<PAGE>   1
DIVERSITY

MORTGAGE BANKING
[GRAPHIC]

RETAIL BANKING
[GRAPHIC]

COMMERCIAL BANKING
[GRAPHIC]

INVESTMENT & TRUST SERVICES
[GRAPHIC]

EQUIPMENT LEASE FUNDING
[GRAPHIC]

CFX CORPORATION
1996 Annual Report


<PAGE>   2

-----------------------
SELECTED FINANCIAL DATA
-----------------------

<TABLE>
<CAPTION>
===================================================================================================================
                                                                                  AT OR FOR
                                                                         YEARS ENDED DECEMBER 31 (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)                    1996          1995        1994 (2&3)   1993 (2)      1992
===================================================================================================================
<S>                                               <C>             <C>           <C>          <C>         <C>
STATEMENT OF INCOME DATA:
   Net interest and dividend income                $   56,859     $   52,026    $   47,998   $   46,478  $   45,409
   Provision for loan and lease losses                  2,935          3,037         2,697       11,608       6,728
   Net income available to common stock (5)            12,641         11,249         6,976        3,927       4,986
   Common earnings per share (3 & 5)                      .99            .89           .58          .34         .42
   Common dividends declared per share (3)                .55            .50           .31          .27         .25
   Preferred dividends declared per share                   -          .4625        1.3875       1.3875      1.3875
-------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
   Total assets                                     1,547,092      1,344,880     1,267,113    1,218,394   1,152,323
   Net loans and leases                             1,102,424        911,981       828,355      731,738     749,447
   Investments                                        278,191        311,814       308,241      369,297     290,752
   Deposits                                         1,157,207      1,056,824       999,217      974,694   1,006,977
   Advances from Federal Home
     Loan Bank of Boston                              175,081        102,814        94,201       49,801       3,000
   Other borrowed funds                                67,374         44,012        45,295       32,822      17,421
   Total shareholders' equity                         132,953        127,032       118,918      117,327     115,627
   Common shareholders' equity                        132,953        127,032       118,725      113,949     112,224
   Common shareholders' equity per share (3)            10.22          10.52          9.74         9.77        9.38
-------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE DATA:
   Total assets                                     1,475,860      1,311,455     1,256,260    1,155,507   1,160,949
   Interest earning assets                          1,360,296      1,214,876     1,140,680    1,065,317   1,074,168
   Loans and leases (net of unearned income) (5)    1,025,013        878,952       790,554      765,294     769,692
   Interest bearing liabilities                     1,194,994      1,053,060       997,080      940,905     965,791
   Common shareholders' equity                        131,974        122,733       113,939      114,546     110,133
-------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
   Return on average common shareholders'
     equity (4)                                          9.58%          9.17%         6.12%        3.43%       4.53%
   Return on average assets (4)                           .86%           .86%          .56%         .34%        .43%
   Efficiency ratio (4)                                 69.58%         68.69%        75.00%       71.46%      70.78%
   Net interest margin                                   4.24%          4.36%         4.27%        4.41%       4.27%
====================================================================================================================
</TABLE>


(1)      On July 1, 1996, the Company acquired The Safety Fund Corporation
         (Safety Fund), a bank holding company, and the Milford Co/operative
         Bank (Milford), a state-chartered co/operative bank. Both transactions
         were accounted for as a pooling-of-interests. Accordingly, all prior
         period balances have been restated to reflect this transaction. See
         Note B of the "Notes to Consolidated Financial Statements."

(2)      On September 1, 1993, the Company, through its subsidiary, Cheshire
         County Savings Bank, acquired the remaining 52.4% of Colonial
         Mortgage, Inc. (renamed CFX Mortgage, Inc.).   Previously, the Company
         owned 47.6% and as a result of the purchase Colonial became a
         wholly-owned subsidiary. The transaction was accounted for by the
         purchase method of accounting.

(3)      Common per share data has been restated to reflect the Company's 5%
         stock dividend declared on December 10, 1996.

(4)      As a result of the Safety Fund and Milford acquisitions discussed in
         (1) above, the Company recorded a charge to earnings in the third
         quarter of 1996 of $3,722,000, on an after-tax basis for merger
         related costs. Also during the third quarter of 1996, the Company
         recorded adjustments relating to a pension settlement gain of $539,000
         after tax and an FDIC-SAIF assessment of $424,000 after tax. See
         "Management's Discussion and Analysis."

(5)      Average loans and leases include total loans and leases and mortgage
         loans held for sale.

<PAGE>   3


THE COMPANY

CFX(R) Corporation is a bank holding company headquartered in Keene, New
Hampshire.  The Company operates 42 full-service offices and 68 automated
teller and remote service banking locations in  New Hampshire and central
Massachusetts. The Company's three banking subsidiaries (the Banks) are CFX
Bank, with headquarters in Keene, New Hampshire, Safety Fund National Bank,
with headquarters in Fitchburg, Massachusetts, and Orange Savings Bank, with
headquarters in Orange, Massachusetts. The principal business of the Banks is
to serve as financial intermediaries, attracting deposits from, and making
loans to, consumers and small-and mid-sized businesses. A Trust Division
furnishes trust and investment services to individuals, corporations,
municipalities and charitable organizations.

      CFX Mortgage, CFX Bank's mortgage banking subsidiary, operates loan
production offices in Bedford and Keene,  New Hampshire and throughout the
Bank's branch network.

      CFX Bank owns 51 percent of CFX Funding L.L.C., which engages in the
facilitation of lease financing and securitization nationwide.


<PAGE>   4

-------------------
TO OUR SHAREHOLDERS
-------------------

<TABLE>
<CAPTION>
          TOTAL
          ASSETS
       (in Millions)

        Year Ended
  1994     1995       1996
<S>     <C>       <C>
$1,267   $1,345   $  1,547
</TABLE>


<TABLE>
<CAPTION>
         TOTAL
       DEPOSITS
     (in Millions)

      Year Ended
 1994     1995     1996
<S>     <C>      <C>
$ 999   $1,057   $1,157
</TABLE>


<TABLE>
<CAPTION>

        TOTAL
    SHAREHOLDERS'
       EQUITY
    (in Millions)

      Year Ended
 1994    1995    1996
<S>     <C>     <C>
$ 119   $ 127   $ 133
</TABLE>


[PHOTO]

PETER J. BAXTER
President & Chief Executive Officer

      The long-term financial success of an institution is dependent upon its
ability to retain profitable business, develop new growth markets, protect
itself from economic cycles by diversifying its revenue base, and preserve the
dedication of its people.  During 1996, we made substantial progress toward all
of these success measurements, resulting in increased shareholder value.

      Completing the acquisition of The Milford Co/operative Bank has
contributed greatly to the retention and expansion of our core markets in
southwestern New Hampshire. New branches in Laconia and Merrimack will provide
new high-growth markets to our retail banking franchise. Adding
Massachusetts-based Safety Fund National Bank to our Company opened up a
significant new geographic market to our mortgage banking subsidiary and a very
important investment and trust operation, which will be expanded throughout the
CFX franchise.

      I am pleased to report another year of record earnings; achieved by
diversifying our revenue stream, leveraging our balance sheet, and improving
our operating efficiency. The condensed financial review that follows presents
a summary of the lines of business that are driving our Company's performance.

      Looking ahead, CFX Corporation will continue to grow core product lines
by focusing on customer satisfaction and retention, and by penetrating our new,
higher-growth markets. Our recently announced acquisitions of Portsmouth Bank
Shares, Inc. ("POBS") and Community Bankshares, Inc. ("Community") bring to CFX
a state-wide presence in New Hampshire. With Portsmouth, we extend our
franchise to the seacoast region of Rockingham County while Community advances
the Company to the number two position in Merrimack County, the state's largest
market area.

      In addition to the pursuit of new growth markets, we will continue to
seek new products and technologies that will enhance our revenue stream, reduce
our costs, and provide our customers with high-quality and convenient banking
options.

      Standing behind our initiatives is our most diverse resource and the
foundation of our success-- our Board of Directors, management, and staff who
dedicate themselves to the pursuit of excellence. My thanks to them and you for
your continued support and confidence.



Peter J. Baxter
President &
Chief Executive Officer
<PAGE>   5


--------------------------
CONDENSED FINANCIAL REVIEW
--------------------------

<TABLE>
<CAPTION>
      EARNINGS
      PER SHARE

      Year Ended
 1994    1995    1996
<S>     <C>     <C>
$ .58   $ .89   $1.27
</TABLE>
*Excludes Charges for Mergers and
       Other Adjustments


<TABLE>
<CAPTION>
      RETURN
     ON EQUITY

     Year Ended
1994    1995     1996
<S>     <C>     <C>
5.94%   9.08%   12.31%
</TABLE>

*Excludes Charges for Mergers and
       Other Adjustments


<TABLE>
<CAPTION>
       RETURN
     ON ASSETS

     Year Ended
1994    1995    1996
<S>     <C>     <C>
0.56%   0.86%   1.10%
</TABLE>

*Excludes Charges for Mergers and
        Other Adjustments

[GRAPHIC]


OVERVIEW

      For the year-ended December 31, 1996, CFX Corporation (the Company)
reported earnings of $12.6 million, or $.99 per share, compared to earnings of
$11.2 million, or $.89 per share, for the prior year. Return on assets and
return on equity were .86% and 9.58%, respectively, for 1996 compared to .86%
and 9.08%, respectively for 1995. The increase in earnings came despite charges
for mergers and other adjustments (see "Management's Discussion and Analysis").

      Excluding charges for mergers and other adjustments, net income was $16.2
million, or $1.27 per share, an increase of 44% over 1995. On the same basis,
return on assets, return on equity, and the efficiency ratio (the cost to earn
a dollar of revenue) were 1.10%, 12.31%, and 63.33%, respectively. Net income
per share, excluding merger and other adjustments, has increased at  a compound
annual growth rate of 24.77% over the last five years. Note: The charts within
this section, "Condensed Financial Review", exclude charges for mergers and
other adjustments for 1996.

      The improvement in the Company's earnings for 1996 can be attributed to
the following factors:

-  DIVERSIFIED REVENUE INITIATIVES: In addition to traditional income from
   loans and investments, the Company has developed strong revenue sources from
   mortgage banking, the facilitation of commercial lease financing and
   securitization, consumer leasing, and investment and trust operations.

-  BALANCE SHEET LEVERAGE: The Company has successfully leveraged its capital,
   resulting in the generation of significant loan and lease assets.  Increased
   leverage reduced the Company's Tier 1 leverage capital ratio  from 8.78% in
   1995 to 8.00% in 1996.

-  LOAN AND LEASE GROWTH: The Company experienced strong loan growth across all
   product lines. For the year ended December 31, 1996, the loan and lease
   portfolio increased as follows:

<TABLE>
<CAPTION>
                                                 Annual Increase
                                              --------------------
                                               $000's           %
                                              --------       -----
<S>                                           <C>            <C>
Residential mortgage and construction         $125,402       21.05%
Consumer                                        42,506       58.38
Commercial and commercial real estate           22,826        8.82
                                              --------
   Total Loans                                $190,734       20.57
                                              ========
</TABLE>


<PAGE>   6


--------------------------
CONDENSED FINANCIAL REVIEW
--------------------------

<TABLE>
<CAPTION>
      EFFICIENCY
         RATIO

       Year Ended
 1994     1995     1996*
<S>     <C>       <C>
75.00%   68.69%   63.33%
</TABLE>
*Excludes Charges for Mergers and
        Other Adjustments


<TABLE>
<CAPTION>
    TIER 1 LEVERAGE
     CAPITAL RATIO

      Year Ended
1994    1995    1996*
<S>     <C>     <C>
9.04%   8.78%   8.00%
</TABLE>
       Year Ended


<TABLE>
<CAPTION>
            NET
          REVENUE*
      ($ in Millions)

          Year Ended
   1994      1995      1996*
<S>       <C>       <C>
$59,077   $66,337   $72,809
</TABLE>

   *Net interest and dividend income
plus other income, exclusive of pension
        settlement gain in 1996


[GRAPHIC]

-  EXPANDED DEPOSIT FRANCHISE: Over the past three years, the Company has
   significantly strengthened and expanded its deposit franchise into markets
   that offer greater opportunities for growth.

<TABLE>
   <S>                                                               <C>
   De novo Branch--Gilford, NH (Central NH)                          12/01/94
   Acquisition--Orange Savings Bank (North Central MA)               04/28/95
   De novo Branch--Manchester, NH (Southern NH)                      06/30/95
   Acquisition--The Safety Fund Corporation (Central MA)             07/01/96
   Acquisition--Milford Co/operative Bank (South Central NH)         07/01/96
   De novo Branch--Laconia, NH (Central NH)                          10/01/96
</TABLE>

-  IMPROVED EFFICIENCY: The consummation of three acquisitions within three
   years has afforded the Company the opportunity to reduce overhead and
   improve key efficiency ratios through the consolidation of operations and
   the elimination of duplicative administrative overhead. The Company has
   successfully grown its balance sheet by leveraging its employee and
   financial resources, thereby maintaining a constant level of operating
   costs.

-  BALANCED RISKS: The Company has grown its balance sheet while monitoring
   overall credit and interest rate risk through a disciplined approach to
   managing the Company's asset quality and asset/liability position.

BUSINESS STRATEGY

      As a public company, the principal objective of the Company is to improve
shareholder value through enhancing profitability by growing and diversifying
revenue streams. Since 1993, the Company has made significant strides in
achieving the above objective.

      The successful leverage of the Company's capital and generation of higher
shareholder returns has been consistently achieved through the expansion and
strengthening of the Company's lines of business and a strong dividend. A brief
summary of the Company's key lines of business are as follows:

MORTGAGE BANKING

      CFX Corporation operates a mortgage banking subsidiary, CFX Mortgage,
Inc., which originates residential housing loans to be held in portfolio    by
the Company's banking subsidiaries, as well as loans for sale to secondary
market investors. Residential loans are originated through various channels,
including the subsidiary banks' branch networks and through loan production
offices.  In addition, CFX Mortgage originates approximately half of its loan
volumes through a correspondent network of community banks, mortgage bankers,
and mortgage brokers throughout New Hampshire, Massachusetts, Maine, and
Vermont.


<PAGE>   7



--------------------------
CONDENSED FINANCIAL REVIEW
--------------------------

<TABLE>
<CAPTION>

     DIVIDENDS
     DECLARED
     PER SHARE

     Year Ended
1994   1995   1996
<S>     <C>    <C>
 .31    .50    .55
</TABLE>


<TABLE>
<CAPTION>
               CORE
            DEPOSITS*
         ($ in Millions)

            Year Ended
    1994         1995         1996
<S>        <C>          <C>
$999,118   $1,036,158   $1,087,447
</TABLE>
    *Excludes Brokered Deposits


<TABLE>
<CAPTION>
           TOTAL
     LOANS AND LEASES
      ($ in Millions)

         Year Ended
  1994       1995         1996
<S>        <C>        <C>
$842,756   $927,430   $1,118,164
</TABLE>

[GRAPHIC]


      Loans originated by CFX Mortgage in 1996 totalled $300 million of which
$179 million were sold to one of the Company's banking affiliates, contributing
to the 1996 increase in the Company's residential and construction real estate
portfolio of $125 million or 21%. At year-end, CFX Mortgage serviced over $1.3
billion in mortgage loans, including the subsidiary banks' mortgage portfolios
which totaled $721 million.

RETAIL BANKING

      CFX Corporation gathers deposits to meet its various funding requirements
through the banking subsidiaries' branch networks and, to a lesser degree,
through the purchase of brokered deposits from around the country. During the
year, core deposits (excluding brokered deposits) increased by  $51 million or
5%. Total core deposits at year-end were $1.1 billion.

      Consumer loans, both collateralized and unsecured, are also originated
through the subsidiary banks' branch networks.  Additionally, consumer loans
and leases are originated through an extensive, state-wide (New Hampshire)
merchant referral and dealer network which provide financing for a multitude of
consumer purchases. Expectations are to expand these same networks throughout
Worcester County in Massachusetts.

      During the year, consumer loans outstanding increased by $43 million or
58%.  Total outstandings at year-end were $115 million.

COMMERCIAL BANKING

      The Company's commercial banking division provides a complete line  of
deposit, loan and fee-based products to small and medium-sized businesses in
the New Hampshire and Massachusetts market areas. The operating  philosophy is
to develop close relationships with commercial customers, provide them with
unparalleled  customer service and ensure a commitment to local
decision-making.

      The recent acquisition of Safety Fund National Bank has greatly increased
both the geographic coverage and the number of commercial customers. As a
larger, more geographically diverse company, the subsidiary banks offer a more
competitive and sophisticated product line including a full range of cash
management services and an expanded small business lending program. These
products, combined with  an active sales program, will contribute to the
Company's loan and deposit growth and generate fee income.

      During the year, commercial and commercial real estate loans increased by
$23 million or 9%. At the end of 1996, our commercial loan portfolio exceeded
$280 million and the credit quality of our portfolio remained strong.



<PAGE>   8

--------------------------
CONDENSED FINANCIAL REVIEW
--------------------------

<TABLE>
<CAPTION>
        NET
  INTEREST MARGIN

     Year Ended
1994    1995    1996*
<S>     <C>     <C>
4.27%   4.36%   4.24%
</TABLE>

[GRAPHIC]


INVESTMENT AND TRUST SEVICES

      With the acquisition of Safety Fund National Bank, the Company gained an
Investment and Trust Services Division with a long history of solid
performance. A comprehensive array of investment and trust products and
services now complement our traditional product offerings. The emphasis of the
Investment and Trust Services Division is focused on the investor as much as on
the investments. We employ a disciplined investment process, assisted by
state-of-the-art technology and our combined years of experience in the trust
and investment industry, to yield superior investment performance. We offer
investment management and financial planning for individuals, corporations,
municipalities and non-profit organizations. We are a leading provider of
investment management and administrative services to funeral homes for pre-need
funeral trusts.

      Strong new business growth and excellent investment performance
contributed to an outstanding year for the Investment and Trust Services
Division. In 1996, the proprietary "Equity Buy List", a model portfolio of
equity selection, outperformed the S&P 500 Stock Index. With trust assets
approaching $400 million, continued growth is anticipated in 1997 as the
Company expands into new markets throughout New Hampshire and Massachusetts.

EQUIPMENT LEASE FUNDING

      A unique concept within the banking industry, CFX Funding facilitates the
funding, accumulation, sale and servicing of small-ticket leases originated by
participating lessors and provides the structural enhancements and
administrative coordination needed to create attractive products for the
capital markets. CFX Funding arranges short-term warehouse lines of credit with
CFX Bank based on the credit of the participating leasing company. The
warehouse lines of credit enable the Program participants to originate leases
for portfolio sale or securitization.

      During the year, lease receivables serviced by CFX Funding increased  by
$48 million or 96%. At year-end, total lease receivables serviced amounted to
approximately $98 million.

<PAGE>   9


--------------------------
CONDENSED FINANCIAL REVIEW
--------------------------

[GRAPHIC]


SHAREHOLDER VALUE

      The Company's corporate culture is focused on maximizing shareholder
value. The accompanying graph displays the Company common stock, the
broad-based Standard & Poor's (S&P) 500 Index, and Keefe, Bruyette & Woods'
(KBW) New England Bank Index.  The total return as shown on this graph is
measured using both stock price appreciation and the effect of continuous
reinvestment of dividend payments. The graph indicates that an initial $100
investment in the Company common stock on December 31, 1991 would be worth $410
on December 31, 1996, provided that all quarterly dividends were reinvested in
the Company common stock. This increase in value is equivalent to a compound
annual return of 32.6% over those five years for an investment in the Company
common stock, compared to 15.2% for the S&P 500 Index and 38.5% for the KBW New
England Bank Index.


                            CFX CORPORATION (CFX) VS.
                         THE FIVE YEAR TOTAL RETURN FOR
                         THE KBW NEW ENGLAND BANK INDEX
                                AND S&P 500 INDEX




                                   [GRAPH]


<PAGE>   10


--------------------------------------------------------------------------------
FINANCIAL CONTENTS
--------------------------------------------------------------------------------


<TABLE>
                       <S>                                                                                        <C>
                       MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................................   10
                       CONSOLIDATED FINANCIAL STATEMENTS
                         Consolidated Balance Sheets................................................................   25
                         Consolidated Statements of Income..........................................................   26
                         Consolidated Statements of Shareholders' Equity............................................   27
                         Consolidated Statements of Cash Flows......................................................   28
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         A.  Significant Accounting Policies.........................................................  29
                         B.  Mergers and Acquisitions................................................................  34
                         C.  Restrictions on Cash and Due From Bank Accounts.........................................  35
                         D.  Investment Securities...................................................................  35
                         E.  Loans and Leases........................................................................  38
                         F.  Allowance for Loan and Lease Losses.....................................................  39
                         G.  Premises and Equipment..................................................................  39
                         H.  Foreclosed Real Estate..................................................................  39
                         I.  Deposits................................................................................  40
                         J.  Short-Term Borrowed Funds...............................................................  41
                         K.  Advances from Federal Home Loan Bank of Boston..........................................  41
                         L.  Preferred Stock.........................................................................  42
                         M.  Income Taxes............................................................................  42
                         N.  Pension and 401(k) Plans................................................................  44
                         O.  Stock Compensation Plans................................................................  46
                         P.  Commitments and Contingencies...........................................................  47
                         Q.  Related Party Transactions..............................................................  48
                         R.  Derivative Financial Instruments........................................................  48
                         S.  Financial Instruments with Off-Balance-Sheet Lending Risk...............................  50
                         T.  Fair Value of Financial Instruments.....................................................  51
                         U.  Regulatory Capital Requirements and Other Restrictions..................................  53
                         V.  Mortgage Loan Servicing.................................................................  54
                         W.  Subsequent Events.......................................................................  54
                         X.  CFX Corporation (Parent-Company-Only)
                             Condensed Financial Statements..........................................................  55
                         Y.  Quarterly Results of Operations (Unaudited).............................................  57
                       REPORT OF MANAGEMENT--ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING................  58
                       REPORTS OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS......................................59 & 60
                       DIRECTORS AND OFFICERS OF CFX CORPORATION.....................................................  61
                       TRUSTEES AND BANKING PARTNERS OF CFX BANK.....................................................  61
                       DIRECTORS OF CFX FINANCIAL SERVICES, INC......................................................  61
                       MANAGEMENT OF CFX FUNDING L.L.C...............................................................  61
                       DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC..................................  62
                       DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK....................................  62
                       DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK.........................................  62
                       INFORMATION ON COMMON STOCK...................................................................  63
                       CORPORATE INFORMATION.........................................................................  64
</TABLE>





                                                                               9
<PAGE>   11


--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
GENERAL
--------------------------------------------------------------------------------
                       All information within this section should be read in
                       conjunction with the Consolidated Financial Statements
                       and Notes thereto included elsewhere in this annual
                       report and the tables appearing throughout the
                       discussion and analysis. All references in the
                       discussion to financial condition and to results of
                       operations are to the consolidated position and results
                       of CFX Corporation and its subsidiaries (the Company)
                       taken as a whole.

                          CFX Corporation is a bank holding company
                       incorporated under the laws of the State of New
                       Hampshire.  Diversified financial services are provided
                       to customers through its three wholly-owned
                       subsidiaries: CFX Bank, headquartered in Keene, New
                       Hampshire, Safety Fund National Bank, headquartered in
                       Fitchburg, Massachusetts, and Orange Savings Bank
                       (Orange), headquartered in Orange, Massachusetts. CFX
                       Bank has two wholly-owned subsidiaries: CFX Capital
                       Systems, Inc. (CFX Capital) and CFX Financial Services,
                       Inc. (CFX Financial). CFX  Capital's wholly-owned
                       subsidiary is CFX Mortgage, Inc. (CFX Mortgage) which
                       engages in mortgage banking. CFX Financial owns 51% of
                       CFX Funding L.L.C. (CFX Funding), which engages in the
                       facilitation of lease financing and securitization.

                          Services provided to our customer base by these
                       subsidiaries include traditional depository banking
                       services, retail and commercial banking, and investment
                       and trust services. CFX Mortgage, Inc. offers a full
                       complement of mortgage products to our customers, as
                       well as purchases approximately one-half of its total
                       originations through a correspondent network located
                       throughout northern New England. CFX Funding, through
                       its national small-ticket lease financing program,
                       facilitates the funding, accumulation, sale and
                       servicing of the small-ticket leases originated by
                       participating lessors and provides the structure, credit
                       enhancements, and administrative coordination needed to
                       create attractive investments for the capital markets.
                       Both CFX  Mortgage and CFX Funding have been
                       instrumental in the growth, both in total assets and
                       profitability, and the diversity of the Company.

                          CFX Corporation has grown profitably over the past
                       several years by leveraging its capital and through a
                       series of strategic acquisitions. This activity has
                       strengthened the franchise and assisted in the
                       transition from a traditional thrift institution to a
                       full-service bank. The operating results of the Company
                       depend primarily on its net interest and dividend
                       income, which is the difference between (i) interest and
                       dividend income on earnings assets, primarily loans,
                       leases, and investment securities, and (ii) interest
                       expense on interest bearing liabilities, which consist
                       of deposits and borrowings. Also affecting the Company's
                       operations are the levels of the provision for loan and
                       lease losses; the level of other operating income
                       consisting of deposit fees, trust and investment fees,
                       gains and losses on the sale of investment securities,
                       mortgage banking activities and leasing activities; the
                       level of operating expenses; and income taxes.

--------------------------------------------------------------------------------
ACQUISITIONS
--------------------------------------------------------------------------------
                       On July 1, 1996, the Company acquired The Safety Fund
                       Corporation, and its subsidiary bank, Safety Fund
                       National Bank (Safety Fund), a commercial bank with
                       total assets of $308 million headquartered in Fitchburg,
                       Massachusetts. In connection with the merger of Safety
                       Fund, the Company issued  2,973,000 shares of its common
                       stock in exchange for all of the outstanding shares of
                       Safety Fund common stock. Under the terms of the
                       agreement, Safety Fund shareholders received 1.785
                       shares of CFX Corporation common stock for each share of
                       Safety Fund common stock they owned. The transaction was
                       accounted for as a pooling-of-interests and as such, the
                       Consolidated Financial Statements have been restated to
                       include Safety Fund for all periods presented. The
                       acquisition of Safety Fund provided an expanded
                       penetration of the Company into commercial business
                       services. In addition, Safety Fund provided the foothold
                       into trust and investment services for the Company.
                       Safety Fund has trust assets totaling approximately $370
                       million.

