware General Corporation Law,
Andover's primary activity is to act as the 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, an important source of franchise value to the Banks, consist of
branch operations, home mortgage and consumer lending, and mortgage banking. The
Banks offer a variety of retail products through branch offices, automated
teller machines ("ATMs"), 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 Company's financial performance in 1996 was positively impacted by a
one-time gain (in the form of a tax benefit) of $2.5 million and a pre-tax
credit of $225,000 for the execution of a merger termination agreement,
partially offset by a pre-tax loss of $1.1 million from the sale of low yielding
investments and the early extinguishment of debt. The Company's 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.

2
<PAGE> 9

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 comprised of
communities in southern New Hampshire and operates banking offices in Salem and
Londonderry, New Hampshire.

LENDING ACTIVITIES

General. Lending is the principal business of the Banks and loans represent
the largest portion of the Banks' assets. As of December 31, 1996, the loan
portfolio, prior to the allowance for loan losses, amounted to $870.0 million or
72.2% of total assets. The Banks' loan portfolio increased 13.2% during 1996
resulting from higher loan origination volume and the purchase of $32.5 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.

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 of the Banks complement their home mortgage activities and
position them as full service retail lenders. The retail lending activities of
the Banks complement their retail deposit gathering activities and strengthen
their overall retail franchise in its 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,
1996, non-retail loans amounted to $190.9 million, prior to the allowance for
loan losses.

Residential Mortgage Loans. Residential mortgage loans totalling $620.0
million represented 71.3% of the total loan portfolio at December 31, 1996.
Included in residential mortgage loans was $11.8 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 $2.2 million in residential mortgage loans was held for sale at that
date. During 1996, the Bank purchased from other banks and correspondent
origination firms, $32.5 million of variable rate, locally originated
residential whole loans.

Nearly all of the loans in the residential mortgage portfolio are secured
by houses located in Massachusetts or in southern New Hampshire. According to
internal 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, 1996, commercial real estate
loans totalled $136.5 million, representing 15.7% of total loans. Approximately
$50.4 million, or 36.9% of these loans, are secured by apartment buildings and
multi-family residential properties. The balance of the commercial real estate
loans is 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. Variable interest rates on such loans are generally
set at a margin above either the one-year Treasury index

3
<PAGE> 10

or the prime rate as published in the Wall Street Journal and is subject to
periodic adjustment. Commercial real estate loans with fixed interest rates are
set at a margin above the Federal Home Loan Bank advance rate.

Construction and Land Loans. Construction and land loans totalled $35.0
million at December 31, 1996, representing 4.0% of total loans. At that date,
amounts committed to but not yet advanced in connection with such loans totalled
an additional $17.8 million. At December 31, 1996, outstanding construction
loans totalled $27.8 million and outstanding land loans (including loans for
unimproved land and land development) totalled $7.2 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 Banks typically are 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 $59.2 million at December 31, 1996,
representing 6.8% of total loans. Home equity loans constitute the greatest
portion of the Banks' consumer lending activity and totalled $41.7 million at
December 31, 1996. At that date, unadvanced amounts relating to home equity
loans totalled an additional $68.0 million. Home equity loans are offered both
in fixed-rate and adjustable form with varying terms of 3 to 10 years. The
adjustable rate loans are generally based on a margin over the prime rate as
published in the Wall Street Journal. Home equity loans are subject to the same
general underwriting standards as residential first mortgage loans.

Commercial Loans. At December 31, 1996, commercial loans totalled $19.4
million, or approximately 2.2% 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.

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 Banks employ a number of
mortgage loan originators who maintain regular contact with real estate firms
and other sources of business and who respond to general mortgage inquiries.
These mortgage specialists are assigned specific territories and receive
commissions on closed mortgage loans. In 1996, according to available data on
market share, Andover Bank ranked first in total home mortgages closed in each
community where it had a branch office. Total residential mortgages originated
in 1996 amounted to $168.3 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 Banks. The primary
origination activity in the consumer loan area relates to home equity lines of
credit which totalled $22.1 million in 1996, while other consumer loan
originations totalled $9.5 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 $94.4 million in such
loans during 1996.

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 loan portfolio, nonaccrual 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."

4
<PAGE> 11

Non-performing Assets. Non-performing assets consist of nonaccruing loans
and other real estate owned. During 1996, non-performing assets decreased 21.6%
or $3.4 million from 1995 levels, to $12.4 million and amounted to 1.0% of total
assets at year-end. The Company places all loans, regardless of collateral
values, on nonaccrual status when principal or interest is past due 90 days or
more. Loans for which payments are less than 90 days past due are placed on
nonaccrual status where there exists serious doubt as to collectibility. At
December 31, 1996, the Bank had $10.7 million in nonaccruing loans and $1.7
million in other real estate owned.

Through periodic provisions charged to expense, the Banks maintain an
allowance for losses on loans. The provision for loan losses totalled $2.6
million and $1.3 million in 1996 and 1995, respectively, primarily due to loan
growth and continued additions to non-performing loans. The provision in 1996
was negatively impacted by the deterioration of a previously reported problem
loan which resulted in a charge-off totalling $760,000. There was no provision
for loan losses in 1994 due to the progress in reducing non-performing assets
during 1994.

Significant Risk Elements. The largest concentration included in risk
elements at December 31, 1996, was non-performing assets within the City of
Lawrence with a carrying value of $7.4 million, or approximately 60% of
non-performing assets. This concentration of non-performing assets includes
non-owner occupied, multi-family housing. The largest non-performing
relationship includes 12 loans totalling $1.0 million to one borrower. 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 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.

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 in the early
1990's. 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 1997. 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
23.0% of total assets or $276.7 million as of December 31, 1996.

Loans generally provide a better return than securities available for
investment. In the third quarter of 1996, the Company restructured its balance
sheet by selling $40 million of low yielding securities at a loss of $870,000.
The majority of the securities were then replaced with similar securities at
higher yields during the fourth quarter of 1996. In the fourth quarter of 1995,
the Company reduced its investments available for sale portfolio to purchase
residential whole loans. The primary component of the total investment portfolio
is mortgage-backed securities which accounted for 66.2% of total investments at
December 31, 1996. The remaining portfolio is comprised of other high grade
investment securities.

Overall, in 1996, the total investment portfolio produced interest and
dividend income of $19.3 million as compared with $23.0 million in 1995 for the
reasons noted above. The investment portfolio and the sale of loans generated
net losses on sales, redemptions and the marking of certain securities to market
of $265,000 in 1996 as compared to net gains of $327,000 in 1995. Included in
the $265,000 loss for 1996 was the loss resulting from the

5
<PAGE> 12

balance sheet restructuring in the third quarter of 1996. 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 $824.3
million at December 31, 1996.

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 and borrowing limitations. As part of the 1996 third
quarter balance sheet restructuring, the Bank elected early prepayment of
selected above market FHLB advances. An extraordinary pretax loss of $298,000
was incurred on the extinguishment of $19.1 million of such borrowings. The
Banks also have 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. In addition, the
Banks have established overnight repurchase agreements with corporate customers.
The Banks may also obtain funds from the Federal Reserve Bank of Boston by
pledging certain assets. At December 31, 1996, total borrowings outstanding from
these sources amounted to $274.4 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 -- Deposits -- Asset and Liability
Management -- Liquidity -- Capital Resources."

OTHER SERVICES

Investment Services. The Banks make investment and brokerage services
available to their customers through 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 $71,000 from these services in 1996.

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

General. 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
Massachusetts Board of Bank Incorporation. As a Massachusetts-chartered savings
bank, the

6
<PAGE> 13

Bank is subject to regulation and supervision by the FDIC and the
Massachusetts Commissioner of Banks. 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.

Federal Deposit Insurance Corporation. The FDIC insures the Banks' deposit
accounts to the $100,000 maximum per separately insured account. The Banks are
subject to regulation, examination, and supervision by the FDIC and to reporting
requirements of the FDIC. The FDIC has adopted requirements setting minimum
standards for capital adequacy and imposing minimum leverage capital ratios. The
Banks exceeded all applicable requirements at December 31, 1996. Furthermore,
under the capital standards established pursuant to the FDIC Improvement Act of
1991, the Banks are currently well-capitalized.

Massachusetts Commissioner of Banks and New Hampshire Commissioner of
Banks. Massachusetts and New Hampshire statutes and regulations govern, among
other things, investment powers, lending powers, deposit activities, maintenance
of surplus and reserve accounts, the distribution of earnings, the payment of
dividends, issuance of capital stock, branching, acquisitions and mergers and
consolidations. Massachusetts and New Hampshire banks that do not operate in
accordance with the regulations, policies and directives of the respective
Commissioner of Banks may be subject to sanctions for noncompliance. The
Commissioners may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Banks' business in a manner
which is unsafe, unsound or contrary to the depositor's interest, or been
negligent in the performance of their duties.

In response to a Massachusetts law enacted in 1996, the Massachusetts
Commissioner has proposed rules that generally would give Massachusetts banks
powers equivalent to those of national banks. The Massachusetts Commissioner
also has adopted procedures expediting branching by strongly capitalized banks.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities will
be permitted, each with different effective dates. Interstate transactions and
activities provided for under the law include: (i) bank holding company
acquisitions of separately held banks in a state other than a bank holding
company's home state; (ii) mergers between banks with different home states,
including consolidations of affiliated banks; (iii) establishment of interstate
branches either de novo or by branch acquisition; and (iv) affiliate banks
acting as agents for one another for certain banking functions without being
considered a "branch". In general, subject to certain limitations, nationwide
interstate acquisitions are now permissible, irrespective of state law
limitations other than limitations related to deposit concentrations and bank
age requirements. Interstate mergers will be permissible on June 1, 1997, unless
a state either passes legislation either to prevent or to permit the earlier
occurrence of interstate mergers. States may at any time enact legislation
permitting interstate branching either de novo or through acquisition.
Affiliated banks may act as agents for one another beginning one year after
enactment. Each of the transactions and activities must be approved by the
appropriate federal bank regulator, with separate and specific criteria
established for each category.

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

EMPLOYEES

At December 31, 1996, Andover had 261 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.

<PAGE> 14

SUBSIDIARIES

Andover has two direct subsidiaries, the Bank and ABNH. The Bank has five
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. The fifth subsidiary, ASB Development Corp. ("ASB"), has four
subsidiaries and holds title to a portion of Andover's main office, the loan
operation building and to other income producing property. One subsidiary of ASB
holds real estate property that comprises a portion of Andover's main office
location. Two other subsidiaries of ASB were organized as Massachusetts security
corporations to take advantage of beneficial state tax treatment related to the
holding of certain investments. The fourth subsidiary of ASB, Andover Preferred
Capital Corporation ("APCC"), is 99 percent owned by ASB and is a Massachusetts
business corporation which has elected to be taxed as a real estate investment
trust for federal and Massachusetts tax purposes. APCC holds mortgage loans
which were previously originated by Andover Bank. ABNH currently has no
subsidiaries.

<PAGE> 15

ITEM 2. PROPERTIES
<TABLE>
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(R),
EXCHANGE(R) and CIRRUS(R) with over 260,000 ATM locations worldwide. The
following table sets forth certain information relating to bank premises owned
or used by Andover in conducting its business.

<CAPTION>
OWNED OR
LOCATION LEASE
- --------- --------

Andover Bank
- ------------
<S> <C>
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
1077 Osgood Street (ATM only) (2)..............................Leased

Tewksbury
995 Main Street.................................................Owned
2171 Main Street (3)...........................................Leased

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

Andover Bank NH
- ---------------
Main Office:
Salem
130 Main Street (4)............................................Leased

Branch:
Londonderry
62 Nashua Road..................................................Owned

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

<FN>
(1) Land is held under a ground lease which expires December 1, 2006, with
renewal options for an additional 59 years.

(2) Lease expires May 31, 2001, with renewal options for an additional ten
years.

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

(4) Lease expires July 31, 1997, with renewal options for an additional six
years.
</TABLE>

9
<PAGE> 16

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.

PART II

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

STOCK PRICES AND DIVIDENDS

Andover's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market(SM) under the symbol: ANDB. On February 21, 1997, there were
approximately 2,562 holders of record of the 5,135,330 shares of Andover Common
Stock outstanding.

<TABLE>
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. All per share information has been restated for all
periods to reflect the Company's 20% stock dividend distributed to shareholders
on November 13, 1996.

PRICE DIVIDENDS
DECLARED
QUARTER ENDED HIGH LOW PER SHARE
------------- ------ ----- ---------
<S> <C> <C> <C>
1994 March 31, 1994..................... $16.35 $12.40 $.0833
---- June 30, 1994...................... 18.12 13.96 .0833
September 30, 1994................. 17.29 14.17 .0833
December 31, 1994.................. 14.48 11.25 .0833

1995 March 31, 1995..................... $15.73 $11.77 $.0833
---- June 30, 1995...................... 16.56 13.85 .0833
September 30, 1995................. 18.85 15.31 .1000
December 31, 1995.................. 19.37 17.19 .1000

1996 March 31, 1996..................... $19.69 $16.87 $.1000
---- June 30, 1996...................... 23.33 17.81 .1250
September 30, 1996................. 22.19 19.06 .1250
December 31, 1996.................. 29.25 21.09 .1500
</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, 1996, Andover
held $3.0 million in cash and interest-bearing deposits at the holding company
level.

Dividend payments totalled $2.6 million in 1996 and $1.9 million in 1995.
On January 23, 1997, a dividend of $.15 per share was declared, payable on
February 18, 1997. See Note 13 to the "Consolidated Financial Statements."

<PAGE> 17

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
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.

<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF OFFICES DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $1,204,813 $1,110,847 $1,058,672 $831,908 $784,284
Total loans........................... 870,035 768,598 645,037 456,813 384,965
Allowance for loan losses............. 12,229 11,665 12,343 13,392 16,054
Investments(1)........................ 276,651 285,232 352,685 294,969 292,825
Assets held for sale.................. 2,220 5,162 2,507 32,280 50,946
Deposits.............................. 824,311 743,205 727,858 558,773 539,765
Borrowed funds........................ 274,418 272,626 251,185 197,637 178,226
Stockholders' equity.................. 95,846 85,165 72,522 70,885 61,718
Non-performing assets................. 12,382 15,785 23,312 24,651 40,353
Number of banking offices............. 12 11 10 8 8
</TABLE>

<TABLE>
YEARS ENDED DECEMBER 31,
<CAPTION> ------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income ......... $83,823 $76,886 $63,585 $52,531 $51,710
Interest expense ..................... 48,529 44,552 33,421 26,034 28,262
------- ------- ------- ------- -------
Net interest and dividend income ..... 35,294 32,334 30,164 26,497 23,448
Provision for loan losses ............ 2,555 1,295 -- -- 750
Net gains (losses) from sales of
assets held for sale and
investments (1) .................... (265) 327 (234) 396 2,729
Losses on real estate operations ..... (1,542) (2,003) (2,617) (4,547) (10,381)
Other income ......................... 5,872 5,469 4,039 2,885 4,470
Merger expense (recovery) ............ (225) 1,000 -- -- --
Non-interest expense ................. 21,113 18,860 17,528 15,224 14,615
------- ------- ------- ------- -------
Income before income tax expense
(benefit) and extraordinary item ... 15,916 14,972 13,824 10,007 4,901
Income tax expense (benefit) ......... 3,264 5,634 4,781 2,449 (3,009)
------- ------- ------- ------- -------
Income before extraordinary item ..... 12,652 9,338 9,043 7,558 7,910
Extraordinary item ................... (173) -- -- -- --
------- ------- ------- ------- -------
Net income ........................... $12,479 $ 9,338 $ 9,043 $ 7,558 $ 7,910
======= ======= ======= ======= =======

PER SHARE DATA: (3)
Net income before extraordinary item.. $ 2.47 $ 1.85 $ 1.80 $ 1.53 $ 1.61
Extraordinary item ................... (0.03) -- -- -- --
------- ------- ------- ------- -------
Net income ........................... $ 2.44 $ 1.85 $ 1.80 $ 1.53 $ 1.61
======= ======= ======= ======= =======
Dividends declared ................... 0.50 0.37 0.33 0.13 0.00
Book value at end of period .......... 18.67 16.75 14.36 14.24 12.55
Book value (2) ....................... 18.61 16.71 15.28 13.86 12.55

SELECTED FINANCIAL RATIOS:
Return on average assets ............. 1.08% 0.87% 0.94% 0.96% 1.12%
Return on average equity (2) ......... 13.89 11.51 12.36 11.60 13.93
Average equity as a percentage
of average assets (2) ............. 7.76 7.59 7.57 8.30 8.03
Dividend payout ratio ................ 20.49 20.00 18.33 8.50 N/A
Weighted average interest rate
spread............................. 2.66 2.71 2.91 3.20 3.17
Net yield on average earning assets .. 3.16 3.14 3.26 3.56 3.53
<FN>
- ------------------

(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.
(3) The per share data has been restated for all periods to reflect a 20% stock dividend distributed on November 13, 1996.
</TABLE>

<PAGE> 18

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 their
loan and investment portfolios and the interest paid on their 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 banking income, 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 1996 and 1995. In order to understand this section in context,
it should be read in conjunction with the Consolidated Financial Statements and
accompanying footnotes.

