Ledyard Financial Group, Inc. Annual Report 2008

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FY2008 Annual Report · Ledyard Financial Group, Inc.

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a n n u a l r e p o r t

20
08

strong relationships, personal service and a commitment to community.

Table of Contents

Letter from the CEO & Board Chair. . . . .page 2

Ledyard Financial Group. . . . .page 5

Ledyard National Bank. . . . .page 8

Ledyard Financial Advisors. . . . .page 10

Community Support......page 12

Management’s Financial Discussion. . . . .page 14

Independent Auditor’s Report. . . . .page 17

Balance Sheets. . . . .page 18

Statement of Condition. . . . .page 19

Notes to Financial Statements. . . . .page 20

Directors & Senior Management . . . . .page 40

(cid:2)

ON THE COVER:

Photograph of the Ledyard Bridge
by John Douglas, Flying Squirrel and
the Hanover Area Chamber of Commerce.

All other photos by Jon Gilbert Fox,
with the exception of the courtesy photos
on page 13.

Financial Highlights

Years-ended December 31,

2008

2007

2006

2005

2004

(dollars in thousands, except per share data)

Financial Condition Data

Assets

Investments

$ 363,345

$ 325,803

$ 320,230

$285,495

$ 268,869

94,014

53,706

Net Loans, including loans held for sale

226,405

228,879

Deposits

Federal Home Loan Bank Advances

Shareholders’ Equity

295,586

276,933

21,868

31,283

1,551

30,517

48,278

218,869

271,142

3,214

27,271

60,601

194,893

240,828

8,857

24,391

65,467

175,189

227,614

11,981

21,849

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

12,892

$ 12,480

$ 12,099

$ 11,486

$ 10,053

3,123

6,449

705

6,754

525

6,282

780

5,834

325

5,330

13,150

12,306

11,894

11,354

10,452

1,040

2,028

2,361

3,862

2,176

3,787

1,748

3,439

1,593

3,013

1.99

1.24

62%

3.80

1.16

31%

30.61

29.95

3.75

1.08

29%

3.43

0.98

29%

26.99

$ 24.16

3.03

0.91

30%

21.96

1,021,510

1,018,996

1,010,246

1,009,746

994,895

0.62%

6.68%

8.61%

2.13%

1.20%

1.31%

1.25%

1.20%

13.37%

14.66%

14.85%

14.56%

9.37%

1.45%

8.52%

1.27%

8.54%

1.21%

8.13%

1.35%

Letter from the Ceo and Board Chair

TO OUR FELLOW OWNERS, OUR LOYAL CUSTOMERS

AND MEMBERS OF OUR COMMUNITY:

gainst the challenging backdrop of 2008’s economic troubles, we’re pleased to report that Ledyard

Financial Group performed well. Ledyard’s total revenue was at an all-time high and we paid a

record dividend to our shareholders. Additionally, Ledyard Financial Advisors’ investment results

outperformed all relative national equity indexes for the year – one reason why we added new

accounts with an aggregate market value of nearly $80 million.

We demonstrated strength and resilience as the year progressed and economic conditions

worsened. Our regulatory capital ratios remained well in excess of the amount needed to be

considered well-capitalized, the highest designation possible. Ledyard proactively took steps to

mitigate the effects of rising delinquencies and foreclosures on borrowers and others. Additionally,

we took part in new FDIC programs that were designed to promote liquidity and contain other

forms of turmoil that threatened all aspects of our economy. One such program was the Transaction

Account Guarantee Program that federally secured certain types of accounts for their entire amount.

Other important aspects of our work are shared in the following pages of this annual report.

Ledyard’s true distinction continues to be its position in the community, which ultimately defines

its place in the banking landscape. Ledyard truly incorporates its employees into the community.

It encourages all employees to play an active role in developing and guiding the bank’s future.

The niche we occupy is even more visible in today’s economic environment. As larger banks

continue to merge and turn themselves into financial conglomerates, members of our communities

perceive us still as a personal, neighborhood organization. We are small enough to hear all of our

customers’ needs and expectations, practically in real-time – and we are strong enough to respond

to those needs with appropriate solutions. Our culture may best be defined by the notion of

“leadership every day.” It influences our training, job development and hiring practices.

In all of these activities, and many others that we do not have the space to mention, we

worked towards our vision of being the financial services institution of choice in each community

we serve. In our daily work, we are focused more than ever on making a difference in the lives

of our customers, shareholders, employees and neighbors.

Letter from the Ceo and Board Chair (concluded)

We also welcomed our new Senior Vice President and Senior Loan Officer, Dan Stannard. In this

position, Dan is responsible for managing the bank’s lending efforts, including commercial, residen-

tial mortgage and consumer lending. The importance of a strong Commercial Banking Team and

loan department has never been more important and we’re confident that Dan will achieve much

success in his new role.

