SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                 FORM 10-KSB

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

For the fiscal year ended                          Commission File No. 0-14895
DECEMBER 31, 1996

                        GRANITE STATE BANKSHARES, INC.
           (Exact name of registrant as specified in its charter)


NEW HAMPSHIRE
(State or other jurisdiction of incorporation or organization)

02-0399222
(I.R.S. Employer Identification No.)
      
122 WEST STREET, KEENE, NEW HAMPSHIRE            03431
(Address of Principal Executive Offices)         (Zip Code)

Registrant's telephone number, including area code: (603) 352-1600

Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK,
                                                             $1.00 PAR VALUE

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

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

      Issuer's revenues for its fiscal year ended December 31, 1996 
were $28,731,000.

      The aggregate market value of the voting common stock held by 
non-affiliates of the Registrant, based on the closing bid price of 
March 17, 1997, was $40,846,493. For purposes of this calculation, 
the affiliates of the Registrant include its directors and 
executive officers.  Although such directors and executive officers 
of the Registrant performing policy-making functions were assumed 
to be "affiliates" of the Registrant, this classification is not to 
be interpreted as an admission of such status.

      As of March 17, 1997, the number of shares of the Registrant's 
common stock outstanding of record (exclusive of treasury shares) 
was 2,019,016.


<PAGE>  1


                             DOCUMENTS INCORPORATED
                                  BY REFERENCE


      The following documents, in whole or in part, are specifically 
incorporated by reference in the indicated Part of the Annual 
Report on Form 10-KSB:


Document                                Part
--------                                ----
Annual Report to Stockholders for       Part I, Item 1 (c) (5),
the year ended December 31, 1996        "Statistical Information"


                                        Part II, Item 6,
                                        "Management's Discussion and
                                        Analysis or Plan of Operation" 


                                        Part II, Item 7,
                                        "Financial Statements"


Proxy Statement for the 1997            Part III, Item 9,
Annual Meeting of Stockholders          "Directors, Executive Officers
                                        Promoters and Control Persons,
                                        Compliance with Section 16(a)
                                        of the Exchange Act


                                        Part III, Item 10,
                                        "Executive Compensation"


                                        Part III, Item 11, 
                                        "Security Ownership of Certain
                                        Beneficial Owners and
                                        Management"


                                        Part III, Item 12,
                                        "Certain Relationships and
                                        Related Transactions" 

<PAGE>  2


                  FORM 10-KSB ANNUAL REPORT -- TABLE OF CONTENTS

                                    PART I

                                                                        Page
Item 1. Description of Business                                         5
            

   a.   General Development of Business                                 5
   b.   Financial Information About Industry Segments                   5
   c.   Narrative Description of Business                               5

      1.   General Description of Business                              5
      2.   Regulation & Supervision                                     6
      3.   Monetary Policies                                            10
      4.   Employees                                                    11
      5.   Statistical Information                                      11

         A.   Distribution of Assets, Liabilities, and
              Stockholders' Equity;  Interest Rates
              and Interest Differential                                 11
         B.   Rate/Volume Analysis                                      11
         C.   Investment Portfolio                                      11
         D.   Loan Portfolio                                            14
         E.   Maturity of Loans                                         14
         F.   Nonperforming Loans and Assets                            15
         G.   Summary of Loan Loss Experience and
              Allocation of the Allowance for Possible
              Loan Losses                                               16
         H.   Risks Associated with Commercial Real Estate,
              Commercial and Construction Loans                         19
         I.   Deposits                                                  19
         J.   Maturities of Time Deposits                               20
         K.   Return on Equity and Assets                               20
         L.   Borrowings                                                20
         M.   Competition                                               21
         N.   Subsidiaries                                              21

   d.   Financial Information About Foreign and Domestic Operations
        and Export Sales                                                21

Item 2. Description of Property                                         22
Item 3. Legal Proceedings                                               22

Item 4. Submission of Matters to a Vote of Security Holders             22

Additional Item Executive Officers                                      23

<PAGE>  3


                                   PART II

                                                                        Page 
Item 5. Market for Registrant's Common Equity and
        Related Stockholder Matters                                     24

   a.   Market Information                                              24
   b.   Holders                                                         24
   c.   Dividends                                                       24

Item 6. Management's Discussion and Analysis or Plan of Operation       25

Item 7. Financial Statements                                            25

   a.   Financial Statements Required by Regulation S-X                 25
   b.   Supplementary Financial Information                             25

      1.   Selected Quarterly Financial Data                            25
      2.   Information on the Effects of Changing Prices                25
      3.   Information About Oil and Gas Producing Activities           25

Item 8. Changes In and Disagreements with Accountants on Accounting
        and Financial Disclosure                                        25

                                   PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons,
        Compliance with Section 16(a) of the Exchange Act               26

Item 10. Executive Compensation                                         26

Item 11. Security Ownership of Certain Beneficial Owners and Management 26

Item 12. Certain Relationships and Related Transactions                 26

Item 13. Exhibits and Reports on Form 8-K                               26

   a.   List of Documents filed as Part of this Report                  26

      1.   Financial Statements                                         26
      2.   Financial Statement Schedules                                27

   b.   Reports on Form 8-K                                             27
   c.   Exhibits                                                        28

Signatures                                                              29


<PAGE>  4


                                   PART I

Item 1.  Description of Business

   (a)   General Development of Business

      Granite State Bankshares, Inc. ("Granite State" or "Company") is 
a single-bank holding company which was formed in 1986 to acquire 
all of the stock of the Granite Bank, formerly Granite Bank of 
Keene and Keene Savings Bank, upon its conversion from a mutual 
savings bank to a state-chartered guaranty (stock) savings bank.  
Since that time, the Company has acquired the Durham Trust Company, 
First Northern Co-operative Bank, First National Bank of 
Peterborough, and the Granite Bank of Amherst.

      In March of 1987, Granite State organized a mortgage corporation, 
GSBI Mortgage Corporation, for purposes of expanding the 
residential loan programs it could offer, as well as improving the 
efficiency and effectiveness of its participation in the secondary 
mortgage markets.  The mortgage corporation now operates as a 
division of Granite Bank and services Cheshire, Hillsborough, 
Strafford, and Rockingham counties, New Hampshire, with a wide 
variety of mortgage loan products.

      In July of 1987, the Granite Bank of Amherst opened for business 
as a state-chartered guaranty (stock) savings bank, and was the 
result of the purchase from the Amoskeag Bank of their Amherst 
branch office.  In June of 1989 it was merged into the First 
National Bank of Peterborough under the name of Granite Bank, N.A.
In March of 1990 Granite Bank, N.A. was merged into Granite Bank.

      In October of 1988, First Peterborough Bank Corp. was merged into 
Granite State, leaving Granite State with the First National Bank 
of Peterborough ("First National").  First National was a national 
bank engaged in substantially all of the business operations 
customarily conducted by a commercial bank in New Hampshire.  In 
June of 1989 the name was changed to Granite Bank, N.A., when it 
absorbed Granite Bank of Amherst.  In March of 1990, Granite Bank, 
N.A. was merged into Granite Bank.

      In August of 1991, Granite Bank entered into a purchase and 
assumption agreement with the Resolution Trust Company ("RTC"), 
whereby it acquired certain assets and assumed certain liabilities 
of  First Northern Co-operative Bank ("First Northern"), 
headquartered in Keene, New Hampshire, which was under RTC 
conservatorship.

      In November of 1991, Granite Bank entered into a purchase and 
assumption agreement with the Federal Deposit Insurance Corporation 
("FDIC"), whereby it acquired certain assets and assumed certain 
liabilities of Durham Trust Company ("Durham"), headquartered in 
Durham, New Hampshire.  The FDIC was the liquidating agent of 
Durham Trust Company.

      Granite Bank completed its conversion from a state-chartered 
guaranty (stock) savings bank to a New Hampshire state-chartered 
commercial bank during 1991.

   (b)   Financial Information about Industry Segments 

        Not applicable.

   (c)   Narrative Description of Business

         (1)   General Description of Business

      Granite State operates as a bank holding company by virtue of its 
ownership of 100% of the stock of Granite Bank (referred to as the 
"Bank").  Currently, the Company does not transact any significant 
business other than through the Bank.


<PAGE>  5


      The principal business of the Bank is attracting deposits and 
originating commercial loans and loans secured by first and second 
mortgage liens on real estate located in New Hampshire.

      In recent years, the Bank has concentrated its efforts on 
expanding its franchise through increased emphasis on commercial 
real estate loans and the introduction of new deposit products.  
The Company has, and continues to devote considerable resources 
toward the enhancement of computer systems and operating procedures 
to position itself to compete effectively in its local markets.

      The Bank offers a wide range of consumer and commercial services, 
including:  commercial demand deposits, consumer regular and 
interest-bearing (NOW) checking and regular savings accounts; 
certificates of deposit; residential and commercial real estate 
loans; secured and unsecured consumer and commercial loans; and 
cash management services.

