EXHIBIT 99.2
Financial Statements of Landmark Bank
as of December 31, 1996
Page 33
LANDMARK BANK
FINANCIAL REPORT
DECEMBER 31, 1996
A.M. PEISCH & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
- SINCE 1920 -
Page 34
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 22
Page 35
A. M. PEISCH & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
-- SINCE 1920 --
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Landmark Bank
We have audited the accompanying consolidated balance sheets of Landmark Bank
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1996, 1995 and 1994. These consolidated financial statements are
the responsibility of the Bank'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 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 that 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 financial position of Landmark Bank and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
January 23, 1997 /s/ A.M. Peisch & Company
White River Junction, Vermont
Page 36
LANDMARK BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
ASSETS
Cash and due from banks $ 1,934,409 $ 1,743,476
Federal funds sold 965,000 1,980,000
Securities available-for-sale, at fair value 1,795,567 9,523,269
Securities, held-to-maturity (approximate fair value
1996 $3,745,231; 1995 $823,916) 3,799,605 812,357
Loans, net 41,906,937 42,861,602
Premises and equipment, net 2,586,928 2,652,038
Accrued interest receivable 252,498 341,795
Deferred income taxes 456,927 203,312
Investment in real estate 114,504 158,308
Other assets 663,378 486,887
----------- -----------
$54,475,753 $60,763,044
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 3,887,390 $ 3,867,185
NOW accounts 4,269,388 3,694,513
Savings and money market 12,700,403 12,017,434
Time, $100,000 and over 6,517,373 7,986,106
Other time 23,031,257 28,793,757
----------- -----------
50,405,811 56,358,995
Securities sold under repurchase agreements 274,569 303,953
Accrued interest and other liabilities 514,706 209,137
----------- -----------
51,195,086 56,872,085
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A convertible, noncumulative, perpetual
preferred stock, $1 par value, $20 stated
value; 600,000 shares authorized, 59,667
issued and outstanding in 1996, 59,664 in 1995 1 ,094,064 1 ,094,004
Common stock, $1 par value; 865,658 shares
authorized; 354,138 shares issued and
outstanding 354,138 354,138
Additional paid-in capital 2,826,281 2,826,281
Accumulated deficit ( 836,112) ( 332,210)
Unrealized gain on securities
available-for-sale, net 4,468 91,899
Unrealized loss on securities
held-to-maturity, net ( 162,172) ( 143,153)
----------- -----------
3,280,667 3,890,959
----------- -----------
$54,475,753 $60,763,044
=========== ===========
The notes to consolidated financial statements are an integral part of these
statements.
Page 37
LANDMARK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 0F INCOME
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Interest income:
Interest and fees on loans $4,010,642 $4,268,442 $3,196,57^
Interest on investment securities:
U.S. Treasury 110,319 145,979 58,34^
U.S. government agencies and mortgage-backed securities 379,709 530,277 285,109
Interest on federal funds sold 158,813 217,962 52,91^
---------- ---------- ----------
4,659,483 5,162,660 3,592,93^
---------- ---------- ----------
Interest expense:
Interest on deposits 2,716,973 2,847,901 1,373,080
Other interest expense 8,451 9,662 18,478
---------- ---------- ----------
2,725,424 2,857,563 1,391,558
---------- ---------- ----------
Net interest income 1,934,059 2,305,097 2,201,378
Provision for possible loan losses 361,000 205,483 203,013
---------- ---------- ----------
Net interest income after provision for possible loan losses 1,573,059 2,099,614 1,998,365
---------- ---------- ----------
Other income:
Service fees 96,409 89,707 85,877
Net gains on sales of securities available-for-sale 91,869 -0- 841
Gains on sale of loans 6,995 63,989 162,550
Secondary market loan fees 72,724 111,408 137,265
Other 133,094 146,713 174,663
---------- ---------- ----------
401,091 411,817 561,196
---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,265,510 1,165,997 1,056,710
Advertising and promotion 113,163 135,297 138,503
Occupancy expenses 141,997 243,049 214,875
Equipment rentals, depreciation and maintenance 275,759 250,553 193,791
Other operating expenses 836,623 690,237 588,696
---------- ---------- ----------
2,633,052 2,485,133 2,192,575
---------- ---------- ----------
Income (loss) before income taxes ( 658,902) 26,298 366,986
Income tax expense (benefit) ( 155,000) 5,315 140,632
---------- ---------- ----------
Net income (loss) ($ 503,902) $ 20,983 $ 226,354
========== ========== ==========
Earnings (loss) per share on weighted average number
of common and common equivalent shares ($ 1.42) ($ .20) $ .34
========== ========== ==========
Weighted average number of common and common
equivalent shares $ 354,138 $ 354,138 $ 354,138
========== ========== ==========
The notes to consolidated financial statements are an integral part of these
statements.