On a final note pertaining to 2008, it comes as no surprise that it was a challenging year – for

the US and global economy, the financial sector, and for banks, in particular. As we reflect on the

developments of the last 12 months and on our successes, we recognize the importance of striking

the right balance between solving immediate challenges and looking to the future for long term

opportunities. We have truly created that balance and believe that we will emerge from these diffi-

cult times stronger than ever.

Going forward, Ledyard has a clear and focused strategy. Strict management of capital, costs

and risks will continue to be a top priority. We will continue to enhance our banking businesses

and build upon our competitive advantage in Investment, Tax & Wealth Management.

We thank you for your support and look forward to strengthening the partnerships we’ve built

with you, our shareholders and customers, in 2009. (cid:2)

Kathryn Underwood
President & CEO,

Ledyard Financial Group/

Ledyard National Bank

Dennis E. Logue
Chair, Ledyard Financial Group/

Ledyard National Bank

Kathryn G. Underwood
President and Chief Executive
Officer,
Ledyard Financial Group/
Ledyard National Bank

Dennis E. Logue
Chair,
Ledyard Financial Group/
Ledyard National Bank

Board of Directors

FRONT ROW, SEATED LEFT TO RIGHT:

BACK ROW, LEFT TO RIGHT:

Frederick A. Roesch
Retired, Senior Vice President,
Citigroup/Citibank and Co-Vice Chair,
Ledyard Financial Group/Ledyard National Bank

James W. Varnum
Retired President, Dartmouth-Hitchcock
Alliance & Mary Hitchcock Memorial
Hospital and Co-Vice Chair,
Ledyard Financial Group/Ledyard National Bank

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

Andrew A. Samwick
Professor of Economics and Director,
Nelson A. Rockefeller Center
at Dartmouth College

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

Cotton M. Cleveland
President, Mather Associates

Kathryn G. Underwood
President and Chief Executive Officer,
Ledyard Financial Group/
Ledyard National Bank

Richard W. Couch, Jr.
Chairman, President and Chief Executive
Officer, Hypertherm, Inc.

NOT PICTURED:

Bayne Stevenson
President, Bayson Company

Deirdre Sheerr-Gross
Principal, Sheerr and White
Residential Architecture

ledyard financial group

Strong relationships, personal service and commitment to community.

edyard Financial Group, the holding company for Ledyard National Bank, remains true

to the bank’s founding principles established in 1991. Those principles include delivering

unparalleled personal service on every level, developing and maintaining strong relationships

with customers and shareholders, as well as empowering employees to fulfill their potential.

In essence, we strive to exceed our commitment to the communities we serve.

In the years since our founding, Ledyard has evolved from a small local bank to become

a more sophisticated community-based financial organization that offers a relationship based

experience to individuals and businesses. We achieve superior results by coordinating all

aspects of our clients’ finances and providing comprehensive financial advice. Our updated

structure and focus puts Ledyard in the best possible position to deliver satisfying returns

to our shareholders.

Over the years, we have nurtured our commitment to community, expanding our

presence and involvement within the region so that our future has become mutually

entwined with that of the broader community. We have a vested interest in contributing to

the economic wellness and vibrancy of our communities, so we have consistently worked

hard to strengthen that bond. In truth, Ledyard employees see themselves as far more than

just “bank employees” performing a job. We truly strive to become life-long financial

partners with our customers and provide the expertise that will positively impact them and

our communities.

“Our key business imperative is simple:

If we make our clients happy,

shareholder expectations

and rewards will follow.”

ledyard financial group (concluded)

We believe deeply in our mission statement and refer to it often in our decision-making

processes. At Ledyard, we experience much satisfaction from the knowledge that our work

impacts so many different constituents. For example,

■ As a community bank for personal banking customers, we have long committed to

helping people make the most important purchase of their lives – their homes – in

ways that are in their best interest.

■ As a resource for local small businesses – the lifeblood of our New Hampshire economy –

we partner with each one to deliver customized solutions. We believe in sharing the ups and

downs that are inherent in running these types of ventures.

■ As wealth managers and advisors, we collaborate with our clients to create financial strategies

that best suit their needs and aspirations.

■ As an employer, we provide employees a work environment that is challenging, nurturing,

educational and rewarding.

■ As an investment for our shareholders, we deliver consistent and superior returns

even in difficult economic times.

Ledyard is financially sound and remains a strong, stable and loyal financial partner to

our colleagues, friends and neighbors. Using local deposits, we continue to invest in our

clients’ futures by helping them with milestones such as buying a new home or funding an

area business. Further, our active involvement in community service is an integral part of our

investment strategy and helps to make the Upper Valley/Lake Sunapee region a better place

to live. Ledyard exemplifies true community based banking. We believe that by helping our
customers plan well, they’ll live well, too. (cid:2)

senior management team

SEATED LEFT TO RIGHT:

STANDING LEFT TO RIGHT:

Gregory D. Steverson
Executive Vice President & Chief Financial Officer,
Ledyard Financial Group/Ledyard National Bank

Daniel X. Stannard, Jr.
Senior Vice President & Senior Loan Officer,
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

D. Rodman Thomas
Senior Vice President & Chief Compliance Officer,
Ledyard Financial Advisors, Ledyard National Bank

Darlene E. Romano
Senior Vice President, Human Resources & Finance,
Ledyard National Bank

Kathryn G. Underwood
President & Chief Executive Officer,
Ledyard Financial Group/Ledyard National Bank

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

“We strive to establish ourselves as

key financial partners

in the growth of our communities.”

ledyard national bank

Strength, stability, community-focused banking.

uilding relationships. Investing in local families and businesses. Making a difference in the

communities where we live and work. That’s what Ledyard National Bank is all about.

