GRANITE STATE BANKSHARES INC, DEF 14A, 1998-03-19

GRANITE STATE BANKSHARES INC
DEF 14A, 1998-03-19
STATE COMMERCIAL BANKS

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[PROXY STATEMENT]

[GRANITE STATE BANKSHARES LETTERHEAD]

March 19, 1998

Dear Stockholder:

You are cordially invited to attend the annual meeting of stockholders
(the "Annual Meeting") of Granite State Bankshares, Inc. ("Granite State" or
the "Company"), to be held on April 14, 1998 at 10:00 a.m., at the Keene
Country Club, Keene, New Hampshire.

Matters to be considered at the Annual Meeting include the election of
seven directors, the approval of the Granite State Bankshares, Inc. 1997
Long-Term Incentive Stock Benefit Plan, and the ratification of the appointment
of independent auditors for the fiscal year ending December 31, 1998. During
this meeting, we will also report on the operations of Granite State. Directors
and officers of Granite State, as well as representatives of Grant Thornton
LLP, the Company's independent auditors, will be present at the Annual Meeting
to respond to any questions that our stockholders may have. For the reasons set
forth in the proxy statement, the Board unanimously recommends a vote "FOR"
each of the nominees listed under Proposal 1, "FOR" Proposal 2 and "FOR"
Proposal 3.

Detailed information concerning the activities and operating performance
of Granite State during the year ended December 31, 1997, is contained in our
annual report, which is enclosed.

I hope you will be able to attend this meeting in person. Whether or not
you expect to attend, I urge you to sign, date and return the enclosed proxy
card so that your shares will be represented.

We look forward to seeing you at the Annual Meeting.

Sincerely,

/s/ CHARLES W. SMITH
Charles W. Smith

<PAGE>

GRANITE STATE BANKSHARES, INC.
122 WEST STREET
KEENE, NEW HAMPSHIRE 03431
(603) 352-1600

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 14, 1998

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Granite
State Bankshares, Inc. will be held on April 14, 1998, at 10:00 a.m., at the
Keene Country Club, West Hill Road, Keene, New Hampshire.

A proxy statement and proxy card for this Annual Meeting are enclosed
herewith. The Annual Meeting is for the purpose of considering and voting upon
the following matters:

1. The election of seven directors, four of which shall be for terms
of three years each, two of which shall be for terms of two years
each, and one of which shall be for a term of one year, or until
their successors are elected and qualified;

2. The approval of the Granite State Bankshares, Inc. 1997 Long- Term
Incentive Stock Benefit Plan;

3. The ratification of Grant Thornton LLP as independent auditors of
the Company for the fiscal year ending December 31, 1998; and

4. To transact such other business as may properly come before the
meeting or any adjournment thereof. Management is not aware of any
such other business.

Pursuant to the Bylaws, the Board of Directors has fixed March 6, 1998,
as the record date for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting. Only holders of Common Stock of the Company
as of the close of business on March 6, 1998 will be entitled to vote at the
Annual Meeting or any adjournments thereof. In the event there are not
sufficient votes for a quorum or to approve or ratify any of the foregoing
proposals at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit further solicitation of proxies by the Company.

EACH STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE ANNUAL MEETING,
IS REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY THE STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING
WITH THE SECRETARY OF GRANITE STATE A WRITTEN REVOCATION OR A DULY EXECUTED
PROXY BEARING A LATER DATE. ANY STOCKHOLDER OF RECORD PRESENT AT THE ANNUAL
MEETING MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT
BEFORE THE ANNUAL MEETING.

By Order of the Board of Directors

/s/ CHARLES B. PAQUETTE
Charles B. Paquette
Secretary

Keene, New Hampshire
March 19, 1998

<PAGE>

GRANITE STATE BANKSHARES, INC.
122 WEST STREET
KEENE, NEW HAMPSHIRE 03431

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
GRANITE STATE BANKSHARES, INC.
APRIL 14, 1998

SOLICITATION AND VOTING OF PROXIES

This proxy statement is being furnished to stockholders of Granite State
Bankshares, Inc. ("Granite State" or the "Company"), in connection with the
solicitation by the Board of Directors of the Company ("Board of Directors" or
the "Board") of proxies to be used at the annual meeting of stockholders (the
"Annual Meeting") to be held on April 14, 1998, at the Keene Country Club,
Keene, New Hampshire, at 10:00 a.m., and at any adjournments thereof.

This proxy statement and the accompanying proxy card are initially being
mailed to recordholders on or about March 19, 1998.

Regardless of the number of shares of common stock owned, it is important
that recordholders of a majority of the shares be represented by proxy or in
person at the Annual Meeting. Stockholders are requested to vote by completing
the enclosed proxy card and returning it signed and dated in the enclosed
postage-paid envelope. Stockholders are urged to indicate their vote in the
spaces provided on the proxy card. PROXIES SOLICITED BY THE BOARD OF DIRECTORS
OF GRANITE STATE WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN.
WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED PROXIES WILL BE VOTED FOR THE
ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR NAMED IN THIS PROXY STATEMENT,
FOR THE APPROVAL OF THE GRANITE STATE BANKSHARES, INC. 1997 LONG-TERM INCENTIVE
STOCK BENEFIT PLAN, AND FOR THE RATIFICATION OF GRANT THORNTON LLP AS
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31,
1998.

The Board of Directors knows of no additional matters that will be
presented for consideration at the Annual Meeting. Execution of a proxy,
however, confers on the designated proxyholders discretionary authority to vote
the shares in accordance with their best judgment on such other business, if
any, that may properly come before the Annual Meeting or any adjournments
thereof, including any motion to adjourn the Annual Meeting in order to solicit
additional proxies or otherwise.

The cost of solicitation of proxies in the form enclosed herewith will be
borne by Granite State. In addition to the solicitation of proxies by mail,
Registrar and Transfer Company, a proxy solicitation firm, will assist the
Company in soliciting proxies for the Annual Meeting and will be paid a fee
estimated to be $2,000, plus out-of-pocket expenses. Proxies may also be
solicited personally or by telephone by directors, officers and regular
employees of the Company or Granite Bank, a subsidiary of the Company (the
"Bank"), without additional compensation therefor. Granite State will also
request persons, firms and corporations holding shares in their names, or in
the name of their nominees, which are beneficially owned by others, to send
proxy materials to and obtain proxies from such beneficial owners, and will
reimburse such holders for their reasonable expenses in doing so.

REVOCATION OF PROXY

A proxy may be revoked at any time prior to its exercise by the filing of
a written notice of revocation with the Secretary of the Company, by delivering
to the Company a duly executed proxy bearing a later date, or by attending the
Annual Meeting and voting in person. However, if you are a stockholder whose
shares are not registered in your own name, you will need additional
documentation from your recordholder to vote personally at the Annual Meeting.

VOTING SECURITIES

The securities which may be voted at the Annual Meeting consist of shares
of common stock of Granite State, par value $1.00 per share (the "Common
Stock"), with each share entitling its owner to one vote on all matters to be
voted on at the Annual Meeting.

<PAGE> 1

The close of business on March 6, 1998 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at this Annual Meeting and any
adjournments thereof. All references to the number of shares of Common Stock
and the price per share of Common Stock in this proxy statement have been
adjusted to reflect Granite State's three-for-two stock split effected in the
form of a 50% stock dividend paid May 9, 1997. On the Record Date, Granite
State had 5,825,672 shares of Common Stock outstanding.

The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. In the event there are
not sufficient votes for a quorum or to approve or to ratify any proposal at
the time of the Annual Meeting, the Annual Meeting may be adjourned in order to
permit the further solicitation of proxies.

As to the election of directors, the proxy card being provided by the
Board of Directors enables a stockholder to vote for the election of the
nominees proposed by the Board, or to withhold authority to vote for one or
more of the nominees being proposed. Under New Hampshire law and the Company's
Certificate of Incorporation and Bylaws, directors are elected by a plurality
of shares voted, without regard to either (i) broker non-votes or (ii) proxies
as to which authority to vote for one or more of the nominees being proposed is
withheld.

Concerning the other matters to come before the Annual Meeting, by
checking the appropriate box, a stockholder may: (i) vote "FOR" the item; (ii)
vote "AGAINST" the item; or (iii) "ABSTAIN" with respect to the item. These
matters shall be determined by a majority of the votes cast FOR or AGAINST.
Hence, shares as to which the "ABSTAIN" box has been selected on the proxy card
and broker non-votes will not affect the vote as to that matter.

Proxies solicited hereby will be returned to the proxy solicitors or the
Company's transfer agent, and will be tabulated by inspectors of election
designated by the Board. After the final adjournment of the Annual Meeting, the
proxies will be returned to the Company for safekeeping.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information as to those persons
believed by management to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock on the Record Date as disclosed in certain
reports regarding such ownership filed with the Company and with the Securities
and Exchange Commission ("SEC"), in accordance with Sections 13(d) or 13(g) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), by such
persons or groups. Other than those persons listed below, the Company is not
aware of any person or group that owns more than 5% of the Company's Common
Stock as of the Record Date.

TITLE OF NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------ ------------------------------ -------------------- ----------

<S> <C> <C> <C>
Common Stock Granite State Bankshares, Inc. 332,304<F1> 5.70%
Employee Stock Ownership
Plan and Trust ("ESOP")
122 West Street
Keene, New Hampshire 03431

<FN>
- --------------------
<F1> Messrs. Koontz, Smedley and Smith serve as the administrative committee
of the ESOP (the "ESOP Committee"). In addition, Future Planning
Associates, Inc., an unrelated corporate trustee has been appointed ESOP
Trustee ("ESOP Trustee"). All shares held in the ESOP Trust have been
allocated to participants, and will be voted by the ESOP Trustee as
directed by such participants.
</FN>
</TABLE>

<PAGE> 2

PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
PROPOSAL 1 -- ELECTION OF DIRECTORS

In accordance with its Bylaws, Granite State currently has eleven (11)
directors. Directors of the Company are elected for staggered terms of three
years each, with a term of office of only one of the three classes of directors
expiring each year. Directors serve until their successors are elected and
qualified. The Bylaws of Granite State provide that no person may serve as
director after attaining 70 years of age.

