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

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


                                    Form 10-K

                Annual Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934
                                  -------------


For the fiscal year ended                               Commission file number
    December 31, 1996                                           0-16510
-------------------------                              -------------------------

                          Portsmouth Bank Shares, Inc.
                          ----------------------------
             (Exact name of registrant as specified in its charter)


            New Hampshire                                   02-0417778
    -------------------------------                      -------------------
    (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                      Identification No.)

333 State Street, Portsmouth, New Hampshire                    03801
-------------------------------------------                  ----------
 (Address of principal executive offices)                    (Zip Code)


                                 (603) 436-6630
                                 --------------
              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock $.10 par value, and
                          Common Stock Purchase Rights
                          ----------------------------
                               (Title of Classes)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                Yes  X    No
                                   -----    -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   X
           -----
<PAGE>   2
         The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of February 28, 1997 was approximately
$77.6 million, based on the closing price on February 28, 1997 of $15.375 per
share.

         5,713,421 shares of the Registrant's Common Stock were outstanding on
February 28, 1997. This does not give effect to a two percent stock dividend
effected on March 15, 1997.

         Portions of the Registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Parts I & II of this report.

         Exhibit Index on page 32.
<PAGE>   3
                                Table of Contents

                                     Part I

<TABLE>
<S>      <C>                                                           <C>
Item 1.  Business ....................................................  1
         (a)      General ............................................  1
         (b)      Lending Activities .................................  2
                  (i)        General .................................  2
                  (ii)       Residential Real Estate Loans ...........  3
                  (iii)      Commercial Real Estate Loans ............  4
                  (iv)       Commercial Paper ........................  4
                  (v)        Consumer and Other Loans ................  5
                  (vi)       Origination of Loans ....................  5
                  (vii)      Non-Performing Assets
                               and Delinquent Loans ..................  6
         (c)      Investment Activities ..............................  6
         (d)      Source of Funds ....................................  7
         (e)      Statistical Information ............................  7
         (f)      Distribution of Assets, Liabilities
                    and Stockholders' Equity; Interest
                    Rates and Interest Differential ..................  7
                  (i)        Investment Portfolio ....................  8
                  (ii)       Loan Portfolio .......................... 10
                  (iii)      Maturity of Loans ....................... 10
                  (iv)       Nonaccrual, Past Due and
                               Restructured Loans .................... 11
                  (v)        Summary of Loan Loss Experience ......... 12
                  (vi)       Allowance for Loan Losses ............... 13
                  (vii)      Deposits ................................ 13
                  (viii)     Maturities of Time Deposits ............. 13
                  (ix)       Return on Equity and Assets ............. 14
                  (x)        Short-Term Borrowings ................... 14
         (g)      Monetary Policies .................................. 14
         (h)      Employees .......................................... 14
         (i)      Competition ........................................ 14
         (j)      Subsidiaries ....................................... 15
         (k)      Regulation ......................................... 15
                  (i)        General ................................. 15
                  (ii)       Federal Deposit Insurance Corporation ... 15
                  (iii)      New Hampshire Law ....................... 16
                  (iv)       Federal Interstate Banking Law .......... 16
                  (v)        Federal Reserve Board ................... 18
                  (vi)       Capital Requirements .................... 19
                  (vii)      Restrictions on the Payment of
                               Dividends or Distributions ............ 21
                  (viii)     Federal Home Loan Bank System ........... 21
                  (ix)       Other Regulations ....................... 21

Item 2.  Properties .................................................. 23

Item 3.  Legal Proceedings ........................................... 23

Item 4.  Submission of Matters to a Vote of
           Security Holders .......................................... 23
</TABLE>
<PAGE>   4
<TABLE>
<S>      <C>                                                           <C>
         Executive Officers .......................................... 24

                                     Part II

Item 5.  Market for Registrant's Common Equity and
           Related Stockholder Matters ............................... 25

Item 6.  Selected Financial Data ..................................... 25

Item 7.  Management's Discussion and Analysis of
           Financial Condition and Results of
           Operations ................................................ 25

Item 8.  Financial Statements and Supplementary Data ................. 25

Item 9.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure .................... 25

                                    Part III

Item 10. Directors and Executive Officers of the
           Registrant ................................................ 26

Item 11. Executive Compensation ...................................... 26

Item 12. Security Ownership of Certain Beneficial
           Owners and Management ..................................... 26


Item 13. Certain Relationships and Related Transactions .............. 26

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K ....................................... 26

         Consent of Independent Public Accountants ................... 30

         Signatures .................................................. 31
</TABLE>
<PAGE>   5
                                     PART I

ITEM 1. BUSINESS

GENERAL

         Portsmouth Bank Shares, Inc. ("Portsmouth" or the "Company"), a New
Hampshire corporation, was formed in November 1987 for the purpose of becoming
the parent holding company of Portsmouth Savings Bank (the "Bank"). The Company
is registered with the Federal Reserve Board as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act").

         The Company conducts its business primarily through the Bank, its
wholly-owned subsidiary. The principal business of the Bank is attracting
deposits from the general public and investing in residential and commercial
real estate loans, consumer loans and a portfolio of conservative investments.
As a holding company, Portsmouth has the flexibility, within the constraints of
the Bank Holding Company Act, to diversify its business activities through
formation of subsidiaries and through acquisitions of or mergers with financial
institutions and other companies. On February 13, 1997 Portsmouth and CFX
Corporation ("CFX") signed a definitive agreement under which CFX will acquire
Portsmouth and the Bank.

         The Bank, an FDIC-insured savings institution, was organized in 1823
and is the oldest state-chartered savings bank in New Hampshire. It operates
through its principal office at 333 State Street, Portsmouth, New Hampshire, and
two branch offices in Greenland and North Hampton, New Hampshire. All of the
Bank's offices are in Rockingham County, New Hampshire. The Bank's lending
activities and depositor base extend into Strafford County, New Hampshire and
York County, Maine.

         The Bank's lending policies focus on loan quality and close monitoring
of the loan portfolio by management. The Board of Directors reviews significant
loan applications prior to approval. The Bank maintains a large investment
portfolio and its investment policies stress safety and liquidity. In order to
protect its net interest margin against significant fluctuations, the Bank
seeks, where possible, to better match the interest rate sensitivity and
maturities of its assets and liabilities.

         The Bank's investment policy emphasizes liquidity and preservation of
capital. The Board of Directors participates with management in all significant
investment decisions. Investments are primarily in short-term, liquid assets in
order to minimize the effects on its portfolio of changes in interest rates.

         The excess of the Bank's interest-earning assets maturing or repricing
within one year over its interest-bearing liabilities maturing or repricing
within one year (the "gap") was a positive $59.9 million (23.2% of earning
assets) at December 31, 1996. In making this calculation, the Bank assumes that
approximately 15% of its regular savings, money markets and NOW accounts reprice
within one year. The Bank regularly, at least monthly, reviews and evaluates its
asset-liability (gap) position and policy guidelines. Quarterly, the Bank
consults with its independent investment advisor, reviewing the policy
guidelines


                                        1
<PAGE>   6
and means to better match interest sensitive assets and liabilities within the
policy guidelines. In setting the guidelines for the policy's time horizons, the
following are the major factors considered: 1) projected interest rates; 2)
run-off or growth of "Core Deposits" (regular savings, money market and NOW
accounts); 3) competitive restraints to rate changes; 4) historical trends; 5)
availability of qualified investments at acceptable rates and maturities; 6)
maintaining a diversified asset mix; and 7) lack of brokered deposits. During
the year 1996, the Bank's investments in U.S. Treasury and government agency
securities, as well as corporate securities, declined substantially due to early
calls and/or maturities. Offsetting their increase, interest-bearing deposits
with other banks and outstanding loan balances increased significantly. The Bank
is currently writing substantially all of its newly originated fixed-rate
mortgage loans to meet the requirements for sale in the secondary market. No
sales in the secondary market were made in 1996.

         The Bank's deposits are insured by the FDIC up to $100,000 per insured
depositor. At December 31, 1996 the Bank had a total regulatory capital ratio of
40.59%, which exceeds the 8% FDIC requirement. At December 31, 1996, the Bank's
ratio of net worth to assets was 24.33%.

         The Bank currently competes for both deposits and loans with many other
savings banks, commercial banks, savings and loan associations and credit unions
with offices in and around the Portsmouth area. The Bank maintains its market
position by offering very competitive rates for deposits and loans as well as a
full complement of core banking services and other retail financial services for
individuals and small businesses.

LENDING ACTIVITIES

         GENERAL

         At December 31, 1996, the Bank's loan portfolio totaled $101.4 million,
representing approximately 51.2% of the Bank's $198.1 million total deposits at
that date. The principal categories of loans in the Bank's portfolio are
residential real estate loans secured by 1-4 family residences; commercial real
estate loans secured by multi-family residential and commercial properties; and
consumer and other loans. At December 31, 1996 the Bank also held $13.0 million
of commercial paper which is classified as loans under regulatory definitions
and generally accepted accounting principles. The Bank's primary lending
activity has been the origination of residential real estate loans which
comprise 62.7% of the portfolio exclusive of commercial and 67.2% of the
portfolio inclusive of commercial paper.

