Ledyard Financial Group, Inc.
Annual Report 2006

Plain-text annual report

A partnership in growth. TABLE of CONTENTS 1 2 3 Financial Highlights Letter from the President & Chair Partnership, Growth & Community 10 Investment & Trust LLEDYARD NATIONAL BANK’S SENIOR MANAGEMENT TEAM Gregory D. Steverson, Executive Vice President & Chief Financial Officer Seated, from left: Kathryn G. Underwood, President & CEO 14 Management’s Financial Discussion Back, from left: 17 Independent Auditors’ Report Darcy D. Rogers, Senior Vice President & Chief Operations Officer 18 Balance Sheets 19 Statement of Condition 22 Notes to Financial Statements 38 Directors, Officers, Boards & Staff Photography by Jon Gilbert Fox Martha P. Candon, Senior Vice President & Senior Retail Banking Officer D. Rodman Thomas, Senior Vice President & Senior Trust Officer William B. Hamilton, Jr., President, Investment & Trust Services Division Darlene E. Romano, Senior Vice President, Human Resources & Finance Mark S. Clough, Senior Vice President & Senior Loan Officer M MISSION STATEMENT: We at Ledyard National Bank are committed to being the financial services institution of choice in each of the markets we serve by providing our customers with outstanding products and services. In order to accomplish this, we must have dedicated and capable employees for whom we will provide a challenging and rewarding work environment. As a direct result, we will provide our shareholders with consistent and superior returns over the long term. FINANCIAL HIGHLIGHTS Years-ended December 31, (dollars in thousands, except per share data) Financial Condition Data Assets Investments Net Loans, including loans held for sale Deposits Federal Home Loan Bank Advances Shareholders’ Equity Operating Data Net Interest Income Provision for Loan Loss Non-interest Income Non-interest Expense Income Taxes Net Income Other Data Earnings per Share, basic Dividends per Share Dividend Payout Ratio Book Value per Share Shares Outstanding Return on Average Assets Return on Average Equity Equity to Asset Ratio Allowance for Loan Losses to Total Loans 2006 2005 2004 2003 2002 $ 268,869 65,467 175,189 227,614 11,981 21,849 $ $ $ $ 10,053 325 5,330 10,452 1,593 3,013 3.03 0.91 30% 21.96 994,895 1.20% 14.56% 8.13% 1.35% $ 242,761 61,005 157,406 205,710 10,493 19,716 $ $ $ $ 9,631 340 4,864 9,767 1,578 2,810 2.84 0.85 30% 19.92 990,679 1.17% 14.90% 8.12% 1.31% $ 233,203 43,030 157,047 203,008 5,000 17,840 $ $ $ $ 9,409 525 4,067 9,237 1,384 2,330 2.37 0.73 31% 18.15 983,519 1.06% 13.58% 7.66% 1.53% $ 320,230 48,278 218,869 271,142 3,214 27,271 $ $ $ $ 12,099 525 6,282 11,894 2,176 3,787 3.75 1.08 29% 26.99 1,010,246 1.31% 14.66% 8.52% 1.27% $ 285,495 60,601 194,893 240,828 8,857 24,391 $ $ $ $ 11,486 780 5,834 11,354 1,748 3,439 3.43 0.98 29% 24.16 1,009,746 1.25% 14.85% 8.54% 1.21% 1 Kathryn G. Underwood President & CEO, Ledyard National Bank Dennis E. Logue Chair, Ledyard National Bank TO OUR FELLOW OWNERS, OUR LOYAL CUSTOMERS and MEMBERS OF OUR COMMUNITIES: TWe are pleased to report that 2006 was another record-breaking year for Ledyard National Bank. We achieved all-time highs in total net income, earnings per share, total assets, and book value per share. In addition, our Investment & Trust Services Division set new highs in assets under man- agement, revenue, profit margin, and profits. These and other positive results – many of which are detailed elsewhere in this report – were achieved in spite of an uncertain environment for the banking industry. Our goal continues to be to build share- holder value by providing superior services in all the communities we serve now and in the future. We are placing our emphasis on both growing our businesses organically in our existing markets and seeking opportunities to expand into places not yet served by us. Our strategic plan calls for continuing emphasis on providing awe-inspiring service to our clients. This will include enhancing our technology to provide greater customer security and convenience and expanding our product offerings so as to meet all our customers’ banking needs. We will also focus on increased employee training to ensure that, in assisting and advising our clients, we are providing them with the best solutions to their planning needs in an increasingly complex financial environment. A significant step in 2006 toward meeting those goals was the planning and ground- breaking for the new headquarters for our Investment & Trust Services Division. This new facility in downtown Hanover will greatly enhance our efforts to expand our product and service offerings for existing clients and gain the business of many more individuals and organizations in and beyond our current markets. The grand opening for this wonderful new building is scheduled to occur in the fourth quarter of 2007. This major step is a key part of our effort to continue double-digit growth in our financial services business through our current investment and trust programs and new products and services. These and other activities will ensure we remain innovative in the businesses and markets we deem critical to our future success. As we have previously reported, we arranged in 2006 for Ledyard National Bank stock to be bought and sold through the NASD-sanctioned “Pink Sheets" (www.pinksheets.com) under ticker symbol LYNA. The national market for our stock will result in increased liquidity for our present and future shareholders. During 2006, Gregory D. Steverson rejoined our senior management team as Executive Vice President and Chief Financial Officer. In addition to applying his considerable financial talents to the operation of our bank, Greg will be coordinating our efforts to enhance our shareholder communications in a number 2 of ways, including increasing the information available to shareholders and others on Ledyard’s website. If you would like to be added to our periodic e-mail communications, e-mail Greg at Greg.Steverson@Ledyardbank.com. Greg is also playing an active role in our efforts to raise our visibility and market share in the New London area where he and his family reside. We want to thank you for placing your trust in all of us here at your bank as we move forward to address future challenges and opportunities. We will do all in our power to continue to be deserving of that trust. While circumstances change, our goal remains as always: to build value for our shareholders by providing our present and future customers with “banking the way it should be.” We look forward to seeing many of you at our Annual Meeting on April 13th and answering any questions you may have for us at that time. KATHRYN G. UNDERWOOD President & Chief Executive Officer DENNIS E. LOGUE Chair LWe have a saying at Ledyard: LEDYARD NATIONAL BANK: PARTNERSHIP, GROWTH and COMMUNITY Our goal is to develop further “It’s not just banking. It’s banking partnerships with more people who the way it should be.” As we celebrate will discover the benefits of working our sixteenth anniversary in 2007, with Ledyard. This means that we will these words have even greater meaning work even harder for our existing with all they imply. They are an customers. We will always strive embodiment of our mission to deliver to "raise the bar" to ensure that community banking that far exceeds expectations are continually exceeded what is expected. and that new, higher standards are consistently set. We firmly believe that our growth is a direct result of staying true to We think that the people and that mission. By building trusted accompanying photographs featured relationships. By offering exceptional in this report will illustrate that products that evolve based on the Ledyard is more than just a bank. We needs of our customers and the are partners within the community community. By delivering the kind who share the same hopes and dreams of extraordinary personalized service for success. That is, after all, banking that we, as customers, would want. the way it should be. “ Our mission is to deliver the extraordinary personalized service that we, as customers, would want. ” 3 PICTURED ABOVE: (from left to right) Martha Richardson of Stave Puzzles; Gail Broughton, Assistant Vice President and Regional Manager of Ledyard’s Lyme and Norwich offices; and Steve Richardson, aka Stave’s “Owner and Chief Tormentor” surrounded by busy “elves” in the Stave Puzzles workshop. 4 “ Ledyard is working hard to make sure that all the financial pieces fit perfectly together... ” SSTAVE PUZZLES COUNTS on LEDYARD to FIT the PIECES TOGETHER Steve Richardson’s official title is “Owner and Chief Tormentor” at Stave Puzzles in Wilder, Vermont. He and his wife and business partner, Martha Richardson, have been handcrafting delightful and diabolically clever wooden puzzles since 1974. They have gained a fan base around the world, including such luminaries as Her Majesty Queen Elizabeth and Bill Gates. Stave Puzzles has grown over the years as a result of staying true to their craft and by never compromising on quality. Their designs are developed with hand-drawn illustrations, and each piece is meticulously hand-cut from fine hardwoods on a saw with delicate blades. Stave’s web site describes their profession as “world class service from down-home people,” a sentiment with which many of their customers agree. According to Steve and Martha, this is the same philosophy they had hoped to find in a bank. When Ledyard opened an office in Norwich, Vermont, they were definitely intrigued. “A small business like ours needs a bank that understands who we are,” says Steve. Ultimately, when they began working with Gail Broughton and her knowledgeable staff in Norwich, this is exactly the kind of bank they discovered. Gail coordinates a team of experts who work together to deliver financial solutions tailored specifically to their customers. Today, the Richardsons count on Ledyard for all their business and personal banking needs, including investment and retirement planning. It’s a true partnership between local, community-based people. Ledyard is working hard to make sure that all the financial pieces fit perfectly together for them and for their business – and that the solution is always easy. 5 PICTURED ABOVE: Terry Appleby, General Manager of the Co-op Food Stores in Hanover and Lebanon, surrounded by his favorite produce. 