SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-28815
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FIRST LITCHFIELD FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1241321
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(State or Other Jurisdiction (I.R.S.Employer
of Incorporation or Organization) Identification No.)
13 North Street, Litchfield, CT 06759
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (860) 567-8752
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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- --------------------------------- ------------------------------------
- --------------------------------- ------------------------------------
- --------------------------------- ------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
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(Title of Class)
Check whether the issuer: (1) filed all reports to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $ 19,376,491
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) $19,300,119
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. March 13, 2002 - 1,669,759
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Transitional Small Business Disclosure Format (check one):
Yes [ _ ] No [ X ]
TABLE OF CONTENTS
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS 1
ITEM 2 - DESCRIPTION OF PROPERTY 10
ITEM 3 - LEGAL PROCEEDINGS 10
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 11
PART II
ITEM 5 - MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 11
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13
ITEM 7 - FINANCIAL STATEMENTS 22
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 23
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS 23
ITEM 10 - EXECUTIVE COMPENSATION 24
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 27
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 33
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Documents incorporated by reference. None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business of the Company
First Litchfield Financial Corporation, a Delaware corporation (the "Company"),
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended. The Company was formed in 1988 and has one banking subsidiary, The
First National Bank of Litchfield (the "Bank"), a national banking association
organized under the laws of the United States. The Bank and its predecessors
have been in existence since 1814. The principal executive office of the Company
is located at 13 North Street, Litchfield, CT 06759, and the telephone number is
(860) 567-8752. The Company owns all of the outstanding shares of the Bank. The
Bank has two subsidiaries, Lincoln Corporation and Litchfield Mortgage Service
Corporation, which are Connecticut corporations. The purpose of Lincoln
Corporation is to hold property such as real estate, personal property,
securities, or other assets, acquired by the Bank through foreclosure or
otherwise to compromise a doubtful claim or collect a debt previously
contracted. The purpose of Litchfield Mortgage Service Corporation is to operate
as a passive investment company in accordance with Connecticut law.
The Bank engages in a wide range of commercial and personal banking activities,
including accepting demand deposits (including Money Market Accounts), accepting
savings and time deposit accounts, making secured and unsecured loans to
corporations, individuals, and others, issuing letters of credit, originating
mortgage loans, and providing personal and corporate trust services. The
business of the Bank is not significantly affected by seasonal factors.
The Bank's lending services include commercial, real estate, and consumer
installment loans. Revenues from the Bank's lending activities constitute the
largest component of the Bank's operating revenues. The loan portfolio
constitutes the major earning asset of the Bank and offers the best alternative
for maximizing interest spread above the cost of funds. The Bank's loan
personnel have the authority to extend credit under guidelines established and
approved by the Board of Directors. Any aggregate credit which exceeds the
authority of the loan officer is forwarded to the loan committee for approval.
The loan committee is composed of various experienced loan officers and Bank
directors. All aggregate credits that exceed the loan committee's lending
authority are presented to the full Board of Directors for ultimate approval or
denial. The loan committee not only acts as an approval body to ensure
consistent application of the Bank's loan policy, but also provides valuable
insight through communication and pooling of knowledge, judgment, and experience
of its members.
The Bank's primary lending area generally includes towns located in Litchfield
County.
The Bank's Trust Department provides a wide range of personal and corporate
trust and trust-related services, including serving as executor of estates, as
trustee under testamentary and intervivos trusts and various pension and other
employee benefit plans, as guardian of the estates of minors and incompetents,
and as escrow agent under various agreements.
The Bank introduces new products and services as permitted by the regulatory
authorities or desired by the public. In 1996, the Bank opened a supermarket
branch in Price Chopper in Torrington, Connecticut which is open seven days a
week, with extended hours and features a 24 hour automated teller machine. The
Bank remains committed to meeting the challenges that require technology. In
addition to providing its customers with access to the latest technological
products, such as telephone banking, which allows customers to handle routine
transactions using a standard touch tone telephone, the Bank is accessible via a
home page on the Internet The Bank also offers PC banking and bill paying via
the Internet at its Website.
Competition
In Connecticut generally, and in the Bank's primary service area specifically,
there is intense competition in the commercial banking industry. The Bank's
market area consists principally of towns located in Litchfield County, although
the Bank also competes with other financial institutions in surrounding counties
in Connecticut in obtaining deposits and providing many types of financial
services. The Bank competes with larger regional banks for the business of
companies located in the Bank's market area. The Bank also competes with savings
and loan associations, credit unions, finance companies, personal loan
companies, money market funds and other non-depository financial intermediaries.
Many of these financial institutions have resources many times greater than
those of the Bank. In addition, new financial intermediaries such as
money-market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions.
Changes in federal and state law have resulted in, and are expected to continue
to result in, increased competition. The reductions in legal barriers to the
acquisition of banks by out-of-state bank holding companies resulting from
implementation of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and other recent and proposed changes are expected to continue to
further stimulate competition in the markets in which the Bank operates,
although it is not possible to predict the extent or timing of such increased
competition.
1
Lending Activities
The Bank's lending policy is designed to correspond with its mission of
remaining a community-oriented bank. The loan policy sets forth accountability
for lending functions in addition to standardizing the underwriting, credit and
documentation procedures. The Bank's target market regarding lending is in the
towns in which a Bank office is located and contiguous towns. The typical loan
customer is an individual or small business which has a deposit relationship
with the Bank. The Bank strives to provide an appropriate mix in its loan
portfolio of commercial loans and loans to individual consumers.
Loan Portfolio
The Bank's loan portfolio at December 31, 2001 - 1997 was comprised of the
following categories:
(Dollar Amounts in Thousands)
December 31,
-------------------------------- -----------------
2001 2000 1999 1998 1997
-------- ------- -------- ------- --------
Commercial $ 7,153 $ 8,136 $ 8,064 $ 4,804 $ 5,680
Real Estate
Construction 5,348 5,427 7,090 5,716 2,229
Residential 123,684 119,215 115,392 112,859 105,489
Commercial 26,791 25,437 19,822 16,555 17,326
Installment 22,391 32,275 33,115 12,413 11,058
Others 367 476 123 91 65
-------- ------- -------- ------- --------
Total Loans $185,734 $190,966 $183,606 $152,438 $141,847
======== ======== ======== ======== ========
The following table reflects the maturity and sensitivities of the Bank's loan
portfolio at December 31, 2001.
(Dollar Amounts in Thousands)
After one
One Year year through Due after Total
or less five years five years loans
------- ----------- ---------- -----
Commercial $ 4,772 $ 1,725 $ 656 $ 7,153
Real Estate
Construction 4,825 523 -- 5,348
Residential 20,677 16,662 86,345 123,684
Commercial 1,761 4,899 20,131 26,791
Installment 6,682 9,484 6,225 22,391
Others 126 71 170 367
------- ------- ------ --------
Total Loans $38,843 $33,364 $113,527 $185,734
======= ======= ======= ========
At December 31, 2001 loans maturing after one year included approximately:
$113,008,000 in fixed rate loans; and $33,883,000 in variable rate loans.
Investment Securities
The primary objectives of the Bank's investment policy are to provide a stable
source of interest income, to provide adequate liquidity necessary to meet short
and long-term changes in the mix of its assets and liabilities, to provide a
means to achieve goals set forth in the Bank's interest rate risk policy and to
provide a balance of quality and diversification to its assets. The
available-for-sale portion of the investment portfolio is expected to provide
funds when demand for acceptable loans increases and is expected to absorb funds
when loan demand decreases.
2
At December 31, 2001 the carrying value of the Bank's investment portfolio was
$62,169,012 or 23% of total assets. There were no federal funds sold as of
December 31, 2001.
The table below presents the amortized cost and fair values of investment
securities held by the Bank at December 31, 2001 and 2000.
(Dollar Amounts in Thousands)
2001 2000
-------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Available-for-sale $ 61,837 $ 61,861 $48,352 $48,365
Held-to-maturity 308 319 983 989
-------- -------- ------- --------
$ 62,145 $ 62,180 $49,335 $ 49,354
========= ======== ======= ========
The following tables present the maturity distribution of investment securities
at December 31, 2001, and the weighted average yields of such securities. The
weighted average yields were calculated based on the amortized cost and
tax-effective yields to maturity of each security.
Held-to-maturity
(Dollar Amounts in Thousands)
Over One Over Five Weighted
One Year Through Through Over Ten No Average
Or Less Five Years Ten Years Years Maturity Total Yield
------- ---------- --------- ----- -------- ----- -----
Mortgage-Backed Securities $ 163 $ 145 -- -- -- $ 308 6.79%
===== ===== === === === ======= ====
Weighted Average Yield 7.69% 5.78% -- -- -- 6.79% --
===== ===== === === === ======= ====
Available-for-sale (1)
Over One Over Five Weighted
One Year Through Through Over Ten No Average
Or Less Five Years Ten Years Years Maturity Total Yield
------- ---------- --------- ----- -------- ----- -----
U.S. Agencies and
Corporations $ -- $ 8,178 $ -- $ -- -- $ 8,178 4.68%
State and Municipal -- -- 11,371 -- -- 11,371 7.02%
Corporate Bonds 2,060 -- -- -- -- 2,060 5.04%
Mortgage-Backed Securities 10,305 21,511 8,107 305 -- 40,228 4.52%
------ ------ ----- --- ---- ------ ----
Total $12,365 $29,689 $19,478 $305 -- $61,837 5.02%
======= ======= ======= ==== ==== ======= =====
Weighted Average Yield 4.58% 4.75% 5.72% 4.15% -- 5.02% --
======= ======= ======= ==== ==== ======= =====
Total Portfolio $12,528 $29,834 $19,478 $305 -- $62,145 5.03%
======= ======= ======= ==== ==== ======= =====
Total Weighted Average Yield 4.62% 4.75% 5.72% 4.15% -- 5.03% --
======= ======= ======= ==== ==== ======= =====
(1) Dollars shown at amortized cost amounts
3
Deposits
The following table summarizes average deposits and interest rates of the Bank
for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
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Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-----------------------------------------------------------
Non-interest bearing
demand deposits $ 38,946 -- $ 35,849 -- $ 32,627 --
Money market deposits 46,348 3.17% 44,260 3.66% 43,876 3.29%
Savings deposits 39,290 1.41% 36,797 1.42% 35,771 1.43%
Time deposits 107,965 5.43% 86,944 5.60% 80,622 4.97%
----------------------------------------------------------------
Total deposits $232,549 3.39% $203,850 3.44% $192,896 3.09%
================================================================
Fixed rate certificates of deposit in amounts of $100,000 or more at December
31, 2001 are scheduled to mature as follows:
(Dollar Amounts in Thousands)
-----------------------------
Three months or less $ 8,971
Over three, through six months 4,232
Over six, through twelve months 3,426
Over twelve months 11,225
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Total $ 27,854
==========
Return on Equity and Assets
The following table summarizes various operating ratios of the Company for the
past three years:
Years ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Return on average total
assets (net income divided by average total assets) .73% .69% .75%
Return on average shareholders' equity (net
income divided by average shareholders' equity) 10.62 11.40 11.92
Equity to assets (average shareholders' equity as a
percent of average total assets) 6.85 6.06 6.36
Dividend payout ratio 34.13 34.15 32.81
Asset/Liability Management
A principal objective of the Bank is to reduce and manage the exposure of
changes in interest rates on its results of operations and to maintain an
approximate balance between the interest rate sensitivity of its assets and
liabilities within acceptable limits. While interest-rate risk is a normal part
of the commercial banking activity, the Bank desires to minimize its effect upon
operating results. Managing the rate sensitivity embedded in the balance sheet
can be accomplished in several ways. By managing the origination of new assets
and liabilities, or the rollover of the existing balance sheet assets,
incremental change towards the desired sensitivity position can be achieved.
Hedging activities, such as the use of interest rate caps, can be utilized to
create immediate change in the sensitivity position.
4
The Bank monitors the relationship between interest earning assets and interest
bearing liabilities by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring the Bank's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-bearing liabilities maturing or repricing and the amount
of interest-earning assets maturing or repricing for the same period of time.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to
increase net interest income. During a period of rising interest rates, a
positive gap would tend to increase net interest income, while a negative gap
would tend to adversely affect net interest income.
The information presented in the interest sensitivity table is based upon a
combination of maturities, call provisions, repricing frequencies, prepayment
patterns and Management judgment. The distribution of variable rate assets and
liabilities is based upon the repricing interval of the instrument. Management
estimates that less than 20% of savings products are sensitive to interest rate
changes based upon analysis of historic and industry data for these types of
accounts.
The following table summarizes the repricing schedule for the Bank's assets and
liabilities and provides an analysis of the Bank's periodic and cumulative GAP
positions.
(Dollar Amounts in Thousands)
As of December 31, 2001
Repriced Within
--------------------------------------------------
Under 3 4 to 12 1 to 5 Over 5
Months Months Years Years
------ ------ ----- -----
Securities available-for-sale $11,014 $15,006 $24,446 $11,371
Securities held-to-maturity 111 147 50 --
Loan Portfolio 35,519 38,661 42,731 68,823
Other -- -- -- 2,472
------- ------- ------- -------
Total interest earning assets 46,644 53,814 67,227 82,666
Interest-bearing liabilities
Money Market 14,034 -- -- 39,510
Savings -- -- -- 42,304
Time 32,477 16,233 55,295 --
------- ------- ------- -------
Total interest-bearing deposits 46,511 16,233 55,295 81,814
Borrowed funds -- 5,000 7,000 --
------- ------- ------- -------
Total interest-bearing liabilities 46,511 21,233 62,295 81,814
Periodic gap $ 133 32,581 $ 4,932 $ 852
======= ======= ======= =======
Cumulative gap $ 133 $32,714 $37,646 $38,498
======= ======= ======= =======
Cumulative gap as a percentage of
total earning assets .05% 13.07% 15.04% 15.38%
======= ======= ======= =======
Supervision and Regulation
The Bank is chartered under the National Bank Act and is subject to the
supervision of, and is regularly examined by, the Office of the Comptroller of
the Currency (the "OCC") and the Federal Deposit Insurance Corporation ("FDIC").
The Company is a bank holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), is registered as such with and is subject to the
supervision of the Federal Reserve Board ("FRB"). The Company, as a bank holding
company, is also subject to the Connecticut Bank Holding Company laws. Certain
legislation and regulations affecting the business of the Company and the Bank
are discussed below.
5
General
As a bank holding company, the Company is subject to the BHC Act. The Company
reports to, registers with, and is examined by the FRB. The FRB also has the
authority to examine the Company's subsidiaries, which includes the Bank.
The FRB requires the Company to maintain certain levels of capital. See "Capital
Standards" herein. The FRB also has the authority to take enforcement action
against any bank holding company that commits any unsafe or unsound practice,
violates certain laws, regulations, or conditions imposed in writing by the FRB.
See "Prompt Corrective Action and Other Enforcement Mechanisms" herein.
Under the BHC Act, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over, or acquires, directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of, any bank or bank holding company. Thus, the Company is required to obtain
the prior approval of the FRB before it acquires, merges or consolidates with
any bank, or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the FRB's
approval.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
Transactions between the Company, the Bank and any future subsidiaries of the
Company are subject to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees which are unreasonable in amount
or exceed the fair market value of the services rendered (or, if no market
exists, actual costs plus a reasonable profit). Additionally, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
Capital Standards
The FRB, OCC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets, and transactions, such as
letters of credit and recourse arrangements, which are reported as off- balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance sheet
items. The regulators measure risk-adjusted assets and off-balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Tier 2
capital may consist of limited amounts of the allowance for loan losses,
unrealized gains on equity securities and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off-balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet
items of 4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
6
The following table presents the capital ratios for the Company and the Bank as
of December 31, 2001:
Minimum
The Company's The Bank's Regulatory
Ratio Ratio Capital Level
RISK-BASED CAPITAL RATIO:
Total Capital............ 11.43% 11.18% 8%
Tier 1 Capital........... 10.86% 10.62% 4%
TIER 1 LEVERAGE CAPITAL RATIO: 6.85% 6.85% 4%
Prompt Corrective Action and Other Enforcement Mechanisms
Each federal banking agency is required to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more of the prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An insured depository institution generally is classified in the following
categories based on capital measures indicated below:
"Well-Capitalized":
Total risk-based capital of 10% or more; Tier 1 risk-based
ratio capital of 6% or more; and Leverage ratio of 5% or more.
"Adequately Capitalized":
Total risk-based capital of at least 8%; Tier 1 risk-based
capital of at least 4%; and Leverage ratio of at least 4%.
"Undercapitalized":
Total risk-based capital less than 8%; Tier 1 risk-based
capital less than 4%; or Leverage ratio less than 4%.
"Significantly Undercapitalized":
Total risk-based capital less than 6% Tier 1 risk-based
capital less than 3%; or Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment. If an insured depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued by the holding
company. Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. The most
important additional measure is that the appropriate federal banking agency is
required to either appoint a receiver for the institution within 90 days or
obtain the concurrence of the FDIC in another form of action. In addition to
measures taken under the prompt corrective action provisions, commercial banking
organizations may be subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the
7
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of a depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution-affiliated parties and the enforcement of such actions
through injunctions or restraining orders based upon a prima facie showing by
the agency that such relief is appropriate. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company. The Company and the Bank are classified as
"well-capitalized" under the above guidelines.
Safety and Soundness Standards
The federal banking agencies have established safety and soundness standards for
insured financial institutions covering (1) internal controls, information
systems and internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation,
fees and benefits; (7) asset quality and earnings; (8) excessive compensation
for executive officers, directors or principal shareholders which could lead to
material financial loss, and (9) standards for safeguarding customer
information. If an agency determines that an institution fails to meet any
standard established by the guidelines, the agency may require the financial
institution to submit to the agency an acceptable plan to achieve compliance
with the standard. If the agency requires submission of a compliance plan and
the institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. Federal Law
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The Company's ability to pay dividends depends in large part on the ability of
the Bank to pay dividends to the Company. The ability of the bank to pay
dividends is subject to restrictions set forth in the National Banking Act and
regulations of the OCC. See "Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters" herein.
