Ledyard Financial Group, Inc.
Annual Report 2007

Plain-text annual report

2007 ANNUAL REPORT Committed to growth. Dedicated to community. TABLE OF CONTENTS: Letter from the CEO & Board Chair 1 Ledyard Financial Group 5 Ledyard National Bank 7 Ledyard Financial Advisors 9 Summary 11 ON THE COVER: The new Ledyard Financial Advisors building at 2 Maple Street in Hanover, New Hampshire. Our headquarters, designed for Ledyard Financial Advisors, support our mission of providing personalized and comprehensive investment and wealth management services and education. The spacious and comfortable interior is configured to encourage client-advisor meetings. Other features include: ~ an investment and financial resource room for client use ~ on-site personal tax return preparation services ~ multiple client and family meeting rooms ~ reserved on-site street level parking for clients 1 LETTER from the CEO and BOARD CHAIR To our fellow owners, and members of our communities: our loyal customers, The year 2007 was, perhaps, the most transformative year in the history of Ledyard National Bank. We took a large step forward with the creation of Ledyard Financial Group, the holding company for Ledyard National Bank. This represents a significant development in how we plan to execute and grow our business in the years to come. The holding company allows us to pursue growth initiatives while also offering the flexibility necessary for more aggressive strategic options. We’re entering a new era for Ledyard Financial Group – one that will enhance shareholder value, improve our product mix and take customer service to an even higher level than what our customers have come to expect from us. Before we further engage in a discussion of the future, let’s acknowledge the success of 2007, in which Ledyard Financial Group reported record earnings. We should also note that US Banker magazine ranked Ledyard National Bank as one of the top 100 most successful banks in the nation amongst a peer group of public banks with less than $1 billion in assets*. We are very proud of our record, made possible by the skill and hard work of our employees as well as the trust and devotion of our customers. We reported last year on the groundbreaking for the new head- quarters of the Investment & Trust Services division. In addition to a new building, the division received a new name – Ledyard Financial Advisors. The re-branding reflects our updated vision of comprehensive investment and wealth management. It captures the essence of our mission – to deliver the most rele- vant and personalized service to our clients. We are confident that the advice and solutions we offer to our clients are unparalleled. And we’re committed to adding services that will ensure a comprehensive, one- stop option for those whom we serve. One such example is our newly created tax service. We will prepare a client’s personal income tax returns, calculate and remit estimated payments, and provide year-round tax advice. In the coming year, we are planning to add insurance policy reviews as well as brokerage services for small accounts, IRA’s, and tax deferred college savings plans. Our ribbon cutting ceremony for the Ledyard Financial Advisors building was held on February 14, 2008. * Based on the bank’s three-year average Return on Equity. Kathryn G. Underwood President & CEO, Ledyard Financial Group/ Ledyard National Bank Dennis E. Logue Chair, Ledyard Financial Group/ Ledyard National Bank “We are confident that the advice and solutions we offer to our clients are unparalleled.” We often reflect on the original vision of an independent community bank established by our founders 17 years ago. We hold true to that vision today, our continued success demonstrating the sustainability of those ideas, even through challenging financial times. Our guiding principles truly resonate with those looking for more than the impersonal banking experiences they might find at larger institutions. These principles include true relationship banking, a customer satisfaction focus, and a deep sense of community responsi- bility. This was demonstrated by our sponsorship support of many significant and worthy causes – Northern Stage, Opera North, David’s House, Lake Sunapee Region VNA, and The Hopkins Center’s Big Apple Circus, to name a few. In the coming years, the opportunities for Ledyard Financial Group are outstanding. We are committed to the concept of continu- ous improvement and enhancing 2 LETTER from the CEO and BOARD CHAIR (concluded) shareholder value. With that in mind, we made two important hires. Robert Boon joined Ledyard Financial Advisors in August as the division’s Executive Vice President and Managing Director. Bob’s experience and expertise will be instrumental in guiding his team of 24 advisors and managers to deliver the best solutions for our clients. In December, Jeff Marks accepted the position of Senior Vice President of Marketing and Client Experience Officer. Jeff will lead our initiatives in marketing/advertising, public relations, and corporate communications. He will also be accountable for developing the Bank’s client experience program and ensuring the highest level of customer service. We will always strive to be the community bank of choice in the regions we serve. We solicit insight and suggestions from the most important perspective of all – that belonging to the customers and shareholders whom we serve. We thank you for your support and look forward to strengthening the part- nerships we’ve built with you, our shareholders and customers, in 2008. Kathryn Underwood President & CEO, Ledyard Financial Group/ Ledyard National Bank Dennis E. Logue Chair, Ledyard Financial Group/ Ledyard National Bank 3 LEDYARD’S SENIOR MANAGEMENT TEAM Seated left to right: Darlene E. Romano Senior Vice President, Human Resources & Finance, Ledyard National Bank Jeffrey H. Marks Senior Vice President, Marketing & Client Experience, Ledyard National Bank Martha P. Candon Senior Vice President & Senior Retail Banking Officer, Ledyard National Bank Gregory D. Steverson Executive Vice President & Chief Financial Officer, Ledyard Financial Group/ Ledyard National Bank Kathryn G. Underwood President & CEO, Ledyard Financial Group/ Ledyard National Bank Standing left to right: Robert T. Boon Executive Vice President & Managing Director, Ledyard Financial Advisors, Ledyard National Bank Darcy D. Rogers Senior Vice President & Chief Operations Officer, Ledyard National Bank Mark S. Clough Senior Vice President & Senior Loan Officer, Ledyard National Bank D. Rodman Thomas Senior Vice President & Chief Compliance Officer, Ledyard Financial Advisors, Ledyard National Bank “We will strive to deliver superior returns to our shareholders and ensure that our status as trusted financial partners will never be taken for granted.” 4 BOARD of DIRECTORS Front row, seated left to right: Dennis E. Logue Steven Roth Professor of Management Emeritus,Tuck School of Business, Dartmouth College and Chair, Ledyard Financial Group/ Ledyard National Bank Deirdre Sheerr-Gross Principal, Sheerr and White Residential Architecture Middle row, left to right: Kathryn G. Underwood President and Chief Executive Officer, Ledyard Financial Group/ Ledyard National Bank Bayne Stevenson President, Bayson Company Back row, left to right: Adam M. Keller Executive Vice President, Finance and Administration, Dartmouth College Andrew A. Samwick Professor of Economics and Director, Nelson A. Rockefeller Center at Dartmouth College James W. Varnum Retired President, Dartmouth-Hitchcock Alliance & Mary Hitchcock Memorial Hospital and Co-Vice Chair, Ledyard Financial Group/Ledyard National Bank Douglas G. Britton President, Britton Lumber Co., Inc., and Secretary, Ledyard Financial Group/ Ledyard National Bank Frederick A. Roesch Retired, Senior Vice President, Citigroup/Citibank and Co-Vice Chair, Ledyard Financial Group/Ledyard National Bank Richard W. Couch, Jr. Chairman, President and Chief Executive Officer, Hypertherm, Inc. Cotton M. Cleveland President, Mather Associates Not Pictured: L. Joyce Hampers Attorney, Former U.S. Assistant Secretary of Commerce and President, Joymark, Inc. “We are grateful to have the knowledge and expertise of our Board of Directors. They are community members who provide strong guidance to Ledyard.” 