         Loans originated by the Bank are subject to certain legal requirements.
The Bank may originate and purchase loans secured by real estate, or other
collateral as authorized under New Hampshire laws and regulations, that are
located in any state or territory of the United States to the same extent and
manner as if the real estate or collateral were located in New Hampshire.
Notwithstanding this nationwide lending authority, the Bank has generally chosen
not to make or purchase loans collateralized by real estate located outside the
states of New Hampshire and Maine. Substantially all of the mortgage loans in
the portfolio are secured by properties located in southeastern New Hampshire


                                        2
<PAGE>   7
and, to a lesser extent, southern Maine. Moreover, substantially all of the
non-mortgage loan portfolio consists of loans made to residents and businesses
located in New Hampshire and York County, Maine.

         New Hampshire law imposes various limitations on the amount of loans
that may be made to one borrower. Under regulations promulgated by the Bank
Commissioner of New Hampshire (the "Commissioner"), the Bank may not make any
loan to one borrower, as defined, which exceeds the lesser of 10% of the Bank's
deposits or 100% of its capital. At December 31, 1996, this limit amounted to
$19.8 million. The Bank has not made any loans to any one borrower which exceed
these regulatory limits. The Bank's largest loan outstanding as of December 31,
1996 was a commercial real estate loan in the amount of $2.3 million. Its
largest single borrower had aggregate loans outstanding of $2.6 million.

         The Bank offers adjustable-rate mortgage loans as part of a strategy to
originate loans that are more interest-rate sensitive than traditional
fixed-rate mortgage loans. At December 31, 1996, adjustable-rate loans
(primarily residential mortgage loans) comprised 34.3% or $34.8 million of the
total loan portfolio.

         Another aspect of the asset-liability management effort has been a
policy of writing newly-originated fixed-rate residential mortgage loans to meet
the requirements for sale in the secondary market. A substantial amount ($42.1
million) of fixed-rate mortgage loans are carried in the portfolio. During
periods of rising interest rates, the market value of fixed-rate loans may
decline. Presently management has no intention of disposing of any significant
portion of its fixed-rate mortgage loan portfolio; any such disposition may
result in the realization of losses, thereby affecting the net worth and net
income of the Bank.

         RESIDENTIAL REAL ESTATE LOANS

         Residential mortgage loans are expected to continue to be the primary
component of the Bank's loan portfolio. At December 31, 1996, the portfolio of
residential mortgage loans totaled $63.6 million, consisting of 1,331 loans. The
average size of such loans was $46,952. These loans come from the Bank's primary
market area and are secured by residences within the same area. The fixed-rate
loan portfolio consists primarily of seasoned loans. Many of these loans are to
customers with established relationships. It is the Bank's policy not to make
residential mortgage loans with a loan-to-value ratio in excess of 80%, except
for permanent mortgage insurance loans (PMI) which can reach 95%.

         Virtually all residential real estate loans originated prior to May
1984 were long-term loans with fixed rates. In May 1984, the Bank commenced
offering single-family residential mortgage loans providing for periodic
interest rate adjustments. Such loans amounted to approximately 34.52%, 34.10%
and 23.78% of the permanent single-family residential loans originated by the
Bank in 1994, 1995 and 1996 respectively. Although the Bank has attempted to
increase the percentage of adjustable-rate loans it originates as a percentage
of total loans, the number of adjustable-rate loans actually originated depends
upon prevailing market conditions as they affect customer demand for such loans.


                                        3
<PAGE>   8
         The adjustable-rate loans currently offered by the Bank have terms of
up to 30 years and an interest rate that adjusts every one, three or five years
in accordance with an index based on securities issued by the United States
Government. There is an annual 2% cap on any increase in interest rates, as well
as an overall "life time" cap equal to 6%. The Bank has not engaged in the
practice of using a cap on the loan payments, which could allow the loan balance
to increase rather than decrease, resulting in negative amortization. Although
the Bank may for competitive reasons offer discounts on the interest on its
adjustable-rate residential mortgage loans for up to five years, the Bank
evaluates a borrower's ability to pay at or above the initial contract rate.

         The origination of adjustable-rate mortgage loans reduces the risks
associated with changes in interest rates, but such loans involve other risks,
because as interest rates increase the underlying payments by the borrower also
increase, thus increasing the potential for default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. These risks have not had any adverse effect on the Bank to date.

         The Bank continues to originate long-term, fixed-rate loans in order to
provide a full range of products to its customers. Although these loans provide
for repayments of principal over a fixed period of up to 30 years, it is the
Bank's experience that such loans have remained outstanding for a substantially
shorter period of time.

         Fire and extended coverage casualty insurance is required in order to
protect the properties securing its residential and other mortgage loans. The
properties securing mortgage loans are appraised by state certified independent
appraisers, and such appraisals are reviewed by senior management and approved
by the Board of Directors.

         COMMERCIAL REAL ESTATE LOANS

         Commercial real estate loans are primarily secured by existing
properties, such as apartment buildings and, to a lesser extent, office
buildings, industrial buildings, warehouses and various special purpose
properties. At December 31, 1996, the Bank had $18.2 million of such loans in
its portfolio, the largest outstanding balance of which was $2.3 million.
Loan-to-value ratios on commercial real estate loans generally do not exceed
75%.

         Although terms vary, commercial real estate loans secured by existing
properties generally have maturities of 15 years or less and interest rates that
are tied to the N.Y. prime rate are generally adjustable.

         COMMERCIAL PAPER

         The Bank periodically invests in high-grade commercial paper as a means
of deploying excess liquidity on a short-term basis. Commercial paper loans
totaled $13.0 million at December 31, 1996, placed directly with General
Electric Capital Corporation.




                                        4
<PAGE>   9
         CONSUMER AND OTHER LOANS

         The Bank offers both secured and unsecured personal loans, as well as
automobile, boat, home improvement, collateral and government guaranteed
education loans. Consumer loans generally have maturities of up to ten years. At
December 31, 1996, the Bank's portfolio of consumer and other loans totaled $6.2
million, representing 6.11% of all loans. Consumer loans generally have shorter
terms and higher interest rates than first mortgage loans. As the result of the
reclassification of certain types of consumer loans they are now reported as
commercial loans, and the second mortgages and home equity loans are included
with mortgage loans.

         ORIGINATION OF LOANS

         The Bank's lending activities are conducted primarily in its market
area. Applications for all types of loans are taken at the Bank's principal and
branch offices. Residential loan applications are primarily attributable to
referrals from real estate brokers, whom the Bank actively solicits, and, to a
lesser extent, builders, existing customers and walk-in customers. Commercial
real estate applications are obtained primarily from previous borrowers, direct
contacts and referrals. Consumer applications are primarily obtained through
existing customers who have been made aware of the Bank's programs by
cross-selling, advertising and other means.

         Senior management is closely involved in the review and approval of
first mortgage real estate loans. All applications for such loans must be
reviewed by the appropriate loan officer and either the Chairman or the
President, and presented to the Board of Directors for approval. The Bank's loan
underwriting process includes the use of detailed credit applications, property
appraisals, and verification of applicants' credit history, employment and
banking relationships. All property securing real estate loans is appraised by
state certified independent appraisers.

         The consumer loan policy provides that collateral loans up to $40,000
may be approved by certain loan officers. Collateral loans greater than $40,000
require the approval of the Board of Directors. Unsecured loans up to $12,000
may be extended upon the approval of certain officers, and unsecured loans over
$12,000 require the approval of the Board of Directors.

         Although, at a minimum, the loan officers abide by this written policy,
in practice the senior officers consult with the Chairman or President of the
Bank on a daily basis. All significant loan applications are then brought before
the entire Board of Directors for approval. The Bank believes that this
centralized approach to reviewing loan applications has proved beneficial to
both the Bank and its customers.

         An exception to the foregoing is the commercial paper that is currently
held in the Bank's loan portfolio. Such commercial paper was not originated in
the same manner as other loans, but was purchased through General Electric
Capital Corporation.



                                        5
<PAGE>   10
NON-PERFORMING ASSETS AND DELINQUENT LOANS

         The Bank's lending policy focuses on loan quality and close monitoring
of the loan portfolio by management. As a result of this lending policy, the
Bank has experienced minimal loan charge-offs and delinquencies. For the year
1996, the Bank had net charge-offs of $40,000. At December 31, 1996, the Bank
had five non-performing loans in its $101.4 million loan portfolio totaling
$576,000. Mortgage loans are classified as delinquent when any payment of
principal and/or interest is 30 days or more past due. Consumer loans are
classified as delinquent when any payment is 30 days or more past due. Loans are
classified as non-performing when the Bank ceases to accrue interest thereon.
While the Bank has generally been able to work out satisfactory repayment
schedules with delinquent borrowers, the Bank will undertake foreclosure or
other legal proceedings if a loan delinquency is not otherwise satisfactorily
resolved. Real estate acquired as a result of foreclosure action amounted to
$100,492 at December 31, 1996 compared with $668,000 at December 31, 1995. The
properties are being actively marketed.