                         Also on July 1, 1996, the Company acquired the Milford
                       Co/operative Bank (Milford), a state-chartered
                       co/operative bank located in Milford, New Hampshire with
                       total assets of $160 million. In connection with the
                       merger of Milford, the Company issued 1,914,000 shares
                       of its common stock in exchange for all of the
                       outstanding shares of Milford common stock. Under the
                       terms of the agreement, Milford shareholders received
                       2.777 shares of CFX Corporation common stock for each
                       share of their Milford common stock. The transaction was
                       accounted for as a pooling-of-interests and as such, the
                       Consolidated Financial Statements have been restated to
                       include Milford for all periods presented. In
                       conjunction with the acquisition, the Company merged
                       Milford into its CFX Bank subsidiary as of the
                       acquisition date. The Milford acquisition serves to
                       connect existing branch facilities in western and
                       central New Hampshire without creating any market
                       overlap.

                         In connection with the mergers, the Company incurred
                       merger-related expenses totaling $4,552,000 (pre-tax).
                       These expenses are described in detail in the "Other
                       Expense" section of this Management's Discussion and
                       Analysis.

                         On February 13, 1997 and on March 24, 1997,
                       respectively, the Company entered into separate
                       definitive agreements for the acquisitions of Portsmouth
                       Bank Shares, Inc. (Portsmouth) headquartered in
                       Portsmouth, New hampshire and Community Bankshares, Inc.
                       (Community), headquartered in Concord, New Hampshire.
                       As a result of these acquisitions, which are anticipated
                       to be accounted for by the pooling-of-interests method
                       of accounting, the Company anticipates that it will take
                       charges to earnings in 1997 of approximately $7.7
                       million on an after-tax basis for one-time costs of the
                       transactions. It is intended that substantially all of
                       the costs will be recognized




10


<PAGE>   12
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------
                       upon consummation of the acquisitions and will be paid
                       in 1997 and/or 1998. The one-time after-tax charges of
                       the transactions pertain to the following areas: data
                       processing $1,400,000; personnel, $1,398,000; and other,
                       $4,902,000. Data processing costs consist primarily of
                       write-offs due to duplication of computer hardware,
                       software, telecommunications equipment, and certain
                       conversion related expenses. Personnel costs consist
                       primarily of charges related to employee severance and
                       employment outplacement assistance. Other costs include
                       investment banking fees, legal and accounting fees, due
                       diligence costs, proxy registration/filing fees and
                       mailing costs. A significant portion of other costs are
                       capitalized for tax purposes and, therefore, are not tax
                       deductible. CFX management continues to review all these
                       costs.  There can be no assurance that such costs will
                       not exceed the amounts described above.

                         Pursuant to the definitive agreement for Portsmouth,
                       each outstanding share of Portsmouth common stock will
                       be converted to .95 share of CFX Corporation common
                       stock. If the average price of CFX Corporation common
                       stock for the ten trading days preceeding the last
                       regulatory approval required for the transaction is
                       below $15.70, the exchange ratio becomes 1.05 shares,
                       and the exchange ratio floats between .95 and 1.05
                       shares if the average price of CFX Corporation common
                       stock is between $17.375 and $15.70. Portsmouth may
                       terminate the agreement if the average price of CFX
                       Corporation common stock is below $14.20 per share
                       unless the Company agrees to increase the exchange
                       ratio. In the event that, prior to the closing, the
                       outstanding shares of the Company's common stock or
                       Portsmouth's common stock shall have been increased due
                       to a stock dividend declared on the respective stock
                       with a record date prior to the closing, then an
                       appropriate and apportionate adjustment shall be made in
                       the number of shares exchanged. See "Capital Resources"
                       of this "Management's Discussion and Analysis" for
                       further discussion of leverage strategies for the
                       Portsmouth transaction.

                         Pursuant to the definitive agreement for Community,
                       each outstanding share of Community common stock will be
                       converted to 2.20 shares of CFX common stock. If the
                       average price of CFX common stock for the fifteen days
                       preceding the closing date is between $18.18 and $20.00,
                       the exchange ratio floats between 2.20 and 2.00 shares.
                       Community may terminate the agreement if the average
                       price of CFX common stock is below $13.50 per share
                       unless the Company agrees to increase the exchange
                       ratio.

--------------------------------------------------------------------------------
FINANCIAL CONDITION--LOANS AND LEASES
--------------------------------------------------------------------------------
                       The table below sets forth the composition of the
                       Company's loan and lease portfolio at the dates
                       indicated.  Loan categories are presented net of
                       unearned income and net deferred origination costs.

<TABLE>
<CAPTION>
                       --------------------------------------------------------------------------------------------------
                       December 31 (Dollars in thousands)                         1996                    1995
                       --------------------------------------------------------------------------------------------------
                                                                                        % OF                    % OF
                                                                         BALANCES     PORTFOLIO      BALANCES   PORTFOLIO
                       --------------------------------------------------------------------------------------------------

                       <S>                                              <C>            <C>          <C>        <C>
                       Real estate:
                         Residential                                     $  712,980     63.76%      $586,489    63.24%
                         Construction                                         8,101       .72          9,190      .99
                         Commercial                                         142,989     12.79        141,618    15.27
                       Commercial, financial, and agricultural              120,380     10.77        104,412    11.26
                       Warehouse lines of credit to leasing companies        18,393      1.64         12,906     1.39
                       Consumer lease financing                              67,146      6.01         24,399     2.63
                       Other consumer                                        48,175      4.31         48,416     5.22
                                                                         ----------   -------       --------   -------
                         Total loans and leases                           1,118,164    100.00%       927,430   100.00%
                                                                                      =======                  =======
                       Less: Allowance for loan and lease losses             15,740                   15,449
                                                                         ----------                 --------
                         Net loans                                       $1,102,424                 $911,981
                                                                         ==========                 ========
</TABLE>

                                  Net loans and leases were $1,102,424,000 or
                          71% of total assets, at December 31, 1996, compared
                          with $911,981,000, or 68% of total assets, at
                          December 31, 1995. Total loans and leases have
                          increased by $190,734,000 primarily due to a
                          $126,491,000 increase in residential real estate
                          loans, a $42,747,000 increase in consumer lease
                          financing, and a $15,968,000 increase in commercial
                          business loans. Residential loan production is
                          primarily generated by a combination of originations
                          and purchases by the Company's mortgage banking
                          affiliate, CFX Mortgage. Residential loans are
                          originated using standards established by the Federal
                          National Mortgage Association (FNMA)  and the Federal
                          Home Loan Mortgage Corporation (FHLMC) allowing CFX
                          Mortgage to sell to the secondary market those loans
                          which are not desired by the Company's banking
                          subsidiaries.  During 1996, lower interest rates
                          spawned higher refinancing activity generating
                          significant volume for CFX Mortgage. These lower
                          rates, coupled with an improving economy, allowed CFX
                          Mortgage to originate and purchase $300 million in
                          residential loans during the year, compared to $133
                          million in 1995. Of the $300 million loan production,
                          a total of $179 million was sold to the Company's
                          subsidiary banks for portfolio.

                                  The growth in the consumer lease portfolio is
                          the result of a maturing lease program targeted
                          toward automobile dealerships throughout New
                          Hampshire and central Massachusetts. This program
                          began in December 1994 and continues to grow as
                          consumers choose leasing as an acceptable alternative
                          to purchasing.

                                  Commercial lending continues to grow, but at
                          a slower rate as compared to the other two
                          portfolios. Strong lending volumes remain in the
                          warehouse lines of credit to leasing companies
                          participating in CFX Funding's lease financing and
                          securitization programs. During 1996, the average
                          balance of these warehouse lines of credit totaled
                          $14,752,000. During 1996, CFX Funding facilitated
                          lease portfolio securitizations totaling
                          approximately $55,814,000, and sold lease portfolios
                          totaling approximately $16,430,000.





                                                                              11
<PAGE>   13
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

                      ----------------------------------------------------------
                      RISK ELEMENTS
                      ----------------------------------------------------------
                      The Company operates principally in New Hampshire and
                      central Massachusetts. Through acquisitions of banking
                      franchises in new marketplaces, the opening of de novo
                      branches in geographically dispersed markets, the
                      purchase and origination of mortgages and leases
                      throughout northern New England, and with the
                      introduction of CFX Funding's national lease financing
                      program, the Company has diversified its credit risk in
                      terms of both loan type and geographic concentrations.
                      The majority of the Company's assets still remain in
                      residential real estate loans as this portfolio comprises
                      46% of all assets as of December 31, 1996, compared with
                      44% a year ago. Asset quality remains strong as
                      nonperforming loans and leases were .74% of total loans
                      and leases at December 31, 1996, compared to 1.09% a year
                      earlier.

                          All loans and leases past due 90 days or more as to
                      principal or interest are generally placed on nonaccrual
                      status. In addition, a loan (including a loan impaired
                      under Financial Accounting Standards Board Statement No.
                      114, "Accounting by Creditors for Impairment of a Loan,"
                      (SFAS No. 114) defined below) is generally classified as
                      nonaccrual when management determines that significant
                      doubt exists as to the collectibility of principal or
                      interest. An impaired loan may remain on accrual status
                      if it is guaranteed or well secured. Interest accrued but
                      not received on loans placed on nonaccrual status is
                      reversed and charged against current income. Interest on
                      nonaccrual loans  is recognized when received. Loans are
                      restored to accrual status when the borrower has
                      demonstrated the ability to make future payments of
                      principal and interest, as scheduled. Prior to 1996,
                      certain loans past due 90 days or more originated by
                      Safety Fund National Bank, remained on accrual status if,
                      in management's judgment, they were fully secured and in
                      the process of collection.

                          The following table provides information with respect
                      to the Company's nonperforming loans and assets at the
                      dates indicated:

<TABLE>
<CAPTION>
                      -----------------------------------------------------------------------------------------------
                      December 31 (Dollars in thousands)                                           1996       1995
                      -----------------------------------------------------------------------------------------------
                      <S>                                                                        <C>         <C>

                      Loans 90 days or more past due, still accruing                             $     -    $    235
                      Nonaccrual loans                                                             8,299       9,840
                                                                                                 -------     -------
                          Total nonperforming loans                                                8,299      10,075
                      Foreclosed real estate                                                       2,233       1,236
                      Valuation allowance on foreclosed real estate                                  (10)        (50)
                                                                                                 -------     -------
                          Total nonperforming assets                                             $10,522     $11,261
                                                                                                 =======     =======
                      Nonperforming loans as a percent of total loans and leases                     .74%       1.09%
                                                                                                 =======     =======
                      Nonperforming assets as a percent of
                          total loans and leases and foreclosed real estate                          .94%       1.21%
                                                                                                 =======     =======

</TABLE>

                          The following table provides the composition of the
                      Company's nonperforming loans and assets at the dates
                      indicated:

<TABLE>
<CAPTION>
                      -----------------------------------------------------------------------------------------------
                      December 31 (Dollars in thousands)                       1996                      1995
                      -----------------------------------------------------------------------------------------------
                                                                                     % of                      % of
                                                                      BALANCES       TOTAL      BALANCES       TOTAL
                      -----------------------------------------------------------------------------------------------
                      <S>                                              <C>         <C>           <C>        <C>
                      Nonperforming loans:
                          Real estate:
                            Residential                                $ 5,986        72.13%      $ 6,218     61.72%
                            Commercial                                   1,146        13.81         1,710     16.97
                          Commercial, financial, and agricultural        1,021        12.30         2,039     20.24
                          Consumer and other                               146         1.76           108      1.07
                                                                       -------      -------      --------    ------
                                                                         8,299       100.00%       10,075    100.00%
                                                                       -------      =======      --------    =======
                      Foreclosed real estate:
                          Residential                                    1,383        62.21%          735     61.97%
                          Construction                                     428        19.25           128     10.79
                          Commercial                                       422        18.98           373     31.45
                          Valuation allowance                              (10)        (.44)          (50)    (4.21)
                                                                       -------      -------      --------    -------
                                                                         2,223       100.00%        1,186    100.00%
                                                                       -------      =======      --------    =======
                         Total nonperforming assets                    $10,522                   $ 11,261
                                                                       =======                   ========
</TABLE>





12
<PAGE>   14


--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                      The following table provides a rollforward of the
                      Company's foreclosed real estate at the dates indicated:

<TABLE>
<CAPTION>
                      ------------------------------------------------------------------------
                      December 31 (In thousands)                            1996       1995
                      ------------------------------------------------------------------------
                      <S>                                                 <C>        <C>
                      Balance at beginning of year, net                   $  1,186     $ 2,599
                      Reclassification to nonperforming loans
                         to reflect adoption of SFAS No. 114
                         (See Note A to "Notes to Consolidated
                         Financial Statements")                                  -        (665)
                      Additions                                              2,870       3,053
                      Pay-offs/sales/other                                  (1,833)     (3,801)
                                                                          --------     -------
                      Balance at end of year, net                         $  2,223     $ 1,186
                                                                          ========     =======
</TABLE>

                       --------------------------------------------------------
                       ALLOWANCE FOR LOAN AND LEASE LOSSES
                       --------------------------------------------------------
                       The allowance for loan and lease losses is maintained
                       through charges to earnings. Loan and lease losses
                       realized, and recoveries received, are charged or
                       credited directly to the allowance. The Company's
                       management determines the level of the allowance for
                       loan and lease losses based upon a review of the
                       Company's loan and lease portfolio. This review
                       identifies specific problem loans and leases requiring
                       allocations of the allowance and also estimates an
                       allocation for potential loan and lease losses based on
                       current economic conditions and historical experience.

                         Changes in the allowance for loan and lease losses
                       are as follows:

<TABLE>
<CAPTION>
                       Year Ended December 31 (Dollars in thousands)             1996       1995       1994
                       <S>                                                     <C>        <C>         <C>
                       Balance at beginning of year                            $15,449     $14,401     $16,168
                       Provision for loan and lease losses                       2,935       3,037       2,697
                       Loans and leases charged-off                             (3,301)     (2,934)     (5,467)
                       Recoveries of loans and leases previously charged-off       657         945       1,003
                                                                                ------      ------      ------
                       Balance at end of year                                  $15,740     $15,449     $14,401
                                                                                ======      ======      ======
                       Allowance for loan and lease losses
                          as a percent of total loans and leases                  1.41%       1.67%       1.71%
                                                                                ======      ======      ======
                       Allowance for loan and lease losses
                          as a percent of total nonperforming loans             189.66%     153.34%     129.20%
                                                                                ======      ======      ======
</TABLE>

                         Management considers the allowance for loan and lease
                       losses to be adequate in view of its evaluation of the
                       Company's loan and lease portfolio, the level of
                       nonperforming loans and leases, current economic
                       conditions and historical experience with loan and lease
                       losses.





                                                                              13
<PAGE>   15
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       TRADING SECURITIES AND INVESTMENT SECURITIES
                       ---------------------------------------------------------
                       Investment securities consist of the following at the
                       dates indicated:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------
                       December 31 (In thousands)            1996           1995
                       ------------------------------------------------------------
                       <S>                                 <C>             <C>
                       Securities available for sale       $245,324        $201,246
                       Securities held to maturity           32,670          97,093
                                                           --------        --------
                               Total                       $277,994        $298,339
                                                           ========        ========
</TABLE>

                          As a result of the Company's acquisition of Safety
                       Fund and Milford on July 1, 1996, and to be consistent
                       with the Company's current interest rate risk profile,
                       certain securities held to maturity were transferred to
                       securities available for sale.

                          The table below describes those securities and the
                       net unrealized losses associated with such securities
                       which were transferred to securities available for sale
                       from securities held to maturity as a result of the 1996
                       acquisitions:

<TABLE>
<CAPTION>
                       -------------------------------------------------------------------------------------
                                                                                             Net Unrealized
                       (In thousands)                                    Amortized Cost          Losses
                       -------------------------------------------------------------------------------------
                       <S>                                                   <C>                 <C>
                       U.S. Treasury and agency obligations                   $54,581            $ 2,036
                       Federal agency mortgage pass-through securities         22,268                486
                                                                              -------            -------
                                                                              $76,849            $ 2,522
                                                                              =======            =======
</TABLE>

                          During 1996 and 1995, the Company had assets in its
                       trading portfolio.  Trading securities primarily related
                       to investments in money market mutual funds that
                       generated capital gains to offset capital loss
                       carryforwards. The average balances in the trading
                       portfolio for 1996 and 1995 were $15,220,000 and
                       $19,636,000, respectively.





14
<PAGE>   16

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       DEPOSITS AND BORROWED FUNDS
                       ---------------------------------------------------------
                       The following table shows the various components of
                       average deposits and borrowed funds and the respective
                       rates paid for the periods indicated:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------------------------------
                       Year Ended December 31 (Dollars in thousands)               1996                   1995
                       -----------------------------------------------------------------------------------------------
                                                                            AMOUNT       RATES     AMOUNT        RATES
                       -----------------------------------------------------------------------------------------------
                       <S>                                                <C>             <C>     <C>           <C>
                       Deposits:
                         Noninterest bearing demand deposits              $  131,008         -%   $  119,021       -%
                         Regular savings deposits                            169,648      2.69       164,944    2.81
                         NOW and money market deposits                       279,353      2.14       300,905    2.37
                         Time deposits                                       477,556      5.55       438,463    5.43
                                                                          ----------              ----------
                            Total retail deposits                          1,057,565      3.50     1,023,333    3.73
                         Brokered time deposits                               64,389      5.73        27,562    6.30
                                                                          ----------              ----------
                            Total deposits                                $1,121,954      3.63%   $1,050,895    3.55%
                                                                          ==========      ====    ==========    ====
                       Borrowed Funds:
                         Advances from Federal Home Loan
                            Bank of Boston                                $  131,913      5.67%   $   75,508    6.28%
                         Other borrowed funds                                 72,135      4.64        45,678    5.13
                                                                          ----------              ----------
                            Total borrowed funds                          $  204,048      5.31%   $  121,186    5.84%
                                                                          ==========      ====    ==========    ====
</TABLE>

                         During 1996, the Company increased average demand
                       deposits by $11,987,000 and average interest bearing
                       retail deposits by $22,245,000. The majority of the
                       increase in overall retail deposits is the result of two
                       de-novo New Hampshire branches opened in Gilford
                       (December 1994) and Manchester (June 1995). In addition,
                       as a result of fixed rate deposits (time deposits)
                       becoming more attractive to our customers, the Company
                       has experienced a shift in deposits from shorter-term
                       variable rate deposits (NOW and money market accounts)
                       to longer-term fixed rate deposits.

                         The increase in Federal Home Loan Bank of Boston
                       advances, brokered deposits and other borrowings funded
                       asset growth. Management customarily directs movement of
                       funding between brokered deposits, advances from the
                       Federal Home Loan Bank and repurchase agreements
                       (included in other borrowed funds) in order to achieve a
                       more favorable cost of funds.





                                                                              15
<PAGE>   17

--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
RESULTS OF OPERATIONS--GENERAL
--------------------------------------------------------------------------------

                       CFX Corporation (the Company) reported net income of
                       $12,641,000, or $.99 per share, compared to earnings of
                       $11,249,000, or $.89 per share, for the prior year.
                       Return on assets and return on equity were .86% and
                       9.58%, respectively, for 1996 compared to .86% and
                       9.08%, respectively, for 1995. Excluding charges for
                       mergers and other adjustments, earnings and earnings per
                       share were $16,248,000 and $1.27 per share,
                       respectively, in 1996 representing an increase of
                       $4,999,000, or 44% over prior year earnings. Return on
                       assets and return on equity in 1996 were 1.10% and
                       12.31%, respectively, excluding merger charges and
                       special adjustments.

                         During 1996, the Company incurred charges associated
                       with the mergers of Safety Fund and Milford totaling
                       $3,722,000 (after tax). Other adjustments included a
                       special assessment related to the recapitalization of
                       the Savings Association Insurance fund (SAIF) of
                       $424,000 (after tax) and a gain of $539,000 (after tax)
                       related to the termination of the Company's previous
                       pension plans in order to transfer the assets and
                       liabilities to a multi-employer pension plan.

                         The increase in earnings was primarily due to
                       increased net interest and dividend income and higher
                       noninterest income, while maintaining noninterest
                       expenses at 1995 levels. The increased net interest and
                       dividend income was primarily due to leveraging the
                       Company's balance sheet with loans and leases which
                       increased $191 million, or 20.57% over the past twelve
                       months. The increase in noninterest income of $2,516,000
                       in 1996 over that in 1995 primarily came from mortgage
                       banking and leasing activities. Also included in this
                       increase was the pension settlement  gain of $877,000
                       discussed earlier. Noninterest expense for 1996 totaled
                       $51,370,000 and was $46,157,000 excluding merger-related
                       charges and the one-time SAIF assessment charge. Despite
                       the growth in core earnings (net interest and dividend
                       income and other income), the noninterest expenses in
                       1996, excluding special charges, compared favorably to
                       those in 1995 which totaled $46,202,000. The 1996
                       expenses were contained due to efficiencies gained from
                       the 1996 mergers in the back-room operations of the
                       Company, eliminations of various professional fees
                       resulting from the mergers, and the reduction of the
                       FDIC insurance premiums at two of the Company's banking
                       subsidiaries.

--------------------------------------------------------------------------------
COMPARISON OF YEARS 1996 AND 1995--NET INTEREST AND DIVIDEND INCOME
--------------------------------------------------------------------------------
                       Taxable-equivalent net interest and dividend income was
                       $57,721,000 in 1996, up 9% from $52,950,000 in 1995.
                       The $4,771,000 increase in net interest and dividend
                       income was due to an increase in average interest
                       earning assets in 1996, offset by a decline in the
                       Company's interest rate spread from 3.80% in 1995 to
                       3.71% in 1996.

                         The increase in average interest earning assets
                       resulted primarily from an increase in loans and leases.
                       See "Financial Condition--Loans and Leases" of this
                       "Management's Discussion and Analysis."

                         The interest rate spread in 1996 decreased nine basis
                       points to 3.71% compared to 3.80% for 1995, primarily
                       due to the increase in costs of interest bearing
                       liabilities outpacing the increase in yields on interest
                       earning assets, indicating an increasingly competitive
                       market for retail deposits. See "Other Income" section
                       for a discussion of the impact of bank-owned life
                       insurance on the net interest margin. Most of the
                       interest earning assets were funded by higher cost
                       products such as certificates of deposit or borrowings.
                       The cost of time deposits increased from 5.48% in 1995
                       to 5.57% in 1996. The Company continues to see a shift
                       in its deposit mix from lower variable rate deposits
                       (NOW and money market accounts) to the higher rate time
                       deposits. The dollar effect of the decline in net
                       interest spread was partially offset by an increase in
                       demand deposits in 1996 compared to 1995.





16

<PAGE>   18
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
                       The following table sets forth comparisons of average
                       interest earning assets and interest bearing
                       liabilities, and interest income and interest expense
                       expressed as a percentage of the related asset or
                       liability. In order to reflect the economic impact of
                       the Company's tax-exempt loans and investments in state
                       and municipal securities and to present data on a
                       comparative basis, the income from and yields on these
                       loans and securities have been restated to a
                       taxable-equivalent basis (using a 34.00% and 38.62% tax
                       rate, respectively). The taxable-equivalent income
                       adjustments for loans and leases are $346,000, $294,000,
                       and $211,000 for the years ended December 31, 1996,
                       1995, and 1994, respectively. The taxable-equivalent
                       income adjustments for investment securities are
                       $516,000, $630,000, and $533,000 for the years ended
                       December 31, 1996, 1995, and 1994, respectively. These
                       adjustments, however, are for comparison purposes only
                       and have no impact on reported net income.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31                                1996                                1995                    1994
---------------------------------------------------------------------------------------------------------------------------
                                                     INTEREST                            Interest
                                        AVERAGE      INCOME/    YIELD/      Average       Income/    Yield/      Average
(Dollars in thousands)                  BALANCE      EXPENSE    RATE        Balance       Expense     Rate       Balance
---------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>          <C>      <C>           <C>          <C>        <C>
Assets
Interest and dividend
   earning assets:
   Loans and leases (1)              $1,016,088       $87,743    8.64%    $  871,620      $76,176     8.74%     $  784,113
   Tax-exempt loans and leases (2)        8,925         1,019   11.42          7,332          865    11.80           6,441
   Taxable securities (3)               303,307        18,565    6.12        286,907       17,420     6.07         298,840
   Tax-exempt securities (4)             18,054         1,337    7.41         22,605        1,632     7.22          21,365
   Other                                 13,922           623    4.47         26,412        1,220     4.62          29,921
                                     ----------       -------             ----------      -------               ----------
Total interest earning assets         1,360,296       109,287    8.03      1,214,876       97,313     8.01       1,140,680
                                                      -------                             -------
Noninterest earning assets              115,564                               96,579                               115,580
                                     ----------                           ----------                            ----------
   Total                             $1,475,860                           $1,311,455                            $1,256,260
                                     ==========                           ==========                            ==========
Liabilities and Shareholders'
   Equity
Interest bearing liabilities:
   Savings deposits                  $  449,001        10,539    2.35     $  465,849       11,745     2.52      $  512,109
   Time deposits                        541,945        30,201    5.57        466,025       25,534     5.48         359,619
   Advances from Federal Home
      Loan Bank of Boston               131,913         7,476    5.67         75,508        4,740     6.28          97,960
   Other borrowed funds                  72,135         3,350    4.64         45,678        2,344     5.13          27,392
                                      ---------       -------             ----------      -------               ----------
Total interest bearing liabilities    1,194,994        51,566    4.32      1,053,060       44,363     4.21         997,080
                                                      -------                             -------
Noninterest bearing liabilities:
   Demand deposits                      131,008                              119,021                               102,152
   Other                                 17,884                               15,496                                39,510
Shareholders' equity                    131,974                              123,878                               117,518
                                     ----------                           ----------                            ----------
   Total                             $1,475,860                           $1,311,455                            $1,256,260
                                     ==========                           ==========                            ==========
Net interest and
   dividend income                                    $57,721                             $52,950
                                                      =======                             =======
Interest rate spread                                             3.71%                                3.80%
Net interest margin                                              4.24%                                4.36%
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------
Year Ended December 31                          1994
------------------------------------------------------------
                                        Interest
                                        Income/     Yield/
(Dollars in thousands)                  Expense      Rate
------------------------------------------------------------
<S>                                    <C>           <C>
Assets
Interest and dividend
   earning assets:
   Loans and leases (1)                  $62,136      7.92%
   Tax-exempt loans and leases (2)           621      9.64
   Taxable securities (3)                 17,178      5.75
   Tax-exempt securities (4)               1,380      6.46
   Other                                   1,066      3.56
                                         -------
Total interest earning assets             82,381      7.22
                                         -------
Noninterest earning assets

   Total

Liabilities and Shareholders'
   Equity
Interest bearing liabilities:
   Savings deposits                       12,400      2.42
   Time deposits                          15,722      4.37
   Advances from Federal Home
      Loan Bank of Boston                  4,529      4.62
   Other borrowed funds                      988      3.61
                                         -------
Total interest bearing liabilities        33,639      3.37
                                         -------
Noninterest bearing liabilities:
   Demand deposits
   Other
Shareholders' equity

   Total

Net interest and
   dividend income                       $48,742
                                         =======
Interest rate spread                                  3.85%
Net interest margin                                   4.27%
</TABLE>


(1) For the purpose of these computations, nonaccrual loans and mortgage loans
    held for sale are included in loans.