6 “ It’s all about working together. It’s all about community. ” TTHE CO-OP and LEDYARD: IT’S ALL ABOUT COMMUNITY The Hanover Consumer Co-operative Society dates back to 1936. Then a small group of community residents pooled their orders for produce and arranged for discounts on gasoline and fuel oil with local suppliers for the benefit of the entire group. Seventy years later, the Co-op has grown to over 30,000 members and operates the Co-op Food Stores in Hanover and Lebanon, as well as an automotive service center in Hanover. According to General Manager Terry Appleby, the Co-op maintains strong relationships with its members, customers, local vendors and the community. “Our strong ties to the local community fit so well with Ledyard’s role as a community bank. Doing business with them was a natural,” says Terry. The Co-op has been banking with Ledyard almost since the Bank’s founding for everything from checking, money market and overnight investment accounts to business loans and lines of credit. Since the Co-op generates a high volume of sales, they also require a loan officer who understands their needs and takes a proactive approach. Mike Sandoe, Vice President and Commercial Loan Officer for Ledyard, works closely with Terry and his team to deliver just that. Terry adds, “Mike regularly checks in to see how Ledyard can help our business and is quick to follow up when we have questions or requests.” Mike believes that Ledyard is uniquely suited to help the Co-op achieve its goals because both organizations are deeply committed to the communities and the people they serve. It’s a symbiotic relationship that goes beyond “bottom-line” success. It’s all about working together. It’s all about community. 7 PICTURED ABOVE ON THE FRONT PORCH OF THE NORWICH INN: (Seated on the rocking chairs in front) Former Owners Tim Wilson and Sally Wilson; (In back, from left to right) Innkeepers Jason Gershon and Tiffany Gershon; Current Owners Jill Lavin and Joe Lavin. Also posing nicely for the camera are furry friends Porter & Mason. 8 “ A lot of hard work was involved to grow the Inn to 27 rooms, a fine restaurant and a renowned brewpub. Ledyard was there for them every step of the way. ” TTHE NORWICH INN and LEDYARD WELCOME NEW OWNERS to the NEIGHBORHOOD When Tim and Sally Wilson, then the owners of The Norwich Inn in Norwich, Vermont, contacted Kevin Raleigh, they knew a good banker when they met one. Tim was a former banker, and he and Sally had known Kevin, now Senior Vice President and Senior Commercial Loan Officer at Ledyard, for years. The couple needed a bank that could help them grow their business into one of Vermont’s most popular historic inns. That Ledyard’s Norwich office is located directly across the street was just icing on the cake. Unlike a hotel, an inn is more personal, and Tim and Sally made every guest feel like family. A lot of hard work was involved to grow the Inn to 27 rooms in three historic buildings (the main building dates back to 1890), a fine restaurant and a renowned brewpub. Ledyard was there for them every step of the way. Joe Lavin had been a guest many times at The Norwich Inn when he visited his son, a Dartmouth student. He and wife Jill loved staying at the Inn – so much so, that Joe, a former Marriott International Executive Vice President, made an offer to buy the business from Tim and Sally. It took a bit of convincing, and after much thought, the Wilsons agreed. Joe, along with partner Steve Barrett, wanted to maintain the high standards and fine reputation of the Inn. They also wanted a knowledgeable, full-service bank that thoroughly understood the nuances of their business. Whom did they turn to for financing? Kevin Raleigh and Ledyard. Joe recognized the importance of Ledyard’s ties to the Inn and to the community and found that the entire financing process couldn’t have been easier. Today, innkeepers Jason and Tiffany Gershon are carrying on The Norwich Inn tradition of fine hospitality, making their guests feel at home. They, in turn, feel quite at home at their bank right across Main Street where their dog, Mason, always gets a treat. 9 William B. Hamilton, Jr. President, Investment & Trust Services Division ITo Our Shareholders: INVESTMENT & TRUST SERVICES Ledyard’s Investment & Trust Services 1. We have had very strong investment Our new facility will include expanded Division had an outstanding year in 2006. results. Our growth and financial performance have been extraordinary. As of December 31, 2006, the Division held assets with an aggregate market value of $665 million. 2. We provide individualized investment planning with a careful eye toward future income needs, including retirement. client meeting areas, safe deposit boxes, an ATM, and ample on-site parking. We believe that our new headquarters will be further confirmation of our dedication to our present and future This represents an increase of $80 million, 3. We help our clients coordinate their clients and our commitment to the or 13.7%, since the end of 2005. This financial, tax and estate planning. communities we have the pleasure and growth was due to a strong flow of new accounts and stock market appreciation. The Division's revenue was 15.4% greater than in 2005, and our net pre-tax profit in 2006 exceeded our 2005 result by an impressive 37.9%. I believe our growth can be attributed to several key factors: 4. We build warm, long-term relation- privilege to serve. ships with our clients – relationships We in the Investment & Trust Services that can be especially important to Division are very proud of our strong surviving spouses, children and performance in 2006, and we look grandchildren. forward to contributing to Ledyard’s In late 2006, we announced that our continued success. Division will be relocating its headquarters Thank you for your support. in the fourth quarter of 2007 to a beautiful new building currently under construction at 2 Maple Street in downtown Hanover. William B. Hamilton, Jr. President, Investment & Trust Services Division 10 LLedyard’s Investment & Trust LEDYARD INVESTMENT and TRUST SERVICES accurate and comprehensive record Services Division offers a full com- keeping, periodic statements, and plement of investment management, a comprehensive annual summary fiduciary and custody services. of tax information. As investment managers, we help our We offer both prospective and current clients define their investment goals, clients an unusual and powerful risk tolerance and time horizon. We investment tool: a comprehensive help establish investment strategy, review of a prospective or current portfolio design and asset allocation. client’s total investment picture. We also provide continuing portfolio For the prospective client, this management, including periodic review represents an excellent first meetings with account officers. step toward establishing a successful As corporate fiduciary, we serve as trustee or co-trustee for revocable trusts, irrevocable trusts and Individual Retirement Accounts. As custodian, we provide securities safekeeping, working partnership with our organization. For the current client, this review represents a basis for careful, strategic coordination across multiple investment accounts. ASSETS UNDER MANAGEMENT or CUSTODY (dollars in thousands) GROSS REVENUE (dollars in thousands) $700,000 600,000 500,000 400,000 300,000 200,000 100,000 $4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 02 03 04 05 06 02 03 04 05 06 11 PICTURED ABOVE: Chandler and Debra Perkins enjoying the peaceful tranquility of their New London home along with their trusty companion, Tucker. 12 “ The trust that brings peace of mind over the long term is the most important benefit we can provide at Ledyard. ” CCHANDLER and DEBRA PERKINS PLACE THEIR TRUST in LEDYARD To say that Debra and Chandler Perkins and their extended family are connected to their community is an understatement. The property where the Perkins have their home in New London, New Hampshire, has been in the family since 1907. A cottage was built on the spot in 1935. Chandler and Debra also founded the New London Agency, now the town’s largest and best-known real estate and insurance agency, celebrating its 50th anniversary. The Perkins certainly understand financial matters, having grown a successful business that their children now operate. Chandler Perkins also served on the Board of New London Trust where he met Bill Hamilton, now President of Ledyard’s Investment & Trust Services Division with an office in New London – another connection. “They know our family and make the family part of the planning,” says Chandler about Bill, J.T. Underwood, Jennifer Goin and the Ledyard Investment & Trust staff. That personal connection is important to them. Equally important, Ledyard has a high level of expertise along with the ability to help them understand the entire process. Debra and Chandler say it gives them a good feeling to know that they have someone whom they can trust to manage their interests. That trust brings peace of mind over the long term, and that is the most important benefit we can provide at Ledyard. 