      The Company's distribution network for its services is comprised 
of its main office in Keene, full-service banking offices in 
Portsmouth, Durham, Peterborough, Amherst, Milford and Chesterfield 
and 23 automatic teller machines ("ATMs") located in Chesterfield, 
Keene, Swanzey, Peterborough, Amherst, Milford, Durham and 
Portsmouth.

         (2)   Regulation and Supervision

General
-------
      Granite State is a registered bank holding company under the Bank 
Holding Company Act of 1956 ("BHCA"), and as such, is subject to 
regulation by the Federal Reserve Board ("FRB").  Granite Bank is a 
New Hampshire-chartered commercial bank, the deposit accounts of 
which are insured by the FDIC.  As such, it is subject to the 
regulation, supervision and examination of the New Hampshire Bank 
Commissioner ("Commissioner") and the FDIC.  See "New Hampshire 
Law" and "Insurance of Deposits".  It is a member of the Federal 
Home Loan Bank of Boston ("FHLB").

New Hampshire Law
-----------------
      As a New Hampshire-chartered commercial bank, Granite Bank is 
subject to the applicable provisions of state law and the 
regulations adopted thereunder by the Commissioner.  Granite Bank 
derives its lending and investment powers from New Hampshire law 
and is subject to periodic examination by and reporting 
requirements of the Commissioner, who also has specific statutory 
jurisdiction over certain banking activities, mergers and the 
creation of new powers.  The Commissioner has authority to take 
various enforcement actions against banks, or bank directors or 
officers, that engage in violations of law or unsafe or unsound 
practices.  The Commissioner also may appoint a receiver or 
conservator for a bank under certain circumstances.  

      The Bank is required under New Hampshire law to maintain a 
reserve of the lesser of not less than 12% of the amount of demand 
deposits and 5% of the amount of time and savings deposits in cash 
or in specified short-term investments, or the reserve requirements 
established by the FRB.  At December 31, 1996 this requirement was 
satisfied.

      Granite State is also subject to the periodic examination and 
reporting requirements of the Commissioner.  Under New Hampshire 
law, Granite State may not acquire ownership or control of more 
than 12 banking affiliates, including (i) banking institutions 
chartered by the state and actively engaged in business as such in 
the State and (ii) national banks authorized to transact business 
in the State, neither may it acquire ownership or control of any of 
the foregoing if, as a result, the Company and its banking 
affiliates would hold deposits in New Hampshire in excess of 20% of 
the total deposits of all federal and state-chartered banking 
institutions, including savings associations, operating in New 
Hampshire.  At the present time the total of the Bank's deposits 
are substantially less than 20% of total New Hampshire deposits.


<PAGE>  6


      The Bank pays assessments to the Commissioners office to support 
its operations.  In 1996, these assessments totaled $6,425.

Federal Deposit Insurance Corporation 
-------------------------------------

Safety and Soundness Regulations
--------------------------------
      The federal regulatory agencies, including the FDIC, were 
required to prescribe standards for depository institutions under 
their jurisdiction relating to a variety of operating matters such 
as internal controls, information systems and internal audit 
systems, loan documentation and credit underwriting, interest rate 
risk exposure, asset growth and quality and employee compensation.  
The federal banking agencies have adopted a final rule containing 
Interagency Guidelines Prescribing Standards for Safety and 
Soundness ("Guidelines") to implement safety and soundness 
standards required under the Federal Deposit Insurance Act.  The 
Guidelines set forth the safety and soundness standards that the 
federal banking agencies use to identify and address problems at 
insured depository institutions before capital becomes impaired.  
The standards set forth in the Guidelines address internal controls 
and information systems; internal audit systems; credit 
underwriting; loan documentation; interest rate risk exposure; 
asset growth; and compensation, fees and benefits.  If the 
appropriate federal banking agency determines that an institution 
fails to meet any standard prescribed by the Guidelines, the agency 
may require the institution to submit to the agency an acceptable 
plan to achieve compliance with the standard, as required by the 
Federal Deposit Insurance Act.  The final rule establishes 
deadlines for the submission and review of such safety and 
soundness compliance plans when such plans are required.

Investment Authority
--------------------
      The FDIC regulations restrict investments by and activities of 
insured state banks such as the Bank.  Effective December 19, 1992, 
neither state banks nor their subsidiaries may engage in 
activities, as principal, not permissible for national banks or 
their subsidiaries unless the FDIC determines that the activity 
would pose no significant risk to the deposit insurance fund and 
the bank is and continues to comply with applicable federal capital 
standards.  Additionally, subject to exceptions for majority-owned 
subsidiaries and certain other limited exceptions, state banks may 
not acquire or retain any equity investment of a type or in an 
amount not permissible for national banks. The Federal Deposit 
Insurance Act does contain a partial exception from these 
requirements for stock and mutual fund ownership by banks which 
were authorized to make such investments by state law and had made 
such investments during a specified time period.  The Bank believed 
it qualified for the exception and applied to the FDIC for 
approval.  During 1993, the Bank received approval from the FDIC to 
invest in equity securities listed on a national exchange and 
registered shares of mutual funds, which are otherwise 
impermissible investments for national banks, in an amount not to 
exceed 100 percent of its Tier 1 capital, which amounted to 
$26,501,000 at December 31, 1996.

Capital Requirements
-------------------- 
      The FDIC has issued regulations that require Bank Insurance Fund-
insured banks, such as the Bank, to maintain minimum levels of 
capital.  The regulations establish a minimum leverage capital 
requirement of not less than 3% core capital to total assets for 
banks in the strongest financial and managerial condition, with a 
CAMELS Rating of 1 (the highest rating of the FDIC for banks).  For 
all other banks, the minimum leverage capital requirement is 3% 
plus an additional cushion of at least 1% to 2%.  Core capital is 
comprised of the sum of common stockholders' equity, noncumulative 
perpetual preferred stock (including any related surplus) and 
minority interests in consolidated subsidiaries, minus all 
intangible assets (other than qualifying servicing rights and 
purchased credit card relationships), identified losses and 
investments in certain subsidiaries.  At December 31, 1996, the 
Bank's ratio of core capital to average total assets equaled 7.32%, 
which exceeded the minimum leverage requirement.


<PAGE>  7


      The FDIC also requires that banks meet a risk-based capital 
standard.  The risk-based capital standard requires the maintenance 
of a ratio of total capital (which is defined as core capital and 
supplementary capital) to risk-weighted assets of  8.00%.  In 
determining the amount of risk-weighted assets, all assets, 
including certain off balance sheet assets, are multiplied by a 
risk-weight of 0% to 100%, based on the risks the FDIC believes are 
inherent in the type of asset.  The components of core capital are 
equivalent to those discussed earlier under the leverage capital 
requirement.  The components of supplementary capital currently 
include cumulative perpetual preferred stock, long term perpetual 
preferred stock, mandatory convertible securities, subordinated 
debt and intermediate preferred stock and allowance for loan and 
lease losses.  Allowance for loan and lease losses includable in 
supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets.  Overall, the amount of capital counted toward 
supplementary capital cannot exceed 100% of core capital.  At 
December 31, 1996, the Bank met its risk based capital requirements 
with a core risk-based capital to risk-weighted assets ratio of 
13.03% and a total risk-based capital to risk-weighted assets ratio 
of 14.14%.

Prompt Corrective Action Regulations
------------------------------------
      Effective December 19, 1992, the regulatory agencies, including 
the FDIC, were required to take certain supervisory actions against 
undercapitalized banks.  The severity of such action depends upon 
the degree of undercapitalization.  The regulations generally 
require subject to a narrow exception, the appointment of a 
receiver or conservator for banks whose tangible capital level 
falls below 2% of assets, which appointment is to be made within a 
maximum of 270 days after the threshold is reached.  At December 
31, 1996, the subsidiary bank was considered "well capitalized" 
for purposes of the FDIC's prompt corrective action regulations.
            
      The FDIC may institute proceedings against any insured bank or 
any director, trustee, officer or employee of such bank who engages 
in unsafe and unsound practices, or the violation of applicable 
laws and regulations.  The FDIC has the authority to terminate or 
suspend insurance of accounts pursuant to procedures established 
for that purpose and may appoint a receiver or conservator under 
certain circumstances.

Insurance of Deposits
---------------------
      The deposit accounts of the Bank are insured by the FDIC up to 
applicable limits, generally $100,000 per insured depositor.  The 
FDIC issues regulations, conducts periodic examinations, requires 
the filing of reports and generally supervises the operations of 
its insured banks.  The approval of the FDIC is required prior to a 
merger or consolidation, or the establishment or relocation of an 
office facility.  The majority of the Bank's deposits are insured 
by the Bank Insurance Fund ("BIF").  Approximately 12% of the 
Bank's deposits are OAKAR deposits, which are deposits purchased 
from institutions previously insured by the Savings Association 
Insurance Fund ("SAIF").

      During 1996, the Bank paid annual insurance premiums of $73,000 
compared with $283,000 in 1995.

