UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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, 2006
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
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(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)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes No X
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Indicate by check mark whether the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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Indicate by check mark whether the Registrant: (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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-K or any amendments to
this Form 10-K. Yes No X
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Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one): Large accelerated filer _______Accelerated filer________
Non-accelerated filer X
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Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). Yes No X
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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 last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently completed
second fiscal quarter: $48,214,349.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date.
March 2, 2007 - 2,257,546
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DOCUMENTS INCORPORATED BY REFERENCE
PART III. Portions of the Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 16, 2007.
TABLE OF CONTENTS
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PART I
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ITEM 1 - BUSINESS 1
ITEM 1A. RISK FACTORS 12
ITEM 1B. UNRESOLVED STAFF COMMENTS 15
ITEM 2 - PROPERTIES 15
ITEM 3 - LEGAL PROCEEDINGS 16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
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ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 16
ITEM 6 - SELECTED FINANCIAL DATA 19
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION 21
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 36
ITEM 9A - CONTROLS AND PROCEDURES 36
ITEM 9B - OTHER INFORMATION 36
PART III
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ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 36
ITEM 11 - EXECUTIVE COMPENSATION 37
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 37
ITEM 13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE 37
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES 38
PART IV
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ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 38
SIGNATURES 44
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PART I
ITEM 1. 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 three subsidiaries, Lincoln Corporation, and Litchfield Mortgage
Service Corporation, which are Connecticut corporations, and First Litchfield
Leasing Corporation which is a Delaware corporation. The Bank holds a majority
ownership position, in First Litchfield Leasing Corporation. 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. During the
fourth quarter of 2006, The Bank formed First Litchfield Leasing Corporation for
the purpose of providing equipment financing and leasing products. On June 26,
2003, the Company formed First Litchfield Statutory Trust I for the purpose of
issuing trust preferred securities and investing the proceeds in subordinated
debentures issued by the Company, and on June 26, 2003, the first series of
trust preferred securities were issued. During the second quarter of 2006, the
Company formed a second statutory trust, First Litchfield Statutory Trust II
("Trust II"). The Company owns 100% of Trust II's common stock. Trust II exists
for the sole purpose of issuing trust securities and investing the proceeds in
subordinated debentures issued by the Company. In June 2006, Trust II issued its
first series of trust preferred securities.
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
and Hartford counties.
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. 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
offers PC banking and bill paying via the Internet at its Website. Also, the
Bank offers a cash management product; e-Business Advantage, which is geared
toward small businesses, municipal and nonprofit customers and provides 24-hour
online account management including real-time account monitoring, managing cash
flow, collecting and making payments electronically, as well as transferring
idle cash.
1
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 and
Hartford 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. [See Risk Factors]
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, 2006 - 2002 was comprised of the
following categories:
(Dollar Amounts in Thousands)
December 31,
-------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- ------------- ------------- ------------- -------------
Commercial $ 26,950 $ 21,151 $ 17,911 $ 20,754 $ 10,531
Real Estate
Construction 30,606 28,549 11,597 9,228 9,994
Residential 177,082 145,927 148,662 126,317 123,393
Commercial 53,318 42,145 33,655 27,022 30,536
Installment 7,168 4,334 6,315 8,057 14,272
Others 172 47 80 86 51
------------- ------------- ------------- ------------- -------------
Total Loans $ 295,296 $ 242,153 $ 218,220 $ 191,464 $ 188,777
============= ============= ============= ============= =============
2
The following table reflects the maturity and sensitivities of the Bank's loan
portfolio at December 31, 2006.
(Dollar Amounts in Thousands)
After one
One Year year through Due after Total
or less five years five years loans
------------- ------------- ------------- -------------
Commercial $ 14,292 $ 6,407 $ 6,251 $ 26,950
Real Estate
Construction 1,690 7,861 21,055 30,606
Residential 41,495 27,082 108,505 177,082
Commercial 5,471 13,794 34,053 53,318
Installment 1,364 4,233 1,571 7,168
Others -- -- 172 172
------------- ------------- ------------- -------------
Total Loans $ 64,312 $ 59,377 $ 171,607 $ 295,296
============= ============= ============= =============
At December 31, 2006, loans maturing after one year included approximately:
$138,473,000 in fixed rate loans and $92,511,000 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.
At December 31, 2006 the carrying value of the Bank's investment portfolio was
$147,820,791 or 30% of total assets. There were no Federal Funds Sold as of
December 31, 2006.
The table below presents the amortized cost and fair values of investment
securities held by the Bank at December 31, 2006 and 2005.