All nominees named are presently directors of the Company. Messrs. Flynn,
Houston and McKerley were appointed to the Board of Directors pursuant to the
Agreement and Plan of Reorganization as amended among Granite State, Granite
Bank and Primary Bank and a related Agreement and Plan of Merger as amended
between Primary Bank and Granite Bank and joined in by Granite State. Messrs.
Flynn Houston and McKerley are now being presented as nominees for directors
for shareholder approval. Except for Messrs. Flynn, Houston and McKerley, no
person being nominated as a director is being proposed for election pursuant to
any agreement or understanding between any person and Granite State.

In the event that such nominee is unable to serve or declines to serve
for any reason, it is intended that proxies will be voted for the election of
the balance of those nominees named and for such other persons as may be
designated by the Board of Directors. The Board of Directors has no reason to
believe that any of the persons named will be unable or unwilling to serve.
Unless authority to vote for the directors is withheld, it is intended that the
shares represented by the enclosed proxy card if executed and returned will be
voted FOR the election of all nominees proposed by the Board of Directors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES
NAMED IN THIS PROXY STATEMENT.

INFORMATION WITH RESPECT TO NOMINEES, CONTINUING DIRECTORS AND EXECUTIVE
OFFICERS

The following table sets forth, as of the Record Date, the names of
nominees, continuing directors and "named executive officers", as defined
below, their ages, the year in which each became a director and the year in
which their terms (or in the case of nominees, their proposed terms) as
director of the Company expire and the amount of Common Stock and the percent
thereof beneficially owned by each and all directors and executive officers as
a group.

<TABLE>
<CAPTION>
EXPIRATION PERCENT
DIRECTOR OF TERM AS AMOUNT AND NATURE OF OF
NAME AGE SINCE DIRECTOR BENEFICIAL OWNERSHIP<F1> CLASS
- ------------------------------------ --- -------- ---------- ------------------------- -------

<S> <C> <C> <C> <C> <C>
NOMINEES
David J. Houston 63 1997 1999 32,128<F2> *
Christopher J. Flynn 51 1997 2000 87,595<F3>,<F4> 1.50%
Forrest D. McKerley 68 1997 2000 32,902<F5> *
Dr. David M. Bartley 63 1997 2001 596 *
Charles W. Smith 55 1986 2001 208,869<F6>,<F7> 3.58%
C. Robertson Trowbridge 66 1988 2001 29,082<F8> *
James C. Wirths III 61 1994 2001 29,637<F9> *

CONTINUING DIRECTORS
Jane B. Reynolds 68 1986 1999 24,094<F9> *
William Smedley, V 66 1986 1999 36,137<F9> *
Philip M. Hamblet 52 1990 2000 52,975<F9> *
James L. Koontz 63 1994 2000 12,117<F9> *

NAMED EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
William C. Henson 42 -- -- 64,125<F10>,<F11> 1.10%
Charles B. Paquette 45 -- -- 103,273<F10>,<F11> 1.77%
William G. Pike 46 -- -- 46,595<F10>,<F11> *
All directors and executive officers
as a group (19 persons) 812,423<F12>,<F13>,<F14> 13.68%

(footnotes on next page)

<PAGE> 3
<FN>
- --------------------
<F*> Represents less than 1.00% of the Company's voting securities.

<F1> Includes all shares of stock owned by each director or named executive
officer, their spouse, or as custodian or trustee, over which shares such
individuals effectively exercise sole or shared voting or investment
power.

<F2> Includes 8,326 shares subject to options granted to Mr. Houston, which
are currently exercisable.

<F3> Includes 11,706 shares held by the ESOP Trust for the benefit of Mr. Flynn
and over which Mr. Flynn has current voting rights.

<F4> Includes 14,713 shares subject to options granted to Mr. Flynn, which are
currently exercisable.

<F5> Includes 6,449 shares subject to options granted to Mr. McKerley, which
are currently exercisable.

<F6> Includes 49,217 shares held by the ESOP Trust for the benefit of Mr.
Smith and over which Mr. Smith has current voting rights.

<F7> Includes 7,500 shares subject to options granted to Mr. Smith, which are
exercisable within 60 days of the record date.

<F8> Includes 2,250 shares subject to options granted to Mr. Trowbridge, which
are exercisable within 60 days of the record date.

<F9> Includes 6,000 shares subject to options granted to each of Messrs.
Wirths, Smedley, Hamblet, Koontz and Mrs. Reynolds, which are exercisable
within 60 days of the record date.

<F10> Includes 22,761 shares, 24,783 shares, and 6,942 shares held by the
ESOP Trust for the benefit of Messrs. Henson, Paquette, and Pike,
respectively, and over which they have current voting rights.

<F11> Includes 5,357 shares subject to options granted to each of Messrs.
Henson, Paquette and Pike, which are exercisable within 60 days of the
record date.

<F12> Excludes shares held by the ESOP Trust that are allocated to non-
executive officers and employees.

<F13> Includes shares owned by five persons who are members of the Board of
Directors of Granite Bank, but not of the Company.

<F14> Includes 112,169 shares subject to options granted to Directors and
executive officers, and 115,409 shares held by the ESOP Trust for the
benefit of the executive officers and over which the executive officers
have current voting rights.
</FN>
</TABLE>

DIRECTORS' PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE FOR FIVE YEARS

Dr. David M. Bartley is President of Holyoke Community College, Holyoke,
Massachusetts.

Christopher J. Flynn is President of Granite Bank, a position he assumed
November 1, 1997 in connection with the Company's acquisition of Primary Bank
and its merger into Granite Bank. Prior to joining Granite Bank, Mr. Flynn was
President and Chief Executive Officer of Primary Bank since 1988.

Philip M. Hamblet is President of Fred H. Hamblet, Inc. an electrical
contracting firm.

David J. Houston is President of David J. Houston Company, a surplus
equipment sales company and also is President of Harbor Medical Devices Inc.
and Hadley Properties, Inc.

James L. Koontz is Chairman of the Executive Committee of the Board of
Granite Bank. Mr. Koontz is President and Chief Executive Officer of Kingsbury
Corporation, a manufacturer of factory automation and machine tools.

Forrest D. McKerley is Chairman and Chief Executive Officer of Secure
Care Products, Inc. He formerly served as President of McKerley Health Care
Centers, Inc., Partner in McKerley Health Facilities, President of Mckerley
Pleasant View, Inc. and Chairman and Chief Executive Officer of Accumed, Inc.

Jane B. Reynolds has been active in community affairs, serving as a
trustee of Cheshire Hospital.

William Smedley, V, is retired and formerly was the Vice President of
Human Resources at National Grange Mutual Insurance Co., Keene, New Hampshire.

Charles W. Smith is Chairman of the Board and Chief Executive Officer of
Granite State and Granite Bank. Mr. Smith has been the Chief Executive Officer
of Granite Bank since October 1982.

C. Robertson Trowbridge is Chairman of the Board of Yankee Publishing,
Inc., a publishing firm.

James C. Wirths, III is retired and formerly was the Vice President of
Finance and Treasurer of Tilcon-Arthur Whitcomb, Inc., a building supplier of
ready-mix concrete.

<PAGE> 4

COMMITTEES OF THE BOARD OF GRANITE STATE

Granite State's Board of Directors has appointed an Executive Committee
consisting of Messrs. Smith, Koontz, Smedley and Wirths and Mrs. Reynolds, an
Audit Committee composed of Messrs. Wirths, Bartley, Flynn, Hamblet and Koontz
and a Personnel Committee which serves as the Company's Compensation Committee
consisting of Messrs. Smedley, Smith and Koontz and Mrs. Reynolds. The Board of
Directors of Granite State does not have a standing Nomination Committee. The
Executive Committee met 6 times during 1997, the Audit Committee met 2 times
and the Personnel Committee met 2 times. The Executive Committee is vested with
the authority of the Granite State Board in most matters between meetings of
the Granite State Board. The Audit Committee reviews audit procedures and
internal controls at the Company and the report and performance of the
Company's independent auditors. The Personnel Committee determines compensation
for the officers and other employees of the Company, as well as reviewing the
employee benefit plans of the Company. The Company's Board of Directors met 9
times, and Granite Bank's Board of Directors met 14 times in 1997. All
directors were present for at least 75% of the meetings of the Board and the
Committees of which they were a member except for Mr. Trowbridge.

DIRECTORS' COMPENSATION

Directors' Fees. The directors of Granite State are paid $700 for each
Board of Directors meeting attended and $150 for each committee meeting
attended. The directors of Granite State who are also directors of Granite
Bank, are paid $700 for attendance at board meetings and $150 for each
committee meeting attended of the subsidiary. Additionally, the Chairman of the
Executive Committee of the Board of Directors of the Bank is also paid a $1,500
annual retainer. The directors may elect to defer their compensation.
Additionally, in the first quarter of each year Directors are given the
opportunity to receive ninety percent of their estimated fees for attendance at
Board meetings during the upcoming year, as a retainer payment, which amount is
utilized for the purpose of purchasing shares of Company Common Stock in the
open market for the benefit of the individual Directors. Persons who were
Directors of Granite State and the Bank prior to the acquisition of Primary
Bank were granted options to purchase shares of Common Stock under the Granite
State Bankshares, Inc. 1997 Long-Term Incentive Stock Benefit Plan. The
exercise price for the shares underlying the options granted is the fair market
value of the Common Stock on the date of grant. For further information
regarding these options, see "Proposal 2 - Approval of The Granite State
Bankshares, Inc. 1997 Long-Term Incentive Stock Benefit Plan." Persons who were
Directors of Primary Bank were granted options under stock option plans adopted
by Primary Bank, which options have been assumed by Granite State as a result
of its acquisition of Primary Bank. All Directors are eligible to receive
future grants under the 1997 Long-Term Incentive Stock Benefit Plan.