      The FDIC has issued regulations which established a system for 
setting deposit insurance premiums based upon the risks a 
particular bank or savings association poses to the deposit 
insurance funds.  Under the rule, the FDIC assigns an institution 
to one of three capital categories consisting of 1) well 
capitalized, 2) adequately capitalized or 3) undercapitalized, and 
one of three supervisory subcategories.  An institution's 
assessment rate depends on the capital category and supervisory 
category to which it is assigned.  In view of the BIF's achieving a 
statutorily required capitalization ratio, the FDIC adopted a new 
assessment rate of 0 to 27 basis points per $100 of deposits.  
Under that schedule, approximately 92% of BIF members paid the 
lowest assessment rate of 0 basis points (subject to a $2,000 
minimum annual charge).


<PAGE>  8


      Notwithstanding its status as a BIF-insured commercial bank, 
approximately 12% of the Bank's deposit base consists of OAKAR 
deposits, which are acquired SAIF deposits.  These deposits are 
assessed at the premium rate applicable to SAIF institutions.

      On September 30, 1996, the President of the United States signed 
into law the Deposit Insurance Funds Act of 1996 (the "Funds 
Act") which, among other things, imposed a special one-time 
assessment on SAIF deposits to recapitalize the SAIF.  As required 
by the Funds Act, the FDIC imposed a special assessment on SAIF 
assessable deposits held as of March 31, 1995, payable November 27, 
1996 (the "SAIF Special Assessment").  The SAIF Special 
Assessment on the Bank's SAIF - assessable OAKAR deposits was 
recognized as an expense in the quarter ended September 30, 1996 
and was paid by the Bank during the quarter ended December 31, 1996 
and is generally tax deductible.  The SAIF Special Assessment 
recorded by the Bank amounted to $187,000.

      The Funds Act also spreads the obligations for payment of the 
Financing Corporation ("FICO") bonds across all SAIF and BIF 
members.  Beginning on January 1, 1997, BIF deposits will be 
assessed for FICO payments at a rate of 20% of the rate assessed on 
SAIF deposits.  Based on current estimates by the FDIC, BIF 
deposits will be assessed a FICO payment of 1.3 basis points, while 
SAIF deposits will pay an estimated 6.4 basis points.   Full pro 
rata sharing of the FICO payments between BIF and SAIF members will 
occur on the earlier of January 1, 2000 or the date the BIF and 
SAIF are merged.  The Funds Act specifies that the BIF and SAIF 
will be merged on January 1, 1999, provided no savings associations 
remain as of that time.

      As a result of the Funds Act, the FDIC recently lowered SAIF 
assessments to 0 to 27 basis points effective January, 1, 1997, a 
range comparable to that of BIF members.  However, SAIF deposits 
will continue to be assessed at the higher FICO rate described 
above.  Management cannot predict the level of FDIC insurance 
assessments on an on-going basis, or whether the BIF and SAIF will 
eventually be merged.

Federal Reserve System
----------------------
      Under FRB regulations, the Bank is required to maintain reserves 
against its transaction accounts (primarily checking and NOW 
accounts), non-personal money market deposit accounts, and non-
personal time deposits.  Because reserves must generally be 
maintained in cash or in non-interest bearing accounts, the effect 
of the reserve requirement is to increase the Bank's cost of funds.  
For most of 1996, these regulations required reserves of 3% of 
total transaction accounts of up to $52.0 million.  Total 
transaction accounts amounting to over $52.0 million required a 
reserve of $1.6 million plus 10% (this rate is set by the FRB and 
can range from 8% to 14%) of that portion of total transaction 
accounts in excess of such amount.  In addition, reserves in the 
amount of 3% must be maintained on non-personal money market 
deposit accounts.  Institutions were permitted to designate and 
exempt $4.3 million of reservable liabilities from these reserve 
requirements.  These amounts and percentages are subject to 
adjustment by the FRB.  The Bank was in compliance with its reserve 
requirements at December 31, 1996.  The Bank also has the authority 
to borrow from the Federal Reserve Board "discount window" to meet 
its short-term  liquidity needs.

        During December, 1996, the amount of reservable liabilities
exempt from reserve requirements was increased to $4.4 million and the 
level at which reservable liabilities would be subject to the 10% 
rate was lowered to $49.3 million.  The effects of these recent 
actions will not have any significant impact on the Bank's 
liquidity and profitability. 


      Under the Federal Change in Bank Control Act ("CIBCA"), a prior 
notice must be submitted to the FRB if any person or group acting 
in concert seeks to acquire 10% or more of Granite State common 
stock, unless (if less than 25% is to be beneficially owned) the 
FRB finds that the acquisition will not result in change in 
control.  Under CIBCA, the FRB has 60 days within which to act, 
taking into


<PAGE>  9


consideration factors similar to those under the Bank 
Holding Company Act ("BHCA").  Under the BHCA, any company would be 
required to obtain prior approval from the FRB before obtaining 
control of the Holding Company.  Control generally is defined as 
beneficial ownership of 25 percent or more of any class of voting 
securities of the Company.  An existing bank holding company would 
need to receive prior FRB approval before acquiring more than 5% of 
the voting securities of the Company.

      Granite State and its subsidiary are subject to examination, 
regulation and periodic reporting by the FRB under the BHCA.  FRB 
approval is required for acquisitions of either financial 
institutions or other entities, or the commencement of new 
activities by the Company.  Pursuant to recent legislation, 
interstate holding company acquisitions of banks are permitted 
generally without regard to state law, except state laws regarding 
deposit concentration.  The legislation also contemplates 
interstate expansion by bank merger or de novo branching if the 
states involved allow.  Granite State and its subsidiary may engage 
only in activities that are deemed to be related to banking by the 
FRB.  The FRB has adopted capital adequacy guidelines for bank 
holding companies (on a consolidated basis)  substantially similar 
to those of the FDIC for the Bank.

      The Federal Reserve Board has issued guidelines for a risk-based 
approach to measuring the capital adequacy of bank holding 
companies and state-chartered banks which are members of the 
Federal Reserve System.  These capital requirements generally call 
for an 8 percent total capital ratio, of which 4 percent must be 
comprised of Tier I capital.  Risk-based capital ratios are 
calculated by weighting assets and off-balance sheet instruments 
according to their relative credit risks.  In addition to the risk-
based capital standard, bank holding companies such as the Company 
must maintain a minimum leverage ratio of Tier I capital to total 
assets of at least 4 percent, with Tier I capital for this purpose 
being defined consistent with the risk-based capital guidelines.  
At December 31, 1996, Granite State had consolidated Tier I and 
total risk-based capital ratios of 13.14% and 14.23%, respectively 
and a leverage ratio of Tier I capital to average total assets of 
7.50%.      

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

      As a member of the FHLB, the Bank is required to purchase and 
hold stock in the FHLB in an amount equal to the greater of 1% of 
the aggregate of unpaid residential mortgage loan balances and the 
carrying value of mortgage-backed securities outstanding at the 
beginning of the year; 5% of FHLB advances outstanding; or 1% of 
30% of total assets.  As of December 31, 1996, Granite Bank held 
stock in the FHLB in the amount of $3,215,000.

         (3)   Monetary Policies

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


<PAGE> 10


         (4)   Employees

      As of December 31, 1996, Granite State and its subsidiary 
employed 133 full time equivalent officers and employees.  Granite 
State considers relations with its employees to be satisfactory.  
None of the employees of the Company or its subsidiary are 
represented by a collective bargaining group.

         (5)   Statistical Information

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

               (A)   Distribution of Assets, Liabilities, and
                     Stockholders' Equity;
                     Interest Rates and Interest Differential

      Information regarding the distribution of assets, liabilities and 
stockholders' equity; interest rates and interest differential for 
each of the three years in the period ended December 31, 1996, on 
page 15 of the Annual Report to Stockholders for the year ended 
December 31, 1996 are incorporated herein by reference.
      
               (B)    Rate/Volume Analysis

      Information regarding the dollar amount of changes in interest 
income and interest expense for interest earning assets and 
interest bearing liabilities attributable to changes in interest 
rates, changes in volume and changes attributable to rate and 
volume for each of the two years in the period ended December 31, 
1996, on page 16 of the Annual Report to Stockholders for the year 
ended December 31, 1996 are incorporated herein by reference

               (C)    Investment Portfolio
      
      The Company follows Financial Accounting Standards Board 
Statement of Financial Accounting Standards ("SFAS") No. 115, 
"Accounting for Certain Investments in Debt and Equity Securities".  
Under SFAS No. 115, debt securities that the Company has the 
positive intent and ability to hold to maturity are classified as 
held-to-maturity and reported at amortized cost; debt and equity 
securities that are bought and held principally for the purpose of 
selling in the near term are classified as trading and reported at 
fair value, with unrealized gains and losses included in earnings; 
and debt and equity securities not classified as either held-to-
maturity or trading are classified as available-for-sale and 
reported at fair value, with unrealized gains and losses excluded 
from earnings and reported as a separate component of stockholders' 
equity, net of estimated income taxes.  The Company classifies its 
securities into three categories:  held-to-maturity, available-for-
sale and held for trading.  The Company had no securities 
classified as trading securities at December 31, 1996, 1995 and 
1994 and had no securities classified as held to maturity at 
December 31, 1995.