(Dollar Amounts in Thousands)
2006 2005
---------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ------------- ------------- -------------
Available-for-sale $ 150,895 $ 147,780 $ 187,128 $ 182,900
Held-to-maturity 41 40 49 48
---------------- ------------- ------------- -------------
$ 150,936 $ 147,820 $ 187,177 $ 182,948
================ ============= ============= =============
The following tables present the maturity distribution of investment securities
at December 31, 2006, 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 $ 13 $ 28 $ -- -- -- $ 41 7.48%
========= ========== ========= ========= ========= ========= =========
Weighted Average Yield 7.16% 7.63% -- -- -- 7.48% --
========= ========== ========= ========= ========= ========= =========
3
Available-for-sale (1)
U.S. Agencies and
Corporations $ 5,000 $ 10,012 $ 24,992 $ 3,000 -- $ 43,004 4.30%
State and Municipal & Other -- -- 1,790 40,677 2,000 44,467 5.72%
Mortgage-Backed Securities 14,790 44,883 3,751 -- -- 63,424 4.92%
-------- -------- -------- -------- -------- -------- --------
Total $ 19,790 $ 54,895 $ 30,533 $ 43,677 2,000 $150,895 4.98%
======== ======== ======== ======== ======== ======== ========
Weighted Average Yield 4.81% 4.74% 4.79% 6.42% 4.00% 4.98% --
======== ======== ======== ======== ======== ======== ========
Total Portfolio $ 19,803 $ 54,923 $ 30,533 $ 43,677 2,000 $150,936 4.98%
======== ======== ======== ======== ======== ======== ========
Total Weighted Average Yield 4.62% 4.75% 4.79% 6.42% 4.00% 4.98% --
======== ======== ======== ======== ======== ======== ========
(1) Dollars shown at amortized cost amounts.
Deposits
The following table summarizes average deposits and interest rates of the Bank
for the years ended December 31, 2006, 2005 and 2004.
2006 2005 2004
---------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------
Non-interest bearing
demand deposits $ 65,047 -- $ 61,375 -- $ 54,333 --
Money market deposits 74,200 2.20% 88,285 1.14% 106,266 1.17%
Savings deposits 48,141 .67% 55,167 .21% 56,174 .27%
Time deposits 115,559 4.05% 84,771 2.73% 89,530 2.51%
------------------------------------------------------------------------
Total deposits $ 302,947 2.19% $ 289,598 1.18% $ 306,303 1.19%
========================================================================
Fixed rate certificates of deposit in amounts of $100,000 or more at December
31, 2006 are scheduled to mature as follows:
(Dollar Amounts in Thousands)
-----------------------------
Three months or less $ 47,670
Over three, through six months 14,669
Over six, through twelve months 9,489
Over twelve months 953
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Total $ 72,781
==========
Return on Equity and Assets
The following table summarizes various operating ratios of the Company for the
past three years:
Years ended December 31,
--------------------------
2006 2005 2004
---- ---- ----
Return on average total
assets (net income divided by average total assets) .29% .91% .93%
Return on average shareholders' equity (net
income divided by average shareholders' equity) 5.43 15.94 17.33
Equity to assets (average shareholders' equity as a
percent of average total assets) 5.31 5.74 5.34
Dividend payout ratio 92.68 29.21 25.10
4
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.
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, 2006
Repriced Within
--------------------------------------------------
Under 3 4 to 12 1 to 5 Over 5
Months Months Years Years
--------- --------- --------- --------
Securities available-for-sale $ 3,758 $ 17,830 $ 54,464 $ 74,843
Securities held-to-maturity 3 25 13 --
Loan Portfolio 78,354 19,156 88,187 109,599
Other -- -- -- 4,749
--------- --------- --------- --------
Total interest earning assets 82,115 37,011 142,664 189,191
Interest-bearing liabilities
Money Market 11,944 -- 59,136 --
Savings 2,265 6,796 36,244 --
Time 76,851 64,455 7,236 --
--------- --------- --------- --------
Total interest-bearing deposits 91,060 71,251 102,616 --
Borrowed funds 68,960 26,500 31,050 10,000
--------- --------- --------- --------
Total interest-bearing liabilities 160,020 97,751 133,666 10,000
Periodic gap $ (77,905) $ (60,740) $ 8,997 $179,191
========= --------- ========= ========
Cumulative gap $ (77,905) $(138,645) $(129,648) $ 49,543
========= ========= ========= ========
Cumulative gap as a percentage of
total earning assets (17.27)% (30.74)% (28.75)% 10.99%
========= ========= ========= ========
5
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"), and as such, is registered with the Federal Reserve
Board ("FRB"). Accordingly, the Company is subject to the supervision of the FRB
and is subject to the Federal BHC Act. 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.
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, or
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 adopted risk-based minimum
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, non-cumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other
6
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.
The following table presents the capital ratios for the Company and the Bank as
of December 31, 2006:
Minimum
The Company's The Bank's Regulatory
Ratio Ratio Capital Level
----- ----- -------------
RISK-BASED CAPITAL RATIO:
Total Capital 13.25% 12.24% 8%
Tier 1 Capital 12.57% 11.55% 4%
TIER 1 LEVERAGE CAPITAL RATIO: 7.55% 6.94% 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%.
7
"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 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 Bank is 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) information security standards. 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. These
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves. 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.
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 for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" herein.
8
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 Deposit Insurance Fund of the FDIC
up to a maximum of $100,000 per separately insured depositor. The federal
deposit insurance limits on certain retirement accounts are separately insured
by the FDIC up to $250,000.