Additionally, a bank may not make any capital distribution, including the
payment of dividends, if, after making such distribution, the bank would be in
any of the "under- capitalized" categories under the OCC's Prompt Corrective
Action regulations.
The OCC also has the authority to prohibit the Bank from engaging in business
practices which the OCC considers to be unsafe or unsound. It is possible,
depending upon the financial condition of a bank and other factors, that the OCC
could assert that the payment of dividends or other payments in some
circumstances might be such an unsafe or unsound practice and thereby prohibit
such payment.
FDIC Insurance
The Bank's deposits are insured through the Bank Insurance Fund of the FDIC up
to a maximum of $100,000 per separately insured depositor.
Inter-Company Borrowings
Bank holding companies are also restricted as to the extent to which they and
their subsidiaries can borrow or otherwise obtain credit from one another or
engage in certain other transactions. The "covered transactions" that an insured
depository institution and its subsidiaries are permitted to engage in with
their nondepository affiliates are limited to the following amounts: (1) in the
case of any one such affiliate, the aggregate amount of covered transactions of
the insured depository institution and its subsidiaries cannot exceed 10% of the
capital stock and the surplus of the insured depository institution; and (2) in
the case of all affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 20% of the
capital stock and surplus of the insured depository institution. In addition,
extensions of credit that constitute covered transactions must be collateralized
in prescribed amounts. "Covered transactions" are defined by statute to include
a loan or extension of credit to the affiliate, a purchase of securities issued
by an affiliate, a purchase of assets from the affiliate (unless otherwise
exempted by the FRB), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
8
Effects of Government Policy
Legislation adopted in recent years has substantially increased the scope of
regulations applicable to the Bank and the Company and the scope of regulatory
supervisory authority and enforcement power over the Bank and the Company.
Virtually every aspect of the Bank's business is subject to regulation with
respect to such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, reorganizations,
nonbanking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
and bank holding companies set forth above do not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the Company. Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
changes and the impact such changes might have on the Bank and the Company are
difficult to determine.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S. 900),
provides bank holding companies, banks, securities firms, insurance companies,
and investment management firms the option of engaging in a broad range of
financial and related activities by opting to become a "financial holding
company." These holding companies are subject to oversight by the FRB, in
addition to other regulatory agencies. Under the financial holding company
structure, banks have the ability to purchase or establish broker/dealer
subsidiaries, as well as the option to purchase insurance companies.
Additionally, securities and insurance firms are permitted to purchase
full-service banks.
As a general rule, the individual entities within a financial holding company
structure are regulated according to the type of services provided which is
referred to as functional regulation. Under this approach, a financial holding
company with banking, securities, and insurance subsidiaries will have to deal
with several regulatory agencies (e.g., appropriate banking agency, SEC, state
insurance commissioner). A financial holding company that is itself an insurance
provider is subject to FRB oversight, as well as to regulation by the
appropriate state insurance commissioner. Broker/dealer and insurance firms
electing to become financial holding companies are subject to FRB regulation.
The impact that Gramm-Leach-Bliley Act is likely to have on the Bank and the
Company remains difficult to predict. To-date the impact has been minimal. While
the Act facilitates the ability of financial institutions to offer a wide range
of financial services, large financial institutions appear to be the
beneficiaries as a result of this Act because many community banks are less able
to devote the capital and management resources needed to facilitate broad
expansion of financial services.
Impact of Monetary Policies
Banking is a business which depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and other
borrowings, and the interest rate earned by a bank on loans, securities and
other interest-earning assets comprises the major source of banks' earnings.
Thus, the earnings and growth of banks are subject to the influence of economic
conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the FRB. The
FRB implements national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks which are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Company cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting the Bank's net earnings.
Employees
The Company, the Bank and its subsidiaries employ 77 full-time employees and 11
part-time employees. Neither the Company nor the Bank are parties to any
collective bargaining agreements, and employee relations are considered good.
Forward Looking Statements
This Form 10-KSB and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and Bank, may include forward-looking statements
relating to such matters as (a) assumptions concerning future economic and
business conditions and their effect on the economy in general and on the
markets in which the Company and the Bank do business, and (b) expectations for
increased revenues and earnings for the Company and Bank through growth
resulting from acquisitions, attraction of new deposit and loan customers and
the introduction of new products and services. Such forward-looking statements
are based on assumptions rather than historical or current facts and, therefore,
are inherently uncertain and subject to risk. For those statements, the Company
claims the protection of the safe harbor for
9
forward looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business conditions in the banking industry generally and
in the specific markets in which the Bank operates; (b) changes in the
legislative and regulatory environment that negatively impact the Company and
Bank through increased operating expenses; (c) increased competition from other
financial and non-financial institutions; (d) the impact of technological
advances; and (e) other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is not the owner or lessee of any properties. The properties
described below are properties owned or leased by the Bank.
The Bank's main office is located at 13 North Street, Litchfield, Connecticut.
In addition to the Bank's main office in Litchfield, the Bank has branches in
Marble Dale, Washington Depot, Goshen, Roxbury and Torrington, Connecticut.
During the year ended December 31, 2001, the net rental expenses paid by the
Bank for all of its office properties was approximately $102,000. All properties
are considered to be in good condition and adequate for the purposes for which
they are used. The following table outlines all owned or leased property of the
Bank, but does not include Other Real Estate Owned.
Owned Lease
Location Address Leased Expiration
- -------- ------ ------ ----------
Main Office 13 North Street Owned since 1816 Litchfield, CT
Marble Dale Route 202 Leased 2005 with one
Marble Dale, CT 3 year extension
Washington Depot Bryan Plaza Owned since 1959
Washington Depot, CT
Goshen Routes 4 & 63 Owned since 1989
Goshen, CT
Roxbury Route 67 Leased 2004 with one 5 year
Roxbury, CT extension
Torrington 990 Torringford Street Leased 2006 with one 5 year
Torrington, CT extensions
Trust Department 40 West Street Owned since 1996
Old Borough Firehouse
Litchfield, CT
Accounting 15 Meadow Street Leased 2005
Department Litchfield, CT
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending material legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matter was submitted to a vote of
Shareholders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
The Company's Common Stock is traded on the Over the Counter ("OTC") Bulletin
Board under the symbol FLFL. As of March 13, 2002, there were 1,669,759 shares
issued and outstanding which were held by approximately 431 shareholders. The
following information, provided by Fahnestock and Co. sets forth transactions in
the Company's common stock for each quarter of the Company's two most recently
completed fiscal years:
2000 High / Low
----------
First Quarter..... $ 18.00 $ 16.00
Second Quarter.... 15.25 13.00
Third Quarter..... 11.75 11.25
Fourth Quarter.... 11.13 9.50
2001 High / Low
----------
First Quarter..... $ 12.00 $ 10.50
Second Quarter.... 12.13 12.00
Third Quarter..... 12.38 12.06
Fourth Quarter.... 12.50 12.15
In January 2001, the Company's Board of Directors approved a 50,000 share Common
Stock buyback program. As part of this program, the Company did not redeem any
outstanding Common Stock. The previous program approved in January 1999 expired
in January 2000 and was not renewed.
Dividends
All shares of the Company's Common Stock are entitled to participate equally and
ratably in such dividends as may be declared by the Board of Directors out of
funds legally available therefore. During 1999, 2000 and 2001, the Company
declared cash dividends of .40 cents per share and stock dividends of 5.00%.
The Company's ability to pay dividends is limited by the prudent banking
principles applicable to all bank holding companies and by the provisions of
Delaware Corporate law, which provides that a company may, unless otherwise
restricted by its certificate of incorporation, pay dividends in cash, property
or shares of capital stock out of surplus or, if no surplus exists, out of net
profits for the fiscal year in which declared or out of net profits for the
preceding fiscal year (provided that such payment will not reduce the company's
capital below the amount of capital represented by classes of stock having a
preference upon distributions of assets).
As a practical matter, the Company's ability to pay dividends is generally
limited by the Bank's ability to dividend funds to the Company. As a national
bank, the declaration and payment of dividends by the Bank must be in accordance
with the National Bank Act. More specifically, applicable law provides that the
Board of Directors may declare quarterly, semiannual and annual dividends so
long as the Bank carries at least ten percent (10%) of its net profits for the
preceding half year in its surplus fund, and, in the case of annual dividends,
has carried not less than one-tenth of its net profits of the preceding two
consecutive half year periods in its surplus fund. National banks are required
to obtain the approval of the Office of the Comptroller of the Currency if the
total dividends declared by it in any calendar year exceed the total of its net
profits for that year combined with any retained net profits of the preceding
two years less any required transfers. In addition to such statutory
requirements, the payment of an excessive dividend which would deplete a bank's
capital base to an inadequate level could be considered to be an unsafe or
unsound banking practice and be a basis for supervisory action by the Office of
the Comptroller of the Currency. As of December 31, 2001, approximately
$4,185,000, of the undistributed net income of the Bank was theoretically
available for distribution to the Company as dividends. However, the ability of
the Bank to declare and pay such dividends would be subject to safe and sound
banking practices.
11
Recent Sales of Unregistered Securities
In the past three years, the Company has issued the following securities
pursuant to the purchasers' exercise of options in accordance with the Company's
stock option plans for executive officers and outside directors.
(a) In January 1999, the Company issued an aggregate of 3,185 shares of common
stock to Miles C. Borzilleri in exchange for aggregate consideration of
$31,627.05 ($9.93/share).
(b) In February 1999, the Company issued 3,185 shares of common stock to Miles
C. Borzilleri in exchange for aggregate consideration of $37,551.15
($11.79/share) and 3,502 shares in exchange for aggregate consideration of
$49,028.00 ($14.00/share).
(c) In February 2000, the Company issued 29,997 shares of common stock to the
Company's President and Chief Executive Officer, Jerome J. Whalen in
exchange for an aggregate consideration of $162,283.77 ($5.41/share).
All of the above transactions were exempt from registration under the Securities
Act of 1933, as amended pursuant to Section 4(2), as they were transactions by
an issuer not involving any public offering.
12
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and the notes
thereto and the other information contained in this Form 10-KSB. The selected
balance sheet and income statement data as of and for the years ended December
31, 2001 and 2000, are derived from, and are qualified by reference to, the
audited consolidated financial statements of the Company appearing elsewhere in
this Form 10-KSB. The balance sheet and income statement data as of and for the
years ended December 31, 1999, 1998, and 1997, are derived from audited
consolidated financial statements of the Company not included herein.
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Income Statement Data
Interest Income $ 17,134,418 $ 18,679,707 $ 16,057,243 $ 14,884,143 $ 13,921,944
Interest Expense 8,342,466 9,659,057 7,332,539 7,114,181 6,719,113
Net Interest Income 8,791,952 9,020,650 8,724,704 7,769,962 7,202,831
Other Income 2,242,073 1,874,700 1,389,362 1,409,302 1,338,035
Noninterest Expense 8,193,263 8,092,630 7,428,330 6,550,248 5,875,583
Income Before Income Taxes 2,600,762 2,622,720 2,565,736 2,509,016 2,565,283
Income Taxes 705,520 820,077 810,311 972,717 1,009,249
Net Income 1,895,242 1,802,643 1,755,425 1,536,299 1,556,034
Balance Sheet Data
Total Loans 185,733,980 190,966,246 183,606,128 152,438,033 141,846,741
Allowance for Loan Losses 957,731 971,891 1,014,522 1,013,949 970,840
Total Investment Securities 62,169,012 49,348,551 46,889,333 48,315,612 47,997,248
Total Assets 270,475,563 264,827,542 255,973,790 215,337,558 202,115,632
Total Deposits 238,573,826 217,279,356 197,232,782 194,941,472 183,673,260
Total Borrowings 12,000,000 28,973,986 42,560,227 5,270,268 4,245,000
Total Liabilities 252,200,381 247,807,784 241,047,581 201,026,182 188,648,066
Shareholders' Equity 18,275,182 17,019,758 14,926,209 14,311,376 13,467,566
Selected Ratios and
Per Share Data
Return on Average Assets .73% .69% .75% .74% .81%
Return on Average Equity 10.62% 11.40% 11.92% 11.25% 12.21%
Basic Net Income Per Share (1) $ 1.14 $ 1.08 $ 1.07 $ .94 $ .95
Diluted Net Income Per Share (1) 1.12 1.06 1.02 .89 .92
Price Per Share 13.78 11.76 17.75 18.50 14.40
Book Value per Share 10.94 10.70 10.05 9.70 9.11
Dividends Declared:
Cash $ .40 $ .40 $ .40 $ .40 $ .38
Stock 5.00% 5.00% 5.00% 155.00% 5.00%
Cash Dividend Yield 2.90% 3.40% 2.25% 2.16% 2.64%
(1) All per share data has been adjusted to give retroactive effect to all
stock dividends and splits.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's discussion of financial condition and results of
operations of the Company on a consolidated basis for the two years ended
December 31, 2001 and 2000. The consolidated financial statements of the Company
include the accounts of the Company and its wholly-owned subsidiary, The First
National Bank of Litchfield (the "Bank") and the Bank's wholly owned
subsidiaries, Lincoln Corporation and Litchfield Mortgage Service Corporation.
This discussion should be read in conjunction with the consolidated financial
statements and the related notes of the Company presented elsewhere herein.
13
FINANCIAL CONDITION
Total assets as of December 31, 2001 were $270,475,563, an increase of
$5,648,021 or 2.1% from yearend 2000 total assets of $264,827,542.
The growth in assets was due primarily to increases in the securities portfolio
which increased to $62,169,012 as of December 31, 2001. This 26.0% growth was a
result of management objective of maximizing earning assets while experiencing
low growth and runoff in the loan portfolio. The increase in investments was in
tax-exempt state and municipal securities and in mortgage-backed securities.
During 2001, some available for sale securities were sold in order to reposition
the portfolio for future earnings. Also, US Treasuries and agency bonds were
called or matured which resulted in the 70.0% decrease in those securities from
year-end 2000.
The loan portfolio as of December 31, 2001 totaled $185,733,655. The portfolio
decreased by 3.0% or $5,693,933 from December 31, 2000. The primary cause of the
decline was in the installment loan portfolio as a result of the decision to
suspend lending related to indirect dealer financing of vehicles and boats.
Installment loans decreased by $9,883,338 or 30.6% from the previous year-end.
Real estate loans, including residential, commercial and construction mortgages,
totaled $155,822,681 as of December 31, 2001. This represents an increase of
$5,743,975 or 3.8% from the balance at December 31, 2000. This growth is in
spite of the intense competition among bank and non-banks during the year for
refinancing by homeowners.
Cash and cash equivalents totaled $8,103,221 as of December 31, 2001 decreasing
by $2,794,664 or 25.6% compared to the balance of $10,897,885 as of December 31,
2000. The decrease was the result of lower needs for cash and liquid funds while
maximizing the Company's investment in earning assets.
Net premises and equipment totaled $2,615,155 as of the year-end 2001 which was
a decrease of 7.3% from the year-end 2000 balance. This decrease was the net
result of depreciation and amortization of bank premises and equipment totaling
$340,759 compared to additions of bank premises and equipment totaling $137,644.
During 2001, the Company purchased additional bank-owned life insurance policies
of $2,000,000. Such policies, through increases of the cash surrender value
associated with them, are expected to provide the Company with tax deferred
appreciation and are used in conjunction with the long-term incentive
compensation plan and other benefit plans for employees.
Total liabilities were $252,200,381 as of December 31, 2001, an increase of
$4,392,597 or 1.8% from the December 31, 2000 balance of $247,807,784.
Deposits as of December 31, 2001 were $238,573,826, an increase of $21,294,470
or 9.8% over the year-end 2000 balance. For the second successive year, growth
was experienced in all deposit products. Since 1999, deposits have increased by
$41,341,044 or 21.0%. During 2001, noninterest bearing demand deposits increased
by 5.3% or $1,954,336. Savings deposits increased to $42,304,004, an increase of
$1,476,621 or 3.6% from December 31, 2000. Money market deposits increased
during the year, from $44,568,031 to $53,544,413, which is an increase of 20.1%.
Time certificates of deposit, both those over $100,000 and under $100,000,
totaled $104,004,866, an increase of $8,887,131 or 9.3%. Management believes
that the deposit growth during 2001 can be attributed to consumer uncertainty
regarding the economy and the stock market, as well as competitive interest
rates offered on our deposits and consolidation within the local banking
environment.
Federal Home Loan Bank advances totaled $12,000,000 as of December 31, 2001. The
aforementioned deposit growth reduced the need for funding via these advances.
The result was a decrease in Federal Home Loan Bank advances of $16,000,000 or
57.1% from the December 31, 2000 balance of $28,000,000.
RESULTS OF OPERATIONS
Net interest income is the single largest source of the Company's net income.
Net interest income is determined by several factors and is defined as the
difference between interest and dividend income from earning assets, primarily
loans and investment securities, and interest expense due on deposits and
borrowed money. Although there are certain factors which can be controlled by
management policies and actions, certain other factors, such as the general
level of credit demand, FRB monetary policy and changes in tax law that are
beyond the control of management.
Net income for the year ended December 31, 2001, was $1,895,242, which was an
increase of $92,599 or 5.1% compared to 2000 net income of $1,802,643. Diluted
net income per share amounted to $1.12 increasing from $1.06 per share in 2000.
Basic net income per share was $1.14 which is an increase of $.06 from 2000. The
improved earnings are primarily due to the increase in noninterest income which
resulted from the growth in trust fees, deposit service charges and gains from
the sale of available for sale securities. Also contributing to the growth in
net income were tax savings related to tax-exempt income from investments in
state and municipal securities as well as income from increases in the cash
surrender value of bank owned life insurance.