INVESTMENT ACTIVITIES

         The Bank's investment policy emphasizes liquidity and preservation of
capital. The Board of Directors participates with management in all significant
investment decisions and is counseled by a professional independent investment
adviser. As part of its asset-liability restructuring program, the Bank
maintains a sizeable investment portfolio amounting to $105.3 million or 38.8%
of its total assets at December 31, 1996. The Bank invests in United States
government and agency obligations, corporate bonds that are of investment grade
or higher and in conservative income-oriented equity securities. The Bank's
equity portfolio had amortized cost and fair values of $14.9 million and $15.9
million, respectively, at December 31, 1996. The balance of the Bank's
investment securities had amortized cost and fair market values of $88.3 million
and $89.3 million, respectively at December 31, 1996. The Bank's investment in
interest-bearing deposits with the Federal Home Loan Bank (the "FHLB") totaled
$54.0 million at December 31, 1996 as call provisions were exercised by the
issuers of agency obligations. These deposits amounted to $55.5 million at
December 31, 1995.

         In addition to providing liquidity and opportunities to enhance the
repricing characteristics of the Bank's earning assets, the investment portfolio
provides an important source of recurring income. For the years ended December
31, 1996 and 1995, the Bank's investment portfolio generated 61.0% and 63.5%,
respectively, of total interest and dividend income. The Bank's investment
portfolio earned 7.42% on taxable investment securities and 3.86% on tax-exempt
securities in 1996, while earning 7.02% and 4.77%, respectively, on such
securities in 1995. The Bank's interest-bearing deposits with the FHLB earned
5.29% in 1996 and 5.91% in 1995. It is management's intent to hold securities on
a long-term basis or until maturity; however, securities may be traded whenever
the opportunity is presented so long as it is consistent with our investment
policy and the categorization of the portfolio for financial reporting purposes.



                                        6
<PAGE>   11
SOURCES OF FUNDS

         Deposits obtained through the Company's banking offices have
traditionally been the principal source of funds for use by the Bank in lending
and for other general business purposes. To a lesser extent, funds are also
derived from amortization and prepayments of outstanding loans and maturities of
investment securities.

         The Bank's current deposit products include passbook savings and club
accounts, demand accounts, NOW accounts, money market deposit accounts and
certificates of deposit ranging in terms from three months to three years.
Included among these deposit products are Individual Retirement Account
Certificates and Keogh Retirement Certificates (collectively "retirement
accounts"). In recent years market conditions have required the Bank to increase
its emphasis on short-term certificate accounts and other types of deposit
accounts that are more responsive to changes in market interest rates.

         The primary source of deposits are obtained from individual and
business residents within the Bank's market area. Its longstanding presence in
this market area has resulted in a loyal, stable depositor base. Deposit
accounts are attracted by offering competitive interest rates, and convenient
office locations and service hours. Deposits of the Bank totaled $198.1 million
or 73.0% of its total assets at December 31, 1996.

          Deposit account interest rates are priced to be competitive with other
financial institutions conducting business in its market area. The ability of
the Bank to attract and maintain deposits and control the Bank's overall cost of
funds has been and will continue to be significantly affected by economic and
competitive conditions.

         The Bank is a member of the Federal Home Loan Bank. The FHLB makes
advances to members in accordance with the policies and procedures established
by its Board of Directors.

STATISTICAL INFORMATION

         The statistical information on Portsmouth set forth in the following
sections is furnished pursuant to Industry Guide 3 under the Securities Exchange
Act of 1934.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

         Certain information regarding the distribution of assets, liabilities
and stockholders' equity, interest rates and interest differential appears under
the headings "Liquidity and Interest Rate Sensitivity Management" and "Interest
Rate Spreads" on pages 6 through 8 of the Company's 1996 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated therein
by reference.

         Additional information concerning the development of the Bank's
business is contained in pages 1 through 10 of the Company's 1996 Annual Report
to


                                        7
<PAGE>   12
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated herein by
reference.

         INVESTMENT PORTFOLIO

         The following table sets forth the aggregate carrying amounts and/or
fair values of investments in securities of the Company at the dates indicated
in accordance with SFAS No. 115. See Note 3 of the Notes to Consolidated
Financial Statements contained on page 22 of the Company's 1996 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which page is incorporated herein by
reference, for additional information.


<TABLE>
<CAPTION>
                                                              December 31
                                                             (in thousands)
Available for sale - at fair value                        1996            1995
                                                        --------        --------
<S>                                                     <C>             <C>
U.S. Government and
agency obligations                                      $ 61,557        $ 62,717

State and municipal
obligations                                                    0               0

Other debt securities                                     15,802          26,016

Marketable equity
securities                                                15,058          13,711
                                                        --------        --------
            Total                                       $ 92,417        $102,444
                                                        --------        --------

Held to maturity - at carrying amounts

U.S. Government and
agency obligations                                      $ 10,000        $ 14,999

State and municipal
obligations                                                    0             570

Other debt securities                                      2,013           4,546

Marketable equity
securities                                                     0               0
                                                        --------        --------
            Total                                       $ 12,013        $ 20,115
                                                        --------        --------
Federal Home Loan Bank stock                            $    874        $    874
                                                        --------        --------
            Grand Total                                 $105,304        $123,433
                                                        ========        ========
</TABLE>


                                        8
<PAGE>   13
         INVESTMENT PORTFOLIO (CONTINUED)


         The following table sets forth by maturities of investment securities
at December 31, 1996, exclusive of marketable equity securities, and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).



<TABLE>
<CAPTION>
                                              After One            After Five
                        Within One            But Within           But Within         After Ten
                           Year               Five Years            Ten Years           Years
                     -----------------     -----------------    -----------------   ---------------
                     Amount      Yield     Amount      Yield    Amount      Yield   Amount    Yield
                     ------      -----     ------      -----    ------      -----   ------    -----
                                                   (dollars in thousands)
<S>                 <C>          <C>      <C>          <C>    <C>           <C>      <C>      <C>
U.S. Government
  and agency
  obligations       $40,034      7.29%    $30,885      7.58%         0      0.00%    $423     10.77%
Other debt
  securities          8,015      6.80%      5,435      7.57%     3,492      7.60%
                    -------               -------               ------               ----
     TOTAL          $48,049      7.21%    $36,320      7.66%    $3,492      7.60%    $423     10.77%
                    =======               =======               ======               ====
</TABLE>


                                        9
<PAGE>   14
         LOAN PORTFOLIO

         The following table shows Portsmouth's loan distribution at the end of
each of the last five years (before deduction of unearned income). See Note 4 of
the Notes to Consolidated Financial Statements contained on page 24 of the
Company's 1996 Annual Report to Stockholders, filed as Exhibit 13 hereto, which
page is incorporated herein by reference, for additional information.


<TABLE>
<CAPTION>
                                                     December 31,
                                1996         1995       1994        1993        1992
                              --------     -------     -------     -------     -------
                                                    (in thousands)
<S>                           <C>          <C>         <C>         <C>         <C>
Commercial, financial and     $ 13,462     $   424     $ 2,386     $   411     $ 5,450
agricultural (including
commercial paper)

Real estate -                   63,568      59,143      59,979      62,371      71,862
residential

Real estate -                   18,208      12,265      11,651      13,447      12,263
commercial
& construction

Installment                      3,752       3,975       4,050       2,476       2,899

Other                            2,427       2,045       2,119       2,128       2,135
                              --------     -------     -------     -------     -------
   TOTAL LOANS                $101,417     $77,852     $80,185     $80,833     $94,609
                              ========     =======     =======     =======     =======
</TABLE>

         MATURITY OF LOANS

         The following table sets forth the scheduled contractual amortization
of loans in the Company's portfolio at December 31, 1996, and the dollar amount
of loans at that date which are scheduled to mature after one year which have
fixed or adjustable interest rates. Adjustable or floating rate assets are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they are due.


<TABLE>
<CAPTION>
                                               Maturing
                              ---------------------------------------------
                                       After 1 Year
                               Within    But Within   After 5
                               1 Year     5 Years       Years        Total
                              -------     -------     --------     --------
                                             (in thousands)
<S>                           <C>         <C>         <C>          <C>
Commercial, financial and     $13,082     $   321     $     59       13,462
agricultural (including
commercial paper)

Real estate -                  16,651       6,892       40,025       63,568
residential

Real estate -                   8,740       6,915        2,553       18,208
commercial
& construction

Installment                       412       3,042          298        3,752

Other                           2,427           0            0        2,427
                              -------     -------     --------     --------
                              $41,312     $17,170     $ 42,935     $101,417
                              =======     =======     ========     ========
</TABLE>



                                       10
<PAGE>   15
<TABLE>
<CAPTION>
Loans maturing after
1 year with:
<S>                                                   <C>                <C>
Fixed interest rates                                  $ 7,898            $42,805
Variable interest rates                                 9,272                130
                                                      -------            -------
                                                      $17,170            $42,935
                                                      =======            =======
</TABLE>

         NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS

         The following table summarizes Portsmouth's nonaccrual, past due, and
restructured loans.