EXECUTIVE COMPENSATION

PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Under rules established by the Securities and Exchange Commission
("SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Company's Chief
Executive Officer and other executive officers of the Company. The disclosure
requirements for the Chief Executive Officer and other executive officers
include the use of tables and a report explaining the rationale and
considerations that led to fundamental compensation decisions affecting those
individuals. In fulfillment of this requirement, the Personnel Committee, at
the direction of the Board of Directors, has prepared the following report for
inclusion in this proxy statement.

The Company does not pay direct cash compensation to the executive
officers of the Company. However, the Company's executives are also executive
officers of the Bank and are compensated by the Bank. The members of the
Personnel Committee are three non-employee members of the Board of Directors
and Charles W. Smith, Chairman and Chief Executive Officer of Granite State and
the Bank. Mr. Smith offers input and advice as to executive compensation
affecting members of the senior management team other than himself.
Compensation decisions and recommendations made as to Mr. Smith are made
without the participation of Mr. Smith. All decisions by the Personnel
Committee relating to the compensation of the Company's executive officers are
reviewed by the full Board of Directors, except for decisions about awards
under certain of the Company's stock- based compensation plans, which can be
made solely by the Committee. The Committee meets at least annually to review
and make recommendations to the Board of Directors regarding the compensation
of the Chief Executive Officer and other executives.

The decisions made by the Personnel Committee as to executive
compensation are subjective in nature, and not subject to specific criteria.
Set forth below are certain considerations taken into account in determining
compensation for the Chief Executive Officer ("CEO") and the other executive
officers.

<PAGE> 5

Base Salaries-In determining the base salaries for the CEO and other
executive officers, the committee reviews salaries to ensure that the Bank's
base salary levels are competitive with financial institutions similar in size,
geographic market and business profile in order for the Bank to attract and
retain persons of high quality. The Bank has retained the services of Tom
Warren and Associates, Inc., compensation consultants ("Warren"), to provide an
independent outside survey and analysis of the appropriateness of senior
management compensation. Warren's salary data was based upon financial
institutions engaged in comparable activities and provided information as to
the median salary by position. Warren relied on several established surveys in
establishing the salary ranges for senior management positions. The Committee
relied upon the market salaries as indicated by the Warren report in approving
salary adjustments.

Bonus Awards-Bonus compensation for the executive officers generally
consist of cash bonuses and long-term benefits such as stock option plans, etc.
There is no established incentive compensation or bonus plan. Historically, the
Personnel Committee has granted cash bonuses to executive officers based on
profitability and/or other factors regarding individual accomplishments and
performance towards meeting overall Company and Bank goals and objectives.

The Company also maintains stock benefit plans in order to promote the
growth and profitability of Granite State and to provide key officers and
employees with an incentive to achieve corporate objectives. Prior to 1997, the
only stock benefit plan was the option plan adopted in 1986 in connection with
the conversion of the Bank to stock form and the Company's initial public
offering. No grants have been made under this plan since 1992. In April 1997, a
stock benefit plan was adopted, and options were granted to certain officers of
the Company and the Bank. Information concerning individual grants of options
is located in the Options Granted Table in this proxy statement.

Compensation of Chief Executive Officer-The Board of Directors approved a
base salary for the CEO for the year 1997 of $254,832 which represented a 6.0%
increase from the base salary provided in 1996. The salary level was based upon
the compensation survey provided by Warren. Although Mr. Smith's contract calls
for a minimum increase of 10% per year, the actual increase, with the consent
of Mr. Smith, has historically been less. The Base salary adjustment for the
year 1997 was agreeable to Mr. Smith. The Committee also recommended that a
bonus of $101,933 be paid to the Chief Executive Officer. The 1997 bonus
primarily reflected the Company's net income exclusive of the effects of the
acquisition of Primary Bank, as well as the successful completion of the
Primary Bank acquisition. The CEO also received an allocation of shares of
Common Stock under the Employee Stock Ownership Plan (which was established in
1986), which allocation was automatic under the ESOP in accordance with the
provisions of the ESOP Plan. In 1997, the Board adopted an incentive stock
benefit plan and granted Mr. Smith an option to purchase 75,000 shares of
Common Stock at an exercise price equal to the market value of the Common Stock
at the date of grant, which represented 26.9% of all options granted in 1997.
In making this grant, the committee took into account that only one option plan
had been adopted by the Company since it went public in 1986, which plan
expired in 1996, that no options had been granted since 1992, and the
performance of the Company over that period of time while Mr. Smith had been
Chief Executive Officer.

PERSONNEL COMMITTEE

WILLIAM SMEDLEY, CHAIRMAN
JANE B. REYNOLDS
JAMES L. KOONTZ
CHARLES W. SMITH

<PAGE> 6

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN<F*>

The graph below compares the cumulative total shareholder return on
Granite State common stock for the last five years against the cumulative total
return of the SNL New England Bank Index and the NASDAQ Total Return Index for
the same period.

<TABLE>
<CAPTION>
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----- ---------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Granite State Bankshares, Inc. $100.00 $132.15 $163.46 $243.22 $332.77 $627.65
NASDAQ -- Total US 100.00 114.80 112.21 158.70 195.19 239.53
SNL New England Bank Index 100.00 102.57 98.57 161.62 220.39 350.81

<FN>
- -------------------
<F*> Investment of $100 in Granite State's common stock, the SNL New England
Bank Index and the NASDAQ Total Return Index. Total return assumes
reinvestment of all dividends.
</FN>
</TABLE>

<PAGE> 7

Summary Compensation Table. The following table shows, for the years
ended December 31, 1997, 1996 and 1995, the cash compensation paid by Granite
State or its subsidiary, as well as certain other forms of compensation paid or
accrued for those years, to the executive officers of the Company who each
received total salary and bonus in excess of $100,000 in 1997 ("Named Executive
Officers").

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ---------------
AWARDS
---------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)<F4> OPTIONS(#)<F2> COMPENSATION<F3>
- ----------------------------------- ---- ------------ -------- ------------------- --------------- ----------------

<S> <C> <C> <C> <C> <C> <C>
Charles W. Smith 1997 $270,082<F1> $101,933 $132,804<F5> 75,000 $26,479
Chairman and Chief Executive 1996 252,308<F1> 96,163 132,804<F5> -- 19,097
Officer of Granite State and 1995 235,800<F1> 79,380 -- -- 10,742
Granite Bank

William C. Henson 1997 125,198 35,055 19,674<F5> 37,500 19,064
Executive Vice President of the 1996 119,236 33,386 48,628<F5> -- 16,639
Company and Director of Community 1995 113,558 28,390 -- -- 10,169
Banking of the Bank

Charles B. Paquette 1997 125,198 35,055 37,382<F5> 37,500 19,481
Executive Vice President, Chief 1996 119,236 33,386 36,398<F5> -- 16,769
Operating Officer and Secretary 1995 113,558 28,390 -- -- 10,185
of the Company and the Bank

William G. Pike 1997 125,198 35,055 -- 37,500 14,493
Executive Vice President and Chief 1996 119,236 33,386 -- -- 15,116
Financial Officer of the Company 1995 113,558 28,390 -- -- 10,153
and the Bank

<FN>
- -------------------
<F1> Includes Board of Directors' fees.

<F2> No options were granted during the years ended December 31, 1996, and
1995.

<F3> Reflects amounts allocated to officers' accounts pursuant to the Employee
Stock Ownership Plan ("ESOP"). Amounts reflect the number of shares
allocated for the respective year, multiplied by the year-end price per
share of Common Stock, which were $26.75, $14.50 and $7.58 at December
31, 1997, 1996 and 1995, respectively.

<F4> For the periods presented, there were no (a) perquisites over the lesser
of $50,000 or 10% of the individual's total salary and bonus for each
year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; or (d) preferential
discounts on stock.

<F5> Represents the reimbursement by the Company of taxes related to the
exercise by the executive of nonstatutory stock options, which
reimbursement approximated the tax benefit received by the Company.
</FN>
</TABLE>

Employment Agreements. Granite State and Granite Bank have entered into
contracts with Messrs. Smith, Paquette, Henson and Pike. Mr. Smith receives a
minimum base salary of $290,000 under this 5 year contract subject to minimum
annual increases of 10%. The contract automatically renews each year, so that
the remaining term is five years unless notice of nonrenewal is provided by the
Board in which event the contract expires five years after such notice. In the
event of a change in control as defined in the contract of Granite State or
Granite Bank, resulting in a termination of employment, other than for cause,
or upon certain other events of termination of employment other than for cause,
Mr. Smith would receive a severance payment equal to the greater of the
payments remaining under the contract or three times his average annual salary
for the five immediately preceding years, plus an accelerated retirement
benefit. In addition, the Company is obligated to indemnify Mr. Smith for any
golden parachute excise tax, and any income tax with respect to such
indemnification payment, for which he would become liable in connection with a
termination following a change in control.

Messrs. Paquette, Henson and Pike have entered into contracts for three
year terms providing that in the event of a change in control as defined
therein, followed by a termination of employment or upon certain other events
of termination of employment, other than for cause, each would receive a
severance payment equal to three times their respective average annual salaries
(over the last 3 years) plus accelerated retirement benefits and continued
health insurance. These contracts automatically renew each year, so that the
remaining term is three years, unless notice of nonrenewal is provided by the
Board, in which event the contracts expire three years after such notice.