Page 38
LANDMARK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 0F STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Unrealized Gain (Loss) on Securities
Additional Available- Held-to
Preferred Common Paid-in Accumulated for-Sale, Maturity,
Stock Stock Capital Deficit net net Totals
---------- ---------- ----------------- ----------------- ----------- ----------- ---------
Balances, December 31, 1993 $ 956,864 $354,138 $2,826,281 ($ 380,601) ( $9,841) $ -0- $3,746,841
Net income -0- -0- -0- 226,354 -0- -0- 226,354
Issuance of preferred stock 60,000 -0- -0- -0- -0- -0- 60,000
Preferred stock dividends
declared -0- -0- -0- ( l06,337) -0- -0- ( 106,337)
Reinvested preferred stock
dividends 42,960 -0- -0- -0- -0- -0- 42,960
Increase in unrealized loss
on securities
available-for-sale, net -0- -0- -0- -0- ( 182,490) -0- (182,490)
Unrealized loss on
transfer of securities
from available-for-sale to
held-to-maturity -0- -0- -0- -0- 163,750 ( l63,750) -0-
Amortization of unrealized
loss on securities
transferred to
held-to-maturity -0- -0- -0- -0- -0- 4,120 4,120
---------- -------- ---------- ---------- ---------- ---------- ---------
Balances, December 31, 1994 1,059,824 354,138 2,826,281 ( 260,584) ( 28,581) ( 159,630) 3,791,448
Net income -0- -0- -0- 20,983 -0- -0- 20,983
Preferred stock dividends
declared -0- -0- -0- ( 92,609) -0- -0- (92,609)
Reinvested preferred
stock dividends 34,180 -0- -0- -0- -0- -0- 34,180
Increase in unrealized
gain on securities
available-for-sale, net -0- -0- -0- -0- 120,480 -0- 120,480
Amortization of unrealized
loss on securities
transferred to
held-to-maturity -0- -0- -0- -0- -0- l6,477 l6,477
---------- -------- ---------- --------- ---------- ---------- ---------
Balances, December 31,1995 1,094,004 354,138 2,826,281 ( 332,210) 91,899 ( 143,153) 3,890,959
Net income (loss) -0- -0- -0- ( 503,902) -0- -0- (503,902)
Issuance of preferred stock 60 -0- -0- -0- -0- -0- 60
Decrease in unrealized
gain on securities
available-for-sale, net -0- -0- -0- -0- (124,668) -0- (124,668)
Amortization of unrealized
loss on securities
transferred to
held-to-maturity -0- -0- -0- -0- -0- 18,218 18,218
Unrealized loss on
transfer of securities
from available-for-sale to
held-to-maturity -0- -0- -0- -0- 37,237 ( 37,237) -0-
---------- -------- ---------- --------- ---------- ---------- ----------
Balances, December 31, 1996 $1,094,064 $354,138 $2,826,281 ($ 836,112) $ 4,468 ($ 162,172) $3,280,667
========== ======== ========== ========= ========== ========== ==========
The notes to consolidated financial statements are an integral part of these
statements.