<TABLE>
<CAPTION>
                                                     December 31,
                                    1996      1995      1994      1993      1992
                                    ----      ----      ----      ----      ----
                                                  (in thousands)
<S>                                 <C>       <C>       <C>       <C>       <C>
Nonaccrual loans                    $576      $483      $ 55      $215      $321

Accruing loans past                  347        44       253        84       326
due 90 days or more

Restructured loans                     0         0         0         0         0
</TABLE>

         The following table summarizes Portsmouth's nonaccrual loans for 1996.

<TABLE>
<CAPTION>
                                                                            1996
<S>                                                                         <C>
Nonaccrual loans:
  Commercial (2)                                                            $155
  Residential real estate (2)                                                421
                                                                            ----

    Total                                                                   $576
</TABLE>


Had these loans performed under their original terms, the amount of interest
income recorded would have been $52,495. The amount recorded during 1996
amounted to $15,637.


         Management's policy is to review loans that are 90 days past due to
determine the future collectibility of both principal and interest. When income
is determined to be uncollectible, the loan is put on a nonaccrual status.

         As of December 31, 1996, there were no potential problem loans which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or represent material credits which cause
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms. There were no loan concentrations exceeding 10%
of total loans.


                                       11
<PAGE>   16
         SUMMARY OF LOAN LOSS EXPERIENCE

         The following table summarizes Portsmouth's loan loss experience for
each of the five years ended December 31:


<TABLE>
<CAPTION>
                                 1996      1995      1994      1993      1992
                                 ----      ----      ----      ----      ----
                                              (dollars in thousands)
<S>                              <C>       <C>       <C>       <C>       <C>
Balance at beginning of year     $727      $767      $807      $843      $865
Charge-offs:
  Commercial, financial and         0         0         0         0         0
     agricultural
  Real estate-
     commercial                     0         0         0        92        90
     residential                   40        41        40         0       133
  Consumer loans                    1         0         0        15         0
  Other                             0         0         0         0         0
                                 ----      ----      ----      ----      ----
    Total Charge-Offs              41        41        40       107       223
Recoveries:
  Commercial, financial and         0         0         0         0         0
     agricultural
  Real estate -
     commercial                     0         0         0         0         0
     residential                    1         1         0         0         0
  Consumer loans                    0         0         0         0         0
  Other
    Total Recoveries                1         1         0         0         0
Net Charge-offs                    40        40        40       107       223
Provision for loan losses           0         0         0        71       201
                                 ----      ----      ----      ----      ----
Balance at end of year           $687      $727      $767      $807      $843
                                 ====      ====      ====      ====      ====
Ratio of net charge-offs
during year to average loans
outstanding                      0.05%     0.05%     0.05%     0.13%     0.24%
</TABLE>

         The foregoing schedule should be read in conjunction with the following
footnotes:

(1) The amount charged to operations and the related balance in the allowance
for loan losses is based upon monthly evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimation of future potential losses.

(2) Based on historical data, management has no reason to believe that net
charge-offs, as a percentage of average loans outstanding by category, will
fluctuate materially during 1997.


                                       12
<PAGE>   17
         ALLOWANCE FOR LOAN LOSSES

         Portsmouth's lending policy focuses on loan quality, primarily in its
market area, and close monitoring of the loan portfolio by management.
Management reviews on a monthly basis, using regulatory guidelines and the risk
elements in the loan portfolio in determining the adequacy of the Allowance For
Loan Losses. At December 31, 1996, management believes the balance in the
Allowance For Loan Losses account is adequate to absorb any losses that may be
inherent in the loan portfolio. The approximate anticipated amount of
charge-offs during the next full year of operations total $60,000 from the real
estate loan category. As a result of this lending policy, Portsmouth has
experienced minimal loan charge-offs and delinquencies. From 1992 through 1996,
only $450,000 was charged off for non-performing loans.

         DEPOSITS

         The average daily balance of deposits and the average rates paid
thereon appear under the headings, "Liquidity and Interest Rate Sensitivity
Management" and "Interest Rate Spreads" on pages 6, 7 and 8 of the Company's
1996 Annual Report to Stockholders, filed as Exhibit 13 hereto, which pages are
incorporated herein by reference.

         MATURITIES OF TIME DEPOSITS

         Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                             Time
                                           Certificate     Other
                                           of Deposit   Time Deposits     Total
                                                    (dollars in thousands)
<S>                                        <C>          <C>               <C>
3 months or less                            $ 6,835          $0            6,835
Over 3 but less than                          3,312           0            3,312
  6 months
Over 6 but less than                          1,599           0            1,599
  12 months
Over 12 months                                2,491           0            2,491
                                            -------          --          -------
    TOTAL                                   $14,237          $0          $14,237
                                            =======          ==          =======
</TABLE>


                                       13
<PAGE>   18
         RETURN ON EQUITY AND ASSETS

         The following table shows operating and capital ratios for 1996 and
1995.


<TABLE>
<CAPTION>
                                                             1996          1995
                                                            -----         -----
<S>                                                         <C>           <C>
Net income to average assets                                 2.25%         2.31%
Net income to average stockholders' equity                   9.28%         9.31%
Dividend payout ratio                                       81.70%        72.74%
Average equity to average total assets                      24.25%        24.15%
</TABLE>

         SHORT-TERM BORROWINGS

         Portsmouth has no material short-term borrowings.

MONETARY POLICIES

         Portsmouth and the Bank are affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for the management of Portsmouth to
predict accurately future changes in monetary policy or the effect of such
changes on the business or financial condition of Portsmouth.

EMPLOYEES

         As of December 31, 1996, Portsmouth and its subsidiary employed 63
full-time officers and employees. None of its employees are represented by
collective bargaining agents, and management considers relations with its
employees to be good. Two officers of the Bank serve as officers of Portsmouth
but received no renumeration for serving as officers of the Company in 1996.
Portsmouth has no other employees.

COMPETITION

         The Company, through the Bank, experiences intense competition in
attracting and retaining deposits and in lending funds throughout its market
area in New Hampshire and southern Maine. The primary factors in competing for
deposits are interest rates, convenient office locations and flexible hours.
Direct competition for deposit accounts comes from bank affiliates or other bank
holding companies, independent commercial banks, mutual savings banks, savings
and loan associations and credit unions. Additional significant competition for
deposits comes from nonbank competitors, such as brokerage firms, and other
investment alternatives such as U.S. government and corporate securities.


                                       14
<PAGE>   19
         Competition for loan origination in the Portsmouth area is intense. The
primary factors affecting competition for loans are interest rates, loan
origination fees and the range of lending services offered. Competition for
originations of mortgage loans normally comes from mortgage bankers, savings
institutions, commercial banks and insurance companies. In particular, there are
a significant number of mortgage companies operating in the Bank's market. The
principal competitors for consumer loans are finance company subsidiaries of
domestic automobile manufacturers, commercial banks and, to a lesser degree,
consumer finance companies. As the Bank develops its future operating strategies
toward providing full financial services for customers in its market area it may
face additional competition from diversified financial institutions.

         There are a number of pending legislative and regulatory proposals that
may alter the structure, regulations, and competitive relationships of financial
institutions. The ability of Portsmouth and the Bank to remain competitive will
depend on how successfully they can respond to the rapidly evolving competitive,
regulatory, technological and demographic developments affecting their
operations.

SUBSIDIARIES

         Portsmouth owns 100% of the capital stock of the Bank. The Company has
no other subsidiaries.

REGULATION

         GENERAL

         Savings banks and bank holding companies are subject to extensive
supervision and regulation. As a New Hampshire-chartered savings bank and a
FDIC-insured bank, the Bank is subject to regulation and supervision by the New
Hampshire Bank Commissioner (the "Commissioner") and the FDIC.

         Portsmouth, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board under the Bank Holding
Company Act of 1956 and by the Commissioner under New Hampshire law. The
issuance and sale of its securities and its relations with its stockholders are
subject to regulation by the Securities and Exchange Commission. The following
references to applicable statutes and regulations are brief summaries thereof
and do not purport to be complete.

         FEDERAL DEPOSIT INSURANCE CORPORATION

         The Bank's deposits are insured by the FDIC up to a maximum of $100,000
per depositor. The FDIC issues regulations, conducts periodic examinations,
imposes minimum capital requirements, requires the filing of reports and
generally supervises the operations of its insured banks. The approval of the
FDIC is required prior to any merger or consolidation, or the establishment or
relocation of a branch. This supervision and regulation is intended primarily
for the protection of depositors.


                                       15
<PAGE>   20
         Any insured bank that does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for non-compliance.
For example, proceedings may be instituted against any insured bank or any
director, officer or employee of such bank who engages in unsafe and unsound
practices, including the violation of applicable laws and regulations. The FDIC
has the authority to terminate insurance of deposits pursuant to procedures
established for that purpose. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDICIA") and regulations promulgated pursuant to
FDICIA have effected a number of regulatory reforms that among other things,
have broadened the authority of federal bank regulatory agencies to take action
against institutions that fail to meet minimum capital requirements or other
applicable standards. See "Capital Requirements."

         Under Section 7(b)(2)(A)(iii) of the Federal Deposit Insurance Act,
"The semiannual assessment for each member of a deposit insurance fund shall not
be less than $1,000.00." The FDIC has the authority to assess additional
premiums to cover its losses and expenses. The Bank's semiannual assessment for
1997 is $12,500.00 or a total of $25,000.00 for 1997.