<PAGE> 11


      The following table sets forth the amortized cost, unrealized 
gains and losses, and estimated market values of securities held to 
maturity and securities available for sale at December 31, 1996, 
1995 and 1994.

<TABLE>
<CAPTION>
                                          Amortized   Unrealized  Unrealized  Estimated
                                            Cost        Gains       Losses   Market Value
                                          ---------   ---------   ---------   ---------
                                                          (In Thousands)

<S>                                       <C>         <C>         <C>         <C>
SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1996
  US Government agency obligations        $   9,500   $       4   $      11   $   9,493
                                          ---------   ---------   ---------   ---------
    Total securities held to maturity     $   9,500   $       4   $      11   $   9,493
                                          =========   =========   =========   =========

SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1996
  US Treasury obligations                 $  25,847   $      26   $      21   $  25,852
  US Government agency obligations           52,749          13         204      52,558
  Other corporate obligations                 5,476                      27       5,449
  Mutual Fund                                 5,239           5                   5,244
  Marketable equity securities                7,073       3,252           5      10,320
                                          ---------   ---------   ---------   ---------
    Total securities available for sale   $  96,384   $   3,296   $     257   $  99,423
                                          =========   =========   =========   =========

SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1995
  US Treasury obligations                 $  59,016   $     452   $      16   $  59,452
  US Government agency obligations           17,000           7                  17,007
  Other corporate obligations                 9,495                      51       9,444
  Mutual Fund                                 3,000           9                   3,009
  Marketable equity securities                4,036       2,077           9       6,104
                                          ---------   ---------   ---------   ---------
    Total securities available for sale   $  92,547   $   2,545   $      76   $  95,016
                                          =========   =========   =========   =========

SECURITIES HELD TO MATURITY
AT DECEMBER 31, 1994
  Other corporate obligations             $  15,499               $     239   $  15,260
                                          ---------   ---------   ---------   ---------
    Total securities held to maturity     $  15,499   $       0   $     239   $  15,260
                                          =========   =========   =========   =========

SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31, 1994
  US Treasury obligations                 $  58,912               $   1,410   $  57,502
  US Government agency obligations            3,000                      45       2,955
  Other corporate obligations                 9,484                     202       9,282
  Marketable equity securities                2,701   $     664          72       3,293
                                          ---------   ---------   ---------   ---------
    Total securities available for sale   $  74,097   $     664   $   1,729   $  73,032
                                          =========   =========   =========   =========
</TABLE>

      As a member of the Federal Home Loan Bank (FHLB) of Boston, the 
Bank is required to invest in $100 par value stock of the FHLB of 
Boston in the amount of 1% of its outstanding loans secured by 
residential housing, or 1% of 30% of total assets, or 5% of its 
outstanding advances from the FHLB of Boston, whichever is higher.  
When such stock is redeemed, the Bank would receive from the FHLB 
of Boston an amount equal to the par value of the stock.  As of 
December 31, 1996, 1995 and 1994, the Company had investments in 
FHLB of Boston stock of $3,215,000, $3,215,000, and $3,215,000 
respectively.  At December 31, 1996 the weighted average yield on 
FHLB of Boston stock was 6.40%.


<PAGE> 12


      The following table sets forth the maturity distribution of  
securities held to maturity and securities available for sale at 
December 31, 1996 and the weighted average yields of such 
securities (calculated on the basis of the cost and effective 
yields weighted for the scheduled maturity of each security).

<TABLE>
<CAPTION>
                                      Amortized    Weighted
                                        Cost     Average Yield
                                      ---------    ---------
                                   (In Thousands)

<S>                                   <C>              <C>
US Treasury obligations
  Due within 1 year                   $  16,015        5.90%
  Due after 1 but within 5 years          9,832        5.87%
                                      ---------
    Total                                25,847        5.89%
                                      ---------
US Government Agency obligations
  Due within 1 year                           0        0.00%
  Due after 1 but within 5 years         62,249        6.20%
                                      ---------
    Total                                62,249        6.20%
                                      ---------

Other corporate obligations
  Due within 1 year                           0        0.00%
  Due after 1 but within 5 years          5,476        6.45%
                                      ---------
    Total                                 5,476        6.45%
                                      ---------
Total debt securities                    93,572        6.13%
Mutual fund shares*                       5,239        5.98%
Marketable equity securities*             7,073        4.85%
Net unrealized gains on
  securities available for sale           3,039
                                      ---------
Total securities held to maturity
  and securities available for sale   $ 108,923        6.04%
                                      =========
</TABLE>
 

      Included in total debt securities above are U.S. Government 
Agency obligations classified as securities held to maturity, with 
an amortized cost of $9,500,000, all of which are due after one but 
within five years with a weighted average yield of 6.51%.  All 
other debt securities are classified as securities available for 
sale.

      *Mutual fund shares and marketable equity securities have no 
stated maturity, and are therefore considered to be due after 10 
years.

      Securities held to maturity and securities available for sale of 
individual issuers, with a book value in excess of 10% of 
stockholders' equity, excluding U.S. Treasury and U.S. Government 
agency obligations, at December 31, 1996 were as follows:

<TABLE>
<CAPTION>
                                     Par Value    Book Value  Market Value    Coupon    Maturity Date
                                     ----------   ----------   ----------   ----------   ----------
                                                            ($ In Thousands)

<S>                                  <C>          <C>          <C>               <C>       <C>      
Dean Witter/Discover & Co            $    3,500   $    3,487   $    3,487        6.35%     2-Mar-99
Asset Management Fund, Inc. -
  Mutual Fund Shares (527,054 shs)          N/A        5,244        5,244          N/A          N/A
</TABLE>


<PAGE> 13 


               (D)   Loan Portfolio

      The following table shows Granite State's loan distribution as of 
December 31:

<TABLE>
<CAPTION>
                                                   1996          1995          1994          1993          1992
                                                -----------   -----------   -----------   -----------   -----------
                                                                          (In Thousands)

<S>                                             <C>           <C>           <C>           <C>           <C>
Commercial, Financial & Agricultural            $    9,849    $   10,696    $   11,787    $   14,746    $   20,374
Real Estate-Residential                            122,561       111,578       118,647       117,251       104,178
Real Estate-Commercial                              58,302        52,555        48,185        39,332        35,169
Real Estate-Construction and Land Development        3,030         2,676         3,436         3,832         1,890
Installment                                          4,488         4,438         3,685         4,588         5,753
Other                                                8,109         8,426         8,847         8,937        10,348
                                                -----------   -----------   -----------   -----------   -----------
  Total Loans                                      206,339       190,369       194,587       188,686       177,712
Less:
Allowance for Possible Loan Losses                  (3,676)       (3,704)       (4,230)       (4,004)       (3,864)
Unearned Income                                     (1,860)       (2,356)       (2,930)       (3,364)       (4,174)
                                                -----------   -----------   -----------   -----------   -----------
Loans, net                                      $  200,803    $  184,309    $  187,427    $  181,318    $  169,674
                                                ===========   ===========   ===========   ===========   ===========
</TABLE>

               (E)    Maturity of Loans

      The following table shows the maturity/repricing distribution of 
loans outstanding, excluding non-accrual loans of $2,022,000 as of 
December 31, 1996.  Fixed rate loans are entered by remaining 
maturity while adjustable rate loans are included by repricing 
frequency.  This table does not reflect scheduled loan 
amortization.

<TABLE>
<CAPTION>
                                                 One Year  Over One Year    Over
                                                  or Less  to Five Years  Five Years     Total
                                                ----------   ----------   ----------   ----------
                                                                 (In Thousands)

<S>                                             <C>          <C>          <C>          <C>
Commercial, Financial & Agricultural            $    8,775   $    1,023   $        0   $    9,798
Real Estate-Residential                             75,980       38,883        6,116      120,979
Real Estate-Commercial                              55,305        2,336          275       57,916
Real Estate-Construction and Land Development        3,001           12           17        3,030
Installment                                          1,311        3,120           54        4,485
Other                                                7,746           68          295        8,109
                                                ----------   ----------   ----------   ----------
                                                $  152,118   $   45,442   $    6,757   $  204,317
                                                ==========   ==========   ==========   ==========
Loans maturing after one year:
  Fixed Interest Rate                                        $    7,030   $    6,755   $   13,785
  Variable Interest Rate                                         38,412            2       38,414
                                                             ----------   ----------   ----------
                                                             $   45,442   $    6,757   $   52,199
                                                             ==========   ==========   ==========
</TABLE>
 

<PAGE> 14


               (F)    Nonperforming Loans and Assets
      
      The following table summarizes Granite State's nonperforming 
loans and assets at December 31. Amounts shown reflect principal 
only.