Page 39
LANDMARK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 503,902) $ 20,983 $ 226,354
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 214,583 178,485 133,179
Provision for loan losses 361,000 205,483 203,013
Net gains on sale of securities available-for-sale ( 91,869) -0- ( 841)
Gains on sale of loans ( 6,995) ( 63,989) ( 162,550)
Gain on sale of investment in real estate ( 14,789) -0- -0-
Decrease in loans held for sale -0- -0- 174,898
Amortization (accretion) net 30,627 ( 94,615) ( 43,426)
Provision for deferred income taxes ( 155,000) ( 10,615) 23,548
Increase in accrued interest receivable
and other assets ( 126,634) ( 243,097) ( 190,080)
Increase in deferred loan costs ( 44,397) ( 33,357) ( 27,908)
Increase (decrease) in accrued interest and
other liabilities 230,569 ( 97,451) 140,785
----------- ----------- -----------
Net cash provided by (used in) operating activities ( 106,807) ( 138,173) 476,972
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in federal funds sold 1,015,000 ( 650,000) 529,000
Purchases of securities available-for-sale ( 7,473,462) ( 499,766) ( 1,977,929)
Proceeds from sales and maturities of securities
available-for-sale 11,837,288 581,443 241,921
Purchases of securities held-to-maturity -0- -0- ( 7,807,934)
Proceeds from maturities of securities
held-to-maturity 272,246 827,263 146,229
Net decrease (increase) in loans 645,057 ( 2,505,059) ( 13,070,481)
Purchase of promises and equipment ( 61,666) ( 2,257,413) ( 129,159)
Purchase of real estate held for investment -0- ( 936) ( 157,383)
Proceeds from sale of real estate held for investment 45,785 -0- -0-
----------- ----------- -----------
Net cash provided by (used in) investing activities 6,280,248 ( 4,504,468) ( 22,225,736)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts, savings and money market 1,278,049 ( 8,959,417) 15,157,463
Net (decrease) increase in time deposits ( 7,231,233) 13,327,509 7,488,351
Net (decrease) increase in repurchase agreements ( 29,384) 83,751 ( 130,695)
Decrease in capital lease obligations -0- ( 38,910) ( 81,876)
Proceeds from sale of preferred stock 60 -0- 60,000
Dividends paid, net of reinvestment -0- ( 40,486) ( 63,377)
----------- ----------- -----------
Net cash provided by (used in) financing activities ( 5,982,508) 4,372,447 22,429,866
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 190,933 ( 270,194) 681,102
Cash and cash equivalents
Beginning 1,743,476 2,013,670 1,332,568
----------- ----------- -----------
Ending $1,934,409 $1,743,476 $ 2,013,670
=========== =========== ===========
(Continued)
The notes to consolidated financial statements are an integral part of these
statements.
Page 40
LANDMARK BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 2,727,140 $ 2,859,592 $ 1,288,156
=========== =========== ===========
Income taxes paid (received) ($ 32,299) $ 183,980 $ 78,969
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Increase (decrease) in unrealized gain on
securities available-for-sale ($ 139,947) $ 192,769 ($ 35,888)
=========== =========== ===========
Transfer of securities available-for-sale to
securities held-to-maturity (fair value) $ 3,040,086 $ -0- $ 838,000
=========== =========== ===========
Page 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policies of Landmark Bank and subsidiaries (the Bank)
are in conformity with generally accepted accounting principles and
general practices within the banking industry. The following is a
description of the more significant policies.
Basis of consolidation
The consolidated financial statements include the accounts of
Landmark Bank and its wholly owned subsidiaries, Landmarkbanc Realty
Holdings Corp. and Landmark Bank Mortgage Corporation. These
subsidiaries were established in 1995 for the purposes of holding
title to the bank building and opening a loan production office in
Vermont. (Landmark Bank Mortgage Corporation has been inactive since
its inception.) All significant intercompany accounts and
transactions have been eliminated.
Nature of operations
The Bank provides a variety of financial services through its two
branch locations to individuals and corporate customers in the City
of Lebanon and the surrounding towns of Hanover, Enfield, and
Plainfield, New Hampshire, as well as the Vermont towns of Norwich
and Hartford. The Bank's primary deposit products are checking and
savings accounts and certificates-of-deposit. Its primary lending
products are commercial, real estate and consumer loans.
Concentration of risk
The Bank's operations are affected by various risk factors, including
interest rate risk, credit risk and risk from geographic
concentration of lending activities. Management attempts to manage
interest rate risk through various asset/liability management
techniques designed to match maturities of assets and liabilities.
Loan policies and administration are designed to provide assurance
that loans will only be granted to credit-worthy borrowers, although
credit losses are expected to occur because of subjective factors and
factors beyond the control of the Bank. Although the Bank has a
diversified loan portfolio and economic conditions are stable, most
of its lending activities are conducted within the geographic area
where it is located. As a result, the Bank and its borrowers may be
especially vulnerable to the consequences of changes in the local
economy. In addition, a substantial portion of the Bank's loans are
secured by real estate.
Earnings per share
Earnings per share are computed based on the weighted average number
of common and common equivalent shares outstanding during the year.
Page 42
Note 1. Significant Accounting Policies (Continued)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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.