         NEW HAMPSHIRE LAW

         As a state-chartered savings bank, the Bank is subject to the
applicable provisions of New Hampshire banking law. The Bank derives its lending
and investment powers from these laws and is subject to periodic examination and
reporting requirements imposed by the Commissioner, who also has specific
statutory jurisdiction over certain banking activities such as mergers and the
creation of new powers. New Hampshire has enacted interstate banking legislation
which permits out-of-state banks and bank holding companies to affiliate with
existing banks and bank holding companies in New Hampshire. The establishment of
branches is subject to the approval of the New Hampshire Board of Trust Company
Incorporation.

         As a New Hampshire bank holding company, Portsmouth is subject to the
general supervision of the Commissioner under New Hampshire law. The
Commissioner may require Portsmouth to submit reports and to be examined if such
reports are inadequate. New Hampshire law prohibits a bank holding company
(defined as a company owning 25% or more of the voting stock of two or more
banks) from acquiring any voting stock of an additional bank if, after such
acquisition, the bank holding company would have more than 12 affiliates in New
Hampshire, or if the total state-wide deposits of such bank holding company and
all its affiliates would exceed 20% of the total deposits of all banks in New
Hampshire. Portsmouth is not subject to such restrictions since it does not come
within these limitations.

         FEDERAL INTERSTATE BANKING LAW

         The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted in September 1994, eliminates many
barriers to: (i) interstate acquisitions by bank holding companies commencing in
1995, and (ii) interstate branching commencing in 1997, subject, in each case,
to the right of individual states to opt out of certain provisions of the
Interstate Banking Act in these regards.

         Commencing in September 1995, bank holding companies which meet
specified capital and management adequacy standards are eligible to acquire
banks in other states. Until 1997, an interstate holding company system will
need to retain a separate bank charter in each state where its subsidiaries
conduct a banking business.


                                       16
<PAGE>   21
         Various restrictions on such acquisitions will still apply after 1995,
including (i) federal and state antitrust laws, as currently in effect; (ii)
prohibitions on a single holding company system accounting for more than 10% of
all deposits nationwide or, subject to various opt-in and opt-out provisions for
individual states on a nondiscriminatory basis, accounting for 30% or more of
deposits in any state; (iii) state-imposed prohibitions on acquiring banks
within up to five years after they commence operations; and (iv) compliance by
the acquirer with the Community Reinvestment Act ("CRA") and fair lending laws.

         Commencing on June 1, 1997, banks will be permitted to cross state
lines to merge with other banks, subject to individual states' ability to adopt
various nondiscriminatory opt-in and opt-out provisions. The opt-in provision
becomes effective in New Hampshire on June 1, 1997. Antitrust and
anticoncentration restrictions will apply as described above. It will not be
necessary to keep multiple state charters in effect or to have a holding company
system. Generally, all banks that are parties to a proposed post-1997 merger
must satisfy applicable CRA, management quality and capital adequacy standards.

         De novo branching across state lines will be permissible if the host
state has a law expressly permitting out-of-state banks to establish de novo
branches in such state, commencing in 1997, state laws restricting branching
within a state will continue to apply to both federally chartered and state
chartered institutions. States may also impose instate standards in such areas
as CRA, fair lending and consumer protection.

         This federal legislation may significantly increase the competition
faced by the Bank over time.


                                       17
<PAGE>   22
         FEDERAL RESERVE BOARD

         The Federal Reserve Board requires the Bank to maintain reserves
against its transaction accounts based on the amount of the Bank's deposits.

         Under the Bank Holding Company Act, Portsmouth, as a bank holding
company, is required to file annually with the Federal Reserve Board a report of
its operations and, with its subsidiaries, is subject to examination by the
Federal Reserve Board. The Bank Holding Company Act prohibits a bank holding
company from acquiring direct ownership or control of more than 5% of the voting
shares of any bank, or increasing such ownership or control of any bank, without
prior approval of the Federal Reserve Board. No approval under the Bank Holding
Company Act is required, however, for a bank holding company already owning or
controlling over 50% of the voting shares of a bank to acquire additional shares
of such bank. The Bank Holding Company Act also generally permits a bank holding
company that is adequately capitalized and adequately managed to acquire control
of a bank located in a state other than the home state of the bank holding
company. New Hampshire law authorizes the acquisition of out-of-state financial
institutions by New Hampshire bank holding companies and of New Hampshire
financial institutions by out-of-state bank holding companies in certain
circumstances.

         The Bank Holding Company Act further precludes a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any nonbanking entity engaged in any
activity other than those that the Federal Reserve Board has determined to be
closely related to banking or managing and controlling banks so as to be a
proper incident thereto. The Federal Reserve Board has determined that certain
activities, including, but not limited to, mortgage banking, operating small
loan companies, discount brokerage activities, factoring, certain data
processing operations, providing investment and financial advice and leasing
personal property on a full payout basis are closely related to banking so as to
be a proper incident thereto. Portsmouth has not determined whether it will
engage in any of those enumerated activities considered (or which may be
considered in the future) to be closely related to banking so as to be a proper
incident thereto. A bank holding company and its subsidiaries are also
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease, sale of property or furnishing of services.

         The acquisition of direct or indirect ownership or control of more than
5% of the voting shares of Portsmouth or the Bank by any company might require
regulatory approval under the Bank Holding Company Act, and the acquisition of
25% or more by any person or group of persons (including individuals as well as
companies) would be subject to the provisions of the Change in Bank Control Act
of 1978.

         Transactions between a depository institution and its holding company
are generally subject to the restrictions contained in Sections 23A and 23B of
the Federal Reserve Act. Section 23A imposes both quantitative and qualitative
restrictions on such transactions, while Section 23B requires, among other
things, that all such transactions be on terms substantially the same, and at
least as favorable to the depository institution, as in a comparable transaction
with an unaffiliated party. Exemption from, and waivers of, the provisions of
Sections 23A and 23B of the Federal Reserve Act may be granted only by the Board
of Governors of the Federal Reserve System.

         FDICIA requires any company that controls a depository institution that
becomes undercapitalized to guarantee, in connection with the submission of a


                                       18
<PAGE>   23
capital restoration plan by the depository institution, that the institution
will comply with the plan and to provide appropriate assurances of performance.
The aggregate liability of any such controlling company under such guaranty is
limited to the lesser of (i) 5% of the depository institution's assets at the
time it becomes undercapitalized, or (ii) the amount necessary to bring the
depository institution into capital compliance as of the time the institution
fails to comply with the terms of its capital plan.

         CAPITAL REQUIREMENTS

         The FDIC and the Federal Reserve Board have adopted minimum capital
ratios and guidelines for banks and bank holding companies (on a consolidated
basis) to provide a framework for assessing the adequacy of capital.

         Under its leverage capital adequacy guidelines, the FDIC has required
that insured state banks, such as the Bank, maintain a ratio of tier 1 or core
capital to assets of not less than 3% for banks rated composite 1 under the
FDIC's CAMEL rating system that are not experiencing or anticipating any
significant growth. For all other banks, the minimum core capital leverage ratio
is 3% plus at least an additional 100 to 200 basis points. The FDIC may impose
higher ratios for banks on a case-by-case basis. Banks that fail to meet these
minimum leverage capital levels will not, absent unusual circumstances, receive
FDIC approval of applications to establish new branches or other transactions
requiring approval.

         The FDIC has adopted so-called "risk based capital" guidelines for
insured state non-member banks. These risk based guidelines generally require
the Company and the Bank to maintain a consolidated ratio of tier 1 capital to
risk-weighted assets, as defined, of at least 4%, and a consolidated ratio of
total capital (defined as the sum of tier 1 and tier 2 capital, as defined
below) to risk-weighted assets of at least 8%. For this purpose, the Company's
total shareholders' equity will constitute tier 1 capital. Banks which are not
rated composite 1 or 2 will generally be required to maintain higher risk-based
capital ratios determined by the FDIC on a case-by-case basis.

         Tier 1 or core capital consists of common stock, surplus, undivided
profits, disclosed capital reserves that represent a segregation of undivided
profits, foreign currency translation adjustments and minority interest in
consolidated subsidiaries less all intangible assets other than certain mortgage
servicing rights. Tier 2 or supplementary capital consists of allowance for loan
and lease losses (up to certain maximums), perpetual preferred stock, long-term
(minimum 20 year maturity) preferred stock, intermediate-term (minimum 5-year
maturity) preferred stock, hybrid capital instruments (including mandatory
convertible securities) and term subordinated debt.

         In determining total risk-weighted assets for purposes of the
risk-based capital requirement, (i) each off-balance sheet asset must be
converted to its on-balance sheet credit equivalent amount by multiplying the
face amount of each such item by a credit conversion factor ranging from 0% to
100% (depending upon the nature of the asset), (ii) the credit equivalent amount
of each off-balance sheet asset and the book value of each on-balance sheet
asset must be multiplied by a risk factor ranging from 0% to 100% (again
depending upon the nature of the asset), and (iii) the resulting amounts are
added together and constitute total risk-weighted assets.