The following also contains forward-looking statements. There are a number
of important factors that could cause the Company's actual results to differ
materially from those contemplated by such forward-looking statements. These
factors include, without limitation, those set forth under the caption "Certain
Factors That May Affect Future Results."

RESULTS OF OPERATIONS

Andover generated net income of $12.5 million or $2.44 per share, $9.3
million or $1.85 per share and $9.0 million or $1.80 per share in 1996, 1995 and
1994, respectively. Andover's return on average assets increased to 1.08% in
1996 compared to 0.87% in 1995 and 0.94% in 1994. Return on average
stockholders' equity increased to 13.89% in 1996 compared to 11.51% in 1995 and
12.36% in 1994. The Company's financial performance in 1996 was positively
impacted by a one-time gain (in the form of a tax benefit) of $2.5 million and a
pre-tax credit of $225,000 for the execution of a merger termination agreement,
partially offset by a pre-tax loss of $1.1 million from the sale of low-yielding
investments and the early extinguishment of debt. 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.

Net Interest and Dividend Income. Net interest and dividend income was
$35.3 million in 1996, up from $32.3 million in 1995 and $30.2 million in 1994.
Net interest income increased $3.0 million during 1996 as a result of higher
average earning asset volumes. Market interest rates have been fairly volatile
over the past several years. The impact of the growth in interest-earning assets
during 1996 was partially muted by the continued contraction in the interest
rate spread. This contraction is primarily the result of increased rates paid on
deposits and totalled 2.66% in 1996. The yield on interest-earning assets
increased slightly in 1996 to 7.50% while the rate paid on interest-bearing
deposits experienced a modest increase to 4.84%. Since the average earning
assets rose faster than the average interest-bearing liabilities, the net yield
increased 2 basis points in 1996 to 3.16%. During 1995, market interest rates
decreased from the levels experienced in 1994, although they remained at levels
above those experienced in 1993 and 1992. With this decline in 1995, the rates
paid on liabilities and yields earned on assets 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 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 amount of foregone interest income
from nonaccruing and restructured loans totalled $909,000 in 1996, $1.0 million
in 1995 and $1.1 million in 1994.

Average earning assets increased 8.6% in 1996 to $1,118.1 million at
December 31, 1996, and increased 11.3% in 1995 to $1,029.6 million as of
December 31, 1995. The increase in each of the two years was primarily due to
higher loan growth resulting from increased loan originations as well as loan
purchases.

<PAGE> 19

Total average loans increased $146.4 million during 1996 and $101.7 million
during 1995 primarily due to retained loan originations and whole loan
purchases. The yield on real estate loans decreased 2 basis points during 1996
to 7.74% while increasing 68 basis points in 1995 to 7.76%. The reasons for the
yield on real estate loans going in an inverse direction with market interest
rates is 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
decreased 58 basis points during 1996 to 8.56% while increasing 113 basis points
during 1995 to 9.14%. The yield on commercial loans increased 158 basis points
during 1996 to 9.63% and increased 327 basis points in 1995 to 11.21%. Consumer
and commercial loans were affected by a stable prime rate during 1996 after
increasing the prior two years. The decline in the consumer and commercial loan
yields during 1996 were primarily due to competitive pricing reasons as well as
a higher proportion of fixed rate loans. Commercial loans were 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 decreased 57 basis
points during 1996 to 5.24% and increased 184 basis points in 1995 to 5.81%. The
yields earned on investment securities decreased 15 basis points to 6.09% in
1996 while decreasing modestly in 1995 to 6.24%. The yield on mortgage-backed
securities increased 11 basis points during 1996 to 6.82% and increased 23 basis
points in 1995 to 6.71%.

The rate paid on deposits increased 18 basis points in 1996 to 4.43% and 80
basis points in 1995 to 4.25%. Core deposits, which include NOW, savings and
money market accounts, have rates lower than those paid by certificates of
deposit. While the Company has been able to keep the rates paid on the core
deposits fairly low overall during 1996, there have been increases in the rates
paid in each of the past two years. Core deposit balances, however, have
remained fairly stable during that same time period and totalled approximately
$269 million. Certificates of deposit average balances increased $26.3 million
and the rates paid increased 15 basis points during 1996, while also increasing
$88.3 million and 85 basis points, respectively, in 1995.

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 1996, the average balance on borrowed funds increased $39.4 million and
the rate paid decreased 31 basis points to 5.85% while in 1995, average balances
increased $23.7 million and the rate paid increased 79 basis points to 6.16%.
The decline in the rate paid is partly attributable to the early extinguishment
of $19.1 million of borrowed funds in the third quarter of 1996.

Overall, the continued compression in the margins over the past two years
have led to an interest rate spread of 2.66% in 1996, down 5 basis points from
2.71% in 1995. The decline in the spread in 1995 totalled 20 basis points.

<PAGE> 20

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

<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------
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)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments .... $ 10,874 $ 570 5.24% $ 10,775 $ 626 5.81% $ 5,220 $ 207 3.97%
Investment securities (1).. 88,347 5,380 6.09 112,342 7,009 6.24 102,458 6,406 6.25
Mortgage-backed
securities (1) ........... 195,137 13,304 6.82 229,111 15,375 6.71 241,574 15,656 6.48
---------- ------- ---------- ------- -------- -------
Total investments .......... 294,358 19,254 6.54 352,228 23,010 6.53 349,252 22,269 6.38
---------- ------- ---------- ------- -------- -------
Real estate loans(1) (2)... 749,407 57,998 7.74 609,485 47,313 7.76 513,481 36,345 7.08
Consumer loans(2) ......... 55,081 4,717 8.56 50,606 4,625 9.14 48,870 3,915 8.01
Commercial loans(2) ....... 19,255 1,854 9.63 17,295 1,938 11.21 13,292 1,056 7.94
---------- ------- ---------- ------- -------- -------
Total loans .............. 823,743 64,569 7.84 677,386 53,876 7.95 575,643 41,316 7.18
---------- ------- ---------- ------- -------- -------
Total interest-earning
assets.................... 1,118,101 83,823 7.50% 1,029,614 76,886 7.47% 924,895 63,585 6.87%
------- ------- -------
Allowance for loan losses ... (11,846) (11,749) (13,826)
Other real estate owned ..... 2,869 6,720 12,014
Other assets ................ 49,655 44,336 43,139
---------- ------- --------

Total assets ............. $1,158,779 $1,068,921 $966,222
========== ========== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts............... $ 66,708 $ 661 0.99% $ 63,049 $ 711 1.13% $ 61,518 $ 725 1.18%
Regular savings accounts .. 76,506 1,800 2.35 71,659 1,554 2.17 76,357 1,512 1.98
Money market deposit
accounts ................. 125,923 3,639 2.89 133,989 3,548 2.65 150,557 3,460 2.30
Certificates of deposit ... 445,682 25,592 5.74 419,385 23,433 5.59 331,076 15,677 4.74
---------- ------- -------- ------- -------- -------
Total interest-bearing
deposits .............. 714,819 31,692 4.43 688,082 29,246 4.25 619,508 21,374 3.45
---------- ------- -------- ------- -------- -------
Borrowed funds:
Reverse repurchase
agreements ............... 15,062 783 5.20 14,798 897 6.06 25,228 1,089 4.32
Notes payable ............. 272,655 16,054 5.89 233,489 14,409 6.17 199,310 10,958 5.50
---------- ------- -------- ------- -------- -------
Total borrowed funds ..... 287,717 16,837 5.85 248,287 15,306 6.16 224,538 12,047 5.37
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 1,002,536 48,529 4.84% 936,369 44,552 4.76% 844,046 33,421 3.96%
------- ------- -------

Demand deposits ............. 57,913 45,328 43,592
Other liabilities ........... 8,465 6,111 5,410
---------- ------- --------
Total liabilities ........ 1,068,914 987,808 893,048

Stockholders' equity ........ 89,865 81,113 73,174
---------- ------- --------
Total liabilities and stock-
holders' equity........ $1,158,779 $1,068,921 $966,222
========== ========== ========
Net interest income ......... $35,294 $32,334 $30,164
======= ======= =======

Interest rate spread ........ 2.66% 2.71% 2.91%
==== ==== ====
Net yield on earning assets . 3.16% 3.14% 3.26%
==== ==== ====
<FN>

(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.
</TABLE>

<PAGE> 21

<TABLE>
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.

<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
--------------------------- ---------------------------
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 ......................... $10,829 $ (144) $10,685 $7,228 $3,740 $10,968
Consumer ............................ 394 (302) 92 143 567 710
Commercial .......................... 206 (290) (84) 373 509 882
------- ------ ------- ------ ------ -------
Total interest on loans ........... 11,429 (736) 10,693 7,744 4,816 12,560
------- ------ ------- ------ ------ -------

Investments:
Short-term investments ............... 6 (62) (56) 292 127 419
Investment securities ................ (1,465) (164) (1,629) 617 (14) 603
Mortgage-backed securities ........... (2,313) 242 (2,071) (825) 544 (281)
------- ------ ------- ------ ------ -------
Total interest and dividends on
investments ...................... (3,772) 16 (3,756) 84 657 741
------- ------ ------- ------ ------ -------
Total interest and dividend
income ........................... 7,657 (720) 6,937 7,828 5,473 13,301
------- ------ ------- ------ ------ -------

Interest Expense
Savings deposits ..................... 10 277 287 (405) 521 116
Time certificates .................... 1,498 661 2,159 4,631 3,125 7,756
Reverse repurchase agreements ........ 16 (130) (114) (542) 350 (192)
Notes payable ........................ 2,330 (685) 1,645 2,013 1,438 3,451
------- ------ ------- ------ ------ -------
Total interest expense ............. 3,854 123 3,977 5,697 5,434 11,131
------- ------ ------- ------ ------ -------

Net increase (decrease) in net interest
and dividend income ................ $ 3,803 $ (843) $ 2,960 $2,131 $ 39 $ 2,170
======= ====== ======= ====== ====== =======
</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 Banks' allowance and may require the Banks to provide additions to
the allowance based on their assessment, which may differ from management's
assessment.

15
<PAGE> 22

The provision for loan losses in 1996 and 1995 was $2.6 million and $1.3
million, respectively. There was no provision for loan losses in 1994. Net
charge-offs amounted to $2.0 million in 1996 compared to $2.0 million in 1995
and $2.8 million in 1994. The increased provision in 1996 was due to loan growth
of 13% on top of the prior year's loan growth and the deterioration of a
previously reported problem loan resulting in a charge-off of $760,000. 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 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.

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

Non-interest Income. The Company recorded income from non-interest sources
of $4.1 million in 1996, $3.8 million in 1995 and $1.2 million in 1994. The
increases of $272,000 in 1996, $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 an
increase in mortgage banking income.

Net losses from sales and redemptions of investments totalled $686,000 in
1996, as compared to net gains of $272,000 in 1995 and $236,000 in 1994. The
loss on sale of investments in 1996 was primarily due to the balance sheet
restructuring whereby the Company sold approximately $40 million of low yielding
investments at a loss of $870,000 in the third quarter. 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 $421,000 in 1996
and $55,000 in 1995 as compared to net losses of $470,000 in 1994. Included in
the net gains on assets held for sale for 1996 was $423,000 resulting from the
adoption of new accounting rules on originated mortgage servicing rights (SFAS
122). Additionally, gains resulting from the capitalization of excess mortgage
servicing fees totalled $264,000, $144,000 and $444,000, respectively, for the
years ending December 31, 1996, 1995 and 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 and a loss of $122,000 on the transfer of loans originally held
for sale to the loan portfolio. See 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 the values of loans and
mortgage-backed securities held for sale to decrease, 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 $1.5 million in 1996, $2.0
million in 1995 and $2.6 million in 1994. Real estate operations consist of the
provision for the valuation allowance, operating and administrative costs of
maintaining other real estate owned, gains or losses on sales of properties and
costs associated with the foreclosure of nonaccrual 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.

<PAGE> 23

Replenishing the valuation allowance caused by charge-offs taken as a
result of declines in value resulted in a charge of $554,000, $750,000 and $1.4
million to real estate operations in 1996, 1995 and 1994, respectively.
Deterioration in the New England real estate market during the early 1990's led
to high levels of other real estate owned and corresponding administrative
costs. Gains on sales of other real estate owned totalled $162,000 in 1996,
$582,000 in 1995 and $1.4 million in 1994, 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
$1.2 million in 1996, $2.0 million in 1995 and $3.0 million in 1994. 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 $3.2 million in 1996, $2.4 million in 1995 and $1.4 million in
1994. The increased income in each of the years was due to an increase in the
total loans serviced for others. As a servicer for investors, the Company
generally retains as a fee a portion of the interest paid by the borrower. The
table below summarizes the Company's results from servicing loans for investors.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------

1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>

Gross servicing income................................. $ 3,523 $ 2,611 $ 2,207
Amortization included in mortgage banking income....... (360) (240) (765)
Amortization included in mortgage banking expense...... (1,045) (602) (32)
-------- -------- ---------
Net loan servicing revenue............................. $ 2,118 $ 1,769 $ 1,410
======== ======== =========

Average loans serviced for investors................... $841,598 $628,450 $458,361
Year-end loans serviced for investors.................. $870,683 $780,356 $513,227
</TABLE>

During 1996, 1995 and 1994, the Company purchased mortgage servicing rights
to $180.0 million, $303.6 million and $82.1 million, respectively, in
residential first mortgage loans. These purchased balances are included in the
balance of loans serviced for others. As part of its long-term business plan,
the Company intends to continue purchasing mortgage servicing to increase the
use of its existing servicing capacity and increase loan service revenue when
it's deemed appropriate. In the first quarter of 1997, the Company purchased the
servicing rights to approximately $209 million of residential first mortgage
loans. The Company also expects to continue selling mortgages in the secondary
market and servicing income related to this activity is accordingly expected to
continue for the forseeable future. See Notes 1 and 5 to the "Consolidated
Financial Statements."

Other income totalled $2.7 million, $3.1 million, and $2.6 million in 1996,
1995 and 1994, 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 both 1996 and 1995, and
$1.5 million in 1994. 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, IRA, safe deposit and ATM fees and other miscellaneous charges.
Rental income from tenants decreased in 1996 due to a vacancy in a retail space.
See Note 14 to the "Consolidated Financial Statements."