A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for losses on
loans. In connection with the determination of this allowance,
management obtains independent appraisals for significant properties
securing the 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 allowance for losses on loans. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the
time of their examination.
Presentation of cash flows
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand, cash items in the process of clearing, and
amounts due from banks. The statement of cash flows for the year ended
December 31, 1994 has been restated using the indirect method to
conform with the 1996 and 1995 presentations.
Investment securities
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost,
adjusted for amortization of premium and accretion of discounts using
methods approximating the interest method. Other marketable securities
are classified as available-for-sale and are carried at fair value.
Unrealized gains and losses on securities available-for-sale are
recognized as direct increases or decreases in stockholders' equity,
net of tax. Cost of securities sold is recognized using the specific
identification method.
Interest income on floating rate bonds is recognized on a level-yield
basis over the life of the related bonds.
Page 43
Note 1. Significant Accounting Policies (Continued)
Loans held for sale
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income
Loans
The Bank adopted Financial Accounting Standards Board (FASB) Statement
No. 114 (as amended by Statement No. 118), Accounting by Creditors
for Impairment of a Loan, effective January 1, 1995. This statement
is considered the primary source of authoritative guidance for
determining allowances relating to specific loans. The effect of
adoption of this statement was immaterial to the Bank's financial
statements.
Loans are stated at the amount of unpaid principal, increased by
deferred costs and reduced by an allowance for possible loan losses
and deferred gains on loan sales.
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as
an adjustment of the related loan's yield. The Bank is generally
amortizing these amounts over the contractual life.
The Bank periodically sells certain interests (for example, the
guaranteed portions) in U.S. Small Business Administration loans. At
the time the portion of the loan is sold, the Bank allocates its
recorded investment in the loan between the portion of the loan sold
and the portion retained, including any excess servicing, based on
their relative fair values. This allocation is used to determine the
gain or loss on the portion of the loan sold and the carrying amount
of the portion retained. The excess servicing receivables and deferred
loan gains resulting from such sales are amortized over the estimated
life using a method approximating the interest method.
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.
Page 44
Note 1. Significant Accounting Policies (Continued)
Mortgage servicing
In May, 1995, the FASB issued Statement No. l22, Accounting for
Mortgage Servicing Rights, an amendment to FASB Statement No. 65,
which became effective January 1, 1996. This statement requires the
Bank to recognize rights to service mortgage loans for others as
separate assets, however those rights are acquired. The statement also
requires that capitalized mortgage servicing rights be amortized in
proportion to, and over the period of, estimated net servicing
revenues. The effect of adoption of this statement was immaterial to
the Bank's consolidated financial statements.
Allowance for possible loan losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries.
Premises and equipment
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 the life of the
improvements. The cost of assets sold or otherwise disposed of and the
related allowance for depreciation are eliminated from the accounts
and the resulting gains or losses are reflected in the income
statement. Maintenance and repairs are charged to current expenses as
incurred and the cost of major renewals and betterments are
capitalized.
Investment in real estate
Investment in real estate consists of residential property adjacent to
the Bank's main office. The property is carried at the lower of
carrying amount or fair value less cost to sell and is currently for
sale by the Bank.
Pension costs
Pension costs relating to the Bank's 401 (k) plan are charged to
employee benefits expense and are funded as accrued.
Advertising costs
The Bank expenses advertising costs as incurred.
Page 45
Note 1. Significant Accounting Policies (Continued)
Income taxes
The Bank recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established
for the temporary differences between the accounting basis and the tax
basis of the Bank's assets and liabilities at enacted tax rates
expected to be in effect when the amounts related to such temporary
differences are realized or settled. Adjustments to the Bank's deferred
tax assets are recognized as deferred income tax expense or benefit
based on management's judgments relating to the realizability of such
asset.
Off-balance-sheet financial instruments
In the ordinary course of business the Bank has entered into off-
balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded in the financial statements
when they become payable.
Fair values of financial instruments
In December, 1996, the FASB issued Statement No. 126, Exemption from
Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities, which became effective immediately. Statement No.
126 exempts some entities from disclosing the fair value of its
financial instruments (as required by Statement No. 107) if certain
conditions are met. The Bank is no longer required to disclose the fair
values of its financial instruments under the new statement and has
elected to omit disclosure of this information in its financial
statements.
Reclassifications
Certain amounts in the 1994 financial statements have been reclassified
to conform with the 1996 and 1995 presentations.