14
Net Interest Income
Net interest income for the year ended December 31, 2001 totaled $8,791,952, a
decrease of $228,698 or 2.5% from the 2000 total of $9,020,650. The decline in
net interest income is attributable to the net effect of declining interest
rates and the decrease in average earning assets and interest bearing
liabilities. Average earning assets, which represent the Company's balance in
loans and investment securities, decreased $3,882,000, from $245,866,000 in 2000
to $241,984,000 in 2001. As shown below, the net interest margin increased to
3.70% compared to the 3.69% margin for the year of 2000. The slight improvement
in the net interest margin is due to lower interest costs for deposits and
borrowed money due to the mix of the funding shifting to deposits from borrowed
money.
2001 2000
---------- ---------
Interest and dividend income $17,134,418 $18,679,707
Tax-equivalent adjustment 156,428 60,896
Interest expense (8,342,466) (9,659,057)
---------- ---------
Net interest income $8,948,380 $9,081,546
========== ==========
The following table presents the Company's average balance sheets (computed on a
daily basis), net interest income, and interest rates for the years ended
December 31, 2001 and 2000. Average loans outstanding include nonaccruing loans.
Interest income is presented on a tax-equivalent basis which reflects a federal
tax rate of 34% for all periods presented.
15
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
2001 2000
---------------------------------------- -------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield
Balance Paid Rate Balance Paid Rate
--------------- --------- --------- ----------- --------- -------
ASSETS
Interest Earning Assets:
Loans receivable $ 186,519,000 $13,947,432 7.48% $190,817,000 $ 15,190,292 7.96%
Securities 49,001,000 3,078,466 6.28 55,014,000 3,547,251 6.45
Federal funds sold 6,464,000 264,948 4.10 35,000 3,060 8.74
--------------- ----------- ------------ -------------
Total interest earning assets 241,984,000 17,290,846 7.15 245,866,000 18,740,603 7.62
Allowance for loan losses (927,000) (999,000)
Cash & due from banks 7,952,000 6,698,000
Bank premises and equipment 2,717,000 2,940,000
Net unrealized gain (loss) on securities 410,000 (944,000)
Foreclosed real estate 301,000 170,000
Other assets 7,930,000 7,431,000
--------------- ------------
Total Average Assets $260,367,000 $261,162,000
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 39,290,000 554,166 1.41 $ 36,797,000 523,527 1.42
Money market deposits 46,348,000 1,467,407 3.17 44,260,000 1,618,648 3.66
Time deposits 107,965,000 5,857,953 5.43 86,944,000 4,869,600 5.60
Borrowed funds 9,018,000 462,940 5.13 40,550,000 2,647,282 6.53
--------------- ----------- ------------ -------------
Total interest bearing liabilities 202,621,000 8,342,466 4.12 208,551,000 9,659,057 4.63
Demand deposits 38,946,000 35,849,000
Other liabilities 954,000 947,000
Shareholders' Equity 17,846,000 15,815,000
--------------- ----------
Total Liabilities and Equity $ 260,367,000 $261,162,000
=============== ===========
Net Interest Income $ 8,948,380 $ 9,081,546
=========== =============
Net interest spread 3.03% 2.99%
======== =====
Net interest margin 3.70% 3.69%
======== =====
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the year ended December 31, 2001 when compared to the year ended
December 31, 2000 in net interest income arising from changes in interest rates
and from asset and liability volume mix. The change in interest attributable to
both rate and volume has been allocated to the changes in the rate and the
volume on a pro rata basis.
16
2001 Compared to 2000
---------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
------ ---- -----
Interest earned on:
Loans ($336,529) ($906,331) ($1,242,860)
Investment Securities (379,656) (89,129) (468,785)
Other Interest Income 264,375 (2,487) 261,888
----------- ----------- -----------
Total interest earning assets (451,810) (997,947) (1,449,757)
----------- ----------- ----------
Interest paid on:
Deposits 1,045,709 (177,958) 867,751
Borrowed money (1,713,508) (470,834) (2,184,342)
------------ ----------- -----------
Total interest bearing liabilities (667,799) (648,792) (1,316,591)
------------ ----------- -----------
Increase in net interest income $ 215,989 $ (349,155) ($ 133,166)
=========== =========== ===========
Of the $133,166 decrease in the net interest income, a net decrease of $349,155
resulted from decreases in interest rates earned or paid during 2001 and a net
increase of $215,989 is attributed to changes in the mix of average interest
bearing liabilities. Although average earning assets decreased during the year,
the growth of deposits and resulting decline in borrowed money volumes decreased
funding costs for the year.
Noninterest Income
Noninterest income for 2001 totaled $2,242,073 increasing $367,373, or 20.0%
from 2000 noninterest income of $1,874,700. Income from banking service charges
and fees increased by $92,501. This increase is the result of changes in the fee
schedules for deposit and related products. Most of these fee schedules were
changed during 2000 and the increase in the income is due to a full year's
effect of the change. Fees from trust services increased by $102,645 or 12.7%
resulting from higher levels of assets under management as well as competitive
fees. During the year, certain available-for-sale securities were sold with an
overall strategy to realign the investment portfolio to maintain future yields.
This action resulted in a gain on the sale of securities totaling $148,090.
Noninterest Expense
Noninterest expense totaled $8,193,263 increasing $100,633 or 1.2% from 2000
noninterest expense of $8,092,630. Salary and benefits costs increased due to
normal annual salary and benefits adjustments. Cost savings enacted during the
year kept most other noninterest expenses close to, or below, the 2000 levels.
Non-accrual, Past Due and Restructured Loans and Other Real Estate Owned
The Bank's non-accrual loans, other real estate owned and loans past due in
excess of ninety days and accruing interest at December 31, 1997 through 2001
are presented below.
December 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 895,180 $ 781,170 $1,076,417 $1,168,159 $1,325,896
Other real estate owned 300,000 300,000 -- -- 60,000
---------- ---------- ---------- ---------- ----------
Total non-performing assets $1,195,180 $1,081,170 $1,076,417 $1,168,159 $1,385,896
========== ========== ========== ========== ==========
Loans past due in excess of
ninety days and accruing interest $ 3,136 $ -- $ 33,441 $ 14,239 $ 454
========== ========== ========== ========== ==========
17
The accrual of interest income is generally discontinued when a loan becomes 90
days past due as to principal or interest, or when, in the judgment of
management, collectibility of the loan or loan interest become uncertain. When
accrual of interest is discontinued, any unpaid interest previously accrued is
reversed from income. Subsequent recognition of income occurs only to the extent
payments are received subject to management's assessment of the collectibility
of the remaining principal and interest. The accrual of interest on loans past
due 90 days or more, including impaired loans, may be continued when the value
of the loan's collateral is believed to be sufficient to discharge all principal
and accrued interest income due on the loan and the loan is in the process of
collection. A non-accrual loan is restored to accrual status when it is no
longer delinquent and collectibility of interest and principal is no longer in
doubt. A loan is classified as a restructured loan when certain concessions have
been made to the original contractual terms, such as reduction of interest rates
or deferral of interest or principal payments, due to the borrower's financial
condition. OREO is comprised of properties acquired through foreclosure
proceedings and acceptance of a deed in lieu of foreclosure. These properties
are carried at the lower of cost or fair value less estimated costs of disposal.
At the time these properties are obtained, they are recorded at fair value
through a direct charge against the allowance for loan losses, which establishes
a new cost basis. Any subsequent declines in value are charged to income with a
corresponding adjustment to the allowance for foreclosed real estate. Revenue
and expense from the operation of foreclosed real estate and changes in the
valuation allowance are included in operations. Costs relating to the
development and improvement of the property are capitalized, subject to the
limit of fair value of the collateral. Upon disposition, gains and losses, to
the extent they exceed the corresponding valuation allowance, are reflected in
the statement of income.
Restructured loans on nonaccrual status are included in the table above. As of
December 31, 2001, there were no restructured loans considered performing.
Had the non-accrual loans performed in accordance with their original terms,
gross interest income for the year ended December 31, 2001 would have increased
by approximately $71,000 compared to approximately $73,000 for the twelve months
ended December 31, 2000.
The Bank utilizes a loan review and rating process which classifies loans
according to the Bank's uniform classification system in order to identify
potential problem loans at an early stage, alleviate weaknesses in the Bank's
lending policies, oversee the individual loan rating system and ensure
compliance with the Bank's underwriting, documentation, compliance and
administrative policies. Loans included in this process are considered by
management as being in need of special attention because of some deficiency
related to the credit or documentation, but which are still considered
collectable and performing. Such attention is intended to act as preventative
measures and thereby avoid more serious problems in the future.
The Bank considers all non-accrual loans, other loans past due 90 days or more
and restructured loans to be impaired. A loan is considered impaired when it is
probable that the creditor will be unable to collect amounts due, both principal
and interest, according to the contractual terms of the loan agreement. When a
loan is impaired, impairment is measured using (1) the present value of expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired loan or
(3) the fair value of the collateral of a collateral-dependent loan. When a loan
has been deemed to have an impairment, a valuation allowance is established for
the amount of impairment.
The Bank makes provisions for loan losses on a quarterly basis as determined by
a continuing assessment of the adequacy of the allowance for loan losses. The
Bank performs an ongoing review of loans in accordance with an individual loan
rating system to determine the required allowance for loan losses at any given
date. The review of loans is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective and is based on an evaluation of the known and inherent risk
characteristics and size of the loan portfolios, the assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of impaired loans, and other relevant
factors. Loans, including impaired loans, are charged against the allowance for
loan losses when management believes that the uncollectibility of principal is
confirmed. Any subsequent recoveries are credited to the allowance for loan
losses when received. In connection with the determination of the allowance for
loan losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties, when considered necessary.
18
The following table summarizes the Bank's OREO, past due and non-accrual loans,
and non-performing assets as of December 31, 2001, 2000 and 1999.
December 31,
--------------------------------------------
2001 2000 1999
------------- -------------- -------------
Nonaccrual loans $ 895,180 $ 781,170 $ 1,076,417
Other real estate owned 300,000 300,000 --
------------- -------------- -------------
Total non-performing assets $ 1,195,180 $ 1,081,170 $ 1,076,417
============= ============== =============
Loans past due in excess of ninety days and accruing interest $ 3,136 $ -- $ 33,441
============= ============== =============
Ratio of non-performing assets to total loans and OREO .64% .57% .59%
Ratio of non-performing assets and loans past due in excess
of ninety days accruing interest to total loans and OREO .64% .57% .60%
Ratio of allowance for loan losses to total loans .52% .51% .55%
Ratio of allowance for loan losses to non-performing assets and
loans in excess of ninety days past due and accruing interest 79.92% 89.89% 91.41%
Ratio of non-performing assets and loans in excess of ninety
days to past due and accruing interest to total shareholders' equity 6.56% 6.35% 7.44%
Total non-performing assets increased by $114,010, or 10.5% to $1,195,180 at
December 31, 2001 from $1,081,170, at December 31, 2000. The increase in
non-performing assets is due to more past due loans in the installment loan
portfolio. At December 31, 2001, loans past due in excess of ninety days and
accruing interest totaled $3,136. There were no loans past due in excess of
ninety days and accruing interest as of December 31, 2000.
Total non-performing assets represented .6% of total loans and other real estate
owned as of the years ended December 31, 2001, 2000 and 1999. The allowance for
loan losses remained at the December 31, 2000 level of .5% of total loans. The
allowance for loan losses provided coverage for 107.0% of non-accrual loans at
December 31, 2001, as compared to 124.4% at December 31, 2000. Although the
coverage ratio declined, the underlying collateral values of the past due loans
support the lower coverage ratio.
Potential Problem Loans
As of December 31, 2001, there were no potential problem loans not disclosed
above which cause Management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms.
19
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the years ended December 31, 1997 through 2001. The allowance is maintained at a
level consistent with identified loss potential and the perceived risk in the
portfolio.
2001 2000 1999 1998 1997
---- ------ ------ ------ ----
Balance, at beginning of period $972 $1,014 $1,014 $ 971 $998
Loans charged-off:
Commercial and financial -- -- -- 7 5
Real estate -- 24 40 68 121
Installment loans to individuals 314 275 86 22 30
---- ------ ------ ------ ----
314 299 126 97 156
---- ------ ------ ------ ----
Recoveries on loans charged-off:
Commercial and financial -- 3 -- 2 1
Real estate -- -- -- -- 21
Installment loans to individuals 60 74 6 18 7
---- ------ ------ ------ ----
60 77 6 20 29
---- ------ ------ ------ ----
Net loans charged-off 254 222 120 77 127
---- ------ ------ ------ ----
Provisions charged to operations 240 180 120 120 100
---- ------ ------ ------ ----
Balance, at end of period $958 $ 972 $1,014 $1,014 $971
==== ====== ====== ====== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period .14% .12% .07% .05% .09%
==== ====== ====== ====== ====
Ratio of allowance for loan losses to total loans .52% .51% .55% .67% .68%
==== ====== ====== ====== ====
During 2001, net charge-offs totaled $254,000 which is an increase of $32,000
from 2000 net charge-offs of $222,000. The increase in net charge-offs was due
to losses in the installment loan portfolio. As experienced in 2000, these
losses are directly related to the consumer loans acquired through the indirect
dealer financing of primarily automobiles, boats and motorcycles. In view of the
credit risks associated with this portfolio, the Bank has substantially
eliminated future originations of loans through indirect dealer financing. The
Bank has also enhanced its collection resources in order to mitigate future
losses.
The following table reflects the allowance for loan losses as of December 31,
2001, 2000, 1999, 1998 and 1997.
Analysis of Allowance for Loan Losses
(Amounts in thousands)
December 31,
Loans by Type 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Allocation of of Loans in Allocation of of Loans in Allocation of of Loans in
Allowance for Each Category Allowance for Each Category Allowance for Each Category
Loan Losses to Total Loans Loan Losses to Total Loans Loan Losses to total Loans
Commercial
& Financial $ 21 3.85% $ 25 4.26% $ 8 4.39%
Real Estate
Construction 16 2.88 22 2.84 -- 3.86
Residential 289 66.59 273 62.43 266 62.85
Commercial 120 14.42 99 13.32 211 10.79
Installment 250 12.06 338 16.90 505 18.04
Other -- 0.20 -- 0.25 24 0.07
Unallocated 262 -- 215 -- -- --
---------------------------------------------------------------------------------------------------
Total $ 958 100.00% $972 100.00% $ 1014 100.00%
================================================================================================
Loans by Type 1998 1997
- --------------------------------------------------------------------------------
Percentage Percentage
Allocation of of Loans in Allocation of of Loans in
Allowance for Each Category Allowance for Each Category
Loan Losses to Total Loans Loan Losses to Total Loans
Commercial
& Financial $ 8 3.15% $ 10 4.00%
Real Estate
Construction -- 3.75 -- 1.57
Residential -- 74.04 -- 74.37
Commercial 137 10.86 151 12.21
Installment -- 8.14 -- 7.80
Other -- 0.06 -- 0.05
Unallocated 869 -- 810 --
---------------------------------------------------------------
Total $1,014 100.00% $ 971 100.00%
===============================================================
The unallocated portion of the allowance reflects Management's estimate of
probable but undetected losses inherent in the portfolio. Such estimates are
influenced by uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, difficulty in identifying triggering events that correlate perfectly
to subsequent loss rates, and risk factors that have not yet manifested
themselves in loss allocation factors.
20
LIQUIDITY
Management's objective is to ensure continuous ability to meet cash needs as
they arise. Such needs may occur from time to time as a result of fluctuations
in loan demand and the level of total deposits. Accordingly, the Bank has a
liquidity policy that provides flexibility to meet cash needs. The liquidity
objective is achieved through the maintenance of readily marketable investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products. Management believes that the liquidity is adequate to
meet the Company's future needs.
The Bank is a member of the Federal Home Loan Bank System which provides credit
to its member banks. This enhances the liquidity position of the Bank by
providing a source of available overnight as well as short-term borrowings.
Additionally, federal funds and the sale of mortgage loans in the secondary
market are available to fund short term cash needs.