Non-interest Expense. Non-interest expenses increased $1.0 million or 5.2%
to $20.9 million in 1996. Non-interest expenses increased $2.3 million or 13.3%
to $19.9 million in 1995. The increases in both 1996 and 1995 are primarily due
to operating a larger institution in each of the years. This has resulted in
higher head counts, increased number of branches and growth in the number of
loans and deposits. The increase in 1995 was also attributable to a $1.0 million
charge taken in connection with the failed acquisition of Finest Financial Corp.

<PAGE> 24

Salaries and employee benefits increased $723,000 to $10.3 million in 1996
and increased $578,000 in 1995 to $9.6 million. The increase in each of the
years was primarily due to a higher head count, merit increases and increased
costs associated with the various benefits offered by the Company. Additionally,
a new branch facility was opened in Londonderry, New Hampshire in 1996 while the
Salem, New Hampshire office opened in September, 1995. See Note 15 to the
"Consolidated Financial Statements."

Office occupancy and equipment increased $418,000 to $2.8 million in 1996
and increased $157,000 in 1995 to $2.3 million. The increase in 1996 was the
result of increased depreciation and rental expenses resulting from the new
branch facilities, including a remote ATM which opened in July, 1996.
Additionally, the Company shortened its estimate of the useful life of one
branch which caused depreciation expense to increase. The primary reason for the
increase in 1995 was the improvement of technology and computer systems
throughout the organization, resulting in higher depreciation expense. See Note
7 to the "Consolidated Financial Statements."

Data processing expenses totalled $1.7 million in 1996, $1.4 million in
1995 and $1.2 million in 1994. Data processing expenses increased $221,000 in
1996 and $273,000 in 1995 due to a higher loan and deposit base resulting from
the purchase of mortgage loan servicing, loan and deposit growth as well as
costs associated with the increased number of ATM's throughout the branches.

Mortgage banking expenses totalled $1.5 million in 1996, $913,000 in 1995
and $415,000 in 1994. The largest component is amortization of purchased
servicing rights which totalled $1.0 million, $602,000 and $32,000,
respectively, in 1996, 1995 and 1994. Other costs included in mortgage banking
expenses are commissions and related expenses paid to the mortgage loan
originators, net of any deferred origination expenses, and costs associated with
servicing the portfolio for outside investors. These costs increased in 1996 due
to higher loan origination volume as well as a larger servicing portfolio.

Professional fees, including corporate legal expense and accounting and
audit expenses, totalled $1.3 million in 1996, $681,000 in 1995 and $648,000 in
1994. The increase of $647,000 was primarily due to costs incurred implementing
tax planning strategies undertaken during the third quarter in the amount of
$400,000. Additionally, increased corporate legal fees and miscellaneous
consulting contracts contributed to the increase in 1996. The modest increase in
1995 was due primarily to costs related to the opening of ABNH.

Marketing expenses totalled $976,000 in 1996, $847,000 in 1995 and $677,000
in 1994. Marketing expenses increased $129,000 in 1996 and $170,000 in 1995 due
to a number of discretionary promotions for various retail products as well as
continued promotions relating to the opening and expansion of Andover Bank NH.

Deposit insurance premiums were $15,000, $892,000 and $1.6 million in 1996,
1995 and 1994, respectively. Deposit insurance premiums decreased $877,000 in
1996 due to significantly reduced FDIC assessment rates and decreased another
$719,000 in 1995 due primarily to a premium refund from the FDIC in the third
quarter as well as reduced assessment rates thereafter. The assessment rate is
expected to increase modestly in 1997. The Banks are in the lowest risk category
for calculating FDIC insurance premiums.

In 1996, the Company recognized a recovery of $225,000 from the execution
of a merger termination agreement while in 1995, the Company incurred a merger
expense of $1.0 million relating to costs associated with a terminated merger
with Finest Financial Corp. The 1995 non-recurring charge included costs
incurred by investment advisors and legal and audit professionals. See Note 19
to the "Consolidated Financial Statements."

Other operating expenses totalled $2.6 million in 1996, $2.1 million in
1995 and $1.8 million in 1994. The increases of $431,000 in 1996 and $342,000 in
1995 are both due to running a larger organization with a new branch added in
1996 and a new subsidiary bank established in 1995. The consecutive increases
result from higher postage expenses, office supplies and printing costs as well
as telephone costs and increased contributions. Additionally, a $155,000
non-recurring charge was incurred in 1996 with respect to an insurance related
adjustment for the former Chief Executive Officer of the Bank pursuant to the
term of his retirement agreement.

<PAGE> 25

Federal and State Income Tax Expense. The Company recorded tax expenses of
$3.1 million, $5.6 million and $4.8 million in 1996, 1995 and 1994,
respectively. The decrease of $2.5 million in 1996 and increase of $853,000 in
1995 were mainly due to a one time benefit of $2.5 million as a result of a
change in federal tax law in 1996 and increased pre-tax earnings in 1995.
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,
1996, 1995 and, 1994, the Company generated taxable income of approximately $8.1
million, $3.8 million and $3.4 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 $500,000 in 1996, $600,000 in
1995 and $1.0 million in 1994.

At December 31, 1996, the net deferred tax asset is supported by
recoverable income taxes of approximately $4.3 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, 1996
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 $94.0 million, or 8.5%, to $1,204.8 million at
December 31, 1996. The growth in total assets was primarily due to an increase
of $101.4 million in total loans, offset by a modest decline in the investment
portfolio. Total assets at December 31, 1995 amounted to $1,110.8 million, an
increase of $52.2 million or 4.9% from $1,058.7 million at December 31, 1994,
primarily resulting from an increase in total loans of $123.6 million, offset by
a decrease in the investment portfolio of $67.5 million.

LOANS

Total loans at December 31, 1996, prior to the allowance for loan losses,
amounted to $870.0 million compared with $768.6 million at December 31, 1995, an
increase of $101.4 million or 13.2% primarily due to internally generated loan
growth combined with a purchase of $32.5 million in residential whole loans. At
December 31, 1996, 66.7% of Andover's total loan portfolio consisted of loans
with adjustable rates.

<PAGE> 26
<TABLE>
The following table shows the composition of the Company's loan portfolio
at the dates indicated. The balances shown are net of unadvanced funds, loan
premiums or discounts and deferred loan origination fees and costs.
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ----------------- ----------------- ---------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential ............. $619,955 71.3% $558,231 72.6% $452,708 70.2% $297,779 65.2% $229,961 59.7%
Commercial .............. 136,454 15.7 121,909 15.9 108,725 16.8 85,339 18.6 79,560 20.7
Construction and land ... 35,001 4.0 18,138 2.4 18,021 2.8 13,991 3.1 11,293 2.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans................. 791,410 91.0 698,278 90.9 579,454 89.8 397,109 86.9 320,814 83.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----

Consumer loans:
Home improvement, second
mortgage and home equity
line of credit ......... 49,670 5.7 43,463 5.6 42,602 6.6 39,338 8.6 39,071 10.2
Personal ................ 3,467 0.4 3,369 0.4 2,751 0.4 2,073 0.5 2,762 0.7
Guaranteed education .... 3,755 0.4 2,149 0.3 4,759 0.8 2,847 0.6 1,948 0.5
Collateral .............. 2,332 0.3 2,189 0.3 2,052 0.3 1,504 0.3 1,812 0.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans .. 59,224 6.8 51,170 6.6 52,164 8.1 45,762 10.0 45,593 11.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----

Commercial loans ......... 19,401 2.2 19,150 2.5 13,419 2.1 13,942 3.1 18,558 4.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----

Total loans ........... 870,035 100.0% 768,598 100.0% 645,037 100.0% 456,813 100.0% 384,965 100.0%
===== ===== ======== ===== ======== ===== ======== =====

Allowance for loan losses (12,229) (11,665) (12,343) (13,392) (16,054)
-------- -------- -------- -------- --------

Net loans ............. $857,806 $756,933 $632,694 $443,421 $368,911
======== ======== ======== ======== ========
</TABLE>

Total real estate loans increased $93.1 million in 1996 to $791.4 million
at December 31, 1996, primarily resulting from loan growth as well as the
purchase of $32.5 million in residential 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 were strong in 1996 due
to a favorable interest rate environment while loan originations dropped in 1995
due to the higher interest rates existing during most of the year. Residential
loan originations totalled $168.3 million in 1996, $132.1 million in 1995 and
$180.4 million in 1994. 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 or available for sale of $37.7 million
in 1996, $20.3 million in 1995 and $60.8 million in 1994, 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 $39.8 million in 1996, $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 $877.7 million at December 31, 1996, compared to $780.4 million
at December 31, 1995 and $513.2 million at December 31, 1994.

<PAGE> 27

<TABLE>

The following table shows the composition of the Company's loan
originations and loan purchases for the years indicated:
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>

Real estate loans:
Residential fixed rate ...................................... $ 89,830 $ 88,990 $ 83,775 $229,827 $294,346
Residential variable rate ................................... 78,453 43,138 96,657 81,308 29,393
-------- -------- -------- -------- --------
Total residential originations ............................. 168,283 132,128 180,432 311,135 323,739

Commercial .................................................. 32,800 17,991 17,745 14,537 6,512
Construction and land ....................................... 41,888 31,543 30,498 26,110 16,255
-------- -------- -------- -------- --------
Total real estate loan originations ........................ 242,971 181,662 228,675 351,782 346,506
-------- -------- -------- -------- --------

Residential whole loan purchases ............................ 32,474 56,665 -- -- --
Commercial whole loan purchases ............................. -- 3,213 -- -- --
-------- -------- -------- -------- --------
Total real estate purchases ................................ 32,474 59,878 -- -- --
-------- -------- -------- -------- --------

Total real estate loan originations and purchases .......... 275,445 241,540 228,675 351,782 346,506
-------- -------- -------- -------- --------

Consumer loans:
Home equity line of credit .................................. 22,063 10,350 14,614 22,411 12,560
Other consumer .............................................. 9,497 8,022 5,723 2,134 3,589
-------- -------- -------- -------- --------
Total consumer loans ....................................... 31,560 18,372 20,337 24,545 16,149
-------- -------- -------- -------- --------

Commercial loans .............................................. 19,732 16,933 10,437 6,161 8,985
-------- -------- -------- -------- --------

Total loan originations and purchases....................... $326,737 $276,845 $259,449 $382,488 $371,640
======== ======== ======== ======== ========
</TABLE>

Outstanding commercial loans increased in 1996 to $19.4 million at December
31, 1996. Commercial real estate loans increased $14.5 million in 1996 to $136.5
million at December 31, 1996, while construction and land loan balances
increased $16.9 million to $35.0 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 stabilizing values and the Company's interest
in corporate lending. Total originations of corporate loans were $94.4 million
in 1996, $66.5 million in 1995 and $58.7 million in 1994.

Loans transferred into real estate owned totalled $1.7 million, $3.2
million and $4.4 million in 1996, 1995 and 1994, 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 increased 15.7%, or $8.1 million to $59.2
million at December 31, 1996, from $51.2 million at year-end 1995. During 1996,
the Company aggressively priced its home equity lines of credit and experienced
a 113% increase in originations over 1995 levels. Prior to 1996, the Company had
experienced a two-year decline in consumer originations. Originations of
consumer loans are also sensitive to changes in the interest rate environment.

21
<PAGE> 28

RISK ELEMENTS

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

<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
Nonaccruing loans..................................... $10,699 $11,627 $14,516 $11,531 $15,912
Other real estate owned............................... 1,683 4,158 8,796 13,120 24,441
------- ------- ------- ------- -------

Total non-performing assets..................... $12,382 $15,785 $23,312 $24,651 $40,353
======= ======= ======= ======= =======

Total non-performing assets as a
percentage of total assets.......................... 1.0% 1.4% 2.2% 3.0% 5.1%
</TABLE>

During 1996, continued progress was made in reducing non-performing assets
with a reduction of $3.4 million or 21.6% primarily due to the sale of other
real estate owned. Of the $10.7 million in nonaccruing loans at December 31,
1996, $3.0 million are less than 90 days past due but have exhibited some other
credit weakness. 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. A significant
portion of Andover's non-performing assets 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 1997. At December 31, 1996, approximately $6.0
million of nonaccruing loans and $1.4 million of other real estate owned were
secured by properties located in Lawrence, of which the largest relationship
totalled $1.0 million.

The amount of accruing loans secured by properties in Lawrence totalled
approximately $49.7 million at December 31, 1996. The two largest multi-family
relationships with borrowers included in the accruing Lawrence portfolio
totalled $1.3 million and $1.2 million, respectively, at December 31, 1996.
Substantially all of the accruing loans at year end in Lawrence were secured by
residential properties.

At December 31, 1996, total impaired loans were $9.1 million, of which $2.7
million had related allowances of $.5 million and $6.4 million which did not
require a related impairment allowance. All of the $9.1 million in impaired
loans have been measured using the fair value of the collateral method. During
the period ended December 31, 1996, the average recorded value of impaired loans
was $10.7 million and the related amount of interest income recognized was
$242,000. See Notes 1, 4 and 6 to the "Consolidated Financial Statements" for
further information.

Nonaccruing Loans. Management places loans, regardless of collateral
values, on nonaccrual status when principal or interest is past due 90 days or
more. All previously accrued but uncollected interest is reversed against
current period interest income when a loan is placed on nonaccrual status. 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.

22
<PAGE> 29

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

<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential real estate................................ $ 2,838 $ 3,037 $ 4,232 $ 2,595 $ 3,878
Commercial real estate................................. 6,901 7,195 8,004 6,313 9,220
Construction and land.................................. 79 --- 382 483 429
Commercial............................................. 727 1,136 1,381 1,660 1,828
Consumer............................................... 154 259 517 480 557
------- ------- ------- ------ ------
Total nonaccrual loans............................... $10,699 $11,627 $14,516 $11,531 $15,912
======= ======= ======= ======= =======

Allowance for loan losses.............................. $12,229 $11,665 $12,343 $13,392 $16,054
======= ======= ======= ======= =======

Allowance for loan losses as a percentage of
nonaccruing loans................................... 114.3% 100.3% 85.0% 116.1% 100.9%
Allowance for loan losses as a percentage of
total loans......................................... 1.4% 1.5% 1.9% 2.9% 4.2%
</TABLE>

During 1996, loans on nonaccrual decreased 8.0% to $10.7 million, spread
among most loan categories. Interest income of approximately $1.6 million would
have been recorded in 1996 on nonaccruing loans if those loans had been on a
current basis in accordance with their original terms. Interest income actually
recognized in 1996 on nonaccruing loans amounted to approximately $315,000.
Additionally, another $342,000 in interest payments were received on nonaccruing
loans during 1996 and applied as a reduction of the loan balance instead of as
interest income.

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
below the prevailing market interest rates at the time of modification 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 $2.2 million and
$3.2 million at December 31, 1996 and 1995, respectively. Interest rate
modifications typically do not exceed one year. The weighted average interest
rate on restructured loans as of December 31, 1996 was 6.39%.

Other Real Estate Owned. Andover's other real estate owned remained at
rather high levels after rising significantly in the early 1990's due to the
deterioration in the New England real estate market and economy. During 1996,
other real estate owned decreased 59.5%. 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.

<TABLE>
The following table shows the composition of other real estate owned at
December 31:
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
Residential real estate................................ $ 456 $1,131 $1,245 $ 1,522 $ 2,784
Commercial real estate................................. 544 572 3,484 5,374 7,954
Multi-family real estate............................... 658 1,820 2,405 3,914 9,537
Construction and land.................................. 201 1,048 2,377 3,396 5,866
------ ------ ------ ------- -------
1,859 4,571 9,511 14,206 26,141
Valuation allowance.................................... (176) (413) (715) (1,086) (1,700)
------ ------ ------ ------- -------
Total other real estate owned.................... $ 1,683 $4,158 $8,796 $13,120 $24,441
======= ====== ====== ======= =======
</TABLE>
23

<PAGE> 30
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 $890,000 in 1996, $1.7 million in 1995
and $2.8 million in 1994. Subsequent provisions for losses due to the
deterioration in real estate values are charged to real estate operations and
totalled $554,000 in 1996, $750,000 in 1995 and $1.4 million in 1994. Gains of
$162,000, $582,000 and $1.4 million were recognized on sales of $4.0 million,
$8.0 million and $10.1 million in other real estate owned in 1996, 1995 and
1994, respectively.