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.
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 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
interact with several regulatory agencies (e.g., appropriate banking agency,
9
Securities and Exchange Commission ("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 of the Gramm-Leach-Bliley Act has on the Bank and the Company has
been minimal. 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.
The Company has no current plans to operate within a financial holding company
structure.
The Sarbanes-Oxley Act of 2002
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirement; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
disclosure of all material off-balance sheet transactions and relationship
that may have a material effect upon the financial status of an issuer;
and
the presentation of pro forma financial information in a manner that is
not misleading, and which is reconcilable with the financial condition of
the issuer under generally accepted accounting principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for a mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by Company's auditor. These reports would have been initially required for the
Company's year ending December 31, 2005. The Securities and Exchange Commission
("SEC") has extended the Section 404 compliance dates for non-accelerated filers
such as the Company (those issuers with non-affiliated public float of less than
$75 million) to fiscal years ending on or after December 15, 2007, and
non-accelerated filers must comply with the auditors attestation report
requirements for reports filed for fiscal years ending on or before December 15,
2008. Due to the burdens on smaller companies in designing and implementing
compliance with this section, this extension will provide smaller companies,
such as the Company, with the necessary opportunity to more thoroughly evaluate
their systems of internal controls. The SEC also requires an issuer to institute
a code of ethics for senior financial officers of the company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The USA Patriot Act
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. On October 26, 2001, President Bush signed
into law the Uniting and
10
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001. On March 10, 2006, the President signed
legislation making permanent certain provisions of the Patriot Act.
Part of the USA Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts. The Bank
has implemented policies and procedures to address the requirements of the USA
Patriot Act.
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 116 full-time employees and 10
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-K and future filings made by the Company with the SEC, 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
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
11
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 SEC.
Such developments could have an adverse impact on the Company's financial
position and results of operation. See Item 1A. Risk Factors for additional
information.
Availability of Financial Information
The Company files reports with the SEC. Those reports include the annual report
on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K
and proxy statements, as well as any amendments to those reports. The public may
read and copy any materials that the Company files with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
quarterly and annual reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The Company's website address is: www.fnbl.com.
- ------------------ ------------
ITEM 1A. RISK FACTORS
In addition to the other information contained in this report, the
following risks may affect the Bank. If any of these risks occurs, the Company's
business, financial condition or operating results could be adversely affected.
Changes in economic conditions could materially hurt the Company's
abusiness.
The business of the Company is directly affected by factors such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond the Company's control. The
Company is particularly affected by economic conditions in the state of
Connecticut. Deterioration in economic conditions could result in the following
consequences, any of which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows:
o problem assets and foreclosures may increase;
o demand for the Bank's products and services may decline;
o low cost or non-interest bearing deposits may decrease; and,
o collateral for loans made by the Bank, especially real estate, may decline
in value, in turn reducing customers' borrowing power, and reducing the
value of assets and collateral associated with the Bank's existing loans.
In view of the geographic concentration of the Bank's operations and the
collateral securing the Bank's loan portfolio in Litchfield and Hartford
Counties, Connecticut, the Bank may be particularly susceptible to the adverse
effects of any of these consequences, any of which could have a material adverse
effect on the Bank's business, financial condition, results of operations and
cash flows.
The Bank is dependent on key personnel.
Competition for qualified employees and personnel in the banking industry
is intense and there are a limited number of qualified persons with knowledge
of, and experience in, the Connecticut, community banking industry. The Bank's
success depends to a significant degree upon the Bank's ability to attract and
retain qualified management, and personnel and upon the continued contributions
of the Bank's management and personnel. In particular, the Bank's success has
been and continues to be highly dependent upon the abilities of the Bank's
management team members, which has expertise in community banking and experience
in the markets served by the Bank. The loss of the services of the Bank's senior
executive management team members or other key executives could have a material
adverse effect on the Bank's business, financial condition, results of
operations and cash flows.
12
The Bank's business is subject to interest rate risk and variations in
interest rates may negatively affect the Bank's financial performance.
A substantial portion of the Bank's income is derived from the
differential or "spread" between the interest earned on loans, securities and
other interest earning assets, and interest paid on deposits, borrowings and
other interest bearing liabilities. Because of the differences in the maturities
and repricing characteristics of the Bank's interest earning assets and interest
bearing liabilities, changes in interest rates do not produce equivalent changes
in interest income earned on interest earning assets and interest paid on
interest bearing liabilities. Accordingly, fluctuations in interest rates could
adversely affect the Bank's interest rate spread and, in turn, the Bank's
profitability. In addition, loan origination volumes are affected by market
interest rates. Rising interest rates, generally, are associated with a lower
volume of loan originations while lower interest rates are usually associated
with higher loan originations. Conversely, in rising interest rate environments,
loan repayment rates may decline and in falling interest rate environments, loan
repayment rates may increase. Falling interest rate environments may cause
additional refinancing of commercial real estate and 1-4 family residence loans,
which may depress the Bank's loan volumes or cause rates on loans to decline. In
addition, an increase in the general level of short-term interest rates on
variable rate loans may adversely affect the ability of certain borrowers to pay
the interest on and principal of their obligations or reduce the amount they
wish to borrow. As short-term rates continue to rise, retention of existing
deposit customers and the attraction of new deposit customers may require the
Bank to increase rates it pays on deposit accounts. Changes in levels of market
interest rates could materially and adversely affect the Bank's net interest
spread, asset quality, loan origination volume, business, financial condition,
results of operations and cash flows.