(2) Tax-exempt loans are included within loans and leases.

(3) Taxable securities include trading securities and investment securities.

(4) Tax-exempt securities are included within investment securities.





                                                                              17
<PAGE>   19
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       The following table presents changes in interest and
                       dividend income, interest expense, and net interest and
                       dividend income which are attributable to changes in the
                       average amounts of interest  earning assets and interest
                       bearing liabilities and/or changes in rates earned or
                       paid thereon. The net changes attributable to both
                       volume and rate have been allocated proportionately.

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------------
                       (In thousands)                             1996 vs 1995                    1995 vs 1994
                       ----------------------------------------------------------------------------------------------
                                                          INCREASE (DECREASE) DUE TO       Increase (Decrease) Due to
                       ----------------------------------------------------------------------------------------------
                                                          VOLUME       RATE      NET       Volume     Rate      Net
                       ----------------------------------------------------------------------------------------------
                       <S>                                <C>         <C>     <C>          <C>      <C>      <C>
                       Interest and dividends earned on:
                         Loans and leases                 $12,648    $(1,081)  $11,567     $ 7,284  $ 6,756  $14,040
                         Tax-exempt loans and leases          185        (31)      154          93      151      244
                         Taxable securities                 1,045        100     1,145        (700)     942      242
                         Tax-exempt securities               (333)        38      (295)         83      169      252
                         Other                               (556)       (41)     (597)       (136)     290      154
                            Total interest and
                                                          -------    -------   -------     -------  -------  -------
                               dividend income             12,989     (1,015)   11,974       6,624    8,308   14,932
                                                          -------    -------   -------     -------  -------  -------
                       Interest paid on:
                         Savings deposits                    (411)      (795)   (1,206)     (1,155)     500     (655)
                         Time deposits                      4,307        360     4,667       5,280    4,532    9,812
                         FHLB advances                      3,250       (514)    2,736      (1,188)   1,399      211
                         Other borrowings                   1,253       (247)    1,006         832      524    1,356
                                                          -------    -------   -------     -------  -------  -------
                            Total interest expense          8,399     (1,196)    7,203       3,769    6,955   10,724
                                                          -------    -------   -------     -------  -------  -------
                            Change in net interest
                               and dividend income        $ 4,590    $   181   $ 4,771     $ 2,855  $ 1,353  $ 4,208
                                                          =======    =======   =======     =======  =======  =======
</TABLE>

                       ---------------------------------------------------------
                       PROVISION FOR LOAN AND LEASE LOSSES
                       ---------------------------------------------------------
                       The allowance for loan and lease losses is maintained
                       primarily through charges to earnings.  Loan and lease
                       losses realized, and recoveries received, are charged or
                       credited directly to the allowance. The Company's
                       management determines the level of the allowance for
                       loan and lease losses based upon a review of the
                       Company's loan and lease portfolio. This review
                       identifies specific problem loans and leases requiring
                       allocations of the allowance and also estimates an
                       allocation for potential loans and leases based on
                       current economic conditions and historical experience.

                         The provision for loan and lease losses in
                       1996 was $2,935,000, compared to $3,037,000 in 1995.
                       Total net charge-offs amounted to $2,644,000 for 1996,
                       compared to $1,989,000 for 1995. The increase in net
                       charge offs in 1996 as compared to 1995 was primarily
                       due to our increase in gross charge-offs of $367,000 and
                       a decrease in recoveries of 288,000. The increase in
                       gross charge-offs was primarily in the residential loan
                       portfolio and is attributable to the higher volume of
                       loans in this category.

                         At December 31, 1996, nonperforming loans stood at
                       $8,299,000, or .74% of total loans and  leases, compared
                       to $10,075,000, or 1.09% of total loans and leases, as
                       of December 31, 1995. The allowance for loan and lease
                       losses as a percentage of nonperforming loans as of
                       December 31, 1996 and December 31, 1995  amounted to
                       189.66% and 153.34%, respectively.

                         Despite the improvements in asset quality, the
                       provision for loan and lease losses remained consistent
                       with the prior year due to the growth in the loan and
                       lease portfolio.





18
<PAGE>   20
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       OTHER INCOME
                       ---------------------------------------------------------
                       Other income totaled $16,827,000 for 1996, up
                       $2,516,000, or nearly 18%, when compared to $14,311,000
                       for 1995. Excluding the pension settlement gain of
                       $877,000 recognized in 1996, year-over-year increases in
                       noninterest income totaled $1,639,000, or 11%. Although
                       service charges on deposit accounts and trust fees were
                       up 7% and 5%, respectively, the significant increases
                       came in the areas of mortgage banking services, leasing
                       activities and income earned on an investment in
                       bank-owned life insurance.

                         Mortgage banking income includes net gains on sales of
                       loans which totaled $1,383,000 in 1996 compared to
                       $648,000 in 1995, a 113% increase in income. This is
                       primarily due to the higher level of mortgage production
                       in 1996 where a total of $300 million of loans were
                       originated and purchased compared to $133 million in
                       1995. The increase in production resulted from a more
                       favorable interest rate environment as well as a larger
                       correspondent network. A portion ($256,000) of the net
                       gains on sales of loans came from a sale of performing
                       residential loans totaling approximately $12 million
                       from one of the Company's banking subsidiaries to an
                       independent financial institution. Total net loan
                       servicing fees in 1996 nearly kept pace with 1995 totals
                       despite higher amortization of mortgage servicing rights
                       resulting from a high level of refinancing activity.

                         Income generated from leasing activities totaled
                       $2,487,000 in 1996, up $520,000, or 26%, from 1995
                       levels.  The increase is due to more lease
                       securitizations in 1996 than in 1995, and an increase in
                       servicing income as a result of a larger servicing base.

                         The pension settlement gain of $877,000 resulted when
                       the Company terminated certain pension plans and
                       transferred the plans' assets and liabilities to a
                       multi-employer benefit plan.  See Note N - "Pension and
                       401(k) Plans" of the Notes to Consolidated Financial
                       Statements for more detail on this transaction.

                         Included in other noninterest income is $975,000 of
                       income resulting from the Company's investment in
                       bank-owned life insurance (BOLI). During 1996, the
                       Company invested $30 million in bank-owned life
                       insurance to help finance the cost of certain employee
                       benefit plan expenses. The BOLI investment is
                       accomplished through the purchase of life insurance on
                       the lives of certain employees through two insurance
                       companies with a Standard &  Poors rating of AA+ or
                       better. The Company, not the employee or family, is the
                       beneficiary of the insurance policies. The first source
                       of income is from the growth of the cash value of the
                       policy. The cash value increases each year as interest
                       (rate is guaranteed each year and changes annually to
                       reflect market rates) is added by the insurance company.
                       The second source of income comes from the insurance
                       proceeds paid to the bank upon the death of an employee.
                       The payment of the insurance proceeds and the earnings
                       from the cash value are income tax free (unless the
                       policy is surrendered). The Company finances the cost of
                       the premium payment with wholesale funding (i.e. Federal
                       Home Loan Bank borrowings). While the earnings from the
                       investment are captured in other income as the cash
                       surrender value increases, the net interest margin is
                       negatively impacted as a result of funding the
                       investment with wholesale borrowings.

                       ---------------------------------------------------------
                       OTHER EXPENSE
                       ---------------------------------------------------------
                       Noninterest expenses for 1996 totaled $51,370,000,
                       compared to $46,202,000 for 1995. Included in the 1996
                       totals are merger-related charges incurred with the
                       acquisitions of Safety Fund and Milford for $4,522,000
                       and a one-time SAIF special assessment of $691,000.
                       Excluding these charges, total noninterest expenses
                       decreased by $45,000 in 1996  compared to 1995.

                         Salaries and employee benefits increased 3% in 1996
                       due to increases in wage rates, additional hires to
                       staff new initiatives, and a full year of salary expense
                       for a branch which was opened in June 1995, partially
                       offset by employee reductions resulting from
                       efficiencies gained from the mergers. Similarly,
                       professional fees are down 19% from the prior year as a
                       result of the mergers and the elimination of certain
                       services required as separate institutions.

                         The insurance premiums assessed by the Federal Deposit
                       Insurance Corporation (FDIC) were $377,000 in 1996, down
                       $1,006,000 from $1,383,000 in 1995. Effective June 1,
                       1995, the FDIC's Bank Insurance Fund was adequately
                       reserved allowing the FDIC to charge significantly lower
                       premiums for future periods. The reduction of expense in
                       1996 reflects the benefit of the lower premiums for an
                       entire year.





                                                                              19
<PAGE>   21
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

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

                       In conjunction with the acquisitions of Safety Fund and
                       Milford, the Company incurred charges of $4,522,000.
                       These charges were comprised of the following:

<TABLE>
<CAPTION>
                       ---------------------------------------
                       December 31 (In thousands)       1996
                       ---------------------------------------
                       <S>                             <C>
                       Personnel                       $1,440
                       Data processing                    118
                       Facilities                         157
                       Other                            2,807
                                                       ------
                                                       $4,522
                                                       ======
</TABLE>

                         Personnel charges relate primarily to the costs of
                       employee severance and employment outplacement
                       assistance. Data processing costs consist primarily of
                       write-offs due to duplication of computer hardware,
                       software, and certain telecommunications equipment.
                       Facilities charges are the result of the consolidation
                       of certain back-office operations and consist of
                       write-downs of properties owned. Other merger expenses
                       include investment banking fees, legal  and accounting
                       fees, due diligence costs, proxy registration/filing
                       fees and mailing costs. All costs were recorded in
                       earnings during 1996, although not all cash has been
                       paid out for such expenses. The following table presents
                       a summary of activity with respect to the merger
                       accrual:

<TABLE>
<CAPTION>
                       -------------------------------------------------
                       Year Ended December 31 (In thousands)      1996
                       -------------------------------------------------
                       <S>                                       <C>
                       Balance at beginning of year              $    -
                       Provision charged against income           4,522
                       Cash outlays                               3,207
                       Noncash write-downs                          275
                                                                 ------
                       Balance at end of year                    $1,040
                                                                 ======
</TABLE>

                         In 1996, Congress passed a bill which required savings
                       institutions (i.e., Milford) which have deposits insured
                       by the FDIC-Savings Association Insurance Fund (SAIF)
                       be charged a special  assessment in order to capitalize
                       the insurance fund. This assessment totaled $691,000 and
                       was paid to the SAIF during the fourth quarter of 1996.

                       ---------------------------------------------------------
                       INCOME TAXES
                       ---------------------------------------------------------
                       In 1996, the Company recognized income tax expense of
                       $6,740,000, an effective tax rate of 34.8%, compared to
                       $5,760,000 and an effective tax rate of 33.7% for 1995.
                       The higher tax rate for 1996 is primarily due to
                       nondeductible merger-related expenses, partially offset
                       by income earned from the bank-owned life insurance
                       investment which is exempt from income taxes, higher tax
                       credits pertaining to low income housing projects, and
                       the reversal of a valuation allowance established by
                       Safety Fund for net operating loss carryforwards at one
                       of their subsidiaries as a result of current and
                       projected profits from that subsidiary.

--------------------------------------------------------------------------------
COMPARISON OF YEARS 1995 AND 1994
--------------------------------------------------------------------------------
                       CFX Corporation reported earnings of $11,249,000, or
                       $.89 per share, for 1995 compared to $6,976,000, or $.58
                       per share, for the prior year. The increase of
                       $4,273,000, or 61%, in earnings from 1994 to 1995 was
                       primarily due to stronger core earnings (net interest
                       and dividend income and other income). Core earnings for
                       the year ended December 31, 1995 were $66,337,000
                       compared to $59,077,000 for 1994. Return on assets and
                       return on equity were .86% and 9.08%,  respectively, for
                       1995 compared to .56% and 5.94%, respectively, for 1994.

                       ---------------------------------------------------------
                       NET INTEREST AND DIVIDEND INCOME
                       ---------------------------------------------------------
                       Net interest and dividend income on a fully taxable
                       equivalent basis totaled $52,950,000 in 1995, compared
                       to $48,742,000 in 1994. The interest rate spread and net
                       interest margin were 3.80% and 4.36%, respectively, for
                       1995 compared to 3.85% and 4.27%, respectively, for
                       1994. The decrease of 5 basis points in the interest
                       rate spread was principally due to the rise in interest
                       rates during 1995 as the increased cost of funding
                       sources outpaced the increase in yield on earning
                       assets.  An increase of 9 basis points in net interest
                       margin was due to an increase of $74,196,000 in average
                       earning assets from $1,140,680,000 in 1994 to
                       $1,214,876,000 in 1995. This increase in average earning
                       assets was primarily comprised of  loans and leases
                       which have higher yields than other interest earning
                       assets.





20
<PAGE>   22
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       PROVISION FOR LOAN AND LEASE LOSSES
                       ---------------------------------------------------------
                         The provision for loan and lease losses in 1995 was
                       $3,037,000, compared to $2,697,000 in 1994. The higher
                       provision for loan and lease losses in 1995 was
                       primarily due to the significant increase in outstanding
                       loans and leases which increased $85 million from 1994
                       to 1995 and a change in loan mix toward consumer loans
                       and leases.

                         At December 31, 1995, nonperforming loans stood at
                       $11,261,000, or 1.09% of total loans and leases,
                       compared to $11,146,000, or 1.32% of total loans and
                       leases, as of December 31, 1994. The allowance for loan
                       and lease losses as a percentage of nonperforming loans
                       as of December 31, 1995 and 1994 amounted to 153.34% and
                       129.20%, respectively.

                       ---------------------------------------------------------
                       OTHER INCOME
                       ---------------------------------------------------------
                       Other income totaled $14,311,000 for 1995, up $3,232,000
                       or 29%, from $11,079,000 in 1994.  The increase is
                       primarily due to increases of $708,000 in service
                       charges on deposit accounts, $1,586,000 in leasing
                       activities, and $1,349,000 in gains on trading
                       securities, partially offset by a decrease in mortgage
                       banking revenues of $357,000.

                         The increased income from service charges on deposit
                       accounts is due to an increase in fees and enhanced
                       collection practices. Gains on the sale of loans
                       increased in 1995 as a result of the implementation of
                       SFAS No. 122, "Accounting for Mortgage Servicing
                       Rights." See Note A of the "Notes to Consolidated
                       Financial Statements." The Company adopted SFAS No. 122
                       as of January 1, 1995, which resulted in a $484,000
                       increase in gains on the sales of loans. Offsetting this
                       increase was a decrease in gains on the sale of
                       servicing rights, which amounted to $677,000 in 1994.
                       The increase in other income from leasing activities is
                       due principally to fees generated by CFX Funding and the
                       amortization of deferred credits relating to an
                       investment in leasehold residuals. The increase in gains
                       on trading securities principally represents capital
                       gains realized from an investment in a money market
                       mutual fund. This investment reflected gains totaling
                       $1,092,000 in 1995 compared to losses of $271,000 in
                       1994, principally due to a larger investment during
                       1995. In addition, 1994 had $528,000 in losses
                       associated with a wholesale leverage program.

                       ---------------------------------------------------------
                       OTHER EXPENSE
                       ---------------------------------------------------------
                       Other expense for 1995 totaled  $46,202,000, compared to
                       $44,864,000 for 1994. The increase in other expense was
                       primarily attributable to the increase in salaries and
                       employee benefits, losses on the sale of real estate
                       investment properties in the first and second quarters
                       of 1995, and costs incurred in connection with the
                       acquisition of Orange Savings Bank. The higher salaries
                       and employee benefits are the result of normal salary
                       adjustments, higher medical costs, higher profit
                       sharing, and lower deferred salary cost in CFX Mortgage
                       pertaining to loan origination. In addition,
                       contributing to the higher salary and employee benefits
                       was an increase in staff in both commercial and consumer
                       lending, along with new employees hired for the de novo
                       New Hampshire branches opened in Gilford (December 1994)
                       and Manchester (June 1995).





                                                                              21
<PAGE>   23
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       However, the above increase in other expense was offset
                       by lower insurance premiums from the FDIC. The FDIC's
                       Bank Insurance Fund (BIF) surpassed its congressionally
                       mandated reserve ratio of 1.25 percent of insured
                       deposits during the month of May, 1995. The new
                       assessment rate schedule for the BIF, which
                       substantially lowered rates for most banks, thus became
                       effective June 1, 1995, enabling the FDIC to refund
                       excess premiums already paid by BIF insured institutions
                       for the four-month period from June 1, 1995  to
                       September 30, 1995 and charge lower premiums for the
                       fourth quarter of 1995.

                       ---------------------------------------------------------
                       TAXES
                       ---------------------------------------------------------

                       Income taxes for 1995 were 33.7% of pretax income,
                       compared to 37.1% of pretax income for 1994. The
                       effective tax rate for 1995 was lower due principally to
                       the reversal of a $125,000 valuation allowance relating
                       to Orange Savings Bank's capital loss carryforward.

--------------------------------------------------------------------------------
CAPITAL RESOURCES
--------------------------------------------------------------------------------
                       Total shareholders' equity at December 31, 1996 was
                       $132,953,000, compared to $127,032,000 a year earlier.
                       The increase is primarily due to the retention of 43% of
                       earnings, partially offset by an increase in the net
                       unrealized losses on securities available for sale. The
                       Consolidated Statements of Shareholders' Equity provide
                       details of changes in equity since December 31, 1993.

                         The Company's capital position is an indication of
                       financial performance and stability and provides
                       protection against loss to depositors and creditors. The
                       Company's objective is to maintain an optimum level of
                       capital to provide maximum shareholder return while
                       serving the needs of the depositor and creditor.

                         Federal regulation requires the Company to maintain
                       minimum capital standards. Tier 1 capital is composed
                       primarily of common stock and retained earnings less
                       certain intangibles. The minimum requirements include a
                       3% Tier 1 leverage capital ratio for the most
                       highly-rated institutions; all other institutions are
                       required to meet a minimum leverage ratio that is at
                       least 1% to 2% above the 3% minimum. In addition, the
                       Company is required to satisfy certain capital adequacy
                       guidelines relating to the risk nature of an
                       institution's assets. These guidelines, established by
                       the Federal Reserve Board and the Federal Deposit
                       Insurance Corporation (FDIC), are applicable to bank
                       holding companies and state chartered  non-member banks,
                       respectively. Under the "risk-based" capital rules,
                       banks and bank holding companies are  required to have a
                       level of Tier 1 capital equal to 4% of total
                       risk-weighted assets, as defined. Banks and bank holding
                       companies are also required to have total capital
                       composed  of Tier 1 plus "supplemental" or Tier 2
                       capital, the latter being composed primarily of the
                       allowances for loan and lease losses, equal to 8% of
                       total risk-weighted assets.

                         As of December 31, 1996, the Company's Tier 1 leverage
                       capital ratio was 8.0%. In addition, the Company's Tier
                       1 risk-based capital ratio and total risk-based capital
                       ratio were 13.5% and 14.8%, respectively. In an effort
                       to optimize the capital level, the Company has leveraged
                       its balance sheet by originating and purchasing loans
                       and leases and funding these assets with deposits and
                       borrowed funds. The tier 1 leverage capital has been
                       reduced from 8.8% at December 31, 1995 to 8.0% at
                       December 31, 1996, still substantially above the minimum
                       level of 6% to be considered well capitalized by the
                       regulatory agencies. The Company will continue this
                       leverage strategy in 1997 to maximize the use of the
                       capital of Portsmouth Bank Shares, Inc., assuming
                       affirmative approval of shareholders and regulators. At
                       December 31, 1996, Portsmouth had a Tier 1 leverage
                       capital ratio of 24.3%. A total of approximately $300
                       million in interest earning assets and interest bearing
                       liabilities are anticipated to be added to the Company
                       to leverage this higher capital base.  These assets will
                       be both loans and leases and investments.

--------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
--------------------------------------------------------------------------------
                      The Company's primary objective regarding asset/liability
                      management is to position the Company so that changes in
                      interest rates do not have a materially adverse impact
                      upon forecasted net  income and the net fair value of the
                      Company. The Company's primary strategy for accomplishing
                      its asset/liability management objective is achieved by
                      matching the weighted average maturities of assets,
                      liabilities and off-balance-sheet items (duration
                      matching).





22
<PAGE>   24
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       To measure the impact of interest rate changes, the
                       Company utilizes a comprehensive financial planning
                       model that recalculates the fair value of the Company
                       assuming instantaneous, permanent parallel shifts in the
                       yield curve of both up and down 100 and 200 basis
                       points, or four separate calculations. Larger increases
                       or decreases in forecasted net income and the net market
                       value of the Company as a result of these interest rate
                       changes represent greater interest rate risk than do
                       smaller increases or decreases.

                         The results of the financial planning model are
                       highly dependent on numerous assumptions. These
                       assumptions generally fall into two categories: those
                       relating to the interest rate environment and those
                       relating to general business and economic factors.
                       Assumptions related to the interest rate environment
                       include the prepayment speeds on mortgage-related assets
                       and the cash flows and maturities of financial
                       instruments. Assumptions related to general business and
                       economic factors include changes in market conditions,
                       loan volumes and pricing, deposit sensitivity, customer
                       preferences, competition, and management's financial and
                       capital plans. The assumptions are developed based on
                       current business and asset/liability management
                       strategies, historical experience, the current economic
                       environment, forecasted economic conditions and other
                       analyses. These assumptions are inherently uncertain and
                       subject to change as time passes. Accordingly, the
                       Company adjusts the pro forma net income and net fair
                       values as it believes appropriate on the basis of
                       historical experience and prudent business judgment. The
                       Company endeavors to maintain a position where it
                       experiences no material change in net fair value and no
                       material fluctuation in forecasted net income as a
                       result of assumed 100 and 200 basis point increases and
                       decreases in interest rates. However, there can be no
                       assurances that the Company's projections  in this
                       regard will be achieved.

                         Management believes that the above method of measuring
                       and managing interest rate risk is consistent with the
                       FDIC regulation regarding an interest rate risk
                       component of regulatory  capital.

                         The following table summarizes the timing of the
                       Company's anticipated maturities or repricing of
                       interest earning assets and interest bearing liabilities
                       as of December 31, 1996. This table has been generated
                       using certain assumptions which the Company believes
                       fairly and accurately represent repricing volumes in a
                       dynamic interest rate environment. Specifically,
                       contractual maturities are used on all time deposits and
                       investments other than asset-backed securities. For
                       asset-backed securities and loans, contractual
                       maturities, repricing and prepayment assumptions are
                       used. The prepayment assumptions are based on current
                       experience and industry statistics. The gap maturity
                       categories for savings deposits (including NOW, savings,
                       and money market accounts) are based on management's
                       philosophy of repricing core deposits in reaction to
                       changes in the interest rate environment. Repricing
                       frequencies will vary at different points in the
                       interest cycle and as supply and demand for credit
                       change. Derivative financial instruments, are reflected
                       in the gap table. For further discussion on strategies
                       for derivatives, see Note R - Derivative Financial
                       Instruments in the "Notes to Consolidated Financial
                       Statements."

<TABLE>
<CAPTION>
   --------------------------------------------------------------------------------------------------------------------------------
   (In thousands)                            0-3            4-12             1-5           5-10         Over 10
   December 31, 1996                        Months         Months           Years          Years          Years         Total
   --------------------------------------------------------------------------------------------------------------------------------
   <S>                                    <C>             <C>             <C>            <C>            <C>              <C>
   Interest earning assets:
     Interest bearing deposits
        with other banks                  $      197      $        -      $        -     $        -     $        -     $      197
     Investment securities                    38,469          39,488         156,694         42,904            439        277,994
     Loans and leases                        276,610         356,260         391,388         68,525         40,593      1,133,376
                                          ----------      ----------      ----------     ----------     ----------     ----------
   Total interest earning assets             315,276         395,748         548,082        111,429         41,032      1,411,567
                                          ----------      ----------      ----------     ----------     ----------     ----------
   Interest bearing liabilities:
     Savings and time deposits               203,994         473,049         275,244         68,045              -      1,020,332
     Advances from Federal Home
        Loan Bank of Boston                  149,661          25,014              80            326              -        175,081
     Short-term borrowed funds                67,374               -               -              -              -         67,374
                                          ----------      ----------      ----------     ----------     ----------     ----------
   Total interest bearing liabilities        421,029         498,063         275,324         68,371              -      1,262,787
                                          ----------      ----------      ----------     ----------     ----------     ----------
   Periodic gap                           $ (105,753)     $ (102,315)     $  272,758     $   43,058     $   41,032     $  148,780
                                          ==========      ==========      ==========     ==========     ==========     ==========
   Cumulative gap                         $ (105,753)     $ (208,068)     $   64,690     $  107,748     $  148,780     $        -
                                          ==========      ==========      ==========     ==========     ==========     ==========
</TABLE>

                         The ability to assess interest rate risk using gap
                       analysis is limited. Gap analysis does not capture the
                       impact of cash flow or balance sheet mix changes over a
                       forecasted future period and it does not measure the
                       amount of price change expected to occur in the various
                       asset and liability categories. Thus, management does
                       not use gap analysis exclusively in its assessment of
                       interest rate risk. The Company's interest rate risk
                       exposure is also measured by the forecasted net income
                       and discounted cash flow market value sensitivities
                       referred to above.