Due to the level of nonaccrual loans at December 31, 1996, continued
foreclosures are likely to occur in 1997 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. It is expected that the
level of foreclosures and related expenses will continue to adversely impact
earnings in 1997.

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

<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year........................ $ 11,665 $12,343 $13,392 $16,054 $22,573
Balance of Acquired Institution..................... --- --- 1,715 --- ---
Provision........................................... 2,555 1,295 --- --- 750

Charge-offs:
Residential real estate........................ (822) (1,501) (1,271) (610) (1,027)
Commercial real estate......................... (2,208) (867) (1,614) (1,541) (4,267)
Construction and land.......................... --- (57) (41) --- (1,168)
Commercial..................................... (100) (171) (194) (814) (2,132)
Consumer....................................... (153) (171) (149) (121) (169)
------- ------- ------- ------- -------
Total charge-offs.............................. (3,283) (2,767) (3,269) (3,086) (8,763)
------- ------- ------- ------- -------

Recoveries:
Residential real estate........................ 45 120 4 32 249
Commercial real estate......................... 178 183 141 130 454
Construction and land.......................... 588 2 57 --- 69
Commercial..................................... 461 461 280 232 610
Consumer....................................... 20 28 23 30 112
------- ------- ------- ------- -------
Total recoveries............................... 1,292 794 505 424 1,494
------- ------- ------- ------- -------

Net charge-offs..................................... (1,991) (1,973) (2,764) (2,662) (7,269)
------- ------- ------- ------- -------

Balance at end of year............................... $12,229 $11,665 $12,343 $13,392 $16,054
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding....................................... 0.24% 0.29% 0.48% 0.61% 1.76%
</TABLE>

Net charge-offs totalled $2.0 million in 1996, $2.0 million in 1995 and
$2.8 million in 1994. The ratio of net charge-offs to average loans, however,
has continued its steady decline from the levels experienced in 1992 and total
only 0.24% for 1996.

The allowance for loan losses as a percentage of total loans decreased to
1.4% at December 31, 1996, from 1.5% and 1.9% at December 31, 1995 and 1994,
respectively, due to continued loan growth and to a lesser extent, the purchase
of whole loans. Management analyzes the adequacy of the allowance for loan
losses on a periodic basis. See "Results of Operations -- Provision for Loan
Losses." Management measures the adequacy of its allowance for loan losses by
assigning loans into risk categories based on a loan classification system
modelled after

24
<PAGE> 31

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. 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 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 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, 1996, was 13 loans totalling approximately $1.3 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.
Andover historically has experienced minimal losses in its residential mortgage
loan portfolio and, therefore, allocations applicable to this portfolio are
lower.

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

<CAPTION>
1996 1995 1996 1993 1992
------------------- -------------------- -------------------- -------------------- --------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF AS A % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
LOAN CATEGORY ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO
- ------------- --------- --------- --------- --------- --------- --------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential........... $ 2,154 71% $ 1,794 73% $ 1,855 70% $ 975 65% $ 1,012 60%
Commercial............ 5,952 16 7,381 16 7,633 17 6,108 19 7,432 20
Construction and
land ................ 802 4 549 2 971 3 791 3 727 3
------- --- ------ --- ------- --- ------ --- ------- --
Total real
estate ......... 8,908 91 9,724 91 10,459 90 7,874 87 9,171 83
Consumer................ 392 7 344 7 478 8 388 10 452 12
Commercial.............. 848 2 1,201 2 1,113 2 1,455 3 1,644 5
Unallocated............. 2,081 -- 396 -- 293 -- 3,675 -- 4,787 --
------- --- ------- --- ------- --- ------ --- ------- ---

Totals........... $12,229 100% $11,665 100% $12,343 100% $13,392 100% $16,054 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>

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

25
<PAGE> 32

INVESTMENTS

As of December 31, 1996, Andover's investment portfolio totalled $276.7
million, a decrease of 3.0% from $285.2 millon at year-end 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 while diversifying the asset mix. The
investment portfolio is also evaluated in comparison to returns that are earned
by the loan portfolio. In the third quarter of 1996, approximately $40 million
of low yielding investments were sold and reinvested in similar securities at
higher yields.

The primary component of the total investment portfolio is mortgage-backed
securities, which accounted for 66.2% of total investments at December 31, 1996.
The remaining portion of total investment portfolio consists of U.S. government
and federal agency obligations, short-term investments in federal funds sold,
and other investment grade securities.

All of the mortgage-backed security portfolio as of December 31, 1996,
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. The approximate market value of
adjustable rate mortgage-backed securities included in the investment portfolio
totalled $31.9 million at December 31, 1996.

The carrying amount of callable securities included in investments
available for sale and investments held to maturity totalled $30.8 million and
$1.4 million, respectively, as of December 31, 1996.

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 values recorded as a
separate component of stockholders' equity, net of the related income taxes.
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," in December 1995, 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.

There was a decrease in the unrealized gain of approximately $2.2 million
in the investment portfolio, from a net unrealized gain of $2.8 million as of
December 31, 1995 to a net unrealized gain of $583,000 as of December 31, 1996,
resulting from an increase in market interest rates. Changes in interest rates
and their impact on the unrealized gain or loss in the investment portfolio are
not material factors in the Company's overall investment strategy. This is
largely due to the fact that neither the changes nor their impact can be
controlled by the Company. 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.

<PAGE> 33

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

1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS................................................... $ 25,600 $ 9,000 $ 5,200
======== ======== ========

INVESTMENTS AVAILABLE FOR SALE (AT MARKET):

U.S. government and federal agency obligations........................... $ 1,740 $ 52,490 $ 52,523
Other bonds and obligations ............................................. 14,993 14,382 11,496
-------- -------- --------
Total bonds and obligations ........................................ 56,733 66,872 64,019
-------- -------- --------

GNMA mortgage-backed securities ......................................... 27,526 37,195 38,711
FHLMC participation certificates ........................................ 25,103 4,420 7,771
FNMA pass-through certificates .......................................... 4,763 -- --
Collateralized mortgage obligations ..................................... -- 482 12,948
-------- -------- --------
Total mortgage-backed securities ................................... 57,392 42,097 59,430
-------- -------- --------
Total investments available for sale ............................... $114,125 $108,969 $123,449
======== ======== ========

INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):

U.S. government and federal agency obligations........................... $ 1,448 $ 1,500 $ 16,259
Other bonds and obligations ............................................. 9,686 12,758 24,349
-------- -------- --------
Total bonds and obligations ........................................ 11,134 14,258 40,608
-------- -------- --------

FHLMC participation certificates ........................................ 63,639 78,649 88,080
FNMA pass-through certificates .......................................... 57,192 67,375 86,920
GNMA mortgage-backed securities ......................................... 3,899 4,458 4,939
Other asset-backed securities ........................................... 1,062 1,407 1,737
Collateralized mortgage obligations ..................................... -- 1,116 1,752
-------- -------- --------
Total mortgage-backed securities ................................... 125,792 153,005 183,428
-------- -------- --------
Total investments held to maturity ................................. $136,926 $167,263 $224,036
======== ======== ========

Total investments .................................................. $276,651 $285,232 $352,685
======== ======== ========
</TABLE>

<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, 1996. 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.
<CAPTION>
LENGTH OF TIME TO MATURITY
--------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------------- -------------- ------------- ------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Total bonds and
obligations............. $30,752 6.88% $24,909 6.53% $ --- .--% $ 1,072 8.40% $ 56,733 6.76%
Total mortgage-backed
securities.............. 1,676 6.86 7,999 6.86 13,618 6.86 34,099 6.81 57,392 6.83
------- ------- ------- ------- --------
Total investments
available for sale.. $32,428 6.88% $32,908 6.61% $13,618 6.86% $35,171 6.86% $114,125 6.79%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
Investments held to maturity:
Total bonds and
obligations............. $ 3,955 6.48% $ 7,179 6.45% $ --- .--% $ --- .--% $ 11,134 6.46%
Total mortgage-backed
securities............. 6,234 6.98 28,724 7.00 48,091 7.02 42,743 6.99 125,792 7.00
------- ------- ------- ------- --------
Total investments held
to maturity....... $10,189 6.79% $35,903 6.89% $48,091 7.02% $42,743 6.99% $136,926 6.96%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>

27
<PAGE> 34

<TABLE>
The following table presents unrealized gains and losses by major
categories of securities as of December 31, 1996. At that date, Andover's net
unrealized gains on investments held to maturity amounted to $81,000. The
unrealized gains of $502,000 on investments available for sale is included in
stockholders' equity, net of applicable income taxes at December 31, 1996.

<CAPTION>
UNREALIZED UNREALIZED
GAINS LOSSES
---------- ----------

(IN THOUSANDS)
INVESTMENTS AVAILABLE FOR SALE:

<S> <C> <C>
U.S. government and federal agency obligations.......................................... $ 475 $ (39)
Other bonds and obligations............................................................. 70 (32)
Mortgage-backed securities.............................................................. 289 (261)
------ -------
Total investments available for sale................................................. 834 (332)
------ -------

INVESTMENTS HELD TO MATURITY:

U.S. government and federal agency obligations.......................................... $ --- $ (16)
Other bonds and obligations............................................................. 79 (33)
Mortgage-backed securities.............................................................. 1,084 (1,033)
------ -------
Total investments held to maturity................................................... $1,163 $(1,082)
====== =======

Total unrealized gains and losses.................................................... $1,997 $(1,414)
====== =======
</TABLE>

DEPOSITS

Total deposits increased $81.1 million during 1996 to $824.3 million as of
December 31, 1996, and increased $15.3 million during 1995. In the current
interest rate environment, depositors continue to shift from core deposit
accounts into higher paying term deposits. That shift has subsided somewhat as
the Banks introduced several new savings and NOW products in the latter part of
1996 that earn a competitive rate, as compared to certificates, when large
balances are maintained. The Bank believes that this trend will continue into
1997. See Note 9 to the "Consolidated Financial Statements" for further
information.

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

1996 1995 1994
------------------------- -------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF INTEREST OF INTEREST OF INTEREST
AMOUNT TOTAL RATE AMOUNT TOTAL RATE AMOUNT TOTAL RATE
------ ----- ------- ------ ----- -------- ------ ----- --------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposit accounts... $ 60,245 7.3% .--% $ 54,516 7.3% .--% $ 45,968 6.3% .--%
NOW accounts.............. 75,297 9.1 1.01 67,275 9.1 1.00 65,882 9.0 1.19
Regular savings accounts.. 96,690 11.8 2.87 68,052 9.2 2.20 76,571 10.5 2.14
Money market
deposit accounts........ 116,019 14.1 2.90 130,437 17.5 2.90 143,203 19.7 2.50
Variable rate certificates 8,459 1.0 5.24 13,279 1.8 5.64 17,185 2.4 6.28
Fixed rate certificates... 467,601 56.7 5.80 409,646 55.1 5.86 379,049 52.1 5.14
-------- ----- -------- ----- -------- -----
Total deposits.......... $824,311 100.0% 4.18% $743,205 100.0% 4.13% $727,858 100.0% 3.65%
======== ===== ==== ======== ===== ==== ======== ===== ====
</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, 1996, 1995 and 1994.

28
<PAGE> 35

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

<CAPTION>
REMAINING TERM TO MATURITY 1996 1995 1994
-------------------------- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Three months or less....................................... $15,662 $ 9,801 $ 3,512
Three to six months........................................ 7,793 7,812 4,268
Six to twelve months....................................... 23,215 18,520 9,564
Over twelve months......................................... 25,136 16,885 28,330
------- ------- -------
$71,806 $53,018 $45,674
======= ======= =======
</TABLE>

BORROWINGS

Total borrowings increased slightly during 1996 to $274.4 million as of
December 31, 1996 from $272.6 million at December 31, 1995. As part of a balance
sheet restructuring in the third quarter of 1996, the Company elected early
prepayment of $19.1 million above market interest rate FHLB advances, incurring
a pretax loss of $298,000. During the past several years, the Banks have
continued to rely on borrowed funds as an alternative source of funds to grow
interest earning assets. See Notes 10 and 11 to the "Consolidated Financial
Statements" for further information.

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, to develop
strategies to deal with various risk factors and to monitor the implementation
of agreed upon strategies. The rate management committee is primarily
responsible for setting deposit interest rates and is involved in other banking
product pricing issues.

During 1996, 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 this mortgage banking activity, the Company 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 an operating officer, 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" for
further information.

29
<PAGE> 36

<TABLE>
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, 1996.

1-180 181-365 >1-3 >3-5 5+
DAYS DAYS YEARS YEARS YEARS TOTAL
---- ---- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Short-term investments................. $ 25,600 $ -- $ -- $ -- $ -- $ 25,600
Assets held for sale................... 2,220 -- -- -- -- 2,220
Investments available for sale......... 29,556 30,856 11,187 30,804 11,722 114,125
Investments held to maturity........... 14,091 10,392 38,328 28,190 45,925 136,926
Stock in FHLB of Boston................ 15,747 -- -- -- -- 15,747
Adjustable-rate loans.................. 217,490 142,006 139,336 51,406 30,407 580,645
Fixed-rate loans....................... 23,741 22,455 77,288 55,895 110,011 289,390
-------- -------- --------- -------- ------- ---------
Total interest sensitive assets...... 328,445 205,709 266,139 166,295 198,065 1,164,653

Interest sensitive liabilities:
Money market deposit accounts.......... 29,847 27,396 27,751 15,233 15,792 116,019
Certificates of deposit................ 178,452 120,120 166,311 11,177 -- 476,060
Other deposits......................... 27,648 25,664 45,378 27,892 45,405 171,987
Borrowed funds......................... 136,621 75,344 49,840 10,138 2,475 274,418
-------- -------- --------- -------- --------- ---------
Total interest sensitive liabilities 372,568 248,524 289,280 64,440 63,672 1,038,484
-------- -------- --------- -------- --------- ---------

Net interest rate sensitivity gap....... $(44,123) $(42,815) $ (23,141) $101,855 $134,393 $ 126,169
======== ======== ========= ======== ======== ==========

Cumulative net interest rate
sensitivity gap....................... $(44,123) $(86,938) $(110,079) $ (8,224) $126,169
======== ======== ========= ======== ========

Cumulative net interest rate
sensitivity gap as a percentage of
total assets.......................... (3.7)% (7.2)% (9.1)% (0.7)% 10.5%

AT DECEMBER 31, 1995:

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%
</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, 1996 that vary from 9.2%
- - 10.5% as compared with 13.5% - 16.5% at December 31, 1995. 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 4.2% - 19.8% at December 31, 1996, versus 4.8% -
48.5% at December 31, 1995.

30
<PAGE> 37

A substantial portion of regular savings and NOW accounts are considered
"core deposits" by management and, therefore, relatively insensitive to interest
rates. In addition, any future changes to the interest rates paid on these
accounts is at the sole discretion of management. Despite the foregoing factors,
based upon the Company's assessment of current market conditions, such accounts
have been included in the "Other Deposits" category. These core deposits, along
with money market accounts, have been allocated between each time period in
recognition of the lagged variable rate feature. 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.

<TABLE>
The following table reflects the scheduled maturities of selected loans at
December 31, 1996:

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

<S> <C> <C> <C> <C>
Construction and land loans..................$29,230 $ 3,913 $1,858 $35,001
Commercial loans............................. 10,152 7,651 1,598 19,401
------- ------- ------ -------
$39,382 $11,564 $3,456 $54,402
======= ======= ====== =======
</TABLE>

Of the loans maturing after one year, $2.1 million, or 14.0%, have fixed
rates and $12.9 million, or 86.0%, have floating or adjustable rates.