Certain types of loans in the Bank's portfolio have a higher degree of
risk and a downturn in the Bank's real estate markets could hurt the Bank's
business.
A downturn in the Bank's real estate markets could hurt the Bank's
business because most of the Bank's loans are secured by real estate. Real
estate values and real estate markets are generally affected by changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loans to potential purchasers, changes in tax laws and
other governmental statutes, regulations and policies and acts of nature. If
real estate prices decline, the value of real estate collateral securing the
Bank's loans could be reduced. The Bank's ability to recover on defaulted loans
by foreclosing and selling the real estate collateral would then be diminished
and the Bank would be more likely to suffer losses on defaulted loans. A
majority of the Bank's loan portfolio consisted of loans collateralized by
various types of real estate. Substantially all of the Bank's real estate
collateral is located in Connecticut. If there is a significant decline in real
estate values, especially in Connecticut, the collateral for the Bank's loans
will provide less security. Any such downturn could have a material adverse
effect on the Bank's business, financial condition, results of operations and
cash flows.
The ability to attract deposits may limit growth.
The Bank's ability to increase the Bank's assets depends in large part on
the Bank's ability to attract additional deposits at favorable rates. The Bank
anticipates seeking additional deposits by offering deposit products that are
competitive with those offered by other financial institutions in the Bank's
markets and by establishing personal relationships with the Bank's customers. A
bank's ability to attract additional deposits at competitive rates could have a
material effect on a bank's business, financial condition, results of operations
and cash flows.
In the business of banking, the allowance for loan losses is an estimate
and may not be adequate to cover all future actual losses.
A source of risk arises from the possibility that losses could be incurred
because borrowers, guarantors, and related parties may fail to perform in
accordance with the terms of their loans. The underwriting and credit monitoring
policies and procedures that we have adopted to address this risk may not
prevent unexpected losses that could have a material adverse effect on the
Bank's business, financial condition, results of operations and cash flows.
Unexpected losses may arise from a wide variety of specific or systemic factors,
many of which are beyond the Bank's ability to predict, influence or control.
Like all banking institutions, the Bank maintains an allowance for loan
losses to provide for loan defaults and non-performance. The allowance for loan
losses reflects the Bank's estimate of the probable losses in the Bank's loan
portfolio at the relevant balance sheet date. The Bank's allowance for loan
losses is based on prior experience, as well as an evaluation of the known risks
in the current portfolio, composition and growth of the loan portfolio and
economic factors. The determination of an appropriate level of loan loss
allowance is an inherently difficult process and is based on numerous
assumptions. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may
13
be beyond the Bank's control and these losses may exceed current estimates.
Federal and state regulatory agencies, as an integral part of their examination
process, review the Bank's loans and allowance for loan losses.
Banks rely on certain third-party service providers.
The Bank relies on certain third-party service providers for much of the
Bank's communications, information, operating and financial control systems
technology. Any failure or interruption or breach in security of these systems
could result in failures or interruptions in the Bank's customer relationship
management, general ledger, deposit, servicing and/or loan origination systems.
The Bank cannot be certain that such failures or interruptions will not occur
or, if they do occur, that they will be adequately addressed by the Bank or the
third parties on which the Bank relies. The occurrence of any failures or
interruptions could have a material adverse effect on the Bank's business,
financial condition, results of operations and cash flows. If any of the Bank's
third-party service providers experience financial, operational or technological
difficulties, or if there is any other disruption in the Bank's relationships
with them, the Bank may be required to locate alternative sources of such
services, and the Bank cannot be certain that the Bank could negotiate terms
that are as favorable to the Bank, or could obtain services with similar
functionality as found in the Bank's existing systems without the need to expend
substantial resources, if at all. Any of these circumstances could have a
material adverse effect on the Bank's business, financial condition, results of
operations and cash flows.
The Bank faces strong competition from financial service companies and
other companies that offer banking services.
The Bank conducts the Bank's banking operations in Connecticut. Increased
competition in the Bank's markets may result in reduced loans and deposits.
Ultimately, the Bank may not be able to compete successfully against current and
future competitors. Many competitors offer the banking services that the Bank
offers in its service areas. These competitors include national banks, regional
banks and other community banks. The Bank also faces competition from many other
types of financial institutions, including savings and loan associations,
finance companies, brokerage firms, insurance companies, credit unions, mortgage
banks and other financial intermediaries. In particular, the Bank's competitors
include several major financial companies whose greater resources may afford
them a marketplace advantage by enabling them to maintain numerous locations and
mount extensive promotional and advertising campaigns. Additionally, banks and
other financial institutions with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions may have larger
lending limits, which would allow them to serve the credit needs of larger
customers. Areas of competition include interest rates for loans and deposits,
efforts to obtain loan and deposit customers and a range in quality of products
and services provided, including new technology-driven products and services.