SHORT-TERM BORROWINGS
The following information relates to the Bank's short-term borrowings for the
year ended December 31, 2001:
2001 2000 1999
------- ------- -------
Balance at December 31, $ 5,000,000 $28,000,000 $36,730,000
Maximum Month-End Borrowings 17,899,000 48,081,000 36,730,000
Average Balance 7,663,000 38,302,000 19,200,000
Average Rate 5.47% 6.57% 5.55%
CAPITAL
At December 31, 2001, total shareholders' equity was $18,275,182 compared to
$17,019,758 at December 31, 2000. From a regulatory perspective, the Company's
and the Bank's capital ratios place each entity in the well-capitalized
categories under applicable regulations. The various capital ratios of the
Company and the Bank are as follows as of December 31, 2001:
Minimum
Regulatory
Capital Level The Company The Bank
Tier 1 leverage capital ratio 4% 6.85% 6.85%
Tier 1 risk-based capital ratio 4% 10.86% 10.62%
Total risk-based capital ratio 8% 11.43% 11.18%
INCOME TAXES
The income tax expense for 2001 totaled $705,520 in comparison to $820,077 in
2000. The decline in income tax expense is due to the Company's investments in
state and municipal securities as well as in bank owned life insurance. Income
from these assets is not subject to Federal income taxes. Also, both the 2001
and 2000 provisions for income taxes included the tax benefit related to income
associated with Litchfield Mortgage Service Corporation ("LMSC"). The income
from LMSC is considered passive investment income under recent Connecticut
legislation under which LMSC was formed and is operating, and not subject to
state taxes which resulted in no state tax expense for both years.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes thereto presented
elsewhere herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative value of money over time due
to inflation. Unlike many industrial companies, most of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
21
ITEM 7. FINANCIAL STATEMENTS
PART F/S FINANCIAL STATEMENTS
Annual Financial Information
Independent Auditor's Report F-1
Consolidated Balance Sheets at December 31, 2001 and 2000 F-2
Consolidated Statements of Income for the Years Ended
December 31, 2001 and 2000 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6 to F-21
22
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
First Litchfield Financial Corporation and Subsidiary
Litchfield, Connecticut
We have audited the accompanying consolidated balance sheets of First Litchfield
Financial Corporation and Subsidiary (the "Corporation") as of December 31, 2001
and 2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 First Litchfield
Financial Corporation and Subsidiary as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ McGladrey & Pullen, LLP
-------------------------
McGladrey & Pullen, LLP
New Haven, Connecticut
March 1, 2002
F-1
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 2000
------------ ------------
ASSETS
Cash and due from banks (Note B) $ 8,103,221 $ 10,897,885
------------ -------------
CASH AND CASH EQUIVALENTS 8,103,221 10,897,885
------------ -------------
Securities (Note C):
Available for sale securities:
U.S. Treasuries and other securities (amortized cost $8,178,265-2001
and $27,464,048-2000) 8,239,940 27,489,496
Mortgage-backed securities (amortized cost $40,228,014-2001
and $20,888,334-2000) 40,135,605 20,876,332
State and municipal securities (amortized cost $11,371,180-2001) 11,404,232 --
Corporate and other bonds (amortized cost $2,059,986-2001) 2,080,871 --
Held to maturity securities:
Mortgage-backed securities (market value $319,172-2001)
and $988,944-2000) 308,364 982,723
------------ -------------
TOTAL SECURITIES 62,169,012 49,348,551
------------ -------------
Federal Home Loan Bank stock, at cost (Note H) 2,389,800 2,389,800
Federal Reserve Bank stock, at cost 81,850 81,850
Loans Receivable (Notes D and E):
Real estate--residential mortgage 123,684,472 119,214,444
Real estate--commercial mortgage 26,790,550 25,437,159
Real estate--construction 5,347,659 5,427,103
Commercial 7,152,723 8,136,115
Installment 22,391,726 32,275,064
Other 366,850 476,361
------------ ------------
TOTAL LOANS 185,733,980 190,966,246
Net deferred loan origination costs 957,406 1,433,233
Allowance for loan losses (957,731) (971,891)
------------ -------------
NET LOANS 185,733,655 191,427,588
------------ ------------
Premises and equipment, net (Note F) 2,615,155 2,823,307
Foreclosed real estate 300,000 300,000
Deferred income taxes (Note J) 61,274 --
Accrued interest receivable 1,309,246 1,815,364
Cash surrender value of insurance (Note K) 5,947,666 3,691,668
Other assets (Note K) 1,764,684 2,051,529
------------ ------------
TOTAL ASSETS $270,475,563 $264,827,542
============ ============
LIABILITIES
Deposits (Note I):
Noninterest bearing:
Demand $ 38,720,543 $ 36,766,207
Interest bearing:
Savings 42,304,004 40,827,383
Money market 53,544,413 44,568,031
Time certificates of deposit in denominations of $100,000 or more 27,854,468 21,150,580
Other time certificates of deposit 76,150,398 73,967,155
------------ ------------
TOTAL DEPOSITS 238,573,826 217,279,356
------------ ------------
Federal Home Loan Bank advances (Note H) 12,000,000 28,000,000
Collateralized borrowings -- 973,986
Deferred income taxes (Note J) -- 137,436
Accrued expenses and other liabilities 1,626,555 1,417,006
------------ ------------
TOTAL LIABILITIES 252,200,381 247,807,784
------------ ------------
Commitments and contingencies (Notes G, H, K, M and O) -- --
SHAREHOLDERS' EQUITY (Notes L, M, N, and Q)
Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares
outstanding Common stock $.01 par value
Authorized---5,000,000 shares
Issued---1,760,624 shares, outstanding---1,669,759 shares---2001 and
Issued---1,677,004 shares, outstanding---1,590,465 shares---2000 17,606 16,770
Capital surplus 13,000,271 11,980,943
Retained earnings 5,943,052 5,714,897
Less: Treasury stock at cost--90,865 shares---2001, 86,539 shares---2000 (701,061) (701,061)
Accumulated other comprehensive income--net unrealized gain on available
for sale securities (net of taxes) (Note S) 15,314 8,209
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,275,182 17,019,758
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $270,475,563 $264,827,542
============ ============
See Notes to Consolidated Financial Statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001 2000
------------- ------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 13,922,404 $ 15,129,396
------------- ------------
Interest and dividends:
Mortgage-backed securities 1,481,135 1,582,186
U.S. Treasury and other securities 1,119,553 1,965,065
State and municipal securities 288,970 --
Corporate bonds and other securities 57,408 --
Federal funds and other interest income 264,948 3,060
------------- -----------
TOTAL INTEREST AND DIVIDEND INCOME 17,134,418 18,679,707
------------- -----------
INTEREST EXPENSE
Interest on deposits:
Savings 554,166 523,527
Money market 1,467,407 1,618,648
Time certificates of deposit in denominations of $100,000 or more 1,299,414 869,663
Other time certificates of deposit 4,558,539 3,999,937
------------- -----------
TOTAL INTEREST ON DEPOSITS 7,879,526 7,011,755
Interest on Federal Home Loan Bank advances 462,940 2,584,855
Interest on collateralized borrowings -- 62,427
------------- ---------
TOTAL INTEREST EXPENSE 8,342,466 9,659,057
------------- ---------
NET INTEREST INCOME 8,791,952 9,020,650
PROVISION FOR LOAN LOSSES (Note E) 240,000 180,000
------------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,551,952 8,840,650
------------- ---------
NONINTEREST INCOME
Banking service charges and fees 746,802 654,301
Trust 912,706 810,061
Gains on sales of available for sale securities (Note C) 148,090 ---
Other 434,475 410,338
------------- ---------
TOTAL NONINTEREST INCOME 2,242,073 1,874,700
------------- ---------
NONINTEREST EXPENSES
Salaries 3,418,164 3,283,915
Employee benefits (Note K) 928,262 887,088
Net occupancy 483,445 451,712
Equipment 410,633 475,161
Legal fees 152,197 193,779
Director fees 159,276 170,472
Computer services 774,542 721,597
Supplies 188,060 188,388
Commissions, services and fees 199,607 259,883
Postage 111,315 111,225
Advertising 181,386 216,164
OREO and non-performing loan expenses - net 5,498 10,514
Other 1,180,878 1,122,732
------------- ---------
TOTAL NONINTEREST EXPENSES 8,193,263 8,092,630
------------- ---------
INCOME BEFORE INCOME TAXES 2,600,762 2,622,720
PROVISION FOR INCOME TAXES (Note J) 705,520 820,077
------------- ---------
NET INCOME $ 1,895,242 1,802,643
============= =========
EARNINGS PER SHARE (Note L)
BASIC NET INCOME PER SHARE $ 1.14 1.08
============= =========
DILUTED NET INCOME PER SHARE $ 1.12 1.06
============= =========
See Notes to Consolidated Financial Statements.
F-3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001 and 2000
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
--------- ------------- ----------- ------------ --------------- -------------
BALANCE, JANUARY 1, 2000 $ 15,674 $ 10,933,465 $ 5,324,445 $ (701,061) $ (646,314) $ 14,926,209
--------- ------------- ------------- ------------- ---------------- -------------
Comprehensive Income:
Net income -- -- 1,802,643 -- -- 1,802,643
Unrealized holding gain on
available for sale securities,
net of taxes (Note S) -- -- -- -- 654,523 654,523
-------------
Total comprehensive income 2,457,166
-------------
Cash dividends declared $.40 per share -- -- (613,526) -- -- (613,526)
5% stock dividend declared
November 30, 2000 - 79,654 shares
including 4,120 treasury shares 796 795,744 (796,540) -- -- --
Fractional shares paid in cash -- -- (2,125) -- -- (2,125)
Stock options exercised - 29,997 shares 300 161,984 -- -- -- 162,284
Deferred tax benefit on stock options
exercised (Note M) -- 89,750 -- -- -- 89,750
--------- ------------- ------------- ------------- --------------- -------------
BALANCE, DECEMBER 31, 2000 16,770 11,980,943 5,714,897 (701,061) 8,209 17,019,758
--------- ------------- ------------- ------------- --------------- -------------
Comprehensive Income:
Net income -- -- 1,895,242 -- -- 1,895,242
Unrealized holding gain on
available for sale securities,
net of taxes (Note S) -- -- -- -- 7,105 7,105
-------------
Total comprehensive income 1,902,347
-------------
Cash dividends declared $.40 per share -- -- (644,115) -- -- (644,115)
5% stock dividend declared
November 29, 2001--83,620 shares
including 4,326 treasury shares 836 1,019,328 (1,020,164) -- -- --
Fractional shares paid in cash -- -- (2,808) -- -- (2,808)
--------- ------------- ------------- ------------- ---------------- -------------
BALANCE, DECEMBER 31, 2001 $ 17,606 $ 13,000,271 $ 5,943,052 $ (701,061) $ 15,314 $ 18,275,182
========= ============= ============= ============= ============= =============
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,895,242 $ 1,802,643
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion of premiums and discounts on investment securities, net 74,234 (103,440)
Provision for loan losses 240,000 180,000
Depreciation and amortization 340,759 378,159
Deferred income taxes (201,362) 176,480
Gains on sales of available for sale securities (148,090) --
Loans originated for sale (215,115) (258,600)
Proceeds from sales of loans held for sale 215,115 258,600
Loss on sale of repossessed assets 54,192 7,972
Loss on disposals of bank premises and equipment 2,579 --
Decrease (increase) in accrued interest receivable 506,118 (360,001)
Decrease in other assets 109,801 107,242
Increase in cash surrender value of insurance (255,998) (191,668)
Decrease (increase) in deferred loan origination costs 475,827 (215,945)
Increase in accrued expenses and other liabilities 201,620 151,881
------------ ------------
Net cash provided by operating activities 3,294,922 1,933,323
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES Available for sale mortgage-backed
securities:
Proceeds from maturities and principal payments 8,285,080 4,194,321
Purchases (35,467,111) (5,702,436)
Proceeds from sales 7,862,412 --
Available for sale U.S. Treasury and other investment securities:
Proceeds from maturities 19,500,000 3,000,000
Purchases (6,208,265) (5,961,570)
Proceeds from sales 6,138,515 --
Available for sale State, municipal and other bond investments:
Purchases (13,520,948) --
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 673,469 3,197,586
Purchases of Federal Home Loan Bank Stock -- (289,800)
Net (decrease) increase in loans 4,784,667 (8,167,852)
Proceeds from sales of repossessed assets 254,803 60,088
Purchases of premises and equipment (137,644) (183,490)
Proceeds from sale of premises and equipment 2,458 --
Purchase of life insurance policies (2,000,000)
Proceeds from sale of foreclosed real estate 61,488 --
------------ ------------
Net cash used in investing activities (9,771,076) (9,853,153)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 12,407,339 7,503,855
Net increase in certificates of deposit 8,887,131 12,542,719
Net decrease in borrowings under Federal Home Loan
Bank advances (16,000,000) (13,730,000)
Net (decrease) increase in collateralized borrowings (973,986) 143,759
Distribution in cash for fractional shares of common stock (2,808) (2,125)
Proceeds from exercise of stock options -- 162,284
Dividends paid on common stock (636,186) (602,973)
------------ ------------
Net cash provided by financing activities 3,681,490 6,017,519
------------ ------------
Net decrease in cash and cash equivalents (2,794,664) (1,902,311)
CASH AND CASH EQUIVALENTS, at beginning of year 10,897,885 12,800,196
------------ ------------
CASH AND CASH EQUIVALENTS, at end of year $ 8,103,221 $ 10,897,885
============ ============
SUPPLEMENTAL INFORMATION Cash paid during the year for:
Interest on deposits and borrowings $ 8,423,871 $ 9,598,941
============ ============
Income taxes $ 660,000 $ 446,952
============ ============
Noncash investing and financing activities:
Transfer of loans to other real estate owned $ 61,488 $ 300,000
============ ============
Transfer of loans to repossessed assets $ 131,951 $ 285,103
============ ============
Accrued dividends declared $ 166,976 $ 159,047
============ ============
See Notes to Consolidated Financial Statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the First
Litchfield Financial Corporation (the "Corporation") and The First National Bank
of Litchfield (the "Bank"), a nationally-chartered commercial bank, and the
Bank's wholly owned subsidiaries, Litchfield Mortgage Service Corporation and
Lincoln Corporation. Deposits in the Bank are insured up to specified limits by
the Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank provides a full range of banking services to
individuals and businesses located primarily in Northwestern Connecticut. These
services include demand, savings, NOW, money market and time deposits,
residential and commercial mortgages, consumer installment and other loans as
well as trust services. The Bank is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain federal
agencies and undergoes periodic regulatory examinations.
On January 7, 2000, the Corporation filed a Form 10-SB registration statement
with the Securities and Exchange Commission (the "SEC") to register the
Corporation's $.01 par value common stock under the Securities and Exchange Act
of 1934 (the "Exchange Act"). The Corporation files periodic financial reports
with the SEC as required by the Exchange Act.
The significant accounting policies followed by the Corporation and the methods
of applying those policies are summarized in the following paragraphs:
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and general practices within the banking
industry. All significant intercompany balances and transactions have been
eliminated. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities, as of the
date of the balance sheet and revenues and expenses for the 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 deferred tax
assets.
INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES: Management determines the
appropriate classification of securities at the date individual investment
securities are acquired, and the appropriateness of such classification is
reassessed at each balance sheet date. The classification of those securities
and the related accounting policies are as follows:
Held to maturity securities: Securities classified as held to maturity are
those debt securities the Bank has both the positive intent and ability to
hold to maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. These securities are
carried at cost, adjusted for amortization of premium and accretion of
discount, computed by a method which approximates the interest method, over
the period to maturity. The sale of a security within three months of its
maturity date or after collection of at least 85% of the principal
outstanding at the time the security was acquired is considered a maturity
for purposes of classification and disclosure.
Available for sale securities: Securities classified as available for sale
are those debt securities that the Bank intends to hold for an indefinite
period of time but not necessarily to maturity and equity securities not
classified as held for trading. Any decision to sell a security classified
as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Available for sale securities
are carried at fair value. Unrealized gains or losses are reported as
increases or decreases in shareholders' equity, net of the related deferred
tax effect. Amortization of premiums and accretion of discounts, computed
by a method which approximates the interest method, are recognized in
interest income over the period to maturity. Realized gains or losses,
determined on the basis of the cost of specific securities sold, are
included in earnings.
Trading securities: Trading securities, if any, which are generally held
for the short term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading account assets
are recognized in the statement of income.
A decline in market value of a security below amortized cost that is deemed
other than temporary is charged to earnings, resulting in the establishment of a
new cost basis for the security. Gains and losses on the sale of securities are
recognized at the time of sale on a specific identification basis.
INTEREST AND FEES ON LOANS: Interest on loans is included in income as earned
based on contractual rates applied to principal amounts outstanding. The accrual
of interest income is generally discontinued when a loan becomes 90 days past
due as to principal or interest, or when, in the judgement of management,
collectibility of the loan or loan interest become uncertain. When accrual of
interest is discontinued, any unpaid interest previously accrued is reversed
from income. Subsequent recognition of income occurs only to the extent payment
is received subject to management's assessment of the collectibility of the
remaining principal and interest. The accrual of interest on loans past due 90
days or more, including impaired loans, may be continued when the value of the
loan's collateral is believed to be sufficient to discharge all principal and
accrued interest income due on the loan and the loan is in the process of
collection. A nonaccrual loan is restored to accrual status when it is no longer
delinquent and collectibility of interest and principal is no longer in doubt.
Loan origination fees and certain direct loan origination costs are deferred and
the net amount is amortized as an adjustment of the related loan's
F-6
yield. The Bank generally amortizes these amounts over the contractual life of
the related loans, utilizing a method which approximates the interest method.
LOANS HELD FOR SALE: Loans held for sale are those loans the Bank has the intent
to sell in the foreseeable future, and are carried at the lower of aggregate
cost or market value, taking into consideration all open positions. Gains and
losses on sales of loans are recognized at the trade dates, and are determined
by the difference between the sales proceeds and the carrying value of the
loans.
TRANSFER OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right to pledge or
exchange the transferred assets and no condition both constrains the transferee
from taking advantage of that right and provides more than a trivial benefit for
the transferor, and (3) the transferor does not maintain effective control over
the transferred assets through either (a) an agreement that both entitles and
obligates the transferor to repurchase or redeem the assets before maturity or
(b) the ability to unilaterally cause the holder to return specific assets,
other than through a cleanup call.
LOANS RECEIVABLE: Loans receivable are stated at current unpaid principal
balances net of the allowance for loan losses and deferred loan origination fees
and costs. Management has the ability and intent to hold its loans for the
foreseeable future or until maturity or payoff.
A loan is classified as a restructured loan when certain concessions have been
made to the original contractual terms, such as reductions of interest rates or
deferral of interest or principal payments, due to the borrowers' financial
condition.
A loan is considered impaired when it is probable that the creditor will be
unable to collect amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When a loan is impaired, impairment is
measured using (1) the present value of expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. When a loan has been deemed to have
an impairment, a valuation allowance is established for the amount of
impairment. The Bank considers all nonaccrual loans, other loans past due 90
days or more and restructured loans to be impaired. The Bank's policy with
regard to the recognition of interest income on impaired loans is consistent
with that of loans not considered impaired.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses, a material estimate
susceptible to significant change in the near-term, is established as losses are
estimated to have occurred through a provision for losses charged against
operations and is maintained at a level that management considers adequate to
absorb losses in the loan portfolio. Management's judgement in determining the
adequacy of the allowance is inherently subjective and is based on an evaluation
of the known and inherent risk characteristics and size of the loan portfolios,
the assessment of current economic and real estate market conditions, estimates
of the current value of underlying collateral, past loan loss experience, review
of regulatory authority examination reports and evaluations of impaired loans,
and other relevant factors. Loans, including impaired loans, are charged against
the allowance for loan losses when management believes that the uncollectibility
of principal is confirmed. Any subsequent recoveries are credited to the
allowance for loan losses when received. In connection with the determination of
the allowance for loan losses and the valuation of foreclosed real estate,
management obtains independent appraisals for significant properties, when
considered necessary.