LIQUIDITY

The Company's primary source of funds is dividends from its bank
subsidiaries. Dividends from the Bank to the Company totalled $4.5 million in
1996, $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.
ABNH was capitalized with an initial contribution of $4.0 million in 1995 and
another contribution of $1.0 million in 1996.

The Company made payments of dividends to stockholders in the amount of
$2.6 million, $1.9 million and $1.7 million, respectively, for the years ended
December 31, 1996, 1995 and 1994.

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, customer 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, 1996, the Company had home equity, reserve credit and
commercial unused lines of credit totalling $83.2 million. Outstanding
commitments to originate real estate loans totalled $27.9 million. Unadvanced
portions of real estate loans amounted to $18.6 million. Standby letters of
credit were $1.8 million. Loans sold with recourse totalled $4.2 million.
Management believes that its sources of liquidity are sufficient to meet these
commitments if and as called upon.

See Notes 10, 11, 13, 17, and 18 to the "Consolidated Financial Statements"
for further information.

31
<PAGE> 38

Cash flows provided by operating activities increased by $555,000 to $18.6
million at December 31, 1996, and decreased by $22.7 million to $18.0 million at
December 31, 1995. The change in 1996 was attributable to increased net income,
while the change in 1995 was primarily due to a decrease in assets held for sale
during 1994. Cash flows used by investing activities increased by $33.3 million
from 1995 to 1996 and decreased $93.6 million from 1994 to 1995. The increase in
1996 was primarily due to purchases of investments available for sale. The
decrease in 1995 was due to fewer purchases of investments held to maturity.
Cash flows provided by financing activities increased $45.7 million from 1995 to
1996, primarily due to a large increase in total deposits. Cash flows provided
by financing activities decreased $72.3 million from 1994 to 1995, primarily due
to a smaller increase in total deposits in 1995 as well as a reduction in net
new borrowings.

CAPITAL RESOURCES

At December 31, 1996, the Company reported total capital of $95.8 million,
or 8.0% of total assets as compared to $85.2 million, or 7.7% at December 31,
1995. The Company and the Banks continue to maintain capital ratios in excess of
all applicable regulatory minimums.

<TABLE>
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, 1996:

<CAPTION>
RISK BASED CAPITAL RATIO
------------------------
LEVERAGE RATIO TIER 1 TOTAL
-------------- ------ -----
<S> <C> <C> <C>
Andover Bancorp............................................ 8.0% 13.4% 14.6%
Andover Bank.......................................... 7.7 12.8 14.1
Andover Bank NH....................................... 11.0 16.1 16.4
</TABLE>

Current minimum regulatory requirements as of December 31, 1996 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.

On October 17, 1996, the Company declared a 20% stock dividend distributed
on November 13, 1996. All per share information has been adjusted to reflect
this stock dividend.

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.

32
<PAGE> 39

<TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----

<S> <C>
Independent Auditors' Report............................................................... 34

Consolidated Balance Sheets as of December 31, 1996 and 1995............................... 35

Consolidated Statements of Operations for each of the years ended
December 31, 1996, 1995 and 1994........................................................ 36

Consolidated Statements of Changes in Stockholders' Equity for each of the
years ended December 31, 1996, 1995 and 1994............................................. 37

Consolidated Statements of Cash Flows for each of the years ended
December 31, 1996, 1995 and 1994......................................................... 38-39

Notes to Consolidated Financial Statements................................................. 40-63
</TABLE>

<PAGE> 40

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, 1996 and 1995, 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, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

As discussed in Note 1, the Company changed its method of accounting for
mortgage servicing rights effective January 1, 1996.

/s/ KPMG PEAT MARWICK LLP

Boston, Massachusetts
January 23, 1997

<CAPTION>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995

1996 1995
---- ----
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and due from banks (note 18)........................................... $ 20,489 $ 19,236
Short-term investments (note 3)............................................. 25,600 9,000
---------- ----------
Cash and cash equivalents................................................. 46,089 28,236
---------- ----------
Assets held for sale (market value $2,220 in 1996 and $5,163 in 1995)
(note 2).................................................................. 2,220 5,162
Investments available for sale (amortized cost of $113,623 in 1996
and $108,643 in 1995) (note 3)............................................ 114,125 108,969
Investments held to maturity (market value $137,007 in 1996 and
$169,761 in 1995) (notes 3, 10 and 11).................................... 136,926 167,263
Loans (notes 4 and 11)...................................................... 870,035 768,598
Allowance for loan losses (note 4).......................................... (12,229) (11,665)
---------- ----------
Net loans.............................................................. 857,806 756,933
---------- ----------
Other real estate owned, net (note 6)....................................... 1,683 4,158
Premises and equipment, net (note 7)........................................ 10,194 9,537
Accrued interest receivable................................................. 7,164 7,164
Stock in FHLB of Boston, at cost (notes 8 and 11)........................... 15,747 13,171
Deferred income taxes receivable (note 12).................................. 1,374 830
Income taxes receivable (note 12)........................................... 478 ---
Mortgage servicing assets (note 5).......................................... 8,006 6,609
Other assets................................................................ 3,001 2,815
---------- ----------
Total assets....................................................... $1,204,813 $1,110,847
========== ==========

<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9)........................................................ $ 824,311 $ 743,205
Securities sold under agreements to repurchase (note 10)................. 2,833 9,212
Federal Home Loan Bank advances (note 11)................................ 271,585 263,414
Mortgagors' escrow accounts.............................................. 2,294 3,526
Income taxes payable (note 12)........................................... 2,570 1,389
Accrued expenses and other liabilities................................... 5,374 4,936
---------- ----------
Total liabilities................................................... 1,108,967 1,025,682
---------- ----------
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;
5,154,792 and 5,154,968 shares issued in 1996 and 1995, respectively.. 515 515
Additional paid-in capital............................................... 59,222 71,515
Retained earnings........................................................ 36,109 26,183
Treasury stock, at cost (20,862 and 917,997 shares issued in 1996
and 1995, respectively)................................................ (301) (13,247)
Unrealized gains (losses) on investments available for sale, net
(notes 3 and 12)....................................................... 301 199
---------- ----------
Total stockholders' equity.......................................... 95,846 85,165
---------- ----------
Total liabilities and stockholders' equity.......................... $1,204,813 $1,110,847
========== ==========
</TABLE>

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

35
<PAGE> 42

<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>

1996 1995 1994
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and dividend income:
Loans........................................................ $64,569 $53,876 $41,316
Mortgage-backed securities................................... 13,304 15,375 15,656
Investment securities........................................ 4,436 6,039 5,529
Dividends on equity securities (note 8)...................... 944 970 877
Short-term investments....................................... 570 626 207
------- ------- -------
Total interest and dividend income........................ 83,823 76,886 63,585
------- ------- -------
Interest expense:
Deposits (note 9)............................................ 31,692 29,246 21,374
Federal Home Loan Bank advances.............................. 16,054 14,409 10,958
Securities sold under agreements to repurchase............... 783 897 1,089
------- ------- -------
Total interest expense.................................... 48,529 44,552 33,421
------- ------- -------
Net interest and dividend income.......................... 35,294 32,334 30,164

Provision for loan losses (note 4).............................. 2,555 1,295 ---
------- ------- -------
Net interest and dividend income after provision
for loan losses........................................ 32,739 31,039 30,164
------- ------- -------
Non-interest income:
Net gains (losses) from sales and redemptions of assets
held for sale (note 2).................................... 421 55 (470)
Net gains from sales and redemptions
of investment securities (note 3)......................... --- 3 ---
Net gains (losses) from sales and redemptions
of investments available for sale (note 3)................ (686) 269 236
Losses on real estate operations, net (note 6)............... (1,542) (2,003) (2,617)
Mortgage banking income...................................... 3,163 2,371 1,442
Other income (note 14)....................................... 2,709 3,098 2,597
------- ------- -------
Total non-interest income................................. 4,065 3,793 1,188
------- ------- -------
Non-interest expense:
Salaries and employee benefits (note 15)..................... 10,346 9,623 9,045
Office occupancy and equipment (note 7)...................... 2,756 2,338 2,181
Data processing.............................................. 1,666 1,445 1,172
Mortgage banking expense..................................... 1,474 913 415
Professional fees............................................ 1,328 681 648
Marketing.................................................... 976 847 677
Deposit insurance premiums................................... 15 892 1,611
Merger expense (recovery) (note 19).......................... (225) 1,000 ---
Other operating expense...................................... 2,552 2,121 1,779
------- ------- -------
Total non-interest expense................................ 20,888 19,860 17,528
------- ------- -------
Income before income tax expense and extraordinary item... 15,916 14,972 13,824
Income tax expense (note 12).................................... 3,264 5,634 4,781
------- ------- -------
Income before extraordinary item.......................... 12,652 9,338 9,043
Extraordinary item, net of tax (notes 11 and 12)................ (173) --- ---
------- ------- -------
Net income................................................ $12,479 $ 9,338 $ 9,043
======= ======= =======

Average number of common shares outstanding..................... 5,108 5,057 5,014

Income per share before extraordinary item...................... $ 2.47 $ 1.85 $ 1.80
Extraordinary item per share, net of tax........................ (0.03) --- ---
------- ------- -------

Net income per share............................................ $ 2.44 $ 1.85 $ 1.80
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON TOTAL
ADDITIONAL INVESTMENTS STOCK-
COMMON PAID-IN RETAINED TREASURY AVAILABLE HOLDERS'S
STOCK CAPITAL EARNINGS STOCK FOR SALE EQUITY
------ --------- -------- -------- ----------- ---------

<S> <C> <C> <C> <C> <C> <C>
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
($0.33 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
($0.37 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

Net income........................ --- --- 12,479 --- --- 12,479
Dividends declared and paid
($0.50 per share)............... --- --- (2,553) --- --- (2,553)
Stock options exercised (note 15). --- 41 --- 612 --- 653
Stock dividend.................... --- (12,334) --- 12,334 --- ---
Change in unrealized gains
(losses) on investments
available for sale (note 3)..... --- --- --- --- 102 102
---- ------- ------- -------- ------- -------
Balance at December 31, 1996......... $515 $59,222 $36,109 $ (301) $ 301 $95,846
==== ======= ======= ======== ======= =======

<FN>
(1) Net of related tax effect.
</TABLE>

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

<PAGE> 44

ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994

1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $12,479 $ 9,338 $ 9,043
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................................ 2,555 1,295 --
Net (gains) losses on sales and provisions
for other real estate owned ................................... 392 168 (24)
Net gains from sales and redemptions of investment
securities ..................................................... -- (3) --
Net (gains) losses from sales and redemptions of
investments available for sale ................................ 686 (269) (236)
Net (gains) losses from sales and writedowns of assets
held for sale ................................................. (421) (55) 470
Depreciation and amortization .................................... 1,396 1,155 919
Amortization of fees, discounts and premiums, net ................ 412 557 1,073
(Increase) decrease in:
Assets held for sale ........................................... 1,232 (2,600) 29,303
Accrued interest receivable .................................... -- (217) (1,855)
Income taxes receivable ........................................ (1,096) 3,401 2,196
Mortgage servicing assets ...................................... 741 698 353
Other assets ................................................... (186) 1,810 (1,363)
Increase (decrease) in:
Mortgagors' escrow accounts .................................... (1,232) 1,283 885
Accrued income taxes payable ................................... 1,181 909 (171)
Accrued expenses and other liabilities ......................... 438 552 121
--------- --------- ---------
Net cash provided by operating activities ................... 18,577 18,022 40,714
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash of acquired institution ................................. -- -- 5,372
Purchases of investments available for sale....................... (100,311) -- (9,103)
Net change FHLB stock ............................................ (2,576) (803) (2,197)
Purchases of investments held to maturity ........................ (2,991) (20,858) (110,271)
Proceeds from sales of investments available for sale ............ 86,641 54,985 18,290
Proceeds from maturities and redemptions of
investments available for sale ................................. 6,023 8,923 4,398
Proceeds from maturities and redemptions of
investments held to maturity ................................... 6,000 5,531 1,052
Principal repayments of investments available for sale ........... 8,174 8,608 15,670
Principal repayments of investments held to maturity ............. 27,008 20,603 42,048
Purchases of whole loans ......................................... (32,474) (59,878) --
Purchases of mortgage servicing rights ........................... (2,138) (3,555) (1,385)
Net increase in loans ............................................ (76,855) (68,835) (113,883)
Capital expenditures on premises and equipment, net .............. (2,053) (878) (1,722)
Proceeds from disposition of other real estate owned ............. 3,958 7,972 10,107
Capital expenditures on other real estate owned .................. (128) (260) (431)
--------- --------- ---------
Net cash used by investing activities ........................ (81,722) (48,445) (142,055)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ......................................... 81,106 15,347 54,908
Net increase (decrease) in securities sold
under agreements to repurchase .................................. (6,379) 5,212 (19,922)
Proceeds from issuance of FHLB advances .......................... 450,469 322,450 345,100
Principal repayments of FHLB advances............................. (442,298) (306,221) (271,630)
Dividends paid ................................................... (2,553) (1,856) (1,677)
Stock options exercised .......................................... 653 345 808
--------- --------- ---------
Net cash provided by financing activities .................... 80,998 35,277 107,587
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................ 17,853 4,854 6,246
Cash and cash equivalents, beginning of year ........................ 28,236 23,382 17,136
--------- --------- ---------
Cash and cash equivalents, end of year............................... $ 46,089 $ 28,236 $ 23,382
========= ========= =========
</TABLE>

Statement continued on next page.

38
<PAGE> 45

<TABLE>
<CAPTION>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1996, 1995 and 1994

1996 1995 1994
---- ---- ----
(IN THOUSANDS)

<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................... $48,787 $44,314 $33,248
Income taxes ....................................... 3,355 1,809 3,405
Cash received during the year for:
Income taxes ....................................... 585 499 741
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities available for sale ....................... 44,062 20,314 60,763
Transfer of loans to other real estate owned .......... 1,747 3,242 4,399
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.

39
<PAGE> 46

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994

(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 12 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.

Mortgage Banking Activities
Loans held for sale in the secondary market are stated at the lower of
aggregate amortized cost or market value. Market value is estimated based on
outstanding investor commitments or, in the absence of such commitments, current
investor yield requirements. Net unrealized losses, if any, are provided for in
a valuation allowance by charges to operations. When loans are sold, a gain or
loss is recognized to the extent that the sale proceeds exceed or are less than
the carrying amount of the loans. Gains and losses are determined using the
specific identification method.
The 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 excess mortgage servicing fee ("excess") is
capitalized.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122"). 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. As a result of adopting SFAS 122, gains on
sales of loans and originated mortgage servicing rights increased $423,000 for
the year ended December 31, 1996.
Mortgage loan servicing rights purchased or originated are amortized to
non-interest expense using a method which approximates the level yield method in
proportion to, and over the period of, estimated net servicing income.
Prepayment experience on each mortgage servicing asset is reviewed periodically
and, when actual prepayments exceed estimated prepayments, the balance of the
mortgage servicing asset is adjusted by a charge to earnings. On a quarterly
basis, the originated, excess and purchased mortgage servicing assets are
assessed for impairment based on the fair value of such rights. The fair value
is estimated using market prices when available or, alternatively, using a
valuation model that calculates the present value of future cash flows. Any
impairment in the fair value of those mortgage servicing assets is recognized by
a charge to earnings through a valuation allowance. The risk characteristics of
the underlying loans used to measure impairment of originated and purchased
mortgage loan servicing rights include the loan type, interest rate, loan
origination date, term to maturity and geographic location.

<PAGE> 47

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

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.
Originated mortgage loans converted to mortgage-backed securities to be sold are
classified as trading. In 1995, 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 with original
maturities of 90 days or less are carried at cost, which approximates market
value.