5 LEDYARD FINANCIAL GROUP LEDYARD FINANCIAL GROUP Committed to growth. Dedicated to community. Ledyard National Bank was founded in 1991 by an entrepre- neurial group of business leaders with extensive financial services experience. From the beginning, our strategy has been to be an independent resource for accessible and highly personalized banking that is owned and operated by committed citizens of the commu- nity while, at the same time, providing outstanding returns for our shareholders. This strategy has allowed us to grow parallel with the needs of the people within the markets we serve. We have expanded the breadth and scope of our financial offerings over time in order to meet the requirements of an increasingly sophisticated customer base. Our balanced perspective, combining community focus and current expertise, enables us to offer customized financial solutions coupled with superior personal service from local experts you know and trust. In 2007, to accommodate our evolving role as one of the area’s leading financial services providers, we formed Ledyard Financial Group, Inc. as the holding company for Ledyard National Bank. As we move forward, this will provide us with greater flexibility in managing our business. It will better enable us to leverage our resources while remaining true to our original mission of providing our shareholders with strong returns and providing excellent service to the communi- ties we serve. We are building on our history and providing a more seamless and “holistic” approach to banking and wealth management. No matter what stage of life our customers may be in, they can turn to Ledyard for the solutions they need. 6 LEDYARD NATIONAL BANK Ledyard Vice President and Mortgage Loan Officer David Skewes (right) congratulates his customers, Liz and Matt, on the purchase of their first home. The couple took advantage of one of our low down payment mortgages specifically tailored for first-time home buyers. “What truly sets Ledyard apart is our untiring commitment to delivering excellent service every time.” 7 LEDYARD NATIONAL BANK LEDYARD NATIONAL BANK Community-focused banking. At Ledyard National Bank, we offer a broad range of innovative personal and commercial financial products and services. From online and mobile banking to remote deposit capture for our commercial customers, we provide the latest in secure, technology-enhanced banking solutions. With seven full-service offices, local decision- making and responsive employees, Ledyard has become the bank of choice in the region. We work hard at providing community-focused banking to our customers. And what truly sets Ledyard apart is our untiring commitment to delivering excellent service every time. Whether it’s a phone call or a personal bank visit, outstanding personal service is always part of the equation. Banking is a collaborative relationship. All of us at Ledyard – from our board of directors to our management and staff – are members of the community we serve. This “on the scene” knowledge allows us to provide appropriate and personalized solutions where other financial institutions could not. By using local deposits to fund local business loans and mortgages, a larger percentage of our investment stays right here to help expand and vitalize the community. This is the distinct advantage Ledyard National Bank provides. 8 LEDYARD FINANCIAL ADVISORS’ PORTFOLIO MANAGERS Pictured from front, counterclockwise: Christopher C. Ng Portfolio Manager, Ledyard Financial Advisors, Ledyard National Bank Julie A. Courtemanche Investment Specialist, Ledyard Financial Advisors, Ledyard National Bank J.T. Underwood Chief Investment Strategist, Ledyard Financial Advisors, Ledyard National Bank Jon E. Molesworth Senior Portfolio Manager, Ledyard Financial Advisors, Ledyard National Bank Constance B. Aldrich Investment Support Manager, Ledyard Financial Advisors, Ledyard National Bank “Understanding that wealth management can be a complex and emotional issue, we take the time to listen and are always available to our clients when they need to discuss their concerns.” LEDYARD FINANCIAL ADVISORS’ TAX SERVICES Center: Douglas C. Gross, CPA Tax & Financial Planning Officer, Ledyard Financial Advisors, Ledyard National Bank Right: Roxanne M. Russell Tax Administrator, Ledyard Financial Advisors, Ledyard National Bank 9 LEDYARD FINANCIAL ADVISORS LEDYARD FINANCIAL ADVISORS Investment and wealth management. The establishment of Ledyard Financial Advisors represents an increased emphasis on compre- hensive wealth management and is a direct reflection of the high level of financial knowledge and expertise that clients have come to expect from Ledyard. By engaging clients in extensive discussions about their broader goals and aspirations, our financial advisors can get a complete understanding of the “big picture” needs of each client in order to develop strategies that address those needs. This requires an advisor who is a disciplined and experienced financial professional, but who also has the interpersonal skills necessary to gain such insight, even when a client may not be able to articulate specific objectives. This is one of the most important aspects, and differences, Ledyard Financial Advisors provides. We are proud of the feedback we receive from our clients and recognize the multitude of reasons that have made Ledyard the wealth management resource of choice for discerning individuals. Whether our clients seek investment expertise, desire convenient access to compre- hensive financial counseling, or seek to establish an enduring relationship with trusted advisors, we strive to meet and exceed those expectations every day. Understanding that wealth management can be a complex and emotional issue, we take the time to listen and are always available to our clients when they need to discuss their concerns. This philosophy of personalized, caring service ultimately fosters relation- ships that can span generations. 10 LEDYARD FINANCIAL ADVISORS (concluded) Under one roof. At Ledyard Financial Advisors, we want to simplify our clients’ financial lives by offering a “single source” solution. With a staff of 24 experienced professionals, we now have a new, expansive and dedicated headquarters in Hanover, New Hampshire, which better supports the enhanced services available to our clients all under one roof. Our new headquarters complements the pre-existing full-service office in New London, New Hampshire. Our officers there can leverage any of the additional resources housed within the new headquarters. As always, when a client cannot visit us, we will gladly travel from any of our locations to the client’s desired meeting destination. 13 KEY WEALTH MANAGEMENT ISSUES: 1. Investment 2. Insurance 9. Family Gifting 10. Charitable Gifting 3. Retirement/IRA 11. Titling of Assets 4. Taxes 5. Liabilities 12. Executor/Trustee Selection 6. Stock Options 13. Distribution 7. Business Succession of Wealth 8. Durable Power of Attorney A framework for managing wealth. Ledyard Financial Advisors employs a “framework” for managing wealth that focuses on 13 key areas. These certainly include an investment plan, but extend well beyond into insurance issues, retirement planning, tax returns, business succession, all the way to wealth distribution. The Advisor also helps coordinate and interface with external resources as required – attorneys, CPAs, insurance professionals and third party solutions. In fact, Ledyard clients have the flexibility to create a personal financial plan that employs customized options from a variety of resources. Community support and stewardship. Through ongoing, prioritized reinvestment and active partici- pation, we support community organizations that make a difference in a wide spectrum of people’s lives. We are proud to help organizations throughout the Upper Valley and Lake Sunapee Region that support the causes of education, contribute to improving the health and well-being of children and adults, provide community development resources, or advance the arts and humanities. We at Ledyard Financial Group... are committed to being the financial services institution of choice by combining innovation with unparalleled personalized customer service. We will offer our employees a challenging and rewarding work experience. As a result of our efforts, Ledyard customers will receive superlative financial services and our shareholders will experience consistent and superior returns. 