         FDICIA has required the various federal banking agencies, including the
FDIC, to develop additional guidelines for their risk-based capital standards to
ensure that those standards take adequate account of (i) interest rate risk,
(ii) concentration of credit risk, (iii) the risks of nontraditional activities


                                       19
<PAGE>   24
and (iv) the actual performance and expected risk of loss on multi-family
mortgages. The Company does not believe that its capital ratios will require
material adjustments in light of these standards.

         FDICIA defines each institution as either well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, imposing progressively more scrutiny and restrictions on an
institution with less favorable capitalization. The definitions are based on an
institution's ability to meet all of the capitalization requirements imposed on
the institution by its primary federal regulator which is, in the case of the
Bank, the FDIC. Well capitalized institutions and adequately capitalized
institutions are defined to be institutions which significantly exceed, or
simply meet, all relevant capital requirements, respectively. Undercapitalized
and significantly undercapitalized banks are defined to be institutions which
fail to meet, or significantly fail to meet, all such capital requirements,
respectively. The level of capital below which an institution is deemed to be
critically undercapitalized may not be less than 2% of total assets nor more
than 65% of the required minimum level of capital under the leverage limit.
Management believes that the Bank was classified at December 31, 1996 as well
capitalized, since it exceeds all applicable minimum capital standards.
Management does not anticipate that the prompt corrective actions required under
FDICIA for undercapitalized institutions (see below) will have a material impact
upon the operations of the Bank as long as current capital levels are
maintained.

         Any insured depository institution which falls below the minimum
capital standards must submit a capital restoration plan. In general,
undercapitalized institutions will be precluded from increasing their assets,
acquiring other institutions, establishing additional branches, or engaging in
new lines of business without an approved capital plan and an agency
determination that such actions are consistent with the plan. Institutions that
are significantly undercapitalized or critically undercapitalized are subject to
additional restrictions and may be required to (i) raise additional capital;
(ii) limit asset growth; (iii) limit the amount of interest paid on deposits to
the prevailing rate of interest in the region where the institution is located;
(iv) divest or liquidate any subsidiary which the FDIC determines poses a
significant risk; (v) order a new election for members of the board of
directors; (vi) require the dismissal of a director or senior executive officer,
or (vii) take such other action as the FDIC determines is appropriate. Under
FDICIA, the FDIC is required to appoint a conservator or receiver for a
critically undercapitalized institution no later than 90 days after the
institution becomes critically undercapitalized, subject to a limited exception
for institutions which are in compliance with an approved capital plan and which
the FDIC certifies are not likely to fail.

         Savings institutions also have the authority to borrow from the Federal
Reserve "discount window" after they have exhausted all Federal Home Loan Bank
("FHLB") sources. FDICIA places limitations upon a Federal Reserve Bank's
ability to extend advances to undercapitalized and critically undercapitalized
depository institutions, including a prohibition on advances outstanding to an
undercapitalized institution for more than 60 days in any 120-day period.

         FDICIA prohibits any depository institution that is not now well
capitalized from accepting deposits through a deposit broker, except that the
FDIC may allow adequately capitalized institutions to accept brokered deposits
for successive periods of up to 90 days. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the area
in which the deposits would otherwise be accepted.


                                       20
<PAGE>   25
         RESTRICTIONS ON THE PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

         The New Hampshire Business Corporation Act (the "Business Corporation
Act") permits Portsmouth to pay dividends on its capital stock unless it would
not be able to pay its debts as they become due in the ordinary course of
business.

         The Bank is not subject to the Business Corporation Act, but the
payment of a cash dividend or distribution may be restricted if the effect
thereof would cause the net worth of the Bank to be reduced below either the
amount required for the guarantee fund of at least 3% of deposits and the
liquidation account or in the event that net worth requirements under New
Hampshire or federal laws or regulations limit such dividends or distributions.
The Bank has consistently complied with these requirements. Furthermore, the
Federal Deposit Insurance Act prohibits the Bank from paying dividends on its
capital stock if it is in default in the payment of any assessment to the FDIC.

         The Bank is not under any regulatory restrictions regarding retained
earnings available for distribution. At December 31, 1996, $35.43 million could
be distributed in accordance with Rule 4-08 (e) (1) of Regulation S-X.

         Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends or distributions
without the prior payment of taxes at the current income tax rates on an amount
greater than the amount appropriated to bad debt reserves.

         FEDERAL HOME LOAN BANK SYSTEM

         The Bank is a member of the FHLB of Boston, which is one of 12 regional
Federal Home Loan Banks. The FHLB serves as a reserve or central bank for its
members. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes advances
to members in accordance with policies and procedures established by the Board
of Directors of the FHLB. The Bank's membership in the FHLB is voluntary and can
be terminated by the Bank at any time when its advances, if any, are paid.

         As a member of the FHLB, the Bank is required to purchase and hold
stock in the FHLB in an amount equal to the greater of 1% of the bank's
aggregate unpaid residential mortgage loan balances at the beginning of the year
or 1/20th of FHLB advances outstanding. As of December 31, 1996, the Bank held
stock in the FHLB in the amount of $874,200, which exceeded the above
requirements.

         Although the Bank is not examined by the FHLB, the Bank, as an FHLB
member, is required to comply with various rules and regulations, including a
requirement that the Bank maintain, if it wishes to borrow from the FHLB, an
average daily balance of liquid assets (consisting of, among other things, cash,
certain time deposits, bankers' acceptances and specified United States
Government, state and federal agency obligations) of not less than a certain
percentage of net withdrawable savings and current short-term borrowings. The
liquidity requirement, currently 5%, may be changed from time to time by the
FHLB to any amount within the range of 4% to 10% depending upon economic
conditions and savings flows of member institutions. Penalties may be imposed
for violations of liquidity requirements. The Bank has consistently complied
with these liquidity requirements.

         OTHER REGULATIONS

         The policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have had a significant effect on the operating results of
financial


                                       21
<PAGE>   26
institutions in the past and are expected to continue to do so in the future. An
important function of the Federal Reserve Board is to regulate aggregate
national credit and money supply through such means as open market operations in
securities, establishment of the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. Policies of these agencies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States Government. Supervision, regulation or examination of Portsmouth
by these regulatory agencies is not intended for the protection of Portsmouth's
stockholders.

         The United States Congress has periodically considered and adopted
legislation that has resulted and could result in further regulation or
deregulation of banks and other financial institutions. Such legislation could
relax or eliminate geographic restrictions on banks and bank holding companies
and could place Portsmouth in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms and investment
banking firms. No assurance can be given as to whether any additional
legislation will be enacted or as to the effect of such legislation on the
business of Portsmouth.


                                       22
<PAGE>   27
ITEM 2. PROPERTIES

Portsmouth is obligated under certain operating leases incurred in the normal
course of business. A schedule of the minimum annual lease payments is as
follows:


                  1997..............................    8,000
                  1998..............................    8,000
                                                     --------
                  Total............................. $ 16,000
                                                     ========

         Portsmouth does not own any property. Portsmouth uses the premises and
equipment of the Bank and does not pay any rental fee for such premises and
equipment. The following tables sets forth information with regard to properties
owned by the Bank. Net book value amounts represent the book value of land and
improvements, after the deduction of accumulated depreciation, on these
properties.


<TABLE>
<CAPTION>
                                            Owned             Net Book Value at
Office Location                           or Leased           December 31, 1996
---------------                           ---------           -----------------
<S>                                       <C>                 <C>
333 State Street
Portsmouth, NH
(Main Office of the Bank and
adjacent drive-in parking
facilities).................                Owned                 $583,398
Fern Avenue
and Route 1
North Hampton, NH...........                Owned                  141,578
Ocean Road
and Route 33
Greenland, NH...............                Owned                  101,353
                                                                  --------
Total                                                             $826,329
                                                                  ========
</TABLE>


ITEM 3. LEGAL PROCEEDINGS

         The Company and the Bank are involved in various legal proceedings
incidental to the Bank's business, none of which is believed by management to be
material to the financial condition of the Bank or the Company.

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

         None.



                                       23
<PAGE>   28
                               EXECUTIVE OFFICERS

         Set forth below is certain information concerning the executive
officers of the Company.

           Harry R. Hart was elected President and Chief Executive Officer of
the Company and Chairman of the Board and Chief Executive Officer of Portsmouth
Savings Bank in November, 1992. Prior to this Mr. Hart served as President of
Portsmouth Savings Bank since 1990. He was Chief Executive Officer and President
of the First National Bank of Litchfield, Connecticut from 1973 to 1988 and
Chairman of the Board of that institution from 1988 to 1990.

         Mark E. Simpson was elected Treasurer and Secretary in November 1987.
In November 1992, Mr. Simpson was elected President of the Bank. Prior to this
Mr. Simpson served as Executive Vice President of the Bank since 1988.
Previously to his election as Executive President of the Bank, Mr. Simpson
served as Vice President and Treasurer of the Bank from 1985 to 1988 and
Assistant Vice President from 1984 to 1985.

         Rodney D. Pridham joined Portsmouth Savings Bank in June, 1957, and
since then, has held several management positions. In January 1985, Mr. Pridham
was elected Senior Vice President-Mortgages, as well as acting as Personnel
Officer.