Individuals and families alike have come to rely on us to provide the most relevant financial

advice, or even to coordinate the overall management of their finances. This is particularly

important in tough economic times. Others rely on us for their mortgages, home equity loans,

checking and savings accounts, investments and other banking solutions. Local businesses look to

us for the loans and financial services they need to thrive and create jobs. We offer the latest in

banking technology for greater convenience. And we continually improve upon these offerings to

maximize the client experience.

Ledyard’s key business philosophy is to develop meaningful client relationships that grow

through the years. This has provided us with the financial strength to maintain our momentum and

adjust our priorities to match the ever-changing economic landscape. In the last year Ledyard, once

again, partnered with Toby and Patty Fried, owner’s of Lou’s Restaurant in downtown Hanover to

help them realize a long-standing vision – to own, in addition to the restaurant, the property upon

which it was built. Lou’s Restaurant, an institution on Main Street since the 1950’s, has been a

Ledyard Bank customer since we opened our doors nearly 20 years ago. Our strong relationship

with the Fried’s as well as our understanding of the dynamics in our community, made us well

suited to finance the purchase of the condominium unit occupied by Lou’s Restaurant and help

grow their business. This transaction, defined by our focus on relationships and results, enabled

the Frieds to reduce, as well as better control, their expenses simply by taking ownership of the

PICTURED AT RIGHT:
Daniel Emanuele,
Vice President & Commercial Banker,
and Alison Pearsons,
Loan Credit Administration Officer,
sharing commercial loan terms
with a business banking client.

PICTURED AT LEFT:
Gail Trottier,
Assistant Vice President
& Personal Banking Officer,
reviewing investment options
with a bank client.

strong

relationships

ledyard national bank (concluded)

property. We viewed the purchase as a logical next step for Lou’s ownership after their 2001

renovation of the restaurant, for which we provided the line of credit and acted as consultative

partners as the work progressed. And because the restaurant also keeps its deposit account with

Ledyard, we are best positioned to reference a more holistic picture of Lou’s and offer our services

based on that information.

Today’s environment calls for providing our customers with a safe haven for their money

through a range of federally insured accounts. It also requires adhering to our longstanding

lending practices and putting money back to work in our communities. Regardless of the

challenges before us, we are flexible enough to make critical and timely adjustments that

ensure our clients’ best interests.

Ledyard’s experienced Commercial Banking Team is expert at guiding its clients through

financial booms as well as through struggling economies. Because we work and reside in the

same community as our customers, we share and understand their needs. This type of background

knowledge is a valuable ingredient in providing solutions that work best for both parties. It helps

us assess the challenges and opportunities that the partnership will bring and strategize ways to

achieve success. One such example is Ledyard’s collaboration with North Branch Construction, a

local, well-known general contractor and construction management company that was founded in

1958. Looking to move from one facility to another and, in the process, expand their physical

footprint, North Branch Construction chose Ledyard to finance the venture. With our financial

support and guidance, they purchased and renovated an existing building, making it more energy

efficient as well as LEED certified. Once the move was complete Ledyard, together with North

Branch, reviewed their business processes to improve efficiencies. Our first recommendation, based

on their location, was the implementation of our Remote Deposit Capture product. It allowed

them to deposit checks at Ledyard without ever leaving their new facility. In essence, we helped

them save the time previously needed to physically take the checks to the branch for deposit.

As 2008 progressed, we offered a variety of relevant financial products and now look forward to

serving North Branch Construction’s needs for years to come.

We also realize that sometimes the greatest value we deliver to our clients is often not by

providing a loan, but by being a non-credit resource. We act, in effect, as a sounding board and

we’re honored that so many clients depend upon us for practical advice and counsel.

We work diligently to expand our financial knowledge base so that we may be an even

stronger resource for our business clients. Addressing issues such as business succession planning

or advising business owners on their other financial needs is all in a days work.

We also believe in constantly expanding our network of business owners and professional

contacts. Often times, simply making a client aware of a new resource or making an introduction

to someone with a particular area of expertise can make a real difference.

We are more than simply a team of commercial bankers. We are a true partner in growth. (cid:2)

ledyard financial advisors

Global experience, expert advice and local service.

edyard Financial Advisors has evolved into a premier wealth management firm providing integrated

investment, tax and wealth management services to affluent individuals and families throughout

the Dartmouth-Lake Sunapee Region. These services are provided by the area’s largest and

most experienced staff of advisors, accountants and portfolio managers utilizing a framework

of potential wealth management issues.