Technological innovation continues to contribute to greater competition in
domestic and international financial services markets as technological advances
enable more companies to provide financial services. The Bank also faces
competition from out-of-state financial intermediaries that have opened loan
production offices or that solicit deposits in the Bank's market areas. If the
Bank is unable to attract and retain banking customers, it may be unable to
continue the Bank's loan and deposit growth and the Bank's business, financial
condition, results of operations and cash flows may be adversely affected.
Changes in accounting standards could materially impact the Company's
financial statements.
From time to time the Financial Accounting Standards Board changes the
financial accounting and reporting standards that govern the preparation of
financial statements.
The Bank is subject to extensive government regulation.
The Bank's operations are subject to extensive regulation by federal,
state and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on
part or all of the Bank's operations. Such laws, rules and regulations are
subject to change. The Bank cannot be certain that these proposed laws, rules
and regulations or any other laws, rules or regulations will not be adopted in
the future, which could make compliance much more difficult or expensive, or
otherwise adversely affect the Bank's business, financial condition, results of
operations or cash flows.
The Bank is exposed to potential risk of environmental liabilities with
respect to properties to which it takes title.
In the course of the Bank's business, the Bank may foreclose and take
title to real estate, and could be subject to environmental liabilities with
respect to these properties.
14
New litigation or changes in current litigation could adversely affect the
Company's financial condition or results of operation.
Although there is currently no material litigation to which the Company is
the subject, other than that disclosed in Item 3 herein, future litigation that
arises during the normal course of business could be material and have a
negative impact on the Company's earnings. Future litigation or changes in
current litigation could also adversely impact the reputation of the Company in
the communities that it serves.
Customer Information may be obtained and used fraudulently.
Risk of theft of customer information resulting from security breaches by
third parties exposes the Bank to reputation risk and potential monetary loss.
The Bank has exposure to fraudulent use of its customers' personal information
resulting from its general business operations and through customer use of
financial instruments, such as debit cards. If a breach in security does occur
and the financial data of customers is compromised, the Bank will react as
quickly as possible to protect customer accounts and limit potential losses to
the Bank.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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, Canton, New Milford, Roxbury and
Torrington, Connecticut.
During the year ended December 31, 2006, the net rental expenses paid by the
Bank for all of its office properties was approximately $287,000. 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.
Owned Lease
Location Address Leased Expiration
-------- ------- ------ ----------
Main Office 13 North Street Owned since 1816
Litchfield, CT
Marble Dale Route 202 Leased 2007
Marble Dale, CT
Washington Depot Bryan Plaza Owned since 1959
Washington Depot, CT
Goshen Routes 4 & 63 Owned since 1989
Goshen, CT
Roxbury Route 67 Leased 2009 with one 5 year
Roxbury, CT extension
New Milford Route 202 Leased 2011 with one 5 year
New Milford, CT extension
Torrington 1057 Torringford Street Leased 2026 with option
Torrington, CT to purchase
15
Canton 188 Albany Turnpike Owned since 2005
Canton, CT
Trust Department 40 West Street Owned since 1996
Old Borough Firehouse
Litchfield, CT
Torrington, North 397 Main Street Leased 2007 with option
Torrington, CT to purchase
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank (or any of their properties) are the subject of
any material pending legal proceedings other than routine litigation that is
incidental to their business with the possible exception of the following
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2006, no matter was submitted to a vote of
Shareholders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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.OB. As of March 2, 2007, there were 2,257,546 shares
issued and outstanding, which were held by approximately 423 shareholders.
The following information, provided by Oppenheimer and Co., sets forth
transactions in the Company's Common Stock during each quarter of the two most
recently completed fiscal years:
2005 High/Low
------------------
First Quarter ..................... $32.38 $27.62
Second Quarter .................... 29.52 26.91
Third Quarter ..................... 28.48 23.45
Fourth Quarter .................... 28.50 23.45
2006 High/Low
------------------
First Quarter ..................... $28.10 $23.10
Second Quarter .................... 28.10 24.76
Third Quarter ..................... 25.71 23.81
Fourth Quarter .................... 23.31 21.25
16
In December 2004, the Company's Board of Directors approved a 120,000 share
Common Stock buyback program. In December 2005, the buyback program expired. No
shares of outstanding Common stock were redeemed in connection with this
program. In December 2006, in a single transaction, the Company purchased 5,000
shares of outstanding Common stock.
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 2004, 2005 and 2006, the Company
declared cash dividends of 50 cents per share, 57 cents per share and 60 cents
per share, respectively. During 2004, 2005 and 2006 the Company declared 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, 2006, approximately
$6,011,000, 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.