         William H. Little joined Portsmouth Savings Bank in June, 1971 and
served in various management capacities. In November 1988, Mr. Little was
elected Vice President and Treasurer supervising overall Bank operations.

         Donald H. Sargent joined Portsmouth Savings Bank in February 1988 and
was elected Vice President-Finance. In January 1990, he was elected Senior Vice
President-Finance. From 1972 to February 1988, Mr. Sargent served in various
officer capacities with Amoskeag Savings Bank and Amoskeag Bank Shares, Inc.

         John J. Pratt, Jr. joined Portsmouth Savings Bank in February 1994 as
Vice President-Commercial Loans. In April 1995, Mr. Pratt was elected Senior
Vice President-Commercial Loans. Prior to coming to Portsmouth Savings Bank, he
was employed by First National Bank of Portsmouth from January 1983 to February
1994. Most recently, he was a Senior Vice President serving in the
Administrative and Loan Departments.



                                       24
<PAGE>   29
                                     PART II

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

         The information required by this item regarding the Company's Common
Stock appears under the heading "Market for the Company's Stock and Related
Stockholder Matters" on page 1 of the Company's 1996 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which page is incorporated herein by
reference. The payment of dividends by the Bank to Portsmouth is subject to
certain regulatory restrictions. See "Regulations," Page 15.

ITEM 6. SELECTED FINANCIAL DATA

         The information required by this item is contained on page 11 of the
Company's 1996 Annual Report to Stockholders, filed as Exhibit 13 hereto, which
page is incorporated herein by reference.

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

         The information required by this item appears under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 5 through 11 of the Company's 1996 Annual Report to
Stockholders, filed as Exhibit 13 hereto, which pages are incorporated herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is contained on pages 12 through
35 of the Company's 1996 Annual Report to Stockholders, filed as Exhibit 13
hereto, which pages are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.


                                       25
<PAGE>   30
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         On or before April 30, 1997, the information pertaining to Directors
required by this item will either be incorporated by reference from the
Company's definitive Proxy Statement-Prospectus for the Company's 1997 Meeting
of Stockholders as filed with the Securities and Exchange Commission (the "Proxy
Statement-Prospectus"), or will be provided pursuant to an amendment on Form 10-
K/A.

ITEM 11. EXECUTIVE COMPENSATION

         On or before April 30, 1997, the information required by this item will
either be incorporated by reference from the Company's definitive Proxy
Statement-Prospectus for the Company's 1997 Meeting of Stockholders as filed
with the Securities and Exchange Commission (the "Proxy Statement-Prospectus"),
or will be provided pursuant to an amendment on Form 10-K/A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         On or before April 30, 1997, the information required by this item will
either be incorporated by reference from the Company's definitive Proxy
Statement-Prospectus for the Company's 1997 Meeting of Stockholders as filed
with the Securities and Exchange Commission (the "Proxy Statement-Prospectus"),
or will be provided pursuant to an amendment on Form 10-K/A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On or before April 30, 1997, the information required by this will
either be incorporated by reference from the Company's definitive Proxy
Statement-Prospectus for the Company's 1997 Meeting of Stockholders as filed
with the Securities and Exchange Commission (the "Proxy Statement-Prospectus"),
or will be provided pursuant to an amendment on Form 10-K/A.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)      (1)      Index of Financial Statements: The following
                           financial Statements appear in response to item 8 of
                           this Report on the pages indicated in the Company's
                           1996 Annual Report to Stockholders, filed as Exhibit
                           13 hereto, which pages are incorporated herein by
                           reference.

                           Report of Independent Certified Accountants, page 12.

                           Consolidated Balance Sheets as of December 31, 1996
                           and 1995, page 13.

                           Consolidated Statements of Income for the Years Ended
                           December 31, 1996, 1995 and 1994, page 14.

                           Consolidated Statements of Changes in Stockholders'
                           Equity for the Years Ended December 31, 1996, 1995
                           and 1994, page 15.

                           Consolidated Statements of Cash Flows for the Years
                           Ended December 31, 1996, 1995 and 1994, page 16.


                                       26
<PAGE>   31
                           Notes to Consolidated Financial Statements, pages 18
                           through 35.


         (a)      (2)      Index of Financial Statement Schedules: Financial
                           Statement Schedules required by item 8 of this Report
                           or as part of this item 14.

                           Schedule I - Indebtedness to Related Parties. The
                           information required by this schedule is not material
                           and is therefore not applicable.

         (c)               Exhibits: Listed separately on Exhibit Index found on
                           page page 32.

         (c)      (2)      Plan of Acquisition, Reorganization, Arrangement,
                           Liquidation or Succession:

                  (a)      Agreement and Plan of Merger dated February 13, 1997,
                           incorporated by reference from Exhibit 2 to CFX
                           Schedule 13D filed with the Securities and Exchange
                           Commission on February 21, 1997 with respect to the
                           common stock of Portsmouth (the "CFX Schedule 13D").

                  (b)      Agreement and Plan of Reorganization dated February
                           13, 1997, incorporated by reference from Exhibit 3 to
                           the CFX Schedule 13D.

                  (c)      Plan of Share Exchange dated February 13, 1997,
                           incorporated by reference from Exhibit 4 to the CFX
                           Schedule 13D.

                  (d)      Stock Option Agreement dated February 13, 1997,
                           incorporated by reference from Exhibit 1 to the CFX
                           Schedule 13D.

         (c)      (3)      Articles of Incorporation and By-Laws:

                  (a)      The Articles of Incorporation as amended of the
                           Company are incorporated by reference to Item 14,
                           Exhibit 3 (a) to the Company's 1990 Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 29, 1991.

                  (b)      The By-Laws of the Company are incorporated herein by
                           reference to Item 14, Exhibit 3(b) to the Company's
                           1988 Annual Report on Form 10-K filed with the
                           Securities and Exchange Commission on March 31, 1989.

         (c)      (4)      Instruments Defining the Rights of Security Holders:

                  (a)      The Articles of Incorporation as amended of the
                           Company are incorporated by reference to Item 14,
                           Exhibit 3 (a) to the Company's 1990 Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 29, 1991.

                  (b)      The By-Laws of the Company are incorporated herein by
                           reference to Item 14, Exhibit 3(b) to the Company's
                           1988 Annual Report on Form 10-K filed with the
                           Securities and Exchange Commission on March 31, 1989.


                                       27
<PAGE>   32
                  (c)      The Rights Agreement, between the Company and The
                           First National Bank of Boston, dated as of November
                           17, 1988, is incorporated herein by reference to Item
                           2.1 to the Company's Registration Statement on Form
                           8-A filed with the Securities and Exchange Commission
                           on November 30, 1988.

         (c)      (10)     Material Contracts:

                  (a)      Agreement among Portsmouth Bank Shares, Inc.,
                           Portsmouth Savings Bank and Robert W. Simpson is
                           incorporated herein by reference to Item 16, Exhibit
                           10.2 to the Company's Registration Statement,
                           registration number 33-18714, on Form S-1, filed with
                           the Securities and Exchange Commission on November
                           25, 1987.

                  (b)      Amended and Restated Agreement among Portsmouth Bank
                           Shares, Inc., Portsmouth Savings Bank and Robert W.
                           Simpson is incorporated herein by reference to Item
                           14, Exhibit 10(b) to the Company's Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 30, 1990.

                  (c)      Employment Agreement between Portsmouth Savings Bank
                           and Robert W. Simpson; Split Dollar Agreement and
                           Amendment thereto between Portsmouth Savings Bank and
                           Robert W. Simpson; and Deferred Compensation
                           Agreement between Portsmouth Savings Bank and Robert
                           W. Simpson, are each incorporated herein by reference
                           to Item 16, Exhibit 10.3 to the Company's
                           Registration Statement, registration number 33-18714,
                           on Form S-1, filed with the Securities and Exchange
                           Commission on November 25, 1987.

                  (d)      Employment Agreements among Portsmouth Bank Shares,
                           Inc., Portsmouth Savings Bank and each of William H.
                           Little, Rodney D. Pridham, Donald H. Sargent and Mark
                           E. Simpson are incorporated herein by reference to
                           Item 14, Exhibit 10(d) to the Company's Annual Report
                           on Form 10-K filed with the Securities and Exchange
                           Commission on March 30, 1990.

                  (e)      Portsmouth Bank Shares, Inc. 1987 Stock Option and
                           Appreciation Rights Plan is incorporated herein by
                           reference to Item 16, Exhibit 10.4 to the Company's
                           Registration Statement registration number 33-18714,
                           on Form S-1, filed with the Securities and Exchange
                           Commission on November 25, 1987.

                  (f)      Portsmouth Savings Bank Employee Stock Ownership Plan
                           and Trust is incorporated herein by reference to Item
                           16, Exhibit 10.5 to the Company's Registration
                           Statement, registration number 33-18714, on Form S-1,
                           filed with the Securities and Exchange Commission on
                           November 25, 1987.

                  (g)      Employment Agreement between Portsmouth Savings Bank,
                           Portsmouth Bank Shares, Inc. and John J. Pratt, Jr.
                           is attached hereto as Exhibit (c)(10)(g) to this
                           Annual Report on Form 10-K.