<PAGE> 8

Under all of the contracts, in the event of a change in control of
Granite State or Granite Bank, previously granted but unexercised stock options
will become fully vested and accelerated retirement benefits and insurance
coverage will be provided and continued. The officer will be reimbursed for all
legal expenses incurred in enforcing the employment contract. Such payments
will be made and such rights will vest if the officer terminates his employment
following a change in control, either involuntarily or voluntarily.

Under current tax law, certain of the payments that may be made under
these agreements in the event of a change in control may not be deductible by
Granite State.

Stock Option Plan. Prior to 1997, the only stock option plan adopted by
the Board of Directors, which was approved by the stockholders, was established
in connection with the Company's initial public offering in 1986. This plan
terminated in 1996, and options thereunder were last granted in 1992. In 1997,
the Board adopted the 1997 Long-Term Incentive Stock Benefit Plan, and stock
options have been granted thereunder. In addition, there currently are
outstanding options to purchase Company Common Stock that originated as options
to purchase Primary Bank common stock under various Primary Bank option plans,
which options were assumed by the Company as a result of the acquisition of
Primary Bank on October 31, 1997.

Set forth below is information relating to options granted under the
Stock Option Plans to Named Executive Officers during 1997.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- -------------------------------------------------------------------------------- ---------------------
PERCENT OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEEES EXERCISE OR EXPIRATION
NAME GRANTED<F1> IN 1997 BASE PRICE DATE 5% 10%
- -------------------- ----------- ---------------- ----------- ---------- -------- ----------

<S> <C> <C> <C> <C> <C> <C>
Charles W. Smith 75,000 26.88% $17.00 4/16/07 $801,840 $2,032,020
William C. Henson 37,500 13.44% 17.00 4/16/07 400,920 1,016,010
Charles B. Paquette 37,500 13.44% 17.00 4/16/07 400,920 1,016,010
William G. Pike 37,500 13.44% 17.00 4/16/07 400,920 1,016,010

<FN>
- -------------------
<F1> Options granted to Mr. Smith are exercisable in equal installments over a
ten year period and the options granted to Messrs. Henson, Paquette and
Pike are exercisable in equal installments over a seven year period. All
options granted include a reload feature, which automatically grants a
new option, with an exercise price at the then fair market value, equal
in number to the number of shares used as payment for the exercise price.
</FN>
</TABLE>

Set forth below is certain information concerning options exercised in
1997 by the Named Executive Officers, and options outstanding to such Named
Executive Officers at December 31,1997.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END<F2>
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME UPON EXERCISE REALIZED<F1> EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)
- -------------------- --------------- ------------ ---------------------------- ----------------------------

<S> <C> <C> <C> <C> <C> <C>
Charles W. Smith 35,250 $396,563 20,100 75,000 $470,742 $731,250
William C. Henson 6,240 70,200 25,807 37,500 604,399 365,625
Charles B. Paquette 10,970 143,889 26,883 37,500 629,600 365,625
William G. Pike 19,050 214,313 0 37,500 0 365,625

<FN>
- -------------------
<F1> Equals the difference between the aggregate exercise price of the options
exercised and the aggregate fair market value of the shares of Common
Stock received upon exercise computed by using the closing bid price of
the Common Stock as quoted on Nasdaq Stock Market on the date of
exercise.

<F2> Equals the difference between the aggregate exercise price of such
options and the aggregate fair market value of the shares of Common Stock
that would be received upon exercise, assuming such exercise occurred on
December 31, 1997, at which date the last sale price of the Common Stock
as quoted on the Nasdaq Stock Market was $26.75.
</FN>
</TABLE>

Defined Benefit Plan. Granite State provides a defined benefit retirement
plan for all eligible employees of Granite State and its subsidiary age 21 or
older who have completed at least one year of credited service. Benefits earned
become 100% vested after 5 years of vesting service after the attainment of age
18. The normal form of benefit at retirement is a straight life annuity. A
participant's retirement benefit will equal 2% of the participant's average
annual earnings (over a 3-year period) multiplied by the number of years of
credited service (up to a maximum of 30 years), reduced by 1-2/3% of his
primary social security benefit multiplied by the number of years of credited
service (up to 30 years).

<PAGE> 9

The following table indicates the estimated annual benefit payable to
employees under the Defined Benefit Plan by the salary and years of service
classifications indicated, assuming retirement at age 65, during 1997 and a
straight life annuity form of payment. As of December 31, 1997, Messrs. Smith,
Henson, Paquette and Pike, had 24 years and 10 months, 17 years, 23 years and 2
months and 6 years and 1 month, respectively, of credited service for purposes
of the defined benefit retirement plan. Messrs. Smith, Henson and Paquette will
have more than the maximum credited service of 30 years at the normal
retirement age. Mr. Pike will have 24 years and 9 months of credited service,
at the normal retirement age.

<TABLE>
<CAPTION>
BENEFIT BASED UPON YEARS OF CREDITED SERVICE AT AGE 65
AVERAGE ------------------------------------------------------------
EARNINGS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS
-------- -------- -------- -------- -------- --------

Under the Internal Revenue Code of 1986 (the "Code"), the maximum benefit
payable under the Defined Benefit Plan per year, in 1997, was $125,000. The
compensation utilized in the formula to calculate pension benefits consists of
the salary reported in the "Summary Compensation Table." The benefit amounts
shown in the preceding table are subject to deductions for Social Security
benefits or other offset amounts. Under the Code, only $160,000 of compensation
may be considered for purposes of determining retirement benefits.

Supplemental Executive Retirement Plan. In August 1996, the Bank restated
its Supplemental Executive Retirement Plan ("SERP"). The SERP is designed to
provide a benefit (less the benefits in fact provided under the defined benefit
plan) that is equal to 60% of the participant's average annual salary at
retirement, which would have been provided to the participant but for the
restrictions imposed by the Code, plus the SERP is designed to provide an
additional benefit to replace amounts the covered executive is giving up under
the Bank's ESOP as a result of Code restrictions. Currently, Mr. Smith is the
only designated participant in the SERP. Under the restated SERP, the amount of
benefit to which the executive would be entitled has been actuarially
determined to be $184,797 upon retirement at age 62. The benefit will be paid
over the executive's life or 20 years, whichever is greater. The Bank has
established a rabbi trust which has purchased life insurance policies on the
executive's life in order to ensure that the Bank can satisfy its obligation
under the SERP. The Bank makes annual contributions in an amount equal to the
expense accrual under the SERP, into a secular trust for the benefit of the
executive. Amounts accrued prior to the restatement of the SERP were
transferred to the secular trust. In the event of the executive's termination
of employment within 36 months of a change in control of the Bank, or in the
event of the executive's death, the Bank is required to make contributions to
the secular trust from its general assets or from the assets held by the rabbi
trust which, when added to the remaining assets in the secular trust, are
sufficient to fund the supplemental retirement income benefit. Contributions
with respect to the SERP relating to the years 1997, 1996 and 1995 were
$256,873, $175,748 and $80,769, respectively.

INDEBTEDNESS OF MANAGEMENT AND TRANSACTIONS WITH CERTAIN RELATED PERSONS

In the ordinary course of business, Granite Bank makes loans to Granite
State's and the Bank's directors, officers and parties related to them. Such
transactions are on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and do not involve more than normal risk of collectibility or
present other unfavorable features.

<PAGE> 10

PROPOSAL 2 -- APPROVAL OF THE GRANITE STATE BANKSHARES, INC.
1997 LONG-TERM INCENTIVE STOCK BENEFIT PLAN

The Board of Directors of the Company has adopted the 1997 Long-Term
Incentive Stock Benefit Plan (the "1997 Stock Benefit Plan"). The Board of
Directors adopted this plan in order to provide the Company the flexibility and
advantages needed to attract, retain and motivate key employees and directors.
The purpose of the 1997 Stock Benefit Plan is to advance the interests of the
Company and to increase shareholder value by providing officers, employees and
directors of the Company with a proprietary interest in the growth and
performance of the Company and with incentives for continued service to the
Company. The following is a summary of the material features of the 1997 Stock
Benefit Plan, which is qualified in its entirety by reference to the provisions
of the plan attached hereto as Appendix A.

GENERAL

The 1997 Stock Benefit Plan was adopted by the Board of Directors in
April of 1997, and will remain in effect for a period of ten years. The 1997
Stock Benefit Plan authorizes the issuance of up to 550,000 shares of Common
Stock of the Company pursuant to the grants of stock options, stock
appreciation rights, or stock awards.

The 1997 Stock Benefit Plan will be administered by a committee (the
"Committee") appointed by the Board of Directors, or by the Board of Directors
itself (references to the Committee shall include the Board to the extent it
administers the Plan). The Committee will be comprised of two or more
"Non-employee Directors" of the Board of Directors, as such term is defined in
Rule 16b-3 of the Exchange Act. The Committee has full and exclusive power
within the limitations set forth in the 1997 Stock Benefit Plan to make all
decisions and determinations regarding the selection of participants and the
granting of awards; establishing the terms and conditions relating to each
award; adopting rules, regulations and guidelines for carrying out the Plan's
purposes; and interpreting and otherwise construing the 1997 Stock Benefit
Plan. The 1997 Stock Benefit Plan may be amended by the Board or the Committee,
without the approval of shareholders, but no such amendments may adversely
affect any outstanding awards under the 1997 Stock Benefit Plan without the
consent of the holders thereof.

ELIGIBILITY

Any employee or director of the Company or of any of its subsidiaries
shall be eligible to receive an award under the 1997 Stock Benefit Plan.