<TABLE>
<CAPTION>
                                                          1996        1995        1994        1993        1992
                                                        ---------   ---------   ---------   ---------   ---------
                                                                            ($ In Thousands)

<S>                                                     <C>         <C>         <C>         <C>         <C>
Nonperforming Loans:
Commercial, Financial & Agricultural                    $      50   $      35   $      81   $      17   $     390
Real Estate-Residential                                     1,582       1,341       1,495       1,801       1,166
Real Estate-Commercial                                        386         332         646         103         399
Real Estate-Construction and Land Development                              88          54         177          67
Installment and other                                           4           2           8          17         366
                                                        ---------   ---------   ---------   ---------   ---------
  Total nonperforming loans                                 2,022       1,798       2,284       2,115       2,388

Other real estate owned                                     1,512       2,691       3,009       4,269       6,839
                                                        ---------   ---------   ---------   ---------   ---------
Total nonperforming loans and other real estate owned   $   3,534   $   4,489   $   5,293   $   6,384   $   9,227
                                                        =========   =========   =========   =========   =========
Percentage of nonperforming loans and
  other real estate owned to total loans receivable         1.71%       2.36%       2.72%       3.38%       5.19%
                                                        =========   =========   =========   =========   =========
Percentage of nonperforming loans and
  other real estate owned to total assets                   0.95%       1.30%       1.70%       2.11%       3.03%
                                                        =========   =========   =========   =========   =========
Loans delinquent 90 days or more included in
  nonperforming loans above                             $     794   $   1,057   $     872   $     807   $   1,584
                                                        =========   =========   =========   =========   =========
Loans delinquent 90 days or more still accruing,
  not included in above                                 $      93   $       0   $      21   $       0   $       0
                                                        =========   =========   =========   =========   =========
</TABLE>
 

      Accrual of interest on loans is discontinued either when 
reasonable doubt exists as to the full, timely collection of 
interest or principal, or when a loan becomes contractually past 
due by ninety days unless the loan is well secured and in the 
process of collection.  When a loan is placed on nonaccrual status, 
all interest previously accrued and not received is reversed 
against current period earnings.

      For the year ended December 31, 1996, the gross interest income 
on nonperforming loans that would have been recorded, had such 
loans been current in accordance with their original terms amounted 
to $263,000.  The amount of interest income on those loans included 
in net earnings for the year ended December 31, 1996 amounted to 
$93,000.

      The Company adopted SFAS No. 114 "Accounting by Creditors for 
Impairment of a Loan," on January 1, 1995.  This new standard 
requires that a creditor measure impairment based on the present 
value of expected future cash flows discounted at the loan's 
effective interest rate, except that as a practical expedient, a 
creditor may measure impairment based on a loan's observable market 
price, or the fair value of the collateral if the loan is 
collateral dependent.  Regardless of the measurement method, a 
creditor must measure impairment based on the fair value of the 
collateral when the creditor determines that foreclosure is 
probable.  In October 1994, SFAS No. 114 was amended by SFAS No. 
118, "Accounting by Creditors for Impairment of a Loan-Income 
Recognition and Disclosures," which allows creditors to use their 
existing methods for recognizing interest income on impaired loans.  
Because the Company already recognized such reductions of value on 
impaired loans through its provision for possible loan losses, the 
adoption of SFAS No. 114, as amended by SFAS No. 118, did not have 
a material impact on its financial condition or results of 
operations.  The balance of impaired loans was $805,000 and 
$1,022,000 at December 31, 1996 and 1995, respectively.  The 
Company has identified a loan as impaired when it is probable that 
interest and principal will not be collected according to the 
contractual terms of 


<PAGE> 15


the loan agreements.  The allowance for 
possible loan losses associated with impaired loans allocated from 
and part of the general allowance for possible loan losses, upon 
the adoption of SFAS No. 114, on January 1, 1995 was $864,000.  
During 1996 and 1995, provisions to the allowance for impaired 
loans amounted to $377,000 and $553,000, respectively and impaired 
loans charged-off amounted to $578,000 and $1,050,000, 
respectively.  The allowance for possible loan losses associated 
with impaired loans at December 31, 1996 and 1995 was $166,000 and 
$367,000, respectively.  At December 31, 1996 and 1995, there were 
no impaired loans which did not have an allowance for possible loan 
losses determined in accordance with SFAS No. 114.  The average 
recorded investment in impaired loans was $634,000 and $1,482,000, 
respectively in 1996 and 1995 and the income recognized on impaired 
loans during 1996 and 1995 was $4,000 and $19,000, respectively.  
Total cash collected on impaired loans during 1996 and 1995 was 
$770,000 and $103,000, respectively, of which $766,000 and $84,000, 
respectively, was credited to the principal balance outstanding on 
such loans.  Interest which would have been accrued on impaired 
loans during 1996 and 1995, had they performed in accordance with 
the terms of their contracts, was $61,000 and $166,000, 
respectively.  The company's policy for interest income recognition 
on impaired loans is to recognize income on nonaccrual loans under 
the cash basis when the loans are both current and the collateral 
on the loan is sufficient to cover the outstanding obligation to 
the Company; if these factors do not exist, the Company does not 
recognize income.  Impaired loans consisted of $418,000 of 
residential real estate loans and $387,000 of commercial real 
estate loans at December 31, 1996 and $650,000 of residential real 
estate loans and $372,000 of commercial real estate loans at 
December 31, 1995.  Such loans were measured for impairment using 
the fair value of the loans' collateral.

      Other real estate owned is comprised of properties acquired 
through foreclosure proceedings or acceptance of a deed in lieu of 
foreclosure.  Real estate formally acquired in settlement of loans 
is recorded at the lower of the carrying value of the loan or the 
fair value of the property received less an allowance for estimated 
costs to sell.  Loan losses arising from the acquisition of such 
properties are charged against the allowance for possible loan 
losses.  Provisions to reduce the carrying value to net realizable 
value are charged to current period earnings as realized and 
reflected as an addition to the valuation allowance.  Operating 
expenses and gains and losses upon disposition are reflected in 
earnings as realized.

      Other real estate owned at December 31 was comprised as follows:

<TABLE>
<CAPTION>
                                        1996        1995        1994        1993        1992
                                      ---------   ---------   ---------   ---------   ---------
                                                           ($ In Thousands)

<S>                                   <C>         <C>         <C>         <C>         <C>
Condominiums and apartment projects   $     340   $     266   $     701   $     492   $     449
Single family housing projects              775         787       1,050       1,024       1,230
Retail and office                                       426         481         691       2,327
Non-retail commercial                       556       1,593       1,166       1,760       1,519
Residential                                 306          75         107         711       1,564
                                      ---------   ---------   ---------   ---------   ---------
                                          1,977       3,147       3,505       4,678       7,089
Less: Valuation allowance                   465         456         496         409         250
                                      ---------   ---------   ---------   ---------   ---------
                                      $   1,512   $   2,691   $   3,009   $   4,269   $   6,839
                                      =========   =========   =========   =========   =========
</TABLE>
 
      As of December 31, 1996, there were no loan concentrations 
exceeding 10% of total loans.      

      As of December 31, 1996, neither Granite State nor its 
subsidiary, Granite Bank, had any foreign loans.

               (G)   Summary of Loan Loss Experience and Allocation  
                     of the Allowance for Possible Loan Losses

      The allowance for possible loan losses is maintained through 
provisions for possible loan losses based upon management's ongoing 
evaluation of the risks inherent in the loan portfolio.  
Management's evaluation of the loan portfolio includes many 
factors, such as identification and review of individual


<PAGE> 16


problem situations that may affect the borrower's ability to repay; 
review of  overall portfolio quality through an analysis of current 
charge-offs, delinquency, and nonperforming loan data; review of 
regulatory authority examinations and evaluations of loans; an 
assessment of current and expected economic conditions; and changes 
in the size and character of the loan portfolio.  At December 31, 
1992 and 1993, the level of the allowance was lower than the 1991 
level due to management's assessment of reductions in nonperforming 
loans as well as an apparent stabilization of the New Hampshire 
economy and the regional real estate markets.  At December 31, 
1994, the level of the allowance was higher than the 1993 level, 
due to an increase in nonperforming loans as well as an increase in 
the balance of the loan portfolio.  The level of the allowance at 
December 31, 1995 was lower than the 1994 level, due primarily to a 
reduction in the level of nonperforming loans, as well as a 
reduction in the balance of the loan portfolio.  At December 31, 
1996, the level of the allowance was fairly stable with the level 
of the allowance at December 31, 1995, based on management's 
overall evaluation of the adequacy of the allowance in relation to 
nonperforming loans, total loans and the risks inherent in the loan 
portfolio.  While management believes that the allowance for 
possible loan losses at December 31, 1996 is adequate based on its 
current review and estimates, further provisions to the allowance 
may be necessary if the market in which the Company operates 
deteriorates.  Additionally, regulatory agencies review the 
Company's allowance for loan losses as part of their examination 
process.  Such agencies may require the Company to recognize 
additions to the allowance based upon judgements which may be 
different from those of management.