Note 2. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash with the
Federal Reserve Bank. The total of those reserve balances was
approximately $101,000 and $98,000 at December 31, 1996 and 1995,
respectively.
Page 46
Note 3. Investment Securities
Securities available-for-sale (AFS) and held-to-maturity (HTM) consist
of the following at December 31, 1996 and 1995:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities AFS:
December 31, 1996:
U.S. Treasury $1,496,553 $ 1,815 $ 1,961 $1,496,407
Mortgage-backed
securities 272,626 8,897 2,058 279,465
Collateralized
mortgage
obligations 19,295 400 -0- 19,695
---------- ---------- ---------- ----------
$1,788,474 $ 11,112 $ 4,019 $1,795,567
========== ========== ========== ==========
December 31, 1995:
U.S. Treasury $1,999,279 $ 5,321 $ -0- $2,004,600
Mortgage-backed
securities 7,348,236 143,454 1,895 7,489,795
Collateralized
mortgage
obligations 28,714 160 -0- 28,874
---------- ---------- ---------- ----------
$9,376,229 $148,935 $ 1,895 $9,523,269
========== ========== ========== ==========
Securities HTM:
December 31, 1996:
U.S. Gov't.
agencies $ 843,058 $ -0- $65,819 $ 777,239
Collateralized
mortgage
obligations 2,956,547 11,445 -0- 2,967,992
---------- ---------- ---------- ----------
$3,799,605 $ 11,445 $65,819 $3,745,231
========== ========== ========== ==========
December 31, 1995:
U.S. Gov't.
agencies $ 812,357 $ 11,559 $ -0- $ 823,916
========== ========== ========== ==========
U.S. Gov't. agencies classified as held-to-maturity at December 31, 1996
and 1995 consist of two Federal Home Loan Bank notes. The interest rates
on these investments, which are considered structured notes, fluctuate
based on changes in the LIBOR rate. These notes were transferred from
the available-for-sale category to the held-to-maturity category at fair
value in 1995. The unrealized loss of $163,750 (net of tax) at the time
of the transfer is being amortized using a method approximating the
interest method.
Collateralized mortgage obligations classified as held-to-maturity at
December 31, 1996 were initially considered as available-for-sale. These
securities were transferred from the available-for-sale category to the
held-to-maturity at fair value in 1996. The unrealized loss of $37,237
(net of tax) at the time of the transfer is being amortized using a
method approximating the interest method.
Page 47
Note 3. Investment Securities (Continued)
The FASB issued an implementation guide to Statement No.115 on
Accounting for Certain Investments in Debt and Equity Securities which
allowed the one time transfer of securities in the held-to-maturity
classification to the available-for-sale classification between the
period November 15 and December 31, 1995. In December, 1995 the Bank
transferred mortgage-backed securities with an approximate amortized
cost and fair value of $7,033,500 and $7,173,500, respectively, from the
held-to-maturity classification to the available-for-sale
classification. Under the implementation guide, this one time transfer
did not call into question the intent of the Bank to hold other debt
securities to maturity in the future.
Proceeds from the sale of securities available-for-sale during 1996 were
$10,475,872, resulting in gross realized gains and gross realized losses
of $135,329 and $43,460, respectively. No securities available-for-sale
were sold in 1995. Proceeds from the sale of securities available-for-
sale during 1994 were $119,776, resulting in gross realized gains of
$841.
The maturities of investment securities at December 31, 1996 were as
follows:
Amortized Fair
Cost Value
Securities AFS:
Due in one year or less $1,000,276 $ 999,531
Due from one to five years 591,182 593,459
Due from five to ten years 12,765 13,356
Due after ten years 184,251 189,221
---------- ----------
$1,788,474 $1,795,567
========== ==========
Securities HTM:
Due from one to five years $ 458,450 $ 447,500
Due from five to ten years 2,101,545 2,107,658
Due after ten years 1,239,610 1,190,073
---------- ----------
$3,799,605 $3,745,231
========== ==========
Expected maturities will differ from contractual maturities on mortgage-
backed securities and collateralized mortgage obligations because
borrowers may have the right to call or prepay obligations without call
or prepayment penalties. The expected average lives of such securities
are substantially less than the contractual lives of the underlying
mortgage products.
Investment securities with an amortized cost of $3,456,424 and $7,070,335
and a fair value of $3,469,086 and $7,200,120 at December 31, 1996 and
1995, respectively, were pledged as collateral on public deposits and for
other purposes as required or permitted by law.