11 LEDYARD FINANCIAL GROUP Our support is not only monetary. As volunteers, many Ledyard employees and board members serve on community boards or donate their time to a wide variety of area organizations. In 2007 alone, that amounted to over 3,000 volunteer hours. Such community involvement is a vital part of our success. We are proud to give back to those we serve. Moving forward. As we look ahead, Ledyard Financial Group will continue to improve our products and services, to build on our past efforts, and to strengthen our client and community relationships. We will strive to deliver superior returns to our shareholders and ensure that our status as trusted financial partners will never be taken for granted. Welcome to a new era of community banking and wealth management. Welcome to Ledyard Financial Group. 12 RIBBON CUTTING for LEDYARD FINANCIAL ADVISORS’ NEW HEADQUARTERS Holding ribbon, left to right: Robert T. Boon Executive Vice President & Managing Director, Ledyard Financial Advisors, Ledyard National Bank D. Rodman Thomas Senior Vice President & Chief Compliance Officer, Ledyard Financial Advisors, Ledyard National Bank First row on stairs, left to right: Henry V. Hayes Lender, Chittenden Bank Randy Mudge Architect, R.T. Mudge and Associates Bayne Stevenson President, Bayson Company and Member, Board of Directors, Ledyard Financial Group/ Ledyard National Bank Kathryn G. Underwood President & CEO, Ledyard Financial Group/ Ledyard National Bank Dennis E. Logue Chair, Ledyard Financial Group/ Ledyard National Bank Back row, left to right: Robert Meyer Project Manager, Bayson Company Tim Estes General Contractor, Estes and Gallup “We are building on our history and providing a more seamless and ‘holistic’ approach to banking and wealth management.” LEDYARD OFFICES LEDYARD NATIONAL BANK HANOVER: 38 Main Street | 603-643-2244 | Lobby, Walk-Up and ATM 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 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 INTERNET BANKING: www.ledyardbank.com KWIKTEL PHONE 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 LEDYARD FINANCIAL ADVISORS HANOVER: 2 Maple Street | 603-643-0044 NEW LONDON: 178 County Road | 603-526-7725 PHOTOGRAPHY BY JON GILBERT FOX 2007 ANNUAL REPORT and FINANCIAL STATEMENTS Committed to growth. Dedicated to community. TABLE OF CONTENTS: Financial Highlights 1 Management’s Financial Discussion 2 Independent Auditors’ Report 5 Financial Statements 6 Management/Staff/Boards 26 1 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 2007 2006 2005 2004 2003 $ 325,803 53,706 228,879 276,933 1,551 30,517 $ 12,480 705 6,754 12,306 2,362 3,862 $ $ 3.80 1.16 31% $ 29.95 1,018,996 1.20% 13.37% 9.37% 1.45% $ 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% $ 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% MANAGEMENT’S FINANCIAL DISCUSSION Review of Financial Statements The discussion and analysis which follows focuses on the factors affecting the Bank’s financial condition at December 31, 2007 and 2006 and its results of operations for the years ended December 31, 2007 and 2006. The Financial Statements and Notes to the Financial Statements should be read in conjunction with this review. Statement of Income Net income was $3,861,653, or $3.80 per share for the twelve months ended 2007 as compared to $3,786,919, or $3.75 per share for 2006, an increase of $74,734, or 1.97%. Increased net interest income and higher Ledyard Financial Advisors income accounted for the majority of the change. Net interest income before the provision for loan loss totaled $12,479,924 for the year ended December 31, 2007, as compared to $12,099,357 for the year ended December 31, 2006. The increase of $380,567, or 3.15%, was primarily attributable to an increase in interest income on loans. Interest and fees on loans totaled $16,079,947 for the year ended December 31, 2007, as compared to $14,185,722 for 2006. This increase of $1,894,225, or 13.35%, was due to an increase in loan balances. Investment 2 MANAGEMENT’S FINANCIAL DISCUSSION income for the year ended December 31, 2007, totaled $3,870,930 as compared to $2,820,087 for 2006, an increase of $1,050,843, or 37.26%. The increase was due primarily to higher average balances in fed funds sold and securities available for sale. The Bank’s interest expense on deposits was $6,782,369 for the year ended December 31, 2007, as compared to $4,127,673 for the year ended December 31, 2006, an increase of $2,654,696, or 64.32%. This increase was the result of increases in deposit volumes, primarily money market accounts and time deposits. Interest expense on borrowed funds decreased $90,195, or 11.58% for the year ended December 31, 2007 totaling $688,584 as compared to $778,779 at December 31, 2006. The decrease was primarily due to the decrease in borrowings from the Federal Home Loan Bank. During 2007, the Bank added $705,000 to its provision for loan losses and realized net charge-offs of $129,122 resulting in an allowance for loan losses totaling $3,360,003, or 1.45% of total loans. The determination of an appro- priate level of allowance for loan losses (the “allowance”), and subsequent provision for loan losses, which would affect earnings, is based on management’s judgment of the adequacy of the allowance based on analysis of various economic factors and review of the bank’s loan portfolio, which may change due to numerous factors. In determining the adequacy of the allowance management reviews the loan portfolio to ascertain whether Gregory D. Steverson, Executive Vice President & Chief Financial Officer, Ledyard Financial Group/ Ledyard National Bank Net Income (in thousands) $4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 03 04 05 06 07 Earnings Per Share (in dollars) $4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 03 04 05 06 07 3 MANAGEMENT’S FINANCIAL DISCUSSION (continued) of $9,910,506 in net loans, including loans held for sale and by a $5,421,995 decrease in fed funds sold, certificates of deposit and investment securities (“investments”). The Bank maintains investments in fed funds sold, certificates of deposit and investment securities in order to diversify its revenue, as well as to provide interest rate and credit risk diversification. These investments also provide for liquidity and funding needs. As mentioned above, total investments decreased $5,421,995, or 6.56%. This decrease consisted of increases to fed funds sold of $11,149,783 and increases in securities available for sale of $10,776,481, a decrease in certificates of deposit of $22,000,000, and a decrease in securities held to maturity of $5,346,709. During 2007, the bank purchased $17,277,463 of available-for-sale securities and realized proceeds from maturities and paydowns of available for sale and held to maturity securities totaling $12,161,869. The Bank provides loans to customers primarily located within its geographic market area. Net loans, including loans held for sale, totaled $228,779,037 at December 31, 2007, a $9,910,506, or 4.53% increase from a year ago. This reflects the strong loan growth experienced in the commercial and residential real estate loan portfolios. Commercial loans consist of (i) loans secured by various corporate assets, (ii) loans to provide working capital in the form of secured and unsecured lines of credit, and (iii) commercial real estate loans secured by income-producing commercial real estate. The Bank focuses