13 Gregory D. Steverson, Executive Vice President & Chief Financial Officer MReview of Financial Statements MANAGEMENT’S FINANCIAL DISCUSSION The discussion and analysis that follows focuses on the factors affecting the Bank’s financial condition at December 31, 2006 and 2005 and its results of operations for the years ended December 31, 2006 and 2005. The Financial Statements and Notes to the Financial Statements should be read in conjunction with this review. Statement of Income Net income was $3,786,919, or $3.75 per share for the twelve months ended 2006 as compared to $3,438,532, or $3.43 per share for 2005, an increase of $348,387, or 10.13%. Increased net interest income and higher Interest and fees on loans totaled $79,290, or 11.34% for the year ended $14,185,722 for the year ended December December 31, 2006 totaling $778,779 as 31, 2006, as compared to $11,523,247 for compared to $699,489 at December 31, 2005. This increase of $2,662,475, or 2005. This difference was due primarily to 23.11%, was due to an increase in loan the increase in borrowings from securities balances and increases in the prime rate sold under repurchase agreements. and other rates, which had a positive impact on adjustable rate loans and resulted in an overall increase in the yields on loans. Investment income for the year ended December 31, 2006, totaled $2,820,087 as compared to $2,580,510 for 2005, an increase of $239,577, or 9.28%. The increase was due primarily to higher average balances in fed funds sold and certificates of deposit. During 2006, the Bank added $525,000 to its provision for loan losses and realized net charge-offs of $124,234, resulting in an allowance for loan losses totaling $2,784,125 on December 31, 2006, or 1.27%, of total loans. The determination of an appropriate level of allowance for loan losses (the “allowance”), and subsequent provision for loan losses, which would affect earnings, is based on management’s Investment & Trust Services Division revenue The Bank’s interest expense on deposits was judgment of the adequacy of the allowance accounted for the majority of the change. $4,127,673 for the year ended December based on analysis of various economic factors Net interest income before the provision for loan loss totaled $12,099,357 for the year ended December 31, 2006, as compared to $11,486,166 for the year ended December 31, 2005. The increase of $613,191 or 5.34% was primarily attributable to an increase in interest income on loans. 31, 2006, as compared to $1,918,102 for and review of the Bank’s loan portfolio, the year ended December 31, 2005, an which may change due to numerous factors. increase of $2,209,571. This increase was Non-performing loans are examined on an the result of rising rates, as well as increases individual basis to determine the estimated in deposit volumes, which affected the probable loss on these loans. In addition, cost of deposits, primarily money market the ongoing evaluation process includes accounts and time deposits. Interest a formal analysis of the allowance each expense on borrowed funds increased quarter. Management believes that the 14 TOTAL ASSETS (dollars in thousands) NET LOANS including loans held for sale (dollars in thousands) TOTAL DEPOSITS (dollars in thousands) $350,000 300,000 250,000 200,000 150,000 100,000 50,000 $350,000 300,000 250,000 200,000 150,000 100,000 50,000 $350,000 300,000 250,000 200,000 150,000 100,000 50,000 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 MANAGEMENT’S FINANCIAL DISCUSSION (continued) allowance at December 31, 2006 was Financial Condition maturities and paydowns of available- appropriate given the current economic conditions in the Bank’s service area. At year-end, total assets were $320,229,558 compared to $285,495,434 at December for-sale securities and held-to-maturity securities totaling $20,114,484. Non-interest income totaled $6,282,237 in 31, 2005, an increase of $34,734,124, or The Bank provides loans to customers 2006 as compared to $5,834,064 in 2005, 12.17%. The change in assets consisted primarily located within its geographic an increase of $448,173, or 7.68%. Income primarily of an increase of $23,975,934 in market area. Net loans, including loans from the Bank’s Investment & Trust net loans, including loans held for sale and held for sale, totaled $218,868,531 at Services Division totaled $4,410,810, up by a $13,172,126 increase in fed funds December 31, 2006, a $23,975,934, or a from $3,821,071 in 2005, an increase of sold, certificates of deposit and investment 12.30% increase from a year ago. This $589,739, or 15.43%. This increase was securities (“investments”). reflects the strong loan growth experienced primarily attributable to increases in assets under management and market conditions. Service fees decreased slightly by $38,454 as the Bank continued to see growth in its free checking NOW account product. The Bank maintains investments in fed funds sold, certificates of deposit and in the commercial and residential real estate loan portfolios. investment securities in order to diversify Commercial loans consist of (i) loans its revenue, as well as to provide interest secured by various corporate assets, rate and credit risk diversification. These (ii) loans to provide working capital in Non-interest expense totaled $11,894,164 investments also provide for liquidity and the form of secured and unsecured lines for 2006 as compared to $11,353,708 in funding needs. As mentioned above, total of credit, and (iii) commercial real estate 2005, an increase of $540,456, or 4.76%. investments increased $13,172,126, or loans secured by income-producing Salaries and benefits expense increased as 19.26%. This increase consisted of commercial real estate. The Bank focuses the Bank continued to realize expenses increases to fed funds sold of $2,870,426, on lending to financially sound small- associated with its management reorgani- certificates of deposit of $22,000,000, and medium-sized business customers zation. Occupancy and equipment securities available for sale of $6,706,810 within its geographic marketplace. Total decreased slightly, and other general and and a decrease in securities held to maturity commercial loans increased by $6,905,425, administrative expenses increased by 3.68% of $18,405,110. During 2006, the Bank or 5.64%, during 2006. due to various third-party expenses. purchased $8,318,601 of available-for-sale securities and realized proceeds from 15 BOOK VALUE PER SHARE (in dollars) NET INCOME (dollars in thousands) EARNINGS PER SHARE (in dollars) $30 25 20 15 10 5 $4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 $4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 MANAGEMENT’S FINANCIAL DISCUSSION (concluded) Residential real estate loans consist of Deposits continue to represent the Bank’s the investment portfolio and residential loans secured by one- to four-family primary source of funds. In 2006, total loan portfolio provide a significant amount residences. The Bank usually retains deposits increased by $30,314,589, or of contingent liquidity that could be accessed adjustable-rate mortgages in its portfolio 12.59% over 2005, ending the year at in a reasonable time period through sales if and will generally sell fixed-rate mortgages. $271,142,194. Comparing year-end needed. The Bank believes that the level of Residential real estate loans increased by balances in 2006 to 2005, demand deposits liquidity is sufficient to meet current and $14,099,819, or 20.93%, in 2006. During increased by $1,663,997, certificates of future funding requirements. 2006, the Bank sold approximately $19 deposit increased by $12,280,476, money million of fixed-rate residential mortgage market and savings accounts increased loans into the secondary market. by $25,385,157 and NOW accounts Consumer loans are originated by the decreased by $9,015,041. Shareholders’ equity was $27,270,995 on December 31, 2006 compared to $24,391,136 on December 31, 2005, an increase of $2,879,859. The increase was Bank for a wide variety of purposes Borrowings supplement deposits as a primarily attributable to net income of designed to meet the needs of its source of liquidity. In addition to borrowings $3,786,919 less $1,090,526 in cash customers. Consumer loans include from the Federal Home Loan Bank dividends to the Bank’s shareholders. The overdraft protection, automobile, boat, (FHLB), the Bank purchases federal funds, Bank’s book value on December 31, 2006 recreational vehicles, home equity, and and sells securities under agreements to was $26.99 per share based on 1,010,246 secured and unsecured personal loans. repurchase. Total borrowings were shares outstanding, an increase of $2.83 Consumer loans increased by $2,555,065, $20,603,624 at December 31, 2006 per share, or 11.71% from a year earlier. or 38.23%, in 2006. compared to $19,116,913 at December 31, Premises and equipment totaled $8,644,308 at December 31, 2006 as compared to $8,878,154 at December 31, 2005. The net decrease of $233,846, or 2.63%, can be attributed to depreciation during 2006. 