Page 48
Note 4. Loans
The composition of net loans is as follows:
------December 31,-------
1996 1995
Commercial and commercial real estate $18,179,605 $19,035,529
Real estate 21,269,779 20,679,143
Consumer 3,308,153 3,801,630
----------- -----------
42,757,537 43,516,302
Allowance for loan losses ( 906,901) ( 659,427)
Net deferred loan costs 79,081 34,684
Deferred gains on loan sales ( 22,780) ( 29,957)
----------- -----------
Loans, net $41,906,937 $42,861,602
=========== ===========
The total recorded investment in impaired loans, all of which had
allowances determined in accordance with Statement No. 114 and No. 118,
amounted to approximately $844,169 and $302,393 at December 31, 1996
and 1995, respectively. The average recorded investment in impaired
loans amounted to approximately $679,681 and $302,393 for the years
ended December 31, 1996 and 1 995, respectively. The allowance for loan
losses related to impaired loans amounted to approximately $399,192 and
$167,635 at December31, 1996 and 1 995, respectively.
Interest income on impaired loans of $6,656 and $-0- was recognized for
cash payments received in 1996 and 1995, respectively.
The Bank has no commitments to loan additional funds to borrowers with
impaired or nonaccrual loans.
Note 5. Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
-----------December 31,-----------
1996 1995 1994
Balance, beginning $ 659,427 $ 465,000 $264,971
Provision charged to
operating expense 361,000 205,483 203,013
Recoveries of amounts
charged off 6,400 20 -0-
---------- ---------- --------
1,026,827 670,503 467,984
Amounts charged off ( 119,926) ( 11,076) ( 2,984)
---------- ---------- --------
Balance, ending $906,901 $659,427 $465,000
========== ========== ========
Page 49
Note 6. Premises and Equipment
Premises and equipment were as follows:
----------December 31,----------
1996 1995
Buildings $1,999,965 $1,999,965
Building improvements 260,400 235,925
Furniture and equipment 1,068,125 945,494
---------- ----------
3,328,490 3,181,384
Less accumulated
depreciation 741 562 529,346
---------- ----------
$2,586,928 $2,652,038
========== ==========
Depreciation included in occupancy and equipment expense amounted to
$212,215, $162,261 and $115,572 for the years ended December 31,
1996, 1995 and 1994, respectively, of which $170,455, $152,969 and
$109,931, respectively, represented equipment depreciation.
Note 7. Deposits
The scheduled maturities of certificates of deposit at December 31,
1996 were as follows:
December 31,
1996
1997 $24,848,706
1998 3,558,931
1999 487,726
2000 517,633
2001 and thereafter 135,634
-----------
$29,548,630
===========
Included in time deposits on the balance sheets at December 31, 1996
and 1995 are out-of-area certificates of deposit (brokered deposits)
of approximately $1,674,000 and $2,179,420, respectively, which are
considered volatile liabilities. Interest rates on these deposits,
typically one-half percent higher than those offered in the normal
course of business, range from 5.2% to 5.9%. These certificates
mature in one year or less.
Deposit accounts with related parties approximated $264,322 and
$316,000 at December 31, 1996 and 1995, respectively.
Page 50
Note 8. Defined Contribution Plan
The Bank has established a 401(k) profit sharing plan which covers
all employees who are at least 21 years of age and who have completed
three months of service. Eligible employees may contribute a
percentage of their annual compensation to the plan each year. The
Bank matches a certain portion of employee contributions. For the
years ended December 31, 1996, 1995 and 1994, the Bank matched
$4,156, $5,948 and $6,277, respectively, of employee contributions
under this plan.
The Bank may also make additional discretionary contributions to the
plan on behalf of employees who meet the eligibility requirements.
These contributions are allocated based on the annual salary of the
participants. No additional discretionary contributions were made for
1996, 1995 and 1994.
All plan members become fully vested after five years of service.
Note 9. Income Taxes
The Bank prepares its federal income tax return on a consolidated
basis (Note 1). Federal income taxes are allocated to members of the
consolidated group based on taxable income. State income tax returns
are filed individually by each member of the consolidated group.