on lending to Ledyard Financial Advisors Gross Income (in thousands) $6,000 5,000 4,000 3,000 2,000 1,000 $350,000 300,000 250,000 200,000 150,000 100,000 50,000 03 04 05 06 07 Total Assets (in thousands) 03 04 05 06 07 there are specific loans which require additional reserves and to assess the collectability of the loan portfolio in the aggregate. Non-performing loans are examined on an individual basis to determine the estimated probable loss on these loans. In addition, the ongoing evaluation process includes a formal analysis of the allowance each quarter. Management believes that the allowance at December 31, 2007 was appropriate given the current economic conditions in the Bank’s service area. Non-interest income totaled $6,754,146 in 2007 as compared to $6,282,237 in 2006, an increase of $471,909, or 7.51%. Gross income from the Bank’s Ledyard Financial Advisors Division totaled $5,026,952 up from $4,410,810 in 2006, an increase of $616,142, or 13.97%. This increase was primarily attributable to increases in assets under management and market conditions during the first half of the year. Service fees and other non-interest income decreased slightly by $144,233 during 2007. Non-interest expense totaled $12,305,817 for 2007 as compared to $11,894,164 in 2006, an increase of $411,653, or 3.46%. Net Loans including loans held for sale (in thousands) Financial Condition At year-end, total assets were $325,805,353 compared to $320,229,558 at December 31, 2006, an increase of $5,575,795, or 1.74%. The change in assets consisted primarily of an increase $350,000 300,000 250,000 200,000 150,000 100,000 50,000 03 04 05 06 07 4 MANAGEMENT’S FINANCIAL DISCUSSION (concluded) Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLB, the Bank purchases federal funds and sells securities under agree- ments to repurchase. Total borrowings were $16,310,681 at December 31, 2007 compared to $20,603,624 at December 31, 2006, a decrease of $4,292,943. The majority of the borrowings were related to securities sold under agreements to repurchase followed by advances from the Federal Home Loan Bank. In addition to the liquidity sources discussed above, the Bank believes the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales if needed. The Bank believes that the level of liquidity is sufficient to meet current and future funding requirements. Shareholders’ equity was $30,517,338 on December 31, 2007 compared to $27,270,995 on December 31, 2006, an increase of $3,246,343. The increase was primarily attributable to net income of $3,861,653 less $1,180,885 in cash dividends to the Bank’s shareholders. The Bank’s book value on December 31, 2007 was $29.95 per share based on 1,018,996 shares outstanding, an increase of $2.96 per share, or 10.97% from a year earlier. financially-sound small and medium- sized business customers within its geographic marketplace. Total commer- cial loans increased by $16,057,632, or 12.42%, during 2007. Residential real estate loans consist of loans secured by one-to-four family residences. The Bank usually retains adjustable-rate mortgages in its portfolio and will generally sell fixed- rate mortgages. Residential real estate loans increased by $121,297, or 0.15%, in 2007. Consumer loans are originated by the Bank for a wide variety of purposes designed to meet the needs of its customers. Consumer loans include overdraft protection, automobile, boat, recreation vehicles, home equity, and secured and unsecured personal loans. Consumer loans decreased by $4,085,264, or 44.22%, in 2007. Premises and equipment totaled $8,341,219 at December 31, 2007 as compared to $8,644,308 at December 31, 2006. The net decrease of $303,089, or 3.51%, can be attributed to depreciation during 2007. Deposits continue to repre- sent the Bank’s primary source of funds. In 2007, total deposits increased by $5,791,298, or 2.14% over 2006, ending the year at $276,933,492. Comparing year-end balances in 2007 to 2006, demand deposits increased by $4,018,407, NOW accounts increased by $813,447, certificates of deposit increased by $6,921,694 and money market and savings accounts decreased by $5,962,250. Total Deposits (in thousands) $350,000 300,000 250,000 200,000 150,000 100,000 50,000 03 04 05 06 07 Shareholders’ Equity (in thousands) $35,000 30,000 25,000 20,000 15,000 10,000 5,000 03 04 05 06 07 Book Value per share (in dollars) $30 25 20 15 10 5 03 04 05 06 07 5 INDEPENDENT AUDITORS’ REPORT principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ledyard Financial Group, Inc. and Subsidiary as of December 31, 2007 and 2006, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine February 20, 2008 TO the BOARD of DIRECTORS & SHAREHOLDERS of LEDYARD FINANCIAL GROUP, INC. and SUBSIDIARY: We have audited the accompanying consolidated balance sheets of Ledyard Financial Group, Inc. and Subsidiary (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting CONSOLIDATED BALANCE SHEETS December 31, 2007 and 2006 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 $3,360,003 in 2007 and $2,784,125 in 2006 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 6 2007 2006 $ 7,931,388 23,524,991 – $ 7,269,808 12,375,208 22,000,000 31,456,379 41,645,016 30,480,552 22,134,195 1,091,100 – 19,704,071 27,480,904 1,092,650 1,602,750 228,779,037 217,265,781 1,295,380 8,341,219 2,227,491 1,081,957 8,644,308 1,712,121 $ 325,805,353 $ 320,229,558 $ 46,872,571 47,774,789 99,230,628 12,999,246 31,947,282 38,108,976 276,933,492 14,759,226 1,551,455 2,043,842 $ 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 Total liabilities 295,288,015 292,958,563 Commitments and contingencies (Notes 5, 11, 12, 13, 14 and 15) Shareholders’ equity Common stock, $1.00 par value; 5,500,000 shares authorized; 1,018,996 and 1,010,246 shares issued and outstanding in 2007 and 2006, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. 1,018,996 9,577,926 19,747,532 172,884 1,010,246 9,279,378 17,066,764 (85,393) 30,517,338 27,270,995 $ 325,805,353 $ 320,229,558 CONSOLIDATED STATEMENTS of INCOME Years Ended December 31, 2007 and 2006 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 7 2007 2006 $ 16,079,947 2,246,570 1,624,360 $ 14,185,722 2,049,556 770,531 19,950,877 17,005,809 6,782,369 688,584 7,470,953 4,127,673 778,779 4,906,452 12,479,924 12,099,357 705,000 525,000 Net interest income after provision for loan losses 11,774,924 11,574,357 Noninterest income Ledyard Financial Advisors division 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 5,026,952 1,122,831 604,363 6,754,146 6,852,143 2,060,396 3,393,278 4,410,810 1,407,541 463,886 6,282,237 6,385,375 1,884,207 3,624,582 12,305,817 11,894,164 6,223,253 2,361,600 3,861,653 3.80 3.77 1,016,331 $ $ $ $ $ $ 5,962,430 2,175,511 3,786,919 3.75 3.73 1,009,788 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS’ EQUITY Years Ended December 31, 2007 and 2006 8 BALANCE, DECEMBER 31, 2005 $ 1,009,746 $ 9,214,466 $ 14,370,371 $ (203,447) $ 24,391,136 COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED OTHER RETAINED COMPREHENSIVE INCOME (LOSS) EARNINGS TOTAL 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) 56,487 8,425 – – – – – (1,090,526) 56,487 8,925 BALANCE, DECEMBER 31, 2006 $ 1,010,246 $ 9,279,378 $ 17,066,764 $ (85,393) $ 27,270,995 Comprehensive income Net income Change in net unrealized depreciation on securities available-for-sale, net of tax of $133,000 Total comprehensive income Cash dividends paid, $1.16 per share Fair value of stock warrants vested during the year – – – – – – 3,861,653 – 3,861,653 – – – 92,000 – 258,277 258,277 3,861,653 258,277 4,119,930 (1,180,885) – – – – – (1,180,885) 92,000 215,298 Stock warrants exercised, 8,750 shares 8,750 206,548 BALANCE, DECEMBER 31, 2007 $ 1,018,996 $ 9,577,926 $ 19,747,532 $ 172,884 $ 30,517,338 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS of CASH FLOWS Years Ended December 31, 2007 and 2006 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 Fair value of stock warrants vested during the year (Increase) decrease in accrued income receivable Increase in accrued expenses and other liabilities (Increase) decrease in other assets Net decrease (increase) 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 Net redemption 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 (decrease) 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 9 2007 2006 $ 3,861,653 $ 3,786,919 643,772 705,000 (353,100) 92,000 (213,423) 982,897 (403,132) 1,602,750 6,918,417 709,015 525,000 (163,200) 56,487 17,834 52,965 173,930 (740,000) 4,418,950 6,891,222 1,776,694 5,270,647 1,550 (17,277,463) (12,218,256) (307,522) (17,639,822) 5,791,298 – (1,662,630) (2,630,313) 215,298 (1,180,885) 532,768 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 Net (decrease) increase in cash and cash equivalents (10,188,637) 23,404,915 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 41,645,016 18,240,101 $ 31,456,379 $ $ 7,451,246 2,391,836 $ $ $ 41,645,016 4,817,250 2,355,371 The accompanying notes are an integral part of these consolidated financial statements. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 10 NATURE OF BUSINESS Ledyard Financial Group, Inc. (the Company) is headquartered in Hanover, New Hampshire and, as a bank holding company, it provides financial services to its customers through its wholly-owned bank subsidiary, Ledyard National Bank (the Bank). The Bank provides retail and commercial banking and investment and trust services through its office locations in Central New Hampshire and Vermont. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Company are in conformity with U.S. generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned bank subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. With the required regulatory approval, the Company became the bank holding company of Ledyard National Bank effective in October 2007. 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 portion 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, periodically review the Bank’s loan portfolio. 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 Company’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 assur- ance 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 Company. Although the Company 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 Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy. In addition, a substantial portion of the Company’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 Company’s due from bank accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk on cash and cash equivalents. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 11 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 approximat- ing the interest method. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, 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 securi- ties available-for-sale are reported as a net amount in other comprehensive income or loss, net of tax. Declines in the fair value of investment securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. 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 Company. 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 Company 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, includ- ing the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic condi- tions. 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. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 12 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Credit Related Financial Instruments In the ordinary course of business, the Company 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. Other Real Estate Owned Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the 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 acquisi- tion 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 prop- erty 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 carrying value of a property to the lower of its cost or fair value less cost to sell. Premises and Equipment Land is carried at cost. 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 proper- ty are amortized over the lesser of the term of the lease or life of the improvements. Income Taxes The Company 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 Company’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 Company’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 Company’s common shares outstanding during the year. Potential common stock is considered in the calculation of weighted average shares outstanding for diluted earn- ings 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 meas- ure 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 Company adopted the provisions of SFAS No. 123(R) using a modified prospec- tive 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. Ledyard Financial Advisors Assets and Fees Assets held by Ledyard Financial Advisors (a division of Ledyard National Bank) for its customers, other than trust cash on deposit at the Bank, are not included in these financial statements because they are not assets of the Bank. Fees that Ledyard Financial Advisors earns are recorded on the accrual basis. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 13 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) 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, 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. 2. CASH AND DUE FROM BANKS The Bank is required to maintain certain reserves of vault cash or deposits with the Federal Reserve Bank (FRB). The amount of this reserve requirement, included in cash and due from banks, was approximately $679,000 and $138,000 as of December 31, 2007 and 2006, 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 sponsored enterprises State and municipal Collateralized mortgage obligations Mortgage-backed securities Total securities available-for-sale Securities Held-to-Maturity U.S. Government sponsored enterprises State and municipal Collateralized mortgage obligations Mortgage-backed securities 2007 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 5,117,527 6,921,159 1,809,959 16,369,960 $ 30,218,605 $ 1,987,287 2,060,744 785,909 17,300,255 $ $ $ 62,653 43,325 43,260 197,647 346,885 22,476 15,691 – 29,306 $ $ $ (499) (36,413) – (48,026) $ 5,179,681 6,928,071 1,853,219 16,519,581 (84,938) $ 30,480,552 (1,082) – (12,132) (183,548) $ 2,008,681 2,076,435 773,777 17,146,013 Total securities held-to-maturity $ 22,134,195 $ 67,473 $ (196,762) $ 22,004,906 NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 14 3. SECURITIES (continued) Securities Available-for-Sale U.S. Government sponsored enterprises State and municipal Mortgage-backed securities Total securities available-for-sale Securities Held-to-Maturity U.S. Government sponsored enterprises State and municipal Collateralized mortgage obligations Mortgage-backed securities 2006 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ $ $ $ 9,093,883 628,293 10,111,278 $ 19,833,454 $ 1,982,429 2,629,817 853,923 22,014,735 23,863 3,456 42,454 69,773 – 8,000 – 10,589 $ $ $ (33,244) – (165,912) $ 9,084,502 631,749 9,987,820 (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 At December 31, 2007 and 2006, securities with a carrying value of $28,269,949 and $29,883,423, 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, 2007 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 $ 5,117,527 918,579 2,386,498 3,616,082 12,038,686 $ 5,179,681 937,100 2,396,033 3,594,938 12,107,752 $ 1,000,000 2,308,597 501,602 237,832 4,048,031 $ 998,918 2,344,608 501,715 239,875 4,085,116 mortgage-backed securities 18,179,919 18,372,800 18,086,164 17,919,790 Total $ 30,218,605 $ 30,480,552 $ 22,134,195 $ 22,004,906 There were no sales of securities available-for-sale or securities held-to-maturity during 2007 and 2006. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 15 3. SECURITIES (concluded) Information pertaining to securities with gross unrealized losses at December 31, 2007 and 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: December 31, 2007 U.S. Government LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES sponsored enterprises $ – $ – $ 1,997,675 $ (1,581) $ 1,997,675 $ 3,261,976 (36,413) – – 3,261,976 (1,581) (36,413) State and municipal Collateralized mortgage obligations Mortgage-backed securities – – – – 773,777 16,204,699 (12,132) (231,574) 773,777 16,204,699 (12,132) (231,574) Total $ 3,261,976 $ (36,413) $ 18,976,151 $ (245,287) $ 22,238,127 $ (281,700) December 31, 2006 LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES U.S. Government sponsored enterprises $ – $ State and municipal Collateralized mortgage obligations Mortgage-backed securities 499,350 $ – (2,557) 6,921,359 – $ (52,750) $ 6,921,359 $ – 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) 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 Company 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. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 16 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 Loans, net 2007 2006 $ 69,948,886 75,406,690 81,573,293 5,153,707 $ 60,389,111 68,908,833 81,451,996 9,238,971 232,082,576 219,988,911 (3,360,003) 56,464 (2,784,125) 60,995 $ 228,779,037 $ 217,265,781 At December 31, 2007 and 2006, nonaccrual loans were $1,433,668 and $520,528, respectively. There were no loans 90 days past due and still accruing interest at December 31, 2007 and 2006. An analysis of the allowance for loan losses follows: Years Ended December 31, Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year 2007 2006 $ $ 2,784,125 705,000 (142,113) 12,991 2,383,359 525,000 (128,915) 4,681 $ 3,360,003 $ 2,784,125 The following is a summary of information pertaining to impaired loans: Years Ended December 31, 2007 2006 Impaired loans with a valuation allowance Total impaired loans Valuation allowance related to impaired loans Average investment in impaired loans $ $ $ $ 2,594,417 2,594,417 750,480 1,557,473 $ $ $ $ 520,528 520,528 130,132 595,211 Interest income recognized on impaired loans during 2007 amounted to $123,592. No interest income was recognized on impaired loans during 2006. No additional funds are committed to be advanced in connection with impaired loans. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 17 5. 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 $ 2007 1,922,993 7,224,331 4,001,924 $ 2006 1,922,993 7,223,330 3,695,403 13,149,248 (4,808,029) 12,841,726 (4,197,418) $ 8,341,219 $ 8,644,308 Depreciation, included in occupancy and equipment expense, amounted to $610,611 and $627,729 for the years ended December 31, 2007 and 2006, respectively. Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2007, pertaining to premises and equipment, future minimum rent commitments under various operating leases are as follows: 2008 2009 2010 2011 2012 Thereafter $ 74,325 473,033 464,233 420,233 376,402 1,565,890 $ 3,774,116 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, 2007 and 2006 amounted to $169,505 and $160,654, respectively. 6. DEPOSITS At December 31, 2007, the scheduled maturities of time deposits are as follows: 2008 2009 2010 2011 2012 $ 62,346,181 7,195,791 257,879 97,200 159,207 $ 70,056,258 Deposit accounts with related parties were $4,663,033 and $4,981,000 at December 31, 2007 and 2006, 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 2007 and 2006 was $25,599,539 and $25,951,442, respectively. The average amount of repurchase agreements outstanding during 2007 and 2006 was $16,702,183 and $13,647,735, respectively. The weighted average interest rate on repurchase agreements outstanding at December 31, 2007 and 2006 was 3.59% and 3.94%, respectively. All securities collateralizing the repurchase agreements are under the Bank’s control. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 18 8. ADVANCES FROM FEDERAL HOME LOAN BANK The Bank’s fixed-rate advances with the Federal Home Loan Bank (FHLB) of $1,551,455 at December 31, 2007 mature through 2013. At December 31, 2007 and 2006, 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: 2007 2008 2009 2013 Total $ 2007 – 500,000 733,489 317,966 $ 2006 1,000,000 500,000 1,349,393 364,692 $ 1,551,455 $ 3,214,085 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 benefit Federal State 2007 2006 $ 2,422,000 292,700 2,714,700 $ 2,025,630 313,081 2,338,711 (318,400) (34,700) (353,100) (123,200) (40,000) (163,200) $ 2,361,600 $ 2,175,511 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) from life insurance Incentive stock options Other 2007 2006 $ 2,115,906 $ 2,027,226 (80,169) 197,386 (8,226) 31,280 105,423 (41,143) 141,831 24,517 19,206 3,874 $ 2,361,600 $ 2,175,511 NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 19 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 Net unrealized gain on securities available-for-sale Depreciation Other 2007 2006 $ $ – 1,175,700 261,500 35,400 1,472,600 89,000 225,200 126,300 440,500 44,000 903,100 213,200 42,700 1,203,000 – 264,700 126,300 391,000 Net deferred tax asset $ 1,032,100 $ 812,000 No valuation allowance is deemed necessary for the deferred income tax asset. 10. EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share for 2007 and 2006: 2007 2006 Net income, as reported $ 3,861,653 $ 3,786,919 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 1,016,331 6,574 450 1,023,355 1,009,788 4,740 1,000 1,015,528 $ $ 3.80 3.77 $ $ 3.75 3.73 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company 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 commit- ments 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 Company has in particular classes of financial instruments. The Company’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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For inter- est rate caps and floors written on adjustable rate loans, the contract or notional amounts do not represent exposure to credit losses. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 20 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (concluded) The Company generally requires collateral or other security to support financial instruments with credit risk. At December 31, 2007 and 2006, the following financial instruments were outstanding whose contract amounts represent credit risk: Commitments to grant loans Commercial and standby letters-of-credit CONTRACT AMOUNT 2007 2006 $ $ 52,963,883 3,858,605 $ $ 53,149,638 11,551,895 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 Company, 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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 pro- ducing commercial property. Standby letters-of-credit are conditional commitments issued by the Company 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 Company places interest rate caps and floors on loans written by the Company 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 Company’s financial statements. 13. SHAREHOLDERS’ EQUITY AND REGULATORY MATTERS The Company and its bank subsidiary are subject to various regulatory capital requirements administered by the FRB and the Office of the Comptroller of the Currency (OCC). Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. These capital requirements represent quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by its regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 21 13. MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded) average assets (as defined). Management believes that, as of December 31, 2007, the Company and its bank subsidiary meet all capital requirements to which they are subject. As of December 31, 2007, the most recent notification from the OCC categorized the banking subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well as capitalized, a financial 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. Prompt corrective action provisions are not applicable to bank holding companies. The actual capital amounts and ratios for the Bank are presented below. The capital ratios for the Company are not materially different from those presented below. ACTUAL MINIMUM CAPITAL REQUIREMENT MINIMUM TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS AMOUNT RATIO AMOUNT > RATIO > AMOUNT > RATIO > (dollars in thousands) 32,804 14.1% $ 18,580 8.0% $ 23,225 10.0% 29,895 12.9% $ 9,290 4.0% $ 13,935 6.0% 29,895 9.3% $ 12,912 4.0% $ 16,141 5.0% 30,140 13.3% 27,356 12.1% 27,356 8.8% $ $ $ 18,149 8.0% 9,075 4.0% 12,405 4.0% $ $ $ 22,687 10.0% 13,612 6.0% 15,506 5.0% December 31, 2007 Total Capital to Risk-Weighted Assets Tier 1 Capital to Risk-Weighted Assets Tier 1 Capital to Average Assets December 31, 2006 Total Capital to Risk-Weighted Assets Tier 1 Capital to Risk-Weighted Assets Tier 1 Capital to Average Assets $ $ $ $ $ $ The ability of the Company to pay cash dividends depends on the receipt of dividends from its banking subsidiary. The Company, as the sole shareholder of the banking subsidiary, is entitled to dividends from legally available funds when and as declared by the banking subsidiary’s Board of Directors. In December 2007, the Board of Directors of the Company approved the 2007 Common Stock Repurchase Program, which permits the Company to purchase 30,000 shares of its authorized and issued common stock for a one-year period, expiring on December 13, 2008. The authority may be exercised from time to time and in such amounts as market conditions warrant. Any repurchases are intended to make appropriate adjustments to the Company’s capital structure, including meeting share requirements related to employee benefit plans and for general corporate purposes. The Company is dependent on dividends from its banking subsidiary to fund these share repurchases. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 22 14. EMPLOYEE BENEFITS The Company sponsors a 401(k) profit sharing plan which covers all employees who are at least 21 years of age and who have com- pleted one year of employment. Eligible employees contribute a percentage of their annual compensation to the 401(k) plan and the Company matches a certain portion of employee contributions. In addition, the Company may make discretionary contributions on behalf of employees under the plan. For the years ended December 31, 2007 and 2006, expense attributable to the plan amounted to $580,082 and $501,738, respectively. Included in accrued expenses and other liabilities in the balance sheets at December 31, 2007 and 2006 are liabilities established pursuant to deferred compensation agreements with certain officers of the Company of $660,272 and $538,376, 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 $121,896 and $(121,362) for the years ended December 31, 2007 and 2006, respectively. 15. WARRANTS Warrants to purchase shares of the Company’s common stock at various exercise prices have been granted to certain members of the organizing group, key management, and employees of the Company 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 Company 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. The stock options vest over a three-year period. On January 1, 2006, the Company 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 Company recorded approximately $92,000 and $56,487 of compensation expense during the years ended December 31, 2007 and 2006, respectively. Total compensa- tion expense related to nonvested awards not yet recognized is $130,676 as of December 31, 2007 and is expected to be recognized over a weighted average period of 1.7 years. Under the current plan, the Company granted 450 shares of restricted stock in 2007 with a fair value of $43.95 at grant date. This grant vests over three years and comprises the Company’s nonvested stock awards at December 31, 2007. The Company granted 1,000 shares of restricted stock in 2006 with a fair value of $42.00 at grant date. The grant vested in 2007. At the closing price on December 31, 2007 of $50.30, the total fair value of restricted stock awards vested during 2007 was $50,300. The fair value of warrants granted during 2007 and 2006 was $7.22 and $6.75, 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 2007 2.30% 4.05% 10 Years 6.49% 2006 2.70% 4.64% 10 Years 9.75% The expected volatility is based on historical volatility of a peer group of similar entities. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 23 15. WARRANTS (concluded) A summary of warrant activity as of December 31, 2007 and changes during the year then ended is presented below: Outstanding at beginning of year Granted Exercised Forfeited or expired Outstanding at December 31, 2007 Exercisable at December 31, 2007 WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE AGGREGATE INTRINSIC VALUE 36.51 51.86 29.99 35.50 43.28 38.69 $ $ $ 157,403 282,380 239,103 6.9 years 4.8 years SHARES 57,666 12,950 (7,750) (22,641) 40,225 20,592 $ $ $ The aggregate intrinsic value of warrants exercised during 2007 and 2006 was $140,306 and $12,575, respectively. Information pertaining to warrants outstanding at December 31, 2007 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 $32.00 - $41.84 $43.95 - $53.52 Outstanding at end of year 27,925 12,300 5.7 years 9.7 years 40,225 6.9 years $ $ 39.32 52.28 43.28 20,592 – 20,592 $ $ 38.69 – 38.69 The remaining number of warrants available to be granted was 53,200 and 44,500 at December 31, 2007 and 2006, 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 2007 2006 $ $ $ 286,184 288,797 319,481 608,278 $ $ $ 238,571 767,767 371,532 1,139,299 NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 24 17. RELATED PARTY TRANSACTIONS The Company has had, and may be expected to have in the future, 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 $1,348,200 and $1,715,808 at December 31, 2007 and 2006, respectively. During January 2007, the banking subsidiary entered into a long-term lease with a company whose sole owner is a director and share- holder of the Company. This lease is for space that is the new headquarters for the Bank’s Ledyard Financial Advisors division. The lease has an initial term of 10 years and calls for initial annual payments of $320,000. The lease has three five-year options to renew. 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 Company’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 Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values. 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 approximates 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. NOTES to CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 25 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 Company’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 Company’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 Company’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 2007 2006 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE $ 31,456,379 30,480,552 22,134,195 $ 31,456,379 30,480,552 22,004,906 $ 41,645,016 19,704,071 27,480,904 $ 41,645,016 19,704,071 26,850,543 1,091,100 228,779,037 1,295,380 1,091,100 229,196,631 1,295,380 1,092,650 218,868,531 1,081,957 1,092,650 219,551,650 1,081,957 276,933,492 14,759,226 278,223,037 14,759,226 271,142,194 17,389,539 272,900,503 17,389,539 1,551,455 228,928 1,550,825 228,928 3,214,085 209,221 3,373,807 209,221 BOARD of DIRECTORS, SENIOR MANAGEMENT and OFFICERS NOTES to FINANCIAL STATEMENTS 26 BOARD OF DIRECTORS Douglas G. Britton President, Britton Lumber Co., Inc., and Secretary, Ledyard Financial Group/Ledyard National Bank Adam M. Keller Executive Vice President, Finance and Administration, Dartmouth College Deirdre Sheerr-Gross, AIA Principal, Sheerr and White, Residential Architecture Cotton M. Cleveland President, Mather Associates Richard W. Couch, Jr. Chairman, President and Chief Executive Officer, Hypertherm, Inc L. Joyce Hampers Attorney, Former U.S. Assistant Secretary of Commerce and President, Joymark, Inc. Dennis E. Logue Steven Roth Professor of Management Emeritus, Tuck School of Business, Dartmouth College and Chair, Ledyard Financial Group/Ledyard National Bank Frederick A. Roesch Retired, Senior Vice President, Citigroup/Citibank and Co-Vice Chair, Ledyard Financial Group/ Ledyard National Bank Andrew A. Samwick Professor of Economics and Director, Nelson A. Rockefeller Center at Dartmouth College Bayne Stevenson President, Bayson Company Kathryn G. Underwood President and Chief Executive Officer, Ledyard Financial Group/Ledyard National