The Bank's mortgage loans are collateralized by real estate located principally
in Litchfield County, Connecticut. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and real estate acquired
through foreclosure is susceptible to changes in market conditions. In addition,
a substantial portion of the Bank's installment loans are generally secured by
motor vehicles and recreational vehicles, whose value declines rapidly during
the loan term. Accordingly, the ultimate collectibility of a substantial portion
of the Bank's installment loan portfolio and repossessed assets is susceptible
to changes in economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance or write-downs may be necessary based on changes in
economic conditions, particularly in Connecticut. In addition, the Office of the
Comptroller of the Currency (the "OCC"), as an integral part of its examination
process, periodically reviews the Bank's allowance for loan losses and valuation
of other real estate. The OCC may require the Bank to recognize additions to the
allowance or write-downs based on their judgements about information available
to them at the time of their examination.
PREMISES AND EQUIPMENT: Bank premises and equipment are carried at cost, net of
accumulated depreciation and amortization. Depreciation is charged to operations
using the straight-line method over the estimated useful lives of the related
assets which range from three to forty years. Leasehold improvements are
capitalized and amortized over the shorter of the terms of the related leases or
the estimated economic lives of the improvements. Gains and losses on
dispositions are recognized upon realization. Maintenance and repairs are
expensed as incurred and improvements are capitalized.
FORECLOSED REAL ESTATE: Foreclosed real estate is comprised of properties
acquired through foreclosure proceedings and acceptance of a deed in lieu of
foreclosure. These properties are carried at the lower of cost or fair value
less estimated costs of disposal. At the time these properties are obtained,
they are recorded at fair value through a direct charge against the allowance
for loan losses, which establishes a new cost basis. Any subsequent declines in
value are charged to income with a corresponding adjustment to the allowance for
foreclosed real estate. Revenue and expense from the operation of foreclosed
real estate and changes in the valuation allowance are included in operations.
Costs relating to the development and improvement of the property are
capitalized, subject to the limit of fair value of the collateral. Upon
disposition, gains and losses, to the extent they exceed the corresponding
valuation allowance, are reflected in the statement of income.
F-7
COLLATERALIZED BORROWINGS: Collateralized borrowings represent the portion of
loans transferred to other institutions under loan participation agreements
which were not recognized as sales due to recourse provisions and/or
restrictions on the participant's right to transfer their portion of the loan.
INCOME TAXES: The Bank recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets may
be reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan that
covers substantially all employees. Pension costs are accrued based on the
projected unit credit method and the Bank's policy is to fund annual
contributions in amounts necessary to meet the minimum funding standards
established by the Employee Retirement Income Security Act (ERISA) of 1974.
STOCK OPTION PLANS: SFAS No. 123, "Accounting for Stock-Based Compensation"
encourages all entities to adopt a fair value based method of accounting for
employee stock based compensation plans, whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. However, it also allows a
company to continue to measure compensation cost for such plans under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion (APB) 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Corporation's stock
option plan have no intrinsic value at the grant date, and under Opinion No. 25
no compensation cost is recognized for them. The Corporation has elected to
continue to follow the accounting in APB 25, and as a result, has provided pro
forma disclosures of net income and earnings per share and other disclosures, as
if the fair value based method of accounting had been applied. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995 (see Note M).
EARNINGS PER SHARE: Basic earnings per share represents income available to
common stockholders and is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common shares that may be
issued by the Corporation relate to outstanding stock options and are determined
using the treasury stock method.
RELATED PARTY TRANSACTIONS: Directors and officers of the Corporation and Bank
and their affiliates have been customers of and have had transactions with the
Bank, and it is expected that such persons will continue to have such
transactions in the future. Management believes that all deposit accounts,
loans, services and commitments comprising such transactions were made in the
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers who are not directors or officers. In the
opinion of the management, the transactions with related parties did not involve
more than normal risks of collectibility or favored treatment or terms, or
present other unfavorable features. Notes D, I, and P contain details regarding
related party transactions.
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
shareholders' equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
STATEMENTS OF CASH FLOWS: Cash and due from banks, Federal funds sold and
interest earning deposits in banks are recognized as cash equivalents in the
statements of cash flows. For purposes of reporting cash flows, the Corporation
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Generally, Federal funds sold have a one
day maturity. Cash flows from loans and deposits are reported net. The
Corporation maintains amounts due from banks and Federal funds sold which, at
times, may exceed federally insured limits. The Corporation has not experienced
any losses from such concentrations.
TRUST ASSETS: Assets of the trust department, other than trust cash on deposit
at the Bank, are not included in these financial statements because they are not
assets of the Bank. Trust fees are recognized on the accrual basis of
accounting.
RECLASSIFICATIONS: Certain 2000 amounts have been reclassified to conform with
the 2001 presentation. Such reclassifications had no effect on net income.
NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its respective transaction
accounts and nonpersonal time deposits. At December 31, 2001 the Bank was
required to have cash and liquid assets of approximately $3,329,000 to meet
these requirements. In addition, the Bank is required to maintain $200,000 in
the Federal Reserve Bank for clearing purposes.
F-8
NOTE C - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of securities which are classified as available for sale
and held to maturity at December 31, 2001 and 2000 are as follows:
AVAILABLE FOR SALE December 31, 2001
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- ------------ -----------
Investment Securities:
U.S. Treasury securities $ 2,975,185 $ 170,755 $ -- $ 3,145,940
U.S. Government Agency Securities 5,203,080 -- (109,080) 5,094,000
----------- --------- ------------ -----------
8,178,265 170,755 (109,080) 8,239,940
----------- --------- ------------ -----------
State and Municipal Obligations 11,371,180 33,052 -- 11,404,232
----------- --------- ------------ -----------
Corporate and other bonds 2,059,986 20,885 -- 2,080,871
----------- --------- ------------ -----------
Mortgage-Backed Securities:
GNMA 18,298,231 109,102 (46,462) 18,360,871
FNMA 11,761,413 17,721 (51,459) 11,727,675
FHLMC 10,168,370 -- (121,311) 10,047,059
----------- --------- ------------ -----------
40,228,014 126,823 (219,232) 40,135,605
----------- --------- ------------ -----------
Total available for sale securities $61,837,445 $ 351,515 $ (328,312) $61,860,648
=========== ========= ============ ===========
December 31, 2000
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- ------------ -----------
Investment Securities:
U.S. Treasury securities $11,964,048 $ 214,982 $ (1,074) $12,177,956
U.S. Government Agency Securities 15,500,000 10,950 (199,410) 15,311,540
----------- --------- ------------ -----------
27,464,048 225,932 (200,484) 27,489,496
----------- --------- ------------ -----------
Mortgage-Backed Securities:
GNMA 17,560,062 118,958 (85,339) 17,593,681
FNMA 3,328,272 -- (45,621) 3,282,651
----------- --------- ------------ -----------
20,888,334 118,958 (130,960) 20,876,332
----------- --------- ------------ -----------
Total available for sale securities $48,352,382 $ 344,890 $ (331,444) $48,365,828
=========== ========= ============ ===========
HELD TO MATURITY December 31, 2001
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- --------- ------------ -----------
Mortgage-Backed Securities:
GNMA securities $203,162 $ 3,865 $ -- $207,027
FHLMC securities 105,202 6,943 -- 112,145
-------- ------- --------- --------
Total held to maturity securities $308,364 $10,808 $ -- $319,172
======== ======= ========= ========
December 31, 2000
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- ------------ -----------
Mortgage-Backed Securities:
GNMA securities $287,000 $2,588 $(1,423) $288,165
FHLMC securities 695,723 5,056 -- 700,779
-------- ------ ------- --------
Total held to maturity securities $982,723 $7,644 $(1,423) $988,944
======== ====== ======= ========
The amortized cost and fair value of securities at December 31, 2001, by
contractual maturity, are shown below. Actual maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the securities may be called or prepaid with or without call or
prepayment penalties. Because mortgage-backed securities are not due at a single
maturity date, they are not included in the maturity categories in the following
maturity summary.
F-9
December 31, 2001
----------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 2,059,986 $ 2,080,871 $ -- $ --
Due after one year through five years 8,178,265 8,239,940 -- --
Due after five years through ten years 11,371,180 11,404,232 -- --
----------- ----------- -------- --------
21,609,431 21,725,043 -- --
Mortgage-backed securities 40,228,014 40,135,605 308,364 319,172
----------- ----------- -------- --------
TOTAL $ 61,837,445 $61,860,648 $308,364 $319,172
=========== =========== ======== ========
Proceeds from the sales of available for sale securities were $14,000,927 during
2001. Gross gains of $216,680 and gross losses of $68,590 were realized on these
sales. There were no sales of available for sale securities during 2000.
Investment securities with a carrying value of $6,202,000 and $6,112,000 were
pledged as collateral to secure treasury tax and loan, trust assets and public
funds at December 31, 2001 and 2000, respectively.
During 2001 and 2000, there were no transfers of securities from the available
for sale category into the held to maturity or trading categories, and there
were no securities classified as held to maturity that were transferred to
available for sale or trading categories.
NOTE D - LOANS TO RELATED PARTIES
In the normal course of business the Bank has granted loans to officers and
directors of the Bank and to their associates. As of December 31, 2001, all
loans to officers, directors and their associates were performing in accordance
with the contractual terms of the loans. Changes in these loans to persons
considered to be related parties are as follows:
2001 2000
-------------- ---------------
Balance at the beginning of year $ 2,961,677 $ 3,440,194
Advances 9,004,240 7,841,684
Repayments (8,602,206) (8,320,201)
Other changes (150,656) --
--------------- --------------
BALANCE AT END OF YEAR $ 3,213,055 $ 2,961,677
============== ==============
Other changes in loans to related parties resulted from loans to individuals who
ceased being related parties during the year, as well as existing loans
outstanding at the beginning of the year to individuals who became related
parties during the year.
NOTE E - ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING LOANS
Changes in the allowance for loan losses for the years ended December 31, 2001
and 2000, were as follows:
2001 2000
-------------- --------------
Balance at beginning of year $ 971,891 $ 1,014,522
Provision for loan losses 240,000 180,000
Loans charged off (314,470) (299,730)
Recoveries of loans previously charged off 60,310 77,099
-------------- --------------
BALANCE AT END OF YEAR $ 957,731 $ 971,891
============== ==============
A summary of nonperforming loans follows:
2001 2000
-------------- --------------
Nonaccrual loans $ 895,180 $ 781,170
Accruing loans contractually past due 90 days or more 3,136 ---
-------------- -------------
TOTAL $ 898,316 $ 781,170
============= =============
If interest income on nonaccrual loans throughout the year had been recognized
in accordance with the loans' contractual terms, approximately $71,000 and
$73,000 of additional interest would have been recorded for the years ended
December 31, 2001 and 2000, respectively. Included in the nonaccrual loans at
December 31, 2001 are two loans which total $352,000 of which 90% is guaranteed
by a U.S. Government agency.
The following information relates to impaired loans, which include all
nonaccrual loans and other loans past due 90 days or more, and all restructured
loans, as of and for the years ended December 31, 2001 and 2000.
F-10
2001 2000
-------- ----------
Loans receivable for which there is a related allowance for credit losses,
determined:
Based on discounted cash flows $225,000 $ 263,000
Based on the fair value of collateral -- 237,000
-------- ----------
Total $225,000 $ 500,000
======== ==========
Loans receivable for which there is no related allowance for credit
losses determined:
Based on discounted cash flows $520,000 $ 241,000
Based on the fair value of collateral 154,000 167,000
-------- ----------
Total $674,000 $ 408,000
======== ==========
Allowance for credit losses related to impaired loans $ 38,000 $ 110,000
======== ==========
Average recorded investment in impaired loans $847,000 $1,338,000
======== ==========
Interest income recognized $ 41,000 $ 39,000
======== ==========
Cash interest received $ 81,000 $ 84,000
======== ==========
The Bank has no commitments to lend additional funds to borrowers whose loans
are impaired.
The Bank's lending activities are conducted principally in the Litchfield County
section of Connecticut. The Bank grants single-family and multi-family
residential loans, commercial real estate loans, commercial business loans and a
variety of consumer loans. In addition, the Bank grants loans for the
construction of residential homes, residential developments and for land
development projects. Although lending activities are diversified, a substantial
portion of many of the Bank's customers' net worth is dependent on real estate
values in the Bank's market area. The Bank also grants loans for motor vehicles
and recreational vehicles. Collectability of such loans is dependent on a
variety of factors including general economic conditions, employment stability,
and the borrower's level of consumer debt.
The Bank has established credit policies applicable to each type of lending
activity in which it engages, evaluates the creditworthiness of each customer
and, in most cases, extends credit of up to 80% of the market value of the
collateral at the date of the credit extension depending on the Bank's
evaluation of the borrowers' creditworthiness and type of collateral. The market
value of collateral is monitored on an ongoing basis and additional collateral
is obtained when warranted. Real estate is the primary form of collateral. Other
important forms of collateral are marketable securities, time deposits,
automobiles, boats, motorcycles and recreational vehicles. While collateral
provides assurance as a secondary source of repayment, the Bank ordinarily
requires the primary source of repayment to be based on the borrower's ability
to generate continuing cash flows. The Bank's policy for real estate collateral
requires that, generally, the amount of the loan may not exceed 80% of the
original appraised value of the property. Private mortgage insurance is required
for the portion of the loan in excess of 80% of the original appraised value of
the property. For installment loans, the Bank may loan up to 100% of the value
of the collateral.
NOTE F - PREMISES AND EQUIPMENT
The major categories of premises and equipment as of December 31, 2001 and 2000
are as follows:
2001 2000
---------- ----------
Land $ 674,849 $ 674,849
Buildings 2,981,448 2,944,239
Furniture and fixtures 2,220,681 2,253,021
Leasehold improvements 202,283 197,323
---------- ----------
6,079,261 6,069,432
Less accumulated depreciation and amortization 3,464,106 3,246,125
---------- ----------
$2,615,155 $2,823,307
========== ==========
Depreciation and amortization expense on premises and equipment for the years
ended December 31, 2001 and 2000 was $340,759 and $378,159, respectively.
NOTE G - LEASE COMMITMENTS
At December 31, 2001, the Corporation was obligated under various noncancellable
operating leases for office space. Certain leases contain renewal options and
provide for increased rentals based principally on increases in the average
consumer price index. Net rent expense under operating leases was approximately
$102,000 and $88,000 for 2001 and 2000, respectively. The future minimum
payments under operating leases are as follows:
2002 $ 107,000
2003 107,000
2004 97,000
2005 and thereafter 95,000
---------------
Total $ 406,000
===============
F-11
NOTE H - FEDERAL HOME LOAN BANK STOCK AND ADVANCES
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"), purchased $289,800 of FHLBB capital stock during 2000. There were no
stock purchases during 2001. The Bank is required to maintain an investment in
capital stock of the FHLBB in an amount equal to a certain percentage of its
outstanding residential first mortgage loans. The carrying value of Federal Home
Loan Bank stock approximates fair value based on the redemption provision of the
Federal Home Loan Bank. As a member of the FHLBB, the Bank has access to a
preapproved line of credit of up to 2% of its total assets and the capacity to
borrow up to 30% of its total assets. In accordance with an agreement with the
FHLBB, the Bank is required to maintain qualified collateral, as defined in the
FHLBB Statement of Products Policy, free and clear of liens, pledges and
encumbrances for the advances. FHLBB stock and certain loans which aggregate
approximately 100% of the outstanding advance are used as collateral. Federal
Home Loan Bank advances as of December 31, 2001 totaled $12,000,000 including
$5,000,000 at a rate of 2.53% due in October 2002, $5,000,000 at a rate of 3.23%
due in October 2003 and $2,000,000 at a rate of 3.47% due in December 2003.
NOTE I - DEPOSITS
The following is a summary of time certificates of deposits by contractual
maturity as of December 31, 2001:
2002 $69,302,475
2003 25,138,352
2004 6,803,916
2005 and thereafter 2,760,123
---------
Total $104,004,866
============
Deposit accounts of officers, directors and their associates aggregated
$1,297,555 and $2,750,479 at December 31, 2001 and 2000, respectively.
NOTE J - INCOME TAXES
The components of the income tax provision are as follows:
2001 2000
-----------------------
Current:
Federal $906,882 $643,597
Deferred:
Federal (201,362) 183,875
State --- (7,395)
-------- ---------
(201,362) 176,480
-------- -------
Total $705,520 $820,077
======== ========
A reconciliation of the anticipated income tax expense (computed by applying the
Federal statutory income tax rate of 34% to the income before taxes) to the
provision for income taxes as reported in the statements of income is as
follows:
2001 2000
---- ----
Provision for income taxes at statutory Federal rate $ 884,259 34% $ 891,725 34%
Increase (decrease) resulting from:
Tax exempt income (116,988) (4) (42,315) (2)
Nondeductible interest expense 13,686 1 4,159 --
Other (75,437) (4) (33,492) (1)
--------------- -------------
Provision for income taxes $ 705,520 27% $ 820,077 31%
=============== =============
F-12
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at December
31, 2001 and 2000 are presented below:
2001 2000
-------------------------
Deferred tax assets:
Allowance for loan losses $ 325,628 $ 330,443
Depreciation 169,905 164,987
Accrued expenses 180,318 134,491
All other 82,868 67,919
--------- ---------
Total gross deferred tax assets 758,719 697,840
--------- ---------
Deferred tax liabilities:
Tax bad debt reserve (153,536) (153,536)
Prepaid pension costs (199,006) (172,679)
Net deferred loan costs (325,518) (487,300)
Unrealized gain on available for sale securities (7,889) (5,237)
Prepaid expenses and other (11,496) (16,524)
-------- --------
Total gross deferred tax liabilities (697,445) (835,276)
-------- --------
Net deferred tax asset (liability) $ 61,274 $(137,436)
========= ==========
Based on the Corporation's earning history and amount of income taxes paid in
prior years, management believes that it is more likely than not that the
deferred tax asset will be realized.