TYPES OF AWARDS

The Committee shall determine the types of awards to be made to each
participant under the Plan and shall approve the terms and conditions governing
these awards. Awards may be granted singly, in combination or in tandem so that
the settlement or payment of one automatically reduces or cancels the other.
The 1997 Stock Benefit Plan provides flexibility in structuring long-term
incentive agreements for various groups and levels of executives, directors and
other participants. The flexibility will permit the Company to grant one form
of award or combination of awards to certain participants while using another
award type or mix for others. Awards may include, but are not limited to, the
following:

Stock Options. Stock options will constitute rights entitling their
holders to purchase shares of the Company's Common Stock during a specified
period. The purchase price of each option may not be less than 100% of fair
market value on the date of grant. Fair market value for purposes of the 1997
Stock Benefit Plan means the reported closing price of the Common Stock on the
day of grant or if the Common Stock is not traded on such date, on the next
preceding day on which the Common Stock was traded.

Any stock option granted in the form of any incentive stock option will
be intended to comply with the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended. Only options granted to employees qualify for
incentive stock option treatment. A stock option may be exercised in whole or
in installments, which may be cumulative. Shares of Common Stock purchased upon
the exercise of a stock option must be paid for in full at the time of the
exercise in cash or such other method as provided by the Committee. Such
payment may include tendering shares of Common Stock or surrendering of a stock
award, or a combination of methods. Accelerated ownership stock option rights
may be granted simultaneously with, or subsequent to, the grant of any option.
If an option grant contains an accelerated ownership stock option right, and if
a participant pays all or part of the exercise price of the option with
previously owned shares of Common Stock, then upon exercise of the option the
participant will be granted an accelerated ownership stock option to purchase
at the fair market value as of the date of grant of the accelerated ownership
stock option, a number of shares of Common Stock equal to the number of whole
shares used by the par-

<PAGE> 11

ticipant to pay for the exercise of the initial option and the number of whole
shares, if any, withheld by the Company in payment for withholding tax in
connection with the exercise of the initial option. Accordingly, the
accelerated ownership stock option rights do not increase the total number of
shares owned by a participant, or the aggregate shares outstanding, but permit
the participant to use previously owned shares of Common Stock to exercise
stock options without decreasing his or her proprietary interest in the
Company. An accelerated ownership option may not be exercised prior to the
expiration of six months from the date of the grant of the accelerated
ownership option.

Stock Appreciation Rights. Stock appreciation rights ("SARs") entitle
their recipients to receive payments in cash, shares of Common Stock, or a
combination thereof, as determined by the Committee. Any such payments shall
represent the appreciation in market value of a specified number of shares from
the date of grant until the date of exercise. Such appreciation will be
measured by the excess of the fair market value on the date of exercise over
the fair market value of the Company's Common Stock on the date of grant of the
SAR or the grant of an award which the SAR replaced.

Stock Awards. Stock awards may constitute actual shares of Common Stock
or may be denominated in stock units which entitle the recipient to receive
future payments in either shares, cash, or a combination thereof. Stock awards
may be subject to conditions established by the Committee as set forth in the
award agreement, and which may include, but are not limited to, continuous
service with the Company, achievement of specific business objectives, and
other measurements of performance. Stock awards may be subject to restrictions
and contingencies regarding vesting and eventual payment as the Committee may
determine.

Any awards made under the 1997 Stock Benefit Plan may be subject to
vesting and other contingencies as determined by the Committee. Awards will be
evidenced by agreements approved by the Committee which set forth the terms and
conditions of each award. The Committee in its discretion may accelerate or
extend the period for the exercise or vesting of awards.

The Committee may provide that awards under the 1997 Stock Benefit Plan
earn dividend equivalents, to be paid currently or at a later date or dates,
subject to such conditions as the Committee may establish. Award payments may
also be deferred as determined by the Committee. Such deferral settlements may
include the crediting of dividend equivalents if denominated in stock awards,
or interest if denominated in cash. Shares of Common Stock underlying stock
awards may be voted by the participant prior to vesting.

Generally, all awards, except nonincentive stock options, granted under
the 1997 Stock Benefit Plan shall be nontransferable except by will or in
accordance with the laws of descent and distribution or pursuant to a domestic
relations order. During the life of the participant, awards can be exercised
only by him or her. The Committee may permit a participant, to designate a
beneficiary to exercise or receive any rights that may exist under the 1997
Stock Benefit Plan upon the participant's death.

CHANGE IN CONTROL

Upon the occurrence of an event constituting a change in control of the
Company, all awards outstanding will become immediately vested, and stock
awards will be distributed.

A change in control is defined, generally, to mean (i) a change in
control of the nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, or as defined under the Change in Bank
Control Act and the Rules and Regulations thereunder; (ii) the acquisition of
25% or more of the Common Stock; (iii) a tender offer, a merger, sale of
assets, or change of a majority of the current Board of Directors (generally
disregarding any change approved by such Board); or (iv) a solicitation of
proxies by someone other than the management of the Company, seeking
shareholder approval of a business combination.

TAX CONSEQUENCES

The following are the federal tax consequences generally arising with
respect to awards granted under the 1997 Stock Benefit Plan. The grant of an
option or SAR will create no tax consequences for an optionee or the Company.
The optionee will have no taxable income upon exercising an incentive stock
option (except that the alternative minimum tax may apply), and the Company
will receive no deduction when an incentive stock option is exercised. Upon
exercising an option other than an incentive stock option, the optionee must
recognize ordinary income equal to the difference between the exercise price
and the fair market value of the stock on the date of exercise; the Company
will be entitled to a deduction for the same amount. The tax treatment for an
optionee on a disposition of shares acquired through the exercise of a stock
option depends on how long the shares have been held and whether such shares
were acquired by exercising an incentive stock option or by exercising an
option other than an incentive stock option. Generally, there will be no tax
consequences to the Company in connection with the dispositions of shares
acquired

<PAGE> 12

under an option except that the Company may be entitled to a deduction in the
case of a disposition of shares acquired under the incentive stock option
before the applicable incentive stock option holding periods have been
satisfied.

With respect to other awards granted under the 1997 Stock Benefit Plan
that are settled either in cash or in stock or other property that is either
transferable or not subject to substantial risk of forfeiture, the participant
must recognize ordinary income equal to the cash or the fair market value of
shares or other property received and the Company will be entitled to a
deduction for the same amount. With respect to awards that are settled in stock
or other property that is restricted as to transferability or subject to
substantial risk of forfeiture, the participant must recognize ordinary income
equal to the fair market value of the shares or other property received at the
time the shares or other property became transferable or not subject to
substantial risk of forfeiture, whichever occurs earlier; the Company will be
entitled to a deduction for the same amount.

ADDITIONAL INFORMATION

Options have been granted under the 1997 Stock Benefit Plan to the
following employees and outside directors in the amounts set forth in the table
below. As of March 13, 1998 the last sale price of the Common Stock, as
reported on the Nasdaq National Market, was $26.38. The exercise price for all
options granted is the fair market value of a share of Common Stock on the date
of grant.

<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE RECEIVED UPON
NAME AND PRINCIPAL POSITION EXERCISE OF OPTIONS<F1>
- --------------------------------------- -----------------------

<S> <C>
Charles W. Smith
Chairman and Chief Executive Officer 93,000

Charles B. Paquette
Executive Vice President and Chief
Operating Officer 46,500

William C. Henson
Executive Vice President 46,500

William G. Pike
Executive Vice President and Chief
Financial Officer 46,500

All executive officers as a
group (five persons) 243,500

All non-employee directors
as a group (nine persons)<F2> 45,750

All employees, excluding
executive officers, as a group 64,750

<FN>
- -------------------
<F1> The value of the stock options is not determinable because the exercise
price was equal to the fair market value of the Company's Common Stock at
the time of the award. For an estimate of the value of the stock options
granted to the Named Executive Officers during 1997 assuming certain
rates of stock price appreciation over the option term, see "Executive
Compensation-Option Grants in Last Fiscal Year."

<F2> Each outside director of Granite State and the Bank (other than former
Primary Bank Directors) has been granted an option to purchase 6,000
shares of Common Stock. Each outside director of Granite State, but not
of the Bank (other than former Primary Bank Directors) has been granted
an option to purchase 2,250 shares of Common Stock and each outside
director of the Bank, but not of Granite State (other than former Primary
Bank Directors) has been granted an option to purchase 3,750 shares of
Common Stock. The Directors who were former Directors of Primary Bank
have options granted and outstanding under plans adopted by Primary Bank,
and have not been granted additional options under the 1997 Long- Term
Incentive Stock Benefit Plan.
</FN>
</TABLE>

<PAGE> 13

Awards of restricted stock have been granted under the 1997 Stock Benefit
Plan to the following person as indicated in the table below.

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND PRINCIPAL POSITION SUBJECT TO AWARD DOLLAR VALUE<F1>
- ------------------------------------- ---------------- ----------------

<S> <C> <C>
Charles W. Smith
Chairman and Chief Executive Officer 10,000 $ 238,750

Charles B. Paquette
Executive Vice President and Chief
Operating Officer 5,000 119,375

William C. Henson
Executive Vice President 5,000 119,375

William G. Pike
Executive Vice President and Chief
Financial Officer 5,000 119,375

All executive officers as a
group (five persons) 32,500 775,938

All non-employee directors
as a group (nine persons) -- --

All employees, excluding
executive officers, as a group -- --

<FN>
- --------------------
<F1> Based on the market value of the Common Stock on January 9, 1998, the
date of grant.
</FN>
</TABLE>

As of March 13, 1998, the last sale price of the Common Stock, as
reported on the Nasdaq National Market, was $26.38. The affirmative vote of the
holders of a majority of the votes cast at the Annual Meeting is required for
approval of the 1997 Stock Benefit Plan. The purpose of obtaining shareholder
approval of the 1997 Stock Benefit Plan is to qualify the Plan for the granting
of incentive stock options and to satisfy the requirement for the listing of
the Company's Common Stock on the NASDAQ National Market. UNLESS MARKED TO THE
CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY WILL BE VOTED FOR THE
APPROVAL OF THE GRANITE STATE BANKSHARES, INC. 1997 LONG-TERM INCENTIVE STOCK
BENEFIT PLAN.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE GRANITE
STATE BANKSHARES, INC. 1997 LONG-TERM INCENTIVE STOCK BENEFIT PLAN.