      Changes in the allowance for possible loan losses for the year 
ended December 31 are as follows:

<TABLE>
<CAPTION>
                                                1996        1995        1994        1993         1992
                                              ---------   ---------   ---------   ---------    --------
                                                                    (In Thousands)

<S>                                           <C>         <C>         <C>         <C>         <C>
Balance at beginning of year                  $   3,704   $   4,230   $   4,004   $   3,864   $   4,570
  Provision for possible loan losses                650         735         600         637         752
  Loans charged off                              (1,193)     (1,405)       (421)       (573)     (1,660)
  Recoveries of loans previously charged off        515         144          47          76         202
                                              ---------   ---------   ---------   ---------    --------
Balance at end of year                        $   3,676   $   3,704   $   4,230   $   4,004   $   3,864
                                              =========   =========   =========   =========   =========
</TABLE>

      A summary of loan charge-offs by loan category for the year ended 
December 31, follows:

<TABLE>
<CAPTION>
                                                  1996        1995        1994        1993        1992
                                                ---------   ---------   ---------   ---------   ---------
                                                                     (In Thousands)

<S>                                             <C>         <C>         <C>         <C>         <C>
Commercial, financial and agricultural          $     537   $     766   $       9   $     123   $     159
Real estate-Residential                               393         333         204         165         622
Real estate-Commercial                                258         300         199         143         352
Real estate-Construction and land development                                                         186
Installment and other loans                             5           6           9         142         341
                                                ---------   ---------   ---------   ---------   ---------
                                                $   1,193   $   1,405   $     421   $     573   $   1,660
                                                =========   =========   =========   =========   =========
</TABLE>
 
      A summary of loan recoveries by loan category for the year ended 
December 31, follows:
      
<TABLE>
<CAPTION>
                                                  1996        1995        1994        1993        1992
                                                ---------   ---------   ---------   ---------   ---------
                                                                     (In Thousands)

<S>                                             <C>         <C>         <C>         <C>         <C>
Commercial, financial and agricultural          $     365   $      19   $      16   $      16   $      41
Real estate-Residential                                 9          80          27          13          41
Real estate-Commercial                                 88           3           2          33         102
Real estate-Construction and land development          50          38           0           0           0
Installment and other loans                             3           4           2          14          18
                                                ---------   ---------   ---------   ---------   ---------
                                                $     515   $     144   $      47   $      76   $     202
                                                =========   =========   =========   =========   =========
</TABLE>


<PAGE> 17

 
      The ratio of net loan charge offs to average loans outstanding 
for the year ended December 31, is summarized as follows:
 
<TABLE>
<CAPTION>
                                     1996         1995         1994         1993         1992
                                  ----------   ----------   ----------   ----------   ----------
                                                         ($ In Thousands)

<S>                               <C>          <C>          <C>          <C>          <C>
Net loan chargeoffs               $      678   $    1,261   $      374   $      497   $    1,458
                                  ==========   ==========   ==========   ==========   ========== 

Average loans outstanding         $  192,898   $  191,696   $  189,034   $  181,069   $  176,367
                                  ==========   ==========   ==========   ==========   ========== 
Ratio of net loan chargeoffs
   to average loans outstanding        0.35%        0.66%        0.20%        0.27%        0.83%
                                  ==========   ==========   ==========   ==========   ==========
</TABLE>

      An allocation of the allowance for possible loan losses as of 
December 31 follows:

<TABLE>
<CAPTION>
                                        1996                        1995                         1994
                              ------------------------    -------------------------     ------------------------
                                         Percent of loans             Percent of loans             Percent of loans
                                         in each category             in each category             in each category
                                Amount    to total loans     Amount    to total loans     Amount    to total loans
                              ----------    ----------    -----------    ----------     ----------    ----------
                                                               ($ In Thousands)

<S>                           <C>               <C>       <C>                <C>        <C>               <C>
Commercial, financial
  and agricultural            $      304         4.77%    $       366         5.62%     $    1,349         6.06%
Real estate-Residential            1,141        59.39%          1,079        58.60%          1,003        60.97%
Real estate-Commercial             1,842        28.26%          1,997        27.61%          1,642        24.76%
Real estate-Construction
  and land development                94         1.47%             98         1.41%             91         1.77%
Installment and other loans          295         6.11%            164         6.76%            145         6.44%
                              ----------    ----------     ----------    ----------     ----------    ----------
                              $    3,676       100.00%     $    3,704       100.00%     $    4,230       100.00%
                              ==========    ==========     ==========    ==========     ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                        1993                         1992
                              ------------------------     ------------------------
                                         Percent of loans             Percent of loans
                                         in each category             in each category
                                Amount    to total loans     Amount    to total loans
                              ----------    ----------     ----------    ----------
                                                 ($ In Thousands)

<S>                           <C>                <C>       <C>               <C>
Commercial, financial
  and agricultural            $      704         7.82%     $    1,062        11.46%
Real estate-Residential            1,742        62.13%          1,122        58.63%
Real estate-Commercial             1,184        20.85%          1,193        19.79%
Real estate-Construction
  and land development               174         2.03%             62         1.06%
Installment and other loans          200         7.17%            425         9.06%
                              ----------    ----------     ----------    ----------
                              $    4,004       100.00%     $    3,864       100.00%
                              ==========    ==========     ==========    ==========
</TABLE>
 
      The allowance for possible loan losses as a percentage of loans 
outstanding at December 31 of each reported period is as follows:

<TABLE>
<CAPTION>
                                  1996       1995       1994       1993       1992
                                --------   --------   --------   --------   --------
<S>                                <C>        <C>        <C>        <C>        <C>
Allowance for possible
 loan losses as a percentage
  of total loans outstanding       1.78%      1.95%      2.17%      2.12%      2.17%
                                ========   ========   ========   ========   ========
</TABLE>


<PAGE> 18


               (H)   Risks Associated with Commercial Real Estate,
                     Commercial and Construction Loans

      Commercial real estate and commercial lending involves 
significant additional risks compared with one-to-four family 
residential mortgage lending, and therefore typically accounts for 
a disproportionate share of delinquent loans and real estate owned 
through foreclosure or by deed in lieu of foreclosure.  Such 
lending generally involves larger loan balances to single borrowers 
or groups of related borrowers than does residential lending, and 
repayment of the loan depends in part on the underlying business 
and financial condition of the borrower and is more susceptible to 
adverse future developments.  If the cash flow from income-
producing property is reduced, for example, because leases are not 
obtained or renewed, the borrower's ability to repay the loan may 
be materially impaired.  These risks can be significantly affected 
by considerations of supply and demand in the market for office, 
manufacturing and retail space and by general economic conditions.  
As a result, commercial real estate and commercial loans are likely 
to be subject, to a greater extent than residential real estate 
loans, to adverse conditions in the general economy.

      Construction loans are, in general, subject to the same risks as 
commercial real estate loans, but involve additional risks as well.  
Such additional risks are due to uncertainties inherent in 
estimating construction costs, delays arising from labor problems, 
shortages of material, uncertain marketability of a complete 
project and other unpredictable contingencies that make it 
relatively difficult to determine accurately the total loan funds 
required to complete a project or the value of the completed 
project.  Construction loan funds are advanced on the security of 
the project under construction, which is of uncertain value prior 
to the completion of construction.  This uncertainty is increased 
in depressed real estate markets.  When a construction project 
encounters cost overruns, marketing or other problems, it may 
become necessary, in order to sustain the project and preserve 
collateral values, for the lender to advance additional funds and 
to extend the maturity of its loan.  In a declining market, there 
is no assurance that this strategy will successfully enable the 
lender to recover outstanding loan amounts and interest due.  
Moreover, foreclosing on such properties results in administrative 
expense and substantial delays in recovery of outstanding loan 
amounts and provides no assurance that the lender will recover all 
monies due to it, either by developing the property, subject to 
regulatory limitations and to the attendant risks of development, 
or by selling the property to another developer.