Income tax expense (benefit) for the years ended December 31, 1996
and 1995 and 1994 were as follows:
-----------December 31,----------
1996 1995 1994
Currently payable:
Federal $ -0- $ 15,930 $103,932
State -0- -0- 13,152
Deferred (155,000) ( 10,615) 23,548
------- ------- --------
($155,000) $ 5,315 $140,632
======== ======== ========
Income tax expense included in the statements of income differs from
that computed at the statutory rate of 34% primarily because of
expenses deductible for financial reporting purposes that are not
deductible for tax purposes and the effect of the surtax exemption.
Temporary differences giving rise to deferred taxes consist primarily
of start-up costs capitalized for tax purposes but expensed for
financial reporting purposes, nondeductible provisions for loan
losses, and net operating loss carryforwards.
Page 51
Note 9. Income Taxes (Continued)
At December 31, 1996 and 1995 gross deferred tax assets and gross
deferred tax liabilities were as follows:
1996 1995
Gross deferred tax assets $491,498 $288,650
Less valuation allowance -0- -0-
-------- --------
491,498 288,650
Gross deferred tax liabilities 34,571 85,338
-------- --------
Net deferred tax asset $456,927 $203,312
======== ========
There was no change in the deferred tax asset valuation allowance
during 1996 and 1995. The Bank has a net operating loss carryforward
of approximately $174,223 available through 2011.
Note 10. Related Party Transactions
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
principal officers, their immediate families and affiliated companies
in which they are principal stockholders (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.
Aggregate loan transactions with related parties were as follows:
------December 31,------
1996 1995
Balance, beginning $1,178,297 $1,114,272
New loans 719,103 665,716
Repayments ( 723,351) ( 601,691)
---------- ----------
Balance, ending $1,174,049 $1,178,297
========== ==========
The Bank formerly leased its offices from an affiliated corporation,
of which most of its stockholders were directors of the Bank (Note
12). In August, 1995, the Bank's wholly owned subsidiary,
Landmarkbanc Realty Holdings Corp., purchased the building from the
affiliated corporation for $1,999,965, including closing costs.
Page 52
Note 11. Repurchase Agreements
Repurchase agreements generally mature within one to four days from
the transaction date and are collateralized by securities in the
Bank's investment portfolio.
The maximum amount of repurchase agreements outstanding at any month-
end during 1996 and 1995 was $359,207 and $392,200, respectively; the
monthly average amount of repurchase agreements outstanding during
1996 and 1995 was $281,909 and $259,111, respectively.
All securities collateralizing repurchase agreements are under the
Bank's control.
Note 12. Leases
The Bank was the lessee of certain computer equipment under capital
leases which expired in 1995. Amortization of assets held under
capital leases is included in depreciation expense. The assets and
liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
asset. The Bank purchased the computer equipment upon expiration of
the leases.
The Bank leased its main office space from a related party (Note 10)
under an operating lease until August, 1995. Subsequent to that date,
the Bank leases its main office space from Landmarkbanc Realty
Holdings Corp., a wholly- owned subsidiary. The lease has a term of
fifteen years. All costs and expenses relating to the leased
property, including taxes, insurance, and repairs and maintenance are
paid by the Bank.
The Bank also leases branch office facilities in West Lebanon, New
Hampshire. The lease has an initial term of ten years which commenced
on October 1, 1995, with two five year renewal periods. The Bank is
responsible for the payment of utilities and taxes relating to the
leased property.
Approximate minimum future lease payments as of December 31, 1996,
assuming no renewal options are exercised, for each of the next ten
years and in the aggregate are:
1997 $ 47,400
1998 47,400
1999 47,400
2000 47,400
2001 47,400
Subsequent to 2001 177,750
--------
$414,750
========
Rent expense paid in connection with these leases for the years ended
December 31, 1996, 1995 and 1994 amounted to $47,400, $119,357 and
$123,185, respectively.
Page 53
Note 13. Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees,
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
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit, standby letters of credit and financial guarantees is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. For interest
rate caps and floors written on adjustable rate loans, the
contractual amounts or notional amounts do not represent exposure to
credit loss. The Bank controls the risk of interest rate cap
agreements through credit approvals, limits and monitoring
procedures.
The Bank generally requires collateral or other security to support
financial instruments with credit risk.
1996 1995
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $5,595,111 $8,529,323
========== ==========
Standby letters of credit and
commercial letters of credit $ 250,000 $ 152,741
========== ==========
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.
Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property and equipment, residential real estate and
income-producing commercial properties.
Page 54
Note 13. Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit and financial guarantees are conditional
commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers.