PROPOSAL 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Company's independent auditors for the fiscal year ended December 31,
1997 were Grant Thornton LLP. The Company's Board of Directors has reappointed
Grant Thornton LLP to continue as independent auditors for the Bank and the
Company for the year ending December 31,1998 subject to ratification of such
appointment by the stockholders.

Representatives of Grant Thornton LLP will be present at the Annual
Meeting. They will be given an opportunity to make a statement if they desire
to do so and will be available to respond to appropriate questions from
stockholders present at the Annual Meeting. UNLESS MARKED TO THE CONTRARY, THE
SHARES REPRESENTED BY THE ENCLOSED PROXY WILL BE VOTED FOR RATIFICATION OF THE
APPOINTMENT OF GRANT THORNTON LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF GRANT THORNTON LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.

<PAGE> 14

ADDITIONAL INFORMATION

STOCKHOLDER PROPOSALS

To be considered for inclusion in the proxy statement and proxy relating
to the Annual Meeting of Stockholders to be held in 1999, a stockholder
proposal must be received by the Secretary of the Company at the address set
forth on the first page of this Proxy Statement, not later than November
19,1998. Any such proposal will be subject to 17 C.F.R. 240.14a-8 of the Rules
and Regulations under the Exchange Act.

NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING

The Bylaws of the Company provide an advance notice procedure for a
stockholder to properly bring business before an Annual Meeting. The
stockholder must give written advance notice to the Secretary of the Company
not less than one hundred twenty (120) days before the date on which the
Company's proxy statement was released to stockholders in connection with the
previous annual meeting. The advance notice by a stockholder must include the
stockholder's name and address, as it appears on the Company's record of
stockholders, a brief description of the proposed business, the reason for
conducting such business at the Annual Meeting, the class and the number of
shares of the Company's capital stock that are beneficially owned by such
stockholder and any material interest of such stockholder in the proposed
business. In the case of nominations to the Board, certain information
regarding the nominee must be provided. Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy
relating to the Annual Meeting any stockholder proposal which does not meet all
of the requirements for inclusion established by the Securities and Exchange
Commission in effect at the time such proposal is received.

OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING

The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of
Annual Meeting of Stockholders. If, however, other matters are properly brought
before the Annual Meeting, it is the intention of the persons named in the
accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.

Whether or not you intend to be present at this Annual Meeting, you are
urged to return your proxy promptly. If you are present at this Annual Meeting
and wish to vote your shares in person, your proxy may be revoked.

A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) FOR THE YEAR ENDED DECEMBER
31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO STOCKHOLDERS OF RECORD UPON WRITTEN REQUEST TO
GRANITE STATE BANKSHARES, INC., MR. WILLIAM G. PIKE, EXECUTIVE VICE PRESIDENT,
122 WEST STREET, KEENE, NEW HAMPSHIRE 03431.

By Order of the Board of Directors

/s/ CHARLES B. PAQUETTE
Charles B. Paquette, Secretary
Keene, New Hampshire
March 19, 1998

YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

<PAGE> 15

APPENDIX A

GRANITE STATE BANKSHARES, INC.
1997 LONG-TERM INCENTIVE STOCK BENEFIT PLAN

1. PURPOSE. The purpose of the Granite State Bankshares, Inc. 1997
Long-term Incentive Stock Benefit Plan (the "Plan") is to advance the interest
of Granite State Bankshares, Inc. (the "Company") and to increase shareholder
value by providing outside directors and key employees of the Company and its
affiliates, including Granite Bank (the "Bank"), upon whose judgment,
initiative and efforts the successful conduct of the business of the Company
and its affiliates largely depends, with additional incentive in the form of a
proprietary interest in the growth and performance of the Company and to
encourage their continued service with the Company and its affiliates. A
purpose of the Plan is also to attract people of experience and ability to the
Company and its affiliates.

2. TERM. The Plan shall be effective as of April 16, 1997 (the date of
board of directors approval) (the "Effective Date") and shall remain in effect
until April 16, 2007 (ten years from such date) unless sooner terminated by the
Company's Board of Directors (the "Board"). The Plan shall be submitted for
stockholder approval. After termination of the Plan, no future awards may be
granted but previously made awards shall remain outstanding in accordance with
their applicable terms and conditions and the terms and conditions of the Plan.

3. PLAN ADMINISTRATION. A committee (the "Committee") appointed by the
Board shall be responsible for administering the Plan. The Committee shall be
comprised of either (i) at least two "Non-Employee Directors" of the Company,
or (ii) the entire Board of the Company. A "Non-Employee Director" means, for
purposes of the Plan, a director who (a) is not employed by the Company or an
affiliate; (b) does not receive compensation directly or indirectly as a
consultant (or in any other capacity than as a director) of greater than
$60,000; (c) does not have an interest in a transaction requiring disclosure
under Item 404(a) of Regulation S-K; or (d) is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(b) of
Regulation S-K. Actions and decisions of the Committee shall be approved by a
majority of the members of the Committee. The Committee shall have full and
exclusive power to interpret, construe and implement the Plan and any rules,
regulations, guidelines or agreements adopted hereunder and to adopt such
rules, regulations and guidelines for carrying out the Plan as it may deem
necessary or proper. These powers shall include, but not be limited to, (i)
determination of the type or types of awards to be granted under the Plan; (ii)
determination of the terms and conditions of any awards under the Plan; (iii)
determination of whether, to what extent and under what circumstances awards
may be settled, paid or exercised in cash, shares, other securities, or other
awards, or other property, or accelerated, canceled, extended, forfeited or
suspended; (iv) adoption of modifications, amendments, procedures, subplans and
the like as are necessary; (v) subject to the rights of participants,
modification, change, amendment or cancellation of any award to correct an
administrative error; and (vi) taking any other action the Committee deems
necessary or desirable for the administration of the Plan. All determinations,
interpretations, and other decisions under or with respect to the Plan or any
award by the Committee shall be final, conclusive and binding upon the Company,
any participant, any holder or beneficiary of any award under the Plan and any
employee of the Company.

4. ELIGIBILITY. Any employee of the Company shall be eligible to receive
Incentive Stock Options, Non-Statutory Stock Options, Stock Awards, Stock
Appreciation Rights, and Accelerated Ownership Option Rights under the Plan.
Outside directors shall be eligible to receive Non- Statutory Stock Options,
Accelerated Ownership Option Rights and Stock Awards under the Plan. The term
"Company" includes any entity that is directly or indirectly controlled by the
Company or any entity in which the Company has a significant equity interest,
as determined by the Committee. An "outside director" means a director of the
Company or an Affiliate who is not an employee of the Company or an Affiliate.

5. SHARES OF STOCK SUBJECT TO THE PLAN. There shall be 550,000 shares of
Common Stock in the aggregate reserved for issuance under the Plan, which
shares shall be available for issuance (subject to adjustment as provided in
Section 6) pursuant to the exercise of stock options, granted under Sections
7(a) and (c) of the Plan, or Stock Awards, under Section 7(d) of the Plan. The
maximum number of shares that may be subject to all awards granted to any one
employee of the Company is 200,000.

In instances where a stock appreciation right ("SAR") or other award is
settled in cash or any form other than shares, then the shares covered by these
settlements shall not be deemed issued and shall remain available for issuance
under the Plan. Any shares that are issued by the Company, and any awards that
are granted by, or become obligations of, the Company, and any awards that are
granted by, or become obligations of, the Company, through the assumption by
the Company or an affiliate of, or in substitution for, outstanding awards
previously granted by an acquired company shall not be counted against the
shares available for issuance under the Plan. In addition, any

<PAGE> A-1

shares that are used for the full or partial payment of the exercise price of
any option in connection with an Accelerated Ownership Option Right will not be
counted as issued under the Plan and will be available for future grants under
the Plan.

Any shares issued under the Plan may consist in whole or in part, of
authorized and unissued shares or of treasury shares, and no fractional shares
shall be issued under the Plan. Cash may be paid in lieu of any fractional
shares in settlements of awards under the Plan.

6. ADJUSTMENTS AND REORGANIZATIONS.

(a) Changes in Stock. If the number of outstanding shares of Common
Stock is increased or decreased or the shares of Common Stock are
changed into or exchanged for a different number of kind of shares
or other securities of the Company on account of any
recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend or other
distribution payable in capital stock, or other increase or
decrease in such shares effected without receipt of consideration
by the Company occurring after the Effective Date, the number and
kinds of shares for which grants of Stock Options or Stock Awards
may be made under the Plan shall be adjusted proportionately and
accordingly by the Company. In addition, the number and kind of
shares for which grants are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest
of the grantee immediately following such event shall, to the
extent practicable, be the same as immediately before such event.
Any such adjustment in outstanding Stock Options shall not change
the aggregate Stock Option purchase price payable with respect to
shares that are subject to the unexercised portion of the Stock
Option outstanding but shall include a corresponding proportionate
adjustment in the Stock Option purchase price per share.

(b) Reorganization in Which the Company Is the Surviving Entity and in
Which No Change of Control Occurs. Subject to Section 22 hereof, if
the Company shall be the surviving entity in any reorganization,
merger, or consolidation of the Company with one or more other
entities, any Stock Option or Stock Awards theretofore granted
pursuant to the Plan shall pertain to and apply to the securities
to which a holder of the number of shares of stock subject to such
Stock Option or Stock Awards would have been entitled immediately
following such reorganization, merger or consolidation, with a
corresponding proportionate adjustment of the Stock Option purchase
price per share so that the aggregate Stock Option purchase price
thereafter shall be the same as the aggregate Stock Option purchase
price of the shares remaining subject to the Stock Option
immediately prior to such reorganization, merger, or consolidation.