                                                                              23
<PAGE>   25
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
LIQUIDITY
--------------------------------------------------------------------------------
                       The Company maintains numerous sources of liquidity in
                       the form of marketable assets and borrowing capacity.
                       Interest bearing deposits with other banks, trading and
                       available for sale securities, regular cash flows from
                       loan and securities portfolios and Federal Home Loan
                       Bank of Boston borrowings are the primary sources of
                       asset liquidity. At December 31, 1996, unrestricted cash
                       equivalents and interest bearing deposits with other
                       banks totaled $22,429,000 and available for sale
                       securities totaled $245,324,000.

                         Because the Company's bank subsidiaries maintain large
                       residential mortgage portfolios, a substantial
                       capability exists to borrow funds from the Federal Home
                       Loan Bank of Boston. Additionally, investment portfolios
                       are predominantly made up of securities which can be
                       readily borrowed against through the repurchase
                       agreement market. Relationships with deposit brokers and
                       correspondent banks are also maintained to facilitate
                       possible borrowing needs.

--------------------------------------------------------------------------------
IMPACT OF INFLATION
--------------------------------------------------------------------------------
                       The consolidated financial statements and related
                       consolidated  financial data herein have been presented
                       in accordance with generally accepted accounting
                       principles which require the measurement of financial
                       position and operating results in terms of historical
                       dollars, without considering changes in the relative
                       purchasing power of money over time due to inflation.
                       Inflation can affect the Company in a number of ways,
                       including increased operating costs and interest rate
                       volatility. Management attempts to minimize the effects
                       of inflation by maintaining an approximate match
                       interest rate sensitive assets and interest rate
                       sensitive liabilities and, where practical, by adjusting
                       service fees to reflect changing costs.

--------------------------------------------------------------------------------
SUBSEQUENT ACCOUNTING PRONOUNCEMENT
--------------------------------------------------------------------------------
                       In June 1996, the FASB issued SFAS No. 125, "Accounting
                       for Transfers and Servicing of Financial Assets and
                       Extinguishments of Liabilities." See Note A -
                       "Significant Accounting Policies," of the Notes to
                       Consolidated Financial Statements for more detail.

--------------------------------------------------------------------------------
YEAR 2000
--------------------------------------------------------------------------------
                       The Company is aware of the issues associated with the
                       programming code in existing computer systems as the
                       millennium (year 2000) approaches. The "year 2000"
                       problem is pervasive and complex as virtually every
                       computer operation will be affected in some way by the
                       rollover of the two digit year value to 00. The issue is
                       whether computer systems will properly recognize date
                       sensitive information when the year changes to 2000.
                       Systems that do not properly recognize such information
                       could generate erroneous data or cause a system to fail.

                          The Company is utilizing both internal and external
                       resources to identify, correct or reprogram, and test
                       the systems for the year 2000 compliance. It is
                       anticipated that all reprogramming efforts will be
                       completed by December 31, 1998, allowing adequate time
                       for testing. To date, confirmations have been received
                       from the Company's primary processing vendors that plans
                       are being developed to address processing of
                       transactions in the year 2000. Management has not yet
                       assessed the year 2000 compliance expense and related
                       potential affect on the Company's earnings.





24
<PAGE>   26
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS                     CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
December 31 (In thousands)                                                                   1996             1995
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>               <C>
ASSETS
   Cash and due from banks                                                                $    50,404      $    44,393
   Federal funds sold                                                                               -            2,500
                                                                                          -----------      -----------
                CASH AND CASH EQUIVALENTS                                                      50,404           46,893
   Interest bearing deposits with other banks                                                     197           13,475
   Securities available for sale                                                              245,324          201,246
   Securities held to maturity                                                                 32,670           97,093
   Mortgage loans held for sale                                                                15,212            7,085
   Loans and leases                                                                         1,118,164          927,430
     Less allowance for loan and lease losses                                                  15,740           15,449
                                                                                          -----------      -----------
                NET LOANS AND LEASES                                                        1,102,424          911,981
   Premises and equipment                                                                      27,386           25,253
   Mortgage servicing rights                                                                    5,313            4,373
   Goodwill and deposit base intangibles                                                        9,235            9,884
   Foreclosed real estate                                                                       2,223            1,186
   Bank-owned life insurance                                                                   30,975                -
   Other assets                                                                                25,729           26,411
                                                                                          -----------      -----------
                                                                                          $ 1,547,092      $ 1,344,880
                                                                                          ===========      ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
   Deposits:
     Interest bearing                                                                     $ 1,020,332      $   932,209
     Noninterest bearing                                                                      136,875          124,615
                                                                                          -----------      -----------
                TOTAL DEPOSITS                                                              1,157,207        1,056,824
   Short-term borrowed funds                                                                   67,374           44,012
   Advances from Federal Home Loan Bank of Boston                                             175,081          102,814
   Other liabilities                                                                           14,477           14,198
                                                                                          -----------      -----------
                TOTAL LIABILITIES                                                           1,414,139        1,217,848
                                                                                          -----------      -----------
SHAREHOLDERS' EQUITY
   Preferred stock, par value $1.00 per share--authorized 4,000,000 shares,
     no shares outstanding in 1996 or 1995                                                          -                -
   Common stock, par value $.66 2/3 per share--authorized 22,500,000
     shares, issued 13,008,787 shares in 1996 and 12,078,268 shares in 1995                     8,672            8,052
   Paid-in capital                                                                             97,406           85,902
   Retained earnings                                                                           28,223           32,488
   Net unrealized gains (losses) on securities available for sale, after tax effects             (929)             590
   Cost of 28,055 shares of common stock in treasury                                             (419)               -
                                                                                          -----------      -----------
                TOTAL SHAREHOLDERS' EQUITY                                                    132,953          127,032
                                                                                          -----------      -----------
                                                                                          $ 1,547,092      $ 1,344,880
                                                                                          ===========      ===========
</TABLE>


See notes to consolidated financial statements and independent auditors'
report.


                                                                              25
<PAGE>   27

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME               CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands, except per share data)  1996        1995        1994
----------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>         <C>
Interest and dividend income:
   Interest on loans and leases                            $ 88,416     $ 76,747     $ 62,546
   Interest on investment securities:
      Taxable                                                18,239       17,050       15,149
      Tax-exempt                                                821        1,002          847
                                                           --------     --------     --------
                                                             19,060       18,052       15,996
   Interest and dividends on trading securities                   -            6        1,725
   Dividends on marketable equity securities                    326          364          304
   Other                                                        623        1,220        1,066
                                                           --------     --------     --------
                TOTAL INTEREST AND DIVIDEND INCOME          108,425       96,389       81,637
                                                           --------     --------     --------
Interest expense:
   Interest on deposits                                      40,740       37,279       28,122
   Interest on borrowings:
      Short-term                                             10,807        7,074        5,507
      Long-term                                                  19           10           10
                                                           --------     --------     --------
                TOTAL INTEREST EXPENSE                       51,566       44,363       33,639
                                                           --------     --------     --------
                NET INTEREST AND DIVIDEND INCOME             56,859       52,026       47,998
Provision for loan and lease losses                           2,935        3,037        2,697
                                                           --------     --------     --------
                NET INTEREST AND DIVIDEND INCOME AFTER
                   PROVISION FOR LOAN AND LEASE LOSSES       53,924       48,989       45,301
                                                           --------     --------     --------
Other income:
   Service charges on deposit accounts                        4,001        3,756        3,048
   Loan servicing fees                                        1,671        1,726        1,862
   Net gain (loss) on trading securities                        564        1,092         (257)
   Net gain on sale of investment securities                    147          204          184
   Net gain on sale of loan servicing rights                      -            -          677
   Net gain on sale of loans                                  1,383          648          192
   Leasing activities                                         2,487        1,967          381
   Trust fees                                                 2,351        2,246        2,169
   Pension settlement gain                                      877            -            -
   Other                                                      3,346        2,672        2,823
                                                           --------     --------     --------
                                                             16,827       14,311       11,079
                                                           --------     --------     --------
Other expense:
   Salaries and employee benefits                            23,847       23,138       22,530
   Occupancy and equipment                                    6,991        6,567        6,091
   Professional fees                                          1,963        2,413        2,469
   Advertising and marketing                                  1,711        1,598        1,198
   Operation of foreclosed real estate                          345          430          620
   FDIC deposit insurance                                       377        1,383        2,244
   Goodwill and deposit base intangible amortization            653          714          757
   Merger expenses                                            4,522            -            -
   SAIF special assessment                                      691            -            -
   Other                                                     10,270        9,959        8,955
                                                           --------     --------     --------
                                                             51,370       46,202       44,864
                                                           --------     --------     --------
                INCOME BEFORE INCOME TAXES                   19,381       17,098       11,516
Income taxes                                                  6,740        5,760        4,272
                                                           --------     --------     --------
                NET INCOME                                   12,641       11,338        7,244
Preferred stock dividends                                         -           89          268
                                                           --------     --------     --------
                NET INCOME AVAILABLE TO COMMON STOCK       $ 12,641     $ 11,249     $  6,976
                                                           ========     ========     ========
Weighted average common shares outstanding                   12,823       12,701       12,052
                                                           ========     ========     ========
Earnings per common share                                  $    .99     $    .89     $    .58
                                                           ========     ========     ========
</TABLE>


See notes to consolidated financial statements and independent auditors'
report.


26
<PAGE>   28
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY             CFX CORPORATION AND
                                                            SUBSIDIARIES
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                            Net Unrealized
                                                                                            Gains (Losses)
                                      Preferred Stock   Common Stock                        on Securities  Treasury Stock
                                      ---------------  ----------------   Paid-in  Retained   Available    --------------
(In thousands, except per share data) Shares Dollars   Shares   Dollars   Capital  Earnings   for Sale     Shares Dollars   Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>   <C>       <C>     <C>        <C>       <C>        <C>         <C>   <C>       <C>
BALANCE AT DECEMBER 31, 1993           194  $  194     11,696 $  7,797   $ 81,749  $ 33,391   $  1,303    (866) $(7,198)  $117,236
   Net income                            -       -         -         -         -      7,244         -        -       -       7,244
   Common cash dividends
      declared--$.31 per share           -       -         -         -         -     (3,731)        -        -       -      (3,731)
   Preferred cash dividends
      declared--$1.3875 per share        -       -         -         -         -       (268)        -        -       -        (268)
   Issuance of common stock under
      stock option plan                  -       -        139       93        820         -         -        -       -         913
   Issuance of common stock under
      employee stock purchase plan       -       -         16       11        139         -         -        -       -         150
   Issuance of common stock under
      dividend reinvestment plan         -       -          6        4         60         -         -        -       -          64
   Preferred stock converted
      to common stock                   (1)     (1)         1        1         -          -         -        -       -          -
   5% common stock dividend              -       -        276      184      3,041    (3,245)        -        -       -         (20)
   Change in net unrealized
      gains (losses) on securities
      available for sale                 -       -         -         -         -          -     (4,537)      -       -      (4,537)
                                      ----  ------     ------ --------   --------  --------   --------   ------ -------   --------
BALANCE AT DECEMBER 31, 1994           193     193     12,134    8,090     85,809    33,391     (3,234)   (866)  (7,198)   117,051
   Net income                            -       -         -         -         -     11,338         -        -       -      11,338
   Common cash dividends
      declared--$.50 per share           -       -         -         -         -     (6,341)        -        -       -      (6,341)
   Preferred cash dividends
      declared--$.4625 per share         -       -         -         -         -        (89)        -        -       -         (89)
   Issuance of common stock under
      stock option plan                  -       -        110       72        833         -         -        -       -         905
   Issuance of common stock under
      employee stock purchase plan       -       -          4        3         32         -         -        -       -          35
   Issuance of common stock under
      dividend reinvestment plan         -       -         22       15        312         -         -        -       -         327
   Preferred stock converted
      to common stock                 (193)   (193)       318      212        (19)        -         -        -       -          -
   Fractional shares paid out            -       -         (1)      (1)       (17)        -         -        -       -         (18)
   5% common stock dividend              -       -        357      238      5,573    (5,811)        -                -          -
   Change in net unrealized
      gains (losses) on securities
      available for sale                 -       -         -         -         -          -      3,824       -       -       3,824
   Retirement of treasury shares         -       -       (866)    (577)    (6,621)        -         -      866    7,198          -
                                      ----  ------     ------ --------    --------  --------   -------   ------ -------   --------
BALANCE AT DECEMBER 31, 1995             -       -     12,078    8,052     85,902    32,488        590       -       -     127,032
   Net income                            -       -         -         -         -     12,641         -        -       -      12,641
   Common cash dividends
      declared--$.55 per share           -       -         -         -         -     (7,171)        -        -       -      (7,171)
   Issuance of common stock under
      stock option plan and
      related tax effects                -       -        296      198      2,058         -         -        -       -       2,256
   Issuance of common stock under
      employee stock purchase plan       -       -         17       11        148         -         -        -       -         159
   Fractional shares paid out            -       -         (2)      (1)       (25)        -         -        -       -         (26)
   5% common stock dividend              -       -        620      412      9,323    (9,735)        -        1       -          -
   Change in net unrealized
      gains (losses) on securities
      available for sale                 -       -         -         -         -          -     (1,519)      -       -      (1,519)
   Cost of shares acquired for
      treasury                           -       -         -         -         -          -         -       27     (419)      (419)
                                      ----  ------     ------ --------   --------  --------   --------   ------ -------   --------
BALANCE AT DECEMBER 31, 1996             -  $    -     13,009 $  8,672   $ 97,406  $ 28,223   $   (929)     28  $  (419)  $132,953
                                      ====  ======     ====== ========   ========  ========   ========   ====== =======   ========
</TABLE>

See notes to consolidated financial statements and independent auditors'
report.





                                                                              27
<PAGE>   29


--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS          CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands)                                          1996          1995            1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>            <C>
OPERATING ACTIVITIES
   Net income                                                              $  12,641      $  11,338      $   7,244
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation and amortization                                         3,532          4,497          4,307
         Amortization of deferred credit on leasehold residual                (1,412)        (1,347)             -
         Provision for loan and lease losses                                   2,935          3,037          2,697
         Provision for foreclosed real estate losses                              10             31            373
         Loans originated and acquired for sale                             (100,445)       (92,242)      (107,366)
         Principal balance of loans sold                                      92,317         94,207        122,636
         Net (gain) loss on sale of portfolio loans                             (256)           (14)           227
         Net gain on sale of foreclosed real estate                             (102)           (51)          (257)
         Net gain on sale of investment securities                              (147)          (204)          (184)
         Net decrease in trading securities                                        -            236         39,595
         Net deferred income tax provision                                     5,822          2,933            232
         Increase in cash surrender value of bank-owned life insurance          (975)             -              -
         Other                                                                (2,974)        (5,754)        (1,744)
                                                                           ---------      ---------      ---------
             NET CASH PROVIDED BY OPERATING ACTIVITIES                        10,946         16,667         67,760
                                                                           ---------      ---------      ---------

INVESTING ACTIVITIES
   Proceeds from sales of securities available for sale                       21,805         28,507         33,494
   Proceeds from maturities of securities available for sale                 115,748         21,651          6,786
   Purchase of securities available for sale                                (103,862)       (46,969)       (41,567)
   Proceeds from sales of securities held to maturity                              -          6,006              -
   Proceeds from maturities of securities held to maturity                    30,102         29,884         71,887
   Purchase of securities held to maturity                                   (42,033)       (42,457)      (118,061)
   Proceeds from the sale of, or payments on, foreclosed real estate           1,954          1,405          1,553
   Proceeds from the sale of portfolio loans                                  12,287            250            999
   Net decrease in interest bearing deposits with other banks                 13,278         10,375         11,451
   Net increase in loans and leases                                         (211,885)       (86,763)      (105,804)
   Purchases of bank-owned life insurance                                    (30,000)             -              -
   Purchases of premises and equipment                                        (5,438)        (1,520)        (4,922)
                                                                           ---------      ---------      ---------
             NET CASH USED BY INVESTING ACTIVITIES                          (198,044)       (79,631)      (144,184)
                                                                           ---------      ---------      ---------

FINANCING ACTIVITIES
   Net decrease in noninterest bearing deposits and savings accounts          (5,580)       (20,840)       (13,498)
   Net increase in time certificates of deposit                              105,963         84,275         31,588
   Net increase (decrease) in short-term borrowed funds                       23,362         (1,284)        12,473
   Proceeds from Federal Home Loan Bank of Boston advances
      with maturities in excess of three months                              180,500         68,500              -
   Payment of Federal Home Loan Bank of Boston advances
      with maturities in excess of three months                             (157,000)        (6,000)             -
   Net increase (decrease) in Federal Home Loan Bank of Boston
      advances with maturities of three months or less                        48,767        (54,887)        45,400
   Common cash dividends paid                                                 (7,067)        (4,654)        (3,642)
   Preferred cash dividends paid                                                   -            (89)          (268)
   Proceeds from issuance of common stock                                      2,109          1,267          1,127
   Payments on fractional shares                                                 (26)           (18)           (20)
   Acquisition of treasury shares                                               (419)             -              -
                                                                           ---------      ---------      ---------
             NET CASH PROVIDED BY FINANCING ACTIVITIES                       190,609         66,270         73,160
                                                                           ---------      ---------      ---------
             INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  3,511          3,306         (3,264)

Cash and cash equivalents at beginning of year                                46,893         43,587         46,851
                                                                           ---------      ---------      ---------
             CASH AND CASH EQUIVALENTS AT END OF YEAR                      $  50,404      $  46,893      $  43,587
                                                                           =========      =========      =========

SUPPLEMENTARY INFORMATION
   Interest paid on deposit accounts                                       $  38,645      $  36,680      $  28,091
   Interest paid on borrowed funds                                            10,990          6,765          5,177
   Income taxes paid                                                           1,425          3,883          2,684
</TABLE>

See notes to consolidated financial statements and independent auditors'
report.




28

<PAGE>   30
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       PRINCIPLES OF PRESENTATION AND CONSOLIDATION
                       ---------------------------------------------------------
                       The consolidated financial statements include the
                       accounts of CFX Corporation and its wholly-owned
                       subsidiaries, CFX Bank, Safety Fund National Bank and
                       Orange Savings Bank (collectively referred to as Banks),
                       and the Banks' subsidiaries which engage in investment
                       activities, mortgage banking, and property management.
                       One of the Bank's subsidiaries has a 51% ownership
                       interest in CFX Funding, L.L.C., which engages in the
                       facilitation of lease financing and securitization. All
                       significant intercompany accounts and transactions are
                       eliminated upon consolidation. See Note B - "Mergers and
                       Acquisitions."

                       ---------------------------------------------------------
                       USE OF ESTIMATES
                       ---------------------------------------------------------
                       The accompanying consolidated financial statements have
                       been prepared in conformity with  generally accepted
                       accounting principles and with general practices within
                       the banking industry. In preparing the consolidated
                       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 these
                       estimates.

                         Material estimates that are particularly susceptible
                       to significant change in the near term relate to the
                       determination of valuation allowances applicable to
                       loans and leases, foreclosed real estate, and deferred
                       tax assets, and of prepayment speeds used to value
                       mortgage servicing rights.

                       ---------------------------------------------------------
                       BUSINESS
                       ---------------------------------------------------------
                       The Company, through its bank subsidiaries, serves as a
                       financial intermediary, attracting deposits from, and
                       making loans to, consumers and small to mid-sized
                       businesses through its 42 full service offices and two
                       loan production offices in New Hampshire and central
                       Massachusetts. The Company's Trust Division furnishes
                       trust and investment services to individuals,
                       corporations, municipalities and charitable
                       organizations.

                       ---------------------------------------------------------
                       RECLASSIFICATIONS AND RESTATEMENTS
                       ---------------------------------------------------------
                       The consolidated financial statements as of December 31,
                       1995 and for the years ended December 31, 1995 and 1994
                       have been restated to reflect the pooling-of-interests
                       with The Safety Fund Corporation and Milford
                       Co/operative Bank. See Note B - "Mergers and
                       Acquisitions." In addition, certain amounts have been
                       reclassified in the 1995 and 1994 consolidated financial
                       statements to conform to the 1996 presentation.

                         Prior period common stock data has been restated to
                       reflect the pooling-of-interests with The Safety Fund
                       Corporation and Milford Co/operative Bank and the
                       Company's 5% stock dividend declared on December 10,
                       1996 to shareholders of record on December 20, 1996.

                       ---------------------------------------------------------
                       CASH FLOW INFORMATION
                       ---------------------------------------------------------
                       Cash equivalents include amounts due from banks and
                       federal funds sold. Generally, federal funds are sold
                       for one-day periods.

                       ---------------------------------------------------------
                       TRADING AND INVESTMENT SECURITIES
                       ---------------------------------------------------------
                       Investments in debt securities that management has the
                       positive intent and ability to hold to maturity are
                       classified as "held to maturity" and reflected at
                       amortized cost. Investments that are purchased and held
                       principally for the purpose of selling them in the near
                       term are classified as "trading securities" and
                       reflected on the balance sheet at fair value, with
                       unrealized gains and losses included in earnings.
                       Investments not classified as either of the above are
                       classified as "available for sale" and reflected on the
                       balance sheet at fair value, with unrealized gains and
                       losses excluded from earnings and reported as a separate
                       component of shareholders' equity, net of related tax
                       effects.

                         Purchase premiums and discounts are amortized to
                       earnings by a method which approximates the interest
                       method over the terms of the investments. Declines in
                       the value of investments that are deemed to be other
                       than temporary are reflected in earnings when
                       identified. Gains and losses on disposition of
                       investments are recorded on the trade date and are
                       computed by the specific identification method.

                         The carrying values of Federal Home Loan Bank of
                       Boston and Federal Reserve Bank of Boston stock
                       approximate fair value.





                                                                              29
<PAGE>   31
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       DERIVATIVE FINANCIAL INSTRUMENTS
                       ---------------------------------------------------------

                       INTEREST RATE SWAP AGREEMENTS: Interest rate swap
                       agreements are designated as hedges against future
                       fluctuations in the interest rates of specifically
                       identified assets or liabilities, and  are accounted for
                       on the same basis as the underlying asset or liability.
                       Accordingly, interest rate swaps designated as hedges
                       against floating rate loan portfolios (carried at
                       historical cost) are reflected at cost. Interest rate
                       swaps which hedge the Company's trading securities
                       portfolio (carried at fair value) are marked to fair
                       value through net gains (losses) on trading securities
                       included in the consolidated statements of income. The
                       net interest paid or received under swap agreements is
                       recorded in the interest income or expense account
                       related to the asset or liability being hedged.

                       INTEREST RATE FLOOR AGREEMENTS: Interest rate floor
                       agreements are used to manage exposure  to interest rate
                       risk. The amounts paid on the floors are accounted for
                       as adjustments to the yield on the hedged assets. The
                       Company applies hedge accounting as the asset being
                       hedged exposes the Company to interest rate risk, and
                       the floor is designated and effective as a hedge of a
                       specific pool of assets. The Company receives an
                       interest payment if the three-month London Interbank
                       Offered Rate (LIBOR) declines below a predetermined
                       rate. This payment would be based upon the rate
                       difference between current LIBOR and the predetermined
                       rate accrued on the notional value of the instrument.
                       The transaction fee paid is amortized over the life of
                       the contract.

                       FINANCIAL FUTURES CONTRACTS: Interest rate futures
                       contracts had been entered into by the Company as hedges
                       against interest rate risk in its trading securities
                       portfolio. These instruments were marked to fair value
                       through net gains (losses) on trading securities
                       included in the consolidated statements of income. No
                       such contracts were in effect during 1996 and 1995.

                       FINANCIAL OPTION CONTRACTS: Option premiums paid or
                       received, and designated as hedges against future
                       fluctuations in the interest rates of specifically
                       identified assets or liabilities, are accounted for on
                       the same basis as the underlying asset or liability.
                       Accordingly, option contracts designated as hedges
                       against mortgage loans held for sale are carried at the
                       lower of cost or estimated fair value in the aggregate.
                       Option contracts which hedge the Company's available for
                       sale securities are marked to fair value and changes in
                       fair value are reflected in shareholders' equity, net of
                       related tax effects.

                       ---------------------------------------------------------
                       MORTGAGE LOANS HELD FOR SALE
                       ---------------------------------------------------------
                       Mortgage loans originated or purchased and intended for
                       sale in the secondary market are carried at the lower of
                       cost or estimated fair value in the aggregate. Net
                       unrealized losses are recognized in a valuation
                       allowance by charges to earnings when applicable.