Loans
Accrual of interest income on loans and amortization of net deferred loan
fees are discontinued when loan payments are 90 days or more past due or earlier
when concern exists as to the ultimate collection of principal or interest. When
loans are placed on nonaccrual status, the interest receivable on the loan is
reversed against interest income of the current period. Non-performing loans are
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. Interest received on nonaccruing loans is either applied against
principal or reported as income according to management's judgement as to the
collectibility of principal. Income received on impaired loans is recognized in
income similar to nonaccrual loans.
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. Purchased loan discounts
are amortized over the weighted average repricing term of the underlying loans.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have 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 not probable that the Company will not 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 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.
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.

<PAGE> 48

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

Restructured, accruing loans entered into prior to 1995 are not required to
be reported as impaired unless such loans are not performing according to their
restructured terms. Loan restructurings at below current market rates entered
into after 1994 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
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.
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
lesser of the estimated useful lives of the assets or over the terms of their
respective leases for leasehold improvements. It is the Company's general
practice to charge the cost of maintenance and repairs to operations when
incurred; major expenditures for improvements are capitalized and depreciated.

Income Taxes
Income taxes are accounted for using the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax 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.

<PAGE> 49

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

Employee Benefits
The Company accounts for pension and postretirement benefits on the net
periodic pension cost method for financial reporting purposes. 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"). This new Statement, effective for fiscal years
beginning after December 15, 1995, 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.
The Company continues to follow APB Opinion No. 25 "Accounting for Stock Issued
to Employees." See footnote 15 for the expanded disclosures required by SFAS 123
regarding pro forma net income and earnings per share.

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. The per share date has been restated for all periods presented to
reflect the 20% stock dividend distribution on November 13, 1996.

Recent Accounting Developments
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS 125 also establishes new accounting requirements for pledged collateral.
SFAS 125 is effective for most transactions occurring after December 31, 1996
with other provisions of the Statement deferred for one year. The Statement must
be applied prospectively. The Company has determined that the adoption of SFAS
125 will not have a material impact on its consolidated financial statements.

(2) ASSETS HELD FOR SALE
The composition of assets held for sale at December 31 follows:
<TABLE>

<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Loans................................................. $2,220 $5,162
====== ======
</TABLE>

At December 31, 1996 and 1995, the market value of assets held for sale
totalled $2,220,000 and $5,163,000, respectively. Proceeds from sales of assets
held for sale totalled $39,839,000, $21,552,000 and $60,907,000, respectively,
for the years ended December 31, 1996, 1995, and 1994. Realized gains on sales
of assets held for sale amounted to $829,000, $329,000 and $529,000 in 1996,
1995, and 1994, respectively. Realized losses on such sales and writedowns were
$382,000, $274,000 and $870,000 in 1996, 1995 and 1994, respectively. Net
unrealized losses of $26,000 and $129,000 on assets held for sale were included
in earnings for 1996 and 1994, respectively. 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.

<PAGE> 50

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

(3) INVESTMENTS
<TABLE>
The amortized cost and approximate fair value of the investment portfolio
at December 31 follows:
<CAPTION>

1996 1995
----------------------------------------- -----------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---- ----- ------ ----- ---- ----- ------ -----
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS:
Federal funds sold................ $ 25,600 $ --- $ --- $ 25,600 $ 9,000 $ --- $ --- $ 9,000
======== ======= ===== ======== ======== ======= ======= ========

INVESTMENTS AVAILABLE FOR SALE:
U. S. government and federal......
agency obligations.............. $ 41,304 $ 475 $ (39) $ 41,740 $ 52,445 $ 329 $(284) $ 52,490
Other bonds and obligations....... 14,955 70 (32) 14,993 14,159 249 (26) 14,382
FHLMC participation certificates.. 25,175 36 (108) 25,103 4,370 50 --- 4,420
FNMA pass-through certificates.... 4,712 51 --- 4,763 --- --- --- ---
GNMA mortgage-backed securities... 27,477 202 (153) 27,526 37,186 257 (248) 37,195
Collateralized mortgage
obligations..................... --- --- --- --- 483 --- (1) 482
------ ------ ------- -------- -------- ---- -------- --------
$113,623 $ 834 $ (332) $114,125 $108,643 $ 885 $ (559) $108,969
======== ====== ======= ======== ======== ===== ======= ========

INVESTMENTS HELD TO MATURITY:
U. S. government and federal
agency obligations............. $ 1,448 $ --- $ (16) $ 1,432 $ 1,500 $ --- $ (1) $ 1,499
Other bonds and obligations...... 9,686 79 (33) 9,732 12,758 180 (29) 12,909
FHLMC participation certificates 63,639 640 (360) 63,919 78,649 1,314 (26) 79,937
FNMA pass-through certificates... 57,192 394 (647) 56,939 67,375 1,100 (144) 68,331
GNMA mortgage-backed securities.. 3,899 50 --- 3,949 4,458 123 --- 4,581
Collateralized mortgage
obligations.................... --- --- --- --- 1,116 --- (2) 1,114
Other asset-backed securities.... 1,062 --- (26) 1,036 1,407 --- (17) 1,390
-------- ------ ------- -------- -------- ------ ----- --------
$136,926 $1,163 $(1,082) $137,007 $167,263 $2,717 $(219) $169,761
======== ====== ======= ======== ======== ====== ===== ========

Total investments.............. $276,149 $1,997 $(1,414) $276,732 $284,906 $3,602 $(778) $287,730
======== ====== ======= ======== ======== ====== ===== ========

</TABLE>
Proceeds from sales of investments available for sale totalled $86,641,000,
$54,985,000 and $18,290,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Realized gains and losses on such sales amounted to $236,000
and $922,000 in 1996, respectively, $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 1996, 1995 and 1994. In 1995, realized
gains totalled $3,000 from redemptions of investments held to maturity in the
amount of $5,531,000.

<TABLE>
The amortized cost and fair value of mortgage-backed securities available
for sale and held to maturity at December 31 follows:
<CAPTION>

1996 1995
---------------------------------------- ----------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
----------------- ------------------ ------------------ -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Originated.................... $ 892 $ 920 $ 38,052 $ 38,101 $ 1,042 $ 1,075 $ 45,941 $ 47,039
Purchased..................... 56,472 56,472 87,740 87,742 40,997 41,022 107,064 108,314
-------- ------- -------- -------- -------- ------- -------- --------
$ 57,364 $57,392 $125,792 $125,843 $ 42,039 $42,097 $153,005 $155,353
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>

44
<PAGE> 51

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994
<TABLE>
The amortized cost and fair value of adjustable rate investments available
for sale and held to maturity by type at December 31 follows:

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agency obligations........ $ --- $ --- $ --- $ --- $ 3,000 $ 2,982 $ 1,500 $ 1,499
Other bonds and obligations ...... --- --- --- --- 1,000 995 500 501
FHLMC participation certificates . 892 920 --- --- 4,211 4,261 --- ---
FNMA pass-through certificates ... --- --- 3,350 3,438 3,821 3,866 --- ---
GNMA mortgage-backed securities .. 27,477 27,526 --- --- 37,186 37,195 --- ---
------- ------- ------- ------- ------- ------- ------- -------
$28,369 $28,446 $ 3,350 $ 3,438 $49,218 $49,299 $ 2,000 $ 2,000
======= ======= ======= ======= ======= ======= ======= =======

</TABLE>
The carrying amounts of callable securities included in investments
available for sale and investments held to maturity totalled $30,779,000 and
$1,448,000 in 1996 and $20,314,000 and $1,500,000 in 1995, respectively.

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

<CAPTION>
1996 1995
---------------------------------------- ----------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
----------------- ------------------ ------------------ -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 year.................... $ 32,430 $ 32,428 $ 10,189 $ 10,175 $ 17,442 $ 17,528 $ 17,747 $ 18,027
1 to 5 years..................... 33,515 32,908 35,903 35,950 52,389 52,597 58,663 59,912
5 to 10 years.................... 13,637 13,618 48,091 48,136 4,555 4,577 31,935 32,903
Over 10 years.................... 34,041 35,171 42,743 42,746 34,257 34,267 58,918 58,919
-------- -------- -------- -------- -------- -------- -------- --------
$113,623 $114,125 $136,926 $137,007 $108,643 $108,969 $167,263 $169,761
======== ======== ======== ======== ======== ======== ======== ========
- --------------------------
</TABLE>
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.

Fixed rate bonds available for sale with an amortized cost of $998,000 and
$1,957,000 and an approximate fair value of $1,003,000 and $2,018,000 were
pledged to secure government deposits at December 31, 1996 and 1995,
respectively. U.S. government obligations available for sale with a carrying
amount of $5,222,000 and an approximate fair value of $5,166,000 were pledged to
secure customer reverse repurchase agreements at December 31, 1996. A FNMA
pass-through certificate held to maturity with a carrying amount of $8,553,000
and an approximate fair value 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.

(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.

<PAGE> 52

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

The composition of loans at December 31 follows:

1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Residential............................................................... $619,955 $558,231
Commercial................................................................ 136,454 121,909
Construction and land..................................................... 35,001 18,138
-------- --------

Total real estate loans.............................................. 791,410 698,278
-------- --------

Consumer loans:
Home improvement, second mortgage and home
equity line of credit.................................................. 49,670 43,463
Personal.................................................................. 3,467 3,369
Guaranteed education...................................................... 3,755 2,149
Collateral................................................................ 2,332 2,189
-------- --------

Total consumer loans................................................. 59,224 51,170
-------- --------

Commercial loans............................................................... 19,401 19,150
-------- --------

Total loans.......................................................... 870,035 768,598

Allowance for loan losses...................................................... (12,229) (11,665)
-------- --------

Net loans............................................................ $857,806 $756,933
======== ========
</TABLE>
At December 31, 1996 and 1995, net deferred loan origination fees amounted
to $163,000 and $253,000, respectively. Unadvanced portions of loans amounted to
$18.6 million and $9.9 million at December 31, 1996 and 1995, respectively.

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

1996 1995 1994
---- ---- ----
(IN THOUSANDS)

<S> <C> <C> <C>
Balance at beginning of year........................................ $11,665 $12,343 $13,392
Balance of acquired institution..................................... --- --- 1,715
Provision........................................................... 2,555 1,295 ---
Charge-offs......................................................... (3,283) (2,767) (3,269)
Recoveries.......................................................... 1,292 794 505
------- ------- -------

Balance at end of year.............................................. $12,229 $11,665 $12,343
======= ======= =======

</TABLE>
The balance of loans on nonaccrual status because of delinquency or other
problem characteristics amounted to $10,699,000 and $11,627,000 at December 31,
1996 and 1995, respectively.

<TABLE>
The reduction in interest income for the years ended December 31,
associated with nonaccrual loans, follows:
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income in accordance with original loan terms.............. $1,566 $1,596 $1,537
Interest income recognized.......................................... (315) (118) (107)
Interest income applied as a reduction in loan balance.............. (342) (438) (347)
------ ------ ------
Foregone interest income............................................ $ 909 $1,040 $1,083
====== ====== ======
</TABLE>

<PAGE> 53

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

At December 31, 1996, total impaired loans were $9.1 million, or which $2.7
million had related allowances of $.5 million and $6.4 million which did not
require a related impairment allowance. 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 impairment allowance.
Impaired loans have been measured using the fair value of the collateral method.
During the years ended December 31, 1996 and 1995, the average recorded value of
impaired loans was $10.7 million and $12.1 million, respectively, and the
related amount of interest income recognized was $242,000 and $170,000,
respectively, all of which was recorded on a cash basis, and approximately
$919,000 and $820,000, respectively, of interest income that would have been
recognized under original terms. The recognition policy of interest income for
impaired loans is the same as for other loans.

<TABLE>
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:

<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year................................................... $1,710 $2,202
New loans granted.............................................................. 37 27
Retirement/reduction of directors and officers................................. (109) (474)
Repayment of principal......................................................... (101) (45)
------ ------
Balance at end of year......................................................... $1,537 $1,710
====== ======

</TABLE>
The outstanding balances of loans to directors and principal officers
included above totalled $208,000 and $221,000, respectively, at December 31,
1996 and 1995. 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
<TABLE>
A summary of the components of the mortgage servicing assets for the years
ended December 31 follows:

<CAPTION>
EXCESS PURCHASED ORIGINATED TOTAL
------ --------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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

Purchased and capitalized....................................... 264 2,138 423 2,825
Amortization.................................................... (360) (1,045) (23) (1,428)
------- ------- ---- -------
Balance as of December 31, 1996................................. $ 2,207 $ 5,399 $400 $ 8,006
======= ======= ==== =======
</TABLE>

During 1996, the Company established a valuation account for purchased
mortgage servicing rights in the amount of $200,000. This valuation account is
included in the amortization amount above. No writedowns were taken in 1996. At
December 31, 1996, 1995 and 1994 mortgage loans partially or wholly owned by
others and serviced by the Company amounted to approximately $877,683,000,
$780,356,000 and $513,227,000, respectively, and are not reflected in the
accompanying consolidated financial statements because they are not assets of
the Company. During 1996 and 1995, the Company purchased mortgage servicing
rights to $180.0 million and $303.6 million, respectively, in residential first
mortgage loans. These purchased balances are included in the loans serviced for
others. Gains resulting from the capitalization of originated and excess
mortgage servicing rights are included in net gains on assets held for sale.
Amortization of the excess mortgage servicing rights are included in mortgage
banking income while amortization of the purchased and originated mortgage
servicing rights are included in mortgage banking expenses.

47
<PAGE> 54

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

(6) OTHER REAL ESTATE OWNED
<TABLE>
The composition of other real estate owned at December 31 follows:

<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Residential real estate........................................................ $ 456 $1,131
Commercial real estate......................................................... 544 572
Multi-family real estate....................................................... 658 1,820
Construction and land.......................................................... 201 1,048
----- ------
1,859 4,571
Valuation allowance............................................................ (176) (413)
----- ------
$1,683 $4,158
</TABLE>

<TABLE>
An analysis of the valuation allowance for the years ended December 31
follows:
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year..................................$ 413 $ 715 $ 1,086
Provision..................................................... 554 750 1,375
Net charge-offs............................................... (791) (1,052) (1,746)
----- ------- -------
Balance at end of year........................................$ 176 $ 413 $ 715
===== ======= =======

</TABLE>
Proceeds from the sale of other real estate owned totalled $3,958,000 and
$7,972,000 during 1996 and 1995, respectively.

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

1996 1995 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net gains on sales..........................................$ 162 $ 582 $ 1,399
Rental income............................................... 44 123 348
Provisions for other real estate owned...................... (554) (750) (1,375)
Other operating expenses, net............................... (787) (1,314) (2,228)
Foreclosure expenses........................................ (407) (644) (761)
------- ------- -------
$(1,542) $(2,003) $(2,617)
======= ======= =======
</TABLE>

(7) PREMISES AND EQUIPMENT
<TABLE>
The composition of premises and equipment at December 31 follows:
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings........................................................ $11,560 $10,895
Furniture, fixtures and equipment......................................... 4,775 3,682
Leasehold improvements.................................................... 173 173
Construction in progress.................................................. 163 113
------- -------
16,671 14,863
Less: accumulated depreciation............................................ (6,477) (5,326)
------- -------
$10,194 $ 9,537
======= =======
</TABLE>
Rent expense was $108,000, $81,000 and $208,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Rental income on portions of the
Company owned and occupied premises totalled $244,000, $354,000 and $355,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.