Recent Sales of Unregistered Securities
In the past three years, there have been no sales of unregistered securities.
Securities Authorized for Issuance under Equity Compensation Plans
The following schedule provides information with respect to compensation plans
under which equity securities are authorized for issuance as of December 31,
2006:
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------------
Plan Category Number of Weighted average exercise Number of securities
securities to be price of outstanding options, remaining available for
issued upon warrants and rights future issuance
exercise of
outstanding
options, warrants
and rights
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------
Equity compensation plans 16,901 $10.22 N/A
approved by shareholders
- -------------------------------------------------------------------------------------------------------------
Equity compensation plans not N/A N/A N/A
approved by shareholders
- -------------------------------------------------------------------------------------------------------------
Total 16,901 $10.22 N/A
- -------------------------------------------------------------------------------------------------------------
17
STOCK PRICE PERFORMANCE GRAPH
-----------------------------
Set forth below is a line graph with an explanatory table comparing the
yearly percentage change in the cumulative total shareholder return on the
Company's Common Stock, based on the market price of the Company's Common Stock
and assuming reinvestment of dividends, with the total return of the S & P 500
Index and the SNL Bank Index for Banks with total assets more than $250 million
and less than $500 million. The calculation of total cumulative return assumes a
$100 investment in the Company's Common Stock and each of the other indices on
December 31, 2001.
[GRAPHI OMITTED]
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG FIRST LITCHFIELD FINANCIAL CORP., S & P 500 INDEX
AND THE SNL $250M-$500M BANK INDEX
Period Ending 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
- ------------- -------- -------- -------- -------- -------- --------
Index
- -----
First Litchfield Financial Corp. 100.00 118.33 199.39 300.62 286.61 235.98
S & P 500 Index 100.00 78.03 100.16 110.92 116.28 134.43
SNL $250M-$500M Bank Index 100.00 128.07 186.94 215.79 228.47 240.02
18
ITEM 6. 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-K. The selected
balance sheet data as of December 31, 2006 and 2005, and the selected income
statement data for the years ended December 31, 2006, 2005 and 2004, are derived
from, and are qualified by reference to, the audited consolidated financial
statements of the Company appearing elsewhere in this Form 10-K. The balance
sheet data as of December 31, 2004, 2003 and 2002, and income statement data for
the years ended December 31, 2003, and 2002, are derived from audited
consolidated financial statements of the Company not included herein.
At or For the Year Ended December 31,
2006 2005 2004 2003 2002
------------- ------------ ------------ ------------ ------------
Income Statement Data
Interest Income $ 25,805,321 $ 21,665,441 $ 19,809,236 $ 16,609,791 $ 16,565,818
Interest Expense 13,114,088 7,594,052 6,216,042 5,788,062 7,056,830
Net Interest Income 12,691,233 14,071,389 13,593,194 10,821,729 9,508,988
Other Income 2,272,986 2,899,313 2,432,094 2,643,623 2,406,363
Noninterest Expense 13,202,841 11,081,440 10,228,091 9,497,832 8,825,163
Income Before Income Taxes 1,341,378 5,547,234 5,437,197 3,667,520 2,825,188
Income Taxes (Benefits) (67,525) 1,511,343 1,520,962 881,096 629,450
Net Income 1,408,903 4,035,891 3,916,235 2,786,424 2,195,738
Balance Sheet Data
Total Loans and Loans Held for Sale 296,338,181 242,152,589 218,220,157 191,463,609 189,161,657
Allowance for Loan Losses 2,106,100 1,759,611 1,389,947 1,149,454 1,011,052
Total Investment Securities 147,820,791 182,949,393 173,864,701 171,164,956 78,744,846
Total Assets 501,232,357 467,560,946 424,304,747 393,771,197 306,803,031
Total Deposits 333,428,874 277,870,361 300,847,379 303,556,487 268,681,943
Total Borrowings 137,610,667 157,301,172 96,620,588 66,211,000 15,000,000
Total Liabilities 474,976,163 441,591,209 399,759,074 371,488,266 285,803,815
Shareholders' Equity 26,206,194 25,969,737 24,545,673 22,282,931 20,999,216
Selected Ratios and
Per Share Data
Return on Average Assets .29% .91% .93% .80% .73%
Return on Average Equity 5.43% 15.94% 17.33% 13.02% 11.29%
Basic Net Income Per Share (1) $ .63 $ 1.80 $ 1.76 $ 1.28 $ 1.02
Diluted Net Income Per Share (1) .62 1.78 1.74 1.25 1.00
Price Per Share (1) 21.73 27.25 30.00 20.65 15.13
Book Value Per Share (1) 11.63 12.16 12.12 11.75 11.82
Dividends Declared:
Cash (1) $ .60 $ .57 $ .50 $ .42 $ .40
Stock 5.00% 5.00% 5.00% 5.00% 5.00%
Cash Dividend Yield 2.76% 2.09% 1.67% 2.03% 2.64%
(1) All per share data has been adjusted to give retroactive effect to all
stock dividends and splits.