At Ledyard Financial Advisors our sole mission is that of preserving and enhancing our

client’s wealth.

PICTURED AT LEFT:
Dennis Mitchell, CFP®
discussing comprehensive
financial planning with a
prospective client.

PICTURED AT RIGHT:
Valerie J. Nevel,
Vice President & Financial Advisor,
working closely with a client.

personal

service

ledyard financial advisors (concluded)

Our approach to providing investment, tax, and wealth management services is driven by

the needs of our clients and their families. It is our only focus, and we dedicate the time

necessary to evaluate each clients’ current situation and family dynamics. Only then do we develop

a comprehensive program to meet their needs appropriately.

As fiduciaries we are required to give primacy to clients’ interests and adhere to standards

of loyalty and prudence in administering their affairs. In other words, we are duty bound to

consider our clients’ interests before our own and this, combined with regular internal and external

examinations, ensures the highest levels of accountability and trust.

We experienced many extraordinary events in 2008. Navigating through one of the most

difficult market and economic periods in modern times presented our investment strategy team

and portfolio managers with unprecedented challenges. Their experience, research and focus

enabled us to deliver results well above market indexes. Some of the team’s strategic decisions

contributing to this outcome were as follows:

■ Underweighted the financial sector for over a year with levels of only 3-10% versus S&P at 16% or higher

■ Lowered allocations to Europe and emerging markets to less then 8% during the year

■ Increased cash allocation to 15-20%, or twice normal levels

Additionally, Ledyard Financial Advisors completed its first year at our new office building on

Maple Street in Hanover and achieved the following milestones during 2008:

■ Opened 107 new accounts with $79 million in assets

■ Welcomed 7 new associates that increased staffing to 26 advisors, planners, analysts,

portfolio managers, lawyers, accountants and technical support

■ Prepared personal income tax returns for over 20% of our clients

■ Introduced Financial Planning and Insurance Reviews as new services

■ Initiated weekly Market Update and monthly Stock Talk newsletters

We are confident in our 2009 investment strategies and will continue to maintain higher than

normal “cash” levels until other clear opportunities emerge. We are equally confident in our focus

on planning, advice and personal conversations as factors that clearly contribute to client success

and satisfaction. Simply put, no other investment firm matches our array of wealth management
services, depth of experience and local presence. (cid:2)

community support
Now, more than ever, our commitment remains strong.

hrough ongoing, prioritized reinvestment and active participation, Ledyard supports community

organizations throughout the Upper Valley/Lake Sunapee region that make a difference in a wide

spectrum of people’s lives. We understand that our work in this area reflects the values that our

bank was built upon and that we perpetuate to this day.

We are proud to help organizations that support the causes of education, contribute to

improving human services such as the health and well-being of children and adults, provide

community development resources, or advance the arts and humanities.

But our support is not only monetary. As a community bank, we have first hand knowledge

of the difficulties and challenges facing individuals, businesses and, non-profit organizations.

Specific to non-profits, the monetary donations that sustained them in years past have, in large

part, disappeared. Now, more than ever, these local groups need our support. To this end, many

Ledyard employees and board members serve on community boards or donate their time to a

wide variety of area organizations. In 2008, these efforts amounted to over 3,000 volunteer

hours. To further advance these efforts we participated in last year’s Make a Difference Day,

an all-encompassing annual event and national day of helping others. After rigorous research,

we chose seven projects, and more than fifty Ledyard employees and their families participated.

Projects included painting, cleaning, cooking meals for the sick, trail-cutting, community outreach

and preservation of an historic site.

Such community involvement is an integral part of Ledyard’s success. We are proud to give

back to those we serve. (cid:2)

community support (concluded)

PICTURED AT RIGHT:
Ledyard Senior Vice President of
Marketing, Jeff Marks, right, and
Dartmouth College Executive
Associate AD for Varsity Sports,
Brian Austin, left, present
tournament championship trophy
to Dartmouth hockey team
captain, Rob Pritchard.
(Photo courtesy of Mark Washburn.)

PICTURED AT RIGHT:
Ledyard employees
and their family members
volunteer to paint
at Hannah House,
a local non-profit organization,
on Make a Difference Day.
(Photo courtesy of Jennifer Engle.)

PICTURED AT LEFT:
Ledyard Senior Vice President of
Retail Banking, Marty Candon,
right, presents the Innovator of
the Year Award to Marc and Patty
Milowsky, founders of Blue Sky
Restaurant Group at the Hanover
Area Chamber of Commerce
Leadership Awards ceremony.
(Photo courtesy of Kawakahi Amina.)

PICTURED AT LEFT:
At David’s House,
a local non-profit
organization, Ledyard
employees volunteer
to cook for guests on
Make a Difference Day.
(Photo courtesy of Bob Murch.)

a commitment

to community

management’s financial discussion

eview of Financial Statements

The discussion and analysis which follows focuses on the factors affecting the Company’s financial

condition at December 31, 2008 and 2007 and its results of operations for the years ended December 31,

2008 and 2007. The Financial Statements and Notes to the Financial Statements should be read in

conjunction with this review.