Bank James W. Varnum Retired President, Dartmouth-Hitchcock Alliance and Mary Hitchcock Memorial Hospital and Co-Vice Chair, Ledyard Financial Group/ Ledyard National Bank SENIOR MANAGEMENT Kathryn G. Underwood President and Chief Executive Officer, Ledyard Financial Group/Ledyard National Bank Martha P. Candon Senior Vice President and Senior Retail Banking Officer, Ledyard National Bank Darcy D. Rogers Senior Vice President and Chief Operations Officer, Ledyard National Bank Gregory D. Steverson Executive Vice President and Chief Financial Officer, Ledyard Financial Group/Ledyard National Bank Mark S. Clough Senior Vice President and Senior Loan Officer, Ledyard National Bank Darlene E. Romano Senior Vice President, Human Resources and Finance, Ledyard National Bank Robert T. Boon Executive Vice President and Managing Director, Ledyard Financial Advisors/Ledyard National Bank Jeffrey H. Marks Senior Vice President, Marketing and Client Experience Officer, Ledyard National Bank D. Rodman Thomas Senior Vice President and Chief Compliance Officer, Ledyard Financial Advisors/Ledyard National Bank OFFICERS / Ledyard National Bank Jason E. Achmoody Office Manager, West Lebanon Constance B. Aldrich Investment Support Manager, Ledyard Financial Advisors Margie L. Arbuckle-Morrill Vice President and Financial Advisor, Ledyard Financial Advisors Grady L. M. George Vice President and Financial Advisor, Ledyard Financial Advisors Douglas C. Gross Vice President and Tax and Financial Planning Officer, Ledyard Financial Advisors William R. Hatch Vice President and Commercial Loan Officer Donna L. Batchelder Assistant Vice President and Client Services Manager, Ledyard Financial Advisors Carol A. Kubler Office Manager, Hanover Betty J. Benson Assistant Vice President and Central Operations Officer Gail M. Broughton Assistant Vice President and Office Manager, Norwich Alison A. Bruce Compliance Administration Officer Terri L. Crate Assistant Vice President and Loan Administration Officer Claudette M. Duhamel Assistant Vice President and Office Manager, New London Michelle M. LeClair Assistant Vice President and Commercial Loan Officer Katherine J. Lucier Assistant Vice President and Office Manager, Lebanon Dennis B. Mitchell Senior Vice President, Business Development, Ledyard Financial Advisors/Ledyard National Bank Jon E. Molesworth Vice President and Senior Portfolio Manager, Ledyard Financial Advisors Catherine E. Murray Vice President and Mortgage Loan Officer Valerie J. Nevel Vice President and Financial Advisor, Ledyard Financial Advisors Christopher C. Ng Vice President and Portfolio Manager, Ledyard Financial Advisors Victoria L. Peiffer Financial Advisor, Ledyard Financial Advisors Kevin J. Raleigh Senior Vice President and Senior Commercial Loan Officer Debra W. Sias Vice President and Commercial Loan Officer David C. Skewes Vice President and Mortgage Loan Officer Donna J. St. Peter Personal Banking Officer Gail E. Trottier Assistant Vice President and Personal Banking Officer Joel T. Underwood Senior Vice President and Chief Investment Strategist, Ledyard Financial Advisors Deanna C. Wilson Vice President and Financial Advisor, Ledyard Financial Advisors As of March 13, 2008 STAFF Ledyard National Bank FULL-TIME STAFF Stacey A. Alexander Customer Service Representative 27 Elizabeth T. Knox Float Teller, Customer Service Representative Betty J. Renault Wire Transfer and Operations Assistant Thomas M. Berry Data Processing and Information Systems Manager Ashley E. Lafountain Customer Service Representative Ashley K. Ricker Teller Supervisor Robin M. Cantlin Commercial Loan Processor Amanda S. Chase Customer Service Representative Julie A. Courtemanche Investment Support Specialist, Ledyard Financial Advisors Debra J. Curtis Client Services Assistant, Ledyard Financial Advisors Karolina Domurad Customer Service Representative Cara J. Dyke Office Supervisor Kachina Earthrowl Customer Service Representative Deborah J. Farnsworth Finance Specialist and Training Coordinator Michelle J. Fellows Commercial Loan Processor Brent A. Fraser Mortgage Processor Brian S. Fraser Office Manager, Lyme Anna M. Gayhart Customer Service Representative Leo L. Goyette, Jr. Customer Service Representative Carrie Anne Hamel Customer Service Representative, Receptionist Doreen J. Holmes Customer Service Representative Jillian K. Ireland Customer Service Representative Jeanine M. Leathe Account Assistant, Ledyard Financial Advisors Tracy W. Lombardi Community Relations and Assistant Marketing Coordinator Karrie L. Longley Teller Supervisor Amy L. Martin Customer Service Representative Deborah J. McDanolds Teller Supervisor Lisa Kathleen Murch Mortgage Loan Processor Rebecca L. Newhall Customer Service Representative Cortney Ann Nichols Central Operations Assistant Tammy L. Norway Client Services Assistant, Ledyard Financial Advisors Michael P. O’Leary Customer Service Representative Lillian R. Olsen Customer Service Representative Robin L. Olsen Customer Service Representative Jennifer J. Parker Customer Service Representative Erica C. Paronto Proof Operations Assistant Emilie A. G. Perry Customer Service Representative Jennifer M. Rockwell Administrative Assistant and Office Manager, Ledyard Financial Advisors Roxanne M. Russell Tax and Financial Planning Services Assistant, Ledyard Financial Advisors Sarah S. Salo Assistant to the President and Chair 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 Monica M. Tuckerman Operations and Administrative Assistant Loretta V. Zuger Account Administrator, Ledyard Financial Advisors PART-TIME STAFF Linda P. Bedford Commercial Loan Credit Administrator Kathryn S. Walker Account Administrator, Ledyard Financial Advisors As of March 13, 2008 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 Robert T. Boon Executive Vice President and Managing Director, Ledyard Financial Advisors/Ledyard National Bank L. Joyce Hampers, J.D., L.L.M. Attorney, Former U.S. Assistant Secretary of Commerce and President of Joymark, Inc. 28 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 Financial Group/ Ledyard National Bank Mado R. Macdonald Executive Officer, Emerita, Tuck School of Business, Dartmouth College 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. J. Jeffrey Maloney, CLU, ChFC Abacus Consulting, LLC Richard H. Showalter, Jr., C.P.A. Chief Financial Officer, Dartmouth-Hitchcock Ann D. McLaughry Vice President, McLaughry Associates, Inc. and President, Upper Valley Real Estate Services Richard S. Shreve, M.B.A. Adjunct Professor of Business Ethics, Tuck School of Business, Dartmouth College Robert D. McLaughry Chairman, McLaughry Associates, Inc. Nancy Hayward Mitchell Retired Chairman, Dartmouth Travel 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 Financial Group/ 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 D. Rodman Thomas, J.D. Senior Vice President and Chief Compliance Officer, Ledyard Financial Advisors/Ledyard National Bank Joel T. Underwood Senior Vice President and Chief Investment Strategist, Ledyard Financial Advisors/Ledyard National Bank Kent Womack, M.B.A., Ph.D. Associate Professor of Finance, Tuck School of Business, Dartmouth College As of March 13, 2008 29 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. 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 Bruce Pacht Executive Director, Twin Pines Housing Trust Nancy S. Dwight Chairman, Dwight Partners, 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 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 Larry 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 March 13, 2008 LEDYARD NATIONAL BANK OFFICES HANOVER: 38 Main Street | 603-643-2244 | Lobby, Walk-Up and ATM 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 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 INTERNET BANKING: www.ledyardbank.com KWIKTEL PHONE 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 LEDYARD FINANCIAL ADVISORS OFFICES HANOVER: 2 Maple Street | 603-643-0044 NEW LONDON: 178 County Road | 603-526-7725 

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