19
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (unaudited)
Selected quarterly data for 2006 and 2005 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
2006:
- -----
Interest Income $ 5,877,209 $ 6,184,919 $ 6,775,724 $ 6,967,469
Interest Expense 2,615,402 2,984,905 3,598,745 3,915,036
Net Interest Income 3,261,807 3,200,014 3,176,979 3,052,433
Other Income 667,495 704,477 735,764 165,250
Noninterest Expense 3,096,249 3,283,532 3,230,751 3,592,309
Income Before Income Taxes 728,053 515,959 576,992 (479,626)
Income Taxes 104,693 40,516 76,594 (289,328)
Net Income 623,360 475,443 500,398 (190,298)
Basic Net Income Per Share (1) $ .28 $ .21 $ .22 $ (.08)
Diluted Net Income Per Share (1) $ .27 $ .21 $ .22 $ (.08)
2005:
- -----
Interest Income $ 5,165,041 $ 5,279,598 $ 5,468,170 $ 5,852,632
Interest Expense 1,548,734 1,788,805 1,938,663 2,316,850
Net Interest Income 3,616,307 3,490,793 3,529,507 3,434,782
Other Income 613,803 597,928 755,696 931,886
Noninterest Expense 2,664,142 2,778,656 2,912,877 2,725,765
Income Before Income Taxes 1,465,345 1,209,442 1,262,955 1,609,492
Income Taxes 407,710 323,685 334,654 445,294
Net Income 1,057,635 885,757 928,301 1,164,198
Basic Net Income Per Share (1) $ .47 $ .40 $ .41 $ .52
Diluted Net Income Per Share (1) $ .47 $ .39 $ .41 $ .51
(1) All per share data has been adjusted to give retroactive effect to all
stock dividends and splits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's discussion of financial condition of the Company
on a consolidated basis for the two years ended December 31, 2006 and 2005 and
results of operations of the Company on a consolidated basis for the three years
ended December 31, 2006, 2005 and 2004. 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.
Additionally included in these statements as of December 31, 2006, and for the
twelve month period ending December 31, 2006, are the accounts of the Bank's
leasing subsidiary, First Litchfield Leasing Corporation; however such accounts
were insignificant. This discussion should be read in conjunction with the
consolidated financial statements and the related notes of the Company presented
elsewhere herein.
FINANCIAL CONDITION
Total assets as of December 31, 2006 were $501,232,357, an increase of
$33,671,411 or 7.2% from year-end 2005 total assets of $467,560,946.
20
The securities portfolio totaled $147,820,791 as of December 31, 2006, a
decrease of 19.2% from the December 31, 2005 balance of $182,949,393. The
decrease in the portfolio is primarily due to the fourth quarter 2006 balance
sheet restructuring whereby approximately $32 million in low yielding
investments were sold in order to reduce the level of wholesale funding.
Additionally, the restructuring positions the balance sheet towards a more
profitable mix of earning assets which is focused on loans rather than
investments.
The net loan portfolio as of December 31, 2006 totaled $293,900,025. The net
portfolio increased by 22.1% or $53,218,286, from the December 31, 2005 balance
of $240,681,739. Loan growth during 2006 was realized in the commercial and
residential mortgage portfolios, as well as in commercial loans. The commercial
mortgage portfolio totaled $53,318,351 as of December 31, 2006, increasing by
$11,173,903, or 26.5% during 2006. The commercial mortgage portfolio has grown
significantly over the last two years due to the Bank's focus in this market,
additional commercial lending expertise, and the expanded footprint due to
branch growth and commercial customer preference for longer term financing.
Residential mortgages totaled $177,082,143 as of December 31, 2006, which was an
increase of $31,154,853 or 21.3% from the December 31, 2005 balance of
$145,927,290. Growth in residential mortgage loans is due to the popularity of
the fixed rate thirty and fifteen year products, as well as to the conversion of
construction loans to permanent mortgage financing. As of December 31, 2006, the
installment loan portfolio totaled $7,167,980, an increase of 65.4% from the
year-end 2005 balance of $4,334,274. During 2006, the Company purchased a small
portfolio of consumer auto loans with the purpose of increasing both the yield
and diversity of the loan portfolio. Finally, commercial loans totaled
$26,949,985 which was a 27.4% increase from the previous year-end balance of
$21,150,306. Growth has been in commercial credit lines and continues to be a
result of the sales development and commercial calling initiatives for
traditional and contiguous markets.
Cash and cash equivalents totaled $29,197,637, as of December 31, 2006, which
was an increase of $10,486,100 compared to the balance of $18,711,537 as of
December 31, 2005. Although there were large dollar items included in both the
cash letter activity of December 31, 2006 and 2005, the cause of this increase
was funds temporarily invested in interest bearing correspondent bank balances
resulting from the balance sheet restructuring in December.
Net premises and equipment totaled $7,440,316 as of December 31, 2006,
increasing by $3,192,988 or 75.2% from the year-end 2005 balance of $4,247,328.