48
<PAGE> 55

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

<TABLE>
A summary of future minimum rental expense and income under non-cancellable
operating leases at December 31, 1996 follows:
<CAPTION>
MINIMUM MINIMUM
RENTAL RENTAL
EXPENSE INCOME
------- ------
(IN THOUSANDS)
<S> <C> <C>
1997............................................................................... $112 $277
1998............................................................................... 114 157
1999............................................................................... 75 140
2000............................................................................... 73 133
2001............................................................................... 75 65
Thereafter......................................................................... 229 --
</TABLE>

(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 $934,000, $877,000 and $834,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

(9) DEPOSITS
<TABLE>
The composition of deposits at December 31 follows:
<CAPTION>
1996 1995
------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(IN THOUSANDS)

<S> <C> <C> <C> <C>
Non-interest bearing:
Demand deposit accounts........................ $ 60,245 .--% $ 54,516 .--%
Interest bearing:
NOW accounts.................................. 75,297 1.01 67,275 1.00
Regular savings accounts...................... 96,690 2.87 68,052 2.20
Money market deposit accounts................. 116,019 2.90 130,437 2.90
Variable rate certificates.................... 8,459 5.24 13,279 5.64
Fixed rate certificates....................... 467,601 5.80 409,646 5.86
-------- --------
Total deposits........................... $824,311 4.18% $743,205 4.13%
======== ==== ======== ====

</TABLE>

Time certificates in excess of $100,000 at December 31, 1996 and 1995
amounted to $71,806,000 and $53,018,000, respectively. There were no brokered
deposits at December 31, 1996 and 1995.

<TABLE>
A summary of interest expense on deposits for the years ended December 31
follows:

<CAPTION>
1996 1995 1994
---- ---- ----

(IN THOUSANDS)
<S> <C> <C> <C>
Now accounts....................................................... $ 661 $ 711 $ 725
Regular savings accounts........................................... 1,800 1,554 1,512
Money market deposit accounts...................................... 3,639 3,548 3,460
Certificates of deposit............................................ 25,592 23,433 15,677
------- ------- -------
$31,692 $29,246 $21,374
======= ======= =======
</TABLE>

<PAGE> 56

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1996 and 1994
<TABLE>

The average interest rate on time certificates at December 31, 1996, by the
earlier of its repricing or period of maturity, follows:
<CAPTION>

AVERAGE
AMOUNT RATE
------ ----
(IN THOUSANDS)
Maturity in:
<S> <C> <C>
1997.......................................................................... $298,613 5.64%
1998.......................................................................... 128,612 5.96
1999.......................................................................... 37,744 6.29
2000.......................................................................... 6,305 6.06
2001.......................................................................... 4,786 5.96
--------
$476,060 5.79%
======== ====

<FN>
Included in the table above are variable rate time certificates, the
majority of which mature in 1997.
</TABLE>

(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. In addition, the Banks have established overnight
corporate customer repurchase agreements whereby collateral is set aside by the
Banks' custodian and the rates paid approximate short term deposit rates. This
product allows the customer to invest excess cash at a market interest rate.
Generally, the outstanding collateral consists of U.S. government and federal
agency obligations and mortgage-backed participation certificates.

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

<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at December 31............................................ $2,833 $ 9,212 $ 4,000
Outstanding collateral:
Carrying amount.................................................... 5,222 13,820 4,619
Fair value......................................................... 5,166 13,911 4,223
Average balance outstanding during the year........................... 15,062 14,798 25,228
Maximum outstanding at any month-end.................................. 36,499 32,382 35,949
Weighted average rate at year-end..................................... 4.35% 5.82% 6.17%
Weighted average rate during the year................................. 5.20% 6.06% 4.32%

<FN>
The reverse repurchase agreements outstanding at December 31, 1996, mature
on January 1, 1997. The reverse repurchase agreement outstanding at December 31,
1995, matured on January 17, 1996.
</TABLE>

The Bank has established reverse repurchase lines of credit in the amount
of $310.0 million. These lines would be subject to the amount of securities
available for collateralization purposes.

50
<PAGE> 57

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

(11) FEDERAL HOME LOAN BANK ADVANCES
<TABLE>
A summary of Federal Home Loan Bank advances by maturities at December 31
follows:
<CAPTION>
1996 1995
---------------------- -------------------
AMOUNT WEIGHTED AMOUNT WEIGHTED
------ AVERAGE ------ AVERAGE
RATE RATE
---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 year............................................. $209,133 5.79% $132,293 5.76%
Over 1 year to 2 years.................................... 43,570 5.49 78,453 6.51
Over 2 years to 3 years.................................... 6,269 5.59 36,948 5.53
Over 3 years to 5 years................................... 10,138 5.76 15,123 5.65
Over 5 years.............................................. 2,475 6.19 597 6.46
-------- --------
$271,585 5.74% $263,414 5.94%
======== ==== ======== ====

</TABLE>

Included in the above maturities are $4,875,000 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). The Bank has lines of credit established
with banks totalling $51.6 million at December 31, 1996.

In the third quarter of 1996, the Bank elected early prepayment of selected
above market interest rate FHLB advances. A pretax loss of $298,000 was incurred
on the extinguishment of $19.1 million of such debts. The loss is recorded as an
extraordinary item, net of a tax benefit of approximately $125,000 (see note
12).

(12) FEDERAL AND STATE INCOME TAXES
<TABLE>
The current and deferred components of income tax expense (benefit) for the
years ended December 31 follow:

<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal............................................... $3,520 $1,938 $ 1,781
State................................................. 361 299 202
------ ------ -------
3,881 2,237 1,983
------ ------ -------
Deferred income tax expense (benefit):
Federal............................................... (8) 2,857 2,629
State................................................. (109) 1,140 1,169
Change in valuation allowance......................... (500) (600) (1,000)
------ ------ -------
(617) 3,397 2,798
------ ------ -------

Income tax expense before extraordinary items.............. 3,264 5,634 4,781
Federal and state tax effect of extraordinary item......... (125) --- ---
------ ------ -------
Total income tax expense................................... $3,139 $5,634 $ 4,781
====== ====== =======
</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.

<PAGE> 58

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

<TABLE>
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:

<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)

<S> <C> <C> <C>
Federal income tax expense at statutory rate................. $ 5,571 $ 5,240 $ 4,700
Tax effect of:
Dividends received deduction............................ (2) (9) (11)
State tax, net of federal benefit before valuation
allowance, excluding state impact of law change....... 589 935 905
Federal and state benefit of adjustment to deferred
taxes resulting from change in federal tax law........ (2,500) --- ---
Change in valuation allowance........................... (500) (600) (1,000)
Other, net.............................................. 106 68 187
------- ------- -------
$ 3,264 $ 5,634 $ 4,781
======= ======= =======

Effective income tax rate before extraordinary item.......... 20.5% 37.6% 34.6%
==== ==== ====

</TABLE>

The existing net deductible temporary differences that give rise to the net
deferred income tax asset are expected to reverse in periods in which the
Company will generate net taxable income. At December 31, 1996, the net deferred
tax asset is supported by recoverable income taxes of approximately $4.3
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.

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

<CAPTION>
1996 1995
---- ----

(IN THOUSANDS)
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses.................................................. $3,954 $ 2,358
Unrealized losses on writedown of other real estate owned.................. 190 1,665
Deferred benefits.......................................................... 618 552
Depreciation............................................................... 32 ---
Other...................................................................... 520 481
------ -------
Gross deferred assets...................................................... 5,314 5,056
Valuation allowance........................................................ (828) (1,328)
------ -------
Net deferred tax assets before deferred tax liabilities...................... 4,486 3,728
------ -------
Deferred tax liabilities:
Depreciation............................................................... --- 432
Deferred expenses.......................................................... 2,571 1,857
Excess mortgage servicing fees............................................. 9 16
Security valuation adjustments on investments available for sale........... 201 127
Miscellaneous security valuation adjustments............................... 225 225
Other...................................................................... 106 241
------ -------
Gross deferred liabilities................................................. 3,112 2,898
------ -------
Net deferred income taxes receivable......................................... $1,374 $ 830
====== =======
</TABLE>

<PAGE> 59

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995, and 1994

In August, 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts beginning after December
31, 1995. These rules also require that thrift institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Company had previously recorded a
deferred tax liability equal to the bad debt recapture and as such, the new
rules will have no effect on net income or federal income tax expense. In
addition, the Company had recorded a deferred tax liability on a portion of the
base year reserves. As a result of the change in rules, the deferred tax
liability was reversed and recognized as a $2.5 million decrease in tax expense
for the year.
The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provision of present law that require recapture in the case of certain excess
distributions to shareholders. The tax effect of pre-1988 bad debt reserves
subject to recapture in the case of certain excess distributions is
approximately $3.9 million.

(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.
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 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.
In connection with the Bank's conversion to a stock savings bank, a
liquidation account was established for the benefit of eligible deposit account
holders in the event of a complete liquidation. At December 31, 1996, the amount
of the liquidation account was approximately $749,000 (unaudited).
On October 17, 1996, the Company declared a 20% stock dividend distributed
on November 13, 1996. All earnings per share, dividends and share information
have been retroactively adjusted to reflect this stock dividend.

<PAGE> 60

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

The Banks are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that as of December 31, 1996, the Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Banks as well capitalized under the framework for prompt
corrective action. To be categorized as well capitalized, the Banks must
maintain total risk-based, Tier 1 risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes would cause a change in the Banks' categorization.
<TABLE>
The Company's actual capital amounts and ratios as of December 31, 1996,
follow:

<CAPTION>
TO BE WELL
MINIMUMS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY ACTION PROVISIONS
-------------------------------------------------------------------------
(IN THOUSANDS)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital $104,368 14.6% $57,123 >8.0% $71,404 >10.0%
(to risk weighted assets)
Tier 1 capital 95,442 13.4 28,562 >4.0 42,843 > 6.0
(to risk weighted assets)
Tier 1 capital 95,442 8.0 47,634 >4.0 59,543 > 5.0
(to average assets)
</TABLE>

(14) OTHER INCOME
<TABLE>
Components of other income for the years ended December 31 follow:

<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposit account service charges.............................. $1,557 $1,579 $1,507
Loan late charges and other fees............................. 437 243 176
Rental income................................................ 244 354 355
Gain on sale of a non-marketable security.................... --- 220 ---
Other........................................................ 471 702 559
------ ------ ------
$2,709 $3,098 $2,597
====== ====== ======
</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.

<PAGE> 61

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

<TABLE>
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:

<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)

<S> <C> <C>
Vested benefits............................................................. $ 2,758 $ 2,637
Non-vested benefits......................................................... 70 57
------- -------
Accumulated benefit obligation.............................................. 2,828 2,694
Additional benefits related to future compensation levels................... 2,164 2,444
------- -------
Projected benefit obligation................................................ 4,992 5,138
Plan assets at fair value................................................... 4,269 3,463
------- -------
Plan assets less than projected benefit obligation.......................... (723) (1,675)
Unrecognized net (gain) loss................................................ (293) 792
Unamortized transition asset................................................ (196) (210)
------- -------
Accrued pension cost........................................................ $(1,212) $(1,093)
======= =======
</TABLE>

<TABLE>
Net periodic pension expense for the years ended December 31 follows:

<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost - benefits earned during the year............... $ 545 $401 $ 548
Interest cost on projected benefit obligation................ 357 315 319
Actual return on plan assets................................. (528) (531) (174)
Net amortization and deferral................................ 213 301 (59)
----- ---- -----
Net periodic pension expense................................. $ 587 $486 $ 634
===== ==== =====
<CAPTION>
Assumptions used to develop the net periodic pension benefit obligation
follow:

<S> <C> <C> <C>
Discount rate................................................. 7.50% 7.00% 8.00%
Rate of increase in compensation levels....................... 5.00% 5.00% 5.00%

Assumptions used to develop the net periodic pension expense follow:

Discount rate................................................. 7.00% 8.00% 7.00%
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 health care and life insurance benefits for certain retired
employees and dependents. This unfunded plan also covered 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.
<TABLE>
The status of the plan for the years ended December 31 follows:

<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents....................................................... $248 $214
Active employees.............................................................. --- 50
---- ----
Total accumulated postretirement benefit obligation............................. $248 $264
==== ====
Accrued postretirement benefit cost............................................. $269 $274
==== ====

</TABLE>

The net periodic postretirement benefit expense for the years ended
December 31, 1996, 1995 and 1994 totalled $17,000, $17,000, and $14,000,
respectively.

<PAGE> 62

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996, 1995 and 1994

Stock Option Plan
Under the Company's 1986 Stock Option Plan for the benefit of officers and
other employees, 600,000 shares of authorized but unissued Common Stock were
reserved for issuance. As of December 31, 1996, this plan has expired and 3,600
ungranted option shares expired during the year. In 1995, the Company adopted a
Stock Incentive Plan, in addition to and separate from the 1986 Stock Option
Plan. A total of 249,134 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.

<TABLE>
A summary of stock option plan activity for the years ended December 31
follows:

<CAPTION>
1996 1995 1994
-------------------- --------------------- --------------------
WTD.AVG. WTD.AVG. WTD.AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES RPICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...........336,612 $13.43 285,468 $11.73 228,779 $ 9.48
Granted...............................105,600 20.71 85,800 17.47 132,000 14.55
Exercised.............................(49,721) 10.80 (34,656) 9.47 (72,608) 9.92
Forfeited............................. (1,800) 12.26 --- --- (2,703) 6.87
------- ------- -------
Outstanding at end of year.................390,691 15.74 336,612 13.43 285,468 11.73
======= ======= =======
Exercisable at end of year.................360,691 15.55 312,612 13.12 255,468 11.06
======= ======= =======
Shares reserved for future grants..........237,714 346,934 183,600
======= ======= =======

</TABLE>

<TABLE>
A summary of options outstanding and exercisable by price range as of
December 31 follows:
<CAPTION>
OPTIONS OUTSTANDING ORTIONS EXERCISABLE
- ------------------------------------------------------------------------- ----------------------------------
OUTSTANDING WTD.AVG. EXERCISABLE
RANGE OF AS OF REMAINING WTD.AVG. AS OF WTD.AVG.
EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE

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

<CAPTION>
1996 1995
---- ----

<S> <C> <C>
Net income as reported................................. $12,479 $9,338
Pro forma net income................................... 12,156 9,032
Earnings per share as reported......................... 2.44 1.85
Pro forma earnings per share........................... 2.38 1.79
</TABLE>

56
<PAGE> 63

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996, 1995 and 1994

Pro forma net income reflects only options granted in 1996 and 1995,
therefore, the full impact of calculating the compensation expense for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
above since options granted prior to January 1, 1995 are not considered. The per
share weighted average fair value of stock options granted during 1996 and 1995
was $4.59 and $4.25, respectively, on the date of grant determined using the
Black Scholes option pricing model with the following weighted average
assumptions:

<TABLE>

<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected dividend yield............................ 3.00% 3.00%
Risk-free interest rate............................ 6.65% 5.44%
Expected volatility................................ 25.00% 25.00%
Expected life (years).............................. 6.20 5.72

</TABLE>
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 14,063 shares of Common Stock were purchased during 1996 at an
average price of $23.05 per share, which when combined with forfeited shares are
allocated to participants proportionate to their gross wages. Contributions by
the Bank to the ESOP for participants for the years ended December 31, 1996,
1995 and 1994 were $325,000, $402,000 and $380,000, 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 Banks. All employees who meet specified age and length of
service requirements are eligible to participate in the 401K plan. The amounts
matched by the Banks are included in salaries and employee benefits expense. The
amounts matched for the years ended December 31, 1996, 1995 and 1994 were
$54,000, $49,000 and $49,000, 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 1996, 1995 and 1994, $293,000, $255,000 and $263,000,
respectively, was charged to salaries and employee benefits expense under this
plan.

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

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. This unfunded plan was amended to allow the directors
to change their deferred compensation account to equivalent stock units in the
Company's common stock, permit distribution upon retirement to be paid in shares
of common stock, or to choose to receive interest

57
<PAGE> 64

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1996, 1995 and 1994

credits based on an equivalent rate on a term certificate of deposit. The
deferred compensation earned by the directors for the years ended December 31,
1996, 1995 and 1994 totalled $53,400, $48,100 and $52,300, respectively.

(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment, 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 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.