                       ---------------------------------------------------------
                       LOANS AND LEASES
                       ---------------------------------------------------------
                       All loans past due 90 days or more as to principal or
                       interest are placed on nonaccrual status. In addition, a
                       loan (including a loan impaired under SFAS No. 114,
                       defined below) is generally classified as nonaccrual
                       when management determines that significant doubt exists
                       as to the collectibility of principal or interest. An
                       impaired loan may remain on accrual status if it is
                       guaranteed or well secured. Interest accrued but not
                       received on loans placed on nonaccrual status is
                       reversed and charged against current income.  Interest
                       on nonaccrual loans is recognized when received. Cash
                       received on impaired loans is generally allocated to
                       principal and interest based on the contractual terms of
                       the note, unless management believes such receipt should
                       be applied directly to principal based on collection
                       concerns. Loans are restored to accrual status when the
                       borrower has demonstrated the ability to make future
                       payments of principal and interest, as scheduled.

                         Loan origination and commitment fees and certain
                       direct origination costs are deferred, and   the net
                       amount is amortized as an adjustment of the related
                       loan's yield using the interest method over the
                       contractual life of the related loans.

                         Consumer lease financing loans are carried at the
                       amount of minimum lease payments plus residual values,
                       less unearned income which is amortized into interest
                       income using the interest method.





30
<PAGE>   32
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                         In May 1993, the Financial Accounting Standards Board
                       (FASB) issued Statement of Financial Accounting
                       Standards (SFAS) No. 114, "Accounting by Creditors for
                       Impairment of a Loan," which was amended in October,
                       1994 by SFAS No. 118, "Accounting by Creditors for
                       Impairment of a Loan, Income Recognition and
                       Disclosure." The Company adopted SFAS No. 114 on January
                       1, 1995. Under this Statement, a loan is considered
                       impaired when, based on current information and events,
                       it is probable that a creditor will be unable to collect
                       the scheduled payments of principal or interest when due
                       according to the contractual terms of the loan
                       agreement. Factors considered by management in
                       determining impairment include payment status,
                       collateral value, and the probability of collecting
                       scheduled principal and interest payments when due.
                       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. The
                       Statement is not applicable to large groups of smaller
                       balance homogeneous loans that are collectively
                       evaluated for impairment, and loans that are measured at
                       fair value or the lower of cost or fair value.
                       Accordingly, the Company has not applied SFAS No. 114 to
                       its consumer and residential mortgage loans which are
                       collectively evaluated for impairment, or to loans held
                       for sale. The Company measures impairment on a loan by
                       loan basis by either the present value of expected
                       future cash flows discounted at the loan's effective
                       interest rate, the loans obtainable market price, or the
                       fair value of the collateral if the loan is collateral
                       dependent. Collateralized loans are generally measured
                       by fair value of existing collateral, unless market
                       prices or discounted cash flow information is deemed to
                       be more current and reflective of the economies of the
                       lending relationship. At December 31, 1996, the Company
                       had $5,401,000 in impaired loans of which approximately
                       93% were measured by the fair value of collateral and 7%
                       by discounted cash flow analysis.

                         SFAS No. 114 also limits the classification of loans
                       as in-substance foreclosures to situations where the
                       creditor actually receives physical possession of the
                       debtor's assets. Accordingly, upon adoption of SFAS No.
                       114, the Company transferred $796,000 of loans
                       previously classified as in-substance foreclosures and
                       $131,000 of the valuation allowance for foreclosed real
                       estate losses to nonperforming loans.

                         The adoption of SFAS No. 114 had no effect on the
                       Company's assessment of the overall adequacy of the
                       allowance for loan and lease losses. The restatement of
                       previously  issued financial statements to conform with
                       SFAS No. 114 is expressly prohibited.

                         Loan losses, including those applicable to impaired
                       loans, are charged against the allowance for loan and
                       lease losses when management believes the collectibility
                       of the loan balance is unlikely. The allowance is an
                       estimate and is increased by charges to current income
                       in amounts sufficient to maintain the adequacy of the
                       allowance. The adequacy is determined by management's
                       evaluation of the extent of existing risk in the loan
                       portfolio, prevailing economic conditions and historical
                       loss experience.

                       ---------------------------------------------------------
                       BANK-OWNED LIFE INSURANCE
                       ---------------------------------------------------------
                       During 1996, the Company invested $30 million in
                       bank-owned life insurance (BOLI) to help finance the
                       cost of certain employee benefit plan expenses. The BOLI
                       investment is accomplished through the purchase of life
                       insurance on the lives of certain employees through two
                       insurance companies with a Standard & Poors rating of
                       AA+ or better. The Company, not the employee or family,
                       is the beneficiary of the insurance policies.  Increases
                       in the cash value of the policies, as well as insurance
                       proceeds received, are recorded in other income, and are
                       not subject to income taxes.





                                                                              31
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--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       PREMISES AND EQUIPMENT
                       ---------------------------------------------------------
                       Premises and equipment are stated at cost less
                       accumulated depreciation and amortization.  Expenditures
                       for maintenance and repairs are charged to income as
                       incurred, and the costs of major additions and
                       improvements are capitalized.

                         The provision for depreciation and amortization is
                       computed on the straight-line method based on the
                       estimated useful lives of the assets or the terms of the
                       leases, if shorter.

                       ---------------------------------------------------------
                       MORTGAGE SERVICING RIGHTS
                       ---------------------------------------------------------
                       Effective January 1, 1995, the Company prospectively
                       adopted SFAS No. 122, "Accounting for Mortgage Servicing
                       Rights," whereby rights to service mortgage loans for
                       others are capitalized as separate assets, whether
                       acquired through purchase or origination, if such loans
                       are sold or securitized with servicing rights retained.
                       Accordingly, the total cost of the mortgage loan is
                       allocated to the related servicing right and to the loan
                       based on their relative fair values if it is practicable
                       to estimate those fair values. The Company estimates
                       fair value based on the present value of estimated
                       expected future cash flows using prepayment speeds and
                       discount rates commensurate with the risks involved.
                       Prior to the adoption of SFAS No. 122, the
                       capitalization of originated mortgage servicing rights
                       was not allowed under generally accepted accounting
                       principles. The  effect of the accounting change for the
                       year ended  December 31, 1995 was to increase net income
                       by $265,000 or $.02 per share.

                         Capitalized mortgage servicing rights are amortized to
                       servicing revenue in proportion to, and   over the
                       period of, estimated net servicing revenues. Impairment
                       of mortgage servicing rights is assessed based on the
                       fair value of those rights. For purposes of measuring
                       impairment, the rights are stratified based on the
                       following predominant risk characteristics of the
                       underlying loans: loan type (fixed rate, variable rate
                       or state housing programs) and note rate. Impairment is
                       recognized through a valuation allowance for an
                       individual stratum, to the extent that fair value is
                       less than the capitalized amount for the stratum. No
                       such impairment was recognized during 1996 or 1995.

                       ---------------------------------------------------------
                       INVESTMENTS IN LEASEHOLD RESIDUALS AND LIMITED
                       PARTNERSHIPS
                       ---------------------------------------------------------
                       Assets acquired in connection with leasehold residual
                       positions have been accounted for using  the purchase
                       method of accounting. Resultant deferred credits are
                       amortized to leasing activities income over the period
                       of, and in proportion to, the related tax benefits
                       realized. At December 31, 1996 and 1995, the leasehold
                       residual position of $1,906,000 is included in other
                       assets and deferred credits of $3,184,000 and
                       $4,596,000, respectively, are included in other
                       liabilities in the consolidated balance sheets.

                         Investments in real estate development limited
                       partnerships are accounted for using the equity method.

                       ---------------------------------------------------------
                       INTANGIBLE ASSETS
                       ---------------------------------------------------------
                       Deposit base intangibles, which represent the value
                       attributable to the capacity of deposit accounts of
                       purchased bank subsidiaries to generate future income,
                       are included in other assets and are being amortized on
                       a straight-line basis over a period of five years. The
                       excess of the cost of purchased subsidiaries over the
                       fair value of tangible and intangible net assets
                       acquired has been allocated to goodwill and is being
                       amortized on a straight-line basis over 25 years for
                       banking operations and 15 years for mortgage banking
                       operations.

                         The accumulated amortizations of deposit base
                       intangibles and goodwill were $1,605,000  and
                       $4,087,000, respectively, as of December 31, 1996.

                       ---------------------------------------------------------
                       FORECLOSED REAL ESTATE
                       ---------------------------------------------------------
                       Foreclosed real estate consists of properties that the
                       Company has formally received title to, or has taken
                       possession of, in partial or total satisfaction of
                       loans. Loan losses arising from the write-down of
                       properties to fair value at the time of acquisition are
                       charged against the allowance for loan and lease losses.

                         Valuations are periodically performed by management,
                       and an allowance for losses is established through a
                       charge to earnings if the carrying value of a property
                       exceeds its fair value less estimated costs to sell.

                         Prior to 1995, the Company classified certain loans
                       meeting more extensive in-substance foreclosure criteria
                       as foreclosed real estate. Upon the adoption of SFAS No.
                       114, the Company reclassified all in-substance
                       foreclosed assets that were not in its possession to
                       loans.

                         Operating expenses of foreclosed real estate and gains
                       and losses upon disposition are reported in earnings.





32
<PAGE>   34
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       PENSION AND 401(k) PLANS
                       ---------------------------------------------------------
                       The Company and its subsidiaries have defined benefit
                       and defined contribution pension plans which cover
                       substantially all full-time employees. The benefits are
                       based on years of service and the employee's
                       compensation during the years immediately preceding
                       retirement. The Company's funding policy is to
                       contribute annually the maximum amount that can be
                       deducted for federal income tax purposes. Contributions
                       are intended to provide not only for benefits attributed
                       to service to date, but also for those expected to be
                       earned in the future.

                         The Company maintains a Section 401(k) savings plan
                       for employees of the Company, Safety Fund National Bank,
                       CFX Bank, and CFX Bank's subsidiaries. Under the plan,
                       the Company makes a matching contribution of one-half to
                       one-third of the amount contributed by each
                       participating employee, up to 6% of the employee's
                       yearly salary. The plan allows for supplementary profit
                       sharing contributions by the Company, at its discretion,
                       for the benefit of participating employees.

                       ---------------------------------------------------------
                       STOCK COMPENSATION PLANS
                       ---------------------------------------------------------
                       In October 1995, the FASB issued SFAS No. 123,
                       "Accounting for Stock-Based Compensation." This
                       Statement encourages all entities to adopt a fair value
                       based method of accounting  for employee stock
                       compensation plans, whereby compensation cost is
                       measured at the grant date based on the value of the
                       award and is recognized over the service period, which
                       is usually the vesting period. However, it also allows
                       an entity to continue to measure compensation cost for
                       those plans using the intrinsic value based method of
                       accounting prescribed by APB Opinion No. 25, "Accounting
                       for Stock Issued to Employees," whereby compensation
                       cost is the excess, if any, of the quoted market price
                       of the stock at the grant date (or other measurement
                       date) over the amount an employee must pay to acquire
                       the stock. Entities electing to remain with the
                       accounting in Opinion No. 25 must make pro forma
                       disclosures of net income and earnings per share, as if
                       the fair value based method of accounting had been
                       applied. The disclosure requirements of this statement
                       are effective for the Company's consolidated financial
                       statements for the year ended December 31, 1996. The pro
                       forma disclosures include the effects of all awards
                       granted on or after January 1, 1995. See Note O - "Stock
                       Compensation Plans."

                       ---------------------------------------------------------
                       INCOME TAXES
                       ---------------------------------------------------------
                       The Company and its subsidiaries file a consolidated
                       federal income tax return. Deferred tax assets and
                       liabilities are recognized for the future tax
                       consequences attributable to temporary differences
                       between the financial statement carrying amounts of
                       existing assets and liabilities and their respective tax
                       bases.  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. Income taxes are allocated
                       to each entity in the consolidated group based on its
                       share of taxable income.

                         Tax credits generated from limited partnerships are
                       reflected in earnings when realized for federal income
                       tax purposes.

                       ---------------------------------------------------------
                       PARENT-COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS
                       ---------------------------------------------------------
                       In the parent-company-only condensed financial
                       statements, the investment in bank subsidiaries is
                       stated at cost plus equity in the undistributed earnings
                       of the subsidiary.

                       ---------------------------------------------------------
                       EARNINGS PER SHARE
                       ---------------------------------------------------------
                       Earnings per common share are computed by dividing net
                       income by the weighted average number of common shares
                       outstanding and common share equivalents with a material
                       dilutive effect. Common share equivalents are shares
                       which may be issuable to employees and non-employee
                       directors upon exercise of outstanding stock options.

                       ---------------------------------------------------------
                       RECENT ACCOUNTING PRONOUNCEMENT
                       ---------------------------------------------------------
                       In June 1996, the FASB issued SFAS No. 125, "Accounting
                       for Transfers and Servicing of Financial Assets and
                       Extinguishments of Liabilities." The accounting and
                       reporting standards of this Statement are based on a
                       financial components approach that focuses on control,
                       whereby after a transfer of financial assets, an entity
                       recognizes only financial and servicing assets it
                       controls and liabilities it has incurred.  Liabilities
                       incurred will be initially recognized at fair value, if
                       practicable. Financial assets are derecognized when
                       control has been surrendered, and liabilities are
                       derecognized when extinguished. The determination of
                       whether control over a financial asset has been
                       surrendered is based on meeting specific criteria as
                       defined in the Statement.





                                                                              33
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--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       The Statement provides standards for distinguishing
                       transfers of  financial assets that are sales from
                       transfers that are secured borrowings, and impacts the
                       accounting for various transactions including the
                       servicing of financial assets, securitizations,
                       securities lending transactions, repurchase agreements,
                       loan participations, and transfers of receivables with
                       recourse.

                         The Statement is effective for transfers and servicing
                       of financial assets and extinguishments of liabilities
                       occurring after December 31, 1996, and is to be applied
                       on a prospective basis. In December 1996, the FASB voted
                       to defer for one year the provisions of the Statement
                       that relate to secured borrowings and collateral.

                         Management is currently evaluating the impacts of the
                       Statement on its secured borrowings such as repurchase
                       agreements but does not expect, based on the general
                       terms of its current agreements, that the Statement will
                       significantly change its accounting for similar
                       transactions in the future. Other provisions of the
                       Statement will not, in management's opinion, have a
                       significant impact on the consolidated financial
                       statements, except that servicing rights pertaining to
                       lease sales and securitizations will be capitalized
                       prospectively at their estimated fair value, with a
                       corresponding credit to earnings, and amortized over the
                       servicing period.

--------------------------------------------------------------------------------
NOTE B--MERGERS AND ACQUISITIONS
--------------------------------------------------------------------------------
                       On July 1, 1996, the Company acquired The Safety Fund
                       Corporation (Safety Fund) and the Milford Co/operative
                       Bank (Milford). Each of Safety Fund's 1,665,000
                       outstanding shares of common stock and Milford's 689,000
                       outstanding shares of common stock were converted into
                       1.785 shares and 2.777 shares, respectively, of the
                       Company's common stock, resulting in the issuance  of
                       2,973,000 shares and 1,914,000 shares, respectively, of
                       the Company's common stock to Safety Fund and Milford
                       shareholders. Outstanding stock options were similarly
                       exchanged for CFX stock options. Milford was a
                       state-chartered co/operative bank, headquartered in
                       Milford, New Hampshire. Milford was merged into CFX's
                       New Hampshire banking subsidiary, CFX Bank, as part of
                       the transaction. Safety Fund was a bank holding company
                       headquartered in Fitchburg, Massachusetts. Safety Fund's
                       subsidiary bank, Safety Fund National Bank, continues to
                       operate as a subsidiary of the Company.

                         Both the Safety Fund and Milford mergers were
                       accounted for by the pooling-of-interests method of
                       accounting, and, accordingly, the financial information
                       for all prior periods presented has been restated to
                       present the combined financial condition and results of
                       operations as if the combination had been in effect for
                       all periods presented. Expenses directly attributable to
                       the mergers amounted to $4,522,000 and were charged to
                       earnings at the date of combination. Separate financial
                       information of CFX Corporation, Safety Fund, and Milford
                       for periods prior to the acquisition is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               PERIOD ENDED JUNE 30,                               Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands)                        1996                                  1995                               1994
-----------------------------------------------------------  -----------------------------------  ---------------------------------
                                      SAFETY                               Safety                              Safety
                            CFX        FUND       MILFORD       CFX         Fund       Milford       CFX        Fund       Milford
                                    (Unaudited)
-----------------------------------------------------------  -----------------------------------  ---------------------------------
<S>                       <C>          <C>         <C>         <C>         <C>        <C>         <C>          <C>        <C>
Net interest and
   dividend income         $18,180     $ 7,102     $ 2,739     $32,881     $13,816     $ 5,329     $31,304     $12,036     $ 4,658
Provision for loan and
   lease losses              1,500         105          50       1,624       1,300         113         437       2,200          60
Other income                 5,222       2,277         325       9,421       4,059         831       6,516       3,823         740
Other expense               14,606       6,518       1,903      28,397      14,016       3,789      27,929      13,424       3,511
Income taxes                 2,358         692         394       4,335         706         719       3,548          77         647
                           -------     -------     -------     -------     -------     -------     -------     -------     -------
Net income                   4,938       2,064         717       7,946       1,853       1,539       5,906         158       1,180
Preferred dividends              -           -           -          89           -           -         268           -           -
                           -------     -------     -------     -------     -------     -------     -------     -------     -------
Net income available
   to common stock         $ 4,938     $ 2,064     $   717     $ 7,857     $ 1,853     $ 1,539     $ 5,638     $   158     $ 1,180
                           =======     =======     =======     =======     =======     =======     =======     =======     =======
</TABLE>




34
<PAGE>   36
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE C--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
--------------------------------------------------------------------------------
                       The Federal Reserve Bank requires the Banks to maintain
                       average reserve balances. The average amounts of these
                       reserve balances for the years ended December 31, 1996
                       and 1995 were approximately $28,172,000 and $26,443,000,
                       respectively.

--------------------------------------------------------------------------------
NOTE D--INVESTMENT SECURITIES
--------------------------------------------------------------------------------
                       The amortized cost and estimated fair value of
                       investment securities, with gross unrealized gains and
                       losses, follows:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                       December 31 (In thousands)                                         1996
                       ------------------------------------------------------------------------------------------------
                                                                                      GROSS       GROSS
                                                                     AMORTIZED     UNREALIZED   UNREALIZED      FAIR
                                                                        COST          GAINS       LOSSES        VALUE
                       ------------------------------------------------------------------------------------------------
                       <S>                                           <C>            <C>          <C>          <C>
                       Securities available for sale:
                         Debt securities:
                            United States Treasury and
                               agency obligations                      $129,426     $    798     $  1,361     $128,863
                            State and municipal                             439            2            -          441
                            Corporate bonds                               3,138           25            -        3,163
                            Federal agency mortgage
                               pass-through securities                   76,068          215        1,130       75,153
                            Other collateralized mortgage
                               obligations (CMO's)                       19,799           15          206       19,608
                         Marketable equity securities                     5,960          104          103        5,961
                         Federal Home Loan Bank of Boston
                            and Federal Reserve Bank
                            of Boston stock                              12,135            -            -       12,135
                                                                       --------     --------     --------     --------
                               Total securities available for sale     $246,965     $  1,159     $  2,800     $245,324
                                                                       ========     ========     ========     ========
                       Securities held to maturity:
                         Debt securities:
                            United States Treasury and
                               agency obligations                      $  9,417     $     18     $     46     $  9,389
                            State and municipal                          13,986          118           21       14,083
                            Federal agency mortgage
                               pass-through securities                    7,783          116           25        7,874
                            Other collateralized mortgage
                               obligations (CMO's)                        1,184            1            -        1,185
                            Other                                           300            -            -          300
                                                                       --------     --------     --------     --------
                               Total securities held to maturity       $ 32,670     $    253     $     92     $ 32,831
                                                                       ========     ========     ========     ========
</TABLE>

                         At December 31, 1996, the Company pledged debt
                       securities with an amortized cost of $114,891,000, and a
                       fair value of $114,368,000, as collateral to secure
                       public funds and repurchase agreements. See Note J -
                       "Short-Term Borrowed Funds."





                                                                              35
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--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       The amortized cost and estimated fair value of debt
                       securities by contractual maturity are shown below.
                       Expected maturities will differ from contractual
                       maturities because issuers may have the right to call or
                       prepay obligations with or without call or prepayment
                       penalties.

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------------------------
                       December 31 (In thousands)                                    1996
                       -----------------------------------------------------------------------------------------
                                                                  AVAILABLE FOR SALE       HELD TO MATURITY
                       -----------------------------------------------------------------------------------------
                                                                AMORTIZED      FAIR      AMORTIZED       FAIR
                                                                  COST         VALUE        COST         VALUE
                       -----------------------------------------------------------------------------------------
                       <S>                                      <C>           <C>         <C>          <C>
                       Within one year                          $ 11,023     $ 11,079     $  4,154     $  4,159
                       After one year through five years          74,607       74,737       15,580       15,617
                       After five years through ten years         44,934       44,244        3,969        3,996
                       After ten years through twenty years        2,439        2,407            -            -
                                                                --------     --------     --------     --------
                                                                 133,003      132,467       23,703       23,772
                       Pass-through securities and CMO's          95,867       94,761        8,967        9,059
                                                                --------     --------     --------     --------
                                                                $228,870     $227,228     $ 32,670     $ 32,831
                                                                ========     ========     ========     ========
</TABLE>

                         Proceeds from the sale of securities available for
                       sale during the years ended December 31, 1996, 1995 and
                       1994 were $21,805,000, $28,507,000 and $33,494,000,
                       respectively. Gross gains of $220,000, $297,000 and
                       $265,000, respectively, were recognized on such sales.
                       Gross losses of $73,000, $99,000 and $81,000,
                       respectively, were realized on such sales. In the third
                       quarter of 1996, the acquisitions of Safety Fund and
                       Milford (see Note B - "Mergers and Acquisitions")
                       necessitated a transfer of securities held to maturity
                       with an amortized cost of $76,849,000 and a net
                       unrealized loss of $2,522,000 to securities available
                       for sale in order to maintain the Company's existing
                       interest rate risk profile. In November 1995, the FASB
                       issued guidance allowing a one-time reassessment of an
                       entity's investment classifications during the period
                       November 15, 1995 to December 31, 1995. As a result,
                       securities held to maturity with an amortized cost of
                       $95,819,000 and a net unrealized loss of $815,000 were
                       transferred to securities available for sale and
                       securities held to maturity with an amortized cost of
                       $6,000,000 were sold at a net realized gain of $6,000.
                       At December 31, 1996 and 1995, net unrealized gains
                       (losses) on securities available for sale included in
                       the shareholders' equity section of the consolidated
                       balance sheets, included net unrealized gains (losses)
                       of $126,000 and $(138,000), respectively, on securities
                       transferred from available for sale to held to maturity
                       during 1994 and 1995.





36
<PAGE>   38
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------------
                       December 31 (In thousands)                                         1995
                       ----------------------------------------------------------------------------------------------
                                                                                   GROSS         GROSS
                                                                  AMORTIZED     UNREALIZED     UNREALIZED      FAIR
                                                                      COST         GAINS        LOSSES        VALUE
                       ----------------------------------------------------------------------------------------------
                       <S>                                         <C>           <C>           <C>           <C>
                       Securities available for sale:
                         Debt securities:
                            United States Treasury and
                               agency obligations                    $100,966     $  1,720     $    155     $102,531
                            Corporate bonds                             5,002           70            -        5,072
                            Federal agency mortgage
                               pass-through securities                 55,953           28          274       55,707
                            Other collateralized mortgage
                               obligations (CMO's)                     24,345           75          262       24,158
                         Marketable equity securities                   5,565           28          139        5,454
                         Federal Home Loan Bank of Boston and
                            Federal Reserve Bank of Boston stock        8,324            -            -        8,324

                               Total securities available            --------     --------     --------     --------
                                  for sale                           $200,155     $  1,921     $    830     $201,246
                                                                     ========     ========     ========     ========
                       Securities held to maturity:
                         Debt securities:
                            United States Treasury and
                               agency obligations                    $ 48,323     $    647     $     90     $ 48,880
                            State and municipal                        19,229          154           38       19,345
                            Federal agency mortgage
                               pass-through securities                 21,243          406          147       21,502
                            Other collateralized mortgage
                               obligations (CMO's)                      8,098          167           22        8,243
                            Other                                         200            -           28          172
                                                                     --------     --------     --------     --------
                               Total securities held to maturity     $ 97,093     $  1,374     $    325     $ 98,142
                                                                     ========     ========     ========     ========
</TABLE>





                                                                              37
<PAGE>   39
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE E--LOANS AND LEASES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                       Loans and leases consist of the following:
                       -------------------------------------------------------------------------------
                       December 31 (In thousands)                              1996            1995
                       -------------------------------------------------------------------------------
                       <S>                                                <C>             <C>
                       Real estate:
                         Residential                                      $  711,440      $  586,074
                         Construction                                          8,099           9,194
                         Commercial                                          143,179         141,833
                       Commercial, financial and agricultural                120,114         104,308
                       Warehouse lines of credit to leasing companies         18,393          12,906
                       Consumer lease financing                               76,343          27,457
                       Other consumer                                         48,182          48,497
                                                                          ----------      ----------
                                                                           1,125,750         930,269
                       Unearned income                                       (10,045)         (3,604)
                       Deferred origination costs, net                         2,459             765
                                                                          ----------      ----------
                                                                          $1,118,164      $  927,430
                                                                          ==========      ==========
</TABLE>

                       The following is a summary of information pertaining to
                       impaired and nonaccrual loans:

<TABLE>
<CAPTION>
                       -------------------------------------------------------------------------------
                       December 31 (In thousands)                            1996        1995
                       -------------------------------------------------------------------------------
                       <S>                                                 <C>         <C>
                       Loans with a valuation allowance                    $ 2,816     $ 7,383
                       Loans without a valuation allowance                   2,585       3,212
                                                                           -------     -------
                         Total impaired loans                              $ 5,401     $10,595
                                                                           =======     =======
                       Valuation allowance allocated to impaired loans     $   934     $ 2,884
                                                                           =======     =======
                       Nonaccrual loans                                    $ 8,299     $ 9,840
                                                                           =======     =======
</TABLE>

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------
                       Year Ended December 31 (In thousands)              1996        1995
                       ----------------------------------------------------------------------
                       <S>                                              <C>          <C>
                       Average investment in impaired loans             $ 7,262     $13,526
                                                                        =======     =======
                       Interest income recognized on impaired loans     $   613     $ 1,087
                                                                        =======     =======
                       Interest income recognized on cash basis         $   497     $ 1,002
                                                                        =======     =======
</TABLE>

                         The Company is not committed to lend additional funds
                       to borrowers whose loans have been modified in
                       connection with troubled debt restructurings or whose
                       loans have been classified as impaired.