Adjustments under this Section 6 related to shares of Stock or securities
of the Company shall be made by the Committee, whose determination in that
respect shall be final, binding and conclusive. No fractional shares or other
securities shall be issued pursuant to any such adjustment, and any fractions
resulting from any such adjustment shall be eliminated in each case by rounding
downward to the nearest whole share. The granting of awards pursuant to the
Plan shall not affect or limit in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations, or changes of its capital
or business structure or to merge, consolidate, dissolve, or liquidate, or to
sell or transfer all or any part of its business or assets.

7. AWARDS. The Committee shall determine the type or types of award(s) to
be made to each participant under the Plan and shall approve the terms and
conditions governing these awards in accordance with Section 11. Awards may be
granted singly, in combination or in tandem so that the settlement or payment
of one automatically reduces or cancels the other. Awards may also be made in
combination or in tandem with, in replacement of, as alternatives to, or as the
payment form for, grants or rights under any other employee or compensation
plan of the Company, including the plan of any acquired entity.

(a) Stock Option - is a grant of a right to purchase a specified number
of shares of Common Stock during a specified period. The purchase
price of each option shall be the Fair Market Value of a share on
the date such option award was granted. However, if a key employee
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or its affiliates (or
under Section 424(d) of the Internal Revenue Code of 1986, as
amended (the "Code") is deemed to own stock representing more than
10% of the total combined voting power of all classes of stock of
the Company or its affiliates by reason of the ownership of such
classes of stock, directly or indirectly, by or for any brother,
sister, spouse, ancestor or lineal descendent of such key employee,
or by or for any corporation, partnership, estate or trust of which
such key employee is a shareholder, partner or beneficiary), the
purchase price per share of Common Stock deliverable upon the
exercise of each Incentive Stock Option shall not be less than 110%
of the Fair Market Value of the Company's Common Stock on the date
the Incentive Stock Option is granted. A stock option may be
exercised in whole or in installments, which may be cumu-

<PAGE> A-2

lative. A stock option may be in the form of an Incentive Stock
Option which complies with Section 422 of the Code, as amended, and
the regulations thereunder at the time of grant, or a Non-Statutory
Stock Option. A Non-Statutory Stock Option means an option granted
by the Committee to (i) an outside director or (ii) to any other
participant, and such option is either (A) not designated by the
Committee as an Incentive Stock Option, or (B) fails to satisfy the
requirements of an Incentive Stock Option as set forth in Section
422 of the Code and the regulations thereunder. The price at which
shares of Common Stock may be purchased under a stock option shall
be paid in full at the time of the exercise, in either cash or such
other methods as provided by the Committee at the time of grant or
as provided in the form of agreement approved in accordance
herewith, including tendering (either actually or by attestation)
Common Stock at Fair Market Value on the date of surrender, or any
combination thereof.

(b) Stock Appreciation Right - is a right to receive a payment, in cash
and/or Common Stock, as determined by the Committee, equal to the
excess of the Fair Market Value of a specified number of shares of
Common Stock on the date the SAR is exercised over the Fair Market
Value on the date of grant of the SAR as set forth in the
applicable award agreement, except that, in the case of an SAR
granted retroactively in tandem with or as a substitution for
another award, the exercise or designated price may be no lower
than the Fair Market Value of a share on the date such other award
was granted.

(d) Stock Award - is an award made in stock or denominated in units of
stock. All or part of any stock award may be subject to conditions
established by the Committee, and set forth in the award agreement,
which may include, but are not limited to, continuous service with
the Company, achievement of specific business objectives, and other
measurements of individual, business unit or Company performance.

8. DEFERRALS AND SETTLEMENTS. Payment of awards may be in the form of
cash, stock, other awards, or in combinations thereof as the Committee shall
determine at the time of grant, and with such restrictions as it may impose.
The Committee may also require or permit participants to elect or defer the
issuance of shares or the settlement of awards in cash under such rules and
procedures as it may establish under the Plan. It may also provide that
deferred settlements include the payment or crediting of interest on the
deferral amounts or the payment or crediting of dividend equivalents on
deferred settlements denominated in shares.

9. FAIR MARKET VALUE. Fair Market Value for all purposes under the Plan
shall mean the reported closing price of Common Stock as reported by the
National Association of Securities Dealers Automatic Quotation System
("NASDAQ") (as published in The Wall Street Journal) on such date or if the
Common Stock was not traded on such date, on the next preceding day on which
Common Stock was traded thereon. Under no circumstances shall Fair Market Value
be less than the par value of the Common Stock.

10. TRANSFERABILITY AND EXERCISABILITY. All awards other than Non-
Statutory Stock Options under the Plan will be nontransferable and shall not be
assignable, alienable, saleable or otherwise transferable by the participant
other than by will or the laws of descent and distribution, except pursuant to
a domestic relations order entered by a court of competent jurisdiction or as
otherwise determined by the Committee. In the event that a participant
terminates employment with the Company to assume a position with a
governmental, charitable, educational or similar non-profit institution, the
Committee may authorize a third party, including but not limited to a "blind"
trust, to act on behalf of and for the benefit of the representative
participant with respect to any outstanding awards.

If so permitted by the Committee, a participant may designate a
beneficiary or beneficiaries to exercise the rights of the participant and
receive any distributions under the Plan upon the death of the Participant.
However, in the case of participants covered by Section 16 of the 1934 Act, any
contrary requirements of Rule 16b-3 under the 1934 Act, or any successor rule,
shall prevail over the provisions of this Section.

Awards granted pursuant to the Plan may be exercisable pursuant to a
vesting schedule as determined by the Committee. The Committee may, in its sole
discretion, accelerate or extend the time at which any Stock Option may be
exercised, or any Stock Award may vest, in whole or in part, provided, however,
that with respect to an Incentive Stock Option, it must be consistent with the
terms of Section 422 of the Code in order to continue to qualify as an
Incentive Stock Option. The Committee may also, in its sole discretion, extend
the time period within which a stock option must be exercised before it
expires. Notwithstanding the above, in the event of Retirement (as herein
defined), death or Disability, all awards shall immediately vest. "Retirement"
means retirement at the normal retirement date as set forth in the Bank's
pension plan, or in accordance with any written agreement entered into with a
participant, or in the absence of the foregoing, as determined by the Board of
Directors in the event there is no such plan. "Disability" means the permanent
and total inability by reason of mental or physical infirmity, or both, of an
employee to perform the work customarily assigned to him, or of a director to
serve as such. Additionally, in the case of an employee, a

<PAGE> A-3

medical doctor selected or approved by the Board must advise the Committee that
it is either not possible to determine when such Disability will terminate or
that it appears probable that such Disability will be permanent during the
remainder of the paid employee's lifetime.

11. AWARD AGREEMENTS. Awards under the Plan shall be evidenced by an
agreement as shall be approved by the Committee that sets forth the terms,
conditions and limitations to an award and the provisions applicable in the
event the participant's employment terminates, provided however, in no event
shall the term of any Incentive Stock Option exceed a period of ten years from
the date of its grant. However, if any key employee, at the time an Incentive
Stock Option is granted to him, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company or its
affiliate (or, under Section 424(d) of the Code, is deemed to own stock
representing more than 10% of the total combined voting power of all classes of
stock, by reason of the ownership of such classes of stock, directly or
indirectly, by or for any brother, sister, spouse, ancestor or lineal
descendent of such key employee, or by or for any corporation, partnership,
estate or trust of which such key employee is a shareholder, partner or
beneficiary), the Incentive Stock Option granted to him shall not be
exercisable after the expiration of five years from the date of grant.

In addition, to the extent required by Section 422 of the Code, the
aggregate Fair Market Value (determined at the time the option is granted) of
the Common Stock for which Incentive Stock Options are exercisable for the
first time by a Participant during any calendar year (under all plans of the
Company and its affiliates) shall not exceed $100,000. In the event the amount
exercisable shall exceed $100,000, the first $100,000 of Incentive Stock
Options (determined as of the date of grant) shall be exercisable as Incentive
Stock Options and any excess shall be exercisable as Non-Statutory Stock
Options.

12. ACCELERATED OWNERSHIP STOCK OPTION RIGHTS. The Committee may grant
the right to receive an Accelerated Ownership Option simultaneously with, or
subsequent to, the grant of any stock option, with respect to all or some of
the shares covered by such stock option. In the event an Accelerated Ownership
Option Right has been granted, upon the exercise of the related Stock Option,
the participant will be granted an Accelerated Ownership Stock Option (which
may be an Incentive or Non-Incentive Stock Option) to purchase a number of
shares of Common Stock equal to the sum of the number of whole shares of Common
Stock used by the participant in payment of the purchase price of the Stock
Option. The exercise price of the Accelerated Ownership Option shall be the
Fair Market Value of the Common Stock on the date of grant of the Accelerated
Ownership Option. The term during which the Accelerated Ownership Option may be
exercised (and the other terms and conditions) shall be determined by the
Committee, but in no event shall an Accelerated Ownership Option be exercisable
in whole or in part before the expiration of six months from the date of the
grant of the Accelerated Ownership Option.

13. PLAN AMENDMENT. The Board or the Committee may modify or amend the
Plan as it deems necessary or appropriate or modify or amend an award received
by key employees and/or outside directors. No such amendment shall adversely
affect any outstanding awards under the Plan without the consent of the holders
thereof.

14. TAX WITHHOLDING. The Company may deduct from any settlement of an
award made under the Plan, including the delivery or vesting of shares, an
amount sufficient to cover withholding required by law for any federal, state
or local taxes or to take such other action as may be necessary to satisfy any
such withholding obligations. The Committee may permit shares to be used to
satisfy taxes and such shares shall be valued at the Fair Market Value as of
the settlement date of the applicable award.

15. OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS. Unless otherwise
determined by the Committee, settlements of awards received by participants
under the Plan shall not be deemed a part of a participant's regular, recurring
compensation for purposes of calculating payments or benefits from any Company
benefit plan, severance program or severance pay law of any country.