<TABLE>
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices follow:
<CAPTION>
1995 1996
------------------------ -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets held for sale...............................$ 2,220 $ 2,220 $ 5,162 $ 5,163
Investments available for sale......................114,125 114,125 108,969 108,969
Investments held to maturity........................136,926 137,007 167,263 169,761
</TABLE>

<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 follow:

<PAGE> 65

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 1996, 1995 and 1994
<TABLE>

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

<CAPTION>
1995 1996
------------------------ -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks........................... $ 20,489 $ 20,489 $ 19,236 $ 19,236
Short-term investments............................ 25,600 25,600 9,000 9,000
Accrued interest receivable....................... 7,164 7,164 7,164 7,164
Stock in FHLB..................................... 15,747 15,747 13,171 13,171
Demand deposit accounts........................... 60,245 60,245 54,516 54,516
NOW accounts...................................... 75,297 75,297 67,275 67,275
Regular savings accounts.......................... 96,690 96,690 68,052 68,052
Money market deposit accounts..................... 116,019 116,019 130,437 130,437
Variable rate certificates........................ 8,459 8,459 13,279 13,279
Securities sold under agreements to repurchase.... 2,833 2,833 9,212 9,212
Mortgagors' escrow accounts....................... 2,294 2,294 3,526 3,526
</TABLE>

The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate fair
value. The fair values for investments available for sale and held to maturity
are based on quoted bid prices received from securities dealers. Commitments to
originate loans and forward commitments to sell loans have been considered in
the value of assets held for sale. Loans are estimated by discounting
contractual cash flows adjusted for prepayment estimates and using discount
rates approximately equal to current market rates on loans with similar
characteristics and maturities. The incremental credit risk for non-performing
loans has been considered in the determination of the fair value of loans.
Excess servicing is based on the present value of the estimated cash flows using
a current risk rate and taking into consideration estimated prepayments. Fixed
rate certificates and Federal Home Loan Bank advances are based on the
discounted value of contractual cash flows. The discount rates used are
representative of approximate rates currently offered on instruments with
similar remaining maturities. The fair values for cash and short-term
investments approximate their carrying amounts because of the short maturity of
these instruments. The fair values of accrued interest receivable, variable rate
certificates, securities sold under agreements to repurchase and mortgagors'
escrow accounts approximate their carrying amounts because of the short-term
nature of these financial instruments. The fair value of stock in the Federal
Home Loan Bank of Boston equals its carrying amount as reported in the balance
sheet because this stock is redeemable only at full par by the FHLB. The fair
values of demand deposit accounts, NOW accounts, regular savings accounts and
money market accounts are equal to their respective carrying amounts since they
are equal to the amounts payable on demand at the reporting date. The 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.

59
<PAGE> 66

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 1996, 1995 and 1994

(17) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
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 follow:

<CAPTION>
BALANCE SHEETS
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and interest-bearing deposit in subsidiaries........................... $ 3,015 $ 1,623
Investment in subsidiaries, at equity....................................... 92,977 83,637
Other assets................................................................ 2 2
------- -------
Total assets...................................................... $95,994 $85,262
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued income taxes................................................... $ 2 $ 2
Accrued expenses....................................................... 146 95
------- -------
Total liabilities................................................. 148 97
------- -------
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; 5,154,792 and 5,154,968 shares issued
in 1996 and 1995, respectively...................................... 515 515
Additional paid-in capital............................................. 59,222 71,515
Retained earnings...................................................... 36,109 26,183
Treasury stock, at cost (20,862 and 70,603 shares in 1996 and
1995, respectively)................................................... (301) (13,247)
Unrealized gains on investments available for sale, net................ 301 199
------- -------
Total stockholders' equity........................................ 95,846 85,165
------- -------
Total liabilities and stockholders' equity........................ $95,994 $85,262
======= =======

</TABLE>
<TABLE>

STATEMENTS OF OPERATIONS

<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Dividends from bank subsidiaries.............................. $ 4,500 $ 1,500 $3,512
Interest income from deposits in bank subsidiaries............ 74 95 91
------- ------- ------
Total operating income..................................... 4,574 1,595 3,603
Non-interest expenses......................................... 240 1,362 315
------- ------- ------
Income before income tax expense (benefit) and
equity in net income of subsidiaries....................... 4,334 233 3,288
Income tax expense (benefit).................................. 93 (380) 20
------- ------- ------
Income before equity in net income of subsidiaries............ 4,241 613 3,268
Equity in net income of subsidiaries.......................... 8,238 8,725 5,775
------- ------- ------
Net income.................................................... $12,479 $ 9,338 $9,043
======= ======= ======
</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.

<PAGE> 67

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $12,479 $ 9,338 $ 9,043
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries...... (8,238) (8,725) (5,775)
(Increase) decrease in other assets..................... --- 423 (293)
Increase in other liabilities........................... 51 34 20
------- ------- -------
Net cash provided by operating activities.......... 4,292 1,070 2,995
------- ------- -------
Cash flows from investing activities:
Investment in subsidiary................................ (1,000) (4,000) ---
------- ------- -------
Net cash used by investing activities.............. (1,000) (4,000) ---
------- ------- -------
Cash flows from financing activities:
Stock options exercised................................. 653 345 808
Dividends paid to stockholders.......................... (2,553) (1,856) (1,677)
------- ------- -------
Net cash used by financing activities.............. (1,900) (1,511) (869)
------- ------- -------
Net increase (decrease) in cash and interest-bearing
deposit in subsidiaries.................................... 1,392 (4,441) 2,126
Cash and interest-bearing deposit in subsidiaries at
beginning of year.......................................... 1,623 6,064 3,938
------- ------- -------
Cash and interest-bearing deposit in subsidiaries at
end of year................................................ $ 3,015 $ 1,623 $ 6,064
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Income taxes............................................ $ 13 $ --- $ 20
</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 amounts recognized in the Consolidated Balance Sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans and mortgage-backed
securities, the contract or notional amounts do not represent exposure to credit
loss. The Company monitors the credit risk of its forward commitments through
credit approvals, limits, and monitoring procedures.

<PAGE> 68

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

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

<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
---------------
1996 1995
---- ----
(IN THOUSANDS)
Financial instruments whose contract amounts represent credit risk:

<S> <C> <C>
Commitments to originate loans:
Fixed rate loans..................................................... $11,041 $ 6,871
Adjustable rate loans................................................ 16,853 8,545
------- ------
Total commitments to originate loans............................... 27,894 15,416
Unused lines of credit................................................. 83,193 76,584
Standby letters of credit.............................................. 1,805 557
Loans sold with recourse............................................... 4,180 5,872
Unadvanced portions of loans........................................... 18,560 9,891

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

Forward commitments to sell loans and mortgage-backed securities....... $ 3,000 $ 8,000
</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.
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 $4,543,000 and $4,268,000 at December 31, 1996
and 1995, respectively.
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1996. 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 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. In the second quarter of 1996, the
Company executed a merger termination agreement with Finest which resulted in a
pretax recovery of $225,000.

62
<PAGE> 69

ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996, 1995 and 1994

(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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. The per
share data has been restated for all periods presented to reflect a 20% stock
dividend distributed on November 13, 1996.

<TABLE>
Summaries of consolidated operating results on a quarterly basis for the
years ended December 31, follow:

<CAPTION>
1996 QUARTERS
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and dividend income.................... $20,070 $20,714 $21,390 $21,649
Interest expense................................ 11,586 11,897 12,496 12,550
------- ------- ------- -------
Net interest and dividend income................ 8,484 8,817 8,894 9,099
Provision for loan losses....................... 395 360 1,305 (a) 495
Losses on real estate operations................ (477) (391) (371) (303)
Non-interest income............................. 1,498 1,524 652 (b) 1,933
Merger expense (recovery)....................... --- (225) --- ---
Non-interest expense............................ 4,802 5,200 5,791 5,320
------- ------- ------- -------
Income before income tax expense (benefit)
and extraordinary item ....................... 4,308 4,615 2,079 4,914
Income tax expense (benefit).................... 1,576 1,695 (1,743) (c) 1,736
------- ------- ------- -------
Income before extraordinary item................ 2,732 2,920 3,822 3,178
------- ------- ------- -------
Extraordinary item, net of tax.................. --- --- (173) ---
-------- ------- ------- -------
Net income...................................... $ 2,732 $ 2,920 $ 3,649 $ 3,178
======= ======= ======= =======
Income per share before extraordinary item...... $ 0.53 $ 0.57 $ 0.75 $ 0.62
Extraordinary item per share, net of tax........ --- --- (0.03) ---
------- ------- ------- -------
Net income per share............................ $ 0.53 $ 0.57 $ 0.72 $ 0.62
======= ======= ======= =======
Dividends declared per share.................... $ 0.10 $ 0.13 $ 0.13 $ 0.15
======= ======= ======= =======

<CAPTION>
1996 QUARTERS
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------

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............................ $ 0.50 $ 0.33 $ 0.52 $ 0.50
======= ======= ======= =======
Dividends declared per share.................... $ 0.08 $ 0.08 $ 0.10 $ 0.10
======= ======= ======= =======

<FN>
(a) Increased provision for loan losses reflects the restructuring of a
previously reported potential problem loan and increased loan growth.
(b) Includes a pre-tax loss of $870,000 from the sale of low yielding
investments.
(c) Includes a tax benefit of $2.5 million from a change in federal tax law.
</TABLE>

<PAGE> 70

<TABLE>
FORM 10-K
CROSS REFERENCE INDEX
Part 1

<CAPTION>
Page

<S> <C> <C>
Item 1 Business............................................................................. 2

Item 2 Properties........................................................................... 9

Item 3 Legal Proceedings.................................................................... 10

Item 4 Submission of Matters to a Vote of Security Holders.................................. 10

Part II

Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................ 10

Item 6 Selected Financial Data.............................................................. 11

Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 12

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

Part III

Part IV

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

(a)(1) Financial Statements -
Independent Auditors' Report............................................... 34

Consolidated Balance Sheets as of December 31, 1996 and 1995............... 35

Consolidated Statements of Operations for each of the years ended
December 31, 1996, 1995 and 1994........................................... 36

Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 31, 1996, 1995 and 1994............... 37

Consolidated Statements of Cash Flows for each of the years ended
December 31, 1996, 1995 and 1994........................................... 38-39

Notes to Consolidated Financial Statements................................. 40-63

</TABLE>

<PAGE> 71

(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, 1996.

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 and restated, January 23, 1997.

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).

10.2 Special Termination Agreement between Andover, Andover Bank and
Gerald T. Mulligan, dated May 16, 1991, as amended and restated
through January 23, 1997.

10.3 Special Termination Agreement between Andover, Andover Bank and
Joseph F. Casey, dated December 17, 1992, as amended and restated
through January 23, 1997.

10.4 Special Termination Agreement between Andover, Andover Bank and
Michael J. Ecker, dated December 17, 1992, as amended and
restated through January 23, 1997.

10.5 Special Termination Agreement between Andover, Andover Bank and
John R. Heerwagen, dated December 17, 1992, as amended and
restated through January 23, 1997.

10.6 Special Termination Agreement between Andover, Andover Bank and
Octavio C. Bolivar, dated January 24, 1994, as amended and
restated, January 23, 1997.

<PAGE> 72

10.7 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).

10.8 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).

10.9 Special Termination Agreement between Andover, Andover Bank and
Raymond P. Smith, dated December 12, 1995, as amended and
restated, January 23, 1997.

10.10 Andover Bancorp, Inc. 1995 Stock Incentive Plan, dated February
16, 1995 (incorporated herein by reference to Exhibit 10.11 to
Andover's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).

10.11 Deferred Compensation Plan for Directors of Andover Bancorp, Inc.
and its Subsidiaries, effective July 1, 1993, as amended and
restated, February 22, 1996 (incorporated herein be reference to
Exhibit 10.12 to Andover's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).

10.12 Andover Bancorp, Inc. Special Termination Plan, effective January
23, 1997.

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, 1996.

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. 1996 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the Securities and Exchange
Commission and is not deemed to be filed.

21 The Company has two subsidiaries, Andover Bank and 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, 1996.

23.1 Consent of KPMG Peat Marwick LLP.

66
<PAGE> 73

NOTES

<PAGE> 74
NOTES

68
<PAGE> 75
SHAREHOLDER INFORMATION

TRANSFER AGENT AND REGISTER - THE FIRST NATIONAL BANK OF BOSTON

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

The First National Bank of Boston
c/o Boston EquiServe, L.P.
Mail Stop 45-02-64, PO Box 644
Boston, MA 02102-0644
617*575*3170 800*730*4001

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN/GENERAL INFORMATION

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

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
508*749*2216

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110

FORM 10K

An additional copy of Andover's Annual Report for 1996 on Form 10-K, as filed
with the Securities and Exchange Commission pursuant to the Securities and
Exchange Act of 1934, may be obtained without charge by contacting:

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
508*749*2216

FDIC COMPLIANCE

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

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
508*749*2216

================================================================================
ANDOVER BANK DIRECTORS

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

*Also Directors of
Andover Bancorp, Inc.

ANDOVER BANK NH DIRECTORS
John P. Bachini
John D. Collins
George J. Khoury
Gerald T. Mulligan
Robert W. Phinney
Marie S. Tucarella

ANNUAL MEETING

The Annual Meeting of the Shareholders of Andover Bancorp, Inc.
will be held at 10 a.m. on Thursday, April 24, 1997 at the
Andover Town House, 20 Main Street, Andover, Massachusetts.
================================================================================

<PAGE> 76

- --------------------------------------------------------------------------------
ANDOVER BANK

Main Office
61 Main Street
Andover, MA 01810

159 River Road
Andover, MA 01810

450 Essex Street
Lawrence, MA 01840

305 South Broadway
Lawrence, MA 01843

547 Broadway
Methuen, MA 01844

228 Haverhill Street
Methuen, MA 01844

91 Pleasant Valley Street
Methuen, MA 01844

108 Main Street
North Andover, MA 01845

995 Main Street
Tewksbury, MA 01876

2171 Main Street
Tewksbury, MA 01876

ANDOVER BANK NH

Main Office
130 Main Street
Salem, NH 03079

62 Nashua Road (Route 102)
Londonderry, NH 03053

TELEPHONE SALES
AND SERVICE CENTER

1 800 2CALL AB

0685-AR-97
- --------------------------------------------------------------------------------

<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 23, 1997,
relating to the consolidated balance sheets of Andover Bancorp, Inc. and
subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K of Andover Bancorp,
Inc.

/s/ KPMG PEAT MARWICK LLP

Boston, Massachusetts
March 7, 1997

<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS DATED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BE REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 20,489
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114,125
<INVESTMENTS-CARRYING> 136,926
<INVESTMENTS-MARKET> 137,007
<LOANS> 870,035
<ALLOWANCE> 12,229
<TOTAL-ASSETS> 1,204,813
<DEPOSITS> 824,311
<SHORT-TERM> 2,833
<LIABILITIES-OTHER> 10,238
<LONG-TERM> 271,585
0
0
<COMMON> 515
<OTHER-SE> 95,331
<TOTAL-LIABILITIES-AND-EQUITY> 1,204,813
<INTEREST-LOAN> 64,569
<INTEREST-INVEST> 19,254
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 83,823
<INTEREST-DEPOSIT> 31,692
<INTEREST-EXPENSE> 48,529
<INTEREST-INCOME-NET> 35,294
<LOAN-LOSSES> 2,555
<SECURITIES-GAINS> (265)
<EXPENSE-OTHER> 20,888
<INCOME-PRETAX> 15,916
<INCOME-PRE-EXTRAORDINARY> 12,652
<EXTRAORDINARY> (173)
<CHANGES> 0
<NET-INCOME> 12,479
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.16
<LOANS-NON> 10,699
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,228
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,665
<CHARGE-OFFS> 3,283
<RECOVERIES> 1,991
<ALLOWANCE-CLOSE> 12,229
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>