                         The primary geographic concentration of credit risk
                       for loans originated by the Company is the State of New
                       Hampshire and central Massachusetts. The remainder of
                       the portfolio is distributed principally throughout the
                       other New England states.





38
<PAGE>   40
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE F--ALLOWANCE FOR LOAN AND LEASE LOSSES
--------------------------------------------------------------------------------
                       Changes in the allowance for loan and lease losses are
                       as follows:

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                     1996            1995          1994
                       ----------------------------------------------------------------------------------------------
                       <S>                                                       <C>           <C>           <C>
                       Balance at beginning of year                              $ 15,449      $ 14,401      $ 16,168
                       Provision for loan and lease losses                          2,935         3,037         2,697
                       Loans and leases charged-off                                (3,301)       (2,934)       (5,467)
                       Recoveries of loans and leases previously charged-off          657           945         1,003
                                                                                 --------      --------      --------
                       Balance at end of year                                    $ 15,740      $ 15,449      $ 14,401
                                                                                 ========      ========      ========
</TABLE>

--------------------------------------------------------------------------------
NOTE G--PREMISES AND EQUIPMENT
--------------------------------------------------------------------------------
                       The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------
                       December 31 (In thousands)                          1996         1995
                       ----------------------------------------------------------------------
                       <S>                                                <C>         <C>
                       Land                                               $ 3,616     $ 3,683
                       Buildings and leasehold improvements                22,641      24,246
                       Furniture and equipment                             17,490      15,585
                                                                          -------     -------
                                                                           43,747      43,514
                       Less accumulated depreciation and amortization      16,361      18,261
                                                                          -------     -------
                                                                          $27,386     $25,253
                                                                          =======     =======
</TABLE>

                         Depreciation and amortization expense was $3,305,000,
                       $3,267,000 and $2,944,000, for the years ended December
                       31, 1996, 1995 and 1994, respectively.

--------------------------------------------------------------------------------
NOTE H--FORECLOSED REAL ESTATE
--------------------------------------------------------------------------------
                       Foreclosed real estate is presented net of a valuation
                       allowance as follows:

<TABLE>
<CAPTION>
                       ------------------------------------------------
                       December 31 (In thousands)     1996       1995
                       ------------------------------------------------
                       <S>                           <C>        <C>
                       Foreclosed real estate        $2,233     $1,236
                       Less allowance for losses         10         50
                                                     ------     ------
                                                     $2,223     $1,186
                                                     ======     ======
</TABLE>

                       An analysis of the allowance for losses on foreclosed
                       real estate follows:

<TABLE>
<CAPTION>
                       --------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)         1996       1995       1994
                       --------------------------------------------------------------------------
                       <S>                                          <C>        <C>         <C>
                       Balance at beginning of year                 $  50      $ 367      $ 407
                       Reclassification to non-performing loans
                         upon adoption of SFAS No. 114                  -       (131)         -
                       Provision for losses                            10         31        373
                       Charge-offs, net of recoveries                 (50)      (217)      (413)
                                                                    -----      -----      -----
                       Balance at end of year                       $  10      $  50      $ 367
                                                                    =====      =====      =====
</TABLE>

                       The following table presents the components of the
                       operation of foreclosed real estate:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)         1996       1995       1994
                       ------------------------------------------------------------------------
                       <S>                                          <C>        <C>        <C>
                       Operating expenses, net of rental income     $ 437      $ 450      $ 504
                       Provision for losses                            10         31        373
                       Net gain on sales of real estate              (102)       (51)      (257)
                                                                    -----      -----      -----
                                                                    $ 345      $ 430      $ 620
                                                                    =====      =====      =====
</TABLE>





                                                                              39
<PAGE>   41

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE I--DEPOSITS
--------------------------------------------------------------------------------
                       Total deposits consist of the following:
<TABLE>
<CAPTION>
                       ------------------------------------------------------------
                       December 31 (In thousands)             1996           1995
                       ------------------------------------------------------------
                       <S>                                <C>            <C>
                       Noninterest bearing                $  136,875     $  124,615
                       Savings:
                         Regular savings                     167,465        173,345
                         NOW accounts                        134,467        132,562
                         Money market accounts               133,555        147,420
                                                          ----------     ----------
                                  Total savings              435,487        453,327
                         Time certificates of deposit        584,845        478,882
                                                          ----------     ----------
                                  Total deposits          $1,157,207     $1,056,824
                                                          ==========     ==========
</TABLE>

                          Time deposits with a minimum balance of $100,000 at
                       December 31, 1996 and 1995 totaled $137,248,000 and
                       $70,343,000, respectively. Brokered certificates of
                       deposit at December 31, 1996 and 1995 amounted to
                       $69,760,000 and $20,666,000, respectively.

                       A summary of time certificates, by maturity, is as
                       follows:

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------
                       December 31 (Dollars in thousands)                 1996                 1995
                       ----------------------------------------------------------------------------------------
                                                                               WEIGHTED              WEIGHTED
                                                                                AVERAGE               AVERAGE
                                                                 AMOUNT          RATE    AMOUNT         RATE
                       ----------------------------------------------------------------------------------------
                       <S>                                      <C>              <C>    <C>              <C>
                       Within one year                          $462,180         5.55%  $337,969         5.68%
                       After one year through three years         96,803         5.69     99,870         5.84
                       After three years through five years       25,862         6.25     41,043         6.20
                                                                --------                --------
                                                                $584,845         5.61%  $478,882         5.76%
                                                                ========                ========
</TABLE>





40
<PAGE>   42

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE J--SHORT-TERM BORROWED FUNDS
--------------------------------------------------------------------------------
                       The following summarizes short-term borrowed funds:
<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------
                       December 31 (In thousands)                           1996        1995
                       -----------------------------------------------------------------------
                       <S>                                                <C>         <C>
                       Securities sold under agreement to repurchase:
                         Retail                                           $44,165     $28,591
                         Wholesale                                         23,160      14,264
                       Treasury tax and loan                                   49       1,157
                                                                          -------     -------
                       Total short-term borrowed funds                    $67,374     $44,012
                                                                          =======     =======
</TABLE>

                         Retail securities sold under agreement to repurchase
                       at December 31, 1996 and 1995 mature within three months
                       at a weighted average interest rate of 4.28% and 4.30%,
                       respectively. Wholesale repurchase agreements mature
                       within three months at a weighted average interest rate
                       of 5.50% and 5.83% at December 31,  1996 and 1995,
                       respectively. Short-term borrowed funds are secured by
                       investment securities. See Note D - "Investment
                       Securities."

--------------------------------------------------------------------------------
NOTE K--ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
--------------------------------------------------------------------------------

                       Advances from the Federal Home Loan Bank of Boston
                       (FHLBB) consist of the following:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------
                       December 31 (In thousands)                   1996         1995
                       -----------------------------------------------------------------
                       <S>                                        <C>          <C>
                       Short-term                                 $174,657     $102,613
                       Long-term:
                         5.00% (fixed rate) due January, 2003          201          201
                         5.00% (fixed rate) due March, 2006            223            -
                                                                  --------     --------
                       Total advances                             $175,081     $102,814
                                                                  ========     ========
</TABLE>

                         Short-term advances mature within six months and have
                       a weighted average interest rate of 5.88% and 6.16% at
                       December 31, 1996 and 1995, respectively.

                         The Banks have available lines of credit with the
                       FHLBB at an interest rate that adjusts daily. Borrowings
                       under the lines are limited to $30,000,000 as of
                       December 31, 1996. Additional credit may be available
                       upon written request to the FHLBB. All borrowings from
                       the FHLBB are secured by a blanket lien on certain
                       qualified collateral, defined principally as 75% of the
                       carrying value of first mortgage loans on owner-occupied
                       residential property and 90% of the fair value of U.S.
                       Government and federal agency securities.





                                                                              41
<PAGE>   43

--------------------------------------------------------------------------------
CFX Corporation and Subsidiaries
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Note L--Preferred Stock
--------------------------------------------------------------------------------

                       The Company's preferred stock was converted to common
                       stock on April 30, 1995, the mandatory conversion date.

--------------------------------------------------------------------------------
NOTE M--INCOME TAXES
--------------------------------------------------------------------------------

                       The components of the provision for income taxes are as
                       follows:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)         1996         1995         1994
                       ------------------------------------------------------------------------------
                       <S>                                         <C>          <C>         <C>
                       Current tax provision:
                         Federal                                   $ 1,037      $ 2,590      $ 3,490
                         State                                         320          414          550
                         Federal tax credits                          (439)        (177)           -
                                                                   -------      -------      -------
                            Total current                              918        2,827        4,040
                                                                   -------      -------      -------
                       Deferred tax provision (benefit):
                         Federal                                     5,438        2,785          110
                         State                                         926          463         (133)
                       Effect of tax law change                          -           10           17
                       Effect of change in valuation allowance        (542)        (325)         238
                                                                   -------      -------      -------
                            Total deferred                           5,822        2,933          232
                                                                   -------      -------      -------
                            Provision for income taxes             $ 6,740      $ 5,760      $ 4,272
                                                                   =======      =======      =======
</TABLE>

                       The components of the net deferred tax asset included in
                       other assets are as follows:

<TABLE>
<CAPTION>
                       -------------------------------------------------------------
                       December 31 (In thousands)                 1996         1995
                       -------------------------------------------------------------
                       <S>                                     <C>          <C>
                       Deferred tax assets:
                         Federal                               $ 10,624     $ 10,746
                         State                                    1,497        1,852
                         Valuation allowance                          -         (542)
                                                               --------     --------
                            Total deferred tax assets, net       12,121       12,056
                                                               --------     --------
                       Deferred tax liabilities:
                         Federal                                  8,521        3,864
                         State                                      836          555
                                                               --------     --------
                            Total deferred tax liabilities        9,357        4,419
                                                               --------     --------
                            Net deferred tax asset             $  2,764     $  7,637
                                                               ========     ========
</TABLE>

                       A summary of the change in the net deferred tax asset is
                       as follows:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                    1996         1995         1994
                       -----------------------------------------------------------------------------------------
                       <S>                                                    <C>          <C>          <C>
                       Balance at beginning of year                           $ 7,637      $ 5,270      $ 3,399
                       Deferred tax provision                                  (5,822)      (2,933)        (232)
                       Purchase accounting effects of leasehold
                         residual acquisition                                       -        6,907            -
                       Tax effects of net unrealized losses on investment
                         securities reflected in shareholders' equity             949       (1,607)       2,103
                                                                              -------      -------      -------
                       Balance at end of year                                 $ 2,764      $ 7,637      $ 5,270
                                                                              =======      =======      =======
</TABLE>




42
<PAGE>   44


--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       The tax effects of each type of income and expense item
                       that give rise to deferred tax assets and liabilities
                       are as follows:

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------------
                       December 31 (In thousands)                                                 1996         1995
                       ----------------------------------------------------------------------------------------------
                       <S>                                                                     <C>          <C>
                       Deferred tax assets:
                         Allowance for loan and lease losses                                   $  5,454     $  5,301
                         Investment in leasehold residual                                         4,354        5,654
                         Alternative minimum tax credit carryforward                              1,079          282
                         State net operating loss carryforward                                       40          261
                         Capital loss carryforwards                                                   -          208
                         Severance accrual                                                          368           96
                         Net unrealized losses on investment securities available for sale          586            -
                         Book reserves                                                              185          520
                         Other                                                                       55          276
                                                                                               --------     --------
                                                                                                 12,121       12,598
                         Valuation allowance                                                          -         (542)
                                                                                               --------     --------
                            Total deferred tax assets, net                                       12,121       12,056
                                                                                               --------     --------
                       Deferred tax liabilities:
                         Depreciation                                                               513          891
                         Deferred point income                                                      752          141
                         Mortgage servicing rights                                                1,009        1,041
                         Consumer lease financing                                                 5,986        1,368
                         Net unrealized gains on investment securities available for sale             -          363
                         Other                                                                    1,097          615
                                                                                               --------     --------
                            Total deferred tax liabilities                                        9,357        4,419
                                                                                               --------     --------
                            Net deferred tax asset                                             $  2,764     $  7,637
                                                                                               ========     ========
</TABLE>

                         The change in the valuation allowance applicable to
                       deferred tax assets is as follows:

<TABLE>
<CAPTION>
                       -------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                1996       1995       1994
                       -------------------------------------------------------------------------------
                       <S>                                                 <C>        <C>         <C>
                       Balance at beginning of year                        $ 542      $ 946      $ 708
                       Benefits generated by current year's operations      (542)      (325)       238
                       Benefits lost                                           -        (79)         -
                                                                           -----      -----      -----
                       Balance at end of year                              $   -      $ 542      $ 946
                                                                           =====      =====      =====
</TABLE>

                         SFAS No. 109 requires a valuation allowance against
                       deferred tax assets if, based on the weight of available
                       evidence, it is more likely than not that some or all of
                       the deferred tax assets will not be realized. In prior
                       years, the Company believed that uncertainty existed
                       with respect to future realization of a portion of its
                       capital loss carryforwards and with respect to deferred
                       Massachusetts state tax assets.  Therefore, the Company
                       had established a valuation allowance relating to net
                       operating and capital loss carryforwards. The valuation
                       allowance was reversed to the extent that capital gains
                       and ordinary income for state tax purposes in certain
                       subsidiaries were realized.





                                                                              43
<PAGE>   45

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       For CFX Bank and Orange Savings Bank, the base amounts
                       of federal  income tax reserves for  loan losses are
                       permanent differences for which there is no recognition
                       of deferred tax liabilities. However, the loan loss
                       allowance maintained for financial reporting purposes is
                       a temporary difference with allowable recognition of a
                       related deferred tax asset, if it is deemed realizable.

                         At December 31, 1996, retained earnings include tax
                       loan loss reserves of approximately $7,038,000 at the
                       base year for which no provision for income taxes has
                       been made. If, in the future, such amounts are used for
                       any purpose other than to absorb loan losses, the
                       Company will incur a tax liability at the current
                       applicable income tax rates. The Company anticipates
                       that the $7,038,000 of retained earnings will not be
                       used for any purpose that would result in the payment of
                       income taxes. The unrecognized deferred tax liability on
                       such amount at December 31, 1996 is approximately
                       $2,800,000.

                         The following is a reconciliation of the statutory
                       federal income tax rate applied to pre-tax accounting
                       income, with the effective income tax rate provided in
                       the consolidated statements of income:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (Dollars in thousands)   1996                        1995                       1994
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                Amount         Percent        Amount     Percent        Amount      Percent
                                      ------         -------        ------     -------        ------      -------
<S>                                   <C>            <C>           <C>         <C>           <C>          <C>
Income tax expense at the
  statutory rate                        $ 6,590        34%         $ 5,813        34%        $ 3,915         34%
Increase (decrease) resulting from:
  Tax-exempt interest income               (427)       (2)            (477)       (2)           (388)        (3)
  Goodwill and deposit base
     intangible amortization                199         1              212         1             232          2
  Nondeductible merger expenses             863         5               56         -               -          -
  State income taxes, net of
     federal income tax benefit             797         4              589         3             278          2
  Cash surrender value                     (332)       (2)               -         -               -          -
  Low income housing tax credits           (439)       (2)            (177)       (1)              -          -
  Change in valuation allowance            (542)       (3)            (325)       (2)            238          2
  Other, net                                 31         -               69         1              (3)         -
                                        -------        --          -------        --         -------         --
Income tax expense                      $ 6,740        35%         $ 5,760        34%        $ 4,272         37%
                                        =======        ==          =======        ==         =======         ==
</TABLE>

--------------------------------------------------------------------------------
NOTE N--PENSION AND 401(k) PLANS
--------------------------------------------------------------------------------
                       The Company's defined benefit pension plans and 401(k)
                       savings plan are summarized in the following tables:

                       --------------------------------------------------------
                       MULTI-EMPLOYER PENSION PLAN
                       --------------------------------------------------------
                       During 1996, CFX Corporation and its subsidiaries,
                       excluding Orange Savings Bank, terminated their defined
                       benefit pension plans, and transferred plan assets to a
                       multi-employer plan in amounts that would effectively
                       settle the plans' accumulated benefit obligations as of
                       January 1, 1996. As a result, the Company recognized
                       settlement and curtailment gains totaling $877,000 in
                       1996. Orange Savings Bank maintained its single-employer
                       defined benefit plan in the Savings Banks Employees
                       Retirement Association (SBERA) during 1996.

                         The multi-employer plan is a defined benefit pension
                       plan that covers all eligible employees of CFX
                       Corporation and its wholly-owned subsidiaries, excluding
                       Orange Savings Bank. Pension expense attributable to the
                       plan in 1996 was $479,000.





44
<PAGE>   46

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       SINGLE-EMPLOYER PENSION PLANS
                       ---------------------------------------------------------
                       The following table sets forth the funded status of
                       single-employer defined benefit plans and amounts
                       recognized in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>
                       --------------------------------------------------------------------------------------------
                       December 31 (In thousands)                                               1996         1995
                       --------------------------------------------------------------------------------------------
                       <S>                                                                    <C>         <C>
                       Actuarial present value of benefit obligations:
                         Accumulated benefit obligation, including vested
                            benefits of $592,000 in 1996 and $4,608,000 in 1995               $  (595)     $(4,997)
                                                                                              =======      =======
                       Projected benefit obligation for service rendered to date              $(1,031)     $(6,844)
                       Plan assets at fair value                                                  866        5,309
                                                                                              -------      -------
                       Projected benefit obligation in excess of plan assets                     (165)      (1,535)
                       Unrecognized net (gain) loss from past experience different
                         from that assumed and effects of changes in assumptions                 (167)         316
                       Prior service cost not yet recognized in net periodic pension cost           -          114
                       Unrecognized net assets at end of year                                     (17)         (97)
                                                                                              -------      -------
                       Accrued pension cost included in other liabilities                     $  (349)     $(1,202)
                                                                                              =======      =======
</TABLE>

                       Net pension expense attributable to these plans includes
                       the following components:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)              1996       1995       1994
                       ------------------------------------------------------------------------------
                       <S>                                              <C>         <C>        <C>
                       Service cost--benefits earned during
                         the period                                      $  74      $ 524      $ 553
                       Interest cost on projected benefit obligation        71        469        493
                       Actual return on plan assets                       (108)       (70)       (56)
                       Net amortization and deferral                        48       (383)      (361)
                                                                         -----      -----      -----
                       Net pension expense                               $  85      $ 540      $ 629
                                                                         =====      =====      =====
</TABLE>

                         Assumptions used in determining the actuarial present
                       value of the projected benefit obligation under these
                       plans, and the expected long-term rate of return on plan
                       assets, are as follows:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                       Year Ended December 31                                       1996          1995          1994
                       ------------------------------------------------------------------------------------------------
                       <S>                                                          <C>        <C>            <C>
                       Weighted average discount rates                              7.5%       7.25%-8.0%       8.0%
                       Annual salary increases                                      6.0%        5.0%-6.0%     5.0%-6.0%
                       Expected return on plan assets                               8.0%        7.5%-8.0%     7.0%-8.0%
</TABLE>

                       ---------------------------------------------------------
                       401(k) PLAN
                       ---------------------------------------------------------
                       The following table sets forth the Company's 401(k) plan
                       expense:

<TABLE>
<CAPTION>
                       --------------------------------------------------------------------
                       Year Ended December 31 (In thousands)        1996     1995     1994
                       --------------------------------------------------------------------
                       <S>                                          <C>      <C>      <C>
                       Matching contribution                        $264     $272     $129
                       Supplemental profit sharing contribution      326      318      328
                                                                    ----     ----     ----
                                                                    $590     $590     $457
                                                                    ====     ====     ====
</TABLE>





                                                                              45
<PAGE>   47

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE O--STOCK COMPENSATION PLANS
--------------------------------------------------------------------------------
                       At December 31, 1996, the Company has three stock-based
                       compensation plans which are described below. The
                       Company applies APB Opinion 25 and related
                       interpretations in accounting for the plans.
                       Accordingly, no compensation cost has been recognized
                       for the option plans. Had compensation cost for the
                       Company's stock-based compensation plans been determined
                       based on the fair value at the grant dates for awards
                       under those plans consistent with the method prescribed
                       by SFAS No. 123, the Company's net income and earnings
                       per share would have been reduced to the pro forma
                       amounts indicated below:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands, except per share data)                    1996       1995
                       ------------------------------------------------------------------------------------------------
                       <S>                                                                           <C>        <C>
                       Net income available to common stock:
                         As reported                                                                 $12,641    $11,249
                         Pro forma                                                                    12,472     10,619
                       Earnings per share:
                         As reported                                                                 $   .99    $   .89
                         Pro forma                                                                       .97        .84
</TABLE>

                       --------------------------------------------------------
                       FIXED STOCK OPTION PLANS
                       --------------------------------------------------------
                          The Company has a 1996 and a 1995 stock option plan
                       (the Option Plans) whereby options may be granted to
                       certain key employees and directors of the Company and
                       its subsidiaries to purchase shares of common stock of
                       the Company at a price not less than fair value at the
                       date of grant.

                          Both incentive stock options and nonqualified stock
                       options may be granted pursuant to the Option Plans. A
                       total of 658,000 shares of authorized but unissued
                       common stock of the Company has been reserved for
                       issuance pursuant to incentive stock options granted
                       under the Option Plans, and 443,000 shares of authorized
                       but unissued common stock have been reserved for
                       issuance pursuant to nonqualified stock options granted.
                       The options are exercisable over a period not to exceed
                       ten years from the date of grant.

                          The fair value of each option grant is estimated on
                       the date of grant using the Black - Scholes
                       option-pricing model with the following weighted average
                       assumptions used in 1996 and 1995, respectively:
                       dividend yield of 5.5% and 5.2%; expected volatility of
                       29%; risk-free interest rates of 5.8% and 5.4%; and
                       expected lives of 6.9 years for both periods.

                          Changes in the status of options are summarized as
                       follows:

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------------
                       December 31 (Options in thousands)         1996                   1995                  1994
                       ------------------------------------------------------------------------------------------------------
                                                                       Weighted               Weighted              Weighted
                                                                        Average                Average               Average
                                                                        Exercise               Exercise             Exercise
                                                            Options      Price     Options      Price     Options    Price
                       ------------------------------------------------------------------------------------------------------
                       <S>                                 <C>          <C>       <C>          <C>       <C>         <C>
                       Outstanding at beginning of year      $ 961      $  9.36       728      $  7.26      794      $ 6.63
                       Granted                                  88        13.89       352        13.12      134        8.21
                       Exercised                              (312)        6.25      (119)        7.50     (151)       6.02
                       Cancelled                                (3)       12.07         -         -         (49)       9.86
                                                           -------                -------                ------
                       Outstanding at end of year              734      $ 11.24       961      $  9.36      728      $ 7.26
                                                           =======      =======   =======      =======   ======      ======
                       Exercisable at end of year              713      $ 11.37       928      $  9.37      715      $ 7.29
                                                           =======      =======   =======      =======   ======      ======
                       Weighted average fair value of
                         options granted during the year       $ 17.01                  $16.05                   N/A
</TABLE>

                         Information pertaining to options outstanding at
                         December 31, 1996 is as follows:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------------------------------
                       (Options in thousands)            Options Outstanding                     Options Exercisable
                       -----------------------------------------------------------------------------------------------
                                                              Weighted         Weighted                      Weighted
                                                              Average           Average                       Average
                         Range of                            Remaining         Exercise                      Exercise
                       Exercise Prices      Number        Contractual Life       Price         Number          Price
                       -----------------------------------------------------------------------------------------------
                       <S>                    <C>             <C>               <C>              <C>           <C>
                       $4.49 - $8.91          293             4.84 years        $ 7.86           272           $ 7.95
                        9.27 - 13.61          217             7.50               12.65           217            12.65
                          14.29               224             8.94               14.29           224            14.29
                                            -------                                            -------
                                              734             6.88 years        $11.24           713           $11.37
                                            =======                                            =======
</TABLE>
                       ---------------------------------------------------------
                       EMPLOYEE STOCK PURCHASE PLAN
                       ---------------------------------------------------------
                       The Company has an employee stock purchase plan (the
                       Stock Purchase Plan) whereby employees of the Company
                       and its subsidiaries with more than one-half year of
                       continuous service, except for certain employees with
                       substantial stock interests in the Company or with
                       substantial rights to purchase common stock, may
                       purchase up to an aggregate of 183,000 shares of the
                       Company's common stock.

                         Eligible employees have the right to purchase common
                       stock by authorizing payroll deductions of up to seven
                       percent of their base salary. The Stock Purchase Plan
                       provides for periodic offerings at a purchase price
                       which would not be less than the lesser of (1) 90% of
                       the fair value per share on the offering date or (2) 90%
                       of the fair value per share on the date of exercise. The
                       Board of Directors of the Company may change the option
                       price for subsequent offerings by increasing the
                       percentage of fair value to a percentage not greater
                       than 100% or decreasing the percentage of fair value to
                       a percentage not less than 85%. Purchase discounts have
                       not been material to date and, accordingly, no
                       compensation cost has been recognized.





46
<PAGE>   48
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
NOTE P--COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
                       In the ordinary course of business, there are
                       outstanding commitments and contingencies which are not
                       reflected in the accompanying consolidated financial
                       statements.