16. UNFUNDED PLAN. Unless otherwise determined by the Committee, the Plan
shall be unfunded and shall not create (or be construed to create) a trust or a
separate fund or funds. The Plan shall not establish any fiduciary relationship
between the Company and any participant or other person. To the extent any
person holds any rights by virtue of a grant awarded under the Plan, such right
(unless otherwise determined by the Committee) shall be no greater than the
right of an unsecured general creditor of the Company.

17. FUTURE RIGHTS. No person shall have any claim or rights to be granted
an award under the Plan, and no participant shall have any rights by reason of
the grant of any award under the Plan to continued employment by the Company or
any subsidiary of the Company.

18. GENERAL RESTRICTION. Each award shall be subject to the requirement
that, if at any time the Committee shall determine, in its sole discretion,
that the listing, registration or qualification of any award under the Plan
upon any securities exchange or under any sate or federal law, or the consent
or approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such award or the

<PAGE> A-4

grant or settlement thereof, such award may not be exercised or settled in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee.

19. GOVERNING LAW. The validity, construction and effect of the Plan and
any actions taken or relating to the Plan shall be determined in accordance
with the laws of the State of New Hampshire and applicable Federal law.

20. SUCCESSORS AND ASSIGNS. The Plan shall be binding on all successors
and permitted assigns of a participant, including, without limitation, the
guardian or estate of such participant and the executor, administrator or
trustee of such estate, or any receiver or trustee in bankruptcy or
representative of the participant's creditors.

21. RIGHTS AS A SHAREHOLDER. A participant shall have no rights as a
shareholder with respect to awards under the Plan until he or she becomes the
holder of record of shares granted under the Plan.

22. CHANGE IN CONTROL. Notwithstanding anything to the contrary in the
Plan, the following shall apply to all outstanding awards granted under the
Plan:

(a) Definitions.

The following definitions shall apply to this Section:

"Change in Control" of the Bank or the Company means a Change in Control
of a nature that: (i) would be required to be reported in response to
Item 1(a) of the current report on Form 8-K, as in effect on the date
hereof pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Company within the meaning of the Change in Bank Control Act,
as administered by the Federal Reserve Board, as in effect on the
effective date of this Plan. In addition to the above, a Change in
Control shall be deemed to have occurred at such time and payments and
benefits under this Section shall be made as (iii) any "person" (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rule d-3 under the Exchange
Act), directly or indirectly, of securities of the Bank or the Company
representing 25% or more of the Bank's or the Company's outstanding
securities ordinarily having the right to vote at the election of
directors except for any securities of the Bank purchased by the Company
in connection with the conversion of the Bank to the stock form and any
securities purchased by the Bank's employee stock ownership plan and
trust; or (iv) individuals who constituted the Board on the Effective
Date (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director
subsequent to the Effective Date whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board,
or whose nomination for election by the Company's shareholders was
approved by the same nominating board serving under an Incumbent Board,
shall be, for purposes of this clause (iv), considered as though he were
a member of the Incumbent Board; or (v) a merger, consolidation or sale
of all or substantially all the assets of the Bank or the Company in
which the Bank or Company is not the surviving institution occurs; or
(vi) a proxy statement, whether or not supported by management or the
Board of Directors, soliciting proxies from stockholders of the Company,
by someone other than the current management of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation
of the Company or Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or reorganization are exchanged for
or converted into cash or property or securities not issued by the Bank
or the Company shall be distributed; or (vii) a tender offer is made for
25% or more of the voting securities of the Bank or the Company.
Notwithstanding the above, the Board of Directors shall have the right to
determine that a Change in Control has occurred.

(b) Acceleration of Vesting and Payment of SARs.

(1) Upon the occurrence of an event constituting a Change in
Control, all SARs, stock options, or any other award granted
pursuant to this Plan outstanding on such date shall become
100% vested.

(2) Upon the occurrence of an event constituting a Change in
Control involving an exchange of stock, all stock options
shall become options to purchase the exchanged stock at the
applicable exchange ratio (with no change in the aggregate
exercise price).

23. COMPLIANCE WITH SECTION 16. With respect to persons subject to
Section 16 of the 1934 Act, transactions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the 1934
Act. To the extent any provisions of the Plan or actions of the Committee fail
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee administrators.

<PAGE> A-5

24. TERMINATION OF EMPLOYMENT. Upon the termination of an employee's
service for any reason other than Disability, Retirement, Change in Control,
death or Termination for Cause, the employee's Stock Options shall be
exercisable, and all Stock Awards shall vest, but only as to those shares that
were immediately purchasable by, or vested in, such employee at the date of
termination, and options may be exercised only for a period of three months
following termination. In the event of termination of employment for Cause (as
defined herein) all rights and awards granted to an employee under the Plan not
exercised or vested shall expire upon termination of employee.

"Termination for Cause" means the termination upon an intentional failure
to perform stated duties, or a breach of a fiduciary duty involving personal
dishonesty, or a willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or a final cease-and-desist order --
any of which results in material loss to the Company or one of its affiliates.

No option shall be eligible for treatment as an Incentive Stock Option in
the event such option is exercised more than three months following the date of
retirement or termination of employment following a Change in Control; and
provided further, that no option shall be eligible for treatment as an
Incentive Stock Option in the event such option is exercised more than one year
following termination of employment due to death or Disability and provided
further, in order to obtain Incentive Stock Option treatment for options
exercised by heirs or devisees of an optionee, the optionee's death must have
occurred while employed or within three (3) months of termination of
employment. Upon the termination of an employee's service for reason of
Disability, Retirement, Change in Control or death, the employee's Stock
Options shall be exercisable, and Stock Awards shall vest, as to all shares
subject to an outstanding award, whether or not otherwise immediately
purchasable by, or vested in, such employee at the date of termination and
options may be exercised for a period of one year following termination. In no
event shall the exercise period extend beyond the expiration of the Stock
Option term.

Upon the termination of a director's service for any reason other than
Disability, Retirement, Change in Control, death or Termination for Cause, the
director's Stock Options shall be exercisable, and Stock Awards shall vest, but
only as to those shares that were immediately purchasable by, or vested in,
such director at the date of termination, and options may be exercised for a
period of one year following termination of service. In the event of
termination of service for cause (as defined above) all rights granted to the
director under the Plan not exercised by or vested in such director shall
expire upon termination of service. Upon the termination of a director's
service for reason of Disability, Retirement, Change in Control or death, Stock
Options shall be exercisable, and Stock Awards shall vest, as to all shares
subject to an outstanding award, whether or not otherwise immediately
purchasable by, or vested in, such director at the date of termination and
options may be exercised for a period of one year following termination.

<PAGE> A-6

[PROXY CARD]

REVOCABLE PROXY
GRANITE STATE BANKSHARES, INC.

[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE

ANNUAL MEETING OF STOCKHOLDERS
APRIL 14, 1998

The undersigned hereby appoints the Proxy Committee of the Board of
Directors, with full power of substitution, to act as attorneys and proxies for
the undersigned to vote all shares of Common Stock of the Company which the
undersigned is entitled to vote at an Annual Meeting of Stockholders
("Meeting") to be held at the Keene Country Club, Keene, New Hampshire at 10:00
a.m. (local time) on April 14, 1998. The Proxy Committee of the Board of
Directors is authorized to cast all votes to which the undersigned is entitled
as follows:

FOR ALL
FOR WITHHELD EXCEPT
1. The election as directors of all nominees [ ] [ ] [ ]
listed (except as marked to the contrary
below):

David J. Houston, Christopher J. Flynn, Forrest D. McKerley,
Dr. David M. Bartley, Charles W. Smith,
C. Robertson Trowbridge and James C. Wirths, III

INSTRUCTION: To withhold your vote for any nominee(s), mark
"For All Except" and write that nominee's name on the line below.

________________________________________________________________________

FOR AGAINST ABSTAIN

2. The approval of the Granite State Bankshares, [ ] [ ] [ ]
Inc. 1997 Long-Term Incentive Stock Benefit Plan.

3. The ratification of the appointment of Grant [ ] [ ] [ ]
Thornton LLP as auditors for the fiscal year
ending December 31, 1998.

Check box if you plan to attend Meeting -----------------------> [ ]

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
LISTED UNDER PROPOSAL 1, "FOR" PROPOSAL 2 AND "FOR" PROPOSAL 3.

THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED ABOVE.
IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, INCLUDING WITHOUT
LIMITATION A MOTION TO ADJOURN OR POSTPONE THE ANNUAL MEETING TO ANOTHER TIME
AND/OR PLACE FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES OR OTHERWISE,
THIS PROXY WILL BE VOTED BY THE PROXY COMMITTEE OF THE BOARD OF DIRECTORS IN
THEIR DISCRETION. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER
BUSINESS TO BE PRESENTED AT THE MEETING.

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.

-----------------------------
Please be sure to sign and date | Date |
this Proxy in the box below. | |
---------------------------------------------------------------------------
| |
| |
-------Stockholder sign above-----------Co-holder (if any) sign above------

<PAGE>

DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.

GRANITE STATE BANKSHARES, INC.

Should the above signed be present and elect to vote at the Meeting or at
any adjournment thereof and after notification to the Secretary of the Company
at the Meeting of the stockholder's decision to terminate this proxy, then the
power of said attorneys and proxies shall be deemed terminated and of no
further force and effect. This proxy may also be revoked by sending written
notice to the Secretary of the Company at the address set forth on the Notice
of Annual Meeting of Stockholders, or by the filing of a later dated proxy card
prior to a vote being taken on a particular proposal at the Meeting.

The above signed acknowledges receipt from the Company prior to the
execution of this proxy of a Notice of the Meeting and a proxy statement dated
March 19, 1998 and the 1997 Annual Report to Stockholders.

Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.

PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY

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