               (I)   Deposits

      The average balance of deposits and the average rates paid 
thereon are summarized as follows:

<TABLE>
<CAPTION>
                                           1996                       1995                      1994
                                  -----------------------   -----------------------   -----------------------
                                                Weighted                  Weighted                  Weighted
                                   Average      Average      Average      Average        Average    Average
                                   Balance        Rate       Balance        Rate         Balance      Rate
                                  ----------   ----------   ----------   ----------   ----------   ----------
                                                                 ($ In Thousands)

<S>                               <C>               <C>     <C>               <C>     <C>               <C>
Interest bearing deposits:
  Interest bearing NOW deposits   $  102,181        3.10%   $   71,367        2.89%   $   50,403        1.63%
  Money market deposits               14,077        2.87%       22,181        2.95%       34,476        2.61%
  Savings deposits                    40,363        2.74%       49,147        2.90%       64,454        2.62%
  Time deposits                      107,689        5.52%       99,248        5.38%       76,967        3.81%
                                  ----------                ----------                ----------
Total interest bearing deposits   $  264,310        4.02%   $  241,943        3.92%   $  226,300        2.80%
                                  ==========   ==========   ==========   ==========   ==========   ==========
Noninterest bearing deposits      $   29,766          N/A   $   27,685          N/A   $   27,027          N/A
                                  ==========                ==========                ==========
</TABLE>


<PAGE> 19


               (J)   Maturities of Time Deposits

      The maturity distribution of time certificates of deposit of 
$100,000 or more at December 31, 1996 follows:

<TABLE>
<CAPTION>

REMAINING MATURITY                   BALANCE
---------------------               ----------
                                  (In Thousands)

<S>                                 <C>
3 months or less                    $    3,445
Over 3 through 6 months                  2,303
Over 6 through 12 months                 2,754
Over 12 through 36 months                3,570
Over 36 months                             202
                                    ----------
                                    $   12,274
                                    ==========
</TABLE>
 
               (K)    Return on Equity and Assets

      Operating and capital ratios for the year ended December 31 
follows:

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

<S>                                                           <C>          <C>          <C>
Net earnings to average assets                                1.07%        1.05%        0.91%

Net earnings to average
  stockholders' equity                                       12.46%       12.23%       10.73%

Dividend pay out ratio on common stock -primary              31.28%       30.38%       28.35%
                                       -fully diluted        31.46%       30.57%       28.57%

Average equity to average total assets                        8.62%        8.59%        8.48%
</TABLE>
 

               (L)    Borrowings

      Information regarding the borrowings in Note K to the 
consolidated Financial Statements in the Annual Report to 
Stockholders for the year ended December 31, 1996 is incorporated 
herein by reference.

Short-Term Borrowings
---------------------
      Outstanding short-term borrowings at December 31 were as follows:

<TABLE>
<CAPTION>
                                                      1996        1995         1994
                                                    ---------   ---------   ---------
                                                             (In Thousands)

<S>                                                 <C>         <C>         <C>
Demand borrowings under available lines of credit   $       0   $       0   $  20,904
                                                    =========   =========   =========
Securities sold under agreements to repurchase      $  31,535   $  26,189   $  21,968
                                                    =========   =========   =========
</TABLE>


<PAGE> 20


      The maximum amount of short-term borrowings outstanding at any 
month end during the year ended December 31 were as follows:

<TABLE>
<CAPTION>
                                                      1996        1995        1994
                                                    ---------   ---------   ---------
                                                             (In Thousands)

<S>                                                 <C>         <C>         <C>
Demand borrowings under available lines of credit   $   4,704   $  23,336   $  28,795
                                                    =========   =========   =========
Securities sold under agreements to repurchase      $  31,535   $  28,298   $  21,968
                                                    =========   =========   =========
</TABLE>
 
      The average balance of short-term borrowings and weighted average 
interest rates thereon for the year ended December 31 were as 
follows:

<TABLE>
<CAPTION>
                                           1996                    1995                    1994
                                   ---------------------   ---------------------   -----------------------
                                    Average    Weighted     Average    Weighted     Average    Weighted
                                    Balance  Average Rate   Balance  Average Rate   Balance  Average Rate
                                   ---------   ---------   ---------   ---------   ---------   ---------
                                            ($ in Thousands)

<S>                                <C>             <C>     <C>             <C>     <C>             <C>
Demand borrowings under
  available Lines of Credit        $     796       6.41%   $   5,742       6.36%   $  13,304       5.24%
                                   =========   =========   =========   =========   =========   =========
Securities sold under
  agreements to repurchase         $  24,727       4.67%   $  21,133       5.24%   $  15,500       4.16%
                                   =========   =========   =========   =========   =========   =========
Short-term fixed rate borrowings   $       0         N/A   $       0         N/A   $       0         N/A
                                   =========   =========   =========   =========   =========   =========
</TABLE>
 
               (M)    Competition

      The Bank continues to experience substantial competition in 
attracting and retaining deposit accounts and in making mortgage 
and other loans.  There are numerous federally-insured banks and 
thrifts with offices within Granite Bank's principal market areas, 
many of which are headquartered there.  In addition, the Bank 
experiences competition from credit unions and other financial 
intermediaries which are not subject to similar State and Federal 
regulations.

      The primary factors in competing for deposit accounts are 
service, interest rates, convenience and, to a lesser extent, 
products offered.  Competitors for deposit accounts include other 
depository institutions and other investment vehicles such as 
mutual funds, government and corporation obligations, and the 
equity capital markets.

      The primary factors in competing for loans are interest rates, 
loan origination fees and the quality and range of lending products 
and services offered.  Competition for origination of loans comes 
primarily from savings institutions, mortgage banking firms, and 
other commercial banks.

               (N)    Subsidiaries

      Granite State owns 100% of the capital stock of Granite Bank, a 
New Hampshire chartered commercial bank, its sole subsidiary.

         (d)    Financial Information about Foreign and Domestic 
                Operations and Export Sales

      Not applicable.


<PAGE> 21


Item 2.      Description of Property

      The following table sets forth the location of the Company's 
offices as of December 31, 1996.  See also Notes G and L to the 
Consolidated Financial Statements in the Annual Report to 
Stockholders for the year ended December 31, 1996 which is 
incorporated herein by reference.

<TABLE>
<CAPTION>

  Office Type                 Location              City/Town       Status
----------------      ------------------------     ------------     -------

<S>                   <C>                          <C>              <C>
Full service          122 West Street              Keene            Owned*
  (Headquarters)
Full service          Routes 9 and 63              Chesterfield     Owned*

Full service          Elm Street at Route 101      Milford          Owned*

Full service          Route 101A & 122             Amherst          Owned*

Full service          21 Grove Street              Peterborough     Owned*

Full service          Jct Route 101 & 202          Peterborough     Leased*

Full service          70 Main Street               Durham           Owned*

Full service          Southgate Plaza, Route 1     Portsmouth       Owned*

Full service          93 Middle Street             Portsmouth       Owned*
</TABLE>
 

      Additionally, the Company operates thirteen ATMs at other 
locations in Keene, Fitzwilliam, Milford, Amherst, Durham, West Swanzey and
North Swanzey, New Hampshire.  The ATM facilities and their enclosures 
are owned by the Company;  the property on which they are located 
is leased.  All offices and ATM facilities are located in New 
Hampshire.

      *Office includes an ATM facility.  The Durham branch has two ATM 
facilities on site.


Item 3.      Legal Proceedings

      The Company is a defendant in various legal actions incident to 
its business, none of which is believed by management to be 
material to the financial condition of the Company. 


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

      None.


<PAGE> 22


Additional Item. Executive Officers

      Information regarding executive officers not listed as directors 
in the Proxy Statement is as follows:

      Charles B. Paquette (age 44) is the Executive Vice President, 
Secretary and Chief Operations Officer of the Holding Company and 
Senior Executive Vice President, Secretary and Chief Operations 
Officer of Granite Bank, positions he assumed in 1986 and 1991, 
respectively.  Mr. Paquette has been employed in a management 
position by the Company and Granite Bank since 1980.

      William C. Henson (age 41) is the Executive Vice President of the 
Holding Company and Director of Community Banking of Granite Bank, 
positions he assumed in 1986 and 1996, respectively.  Mr. Henson 
joined the Bank in 1980, and has since served in a management 
capacity.

      William G. Pike (age 45) is the Executive Vice President and 
Chief Financial Officer of the Holding Company and Granite Bank, 
positions he assumed in December 1991 when he joined the Company.  
From 1987 to December of 1991, Mr. Pike was a partner in the firm 
of Grant Thornton, Accountants and Management Consultants.

      William D. Elliott (age 49) is Senior Vice President and 
Commercial Lending Officer of Granite Bank.  Mr. Elliott joined 
Granite Bank as Senior Vice President and Senior Loan Officer in 
April, 1990 and served as Executive Vice President from February 
1992 to December of 1996.  From December 1981 to December 1989, Mr. 
Elliott was Executive Vice President and Senior Loan Officer of 
Indian Head National Bank of Keene.  In December of 1989 Indian 
Head National Bank of Keene was acquired by Fleet Bank, where Mr. 
Elliott assumed the position of Vice President and Regional 
Commercial Banking Manager until he joined Granite Bank.