                       ---------------------------------------------------------
                       EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
                       ---------------------------------------------------------
                       The Company has entered into employment agreements with
                       three senior executives. The agreements provide for
                       automatic one-year extensions unless either party elects
                       to limit the agreement to its then existing term, and
                       generally provide for a specified minimum annual
                       compensation and the continuation of benefits currently
                       received, including provisions following a "Change of
                       Control." However, such employment may be terminated for
                       cause, as defined, without incurring any continuing
                       obligations. In addition to the above agreements, the
                       Company has entered into special termination agreements
                       with certain additional senior executives. The
                       agreements generally provide for certain lump sum or
                       periodic severance payments following a "Change in
                       Control" as defined in the agreements.

                       ---------------------------------------------------------
                       INVESTMENT IN LIMITED PARTNERSHIPS
                       ---------------------------------------------------------
                       At December 31, 1996, the Company was committed to
                       invest $4,098,000 in seven real estate development
                       limited partnerships. At December 31, 1996 and 1995, the
                       Company had $2,493,000 and $937,000,  respectively,
                       invested in such partnerships, which are included in
                       other assets.

                       ---------------------------------------------------------
                       LEASE SECURITIZATION
                       ---------------------------------------------------------
                       In connection with the lease securitization transactions
                       completed by CFX Funding, the Company has guaranteed a
                       portion of the loss reserve accounts by executing
                       letters of credit arrangements with third party banks.
                       At December 31, 1996, the letters of credit amounted to
                       $1,716,000 and will reduce monthly and expire during the
                       period April 1998 through December 1998. The Company's
                       guarantees are secured by the equipment giving rise to
                       the securitizations.

                       ---------------------------------------------------------
                       MORTGAGE SERVICING RIGHTS
                       ---------------------------------------------------------
                       At December 31, 1996, the Company was committed to
                       purchase servicing rights for approximately $105,000,000
                       in mortgage loans for $1,300,000.

                       ---------------------------------------------------------
                       OPERATING LEASE COMMITMENTS
                       ---------------------------------------------------------
                       Pursuant to the terms of noncancelable lease agreements
                       in effect at December 31, 1996, pertaining to banking
                       premises and equipment, future minimum rent commitments
                       are as follows:

<TABLE>
<CAPTION>
                       ---------------------------------------------------------
                       Year Ending December 31 (In thousands)
                       ---------------------------------------------------------
                         <S>               <C>
                            1997           $   816
                            1998               673
                            1999               589
                            2000               449
                            2001               253
                         Thereafter            197
                                            ------
                                            $2,977
                                            ======
</TABLE>

                         Certain of the leases include options to renew for
                       periods ranging from 5 to 15 years. The cost of such
                       rentals is not  included above. Total rent expense for
                       the years ended December 31, 1996, 1995 and 1994
                       amounted to $640,000, $594,000 and $365,000,
                       respectively.

                       ---------------------------------------------------------
                       OTHER CONTINGENCIES
                       ---------------------------------------------------------
                       Various legal claims also arise from time to time in the
                       ordinary course of business which, in the opinion of
                       management, will have no material effect on the
                       Company's consolidated financial statements.





                                                                              47
<PAGE>   49

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE Q--RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
                       In the ordinary course of business, the Company makes
                       loans to directors, officers and their associates and
                       affiliated companies (related parties) at substantially
                       the same terms, including interest rates and collateral,
                       as those prevailing at the time of origination for
                       comparable transactions with other borrowers.

                         The total amounts due from directors, officers and
                       their associates were $3,560,000 and $11,344,000 at
                       December 31, 1996 and 1995, respectively. During the
                       year ended December 31, 1996, new loans totaling
                       $285,000 were made, and reductions were made to
                       outstanding loan balances totalling $8,069,000, of which
                       $1,054,000 was from repayments and $7,015,000 was
                       attributable to directors no longer being affiliated
                       with the Company.

                         During the year ended December 31, 1996, payments
                       amounting to $695,000 were made by  the Company to a
                       construction company in which a director holds a 100%
                       ownership interest, for renovations to banking
                       facilities. In addition, at December 31, 1996, the
                       Company was committed to pay $500,000 to this company
                       for further construction services.

--------------------------------------------------------------------------------
NOTE R--DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
                       The Company uses certain derivative financial
                       instruments in managing the interest rate risk included
                       in the consolidated balance sheet.

                         Derivative instruments are monitored regularly to
                       assess market price changes. On at least a monthly
                       basis, rate change analyses are done in order to assess
                       potential market risk in changing interest rate
                       environments. When the price volatility of derivative
                       instruments varies from the price volatility of assets
                       being hedged, positions are adjusted to maintain an
                       appropriate match.

                         The Company includes all off-balance sheet and
                       derivative positions in its analysis of interest rate
                       risk.  Increases and decreases of both 100 and 200 basis
                       points are analyzed in order to determine anticipated
                       changes in earnings and market values.

                         The detail on the specific financial instruments used
                       is as follows:

                       ---------------------------------------------------------
                       INTEREST RATE AGREEMENTS
                       ---------------------------------------------------------
                       Interest-rate swaps generally involve the exchange of
                       fixed and floating-rate interest obligations without the
                       exchange of the underlying principal amounts. The
                       Company typically becomes a principal in the exchange of
                       interest payments between the parties and, therefore, is
                       exposed to loss should one of the parties default. The
                       Company minimizes this risk by performing normal credit
                       reviews on its swap counterparties.  Notional principal
                       amounts often are used to express the volume of these
                       transactions, but the amounts potentially subject to
                       credit risk are much smaller.

                         Interest rate floor agreements provide for the receipt
                       of interest to the extent that the three-month LIBOR is
                       the specified rate.

                         At December 31, 1996 and 1995, interest rate agreements
                       were comprised of the following:

<TABLE>
<CAPTION>
                       ---------------------------------------------------------------------------------------------
                       (Dollars in thousands)
                       ---------------------------------------------------------------------------------------------
                           Assets              Interest           Interest        Notional    Maturity   Unrealized
                           Hedged              Received             Paid           Amount       Date        Gain
                       ---------------------------------------------------------------------------------------------
                       <S>                   <C>                  <C>              <C>         <C>           <C>
                       December 31, 1996
                       ---------------------------------------------------------------------------------------------
                       Variable rate          Fixed - 7.95%        Variable -      $ 5,000     12/16/97       $ 99
                         commercial loans                         3 mo. LIBOR
                       Variable rate            Variable -           N/A           $10,000     02/15/00       $174
                         commercial loans      LIBOR floor(6.25%)
                       Variable rate            Variable -           N/A           $10,000     06/03/99       $ 74
                         commercial loans      LIBOR floor(5.75%)
</TABLE>

<TABLE>
<CAPTION>
                       ---------------------------------------------------------------------------------------------
                       December 31, 1995
                       ---------------------------------------------------------------------------------------------
                       <S>                    <C>               <C>                <C>         <C>            <C>
                       Variable rate          Fixed - 7.95%        Variable -       $5,000     12/16/97       $254
                         commercial loans                       3 mo. LIBOR
                       Variable rate            Variable -           N/A           $10,000     02/15/00       $400
                         commercial loans      LIBOR floor(6.25%)
</TABLE>





48
<PAGE>   50
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                       ---------------------------------------------------------
                       FINANCIAL OPTION CONTRACTS
                       ---------------------------------------------------------
                       The Company periodically uses financial options to hedge
                       interest rate exposure generally on  secondary mortgage
                       market operations. Options are contracts that allow the
                       holder of the option  to purchase or sell a financial
                       instrument at a specified price within a specified
                       period of time. For most options transactions, the
                       Company uses recognized and centralized exchanges for
                       execution. These exchanges act as the counterparty to
                       all transactions, thereby minimizing the credit risk of
                       market participants. Option contracts are used
                       explicitly for hedge purposes and are not undertaken for
                       speculation. The Company's intent and general practice
                       is to liquidate option contract obligations before
                       stated exercise or delivery dates through established
                       market transactions. The Company does not generally
                       intend to deliver or receive the securities underlying
                       option contracts, but may execute delivery or receipt if
                       it is financially prudent to do so. At December 31,
                       1996, to hedge mortgage loans held for sale, the Company
                       held put options (the  option to sell securities at a
                       stated price within a specified term) on 30-year
                       treasury obligations totaling $4,000,000 and covered
                       call options on 5-year treasury obligations totaling
                       $10,000,000 extending through March 1997. The unrealized
                       gain on the option contracts at December 31, 1996 was
                       $189,000.

                       ---------------------------------------------------------
                       TRADING ACTIVITIES
                       ---------------------------------------------------------
                       In 1994, as mortgage-backed securities were purchased for
                       the trading portfolio, the Company assessed their price
                       volatility under varying interest rates. A hedge using a
                       combination of interest rate swap agreements, financial
                       futures contracts and financial option contracts was
                       constructed to closely resemble the volatility of the
                       underlying security. Derivatives held for trading
                       purposes, as well as the overall program for which they
                       were used, were liquidated in October, 1994.

                         Net gains (losses) on trading securities, included
                       separately in the consolidated statements of income, are
                       summarized as follows:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------
                       Year Ended December 31
                       (In thousands)                    1996       1995         1994
                       -----------------------------------------------------------------
                       <S>                            <C>         <C>          <C>
                       Mortgage-backed securities     $     -     $     -      $(2,985)
                       Other debt securities                -           -           (4)
                       Equity securities                  564       1,092          271
                       Futures, options and swaps           -           -        2,461
                                                      -------     -------      -------
                                                      $   564     $ 1,092      $  (257)
                                                      =======     =======      =======
</TABLE>





                                                                              49
<PAGE>   51
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE S--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK
--------------------------------------------------------------------------------
                       In addition to using derivative financial instruments to
                       manage interest rate risk (see Note R), the Company is
                       party to  financial instruments with off-balance sheet
                       risk in the normal course of business to meet the
                       financing needs of its customers. These financial
                       instruments include commitments to extend credit,
                       standby letters of credit and forward delivery
                       contracts. These instruments involve, to varying
                       degrees, elements of credit and interest-rate risk in
                       excess of the amount recognized in the consolidated
                       balance sheet.

                         The Company's exposure to credit loss for commitments
                       to extend credit and standby letters of credit is
                       represented by the contractual amount of these specific
                       instruments. The Company uses the same credit policies
                       in making these commitments and conditional obligations
                       as it does for on-balance sheet instruments.

                         At December 31, 1996 and 1995, the following financial
                       instruments were outstanding:

<TABLE>
<CAPTION>
                       -----------------------------------------------------------------------------------------------
                                                                                                     Contract or
                                                                                                  Notional Amount
                       -----------------------------------------------------------------------------------------------
                       December 31 (In thousands)                                                 1996         1995
                       -----------------------------------------------------------------------------------------------
                       <S>                                                                      <C>         <C>
                       Financial instruments for which contract
                         amounts represent credit risk:
                         Commitments to originate and purchase loans                            $ 56,043     $ 63,298
                         Unadvanced funds on lines of credit                                     115,978       78,205
                         Standby letters of credit                                                 1,840        2,566
                       Financial instruments for which contract amounts exceed credit risk:
                         Outstanding forward delivery contracts                                   94,888      128,182
</TABLE>

                          A commitment to extend credit is an agreement to
                       provide financing to a customer contingent upon
                       compliance with all conditions established in the
                       contract. A commitment generally has a fixed expiration
                       date or other termination clause and may require payment
                       of a fee. Since many of the commitments are expected to
                       expire without being drawn upon, the total commitment
                       amount does not necessarily represent future cash
                       requirements. The Company evaluates each customer's
                       credit worthiness on an individual basis. The amount of
                       collateral obtained, if deemed necessary upon extension
                       of credit, is based on management's evaluation of the
                       counterparty. The collateral held varies but may include
                       cash, accounts receivable, inventory, property, plant
                       and equipment, income-producing commercial properties,
                       and residential real estate.

                         Standby letters of credit are conditional commitments
                       issued by the Company to guarantee the performance of a
                       customer to a third party. These commitments are
                       primarily issued to support private borrowing
                       arrangements on a short-term basis. The credit risk
                       involved in issuing letters  of credit is essentially
                       the same as that involved in extending loan facilities
                       to customers.

                         Forward delivery contracts are contracts for delayed
                       delivery of mortgage loans or mortgage- backed
                       securities in which  the Company agrees to make delivery
                       at a specified future date of a specified instrument, at
                       a specified price or yield. Credit risk to the Company
                       arises from the possible inability of counterparties to
                       meet the terms of their contracts. In the event of
                       nonacceptance by the counterparty, the Company would be
                       subject to the credit risk of the loans retained. These
                       loans would have been originated in the ordinary course
                       of business complying with the Company's standard credit
                       evaluation and collateral requirements. Failure to
                       fulfill delivery requirements for these contracts may
                       result in payment of fees to certain investors.





50
<PAGE>   52

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE T--FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
                       SFAS No. 107, "Disclosures about Fair Value of Financial
                       Instruments," requires disclosure of estimated fair
                       values of all financial instruments where it is
                       practicable to estimate such values.  In cases where
                       quoted market prices are not available, fair values are
                       based on estimates using present value or other
                       valuation techniques. Those techniques are significantly
                       affected by the assumptions used, including the discount
                       rate and estimates of future cash flows. Accordingly,
                       the derived fair value estimates cannot be substantiated
                       by comparison to independent markets and, in many cases,
                       could not be realized in immediate settlement of the
                       instrument. SFAS No. 107  excludes certain financial
                       instruments and all nonfinancial instruments from its
                       disclosure requirements. Accordingly, the aggregate fair
                       value amounts presented do not represent the underlying
                       value of the Company.

                         The following methods and assumptions were used by the
                       Company in estimating fair value disclosures for
                       financial instruments:

                       CASH AND CASH EQUIVALENTS: The carrying amounts of cash
                       and short-term instruments approximate fair values.

                       INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying
                       values of interest bearing deposits with other banks
                       approximate fair values.

                       RESTRICTED SECURITIES: The carrying values of Federal
                       Home Loan Bank  of Boston and Federal Reserve Bank of
                       Boston stock approximate fair value, based on redemption
                       provisions.

                       INVESTMENT SECURITIES: Fair values of all other
                       investment securities are based on quoted market prices.

                       MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage
                       loans held for sale are determined  taking into
                       consideration commitments on hand from investors and
                       prevailing market prices.

                       LOANS AND LEASES (LOANS): Fair values of variable-rate
                       loans that reprice frequently and have no significant
                       change in credit risk, are based on carrying values.
                       Fair values for other loans are estimated using
                       discounted cash flow analyses which use interest rates
                       currently being offered for loans with similar terms to
                       borrowers of similar credit quality.

                       DEPOSITS: Fair values disclosed for demand deposits
                       (non-interest bearing deposits, savings and certain
                       types of money market accounts) are, by definition,
                       equal to the amount payable on demand at the reporting
                       date (i.e., their carrying amounts). Fair values for
                       fixed-rate certificates of deposit are estimated using a
                       discounted cash flow calculation that applies interest
                       rates currently being offered on certificates to a
                       schedule of aggregated expected monthly maturities on
                       time deposits.

                       SHORT-TERM BORROWED FUNDS: The carrying amounts of
                       borrowings under repurchase agreements and other
                       short-term borrowings approximate their fair values.

                       ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON: The
                       carrying amounts of advances from the Federal Home Loan
                       Bank of Boston maturing within 90 days approximate their
                       fair values. The fair values of other advances are
                       estimated using discounted cash flow analyses based on
                       the Company's current incremental borrowing rates for
                       similar types of advances.

                       ACCRUED INTEREST: The carrying amounts of accrued
                       interest approximate fair value.

                       OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options,
                       swaps and interest rate agreements are based on quoted
                       market prices. Fair values for off-balance-sheet lending
                       commitments are based on fees currently charged to enter
                       into similar agreements, taking into account the
                       remaining terms of the agreements and the
                       counterparties' credit standing.





                                                                              51
<PAGE>   53

--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       The estimated fair values, and related carrying amounts
                       or notional amounts, of the Company's   financial
                       instruments are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31 (In thousands)                                    1996                              1995
--------------------------------------------------------------------------------------------------------------
                                                   CARRYING         FAIR            CARRYING            FAIR
                                                     AMOUNT         VALUE             AMOUNT           VALUE
--------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>              <C>             <C>
Financial assets:
  Cash and cash equivalents                       $    50,404     $    50,404      $    46,893     $    46,893
  Interest bearing deposits with other banks              197             197           13,475          13,475
  Securities available for sale                       245,324         245,324          201,246         201,246
  Securities held to maturity                          32,670          32,831           97,093          98,142
  Mortgage loans held for sale                         15,212          15,302            7,085           7,196
  Loans and leases, net                             1,102,424       1,096,876          911,981         919,184
  Accrued interest receivable                           9,741           9,741           10,218          10,218
Financial liabilities:
  Deposits                                          1,157,207       1,159,738        1,056,824       1,058,869
  Short-term borrowed funds                            67,374          67,374           44,012          44,012
  Advances from the Federal Home
     Loan Bank of Boston                              175,081         175,050          102,814         102,877
  Accrued interest payable                              3,834           3,834            1,908           1,908
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                    NOTIONAL            FAIR          NOTIONAL          FAIR
                                                     AMOUNT            VALUE           AMOUNT           VALUE
--------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>            <C>                <C>
Unrecognized financial instruments:
  Commitments to originate and
     purchase loans                                    56,043            (260)          63,298            (145)
  Standby letters of credit                             1,840              (2)           2,566             (15)
  Unadvanced funds on lines of credit                 115,978            (558)          78,205            (304)
  Interest-rate swap agreements                         5,000              99            5,000             254
  Financial option contracts (long position)            4,000              37                -               -
  Financial option contracts (short position)          10,000             152                -               -
  Interest-rate floor agreements                       20,000             248           10,000             400
</TABLE>





52
<PAGE>   54

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE U--REGULATORY CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
--------------------------------------------------------------------------------
                       The Company (on a consolidated basis) and each Bank (on
                       a consolidated basis) are subject to various regulatory
                       capital requirements administered by the federal banking
                       agencies. Failure to meet minimum capital requirements
                       can initiate certain mandatory and possibly additional
                       discretionary actions by regulators that, if undertaken,
                       could have a direct material effect on the Company's and
                       Banks' financial statements. Under capital adequacy
                       guidelines and the regulatory framework for prompt
                       corrective action, the Company and the Banks must meet
                       specific capital guidelines that involve quantitative
                       measures of their assets, liabilities and certain
                       off-balance sheet items as calculated under regulatory
                       accounting practices. The capital amounts and
                       classification are also subject to qualitative judgments
                       by the regulators about components, risk weightings, and
                       other factors.

                         Quantitative measures established by regulation to
                       ensure capital adequacy require the Company and the
                       Banks to maintain minimum amounts and ratios (set forth
                       in the following table) of total and Tier 1 capital (as
                       defined) to average assets (as defined). Management
                       believes, as of December 31, 1996, that the Company and
                       the Banks meet all capital adequacy requirements to
                       which they are subject.

                         As of December 31, 1996, the most recent notifications
                       from the Federal Reserve Board and the Federal Deposit
                       Insurance Corporation categorized the Company and the
                       Banks as well capitalized under the regulatory framework
                       for prompt corrective action. To be categorized as well
                       capitalized, they must maintain minimum total
                       risk-based, Tier 1 risk-based and Tier 1 leverage ratios
                       as set forth in the following table. There are no
                       conditions or events since the notifications that
                       management believes have changed these categories. The
                       Company's and the Banks' actual capital amounts and
                       ratios are also presented in the table.

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                                                                                                        Minimum
                                                                                                        To Be Well
                                                                                  Minimum           Capitalized Under
                                                                                  For Capital       Prompt Corrective
                                                               Actual         Adequacy Purposes      Action Provisions
                       ------------------------------------------------------------------------------------------------
                       December 31, 1996 (In thousands)  Amount     Ratio     Amount      Ratio      Amount     Ratio
                       ------------------------------------------------------------------------------------------------
                       <S>                               <C>         <C>      <C>        <C>         <C>        <C>
                       Total capital to risk-weighted
                         assets:
                            Consolidated                 $136,210    14.8%    $  73,875   8.0%       $ 92,344   10.0%
                            CFX Bank                       86,845    12.2        57,110   8.0          71,388   10.0
                            Safety Fund National Bank      24,345    13.9        14,048   8.0          17,560   10.0
                            Orange Savings Bank            10,108    20.9         3,859   8.0           4,823   10.0
                       ------------------------------------------------------------------------------------------------
                       Tier 1 capital to risk-weighted
                         assets:
                            Consolidated                  124,615    13.5        36,938   4.0          55,407    6.0
                            CFX Bank                       78,912    11.0        28,555   4.0          42,833    6.0
                            Safety Fund National Bank      22,090    12.6         7,024   4.0          10,536    6.0
                            Orange Savings Bank             9,503    19.7         1,929   4.0           2,894    6.0
                       ------------------------------------------------------------------------------------------------
                       Tier 1 capital to average assets:
                         Consolidated                     124,615     8.0        62,323 - 4.0 -        77,903    5.0
                                                                                 77,903   5.0
                         CFX Bank                          78,912     6.8        46,406 - 4.0 -        58,008    5.0
                                                                                 58,008   5.0
                         Safety Fund National Bank         22,090     7.0        12,568 - 4.0 -        15,710    5.0
                                                                                 15,710   5.0
                         Orange Savings Bank                9,503     9.8         3,870 - 4.0 -         4,837    5.0
                                                                                  4,837   5.0
</TABLE>

                         Certain restrictions exist regarding the ability of
                       the Banks to transfer funds to the Company in the form
                       of cash dividends, loans and advances. Applicable rules
                       prohibit the payment of a cash dividend by the Banks if
                       the effect thereof would cause the net worth of the
                       Banks to be reduced below applicable net worth
                       requirements.

                         Accordingly, $62,844,000 of the Company's equity in
                       the net assets of the Banks was restricted at December
                       31, 1996.

                         Under Federal Reserve regulations, the Banks are also
                       limited as to the amount they may loan to the Company,
                       unless such loans are collateralized by specified
                       obligations. At December 31, 1996, the maximum amount
                       available for transfer from the Banks to the Company in
                       the form of loans approximated $12,625,000.





                                                                              53
<PAGE>   55
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
NOTE V-- MORTGAGE LOAN SERVICING
--------------------------------------------------------------------------------
                       Mortgage loans serviced for others are not included in
                       the accompanying consolidated balance sheets. The unpaid
                       principal balances of mortgage loans serviced for others
                       were $765,000,000   and $672,000,000 at December 31,
                       1996 and 1995, respectively.

                         Substantially all loans serviced for others were sold
                       without recourse provisions.

                         The following is an analysis of the changes in mortgage
                       servicing rights:

<TABLE>
<CAPTION>
                       --------------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                       1996          1995         1994
                       --------------------------------------------------------------------------------------------
                       <S>                                                       <C>          <C>          <C>
                       Balance at beginning of year                              $ 4,373      $ 4,207      $ 4,557
                       Additions                                                   1,826          682          406
                       Sales                                                           -            -         (126)
                       Amortization                                                 (886)        (516)        (630)
                                                                                 -------      -------      -------
                       Balance at end of year                                    $ 5,313      $ 4,373      $ 4,207
                                                                                 =======      =======      =======
</TABLE>

                         At December 31, 1996 and 1995, the fair value of
                       capitalized mortgage servicing rights was $7,848,000 and
                       $5,696,000, respectively. There was no activity in the
                       valuation allowances for mortgage servicing rights for
                       the years ended December 31, 1996 and 1995.

--------------------------------------------------------------------------------
NOTE W--SUBSEQUENT EVENT
--------------------------------------------------------------------------------
                       On February 13, 1997, the Company signed a definitive
                       agreement to acquire all of the outstanding capital
                       stock of Portsmouth Bank Shares, Inc. (Portsmouth), a
                       New Hampshire bank holding company, headquartered in
                       Portsmouth, NH.

                         Pursuant to the definitive agreement each of
                       Portsmouth's outstanding shares of common stock has the
                       potential to be converted into .95 shares of the
                       Company's common stock. The actual number of shares of
                       the Company's common stock issuable in the transaction
                       is subject to adjustment based on the average price of
                       the Company's common stock for the ten trading days
                       immediately  before the Company receives the last
                       regulatory approval required to consummate the
                       transaction. In the event that the average price of the
                       Company's common stock is below $15.70, the exchange
                       ratio becomes 1.05 shares; and the exchange ratio floats
                       between .95 and 1.05 shares if the average price of the
                       Company's common stock is between $17.375 and $15.70.
                       Portsmouth has the right to terminate the agreement if
                       the average price of the Company's common stock is below
                       $14.20 per share unless the Company agrees to increase
                       the exchange ratio.

                         The transaction is tax free to the owners of
                       Portsmouth and is subject to regulatory approval and the
                       approval of both the Company's and Portsmouth's
                       shareholders. It is anticipated that the transaction
                       will be accounted for by the pooling-of-interests method
                       of accounting.

                         At December 31, 1996, Portsmouth had (unaudited) total
                       assets of $272 million, deposits of   $198 million and
                       stockholders' equity of $66 million.

                         Portsmouth's bank subsidiary, Portsmouth Savings Bank,
                       operates 3 full service offices in Portsmouth, North
                       Hampton and Greenland, New Hampshire.

                         On March 24, 1997, the Company entered into a
                       definitive agreement to acquire all of the outstanding
                       capital stock of Community Bankshares, Inc. (Community),
                       a New Hampshire bank holding company, headquartered in
                       Concord, New Hampshire. Pursuant to the definitive
                       agreement, each outstanding share of Community common
                       stock will be converted into 2.20 shares of CFX common
                       stock. If the average price of CFX common stock for the
                       fifteen days preceding the closing date is between
                       $18.18 and $20.00, the exchange ratio floats between 2.2
                       and 2.0 shares. Community may terminate the agreement if
                       the average price of CFX common stock is below $13.50
                       per share unless CFX agrees to increase the exchange
                       ratio.

                         The transaction is tax free to the owners of Community
                       and is subject to regulatory approval and the approval
                       of both the Company's and Community's shareholders. It
                       is anticipated that the transaction will be accounted for
                       by the pooling-of-interests method of accounting.

                         At December 31, 1996, Community had (unaudited) total
                       assets of $550 million, deposits of $396 million and
                       stockholder's equity of $41 million.