Effective for taxable years commencing after December 31, 1998, financial
services institutions doing business in Connecticut are permitted to establish a
"passive investment company" ("PIC") to hold and manage loans secured by real
property. PICs are exempt from Connecticut corporation business tax, and
dividends received by the financial services institution's parent from PICs are
not taxable. In August 2000, the Bank established a PIC, as a wholly-owned
subsidiary, and beginning in October 2000, began to transfer a portion of its
residential and commercial mortgage loan portfolios from the Bank to the PIC. A
substantial portion of the Corporation's interest income is now derived from the
PIC, an entity that has been organized as a state tax exempt entity, and
accordingly there is no provision for state income taxes in 2001 and 2000.
NOTE K - EMPLOYEE BENEFITS
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan that
covers substantially all employees who have completed one year of service and
have attained age 21. The benefits are based on years of service and the
employee's compensation during the last five years of employment. The Bank's
funding policy is to contribute amounts to the Plan sufficient to meet the
minimum funding requirements set forth in ERISA, plus such additional amounts as
the Bank may determine to be appropriate from time to time. The actuarial
information has been calculated using the projected unit credit method.
F-13
The following table sets forth the plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 2001 and 2000 using a
measurement date of December 31:
Change in benefit obligation: 2001 2000
----------- -----------
Benefit obligation, beginning $ 2,040,037 $ 1,812,770
Service cost 168,069 154,967
Interest cost 149,624 125,283
Actuarial gain 127,671 2,825
Benefits paid (174,234) (55,808)
----------- -----------
Benefit obligation, ending 2,311,167 2,040,037
----------- -----------
Change in plan assets:
Fair value of plans assets, beginning 2,797,880 2,545,708
Actual return on plan assets (287,293) 190,290
Employer contribution 155,535 117,690
Benefits paid (174,234) (55,808)
----------- -----------
Fair value of plan assets, ending 2,491,888 2,797,880
----------- -----------
Funded status 180,721 757,843
Unrecognized net actuarial gain 459,062 (168,257)
Unrecognized service cost (54,470) (81,706)
----------- -----------
Prepaid benefit cost $ 585,313 $ 507,880
=========== ===========
Components of net periodic benefit cost:
Service cost $ 168,069 $ 154,967
Interest cost 149,624 125,283
Expected return on plan assets (212,355) (194,903)
Amortization of prior service cost (27,236) (27,236)
----------- -----------
Net periodic benefit cost $ 78,102 $ 58,111
=========== ===========
Weighted-average assumptions:
Discount rate 7.00% 7.00%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 5.00% 5.00%
EMPLOYEE SAVINGS PLAN: The Bank offers an employee savings plan under section
401(k) of the Internal Revenue Code. Under terms of the Plan, employees may
contribute up to 10% of their pre-tax compensation. Currently, the Bank makes
matching contributions equal to 75% of participant contributions up to the first
4% of pre-tax compensation of a contributing participant. Participants vest
immediately in both their own contributions and the Bank's contributions.
Employee savings plan expense was $78,737 for 2001 and $75,250 for 2000.
OTHER BENEFIT PLANS: Effective September 1, 1994, the Bank entered into a
supplemental retirement plan with the President/Chief Executive Officer which
was replaced by an executive supplemental compensation agreement effective
November 21, 2000. At December 31, 2001 and 2000 accrued supplemental retirement
benefits of $125,808 and $81,904 respectively, are recognized in the
Corporation's balance sheet related to this plan. For the years ended December
31, 2001 and 2000, $43,904 and $37,138 of related expenses are included in
operations.
Effective December 31, 1996, the Bank entered into a supplemental retirement
plan with the Bank's Senior Lending Officer, who retired in 1997. At December
31, 2001 and 2000, accrued supplemental retirement benefits of $26,946, are
recognized in the Corporation's balance sheet related to this Plan. Payments to
this retiree will be $5,000 per year through 2008.
Beginning in 1996, the Corporation offers directors the option to defer their
directors' fees. If deferred, the fees are held in a trust account with the
Bank. The Bank has no control over the trust. The value (on a cost basis) of the
related trust assets and corresponding liability of $300,391 and $252,821 at
December 31, 2001, and 2000, respectively are included in the Corporation's
balance sheet.
In 2000, the Bank adopted a long-term incentive compensation plan for its
executive officers and directors. Under this plan, officers and directors are
awarded deferred incentive compensation annually based on the earnings
performance of the Bank. Twenty percent of each award vests immediately, and the
remainder vests ratably over the next four years, however, awards are
immediately vested upon change of control of the Bank, or when the participants
reach their normal retirement date or early retirement age, as defined. In
addition, interest is earned annually on the vested portion of the awards. Upon
retirement, the participants' total deferred compensation, including earnings
thereon, may be paid out in one lump sum, or paid in equal annual installments
over fifteen years for executive officers and ten years for directors. For the
years ended December 31, 2001 and 2000, $43,308 and $33,891, respectively, were
charged to operations under this plan. The related liability, of $77,199 and
$33,891 at December 31, 2001 and 2000, respectively, is included in accrued
expenses and other liabilities. At December 31, 2001 and 2000, unvested benefits
earned under this plan were approximately $42,000 and $26,500, respectively.
F-14
The Bank has an investment in, and is the beneficiary of, life insurance
policies on the lives of certain directors and officers. The purpose of these
life insurance investments is to provide income through the appreciation in cash
surrender values of the policies, which is used to offset the costs of the
long-term incentive compensation plan as well as other employee benefit plans.
These policies have aggregate cash surrender values of approximately $5,948,000
and $3,692,000 at December 31, 2001 and 2000, respectively.
The Corporation has agreements with certain members of senior management which
provide for cash severance payments equal to two times annual compensation for
the previous year, upon involuntary termination or reassignment of duties
inconsistent with the duties of a senior executive officer, within 24 months
following a "change in control" (as such terms are defined in the agreements).
In addition, the agreements provide for the continuation of health and other
insurance benefits for a period of 24 months following a change in control. The
Corporation has similar agreements with other members of management which
provide for cash severance of six months annual compensation if termination or
reassignment of duties occurs within six months following a change of control,
and provide for the continuation of health and other insurance benefits for a
period of six months following a change in control.
NOTE L - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
On November 29, 2001 and November 30, 2000, the Board of Directors declared 5%
stock dividends payable on December 31, 2001 and December 29, 2000,
respectively. Payment of these dividends resulted in the issuance of 83,620
additional common shares in December 2001 and 79,654 additional common shares in
December 2000. The market value of the shares issued was charged to retained
earnings, the par value of the shares issued was credited to common stock and
the remainder was credited to capital surplus. Fractional shares were payable in
cash on an equivalent share basis of $12.20 for the 2001 stock dividend and
$10.00 for the 2000 stock dividend.
Weighted-average shares and per share data have been restated to give effect to
all stock dividends and splits.
In January 2001, the Board of Directors of the Corporation adopted a resolution
authorizing the Corporation to repurchase up to 50,000 shares of the
Corporation's common stock from time to time for a period of one year, at prices
to be determined by the Corporation and sellers at the time of each transaction.
The following is information about the computation of net income per share for
the years ended December 31, 2001 and 2000. The 2000 information has been
restated to give retroactive effect to all stock dividends and stock splits for
the periods presented.
For the Year Ended December 31, 2001
------------------------------------
Net
Income Shares Amount Per Share
------ ------ ------ ---------
Basic Net Income Per Share
Income available to common stockholders $1,895,242 1,669,759 $ 1.14
========
Effect of Dilutive Securities
Options Outstanding -- 27,715
---------- ---------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $1,895,242 1,697,474 $ 1.12
========== ========= ========
For the Year Ended December 31, 2000
-------------------------------------
Net Per Share
Income Shares Amount
------ ------ ------
Basic Net Income Per Share
Income available to common stockholders $1,802,643 1,665,199 $ 1.08
========
Effect of Dilutive Securities
Options Outstanding -- 35,872
----------- ---------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $1,802,643 1,701,071 $ 1.06
========== ========= ========
NOTE M - STOCK OPTION PLANS
At December 31, 2001, the Corporation has two fixed option plans, which are
described below. The Corporation has elected to apply APB Opinion No. 25 to
account for the stock options granted to employees, including directors, and
accordingly, no compensation cost has been recognized in the consolidated
statements of income for the fixed stock option plans. Had compensation cost for
the options granted been determined consistent with SFAS No. 123, the
Corporation's 2000 net income and earnings per share amounts would have been
reduced to the pro forma amounts indicated below:
F-15
Years ended December 31, 2000
-----------
Net income As Reported $1,802,642
Pro forma $1,799,160
Basic net income per share As Reported $ 1.08
Pro forma $ 1.08
Diluted net income per share As Reported $ 1.06
Pro forma $ 1.06
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing. There were no options granted in 2001 or 2000, and
in 2001, there was no proforma compensation for options issued in prior years as
all options were fully vested at December 31, 2000.
OPTION PLAN FOR PRESIDENT
In 1990 the Board of Directors granted the Corporation's President/Chief
Executive Officer certain stock options to purchase a maximum of 3,000 shares of
the Corporation's common stock. The exercise price of $55 per share was the fair
market value of the common stock on March 1, 1990, the date the President joined
the Corporation. The stock options are exercisable for up to 20% of the 3,000
shares approved per annum (600 shares), and expire ten years from the grant
thereof. The options are cumulative so that if shares are not purchased in any
particular year, such shares may be purchased in a subsequent year.
In 1994, the Board of Directors amended the plan to provide for adjustments in
the price and number of options granted upon the occurrence of changes in the
Corporation's capital structure. The effect of this amendment, as of December
31, 1999, was to retroactively increase the number of options to 30,548 to
include the effect of the annual 5% stock dividends paid since April 11, 1990 as
well as the stock splits of February 8, 1995 and April 30, 1998. For the year
ended December 31, 2000, 29,997 options were exercised under this plan. At
December 31, 2001 and 2000, there were no outstanding options under this plan.
OPTION PLAN FOR OFFICERS AND OUTSIDE DIRECTORS
A stock option plan for officers and outside directors was approved by the
shareholders during 1994. The price and number of options in the plan have been
adjusted for all stock dividends and splits.
The stock option plan for directors automatically granted each director an
initial option of 2,778 shares of the Corporation's common stock. Automatic
annual grants of an additional 471 shares for each director were given for each
of the four following years.
The stock option plan for officers grants options based upon individual officer
performance.
Under both the director and officer plans, the price per share of the option is
the fair market value of the Corporation's stock at the date of the grant. No
option may be exercised until 12 months after it is granted. Options are
exercisable for a period of ten years from the grant thereof.
Activity in the option plan for officers and outside directors for 2001 and 2000
is summarized as follows: (The number of shares and price per share have been
adjusted to give retroactive effect to all stock dividends and splits.)
2001 2000
-------------------------------- -------------------------------------
Weighted Weighted
Number of Average Exercise Number of Average Exercise
Shares Price Per Share Shares Price Per Share
---------- ------------------- ----------- --------------------
Options outstanding at beginning of year 112,438 $ 10.15 112,438 $ 10.15
Granted --- --- --- ---
Exercised --- --- --- ---
Cancelled --- --- --- ---
---------- -----------
Options outstanding at end of year 112,438 10.15 112,438 10.15
========== ===========
Options exercisable at end of year 112,438 10.15 112,438 10.15
========== ===========
At December 31, 2001, exercise prices ranged from $5.83 to $15.98 with an
average remaining contractual life of 4.7 years and a weighted average exercise
price of $10.15.
During 2000, the option plan for officers and directors expired. Shares reserved
for issuance of common stock under all the option plans is equal to the amount
of options outstanding at the end of the year or 112,438.
F-16
NOTE N - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Corporation from its assets which are mainly provided
by dividends from the Bank. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Corporation in the form of cash
dividends, loans or advances. The approval of the Comptroller of the Currency is
required to pay dividends in excess of the Bank's earnings retained in the
current year plus retained net profits for the preceding two years. As of
December 31, 2001, the Bank had retained earnings of approximately $15,413,000
of which approximately $4,184,553 was available for distribution to the
Corporation as dividends without prior regulatory approval.
Under Federal Reserve regulation, the Bank is also limited to the amount it may
loan to the Corporation, unless such loans are collateralized by specified
obligations. At December 31, 2001, the amount available for transfer from the
Bank to the Corporation in the form of loans is limited to 10% of the Bank's
capital stock and surplus.
NOTE O - COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
instruments include commitments to extend credit and unused lines of credit, and
expose the Bank to credit risk in excess of the amounts recognized in the
balance sheets.
The contractual amounts of commitments to extend credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral become worthless. The Bank
uses the same credit policies in making off-balance-sheet commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
believes that the Bank controls the credit risk of these financial instruments
through credit approvals, credit limits, monitoring procedures and the receipt
of collateral as deemed necessary. Total credit exposures at December 31, 2001
and 2000 related to these items are summarized below:
2001 2000
--------------- -----------
Contract Amount Contract Amount
Loan commitments:
Approved mortgage and equity loan commitments$ 5,479,000 $ 3,314,000
Unadvanced portion of construction loans 4,458,000 2,641,000
Unadvanced portion of:
Commercial lines of credit 7,006,000 4,641,000
Home equity lines of credit 24,536,000 17,404,000
Overdraft protection 579,000 558,000
Credit Cards 1,329,000 1,627,000
Floor plans 633,000 1,103,000
Standby letters of credit 50,000 50,000
------------- -----------
$ 44,070,000 $31,338,000
============= ===========
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some 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 credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held is primarily residential
property. Interest rates on the above are primarily variable. Standby letters of
credit are written commitments issued by the Bank to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. These financial instruments are recorded in the financial statements
when they become payable.
LEGAL PROCEEDINGS
The Corporation is involved in various legal proceedings which arose during the
course of business and are pending against the Corporation. Management believes
the ultimate resolution of these actions and the liability, if any, resulting
from such actions will not materially affect the financial condition or results
of operations of the Corporation.
NOTE P - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2001 and 2000, the Bank paid approximately
$228,000 and $157,000, respectively, for insurance and legal fees, to companies,
the principals of which are Directors of the Corporation.
NOTE Q - REGULATORY CAPITAL
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
F-17
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) of total Tier 1 Capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 Capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2001 that the Bank meets all
capital adequacy requirements to which it is subject.
Tier 1 capital consists of common shareholders' equity, noncumulative and
cumulative perpetual preferred stock, and minority interests less goodwill.
Total capital includes the allowance for loan losses (up to a certain amount),
perpetual preferred stock (not included in Tier 1), hybrid capital instruments,
term subordinated debt and intermediate-term preferred stock. Risk adjusted
assets are assets adjusted for categories of on and off-balance sheet credit
risk.
As of December 31, 2001 the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There were no conditions or events since that notification
that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios compared to required regulatory
amounts and ratios are presented below:
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Purposes
--------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2001:
Total Capital to Risk Weighted Assets $19,082,396 11.18% $13,654,666 8% $17,068,333 10%
Tier I Capital to Risk Weighted Assets 18,124,665 10.62 6,826,616 4 10,239,924 6
Tier I Capital to Average Assets 18,124,665 6.85 10,583,746 4 13,229,682 5
As of December 31, 2000:
Total Capital to Risk Weighted Assets $17,856,442 10.71% $13,338,145 8% $16,672,682 10%
Tier I Capital to Risk Weighted Assets 16,884,551 10.13 6,667,147 4 10,000,721 6
Tier I Capital to Average Assets 16,884,551 6.37 10,602,544 4 13,253,180 5
The Corporation is also considered to be well capitalized under the regulatory
framework specified by the Federal Reserve. Actual and required ratios are not
substantially different from those shown above.
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value of other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Corporation.
Management uses its best judgement in estimating the fair value of the
Corporation's financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Corporation could have realized in a sales
transaction at either December 31, 2001 or 2000. The estimated fair value
amounts for 2001 and 2000 have been measured as of their respective year-ends,
and have not been reevaluated or updated for purposes of these financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year-end.
The information presented should not be interpreted as an estimate of the fair
value of the entire Corporation since a fair value calculation is only required
for a limited portion of the Corporation's assets and liabilities. Due to the
wide range of valuation techniques and the degree of subjectivity used in making
the estimate, comparisons between the Corporation's disclosures and those of
other companies or banks may not be meaningful.
The fair value of the Federal Home Loan Bank stock and Federal Reserve Bank
stock is estimated to equal the carrying value, due to the historical experience
that these stocks are redeemed at par.
F-18
The fair value of securities is based on quoted market prices or dealer quotes,
if available, or if not available, on dealer quotes for similar instruments.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential mortgages,
commercial mortgages, construction mortgages, commercial, installment and other
loans. Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
Fixed rate loans were priced using the discounted cash flow method. The fair
value was determined using a discount rate equivalent to the prevailing market
interest rate for similar loans.
Variable rate loans were valued at carrying value due to the frequent repricing
characteristics of the portfolio. The remaining portfolio, such as collateral,
home equity lines and overdraft protection loans were valued at carrying value
due to the frequent repricing characteristics of the portfolios. The fair value
of fees associated with off-balance-sheet lending commitments is based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standings.
Nonperforming loans were valued using either the discounted cash flow method or
collateral value, if collateral dependent. Discounted cash flows were determined
using a discount rate commensurate with the anticipated risks and repayment
period.
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, and money market accounts, is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit and other borrowings is based on the discounted value of contractual
cash flows that applies interest rates currently offered or that would be paid
for deposits or borrowings of similar remaining maturities to a schedule of
aggregate expected maturities.
Cash and due from banks, federal funds sold, interest income receivable, and
short term borrowings are short term, and therefore, book value is a reasonable
estimate of fair value.