Statement of Income

Our results for the year reflect the strength in our two basic businesses, community banking and

wealth advisory services. We continued to invest in both during 2008 in terms of people, facilities and

systems. Total revenue for the year ended December 31, 2008 was a record high of $19,340,889,

compared to $19,234,820 for the same period in 2007. Net interest income for the year ended December

31, 2008 was at an all-time high of $12,891,820, compared to $12,479,924 for the same period in 2007.

Net income was $2,027,744, or $1.99 per share for the twelve months ended 2008 as compared to

$3,861,653, or $3.80 per share for 2007, a decrease of $1,833,909, or 47.49%. The increase in our

allowance for loan losses combined with the increased costs associated with the new headquarters for

Ledyard Financial Advisors were the primary contributors to our income being down for the year.

Interest and fees on loans totaled $14,818,873 for the year ended December 31, 2008, as compared

to $16,079,947 for 2007. This decrease of $1,261,074, or 7.84%, was due to a decrease in interest rates

that occurred during 2008. Investment income for the year ended December 31, 2008, totaled

$3,688,423 as compared to $3,870,930 for 2007, a decrease of $182,507, or 4.72%.

The Company’s interest expense on deposits was $4,868,601 for the year ended December 31, 2008,

as compared to $6,782,369 for the year ended December 31, 2007, a decrease of $1,913,768, or

28.22%. Deposit rates were lowered through out the year to reflect the changes in interest rates resulting

in lower interest paid. Interest expense on borrowed funds increased $58,291, or 8.47% for the year

ended December 31, 2008 totaling $746,875 as compared to $688,584 at December 31, 2007. The

increase was primarily due to the increase in borrowings from the Federal Home Loan Bank.

During 2008, the Company added $3,123,000 to the allowance for loan losses and realized net

charge-offs of $1,557,503 resulting in an allowance for loan losses totaling $4,925,500, or 2.13% of

total loans. Like most community banks Ledyard saw an increase in charge-offs and non-performing

loans during 2008, resulting in an increase in the allowance. The determination of an appropriate level

of allowance for loan losses (the “allowance”), is based on management’s judgment of the adequacy

of the allowance based on various factors and a review of the Company’s loan portfolio. An evaluation

net income
(in thousands)

earnings
per share

(in dollars)

TOTAL
REVENUE
(in thousands)

$4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

$25,000

20,000

15,000

10,000

5,000

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

management’s financial discussion (continued)

of the adequacy of the allowance is performed each quarter by management. Management believes that

the allowance at December 31, 2008 was appropriate given the current economic conditions in the

Company’s service area.

Non-interest income totaled $6,449,069 in 2008 as compared to $6,754,146 in 2007, a decrease of

$305,077, or 4.52%. Income from the Company’s Ledyard Financial Advisors Division totaled $4,895,381,

down from $5,026,952 in 2007, a decrease of $131,571, or 2.62%. This decrease in revenue was a result

of market conditions during 2008. Service fees and other non-interest income decreased slightly by

$173,506 during 2008. Non-interest expense totaled $13,149,945 for 2008 as compared to $12,305,817

in 2007, an increase of $844,128, or 6.86%.

Financial Condition

At year-end, total assets were $363,345,236 compared to $325,805,353 at December 31, 2007, an

increase of $37,539,883, or 11.52%. The change in assets consisted primarily of a decrease of $2,373,882

in net loans, including loans held for sale and an increase of $33,391,673 in cash and cash equivalents,

securities available-for-sale and held-to-maturity (“investments”).

The Company maintains investments in fed funds sold 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 increased $33,391,673, or

39.72%. This increase consisted of a decrease to cash and cash equivalents of $5,998,156 and increases

in securities available for sale of $21,646,610 and securities held to maturity of $17,743,219. During

2008, the Company purchased $56,620,331 of available-for-sale and held-to-maturity securities and

realized proceeds from maturities and paydowns of available for sale and held to maturity securities

totaling $17,355,996.

The Company provides loans to customers primarily located within its geographic market area.

Net loans, including loans held for sale, totaled $226,405,155 at December 31, 2008, a $2,373,882,

or 1.04% decrease from a year ago. This decrease reflects the general slow down in lending activity due

to economic conditions.

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 Company focuses on lending to

financially-sound small and medium-sized business customers within its geographic marketplace.

Total commercial loans decreased by $6,634,758, or 4.57%, during 2008.

Ledyard Financial Advisors
gross income
(in thousands)

total ASSETS
(in thousands)

net loans
including loans held for sale
(in thousands)

$6,000

5,000

4,000

3,000

2,000

1,000

$400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

$400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

management’s financial discussion (concluded)

Residential real estate loans consist of loans secured by one-to-four family residences. The Company

usually retains adjustable-rate mortgages in its portfolio and will generally sell fixed-rate mortgages.