                         Community's bank subsidiaries, Concord Savings Bank,
                       headquartered in Concord, New Hampshire and Centerpoint
                       Bank, headquartered in Bedford, New Hampshire, operate
                       11 branches located in Merrimack, Hillsborough, Belknap
                       and Rockingham Counties.

                         In the event that, prior to the closings, the
                       outstanding shares of the Company's common stock or
                       Portsmouth's common or Community's common stock shall
                       have been increased due to a stock dividend declared on
                       the respective stock with a record date prior to the
                       closings, then appropriate and apportionate adjustments
                       shall be made in the number of shares exchanged.




54
<PAGE>   56
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE X--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                       Balance Sheets
                       -----------------------------------------------------------------------------
                       December 31 (In thousands)                               1996         1995
                       -----------------------------------------------------------------------------
                       <S>                                                    <C>          <C>
                       Assets
                         Cash and due from banks                              $    199     $  1,174
                         Interest bearing deposits with bank subsidiaries        2,481        2,611
                         Securities held to maturity                               320          577
                         Receivables from subsidiaries                           7,992        8,233
                         Investment in bank subsidiaries                       118,841      116,191
                         Other assets                                            5,661        2,670
                                                                              --------     --------
                                                                              $135,494     $131,456
                                                                              ========     ========


                       Liabilities                                            $  2,541     $  4,424
                       Shareholders' Equity                                    132,953      127,032
                                                                              --------     --------
                                                                              $135,494     $131,456
                                                                              ========     ========
</TABLE>

<TABLE>
<CAPTION>
                       Statements of Income
                       ----------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                   1996         1995       1994
                       ----------------------------------------------------------------------------------------
                       <S>                                                  <C>          <C>           <C>
                       Interest and dividend income                         $    258     $    340      $    289
                       Dividends from subsidiaries                            10,639        4,461         5,490
                       Gain on sale of investment securities                       -           28             -
                                                                            --------     --------      --------
                                                                              10,897        4,829         5,779
                       General and administrative expenses                     2,020          891         1,022
                                                                            --------     --------      --------
                       Income before income taxes and equity in
                         undistributed net income of subsidiaries              8,877        3,938         4,757
                       Income tax expense (benefit)                               38         (141)         (345)
                                                                            --------     --------      --------
                       Income before equity in undistributed net income
                         of subsidiaries                                       8,839        4,079         5,102
                       Equity in undistributed net income
                         of subsidiaries                                       3,802        7,259         2,142
                                                                            --------     --------      --------
                              Net Income                                    $ 12,641     $ 11,338      $  7,244
                                                                            ========     ========      ========
</TABLE>





                                                                              55
<PAGE>   57
--------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                       STATEMENTS OF CASH FLOWS
                       --------------------------------------------------------------------------------------------------
                       Year Ended December 31 (In thousands)                          1996          1995           1994
                       --------------------------------------------------------------------------------------------------
                       <S>                                                          <C>           <C>           <C>
                       OPERATING ACTIVITIES
                         Net income                                                 $ 12,641      $ 11,338      $  7,244
                         Adjustments to reconcile net income to
                            net cash provided by operating activities:
                               Net deferred income tax provision (benefit)                 -             7          (111)
                               Gain on sale of investment securities                       -           (28)            -
                               Equity in undistributed net income
                                  of subsidiaries                                     (3,802)       (7,259)       (2,142)
                               Net change in other assets and other liabilities       (1,789)       (2,140)        2,532
                                                                                    --------      --------      --------
                                  Net Cash Provided
                                     by Operating Activities                           7,050         1,918         7,523
                                                                                    --------      --------      --------
                       INVESTING ACTIVITIES
                         Capital contribution to subsidiary                                -          (200)            -
                         Net decrease (increase) in interest
                            bearing deposits with bank subsidiaries                      130         8,775        (3,630)
                         Decrease (increase) in receivables from subsidiaries            241        (7,940)          110
                         Purchases of securities available for sale                        -             -        (1,027)
                         Proceeds from sales of securities available for sale              -         1,075             -
                         Purchases of securities held to maturity                          -             -        (3,002)
                         Proceeds from maturities of securities
                            held to maturity                                             257            18         3,275
                         Purchase of bank-owned life insurance                        (3,250)            -             -

                                  NET CASH PROVIDED (USED)                          --------      --------      --------
                                     BY INVESTING ACTIVITIES                          (2,622)        1,728        (4,274)
                                                                                    --------      --------      --------
                       FINANCING ACTIVITIES
                         Common cash dividends paid                                   (7,067)       (4,654)       (3,642)
                         Preferred cash dividends paid                                     -           (89)         (268)
                         Proceeds from issuance of common stock                        2,109         1,267         1,127
                         Payments on fractional shares                                   (26)          (18)          (20)
                         Acquisition of treasury shares                                 (419)            -             -
                                  NET CASH USED
                                                                                    --------      --------      --------
                                     BY FINANCING ACTIVITIES                          (5,403)       (3,494)       (2,803)
                                                                                    --------      --------      --------

                                  INCREASE (DECREASE) IN CASH
                                     AND CASH EQUIVALENTS                               (975)          152           446
                       Cash and cash equivalents at beginning of year                  1,174         1,022           576

                                  CASH AND CASH EQUIVALENTS                         --------      --------      --------
                                     AT END OF YEAR                                 $    199      $  1,174      $  1,022
                                                                                    ========      ========      ========
</TABLE>





56
<PAGE>   58
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE Y--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
                       The following is a summary of the consolidated quarterly
                       results of operations for the years ended December 31,
                       1996 and 1995:

<TABLE>
<CAPTION>
                       ----------------------------------------------------------------------------------------
                       Three Months Ended                      March 31      June 30      Sept. 30      Dec. 31
                       ----------------------------------------------------------------------------------------
                                                                    (In thousands, except per share data)
                       ----------------------------------------------------------------------------------------
                       1996
                       ----------------------------------------------------------------------------------------
                       <S>                                     <C>          <C>          <C>           <C>
                       Interest and dividend income            $ 25,740     $ 26,892     $ 27,416      $ 28,377
                       Interest expense                          12,039       12,573       13,005        13,949
                                                               --------     --------     --------      --------
                       Net interest and dividend income          13,701       14,319       14,411        14,428
                       Provision for loan and lease losses          905          750          680           600
                       Trading securities gains, net                153            -            -           411
                       Investment securities gains, net              57          146          (13)          (43)
                       Other income (2 & 3)                       3,622        3,846        4,428         4,220
                       Other expenses (1)                        11,577       11,450       16,587        11,756
                                                               --------     --------     --------      --------
                       Income before income taxes                 5,051        6,111        1,559         6,660
                       Income taxes                               1,496        2,098        1,108         2,038
                                                               ========     ========     ========      ========
                       Net income                              $  3,555     $  4,013     $    451      $  4,622
                                                               ========     ========     ========      ========
                       Earnings per common share               $    .28     $    .31     $    .04      $    .36
                                                               ========     ========     ========      ========

                       ----------------------------------------------------------------------------------------
                       1995
                       ----------------------------------------------------------------------------------------
                       Interest and dividend income            $ 22,875     $ 23,963     $ 24,499      $ 25,053
                       Interest expense                          10,262       11,100       11,460        11,542
                                                               --------     --------     --------      --------
                       Net interest and dividend income          12,613       12,863       13,039        13,511
                       Provision for loan and lease losses          705          953          625           754
                       Trading securities gains, net                224          294          273           301
                       Investment securities gains, net               3          106           73            22
                       Other income                               2,938        3,440        3,354         3,283
                       Other expenses (4)                        11,677       11,589       11,261        11,675
                                                               --------     --------     --------      --------
                       Income before income taxes                 3,396        4,161        4,853         4,688
                       Income taxes                               1,204        1,406        1,624         1,526
                                                               --------     --------     --------      --------
                       Net income                                 2,192        2,755        3,229         3,162
                       Preferred stock dividends                     67           22            -             -
                                                               --------     --------     --------      --------
                       Net income available to
                         common stock                          $  2,125     $  2,733     $  3,229      $  3,162
                                                               ========     ========     ========      ========
                       Earnings per common share               $    .17     $    .21     $    .26      $    .25
                                                               ========     ========     ========      ========
</TABLE>

                       (1)        For the quarter ended September 30, 1996, the
                                  Company recorded costs related to the mergers
                                  of Safety Fund and Milford totaling
                                  $4,522,000, and costs associated with a SAIF
                                  special assessment of $691,000.

                       (2)        For the quarter ended September 30, 1996, the
                                  Company terminated CFX Corporation's and
                                  Safety Fund's pension plans and transferred
                                  the assets and liabilities to a
                                  multi-employer pension plan.  A gain from the
                                  settlement of the pension plan was recorded
                                  totaling $877,000.

                       (3)        For the quarter ended December 31, 1996, the
                                  Company recorded $411,000 in gains on trading
                                  securities on an investment purchased and
                                  sold during the same quarter.

                       (4)        For the quarter ended September 30, 1995, the
                                  Company received a $424,000 insurance premium
                                  refund from the Federal Deposit Insurance
                                  Corporation (FDIC). In addition, for the
                                  quarter ended December 31, 1995 the insurance
                                  premiums paid to the FDIC were significantly
                                  reduced.



                                                                              57
<PAGE>   59
--------------------------------------------------------------------------------
Report of Management--Assessment of Internal Controls Over Financial Reporting
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       Management is responsible for establishing and
                       maintaining an effective internal control structure over
                       financial reporting presented in conformity with both
                       generally accepted accounting principles and the Federal
                       Financial Institutions Examination Council instructions
                       for Consolidated Reports of Condition and Income (call
                       report instructions). The structure contains monitoring
                       mechanisms, and actions are taken to correct
                       deficiencies identified.

                         There are inherent limitations in the effectiveness of
                       any structure of internal control, including the
                       possibility of  human error and the circumvention or
                       overriding of controls. Accordingly, even an effective
                       internal control structure can provide only reasonable
                       assurance with respect to financial statement
                       preparation. Further, because of changes in conditions,
                       the effectiveness of an internal control structure may
                       vary over time.

                         Management assessed the Company's internal control
                       structure over financial reporting presented in
                       conformity with both generally accepted accounting
                       principles and call report instructions as of December
                       31, 1996. This assessment was based on criteria for
                       effective internal control over financial reporting
                       described in "Internal Control - Integrated Framework"
                       issued by the Committee of Sponsoring Organizations of
                       the Treadway Commission. Based on this assessment,
                       management believes that, as of December 31, 1996, CFX
                       Corporation and subsidiaries maintained an effective
                       internal control structure over financial reporting
                       presented in conformity with both generally accepted
                       accounting principles and call report instructions.





<TABLE>
                       <S>                                <C>                                   <C>
                       Peter J. Baxter                    Mark A. Gavin                         Gregg R. Tewksbury
                       President and Chief                Chief Operating Officer               Chief Financial Officer
                       Executive Officer
</TABLE>



58
<PAGE>   60
--------------------------------------------------------------------------------
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       To the Board of Directors and Shareholders of CFX
                       Corporation:

                       We have audited the accompanying consolidated balance
                       sheets of CFX Corporation and subsidiaries as of
                       December 31, 1996 and 1995, and the related consolidated
                       statements of income, shareholders' equity and cash
                       flows for each of the years in the three-year period
                       ended December 31, 1996. These financial statements are
                       the responsibility of the Company's management. Our
                       responsibility is to express an opinion on these
                       financial statements based on our audits.

                         The consolidated financial statements as of December
                       31, 1995, and for the years ended December 31, 1995 and
                       1994  have been restated to reflect the pooling of
                       interests with The Safety Fund Corporation and Milford
                       Co/operative Bank as described in Note B to the
                       consolidated financial statements. We did not audit the
                       1995 and 1994 financial statements of The Safety Fund
                       Corporation, which statements reflect total assets of
                       $287,483,000 as of December 31, 1995 and net interest
                       and dividend income of $13,816,000 and $12,036,000 for
                       the years ended December 31, 1995 and 1994,
                       respectively. Those statements were audited by other
                       auditors whose reports have been furnished to us, and
                       our opinion, insofar as it relates to the amounts
                       included for The Safety Fund Corporation as of December
                       31, 1995 and for the years ended December 31, 1995 and
                       1994 is based solely on the reports of other auditors.

                         The consolidated financial statements as of and for
                       the year ended December 31, 1994 reflect the pooling of
                       interests with Orange Savings Bank. We did not audit the
                       1994 financial statements of Orange Savings Bank, which
                       statements reflect total assets of $83,268,000 as of
                       December 31, 1994 and net interest and dividend income
                       of $3,255,000 for the year ended December 31, 1994.
                       Those statements were audited by other auditors whose
                       report has been furnished to us, and our opinion,
                       insofar as it relates to the amounts included for Orange
                       Savings Bank as of and for the year ended December 31,
                       1994 is based solely on the report of other auditors.

                         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 and the reports
                       of other auditors provide a reasonable basis for our
                       opinion.

                         In our opinion, based on our audits and the reports of
                       other auditors, the consolidated financial statements
                       referred to above present fairly, in all material
                       respects, the financial position of CFX Corporation 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 A to the consolidated financial
                       statements, the Company adopted Statement of Financial
                       Accounting Standards No. 122, "Accounting for Mortgage
                       Servicing Rights," effective January 1, 1995.





                       Boston, Massachusetts
                       January 29, 1997, except for Note W
                       as to which the date is March 24, 1997





                                                                              59
<PAGE>   61
--------------------------------------------------------------------------------
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       To the Board of Directors and Shareholders of CFX
                       Corporation:

                       We have examined management's assertion that CFX
                       Corporation and subsidiaries maintained an effective
                       internal control structure over financial reporting as
                       of December 31, 1996, included in the accompanying
                       report on Assessment of Internal Controls Over Financial
                       Reporting, presented in conformity with both generally
                       accepted accounting principles and call report
                       instructions.

                         Our examination was made in accordance with standards
                       established by the American Institute of Certified
                       Public Accountants and, accordingly, included obtaining
                       an understanding of the internal control structure over
                       financial reporting, testing and evaluating the design
                       and operating effectiveness of the internal control
                       structure, and such other procedures as we considered
                       necessary in the circumstances. We believe that our
                       examination provides a reasonable basis for our opinion.

                         Because of inherent limitations in any internal
                       control structure, errors or irregularities may occur
                       and not be detected. Also, projections of any evaluation
                       of the internal control structure over financial
                       reporting to future periods are subject to the risk that
                       the internal control structure may become inadequate
                       because of changes in conditions, or that the degree of
                       compliance with the policies or procedures may
                       deteriorate.

                         In our opinion, management's assertion that CFX
                       Corporation and subsidiaries maintained an effective
                       internal control structure over financial reporting
                       presented in conformity with both generally accepted
                       accounting principles and call report instructions as of
                       December 31, 1996, is fairly stated, in all material
                       respects, based on Internal Control-Integrated Framework
                       issued by the Committee of Sponsoring Organizations of
                       the Treadway Commission.





                       Boston, Massachusetts
                       January 29, 1997





60
<PAGE>   62
--------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF CFX CORPORATION
--------------------------------------------------------------------------------

Directors

Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court

Richard F. Astrella
President, Orange Savings Bank

William E. Aubuchon, III
Chairman of the Board and CEO
W.E. Aubuchon Company, Inc.

Peter J. Baxter
President and Chief Executive Officer,
CFX Corporation and CFX Bank

Richard B. Baybutt
Chairman of the Board,
Baybutt Construction

Christopher V. Bean
Attorney,
Bean Law Offices

Christopher W. Bramley
President and CEO
Safety Fund National Bank

P. Kevin Condron
President
Central Supply Company, Inc.

Calvin L. Frink
Retired

David R. Grenon
Chairman of Advisory Board
& Asst. Clerk
The Protector Group Insurance Agency, Inc.

Elizabeth Sears Hager
New Hampshire
State Representative

Douglas S. Hatfield, Jr.
President and Treasurer,
Hatfield, Moran & Barry, P.A

Philip A. Mason
Attorney, Mason & Martin

Walter R. Peterson
President Emeritus
Franklin Pierce College

L. William Slanetz
Owner, Cheshire Realty


Officers

Peter J. Baxter
President and Chief Executive Officer

Mark A. Gavin, CPA
Executive Vice President and
Chief Operating Officer

Gregg R. Tewksbury, CPA
Chief Financial Officer

William H. Dennison
Treasurer

John F. Foley
Senior Vice President,
Human Resources

Laurence E. Babcock
Vice President,
Data Processing

Daniel J. LaPlante
Vice President,
Investment Manager

Philip B. Emma
Corporate Controller

Donald E. Leroux, CPA
Director of Audit

Charles B. Troccia
Director of Marketing

Karen M. Mayo, CPA
Director of Compliance

Christopher V. Bean
Secretary

Winifred M. Brooks
Assistant Secretary


--------------------------------------------------------------------------------
TRUSTEES AND BANKING PARTNERS OF CFX BANK
--------------------------------------------------------------------------------

Trustees

Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court

Richard B. Baybutt
Chairman of the Board,
Baybutt Construction

Peter J. Baxter
President and
Chief Executive Officer
CFX Bank

Delcie D. Bean
President,
D.D. Bean & Sons, Inc.

Richard D. D'Amato
Former President,
Milford Co/operative Bank

William H. Dennison
Banking Partner,
CFX Bank

Calvin L. Frink
Retired

Emerson H. O'Brien
President, Economy Plumbing
& Heating

J. Justin Pestana, Jr.
Chairman of the Board, President,
J.P. Chemical Company

L. William Slanetz
Owner, Cheshire Realty

David B. Walters
Director of Community Relations,
CFX Bank


Honorary Trustee

Mario G. Farina
Chairman of the Board, M.G.F., Inc.


Banking Partners

Peter J. Baxter
President and
Chief Executive Officer

Daniel J. LaPlante
Treasurer

Keith D. Armstrong

Benoit J. Asselin

Judith Avery-Dunning

Laurence E. Babcock

Susan Martore-Baker

A. Jane Beauchamp

Claire J. Castanino

Kathleen A. Cleveland

Martha A. Curtis

William H. Dennison

Janice P. Dokla

Brian P. Donovan

Gordon R. Edmonds

John F. Foley

Carole E. Fredericks

Mark A. Gavin, CPA

Carol M. Harwood

Ellen M. Jones

Donald E. Leroux, CPA

Karen M. Mayo, CPA

William J. McIver

Lee K. Robator

Larry E. Ruest

Gregg R. Tewksbury, CPA

Charles B. Troccia

Peter T. Whittemore

Liane T. Wiley

Debra T. Wilner

--------------------------------------------------------------------------------
DIRECTORS OF CFX FINANCIAL SERVICES, INC.
--------------------------------------------------------------------------------

Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court

Philip A. Mason
Attorney, Mason & Martin

Peter J. Baxter
President and Chief Executive Officer,
CFX Corporation and CFX Bank

Mark A. Gavin, CPA
Executive Vice President and Chief Operating Officer
CFX Corporation

William C. Mears
President
CFX Funding L.L.C.

Steven T. Platten
Vice President
CFX Funding L.L.C.


--------------------------------------------------------------------------------
MANAGEMENT OF CFX FUNDING L.L.C.
--------------------------------------------------------------------------------

William C. Mears
President

Steven T. Platten
Vice President

Mark A. Gavin, CPA
Treasurer

James Valz
Controller


                                                                              61
<PAGE>   63
--------------------------------------------------------------------------------
DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC.
--------------------------------------------------------------------------------

Directors

Peter J. Baxter
President and
Chief Executive Officer,
CFX Corporation and CFX Bank

Paul T. Pouliot, CMB
President
Mortgage Banking Partner,
CFX Mortgage, Inc.

Mark A. Gavin, CPA
Executive Vice President and
Chief Operating Officer
CFX Corporation


Mortgage Banking Partners

Paul T. Pouliot, CMB
President

Winnie F. Thibault
Treasurer

Dianne M. Bishop

Daniel J. McKenney

Pauline D. Tessier


--------------------------------------------------------------------------------
DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK
--------------------------------------------------------------------------------

Directors

William E. Aubuchon, III
Chairman of the Board and CEO
W.E. Aubuchon Company, Inc.

Christopher W. Bramley
President and CEO
Safety Fund National Bank

P. Kevin Condron
President
Central Supply Company, Inc.

David R. Grenon
Chairman of Advisory Board
& Asst. Clerk
The Protector Group Insurance
Agency, Inc.

Donald L. Hall
President and Director
Higley, Hall & Company, Inc.


Directors

Douglas S. Hatfield, Jr.
President and Treasurer,
Hatfield, Moran & Barry, P.A.

John E. Howard, CPA
Managing Partner
William S. Reagan & Company, LLP

Philip A. Mason
Attorney, Mason & Martin

Walter R. Peterson
President Emeritus
Franklin Pierce College

Allen I. Rome
President
Rome Insurance Agency, Inc.

Henri L. Sans, Jr.
Attorney
LeBlanc and Sans

J. Robert Seder
Attorney
Seder & Chandler


Senior Officers

Christopher W. Bramley
President and
Chief Executive Officer

James C. Garvey
Senior Vice President and
Senior Commercial Loan Officer

Michael A. L'Ecuyer
Senior Vice President -
Retail Banking

Stephen R. Shirley
Senior Vice President and
Senior Trust Officer

Michael D. Thibeault
Senior Vice President

Diane Whitten
Senior Vice President -  Loan
Resolution


--------------------------------------------------------------------------------
DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK
--------------------------------------------------------------------------------

Directors

Elwyn C. Hayden
Chairman of the Board
Retired,
Hayden Realty & Development Corp.

Richard F. Astrella
President,
Orange Savings Bank

Robert G. Allen
Sales Engineer,
L.S. Starrett, Co.

Christopher V. Bean
Attorney
Bean Law Offices

Paul A. Larocque, D.D.S.
Semi-Retired,
 Dentist

Thomas S. Mann, III
President,
T. S. Mann Lumber Company

Philip A. Mason
Attorney, Mason & Martin


Directors

Andrea L. Shaughnessy
President,
Duall Plastics, Inc.

John B. Stevenson
Accounting & MIS Manager
Riveto Manufacturing Company

Arlan D. Willard
Retired,
L. S. Starrett, Co.


Banking Partners

Richard F. Astrella

Connie A. Zani





62
<PAGE>   64
--------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       At December 31, 1996, there were 4,268 holders of record
                       of CFX Corporation's common stock. The stock is traded
                       on the American Stock Exchange (AMEX) under the symbol
                       "CFX." The following table sets forth cash dividends
                       declared on the Company's common stock and the high and
                       low sale prices as reported by AMEX for the appropriate
                       periods.

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                       1996                                         First        Second         Third          Fourth
                       Calendar Quarters                          Quarter        Quarter        Quarter      Quarter
                       ------------------------------------------------------------------------------------------------
                       <S>                                       <C>            <C>           <C>            <C>
                       Dividends declared per share (1)          $    .1714     $        -    $     .1905    $   .2095
                       Stock price (1):
                         High                                        15 3/8         14 3/8         15 1/4       16 5/8
                         Low                                         12 7/8         12 1/4         11 5/8       13 5/8
                         Last sale                                   14             12 3/8         14 1/8       15 1/2
<CAPTION>
                       ------------------------------------------------------------------------------------------------
                       1995                                         First        Second         Third          Fourth
                       Calendar Quarters                           Quarter       Quarter        Quarter       Quarter
                       ------------------------------------------------------------------------------------------------
                       <S>                                       <C>            <C>           <C>            <C>
                       Dividends declared per share (1)          $    .1391     $    .1451    $     .1451    $   .3266
                       Stock price (1):
                         High                                        11 3/4         15 3/8         16 1/2       16 5/8
                         Low                                          9 1/2         11             13 1/2       13 1/4
                         Last sale                                   11 1/8         15             16 3/8       14 7/8
                       ------------------------------------------------------------------------------------------------
</TABLE>

                       (1)    Common cash dividends and common stock sale
                              prices have been restated to reflect the
                              Company's 5% common stock dividend declared on
                              December 10, 1996.





                                                                              63
<PAGE>   65


--------------------------------------------------------------------------------
CORPORATE INFORMATION
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                       EXECUTIVE OFFICES
                       102 Main Street
                       Keene, NH 03431

                       REGISTRAR AND TRANSFER AGENT
                       Chemical Mellon Shareholder Services, L.L.C.
                       Overpeck Centre
                       85 Challenger Road
                       Ridgefield Park, NJ 07660
                       1-800-288-9541

                       INDEPENDENT AUDITORS
                       Wolf & Company, P.C.
                       One International Place
                       Boston, MA 02110-9801

                       COMMON STOCK INFORMATION
                       Listed on AMEX: CFX
                       Shares outstanding as of 12/31/96: 12,980,732

                       REQUEST FOR INFORMATION

                       For more information on the Company's  products and
                       services, call or write:

                          Mark A. Gavin, CPA
                          Chief Operating Officer
                          CFX Corporation
                          P.O. Box 429
                          102 Main Street
                          Keene, NH 03431
                          (603) 352-2502

                       A copy of Form 10-K filed for the year ended December
                       31, 1996 by the Company with the Securities and Exchange
                       Commission and quarterly financial reports may be
                       obtained without charge by written request to:

                          Gregg R. Tewksbury, CPA
                          Chief Financial Officer
                          CFX Corporation
                          P.O. Box 429
                          102 Main Street
                          Keene, NH 03431
                          (603) 352-2502

                       DIVIDEND REINVESTMENT PLAN

                       CFX Corporation offers a dividend reinvestment plan
                       which permits participating shareholders of record to
                       reinvest dividends in CFX Corporation Common Stock
                       without paying brokerage commissions or service charges.
                       A minimum of fifty shares of common stock owned is
                       required to be eligible for participation in the plan.
                       Participating shareholders may also invest up to $5,000
                       in additional funds each quarter for the purchase of
                       additional shares. A copy of the dividend reinvestment
                       plan prospectus and application may be requested from
                       the transfer agent at the above address or from
                       Shareholder Services at CFX Corporation.




64