<PAGE> 23


                                   PART II

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

         (a)   Market Information

      Granite State's common stock is quoted on the Nasdaq Stock Market 
under the symbol GSBI. The following table shows the range of the 
high and low prices and dividend information on a quarterly basis 
for Granite State's common stock for 1996 and 1995.  The table does 
not reflect inter-dealer prices, potential mark-ups, mark-downs or 
commissions, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                      1996
                                    -----------------------------------------
                                    4th Qtr    3rd Qtr    2nd Qtr    1st Qtr
                                    --------   --------   --------   --------

<S>                                 <C>        <C>        <C>        <C>
  Dividends declared per share...   $    .14   $    .14   $    .14   $    .14
Stock Price
  High...........................      22.75      18.75      18.75      18.00
  Low............................      18.63      18.00      17.38      16.13
</TABLE>

<TABLE>
<CAPTION>
                                                       1995
                                    ------------------------------------------
                                    4th Qtr    3rd Qtr     2nd Qtr    1st Qtr
                                    --------   --------    --------   --------

<S>                                 <C>        <C>         <C>        <C>
  Dividends declared per share...   $    .12   $    .12    $    .12   $    .12
Stock Price
  High...........................      17.25      17.25       13.63      13.25
  Low............................      16.13      13.06       12.25      11.38
</TABLE>
 
         (b)   Holders

      As of March 17, 1997, Granite State had approximately 744 common 
shareholders.

         (c)   Dividends

      The holders of common stock of Granite State are entitled to 
receive and share pro-rata in such dividends as may be declared by 
the Board of Directors of Granite State out of funds legally 
available therefore.  Granite State is permitted by New Hampshire 
corporate law to pay dividends out of unreserved and unrestricted 
earned surplus or from unreserved and unrestricted net earnings of 
a current fiscal year and the next preceding fiscal year taken as a 
single period, as and when declared by its Board of Directors.

      New Hampshire banking regulations prohibit the payment of a cash 
dividend if the effect thereof would cause the net worth of the 
Bank to be reduced below either the amount required for its 
liquidation account or applicable capital requirements.  The 
liquidation account was established in connection with Granite 
Bank's conversion from a mutual to a stock savings bank 
("conversion") for the benefit of certain depositors in the event 
of a liquidation of the Bank.  The initial amount of the 
liquidation account, as originally established, equaled the Bank's 
net worth of $5,603,000 at February 28, 1986,  and has since been 
declining as deposits have been reduced or withdrawn (it will never 
be increased, despite additional deposits).  The balance of the 
liquidation account at December 31, 1996 was approximately 
$674,000.  The Federal Deposit Insurance Act prohibits the Bank 
from making a capital distribution, including payment of a cash 
dividend, if the Bank would not meet applicable capital 
requirements after the payment.  Furthermore, the Federal Deposit 
Insurance Act prohibits the Bank from paying dividends on its 
capital stock if it is in default in the payment of any assessment 
to the FDIC.
      

<PAGE> 24


Item 6.      Management's Discussion and Analysis or Plan  of Operation

      Management's Discussion and Analysis or Plan of Operation on 
pages 9 to 23, inclusive, of the Annual Report to Stockholders for 
the year ended December 31, 1996 is incorporated herein by 
reference.

Item 7.      Financial Statements

         (a)   Financial Statements Required by Regulation S-X

      Information relating to financial statements on pages 25 to 48, 
inclusive, of the Annual Report to Stockholders for the year ended 
December 31, 1996 is incorporated herein by reference.

         (b)   Supplementary Financial Information
                   
                (1)   Selected Quarterly Financial Data

      The Selected Quarterly Financial Data on pages 49 to 50 of the 
Annual Report to Stockholders for the year ended December 31, 1996 
is incorporated herein by reference.

                (2)   Information on the Effects of Changing Prices

      Management's discussion of the effects of inflation on page 22 of 
the Annual Report to Stockholders for the year ended December 31, 
1996 is incorporated herein by reference.

                (3)   Information About Oil and Gas Producing Activities

      Not applicable.



Item 8.      Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure

      None.


<PAGE> 25


                                  PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons,
         Compliance with Section 16(a) of the Exchange Act

      Information regarding directors and executive officers of Granite 
State on pages 3 to 4 of the Proxy Statement for the 1997 Annual 
Meeting of  Stockholders is incorporated herein by reference.

Item 10. Executive Compensation

      Information regarding executive compensation on pages 4 to 7 of 
the Proxy Statement for the 1997 Annual Meeting of  Stockholders is 
incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management      

      Information regarding security ownership of certain beneficial 
owners and Granite State's management on pages 2 to 4 of the Proxy 
Statement for the 1997 Annual Meeting of  Stockholders is 
incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions

      Information regarding certain relationships and related 
transactions on page 7 of the Proxy Statement for the 1997 Annual 
Meeting of  Stockholders is incorporated herein by reference.

Item 13. Exhibits and Reports on Form 8-K

         (a)   List of Documents Filed as Part of this Report

                (1)   Financial Statements

      The financial statements listed below and the report of 
independent certified public accountants are incorporated herein by 
reference to the Annual Report to Stockholders for the year ended 
December 31, 1996, in Item 7. Page references are to such Annual 
Report.

<TABLE>
<CAPTION>

Financial Statements                                            Page Reference
--------------------                                            --------------

<S>                                                                     <C>
   Granite State Bankshares, Inc. and Subsidiary

        Report of Independent Certified Public Accountants              25

        Consolidated Statements of Financial Condition                  26

        Consolidated Statements of Earnings                             27

        Consolidated Statements of Stockholders' Equity                 28

        Consolidated Statements of Cash Flows                           29

        Notes to Consolidated Financial Statements                      30-48
</TABLE>


<PAGE> 26


                (2)   Financial Statements Schedules

      Schedules of the Consolidated Financial Statements required by 
the applicable accounting regulations of the Securities and 
Exchange Commission are not required under the related instructions 
or are inapplicable, and therefore have been omitted.

      The remaining information appearing in the Annual Report to 
Stockholders for the year ended December 31, 1996,  is not deemed 
to be filed as part of this report, except as expressly provided 
herein.

         (b)   Reports on Form 8-K

      None.


<PAGE> 27


         (c)   Exhibits

      The exhibits listed below are filed herewith or are incorporated 
by reference to other filings.

                        EXHIBIT INDEX TO FORM 10-KSB


Exhibit 3.1     Articles of Incorporation*

Exhibit 3.2     Bylaws

Exhibit 10.1    Stock Option Plan*

Exhibit 10.2    Employment Agreement with Charles W. Smith*

Exhibit 10.3    Amendment No. 1 to Employment Agreement with Charles W. Smith

Exhibit 10.4    Form of Special Termination Agreement with Messrs. 
                Charles B. Paquette, William C. Henson, William G. 
                Pike and William D. Elliott

Exhibit 10.5    Employee Stock Ownership Plan*

Exhibit 10.6    Purchase and Assumption Agreement and related Indemnity 
                Agreement between Granite Bank and the Resolution Trust 
                Corporation dated August 2, 1991**

Exhibit 10.7    Purchase and Assumption Agreement and related Indemnity 
                Agreement between Granite Bank and the Federal Deposit 
                Insurance Corporation dated November 15, 1991***

Exhibit 11      Calculations of Earnings Per Common and Common Equivalent
                Share and Earnings Per Common Share Assuming Full Dilution

Exhibit 13      Portions of the Annual Report to Stockholders for the year
                ended December 31, 1996

Exhibit 21      Subsidiary of Granite State Bankshares, Inc. ****

Exhibit 23      Consent of Independent Certified Public Accountants

Exhibit 27      Financial Data Schedule

          
        *Incorporated by reference from Granite State Bankshares, Inc., 
         Form S-1, filed on April 18, 1986.

        **Incorporated by reference from Granite State Bankshares, Inc., 
        Form 8-K, Exhibits 2.1 and 2.2, filed on August 16, 1991.

        ***Incorporated by reference from Granite State Bankshares, Inc., 
        Form 8-K, Exhibits 2.1 and 2.2, filed on December 2, 1991.

        ****See Part I, Item 1(a) and Item 1 (c)(5)(N) of Form 10-KSB.


<PAGE> 28


                                  SIGNATURES

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

                                                GRANITE STATE BANKSHARES, INC.
            
            
                                                /s/   Charles W. Smith
Dated :   March 27, 1997                        ----------------------
                                                By: Charles W. Smith
                                                    Chairman of the Board 


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

/s/ Charles W. Smith            3/27/97         Chief Executive Officer 
--------------------                            (Principal Executive Officer)
Charles W. Smith                                and Chairman of the Board
                                                

/s/ William G. Pike             3/27/97         Executive Vice President 
-------------------                             and Chief Financial Officer
William G. Pike                                 (Principal Financial and
                                                Accounting Officer)


/s/ James L. Koontz             3/27/97         Director 
-------------------
James L. Koontz


/s/ Jane B. Reynolds            3/27/97         Director 
--------------------
Jane B. Reynolds


/s/ William Smedley V           3/27/97         Director 
---------------------
William Smedley V


<PAGE> 29


/s/ C. Robertson Trowbridge     3/27/97         Director 
---------------------------
C. Robertson Trowbridge


/s/ Philip M. Hamblet           3/27/97         Director 
---------------------
Philip M. Hamblet





/s/ James C. Wirths III         3/27/97         Director 
-----------------------
James C. Wirths III


<PAGE> 30