Residential real estate loans increased by $4,190,296, or 5.15%, in 2008.

Consumer loans are originated by the Company 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 increased by $989,601, or

19.20%, in 2008.

Other assets totaled $7,194,460 at December 31, 2008 as compared to $2,227,491 at December

31, 2007. The net increase of $4,966,969 can be attributed to bank owned life insurance purchased

during 2008. This insurance is a tax-free method for funding employee benefits.

Deposits continue to represent the Company’s primary source of funds. In 2008, total deposits

increased by $18,652,078, or 6.74% over 2007, ending the year at $295,585,570. Comparing year-end

balances in 2008 to 2007, demand deposits increased by $4,510,915, NOW accounts decreased by

$1,495,800, certificates of deposit increased by $3,256,081 and money market and savings accounts

increased by $12,380,882.

Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLB,

the Company purchases federal funds and sells securities under agreements to repurchase. Total

borrowings were $36,295,903 at December 31, 2008 compared to $16,310,681 at December 31, 2007,

an increase of $19,985,222. The borrowings were distributed between securities sold under agreements to

repurchase and advances from the Federal Home Loan Bank. In addition to the liquidity sources discussed

above, the Company 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 Company believes that the level of liquidity is sufficient to meet current and future funding require-

ments.

Shareholders’ equity was $31,283,345 on December 31, 2008 compared to $30,517,338 on

December 31, 2007, an increase of $766,007. The increase was primarily attributable to net income of

$2,027,744 less $1,267,222 in cash dividends to the Company’s shareholders and a decrease of $223,805

from the repurchase of Company stock. The Company’s book value per share on December 31, 2008 was

$30.61 per share based on 1,021,510 shares outstanding, an increase of $0.66 per share from
a year earlier. (cid:2)

total
deposits
(in thousands)

book value
per share
(in dollars)

shareholders’
equity
(in thousands)

$400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

$35

$35,000

30,000

25,000

20,000

15,000

10,000

5,000

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

Gregory D. Steverson
Executive Vice President,
Chief Financial Officer,
Ledyard Financial Group/
Ledyard National Bank

independent auditors’ report

BOARD of DIRECTORS and SHAREHOLDERS
LEDYARD FINANCIAL GROUP, INC. and SUBSIDIARY

e have audited the accompanying consolidated balance sheets of Ledyard Financial Group, Inc. and

Subsidiary (the Company) as of December 31, 2008 and 2007, and the related consolidated state-

ments 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 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, 2008 and 2007, 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 18, 2009

CONSOLIDATED BALANCE SHEETS

December 31, 2008 and 2007

ASSETS
Cash and due from banks
Federal funds sold

Total cash and cash equivalents

Securities available-for-sale
Securities held-to-maturity

Nonmarketable equity securities

Loans held for sale

2008

2007

25,428,627
29,596

7,931,388
23,524,991

25,458,223

31,456,379

52,127,162
39,877,414

30,480,552
22,134,195

2,010,900

1,091,100

832,000

200,000

Loans receivable, net of allowance for loan losses of $4,925,500

in 2008 and $3,360,003 in 2007

225,573,155

228,579,037

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

1,325,024

8,946,898

7,194,460

1,295,380

8,341,219

2,227,491

$ 363,345,236

$ 325,805,353

51,383,486
46,278,989
110,456,277
14,154,479
24,500,517
48,811,822
295,585,570

14,427,836
21,868,067
180,418

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

Total liabilities

332,061,891

295,288,015

Commitments and contingencies (Notes 5, 11, 12, 13, 14 and 15)

Shareholders’ equity

Common stock, $1.00 par value; 5,500,000 shares authorized;
1,021,510 and 1,018,996 shares issued at December 31,
2008 and 2007, respectively

Additional paid-in capital
Treasury stock, at cost; 5,500 shares at December 31, 2008
Retained earnings
Accumulated other comprehensive income

Total shareholders’ equity

1,021,510
9,733,765
(223,805)
20,508,054

243,821

1,018,996
9,577,926
–
19,747,532
172,884

31,283,345

30,517,338

$ 363,345,236

$ 325,805,353

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS of INCOME
Years Ended December 31, 2008 and 2007

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

2008

2007

14,818,873
3,376,241
312,182

16,079,947
2,246,570
1,624,360

18,507,296

19,950,877

4,868,601
746,875

5,615,476

6,782,369
688,584

7,470,953

12,891,820

12,479,924

3,123,000

705,000

Net interest income after provision for loan losses

9,768,820

11,774,924

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

4,895,381
912,925
640,763

6,449,069

7,212,227
2,732,058
3,205,660

5,026,952
1,122,831
604,363

6,754,146

6,852,143
2,060,396
3,393,278

13,149,945

12,305,817

3,067,944

1,040,200

2,027,744

1.99
1.98
1,020,926

$
$

6,223,253

2,361,600

3,861,653

3.80
3.77
1,016,331

$
$

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS’ EQUITY
Years Ended December 31, 2008 and 2007