The recorded book balances and estimated fair values of the Corporation's
financial instruments at December 31, 2001 and 2000 are as follows:
2001 2000
---------------------------- ------------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
Financial Assets:
Cash and due from banks $ 8,103,221 $ 8,103,221 $ 10,897,885 $ 10,897,885
Available for sale securities 61,860,648 61,860,648 48,365,828 48,365,828
Held to maturity securities 308,364 319,172 982,723 988,944
Federal Home Loan Bank stock 2,389,800 2,389,800 2,389,800 2,389,800
Federal Reserve Bank stock 81,850 81,850 81,850 81,850
Loans, net 185,733,655 192,205,615 191,427,588 189,106,709
Accrued interest receivable 1,309,246 1,309,246 1,815,364 1,815,364
Financial Liabilities:
Savings deposits 42,304,004 42,304,004 40,827,383 40,827,383
Money market and demand deposits 92,264,956 92,264,956 81,334,238 81,334,238
Time certificates of deposit 104,004,866 105,375,437 95,117,735 95,096,234
Federal Home Loan Bank Advances 12,000,000 11,981,393 28,000,000 28,000,000
Collateralized borrowings -- -- 973,986 973,986
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 2001 and 2000.
The Bank assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, the fair values
of the Bank's financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the Bank. Management
attempts to match maturities of assets and liabilities to the extent believed
necessary to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and
by investing in securities with terms that mitigate the Bank's overall interest
rate risk.
F-19
NOTE S - OTHER COMPREHENSIVE INCOME
Other comprehensive income, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as follows:
2001
--------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
Unrealized holding gains arising during the period $ 157,847 $(42,900) $ 114,947
Less: reclassification adjustment for gains recognized in net income (148,090) 40,248 (107,842)
--------- -------- ---------
Unrealized holding gain on available for sale securities, net of taxes $ 9,757 $ (2,652) $ 7,105
========= ======== =========
2000
--------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
Unrealized holding losses arising during the period $1,083,679 $(429,156) 654,523
Less: reclassification adjustment for gains recognized in net income -- -- --
---------- --------- -------
Unrealized holding loss on available for sale securities, net of taxes $1,083,679 $(429,156) 654,523
========== ========= =======
F-20
NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION
FIRST LITCHFIELD FINANCIAL CORPORATION
Condensed Balance Sheets Years Ended December 31,
-----------------------------------------------
2001 2000
--------------- ---------------
Assets
Cash and due from banks $ 281,707 $ 179,729
Investment in The First National Bank of Litchfield 18,139,979 16,892,760
Other assets 20,472 106,316
---------------- ---------------
Total Assets $ 18,442,158 $ 17,178,805
================ ===============
Liabilities and Shareholders' Equity
Liabilities:
Other liabilities $ 166,976 $ 159,046
---------------- ---------------
Total Liabilities 166,976 159,046
---------------- ---------------
Shareholders' equity 18,275,182 17,019,759
---------------- ---------------
Total Liabilities and Shareholders' Equity $ 18,442,158 $ 17,178,805
================ ===============
Condensed Statements of Income Years Ended December 31,
------------------------------------------------
2001 2000
------------------ ---------------
Dividends from subsidiary $ 695,000 $ 505,000
Other expenses, net 60,344 49,988
------------------ ---------------
Income before taxes and equity in earnings of subsidiary 634,656 455,012
Income tax benefit (20,472) (16,831)
------------------- -----------------
Income before equity in undistributed earnings of subsidiary 655,128 471,843
Equity in undistributed earnings of subsidiary 1,240,114 1,330,800
------------------ ---------------
Net income $ 1,895,242 $ 1,802,643
================== ===============
Condensed Statements of Cash Flows Years Ended December 31,
------------------------------------------------
2001 2000
------------------ ---------------
Cash flows from operating activities:
Net Income $ 1,895,242 $ 1,802,643
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,240,114) (1,330,800)
Other, net 85,844 (15,022)
------------------ -----------------
Cash provided by operating activities 740,972 456,821
------------------ ---------------
Cash flows from financing activities:
Stock options exercised --- 162,284
Distribution in cash for fractional shares of common stock (2,808) (2,125)
Dividends paid on common stock (636,186) (602,973)
------------------ ----------------
Cash used by financing activities (638,994) (442,814)
------------------ ----------------
Net increase in cash and cash equivalents 101,978 14,007
Cash and cash equivalents at the beginning of the year 179,729 165,722
------------------ ---------------
Cash and cash equivalents at the end of the year $ 281,707 $ 179,729
================== ===============
F-21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the accountants of the Company or
the Bank during the 24 month period prior to December 31, 2001, or subsequently.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information concerning Directors and Executive
Officers of the Company and/or the Bank. Unless otherwise indicated, each person
has held the same or a comparable position with his present employer for the
last five years. The Directors of the Company are elected for a term of three
years with approximately one-third of the Directors elected in any one year. The
Directors of the Bank and the officers of the Bank and the Company are all
elected for terms of one year.
Position Held with Expiration Date
Name and Age the Company of Current Term
- ------------ ------------------- ---------------
Clayton L. Blick (84) Director of the Company since 1988 and of the Bank since 1953 (1) 2002
Ernest W. Clock (77) Chairman of the Board of Directors; Director of the Company since 2004
1988 and of the Bank since 1973 (2)
John H. Field (76) Director of the Company and the Bank since 1990 (3) 2003
Bernice D. Fuessenich (83)Director of the Company since 1988 and of the Bank since 1978 (4) 2002
Perley H. Grimes, Jr. (57)Director of the Company since 1988 and of the Bank since 1984 (5) 2003
Thomas A. Kendall (46) Director of the Company and of the Bank since 1999 (6) 2003
George M. Madsen (68) Director of the Company and the Bank since 1988 (7) 2004
Alan B. Magary (59) Director of the Company and the Bank since 2002 (8) 2004
Charles E. Orr (66) Director of the Company since 1988 and of the Bank since 1981 (9) 2003
William J. Sweetman (55) Director of the Company and the Bank since 1990 (10) 2004
H. Ray Underwood (48) Director of the Company and of the Bank since 1998 (11) 2002
Patricia D. Werner (55) Director of the Company and the Bank since 1996 (12) 2004
Jerome J. Whalen (60) President, Chief Executive Officer and Director of the Company and 2002
of the Bank since 1990 (13)
Carroll A. Pereira (46) Senior Vice President and Chief Financial Officer of the Bank and N/A
Treasurer of the Company since 1984
Philip G. Samponaro (60) Senior Vice President, Chief Administrator, Cashier and Secretary of N/A
the Bank since 1976
Revere H. Ferris (60) Senior Vice President and Senior Loan Officer of the Bank since 1997 (14) N/A
John S. Newton (63) Senior Vice President and Trust Officer of the Bank since 1999 (15) N/A
- ---------------------
1. Mr. Blick is a Partner in the Law Firm of Cramer & Anderson.
2. Mr. Clock is Chairman of the Board of F. North Clark Insurance Agency.
3. Mr. Field is retired. He served as Executive Vice President of Union
Carbide Corporation until December 1986.
4. Ms. Fuessenich is a realtor and an owner of the Fuessenich Agency.
5. Mr. Grimes is a Partner in the Law Firm of Cramer & Anderson.
23
6. Mr. Kendall is a self employed investor.
7. Mr. Madsen is retired. He formerly served as President of Roxbury
Associates, Inc.
8. Mr. Magary is retired. He served as principal of Magary Consulting Services
through December 1999.
9. Mr. Orr is President of New Milford Volkswagen, Inc.
10. Mr. Sweetman is the President and owner of Dwan & Co., Inc.
11. Mr. Underwood is Secretary and Treasurer of Underwood Services, Inc.
12. Ms. Werner is the head of the Washington Montessori Association, Inc.
13. Mr. Whalen has served as the President of the Company and the Bank since
March 1, 1990.
14. Mr. Ferris has served as Senior Vice President and Senior Loan Officer of
the Bank since 1997. Mr. Ferris served as Vice President from January, 1997
through December, 1997 and served as Assistant Vice President from January,
1996 through December, 1996.
15. Mr. Newton has served as Senior Vice President and Trust Officer of the
Bank since April, 1999. Prior to joining the Bank, Mr. Newton served as
Vice President and Senior Trust Officer of The Bank of Western
Massachusetts from October, 1995 to April, 1999.
There are no arrangements or understandings between any of the Directors or any
other persons pursuant to which any of the above Directors have been selected as
Directors.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain information regarding the compensation paid
by the Company and the Bank to certain Executive Officers of the Company and the
Bank for services rendered in all capacities during the fiscal years ended
December 31, 2001, 2000 and 1999. Other than the Named Executive Officers set
forth below (the "Named Executive Officers") no other individual employed by the
Company and/or the Bank received aggregate compensation of $100,000 or more
during the fiscal year ended December 31, 2001.
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM COMPENSATION
Annual Compensation Awards Payout
- ------------------------------------------------------------------------------ ------------ ------
Restricted
Name and Principal Other Annual Stock Options/ LTIP All Other
Positon Year Salary($)(1)(2) Bonus($) Compensation($) Awards($) SARs(#) Payout Compensation ($)
Jerome J. Whalen 2001 $194,683 -- $ 16,744 (3)
President and Chief 2000 $195,331 -- $ 270,308 (4)
Executive Officer 1999 $186,454 5,855 (5) $ 6,061 (6)
of the Bank and
Company
Revere H. Ferris 2001 $106,716 -- $ 8,679 (7)
Senior Vice President 2000 $107,056 -- $ 3,205 (8)
of the Bank and 1999 $102,316 3,861 (5) $ 3,064 (8)
Senior Loan Officer of
The Bank
John S. Newton 2001 $119,700 $ 8,883 (9)
Senior Vice President and 2000 $119,700 $ 2,018 (8)
Trust Officer of the Bank 1999 $ 90,200
Carroll A. Pereira 2001 $100,787 -- $ 8,403 (10)
Treasurer of the 2000 $101,127 -- $ 3,028 (8)
Company, Senior 1999 $ 96,472 3,861 (5) $ 2,888 (8)
Vice President and
Chief Financial
Officer of the Bank
Philip G. Samponaro 2001 $106,196 -- $ 8,679 (11)
Senior Vice President, 2000 $106,536 -- $ 3,190 (8)
Chief Administrative 1999 $101,796 3,861 (5) $ 3,048 (8)
Officer and Cashier
of the Bank and
Secretary of the
Company
24
1. The Company furnishes the Named Executive Officers with certain non-cash
compensation and other personal benefits aggregating less than 10% of their
cash compensation.
2. All employees of the Bank, including the above officers, are eligible after
1 year of service to participate in the Bank's 401(k) deferred compensation
plan. The Bank's contribution of up to 75% of the first 4% of each
employee's voluntary salary reduction contributed to the 401(k) plan
becomes immediately vested. The Officer's compensation above is without
deduction for their 401(k) contribution.
3. Amount includes the Named Executive Officer's taxable benefit portion of
the Split Dollar Life Insurance policy for the benefit of the Named
Executive Officer pursuant to the 1994 Supplemental Employee Retirement
Plan Agreement, $500. ( See "1994 Supplemental Employee Retirement Plan for
Mr. Whalen"). Additionally, the amount includes $5,733 which is the Bank's
matching contribution to the Bank's 401(k) plan for the benefit of the
Named Executive Officer. Additionally, amount includes $10,511 awarded to
Mr. Whalen pursuant to the Bank's Long Term Incentive and Deferred
Compensation Plan. (See "Long Term Incentive and Deferred Compensation
Plans.")
4. Amount includes the Named Executive Officer's taxable benefit portion of
the Split Dollar Life Insurance policy, for the benefit of the Named
Executive Officer pursuant to the 1994 Supplemental Employee Retirement
Plan Agreement, $478. Additionally, the amount includes $263,974, which can
be attributed to the exercise of stock options by the Named Executive
Officer and $5,856 which is the Bank's matching contribution to the Bank's
401(k) plan for the benefit of the Named Executive Officer.
5. Options granted pursuant to the 1994 Stock Option Plan for officers and
outside directors. The numbers of options have been adjusted to reflect
stock splits and dividends. (See "1994 Stock Option Plan for Officers and
Outside Directors").
6. Amount includes the Named Executive Officer's taxable benefit portion of
the Split Dollar Life Insurance policy for the benefit of the Named
Executive Officer pursuant to the 1994 Supplemental Employee Retirement
Plan Agreement, $460. (See "1994 Supplemental Employee Retirement Plan")
Additionally, the amount includes $5,601 which is the Bank's matching
contribution to the Bank's 401(k) plan for the benefit of the Named
Executive Officer.
7. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer. Additionally, amount
includes $5,616 awarded to Mr Ferris pursuant to the Banks Long-Term
Incentive and Deferred Compensation Plan (see "Long-Term Incentive and
Deferred Compensation Plans.")
8. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer.
9. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer, $3,135. Additionally,
amount includes $5,748 awarded to Mr. Newton pursuant to the Bank's Long
Term Incentive and Deferred Compensation Plan. (See "Long Term Incentive
and Deferred Compensation Plans.")
10. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer, $2,985. Additionally,
amount includes $5,418 awarded to Ms. Pereira pursuant to the Bank's Long
Term Incentive and Deferred Compensation Plan. (See "Long Term Incentive
and Deferred Compensation Plans.")
11. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer, $3,063. Additionally,
amount includes $5,616 awarded to Mr. Samponaro pursuant to the Bank's Long
Term Incentive and Deferred Compensation Plan. (See "Long Term Incentive
and Deferred Compensation Plans.")
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
The following table sets forth information regarding stock options that
were exercised, if any, during the last fiscal year, and unexercised stock
options held by the Named Executive Officers. The number of options and the per
share exercise prices have been adjusted to reflect stock splits and dividends.
Number of
Securities/ Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares Acquired Value Realized at FY-End (#) At FY-End ($)(1)
Name on Exercise (#) ($)(2) Exercisable/Unexercisable (3)Exercisable/Unexercisable (3)
- ---- --------------- ----------------------------------------- --------------------------------
Jerome J. Whalen 0 $ 0 29,303 $98,461
Revere H. Ferris 0 0 8,108 $ 6,689
Carroll A. Pereira 0 0 15,480 $38,905
Philip G. Samponaro 0 0 19,002 $63,629
1. Represents the difference between the closing bid price of the Company's
common stock at December 31, 2001, $13.75, and the exercise price of
options, multiplied by the number of options. No SARs have been granted by
the Company. Options are in the money if the fair market value of the
underlying securities exceeds the exercise or base price of the options.
2. Represents the difference between the closing bid price of the Company's
common stock on the date the options are exercised and the exercise price
of options, multiplied by the number of options.
3. All options are exercisable.
Agreements with Management
While there are no employment contracts between the Company and any of its
Executive Officers, there are change of control agreements between the Bank and
its Executive Officers. These agreements provide that in certain instances if
the Executive Officer is terminated or reassigned within twenty-four (24) months
following the occurrence of a change of control (as such term is defined in the
Change of Control Agreements), then such individual shall be entitled to receive
an amount as provided by such agreement equal to twenty-four (24) months salary,
reasonable legal fees and expenses incurred by the Executive Officer as a result
of such termination or reassignment, and continued participation in certain
benefit plans.
25
Agreements with Employees
While there are no employment contracts between the Company and any of its
employees, there are change of control agreements between the Bank and
twenty-eight (28) employees who have been employed by the Bank for more than ten
years. These agreements provide that in certain instances if the employee is
terminated or reassigned within six (6) months following the occurrence of a
change of control (as such term is defined in the Change of Control Agreements),
then such individual shall be entitled to receive an amount as provided by such
agreement equal to six (6) months salary, reasonable legal fees and expenses
incurred by the employee as a result of such termination or reassignment, and
continued participation in certain benefit plans.
Long Term Incentive and Deferred Compensation Plans
- ---------------------------------------------------
During November and December 2000, the Bank entered into Long Term Incentive
Retirement Agreements (the "Executive Incentive Agreements") with the Named
Executive Officers to encourage the Executives to remain employees of the Bank.
The Executive Incentive Agreements will trigger the award of deferred bonuses to
the Named Executive Officers if specified Bank performance objectives are
achieved, based upon a formula approved by the Board of Directors and upon which
tax deferred earnings will accrue at rates which will generally range between 4%
and 15%. Amounts are awarded after the end of each fiscal year. Such awards will
immediately vest 20% per additional year of service subsequent to the year with
respect to which the award is granted with 100% vesting upon a change in control
termination without cause, or, at normal retirement or at age 55 with 20 years
of service. In the Named Executive Officer dies while serving as an executive
officer of the Bank, the amount payable to the participant's beneficiary is
projected to be equivalent to the participant's projected retirement benefit (as
defined in the Executive Incentive Agreements) if the Bank acquires and
maintains a corporate life insurance policy on the life of the participant at
the time of death (see below). Upon retirement, the Named Executive Officers'
total deferred compensation, including earnings thereon, may be paid out in one
lump sum, or paid in equal annual installments over fifteen (15) years.
During November and December 2000, the Bank entered into Long Term Incentive
Retirement Agreements with each of its Directors (the "Director Incentive
Agreements") to reward past service and encourage continued service of each
Director. The Director Incentive Agreements will award a director with a right
to earn and defer the receipt of a bonus in an amount of percentage of director
and retainer fees, and have earnings accrue on such amounts at a rate
anticipated to be between 4% and 15% and generally equivalent to the
appreciation in the Company's stock price over the period of time for which the
fees are deferred pursuant to the Director Incentive Agreements if specified
Bank performance objectives are achieved. All amounts in the Director Incentive
Agreements will immediately vest 20% per additional year of service with 100%
vesting upon a change in control, at normal retirement or full term years of
service. If a participant dies while serving as an outside director of the Bank,
the amount payable to the participant's beneficiary is projected to be
equivalent to the participant's projected retirement benefit (as defined in the
Director Incentive Agreements) if the Bank has acquired and maintains a
corporate life insurance policy on the life of the participant at the time of
death (see below). Upon retirement, the Directors' total deferred compensation,
including earnings thereon, may be paid out in one lump sum, or paid in equal
annual installments over ten (10) years.
In concert with the Executive and Director Incentive Agreements, the Bank has
invested $5.5 million in universal cash surrender value life insurance.