2005, an increase of $1,486,711. The majority of the borrowings were related to securities sold under agreements to repurchase followed by advances from the FHLB. In addition to the liquidity sources discussed above, the Bank believes 16 I INDEPENDENT AUDITORS’ REPORT To the Board of Directors & Shareholders of Ledyard National Bank: We have audited the accompanying auditing standards. Those standards presentation. We believe our audits balance sheets of Ledyard National Bank require that we plan and perform the provide a reasonable basis for our opinion. as of December 31, 2006 and 2005, and audit to obtain reasonable assurance In our opinion, the financial the related statements of income, changes about whether the financial statements statements referred to above present fairly, in shareholders’ equity and cash flows for are free of material misstatement. An in all material respects, the financial the years then ended. These financial audit includes examining, on a test basis, position of Ledyard National Bank as of statements are the responsibility of the evidence supporting the amounts and December 31, 2006 and 2005, and the Bank’s management. Our responsibility disclosures in the financial statements. results of its operations and its cash flows is to express an opinion on these financial An audit also includes assessing the for the years then ended in conformity statements based on our audits. accounting principles used and significant with U.S. generally accepted accounting We conducted our audits in accor- estimates made by management, as well as principles. dance with U.S. generally accepted evaluating the overall financial statement Berry, Dunn, McNeil & Parker Portland, Maine February 15, 2007 17 BALANCE SHEETS December 31, 2006 and 2005 ASSETS Cash and due from banks Federal funds sold Certificates of deposit Total cash and cash equivalents Securities available-for-sale Securities held-to-maturity Nonmarketable equity securities Loans held for sale Loans receivable, net of allowance for loan losses of $2,784,125 in 2006 and $2,383,359 in 2005 Accrued interest receivable Bank premises and equipment, net Other assets LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Demand NOW accounts Money market accounts Savings Time, $100,000 and over Other time Total deposits Securities sold under agreements to repurchase Advances from Federal Home Loan Bank Accrued expenses and other liabilities 2006 2005 $ 7,269,808 12,375,208 22,000,000 $ 8,735,319 9,504,782 – 41,645,016 18,240,101 19,704,071 27,480,904 1,092,650 1,602,750 12,997,261 45,886,014 1,717,850 862,750 217,265,781 194,029,847 1,081,957 8,644,308 1,712,121 1,099,791 8,878,154 1,783,666 $ 320,229,558 $ 285,495,434 $ 42,854,164 46,961,342 104,629,163 13,562,961 26,176,118 36,958,446 271,142,194 17,389,539 3,214,085 1,212,745 $ 41,190,167 55,976,383 76,624,027 16,182,940 24,352,485 26,501,603 240,827,605 10,259,834 8,857,079 1,159,780 Total liabilities 292,958,563 261,104,298 Commitments and contingencies (Notes 5, 11, 12, 13, 14 and 15) Shareholders’ equity Common stock, $1.00 par value; 5,500,000 shares authorized; 1,010,246 and 1,009,746 shares issued and outstanding in 2006 and 2005, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity The accompanying notes are an integral part of these financial statements. 18 1,010,246 9,279,378 17,066,764 (85,393) 1,009,746 9,214,466 14,370,371 (203,447) 27,270,995 24,391,136 $ 320,229,558 $ 285,495,434 STATEMENTS of INCOME Years Ended December 31, 2006 and 2005 Interest and dividend income Interest and fees on loans Investment securities Other interest-earning assets Total interest and dividend income Interest expense Deposits Borrowed funds Total interest expense Net interest income Provision for loan losses 2006 2005 $ 14,185,722 2,049,556 770,531 $ 11,523,247 2,348,439 232,071 17,005,809 14,103,757 4,127,673 778,779 4,906,452 1,918,102 699,489 2,617,591 12,099,357 11,486,166 525,000 780,000 Net interest income after provision for loan losses 11,574,357 10,706,166 4,410,810 1,407,541 463,886 6,282,237 6,385,375 1,884,207 3,624,582 3,821,071 1,445,995 566,998 5,834,064 5,969,382 1,888,213 3,496,113 11,894,164 11,353,708 5,962,430 2,175,511 3,786,919 3.75 3.73 1,009,788 $ $ $ $ $ $ 5,186,522 1,747,990 3,438,532 3.43 3.41 1,002,958 Noninterest income Trust department income Service fees Other Total noninterest income Noninterest expense Salaries and employee benefits Occupancy and equipment Other general and administrative Total noninterest expense Income before income taxes Income tax expense Net income Basic earnings per share Diluted earnings per share Weighted average numbers of shares outstanding The accompanying notes are an integral part of these financial statements. 19 STATEMENTS of CHANGES in SHAREHOLDERS’ EQUITY Years Ended December 31, 2006 and 2005 BALANCE, DECEMBER 31, 2004 $ 994,895 $ 8,951,476 $ 11,916,367 $ (14,081) $ 21,848,657 COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED OTHER RETAINED COMPREHENSIVE LOSS EARNINGS TOTAL Comprehensive income Net income Change in unrealized loss on interest rate protection agreement, net of tax of $10,371 Change in net unrealized appreciation on securities available-for-sale, net of tax of $107,921 Total comprehensive income Cash dividends paid, $0.98 per share – – – – – – – – – – 3,438,532 – 3,438,532 – – 20,131 20,131 (209,497) (209,497) 3,438,532 (189,366) 3,249,166 (984,528) – – ( 984,528) 277,841 Stock warrants exercised, 14,851 shares 14,851 262,990 – BALANCE, DECEMBER 31, 2005 $ 1,009,746 $ 9,214,466 $ 14,370,371 $ (203,447) $ 24,391,136 Comprehensive income Net income Change in net unrealized depreciation on securities available-for-sale, net of tax of $60,815 Total comprehensive income Cash dividends paid, $1.08 per share Fair value of stock warrants vested during the year – – – – – Stock warrants exercised, 500 shares 500 – 3,786,919 – 3,786,919 – 118,054 118,054 3,786,919 118,054 3,904,973 – – – (1,090,526) – – – (1,090,526) 56,487 8,925 56,487 8,425 – – BALANCE, DECEMBER 31, 2006 $ 1,010,246 $ 9,279,378 $ 17,066,764 $ (85,393) $ 27,270,995 The accompanying notes are an integral part of these financial statements. 20 STATEMENTS of CASH FLOWS Years Ended December 31, 2006 and 2005 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Provision for loan losses Deferred income tax (benefit) expense Fair value of stock warrants vested during the year Decrease (increase) in accrued income receivable Increase in accrued expenses and other liabilities Decrease (increase) in other assets Net (increase) decrease in loans held for sale Net cash provided by operating activities Cash flows from investing activities Proceeds from maturities of securities available-for-sale Proceeds from maturities and paydowns of securities held-to-maturity Purchase of securities held-to-maturity Net redemption (purchase) of FHLB stock Purchase of securities available-for-sale Net increase in loans to customers Purchase of bank premises and equipment Net cash used by investing activities Cash flows from financing activities Net increase in deposits Proceeds from long-term FHLB borrowings Repayment of long-term FHLB borrowings Net increase in securities sold under agreements to repurchase Proceeds from exercise of stock warrants Cash dividends paid on common stock Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplementary cash flow information: Interest paid on deposits and borrowed funds Income taxes paid The accompanying notes are an integral part of these financial statements. 21 2006 2005 $ 3,786,919 $ 3,438,532 709,015 525,000 (163,200) 56,487 17,834 52,965 173,930 (740,000) 4,418,950 554,223 780,000 53,900 – (157,247) 4,495 (497,238) 832,218 5,008,883 1,776,694 2,156,552 18,337,790 – 625,200 (8,318,601) (23,760,934) (393,882) (11,733,733) 30,314,589 2,000,000 (7,642,995) 7,129,705 8,925 (1,090,526) 30,719,698 20,433,674 (12,960,555) (7,149) (4,973,848) (21,316,049) (200,024) (16,867,399) 13,213,955 2,000,000 (5,123,772) 3,989,623 277,841 (984,528) 13,373,119 23,404,915 1,514,603 18,240,101 16,725,498 $ 41,645,016 $ $ 4,817,250 2,355,371 $ $ $ 18,240,101 2,579,413 1,326,000 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 NATURE OF BUSINESS Ledyard National Bank (the Bank) is headquartered in Norwich, Vermont and provides a variety of financial services to individual and business customers through its office locations in central New Hampshire and Vermont. The Bank’s principal business activity is retail and commercial banking and investment and trust services which are provided through its seven branch locations in New Hampshire and Vermont. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Bank are in conformity with U.S. generally accepted accounting principles and general practices with- in the banking industry. The following is a description of the more significant policies. Use of Estimates In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of other real estate owned. In connection with the determination of the allowance, management obtains independent appraisals for collateral securing significant loans. Accordingly, the ultimate collectibility of a substantial por- tion of the Bank’s loan portfolio is susceptible to changes in local market conditions. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodi- cally review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Significant Group Concentrations of Credit Risk The Bank’s operations are affected by various risk factors, including interest rate risk, credit risk, and risk from geographic concentration of lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors beyond the control of the Bank. Although the Bank has a diversified loan portfolio and economic conditions are stable, most of its lending activities are conducted within the geographic area where it is located. As a result, the Bank and its borrowers may be especially vulnerable to the consequences of changes in the local economy. In addition, a substantial portion of the Bank’s loans are secured by real estate. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and certificates of deposit. The Bank’s due from bank accounts, at times, may exceed federally insured limits. The Bank has not experienced any losses in such accounts. The Bank believes it is not exposed to any significant risk on cash and cash equivalents. Investment Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts over the period to call or maturity using methods approximating the interest method. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, 22 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment Securities (concluded) are classified as available-for-sale and are carried at fair value. Nonmarketable equity securities, consisting of stock in the Federal Home Loan Bank and Federal Reserve Bank, are carried at cost and evaluated for impairment. Unrealized gains and losses on securities available-for-sale are reported as a net amount in other comprehensive income or loss, net of tax. Cost of securities is recognized using the specific identification method. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by deferred loan fees and an allowance for loan losses. Loans past due 30 days or more are considered delinquent. Management is responsible to initiate immediate collection efforts to minimize delinquency and any eventual adverse impact on the Bank. In general, consumer loans will be charged off if the loan is delinquent for 120 consecutive days. Commercial and real estate loans are charged off in part or in full if they are considered uncollectible. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as provision for loan losses. Small balance homogeneous loans are collectively evaluated for impairment. Loan interest income is accrued daily on the outstanding balances. Accrual of interest is discontinued when a loan is specifically determined to be impaired or management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan origination and commitment fees and certain direct origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is generally amortizing these amounts over the contractual life Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded. 23 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Other Real Estate Owned Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Bank’s carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the car- rying value of a property to the lower of its cost or fair value less cost to sell. Bank Premises and Equipment Land is carried at cost. Bank premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed over the estimated useful life of the related asset, principally by the straight-line method. Improvements to leased property are amortized over the lesser of the term of the lease or life of the improvements. Income Taxes The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the book bases and the tax bases of the Bank’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Bank’s deferred tax assets are recognized as deferred income tax expense or benefit based on management’s judgment relating to the realizability of such assets. Earnings Per Share Basic earnings per share data is computed based on the weighted average number of the Bank’s common shares outstanding during the year. Potential common stock is considered in the calculation of weighted average shares outstanding for diluted earnings per share, and is determined using the treasury stock method. Stock Warrant Plans In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) requires entities issuing stock options in exchange for services to measure the fair value of the options at the grant date and to recognize the fair value of those options as expense, generally over the period in which they vest. On January 1, 2006 the Bank adopted the provisions of SFAS No. 123(R) using a modified prospective application. Using this application, SFAS No. 123(R) applies to options granted or modified in periods beginning after December 15, 2005. Additionally, compensation cost for the portion of outstanding options for which requisite service has not been rendered as of the effective date shall be recognized as the service is rendered on or after the effective date. The proforma effect of expensing stock warrants in 2005 would have been to reduce net income by $30,077. Trust Assets and Fees Assets held by the trust department, other than trust cash on deposit at the Bank, are not included in these financial statements because they are not assets of the Bank. Trust fees are recorded on the accrual basis. Derivative Financial Instruments The Bank uses an interest rate protection agreement (cap) as a cash flow hedge to eliminate the cash flow exposure of interest rate movements on borrowings. The premium paid for the cap is amortized over its life. Any cash payments received are recorded as an 24 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Derivative Financial Instruments (concluded) adjustment to net interest income. The cap is designated and qualifies as a cash flow hedge, and thus is recorded at fair value. Changes in fair value are recorded as a component of comprehensive income. The notional amount of the Bank’s cap was $5,000,000 and the fair value was $0 at December 31, 2005. The cap matured in 2006. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and the interest rate protection agreement, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Reclassifications Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation. 2. CASH AND DUE FROM BANKS The Bank is required to maintain certain reserves of vault cash or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $138,000 and $385,000 as of December 31, 2006 and 2005, respectively. 3. SECURITIES The amortized cost and fair value of securities, with gross unrealized gains and losses, follow: Securities Available-for-Sale U.S. Government agencies and corporations Mortgage-backed securities State and municipal Total securities available-for-sale Securities Held-to-Maturity U.S. Government agencies and corporations State and municipal Collateralized mortgage obligations Mortgage-backed securities 2006 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ $ $ $ 9,093,883 10,111,278 628,293 $ 19,833,454 $ 1,982,429 2,629,817 853,923 22,014,735 23,863 42,454 3,456 69,773 – 8,000 – 10,589 $ $ $ (33,244) (165,912) – $ 9,084,502 9,987,820 631,749 (199,156) $ 19,704,071 (19,506) (2,557) (27,308) (599,579) $ 1,962,923 2,635,260 826,615 21,425,745 Total securities held-to-maturity $ 27,480,904 $ 18,589 $ (648,950) $ 26,850,543 25 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 3. SECURITIES (continued) Securities Available-for-Sale U.S. Government agencies and corporations Mortgage-backed securities Total securities available-for-sale Securities Held-to-Maturity U.S. Government agencies and corporations State and municipal Collateralized mortgage obligations Mortgage-backed securities 2005 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ $ $ $ 4,981,879 8,323,634 $ 13,305,513 $ 14,455,872 3,140,986 1,030,747 27,258,409 – – – – 15,022 – 19,901 $ $ $ (55,779) (252,473) $ 4,926,100 8,071,161 (308,252) $ 12,997,261 (95,261) (9,763) (28,616) (765,364) $ 14,360,611 3,146,245 1,002,131 26,512,946 Total securities held-to-maturity $ 45,886,014 $ 34,923 $ (899,004) $ 45,021,933 At December 31, 2006 and 2005, securities with a carrying value of $29,883,423 and $18,616,355, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The amortized cost and fair value of debt securities by contractual maturity at December 31, 2006 follow: Within one year Over one year through five years Over five years through ten years Over ten years Collateralized mortgage obligations and AVAILABLE-FOR-SALE HELD-TO-MATURITY AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE $ 3,996,743 5,097,140 628,293 – 9,722,176 $ 3,972,432 5,112,070 631,749 – 9,716,251 $ 550,000 3,322,683 237,656 501,907 4,612,246 $ 550,180 3,308,511 240,142 499,350 4,598,183 mortgage-backed securities 10,111,278 9,987,820 22,868,658 22,252,360 $ 19,833,454 $ 19,704,071 $ 27,480,904 $ 26,850,543 There were no sales of securities available-for-sale or securities held-to-maturity during 2006 and 2005. 