COMMON
STOCK

ADDITIONAL
PAID-IN
CAPITAL

TREASURY
STOCK

ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
INCOME (LOSS)
EARNINGS

TOTAL

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

Stock warrants exercised,

–

92,000

8,750 shares

8,750

206,548

Balance, December 31, 2007

$ 1,018,996

9,577,926

Comprehensive income

Net income

Change in net unrealized

appreciation on securities
available-for-sale, net
of tax of $36,543

Total comprehensive

income

Cash dividends paid,
$1.24 per share

Stock repurchase (5,500 shares)

Fair value of stock warrants
vested during the year

Stock warrants exercised,

–

80,960

2,514 shares

2,514

74,879

–

3,861,653

–

3,861,653

–

(223,805)

–

258,277

3,861,653

258,277

4,119,930

(1,180,885)

–

(1,180,885)

92,000

215,298

19,747,532

172,884

30,517,338

2,027,744

–

2,027,744

–

70,937

2,027,744

70,937

2,098,681

(1,267,222)

–

(1,267,222)

(223,805)

80,960

77,393

Balance, December 31, 2008 $ 1,021,510 $ 9,733,765 $

(223,805) $ 20,508,054

243,821 $31,283,345

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS of CASH FLOWS
Years Ended December 31, 2008 and 2007

Cash flows from operating activities

Net income
Adjustments to reconcile net income to net cash

provided by operating activities

Depreciation and amortization or accretion
Provision for loan losses
Deferred income tax benefit
Fair value of stock warrants vested during the year
Increase in accrued interest receivable
(Decrease) increase in accrued expenses and other liabilities
(Decrease) increase in other assets
Net (increase) decrease in loans held for sale

2008

2007

2,027,744

3,861,653

662,687
3,123,000
(741,600)
80,960
(29,644)
(1,863,424)
538,088
(632,000)

643,772
705,000
(353,100)
92,000
(213,423)
982,897
(403,132)
1,602,750

Net cash provided by operating activities

3,165,811

6,918,417

Cash flows from investing activities

Proceeds from maturities of securities available-for-sale
Proceeds from maturities and paydowns of securities held-to-maturity
Net (purchase) redemption of FHLB stock
Purchase of securities available-for-sale
Purchase of securities held-to-maturity
Purchase of bank owned life insurance
Net decrease (increase) in loans to customers
Purchase of premises and equipment

10,070,870
7,285,126
(919,800)
(31,539,751)
(25,080,580)
(5,000,000)
82,882
(1,286,380)

6,891,222
5,270,647
1,550
(17,277,463)
–
–
(12,218,256)
(307,522)

Net cash used by investing activities

(46,387,633)

(17,639,822)

Cash flows from financing activities

Net increase in deposits
Proceeds from long-term FHLB borrowings
Repayment of long-term FHLB borrowings
Net decrease in securities sold under agreements to repurchase
Purchase of treasury stock
Proceeds from exercise of stock warrants
Cash dividends paid on common stock

18,652,078
21,500,000
(1,183,388)
(331,390)
(223,805)
77,393
(1,267,222)

5,791,298
–
(1,662,630)
(2,630,313)
–
215,298
(1,180,885)

Net cash provided by financing activities

37,223,666

532,768

Net decrease in cash and cash equivalents

(5,998,156)

(10,188,637)

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

Non-cash transaction: Loan transferred to OREO

31,456,379

41,645,016

25,458,223

5,579,872

1,875,000

200,000

31,456,379

7,451,246

2,391,836

–

The accompanying notes are an integral part of these consolidated financial statements.

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

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 collectability 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

assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of

subjective factors beyond the control of the 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, and federal

funds sold.

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, 2008 and 2007

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 approximating 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 securities 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 collectability of the loan

portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans,

and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value

of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by

charge-offs, net of recoveries.

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

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

acquisition are charged to the allowance for loan losses.

After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant

property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically

performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce

the 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

property 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 manage-

ment’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 outstand-

ing during the year. Potential common stock is considered in the calculation of weighted average shares outstanding for diluted

earnings per share, and is determined using the treasury stock method.

Stock Warrant Plans

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123

(revised 2004), Share-Based Payment. SFAS No. 123(R) requires entities issuing stock options in exchange for services to

measure the fair value of the options at the grant date and to recognize the fair value of those options as expense, generally over

the period in which they vest. On January 1, 2006 the Company adopted the provisions of SFAS No. 123(R) using a modified

prospective application. Using this application, SFAS No. 123(R) applies to options granted or modified in periods beginning after

December 15, 2005. Additionally, compensation cost for the portion of outstanding options for which requisite service has not

been rendered as of the effective date shall be recognized as the service is rendered on or after the effective date.

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, 2008 and 2007

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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.