Insurance policies were acquired on the lives of each of the Bank's Named
Executive Officers, five (5) non-senior officers and all but three (3) of the
Bank's directors which are designed to recover the costs of the Bank's Executive
and Director Incentive Agreements. The policy death benefit has been structured
to indemnify the Bank against the death benefit provision of these benefit
agreements. The policies were paid with a single premium. Policy cash values
will earn interest at a current rate of approximately 4.9% and policy mortality
costs will be charged against the cash value monthly. There are no loan or
surrender charges associated with the policies.
Supplemental Employee Retirement Plan for President Whalen
- -----------------------------------------------------------
Effective September 1, 1994, the Bank entered into a Supplemental Employee
Retirement Plan Agreement (SERP) with Jerome J. Whalen, President and CEO. The
SERP was amended in 1998. The purpose of the SERP is to provide President Whalen
with increased retirement benefits through a trust arrangement, such that his
total retirement payments from all sources will approximate 60% of his last five
years annual compensation. The premium paid by the Bank on the policy to fund
the SERP during 2001 was $37,250. Upon the death of Mr. Whalen, the Bank expects
to recover its costs from the face amount of the policy. Upon termination of
employment, prior to retirement, Mr. Whalen may continue the policy, provided he
makes all future premium payments.
1990 Stock Option Agreement with President Whalen
- -------------------------------------------------
The Board of Directors, with shareholder approval on April 11, 1990, granted the
Company's President, Jerome J. Whalen, stock options to purchase a maximum of
3,000 shares of the Company's Common Stock (the "1990 Plan"). The options have a
term of ten years from the 1990 date of grant. The original exercise price was
$55.00 per share which was the fair market value of the Common Stock on March 1,
1990, the date Mr. Whalen joined the Company as President and Chief Executive
Officer. On May 4, 1994, an amendment to the 1990 Plan was approved by
shareholders thereby increasing the number of stock options available to
President Whalen on December 31, 1994 to 3,829 at an adjusted price of $43.08
per share. As a result of stock splits and dividends, as of December 31, 1999,
President Whalen had options to purchase 29,997 shares at a price of $5.41 per
share pursuant to the 1990 Plan. In accordance with the Plan, Mr. Whalen
exercised his options to purchase 29,997 shares of common stock in February,
2000.
26
1994 Stock Option Plan For Officers and Outside Directors
On May 4, 1994, Shareholders approved a stock option plan for officers and
outside directors of the Company and the Bank, respectively (the "1994 Stock
Option Plan"). The Plan expired on May 4, 1999. Pursuant to the 1994 Stock
Option Plan, in 1995, the Board of Directors granted options to President
Whalen, which as a result of stock splits, stock dividends and exercises allows
Mr. Whalen to purchase 5,279 shares of the Company's Common Stock at $6.73 per
share, 5,865 shares of Common Stock at $8.58 per share and 5,865 shares of
common stock of $10.18 per share, and 6,147 shares at an exercise price of
$12.10 per share. In January, 1999, the Board granted options to President
Whalen, which as a result of a stock dividend, allows Mr. Whalen to purchase
6,147 shares at an exercise price of $15.98 per share.
Pursuant to the 1994 Stock Option Plan, in January 1995, the Board of Directors
granted stock options to Mr. Samponaro which as a result of stock splits and
dividends allows him to purchase 3,522 shares of the Company's Common Stock at
$6.73 per share. In January 1996, the Board granted stock options to Ms. Pereira
and Mr. Samponaro which as a result of stock splits and dividends allow each
such individual to purchase 3,686 shares of the Company's Common Stock at $8.58
per share. In January 1997, the Board granted stock options to Ms. Pereira and
Mr. Samponaro which as a result of stock splits and dividends allows such
individuals to purchase 3,686 shares of Common Stock at an exercise price of
$10.18 per share. In January 1998, the Board granted stock options to Ms.
Pereira and Messrs. Ferris, and Samponaro which as a result of stock splits and
dividends allow such individuals to each purchase 4,054 shares of Common Stock
at an exercise price of $12.10 per share. In January, 1999, the Board granted
options to each of these individuals, which as a result of a stock dividend,
allows each individual to purchase 4,054 shares at an exercise price of $15.98
per share.
Pursuant to the 1994 Stock Option Plan, with the exceptions of Patricia D.
Werner who became a director in 1996, H. Ray Underwood who became a Director in
1998 and Thomas A. Kendall who became a Director in 1999, each outside director
who is not an officer of the Company or the Bank ("Outside Director") has
received stock options, which are presently exercisable, to purchase a total of
4,662 shares of the Company's Common Stock. More specifically, in May 1994, each
Outside Director was granted options, which as a result of stock splits and
dividends allows such individuals to purchase 2,778 shares of Common Stock at
$5.83 per share. Moreover, in June, 1995, each Outside Director was granted
options, which as a result of stock splits and dividends allows such individuals
to purchase 471 shares of Common Stock at $6.78 per share. In June 1996, each
Outside Director was granted options, which as a result of stock splits and
dividends, allows such individuals to purchase 471 shares of Common Stock at
$9.29 per share. In June, 1997, each Outside Director was granted options which
as a result of stock splits and dividends allows such individuals to purchase
471 shares of Common Stock at an exercise price of $10.30 per share. In June
1998, each Outside Director was granted options, which as a result of a stock
dividend, allows each individual to purchase 471 shares of Common Stock at an
exercise price of $14.48. Moreover, Patricia D. Werner has options to purchase
3,249 shares of Common Stock consisting of options to acquire 2,778 shares at
$10.33 per share and options to acquire 471 shares at $14.48 per share.
Director Compensation
In 2001, each Director of the Company who was not an employee of the Bank,
received $300 for each Board meeting attended and $275 for each committee
meeting attended. The Chairman of the Board of Directors also receives an annual
retainer of $6,000 and each non-officer director of the Company also receives an
annual retainer of $5,000 for serving as a director. Directors who are employees
of the Bank receive no additional compensation for their services as members of
the Board or any board committee.
Beginning in 1996, the Company offers directors the option to defer their
directors' fees. If deferred, the fees are held in a trust account with the
Bank. The Bank has no control over the trust.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Principal Shareholders
The following table includes certain information as of March 8, 2002 regarding
the principal shareholders (the "Principal Shareholders") of the Company. With
the exception of the Principal Shareholders listed below, the Company is not
aware of any beneficial owner of five percent (5%) or more of the Company's
Common Stock.
Percent of
Name and Address Number of Shares Outstanding
of Beneficial Owner Beneficially Owned (1) Common Stock
- ------------------- ---------------------- ------------
Donald K. Peck 122,534 (2) 7.34%
Litchfield, CT
William J. Sweetman 93,366 (3), (4) 5.59%
Litchfield, CT
(1) The definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship
or otherwise has or shares voting power or investment power with respect to
such security.
27
(2)Includes shares owned by, or as to which voting power is shared with spouse.
(3) Includes options to purchase 4,662 additional shares of the Company's
Common Stock.
(4) Includes 12,987 shares owned by an estate as to which individual has voting
power as fiduciary of said estate.
28
(B) Security Ownership of Directors And Executive Officers
The following table sets forth the number and percentage of Common Stock
beneficially owned by each Director of the Company and the Bank and by all the
Company's and the Bank's Directors and Executive Officers as a group at March 8,
2002. Unless indicated otherwise in a footnote, the Directors and Executive
Officers possess sole voting and investment power with respect to all shares
shown.
Common Shares
Name Of Beneficially Owned
Beneficial Owner At March 8, 2002 (1) Percent of Class
- ---------------------- -------------------- ----------------
Clayton L. Blick 12,723 (2) (3) .76%
Ernest W. Clock 24,891 (2) (3) 1.49%
John H. Field 7,723 (2) .46%
Bernice D. Fuessenich 9,984 (2) .60%
Perley H. Grimes, Jr 14,927 (2) .89%
Thomas A. Kendall 607 .036%
George M. Madsen 15,190 (2) .91%
Alan B. Magary 200 .01%
Charles E. Orr 13,283 (2) .80%
William J. Sweetman 93,366 (2) (4) ` 5.59%
H. Ray Underwood 120 .007%
Patricia D. Werner 3,634 (5) .22%
Jerome J. Whalen 45,914 (3) (6) 2.75%
Carroll A. Pereira 15,682 (3) (7) .94%
Philip G. Samponaro 20,855 (8) 1.25%
Revere H. Ferris 37,947 (9) 2.27%
All Directors and Executive 317,046 18.99%
Officers as a group (15 persons)
- --------------------------------
(1) The definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship
or otherwise has or shares voting power or investment power with respect to
such security.
(2) Includes options to purchase 4,662 shares of common stock.
(3) Includes shares owned by, or as to which voting power is shared with,
spouse, children or controlled business.
(4) Includes 12,987 shares owned by an estate as to which individual has voting
power as fiduciary of said estate.
(5) Includes options to purchase 3,249 shares of common stock.
(6) Includes options to purchase 29,303 shares of common stock.
(7) Includes options to purchase 15,480 shares of common stock.
(8) Includes options to purchase 19,002 shares of common stock. Includes 1,034
shares of common stock held in a trust for which Mr. Samponaro is a
beneficiary.
(9) Includes options to purchase 8,108 shares of common stock. In addition, the
total for Mr. Ferris includes 15,402 shares of common stock held in trusts
for which Mr. Ferris serves as trustee.
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had and expects to have in the future, transactions in the ordinary
course of its business with Directors, Officers, principal shareholders and
their associates, on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with others, on terms that do not involve more than the normal risk
of collectibility or present other unfavorable features. The aggregate dollar
amount of these loans was $3,213,055 and $2,961,677 at December 31, 2001 and
2000, respectively. During 2001, $9,004,240 of new loans were made, and
repayments totaled $8,602,206. At December 31, 2001, all loans to Officers,
Directors, principal shareholders and their associates were performing in
accordance with the contractual terms of the loans.
Clayton L. Blick and Perley H. Grimes, Jr., both of whom are Directors of the
Company and the Bank, are partners in Cramer & Anderson, a law firm which
renders certain legal services to the Bank in connection with various matters.
During 2001 and 2000, the Bank paid Cramer & Anderson $94,052 and $83,073,
respectively for legal services rendered, a portion of which was reimbursed to
the Bank by third parties.
Ernest W. Clock, Director of the Company and the Bank, is the Chairman of F.
North Clark Insurance Agency, Inc., which serves as insurance agent for many of
the Bank's insurance needs. In 2001, and 2000, the Bank paid insurance premiums
to F. North Clark Insurance Agency, Inc. in the aggregate amount, of $134,262
and $74,040, respectively.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT INDEX
Exhibit
No. Exhibit
--- -------
3.1 Certificate of Incorporation of First Litchfield Financial
Corporation, as amended. Exhibit is incorporated by reference to
Exhibit 3.1 set forth in the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
Exhibit is incorporated by reference to Exhibit 3.2 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
4. Specimen Common Stock Certificate. Exhibit is incorporated by
reference to Exhibit 4. set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
10.1 1990 Stock Option Plan for Company's President and Chief Executive
Officer, as amended. Exhibit is incorporated by reference to
Exhibit 10.1 set forth in the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
10.2 1994 Stock Option Plan for Officers and Outside Directors. Exhibit
is incorporated by reference to Exhibit 10.2 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
10.3 Supplemental Executive Retirement Agreement between Company and
Jerome J. Whalen. Exhibit is incorporated by reference to Exhibit
10.3 set forth in the Company's Registration Statement on Form
10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
10.4 Change in Control Agreement between Jerome J. Whalen and Company.
Exhibit is incorporated by reference to Exhibit 10.4 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.5 Change in Control Agreement between Philip G. Samponaro and
Company. Exhibit is incorporated by reference to Exhibit 10.5 set
forth in the Company's Registration Statement on Form 10-SB as
filed with the Securities and Exchange Commission on January 7,
2000.
10.6 Change in Control Agreement between Carroll A. Pereira and Company.
Exhibit is incorporated by reference to Exhibit 10.6 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.7 Change in Control Agreement between John S. Newton and Company.
Exhibit
30
is incorporated by reference to Exhibit 10.7 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
10.8 Change in Control Agreement between Revere H. Ferris and Company.
Exhibit is incorporated by reference to Exhibit 10.8 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.9 Supplemental Employee Retirement Agreement between the Company and
Walter Hunt. Exhibit is incorporated by reference to Exhibit 10.9
set forth in the Company's Registration Statement on Form 10-SB as
filed with the Securities and Exchange Commission on January 7,
2000.
10.10 DeferredDirectors' Fee Plan. Exhibit is incorporated by reference
to Exhibit 10.10 set forth in the Company's Registration Statement
on Form 10-SB as filed with the Securities and Exchange Commission
on January 7, 2000.
10.11 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.11 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
10.12 Executive Supplemental Compensation Agreement dated November 21,
2000 between the Company and Jerome J. Whalen. Exhibit is
incorporated by reference to Exhibit 10.12 set forth in the
Company's Annual Report in Form 10-KSB for the fiscal year ended
December 31, 2000 as filed with the Securities and Exchange
Commission on April 2, 2001.
10.13 Split Dollar Agreement with Salisbury Bank as Trustee dated
November 21, 2000. Exhibit is incorporated by reference to Exhibit
10.13 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.14 The Rabbi Trust Agreement with Salisbury Bank as Trustee dated
November 21, 2000. Exhibit is incorporated by reference to Exhibit
10.14 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.15 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Jerome J. Whalen and the Bank dated
December 28, 2000. Exhibit is incorporated by reference to Exhibit
10.15 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.16 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Carroll A. Pereira and the Bank dated
November 30, 2000. Exhibit is incorporated by reference to Exhibit
10.16 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.17 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Philip G. Samponaro and the Bank dated
December 19, 2000. Exhibit is incorporated by reference to Exhibit
10.17 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.18 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Revere H. Ferris and the Bank dated
November 30, 2000. Exhibit is incorporated by reference to Exhibit
10.18 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.19 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between John S. Newton and the Bank dated
December 21, 2000. Exhibit is incorporated by reference to Exhibit
10.19 set forth in the Company's Annual Report in Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on April 2, 2001.
10.20 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Charles E. Orr and the Bank dated November 29,
2000. Exhibit is incorporated by reference to Exhibit 10.20 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.21 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Patricia D. Werner and the Bank dated November
30, 2000. Exhibit is incorporated by reference to Exhibit 10.21 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
31
10.22 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Clayton L. Blick and the Bank dated December 4,
2000. Exhibit is incorporated by reference to Exhibit 10.22 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.23 The First National Bank of Litchfield Director Incentive Retirement
Agreement between George M. Madsen and the Bank dated December 7,
2000. Exhibit is incorporated by reference to Exhibit 10.23 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.24 The First National Bank of Litchfield Director Incentive Retirement
Agreement between William J. Sweetman and the Bank dated December
20, 2000. Exhibit is incorporated by reference to Exhibit 10.24 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.25 The First National Bank of Litchfield Director Incentive Retirement
Agreement between H. Ray Underwood and the Bank dated December 20,
2000. Exhibit is incorporated by reference to Exhibit 10.25 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.26 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Bernice D. Fuessenich and the Bank dated December
21, 2000. Exhibit is incorporated by reference to Exhibit 10.26 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.27 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Thomas A. Kendall and the Bank dated December 26,
2000. Exhibit is incorporated by reference to Exhibit 10.27 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.28 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Ernest W. Clock and the Bank dated December 26,
2000. Exhibit is incorporated by reference to Exhibit 10.28 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.29 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Perley H. Grimes and the Bank dated December 27,
2000. Exhibit is incorporated by reference to Exhibit 10.29 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.30 The First National Bank of Litchfield Director Incentive Retirement
Agreement between John H. Field and the Bank dated December 4,
2000. Exhibit is incorporated by reference to Exhibit 10.30 set
forth in the Company's Annual Report in Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
21. List of Subsidiaries of First Litchfield Financial Corporation.
Exhibit is incorporated by reference to Exhibit 21 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
23. Consent of McGladrey & Pullen, LLP.
B. Reports on Form 8-K
1. The Company filed a Form 8-K on November 29, 2001 to report that
the Company's Board of Directors declared a 5% stock dividend to
be paid on December 31, 2001 to stockholders of record as of
December 14, 2001. Also reported was the approval of a quarterly
cash dividend of $ .10 per share to be paid on January 25, 2002
to stockholders of record as of January 7, 2002.
2. The Company filed a Form 8-K on February 28, 2002 to report that
the Company's Board of Directors declared a quarterly cash
dividend of $.10 per share to be paid on April 25, 2002 to
stockholders of record as of March 11, 2002.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2002 FIRST LITCHFIELD FINANCIAL CORPORATION
By: /s/ Jerome J. Whalen
----------------------------
Jerome J. Whalen, President and
Chief Executive Officer
Dated: March 28, 2002 By: /s/ Carroll A. Pereira
----------------------------
Carroll A. Pereira,
Principal Accounting Officer
and Treasurer
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
s/s Jerome J. Whalen President, Chief Executive March 28, 2002
- -----------------------
Jerome J. Whalen Officer and Director
Clayton L. Blick Director March 28, 2002
- -----------------------
Clayton L. Blick
Ernest W. Clock Director March 28, 2002
- -----------------------
Ernest W. Clock
John H. Field Director March 28, 2002
- -----------------------
John H. Field
Bernice D. Fuessenich Director March 28, 2002
- -----------------------
Bernice D. Fuessenich
Perley H. Grimes, Jr. Director March 28, 2002
- -----------------------
Perley H. Grimes, Jr.
Thomas A. Kendall Director March 28, 2002
- -----------------------
Thomas A. Kendall
George M. Madsen Director March 28, 2002
- -----------------------
George M. Madsen
Alan B. Magary Director March 28, 2002
- -----------------------
Alan B. Magary
Charles E. Orr Director March 28, 2002
- -----------------------
Charles E. Orr
William J. Sweetman Director March 28, 2002
- -----------------------
William J. Sweetman
H. Ray Underwood Director March 28, 2002
- -----------------------
H. Ray Underwood
Patricia D.Werner Director March 28, 2002
- -----------------------
Patricia D. Werner
34