26 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 3. SECURITIES (concluded) Information pertaining to securities with gross unrealized losses at December 31, 2006 and 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: December 31, 2006 U.S. Government agencies and corporations State and municipal Collateralized mortgage obligations Mortgage-backed securities LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES $ – $ – $ 6,921,359 $ (52,750) $ 6,921,359 $ 499,350 (2,557) – – 499,350 (52,750) (2,557) – 1,782,153 – (12,136) 826,615 25,209,709 (27,308) (753,355) 826,615 26,991,862 (27,308) (765,491) Total $ 2,281,503 $ (14,693) $ 32,957,683 $ (833,413) $ 35,239,186 $ (848,106) December 31, 2005 U.S. Government agencies and corporations State and municipal Collateralized mortgage obligations Mortgage-backed securities LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES $ 14,360,464 $ 729,928 (85,138) $ (9,763) 4,926,247 – $ (65,902) $ 19,286,711 $ – 729,928 (151,040) (9,763) 1,002,131 9,511,176 (28,616) (208,789) – 21,558,237 – (809,048) 1,002,131 31,069,413 (28,616) (1,017,837) Total $ 25,603,699 $ (332,306) $ 26,484,484 $ (874,950) $ 52,088,183 $ (1,207,256) Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary. 27 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 4. LOANS The composition of net loans at December 31 is as follows: Commercial Commercial real estate Residential real estate Consumer Subtotal Allowance for loan losses Net deferred loan costs (fees) Loans, net 2006 2005 $ 60,389,111 68,908,833 81,451,996 9,238,971 $ 51,823,665 70,568,854 67,352,177 6,683,906 219,988,911 196,428,602 (2,784,125) 60,995 (2,383,359) (15,396) $ 217,265,781 $ 194,029,847 At December 31, 2006 and 2005, nonaccrual loans were $520,528 and $343,061, respectively. There were no loans 90 days past due and still accruing interest at December 31, 2006 and 2005. An analysis of the allowance for loan losses follows: Years Ended December 31, 2006 2005 Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year The following is a summary of information pertaining to impaired loans: Impaired loans with a valuation allowance Total impaired loans Valuation allowance related to impaired loans $ $ 2,383,359 525,000 (128,915) 4,681 2,391,187 780,000 (831,260) 43,432 $ 2,784,125 $ 2,383,359 2006 2005 $ $ $ 520,528 520,528 130,132 $ $ $ 343,061 343,061 171,530 Years Ended December 31, 2006 2005 Average investment in impaired loans $ 595,211 $ 304,387 No interest income was recognized on impaired loans during 2006 and 2005. No additional funds are committed to be advanced in connection with impaired loans. 28 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 5. BANK PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of premises and equipment follows: Land and improvements Buildings and improvements Equipment Accumulated depreciation 2006 2005 $ $ 1,922,993 7,223,330 3,695,403 12,841,726 (4,197,418) 1,922,993 7,224,431 4,578,202 13,725,626 (4,847,472) $ 8,644,308 $ 8,878,154 Depreciation, included in occupancy and equipment expense, amounted to $627,729 and $656,469 for the years ended December 31, 2006 and 2005, respectively. Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2006, pertaining to premises and equipment, future minimum rent commitments under various operating leases are as follows: 2007 2008 2009 2010 2011 $ $ 154,547 120,047 118,547 109,747 21,916 524,804 The leases contain options to extend for periods from three to ten years. The cost of such extensions is not included above. Total rent expense for the years ended December 31, 2006 and 2005 amounted to $160,654 and $155,741, respectively. 6. DEPOSITS At December 31, 2006, the scheduled maturities of time deposits are as follows: 2007 2008 2009 2010 2011 Thereafter $ 52,805,636 10,000,979 25,819 23,706 217,086 61,338 $ 63,134,564 Deposit accounts with related parties were $4,981,000 and $4,866,000 at December 31, 2006 and 2005, respectively. 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under repurchase agreements mature within twelve months and are collateralized by securities in the Bank’s investment portfolio. The maximum amount of repurchase agreements outstanding at any month-end during 2006 and 2005 was $25,951,442 and $21,803,899, respectively. The average amount of repurchase agreements outstanding during 2006 and 2005 was $13,647,735 and $8,130,256, respectively. The weighted average interest rate on repurchase agreements outstanding at December 31, 2006 and 2005 was 3.94% and 2.62%, respectively. All securities collateralizing the repurchase agreements are under the Bank’s control. 29 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 8. ADVANCES FROM FEDERAL HOME LOAN BANK The Bank’s fixed-rate advances with the Federal Home Loan Bank (FHLB) of $3,214,085 at December 31, 2006 mature through 2013. At December 31, 2006 and 2005, interest rates of fixed-rate advances ranged from 2.90% to 4.33%. Outstanding FHLB borrowings are secured by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities, and other qualified assets. The contractual maturities of advances are as follows: 2006 2007 2008 2009 2013 Total 2006 2005 $ $ – 1,000,000 500,000 1,349,393 364,692 5,000,000 1,000,000 500,000 1,947,592 409,487 $ 3,214,085 $ 8,857,079 9. INCOME TAXES Allocation of federal and state income taxes between current and deferred portions is as follows: Current tax expense Federal State Deferred tax expense (benefit) Federal State 2006 2005 $ 2,025,630 313,081 2,338,711 $ 1,574,090 120,000 1,694,090 (123,200) (40,000) (163,200) 58,800 (4,900) 53,900 $ 2,175,511 $ 1,747,990 The income tax provision differs from the expense that would result from applying federal statutory rates to income before income taxes, as follows: Computed tax expense Increase (reduction) in income taxes resulting from: Tax exempt income State taxes, net of federal benefit (Income) expense from life insurance Incentive stock options Other 30 2006 2005 $ 2,027,226 $ 1,763,419 (41,143) 141,831 24,517 19,206 3,874 (40,177) 57,552 (36,690) – 3,886 $ 2,175,511 $ 1,747,990 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 9. INCOME TAXES (concluded) The components of the net deferred tax asset, included in other assets, are as follows: Deferred tax assets Net unrealized loss on securities available-for-sale Allowance for loan losses Employee benefit plans Other Deferred tax liabilities Depreciation Other 2006 2005 $ $ 44,000 903,100 213,200 42,700 104,800 731,000 261,300 30,200 1,203,000 1,127,300 264,700 126,300 391,000 291,400 126,300 417,700 Net deferred tax asset $ 812,000 $ 709,600 10. EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share for 2006 and 2005: 2006 2005 Net income, as reported $ 3,786,919 $ 3,438,532 Weighted-average shares outstanding Effect of dilutive employee stock options Effect of unvested stock grant Adjusted weighted-average shares and assumed conversion Basic earnings per share Diluted earnings per share 1,009,788 4,740 1,000 1,015,528 1,002,958 4,186 – 1,007,144 $ $ 3.75 3.73 $ $ 3.43 3.41 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby and commercial letters-of-credit, and interest rate caps and floors written on adjustable rate loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters-of-credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit losses. 31 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (concluded) The Bank generally requires collateral or other security to support financial instruments with credit risk. At December 31, 2006 and 2005, the following financial instruments were outstanding whose contract amounts represent credit risk: Commitments to grant loans Commercial and standby letters-of-credit CONTRACT AMOUNT 2006 2005 $ $ 53,149,638 11,551,895 $ $ 41,462,409 11,165,024 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income- producing commercial property. Standby letters-of-credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters-of- credit is essentially the same as that involved in extending loan facilities to customers. At times, the Bank places interest rate caps and floors on loans written by the Bank to enable customers to transfer, modify, or reduce their interest rate risk. 12. LEGAL CONTINGENCIES Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Bank’s financial statements. 13. MINIMUM REGULATORY CAPITAL REQUIREMENTS The Bank is restricted as to the amount of dividends which can be paid. Dividends declared by national banks that exceed the net income (as defined) for the current year plus retained net income for the preceding two years must be approved by the Office of the Comptroller of the Currency (OCC). Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements discussed below. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory frame- work for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 32 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 13. MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded) Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table, dollars in thousands) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets as these are defined in the regulations. Management believes, as of December 31, 2006 and 2005, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2006, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk- based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios as of December 31, 2006 and 2005 are also presented in the table. ACTUAL MINIMUM CAPITAL REQUIREMENT MINIMUM TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS AMOUNT RATIO AMOUNT > RATIO > AMOUNT > RATIO > (dollars in thousands) 30,140 13.3% $ 18,149 8.0% $ 22,687 10.0% 27,356 12.1% $ 9,075 4.0% $ 13,612 6.0% 27,356 8.8% $ 12,405 4.0% $ 15,506 5.0% 26,976 13.0% 24,594 11.9% 24,594 8.8% $ $ $ 16,602 8.0% 8,301 4.0% 11,124 4.0% $ $ $ 20,752 10.0% 12,451 6.0% 13,905 5.0% December 31, 2006 Total Capital to Risk-Weighted Assets Tier 1 Capital to Risk-Weighted Assets Tier 1 Capital to Average Assets December 31, 2005 Total Capital to Risk-Weighted Assets Tier 1 Capital to Risk-Weighted Assets Tier 1 Capital to Average Assets $ $ $ $ $ $ 14. EMPLOYEE BENEFITS The Bank sponsors a 401(k) profit sharing plan which covers all employees who are at least 21 years of age and who have completed one year of employment. Eligible employees contribute a percentage of their annual compensation to the 401(k) plan and the Bank matches a certain portion of employee contributions. In addition, the Bank may make discretionary contributions on behalf of employees under the plan. For the years ended December 31, 2006 and 2005, expense attributable to the plan amounted to $501,738 and $427,284, respectively. Included in accrued expenses and other liabilities in the balance sheets at December 31, 2006 and 2005 are liabilities established pursuant to deferred compensation agreements with certain officers of the Bank of $538,376 and $659,738, respectively. An adjustment was made in 2006 to reflect a reduction of benefits to a former officer. Deferred compensation expense (benefit) related to these plans amounted to $(121,362) and $95,593 for the years ended December 31, 2006 and 2005, respectively. 33 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 15. WARRANTS Warrants to purchase shares of the Bank’s common stock at various exercise prices have been granted to certain members of the organizing group, key management, and employees of the Bank prior to April 2006. The warrants vest in three years and expire ten years from the date the warrant was granted. On April 19, 2006, the shareholders of the Bank approved the 2006 Stock Option and Incentive Plan (the “current plan”). The maximum number of shares of stock reserved and available for issuance under this Plan is 50,000 shares. Awards may be granted in the form of incentive stock options and restricted stock, or any combinations of the preceding, and the exercise price shall not be less than 100% of the fair market value on the date of grant. No stock options are exercisable more than ten years after the date the stock option is granted. On January 1, 2006, the Bank adopted the provisions of SFAS No. 123(R) for the incentive stock option grants relating to the current plan and previous plans. In accordance with the provisions of SFAS No. 123(R), the Bank recorded approximately $56,000 of compensation expense during 2006. Total compensation expense related to nonvested awards not yet recognized at December 31, 2006 is $63,773 and these awards vest over the next 3 years. Under the current plan, the Bank granted 1,000 shares of restricted stock in 2006 with a fair value of $42.00 at grant date. This grant comprises the Bank’s nonvested stock awards at December 31, 2006. The fair value of warrants granted during 2006 and 2005 was $6.75 and $6.56, respectively. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: Dividend yield Risk-free interest rate Expected life Expected volatility 2006 2.70% 4.64% 10 Years 9.75% 2005 2.30% 4.50% 10 Years N/A A summary of warrant activity as of December 31, 2006, and changes during the year then ended is presented below: Outstanding at beginning of year Granted Exercised Forfeited or expired Outstanding at December 31, 2006 Exercisable at December 31, 2006 WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE AGGREGATE INTRINSIC VALUE 35.98 40.00 17.85 35.25 36.51 36.42 $ $ $ 12,575 547,102 455,382 5.0 years 5.2 years SHARES 58,666 4,500 (500) (5,000) 57,666 40,333 $ $ $ 34 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 15. WARRANTS (concluded) Information pertaining to warrants outstanding at December 31, 2006 is as follows: WARRANTS OUTSTANDING WARRANTS EXERCISABLE RANGE OF EXERCISE PRICES NUMBER OUTSTANDING WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISE PRICE NUMBER EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE $15.95 - $17.85 $32.00 - $41.84 Outstanding at end of year 2,916 54,750 0.4 years 5.3 years 57,666 5.0 years $ $ 17.85 37.51 36.51 2,916 38,917 41,833 $ $ 17.85 36.41 35.11 The remaining number of warrants available to be granted was 44,500 and 699 at December 31, 2006 and 2005, respectively. 16. OTHER NONINTEREST INCOME AND EXPENSES The components of other noninterest income and expenses which are in excess of 1% of total revenues (total interest and dividend income and noninterest income) and not shown separately in the statements of income are as follows for the years ended December 31: Income Gain on sale of loans Expenses Credit card charges Advertising 2006 2005 $ $ $ 238,571 767,767 371,532 1,139,299 $ $ $ 204,038 678,445 335,816 1,014,261 35 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 17. RELATED PARTY TRANSACTIONS The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Loans granted to related parties amounted to $1,715,808 and $1,614,808 at December 31, 2006 and 2005, respectively. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107, Disclosure About Fair Value of Financial Instruments, which prescribes fair value disclosures, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Bank. The following methods and assumptions were used by the Bank in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values. Securities: Fair values for securities, excluding Federal Home Loan Bank stock and Federal Reserve Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank Stock and Federal Reserve Bank stock approximate fair value based on the redemption provisions of the Federal Home Loan Bank and Federal Reserve Bank. Loans held for sale: Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. 36 NOTES to FINANCIAL STATEMENTS December 31, 2006 and 2005 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) Securities sold under agreements to repurchase: The carrying amounts of borrowings under repurchase agreements maturing within ninety days approximate their fair values. Advances from Federal Home Loan Bank: The fair values of these borrowings are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amounts of accrued interest approximate fair value. Off-balance-sheet instruments: The Bank’s off-balance-sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant. The estimated fair values, and related carrying or notional amounts, of the Bank’s financial instruments are as follows: Financial assets Cash and cash equivalents Securities available-for-sale Securities held-to-maturity Federal Home Loan Bank and Federal Reserve Bank stock Loans and loans held for sale, net Accrued interest receivable Financial liabilities Deposits Repurchase agreements Advances from Federal Home Loan Bank Accrued interest payable 2006 2005 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE $ 41,645,016 19,704,071 27,480,904 $ 41,645,016 19,704,071 26,850,543 $ 18,240,101 12,997,261 45,886,014 $ 18,240,101 12,997,261 45,021,933 1,092,650 218,868,531 1,081,957 1,092,650 219,551,650 1,081,957 1,717,850 194,892,597 1,099,791 1,717,850 195,709,366 1,099,791 271,142,194 17,389,539 272,900,503 17,389,539 240,827,605 10,259,834 241,301,815 10,259,834 3,214,085 209,221 3,373,807 209,221 8,857,079 120,019 8,817,962 120,019 37 BOARD of DIRECTORS, SENIOR MANAGEMENT and OFFICERS Ledyard National Bank BOARD OF DIRECTORS Douglas G. Britton President, Britton Lumber Co., Inc. Cary P. Clark Retired General Counsel, Dartmouth College Cotton M. Cleveland President, Mather Associates Richard W. Couch, Jr. Chairman, President and Chief Executive Officer, Hypertherm, Inc. William B. Hamilton, Jr. President, Investment & Trust Services Division, Ledyard National Bank SENIOR MANAGEMENT Kathryn G. Underwood President and Chief Executive Officer William B. Hamilton, Jr. President, Investment & Trust Services Division Gregory D. Steverson Executive Vice President and Chief Financial Officer OFFICERS Constance B. Aldrich Assistant Trust Officer and Investment Support Manager Margie L. Arbuckle-Morrill Vice President and Trust Officer Donna L. Batchelder Trust Operations Officer Betty J. Benson Assistant Vice President and Central Operations Officer Gail M. Broughton Assistant Vice President and Regional Office Manager, Lyme & Norwich Alison A. Bruce Compliance Administration Officer Terri L. Crate Assistant Vice President and Loan Administration Officer Debra J. Curtis Personal Banking Officer and Office Manager, West Lebanon Judith B. Dionne Vice President and Trust Operations Officer Claudette M. Duhamel Assistant Vice President and Office Manager, New London L. Joyce Hampers Attorney, Former U.S. Assistant Secretary of Commerce and President, Joymark, Inc. Adam M. Keller Executive Vice President, Finance and Administration, Dartmouth College Dennis E. Logue Steven Roth Professor of Management Emeritus, Tuck School of Business, Dartmouth College and Chair, Ledyard National Bank Frederick A. Roesch Retired, Senior Vice President, Citigroup/Citibank and Co-Vice Chair, Ledyard National Bank Andrew A. Samwick Professor of Economics and Director, Nelson A. Rockefeller Center at Dartmouth College Deirdre Sheerr-Gross, AIA Principal, Sheerr and White, Residential Architecture Bayne Stevenson President, Bayson Company Kathryn G. Underwood President and Chief Executive Officer, Ledyard National Bank James W. Varnum Retired President, Dartmouth-Hitchcock Alliance and Mary