         (c)      (11)     Computation of Per Share Earnings: The computation of
                           per share earnings is contained under the heading
                           "Consolidated Statements of Income" on page 12 of the
                           Company's 1996 Annual


                                       28
<PAGE>   33
                           Report to Stockholders, filed as Exhibit 13 hereto,
                           which page is incorporated herein by reference.

         (c)      (12)     Statements re Computation of Ratios: Not applicable,
                           as the Company does not have any debt securities or
                           preferred stock registered under Section 12 of the
                           Securities Exchange Act of 1934.

         (c)      (13)     Annual Report to Security Holders: The Company's 1996
                           Annual Report to Stockholders' is attached hereto as
                           Exhibit 13 to this Annual Report on Form 10-K.

         (c)      (21)     Subsidiaries of Registrant: As of March 15, 1997, the
                           Company had the following subsidiary:


               Name                               State of Incorporation
               ----                               ----------------------

      Portsmouth Savings Bank                     New Hampshire


                                       29
<PAGE>   34
                          SHATSWELL, MacLEOD & COMPANY
                          Certified Public Accountants

                                 83 Pine Street
                    West Peabody, MA 01960-3635(508)535-0206



                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

         We consent to the incorporation by reference in the registration
statement of Portsmouth Bank Shares, Inc. and subsidiary on Form S-8 (File No.
33-24050) of our report dated January 13, 1997, except for Note 20, as to which
the date is February 13, 1997, on our examination of the consolidated financial
statement schedules of Portsmouth Bank Shares, Inc. and Subsidiary as of
December 31, 1996 and 1995, and for each of the fiscal years ended December 31,
1996, 1995 and 1994, which report is incorporated by reference in this Annual
Report on Form 10-K.



                                                        SHATSWELL, MacLEOD & CO.
W. Peabody, Massachusetts
March 28, 1997


                                       30
<PAGE>   35
                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                          PORTSMOUTH BANK SHARES, INC.

         By:/s/ Harry R. Hart                     By:/s/ Mark E. Simpson
            -----------------------------         ------------------------------
            Harry R. Hart                            Mark E. Simpson
            President and                            Secretary and Treasurer
            Chief Executive Officer

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
     Signature                               Title                                  Date
     ---------                               -----                                  ----
<S>                                    <C>                                     <C>
/s/ Robert W. Simpson                  Chairman of the Board                   March 13, 1997
-----------------------                of Directors, Portsmouth                --------------
Robert W. Simpson                      Bank Shares, Inc.

/s/ Timothy J. Connors                 Director of Portsmouth                  March 13, 1997
-----------------------                Bank Shares, Inc.                       --------------
Timothy J. Connors

/s/ Harry R. Hart                      Director, President and                 March 13, 1997
-----------------------                Principal Executive Officer             --------------
Harry R. Hart                          and Financial Officer

/s/ Harry P. Jarvis                    Director of Portsmouth                  March 13, 1997
-----------------------                Bank Shares, Inc.                       --------------
Harry P. Jarvis

/s/ Duane L. Jellison                  Director of Portsmouth                  March 13, 1997
-----------------------                Bank Shares, Inc.                       --------------
Duane L. Jellison

/s/ M. Kevin MacLeod                   Director of Portsmouth                  March 13, 1997
-----------------------                Bank Shares, Inc.                       --------------
M. Kevin MacLeod

/s/ Mark E. Simpson                    Director, Secretary                     March 13, 1997
-----------------------                and Treasurer                           --------------
Mark E. Simpson
</TABLE>


                                       31
<PAGE>   36
                                    EXHIBITS

(c)      (2)      Plan of Acquisition, Reorganization, Arrangement, Liquidation
                  or Succession:

                  (a)      Agreement and Plan of Merger dated February 13, 1997,
                           incorporated by reference from Exhibit 2 to CFX
                           Schedule 13D filed with the Securities and Exchange
                           Commission on February 21, 1997 with respect to the
                           common stock of Portsmouth (the "CFX Schedule 13D").

                  (b)      Agreement and Plan of Reorganization dated February
                           13, 1997, incorporated by reference from Exhibit 3 to
                           the CFX Schedule 13D.

                  (c)      Plan of Share Exchange dated February 13, 1997,
                           incorporated by reference from Exhibit 4 to the CFX
                           Schedule 13D.

                  (d)      Stock Option Agreement dated February 13, 1997,
                           incorporated by reference from Exhibit 1 to the CFX
                           Schedule 13D.

         (3)      Articles of Incorporation and By-Laws:

                  (a)      The Articles of Incorporation as amended of the
                           Company are incorporated by reference to Item 14,
                           Exhibit 3 (a) to the Company's 1990 Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 29, 1991.

                  (b)      The By-Laws of the Company are incorporated herein by
                           reference to Item 14, Exhibit 3(b) to the Company's
                           1988 Annual Report on Form 10-K filed with the
                           Securities and Exchange Commission on March 31, 1989.

         (4)      Instruments Defining the Rights of Security Holders:

                  (a)      The Articles of Incorporation as amended of the
                           Company are incorporated by reference to Item 14,
                           Exhibit 3 (a) to the Company's 1990 Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 29, 1991.

                  (b)      The By-Laws of the Company are incorporated herein by
                           reference to Item 14, Exhibit 3(b) to the Company's
                           1988 Annual Report on Form 10-K filed with the
                           Securities and Exchange Commission on March 31, 1989.

                  (c)      The Rights Agreement, between the Company and The
                           First National Bank of Boston, dated as of November
                           17, 1988, is incorporated herein by reference to Item
                           2.1 to the Company's Registration Statement on Form
                           8-A filed with the Securities and Exchange Commission
                           on November 30, 1988.

         (10)     Material Contracts:

                  (a)      Agreement among Portsmouth Bank Shares, Inc.,
                           Portsmouth Savings Bank and Robert W. Simpson is
                           incorporated herein by reference to Item 16, Exhibit
                           10.2 to the Company's Registration Statement,
                           registration number 33-18714, on Form S-1,


                                       32
<PAGE>   37
                           filed with the Securities and Exchange Commission on
                           November 25, 1987.

                  (b)      Amended and Restated Agreement among Portsmouth Bank
                           Shares, Inc., Portsmouth Savings Bank and Robert W.
                           Simpson is incorporated herein by reference to Item
                           14, Exhibit 10(b) to the Company's Annual Report on
                           Form 10-K filed with the Securities and Exchange
                           Commission on March 30, 1990.

                  (c)      Employment Agreement between Portsmouth Savings Bank
                           and Robert W. Simpson; Split Dollar Agreement and
                           Amendment thereto between Portsmouth Savings Bank and
                           Robert W. Simpson; and Deferred Compensation
                           Agreement between Portsmouth Savings Bank and Robert
                           W. Simpson, are each incorporated herein by reference
                           to Item 16, Exhibit 10.3 to the Company's
                           Registration Statement, registration number 33-18714,
                           on Form S-1, filed with the Securities and Exchange
                           Commission on November 25, 1987.

                  (d)      Employment Agreements among Portsmouth Bank Shares,
                           Inc., Portsmouth Savings Bank and each of William H.
                           Little, Rodney D. Pridham, Donald H. Sargent and Mark
                           E. Simpson are incorporated herein by reference to
                           Item 14, Exhibit 10(d) to the Company's Annual Report
                           on Form 10-K filed with the Securities and Exchange
                           Commission on March 30, 1990.

                  (e)      Portsmouth Bank Shares, Inc. 1987 Stock Option and
                           Appreciation Rights Plan is incorporated herein by
                           reference to Item 16, Exhibit 10.4 to the Company's
                           Registration Statement, registration number 33-18714,
                           on Form S-1, filed with the Securities and Exchange
                           Commission on November 25, 1987.

                  (f)      Portsmouth Savings Bank Employee Stock Ownership Plan
                           and Trust is incorporated herein by reference to Item
                           16, Exhibit 10.5 to the Company's Registration
                           Statement, registration number 33-18714, on Form S-1,
                           filed with the Securities and Exchange Commission on
                           November 25, 1987.

                  (g)      Employment Agreement between Portsmouth Savings Bank,
                           Portsmouth Bank Shares, Inc. and John J. Pratt, Jr.
                           is attached hereto as Exhibit (c)(10)(g) to this
                           Annual Report on Form 10-K.

         (11)     Computation of Per Share Earnings: The computation of per
                  share earnings is contained under the heading "Consolidated
                  Statements of Income" on page 12 of the Company's 1996 Annual
                  Report to Stockholders, filed as Exhibit 13 hereto, which page
                  is incorporated herein by reference.

         (12)     Statements re Computation of Ratios: Not applicable, as the
                  Company does not have any debt securities or preferred stock
                  registered under Section 12 of the Securities Exchange Act of
                  1934.

         (13)     Annual Report to Security Holders: The Company's 1996 Annual
                  Report to Stockholders'. (Filed by Amendment)



                                       33
<PAGE>   38
         (21)     Subsidiaries of Registrant: As of March 15, 1997, the Company
                  had the following subsidiary:


                           Name                     State of Incorporation
                           ----                     ----------------------

                  Portsmouth Savings Bank           New Hampshire





                                       34