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty

in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial

statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a minimum recognition threshold

and measurement attributed for the financial statement recognition and measurement of a tax provision taken or expected to

be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2007. The Company

implemented FIN 48 during 2008 and it did not have a material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a

framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about

fair value measurements. This Statement was effective for the Company on January 1, 2008, and it did not have a material

impact on the Company’s financial statements. In February 2008, FASB issued FASB Staff Position (FSP) No. 157-2 which delays

by one year the effective date of SFAS No. 157 for certain types of nonfinancial assets and nonfinancial liabilities. In October

2008, FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.

FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key

considerations in determining the fair value of a financial asset when the market for that financial asset is not active.

Business Segments

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires public companies to report (i)

certain financial and descriptive information about “reportable operating segments”, as defined, and (ii) certain enterprise-wide

financial information. Operating segment information is reported using a “management approach” that is based on the way

management organizes the segments for purposes of making operating decisions and assessing performance.

The Company’s two primary business segments are banking and wealth advisory services.

Banking consists principally of lending to commercial and consumer customers, as well as deposit gathering activities.

Wealth Advisory Services includes, as its principal business lines, financial planning services, investment management services,

personal tax services, trustee services and estate planning.

The Company’s business segment disclosure is based on information generated by an internal profitability reporting system,

which generates information by business segment based on the needs of management responsible for managing those

segments. Allocations between the business segments can be subjective in nature are reviewed and refined as circumstances

warrant. Any allocations that may affect the reported results of any business segment will not affect the consolidated financial

position or results of operations of the Company as a whole. The Company does not allocate assets by segment.

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
The following tables provide selected financial information for the Company’s business segments:

Year ended December 31, 2008:
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income

Year ended December 31, 2007:
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income

BANKING

$ 12,891,820
3,123,000
1,553,688
9,454,327
1,868,181
633,415
1,234,765

$ 12,479,924
705,000
1,727,194
9,087,410
4,414,708
1,675,293
2,739,415

WEALTH
ADVISORY
SERVICES

-
-
4,895,381
3,695,617
1,199,764
406,785
792,980

$ -
-
5,026,952
3,218,407
1,808,545
686,307
1,122,238

TOTAL
CONSOLIDATED

$ 12,891,820
3,123,000
6,449,069
13,149,945
3,067,944
1,040,200
2,027,744

$ 12,479,924
705,000
6,754,146
12,305,817
6,223,253
2,361,600
3,861,653

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 $96,000 and $679,000 as of December 31,

2008 and 2007, 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

2008

AMORTIZED
COST

GROSS
UNREALIZED
GAINS

GROSS
UNREALIZED
LOSSES

FAIR
VALUE

$ 4,499,448
12,621,106
1,502,335
33,134,848

60,870
48,591
48,657
826,294

-
(560,019)
-
(54,968)

$ 4,560,318
12,109,678
1,550,992
33,906,174

Total securities available-for-sale

$ 51,757,737

984,412

(614,987)

$ 52,127,162

Securities Held-to-Maturity
U.S. Government sponsored enterprises
State and municipal
Collateralized mortgage obligations
Mortgage-backed securities

992,146
2,559,875
786,365
35,539,028

47,931
13,377
-
956,801

-
(40,174)
(15,246)
(88,167)

$ 1,040,077
2,533,078
771,119
36,407,662

Total securities held-to-maturity

$ 39,877,414

$ 1,018,109

(143,587)

$ 40,751,936

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

3. SECURITIES (continued)

Securities Available-for-Sale
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

62,653
43,325
43,260
197,647

(499)
(36,413)
-
(48,026)

$ 5,179,681
6,928,071
1,853,219
16,519,581

Total securities available-for-sale

$ 30,218,605

346,885

(84,938)

$ 30,480,552

Securities Held-to-Maturity
U.S. Government sponsored enterprises
State and municipal
Collateralized mortgage obligations
Mortgage-backed securities

$ 1,987,287
2,060,744
785,909
17,300,255

22,476
15,691
-
29,306

(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

At December 31, 2008 and 2007, securities with a carrying value of $44,332,360 and $28,269,949, 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, 2008 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

$ 5,435,059
1,035,919
943,764
9,705,812
17,120,554

$ 5,497,440
1,071,749
938,313
9,162,494
16,669,996

$ 1,820,569
992,146
501,297
238,009
3,552,021

$ 1,833,946
1,040,077
472,205
226,927
3,573,155

mortgage-backed securities

34,637,183

35,457,166

36,325,393

37,178,781

Total

$ 51,757,737

$ 52,127,162

$ 39,877,414

$ 40,751,936

There were no sales of securities available-for-sale or securities held-to-maturity during 2008 and 2007.

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

3. SECURITIES (concluded)
Information pertaining to securities with gross unrealized losses at December 31, 2008 and 2007 aggregated by investment

category and length of time that individual securities have been in a continuous loss position, follows:

December 31, 2008

U.S. Government

LESS THAN 12 MONTHS

12 MONTHS OR GREATER

TOTAL

FAIR VALUE

GROSS
UNREALIZED
LOSSES

FAIR VALUE

GROSS
UNREALIZED
LOSSES

FAIR VALUE