Hitchcock Memorial Hospital and Co-Vice Chair, Ledyard National Bank Martha P. Candon Senior Vice President and Senior Retail Banking Officer Mark S. Clough Senior Vice President and Senior Loan Officer Darcy D. Rogers Senior Vice President and Chief Operations Officer Grady L. M. George Trust Officer Jennifer J. Goin Trust Officer William R. Hatch Vice President and Commercial Loan Officer Michelle M. LeClair Commercial Loan Officer Katherine J. Lucier Assistant Vice President and Regional Office Manager, Lebanon & West Lebanon Robin A. Mazejka Regional Office Manager, Hanover Main Street and Lebanon Street Offices Jon E. Molesworth Vice President and Trust Investment Officer Catherine E. Murray Vice President and Mortgage Loan Officer Valerie J. Nevel Vice President and Trust Officer Christopher C. Ng Vice President and Trust Investment Officer D. Rodman Thomas Senior Vice President and Senior Trust Officer Darlene E. Romano Senior Vice President, Human Resources and Finance Victoria L. Peiffer Trust Administrative Officer Kevin J. Raleigh Senior Vice President and Senior Commercial Loan Officer Michael K. Sandoe Vice President and Commercial Loan Officer Debra W. Sias Vice President and Commercial Loan Officer David C. Skewes Mortgage Loan Officer Donna J. St. Peter Personal Banking Officer Edmund R. Taylor Senior Vice President and Chief Investment Officer Gail E. Trottier Assistant Vice President and Personal Banking Officer Joel T. Underwood Senior Vice President and Trust Investment Officer As of February 9, 2007 38 STAFF Ledyard National Bank FULL-TIME STAFF Stacey A. Alexander Teller, Customer Service Representative Karrie L. Longley Head Teller Arleen A. Berry Customer Service Representative Vicky C. Lorden Customer Service Representative Thomas M. Berry Data Processing and Information Systems Manager Amy L. Martin Customer Service Representative Robin M. Cantlin Commercial Loan Processor Stephanie J. Chase Office Supervisor Deborah J. McDanolds Customer Service Representative Cynthia L. McSpadden Head Teller Julie A. Courtemanche Trust Investment Support Specialist Gregory J. Monmaney Customer Service Representative Cara J. Dyke Office Supervisor Lisa Kathleen Murch Mortgage Loan Processor Deborah J. Farnsworth Finance Specialist and Training Coordinator Patricia M. Neily Head Teller Michelle J. Fellows Commercial Loan Processor Anna M. Gayhart Teller, Customer Service Representative Danielle L. Gohlke Customer Service Representative Stephanie Gordon Customer Service Representative Carrie Anne Hamel Customer Service Receptionist Doreen J. Holmes Head Teller Rebecca L. Newhall Customer Service Representative Cortney Ann Nichols Central Operations Assistant Tammy L. Norway Trust Operations Assistant Lillian R. Olsen Customer Service Representative Robin L. Olsen Customer Service Representative Erica C. Paronto Proof Operations Assistant Zvonko Ilic Assistant Branch Manager Sandra Jean Pike Customer Service Representative Jeanine M. Leathe Administrative Assistant, Investment & Trust Services Divisiion Tracy W. Lombardi Community Relations and Assistant Marketing Coordinator Betty J. Renault Wire Transfer and Operations Assistant Roxanne M. Russell Trust Operations Assistant 39 Sarah S. Salo Administrative Assistant, Sales and Marketing Coordinator and Office Manager Staci R. Sargent Customer Service Representative Victoria L. Schettino Deposit Operations Assistant Brett A. Smith Finance Manager Michelle R. Stewart Technical Support Manager Alexis L. Swain Loan Operations Assistant Jessica L. Taylor Customer Service Representative Monica M. Tuckerman Operations and Administrative Assistant Michelle L. Whitcomb Office Supervisor Loretta V. Zuger Trust Administrative Assistant PART-TIME STAFF Linda P. Bedford Commercial Loan Credit Administrator Kathryn S. Walker Trust Administrative Assistant As of February 9, 2007 ADVISORY BOARDS Ledyard National Bank FOUNDING ADVISORS Richard W. Birnie, Ph.D. Professor of Earth Sciences, Dartmouth College Douglas G. Britton President, Britton Lumber Co., Inc. Dorothy M. Byrne President, The Byrne Foundation Robert L. Callender Private Investor Fred P. Carleton Real Estate Management Brian H. Cole Owner/President, Cole Electric, Inc. and Owner, Vermont Alpaca Company Paul Danos Dean, Tuck School of Business at Dartmouth and Laurence F. Whittemore Professor of Business Administration Joseph F. Daschbach, Esq. Daschbach, Csatari & Young, PLLC Bradley Dewey, Jr. Retired INVESTMENT ADVISORY BOARD Robert Z. Aliber, Ph.D. Professor Emeritus, Graduate School of Business, University of Chicago William B. Hamilton, Jr., J.D. President, Investment & Trust Services Division, Ledyard National Bank L. Joyce Hampers, J.D., L.L.M. Attorney, Former U.S. Assistant Secretary of Commerce and President, Joymark, Inc. S. Whitney Dickey Retired Banker Donald Carpenter Goss Retired Advertising Agency Partner Charles M. Hebble, Jr. Retired Chairman and Chief Executive Officer, Creonics, Inc. Dennis E. Logue, M.B.A., Ph.D. Steven Roth Professor of Management, Emeritus, Tuck School of Business, Dartmouth College and Chair, Ledyard National Bank Mado R. Macdonald Executive Officer, Emerita, Tuck School of Business, Dartmouth College J. Jeffrey Maloney, CLU, ChFC Abacus Consulting, LLC Ann D. McLaughry Vice President, McLaughry Associates, Inc. and President, Upper Valley Real Estate Services Robert D. McLaughry Chairman, McLaughry Associates, Inc. Nancy Hayward Mitchell Retired Chairman, Dartmouth Travel John S. North Retired Chief Operating Officer, New England Telephone James E. Porath, C.P.A. Partner, Tonneson and Co. Alfred T. Quirk Dean of Admissions and Financial Aid, Emeritus, Dartmouth College Frank E. Sands II Chairman, King Arthur Flour Co., Inc. Edward M. Scheu, Jr. Retired Chairman and Chief Executive Officer, Luminescent Systems, Inc. Geraldine Searles President, Ruggles Mine, Inc. Richard H. Showalter, Jr., C.P.A. Chief Financial Officer, Dartmouth-Hitchcock Richard S. Shreve, M.B.A. Adjunct Professor of Business Ethics, Tuck School of Business, Dartmouth College Joseph C. Stevens, M.D. Dennis E. Logue, M.B.A., Ph.D. Steven Roth Professor of Management, Emeritus, Tuck School of Business, Dartmouth College and Chair, Ledyard National Bank Andrew A. Samwick Professor of Economics and Director, Nelson A. Rockefeller Center at Dartmouth College Deirdre Sheerr-Gross, AIA Principal, Sheerr and White, Residential Architecture Richard S. Shreve, M.B.A. Adjunct Professor of Business Ethics, Tuck School of Business, Dartmouth College Edmund R. Taylor, C.F.A. Senior Vice President and Chief Investment Officer, Ledyard National Bank D. Rodman Thomas, J.D. Senior Vice President and Senior Trust Officer, Ledyard National Bank Kent Womack, M.B.A., Ph.D. Associate Professor of Finance, Tuck School of Business, Dartmouth College As of February 9, 2007 40 NORWICH COMMUNITY BOARD Terry P. Appleby General Manager, Hanover Cooperative Society, Inc. Perrine McConnel Co-owner, Norwich Bookstore, Inc. Bruce “Buff” McLaughry President, McLaughry Associates, Inc. Steve Richardson President, Chief Tormentor, Stave Puzzles, Inc. Sally J. Wilson Retired COMMUNITY BOARDS Ledyard National Bank HANOVER COMMUNITY BOARD LYME COMMUNITY BOARD Julia N. Griffin Town Manager, Town of Hanover Martha E. Diebold Martha E. Diebold Real Estate David Laurin Managing Partner, Banwell Architects Nancy S. Dwight Chairman, Dwight Partners, Inc. Bruce Pacht Executive Director, Twin Pines Housing Trust Lloyd G. Nichols Tarm USA, Inc. Barry C. Schuster, Esq. Schuster, Buttrey & Wing, P.A. LEBANON COMMUNITY BOARD William Babineau Managing Member, Vermont Mailing Systems, LLC Terri Dudley Talk Show Host and Former Mayor Patrick E. Flanagan Patrick E. Flanagan Real Estate Broker Barry C. Schuster, Esq. Schuster, Buttrey & Wing, P.A. Bruce M. Waters, CCIM McLaughry Commercial Associates, Inc. John S. North Retired Chief Operations Officer, New England Telephone Norman C. Wakely Co-Director, Grant Brook Educational Services NEW LONDON COMMUNITY BOARD Thomas J. Brennan Superintendent, Kearsarge Regional School District Laurie T. DiClerico Diana Doheny Realtor, Gale & Associates Lawrence Dufault, Esq. Dufault & Dufault Bruce P. King Chief Executive Officer, New London Hospital Gail Matthews Jeff Milne Principal, Milne/Currier Associates Andrea F. Steel President and CEO, Lake Sunapee Region Visiting Nurse Association Ellen D. Winkler Principal Designer, Chief Executive Officer, Ellen’s Interiors As of February 9, 2007 LLedyard National Bank Offices: HANOVER 38 Main Street | 603-643-2244 Lobby, Walk-Up and ATM Investment & Trust Services | 603-643-0044 Lebanon Street at Park Street | 603-643-7457 Lobby, Drive-Up and ATM Dartmouth College | Collis Center ATM LEBANON Route 120 at Old Etna Road | 603-448-2220 Lobby, Drive-Up and ATM Centerra Park/River Valley Club ATM LYME On The Green | 603-795-2288 Lobby and ATM NEW LONDON 178 County Road | 603-526-7725 Lobby, Drive-Up and ATM Investment & Trust Services | 603-526-9251 NORWICH, VERMONT 320 Main Street | 802-649-2050 Lobby, Drive-Up and ATM WEST LEBANON 67 Main Street | 603-298-9444 Lobby, Drive-Up and ATM Powerhouse Mall ATM WHITE RIVER JUNCTION, VERMONT Gateway Motors | Sykes Avenue ATM KWIKNET INTERNET BANKING www.ledyardbank.com KWIKTEL TELEPHONE BANKING 1 - 8 8 8 - KW I K T E L 1 - 8 8 8 - 5 9 4 - 5 8 3 5 M E M B E R F D I C 

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