The Bank enters into a variety of interest rate contracts, including
interest rate caps and floors written on adjustable rate loans in
managing its interest rate exposure. Interest rate caps and floors on
loans written by the Bank enables customers to transfer, modify, or
reduce their interest rate risk.
Note 14. Commitments and Contingencies
In the normal course of business, the Bank is involved in various
legal proceedings. In the opinion of management, after consulting
with the Bank's legal counsel, any liability resulting from such
proceedings would not have a material adverse effect on the Bank's
financial statements.
The Bank has executed an agreement allowing it to obtain credit from
the Federal Reserve Bank. Should the Bank utilize this credit,
certain portions of the investment and loan portfolios would be
pledged as collateral against the borrowings.
Note 15. Preferred Stock
During the period October, 1992 to January, 1994, the Bank offered
for sale 100,000 shares of Series A $20 convertible, noncumulative,
perpetual preferred stock, par value $1.00 per share, stated value
$20 per share, in which a total of 55,500 shares were issued.
Offering costs of $99,276 were charged to the preferred stock account
in connection with the offerings.
At their option, holders of Series A preferred stock have the right
to convert any share of preferred stock into two fully-paid shares of
common stock. Noncumulative dividends may be paid quarterly on this
preferred stock, subject to declaration of the Board of Directors of
the Bank. Any dividends declared may be automatically reinvested at
the option of the holders of the preferred stock.
A total of 600,000 shares of preferred stock are authorized, with
100,000 shares reserved for the dividend reinvestment plan. The total
number of shares of preferred stock outstanding at December 31, 1996
and 1995, including shares issued pursuant to the dividend
reinvestment plan, was 59,667 and 59,664, respectively.
Page 55
Note 15. Preferred Stock (Continued)
In the event of the liquidation, dissolution or winding up of the
Bank, the liquidation preference of the preferred stock shareholders,
if any, would be fixed by the Board of Directors in accordance with
applicable law and the terms of the resolution which established the
Series A preferred stock.
Note 16. Warrants
The Bank has issued and delivered warrants to purchase shares of
common stock to certain of its organizers and to the underwriter of
its initial public offering.
Transferable warrants to purchase an aggregate of 59,000 shares of
common stock at a purchase price of $10.00 per share were issued on
July 31, 1992 to certain organizers of the Bank, pursuant to a
Warrant Resolution adopted by the Board of Directors on June 13,
1991. Further, pursuant to the terms of a Warrant Agreement dated
March 28, 1991 among the Bank and the underwriter, the Bank is
obligated to issue and deliver, upon payment of consideration of
$100, transferable warrants to purchase an aggregate of 2,620 shares
of common stock at a purchase price of $12.00 per share. The warrants
expired in 1996.
Note 17. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below, dollars in thousands) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Bank's category.
Page 56
Note 17. Regulatory Matters (Continued)
The Bank's actual capital amounts and ratios are also presented in
the table.
Minimums To be well
Minimums Capitalized Under
For Capital Prompt corrective
Adequacy Purposes: Action Provisions:
Actual Actual
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
As of December31, 1996:
Total capital (to
risk weighted
assets) $3,895 10.6% $2,952 8.0% $3,690 10.0%
Tier I capital
(to risk weighted
assets) $3,428 9.3% $1,476 4.0% $2,214 6.0%
Tier I capital
(to average assets) $3,428 6.0% $2,291 4.0% $2,864 5.0%
As of December 31, 1995, the Bank was considered well capitalized
under these guidelines.
New Hampshire law places restrictions on the Bank's ability to pay
dividends. The Board of Directors may declare and pay dividends only
to the extent that there is no impairment of the Bank's guaranty
fund. The Bank must maintain a guaranty fund equal to 3 percent of
the amount of all deposits in excess of $1,000,000. The guaranty fund
consists of all capital stock in excess of $100,000 plus such
additional amounts, transferred from net earnings, as may be
necessary to make up the required amount.
Note 18. Subsequent Events
On January 22, 1997, the Bank was merged with and into Lake Sunapee
Bank, fsb, pursuant to certain Articles of Combination filed with the
Office of Thrift Supervision. The Bank's outstanding preferred stock
was converted to common stock pursuant to the merger agreement and
the applicable provisions of the authorizing resolution adopted by
the Board of Directors which created the Series A preferred stock.
The transaction was treated as a purchase of the Bank by Lake Sunapee
Bank, fsb for accounting purposes.
Page 57