Although purchases of premises and equipment related to the Bank's Canton,
Connecticut branch were expended during 2005, costs relating to the New Milford
branch and the new full-service Torrington branch are the causes of the increase
in 2006. Associated with the Torrington branch is a capital lease totaling
$1,100,604. During 2006, depreciation and amortization of bank premises and
equipment totaled $498,680 and net purchases in addition to the capital lease,
totaled $2,589,641.
Deferred tax assets totaled $2,173,033 as of December 31, 2006, which is an
increase of $360,917 over the December 31, 2005 balance of $1,812,116. In 2006
the Company adopted SFAS No. 158 and charged to comprehensive income an
adjustment to recognize the Company's unfunded pension liability. Deferred taxes
associated with the adoption of SFAS No. 158 totaled $391,878. Offsetting this
increase was a decrease of deferred taxes associated with the unrealized losses
on available for sale securities.
Total liabilities were $474,976,163 as of December 31, 2006, an increase of
$33,384,954, or 7.6% from the December 31, 2005 balance of $441,591,209.
Deposits as of December 31, 2006 were $333,428,874, increasing $55,558,513 or
20.0% from the December 31, 2005 balance of $277,870,361. Demand deposits
totaled $68,501,750 as of December 31, 2006 which was a slight increase of 2.4%
from the year-end 2005 balance. Savings deposits totaled $45,304,667, which was
a decrease of $3,197,538, or 6.6% from the December 31, 2005 balance. Money
market deposits totaled $71,079,935, which was a decrease of $8,162,061, or
10.3% from the December 31, 2005 balance of $79,241,996. Although during 2006
the Company introduced and promoted competitively priced products with some
success, overall decreases were the result of customers shifting into higher
yielding certificates of deposit or migrating to non-bank investment
alternatives. Time certificates of deposit totaled $148,542,522 as of December
31, 2006 which is an increase of 78.5%, or $65,323,865 since year-end 2005.
Growth in these deposits has resulted from migration of deposits from the money
market and saving products as well as new money resulting from new products,
promotions and new branch marketing. Included in the increase of
interest-bearing deposits are increases of $22,500,000 in brokered certificates
of deposit through financial institution counterparties. These deposits have
remaining maturities of within three months and represent a cost efficient
source of funding for meeting liquidity needs while deposit growth in new
markets is being developed.
As of December 31, 2006, Federal Home Loan Bank (FHLBB), advances totaled
$67,000,000 as compared to $73,616,000 as of December 31, 2005. At December 31,
2006, borrowings under repurchase agreements totaled $59,406,023, a decrease of
21
$17,268,149 from the year-end 2005 balance of $76,674,172. As of December 31,
2006 and 2005, included in repurchase agreements is $12,206,023 and $9,974,172,
respectively, which represent balances in the overnight investment product
offered to the Bank's commercial and municipal cash management customers. At
December 31, 2006, total borrowings under repurchase agreements and FHLBB
advances decreased by $23,884,149 from December 31, 2005. As of December 31,
2006, obligations under subordinated debt totaled $10,104,000 which is an
increase of $3,093,000 from the balance of $7,011,000 as of December 31, 2005.
The increase in the subordinated debt represents the Company's liability for
junior subordinated notes with regard to First Litchfield Statutory Trust II,
which were issued in June of 2006. The ratio of borrowed funds to total assets
was 27.2% as of December 31, 2006, compared to 33.6% as of December 31, 2005.
As of December 31, 2006, the Company had a capital lease obligation totaling
$1,100,644. This obligation represents the Company's liability for the
contractual lease payments on the Bank's new full service Torrington branch.
There were no similar obligations as of December 31, 2005.
RESULTS OF OPERATIONS - 2006 COMPARED TO 2005
Net interest income is the single largest source of the Company's 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.
Net income for the year totaled $1,408,903 or $.62 and $.63 diluted and basic
earnings per share, respectively. Earnings decreased 65.1% or $2,626,988 from
2005 earnings of $4,035,891, or $1.78 and $1.80 diluted and basic earnings per
share. The Company's return on average shareholders' equity totaled 5% for 2006
versus 16% for 2005. The decline in earnings resulted mostly from a combination
of factors including decreased net interest income, increased non-interest
expenses and a loss incurred on the sale of securities in connection with the
repositioning of the investment portfolio and deleveraging of the balance sheet.
Net Interest Income
Net interest income for the year of 2006 totaled $12,691,233, a decrease of 9.8%
or $1,380,156, from 2005. See "Rate/Volume Analysis" on p. 21 for a description
of the various factors that impacted net interest income. Average earning
assets, which represent the Company's balance in loans, investment securities
and Federal funds sold, totaled $458 million for 2006, an increase of $46
million from 2005 average earning assets of $412 million. This growth was
realized in the commercial lending and mortgage portfolios as well as in the
investment portfolio and was funded primarily from borrowed funds, certificates
of deposit and demand deposits. As shown below, the 2006 net interest margin
decreased 61 basis points from the 2005 level of 3.52% to 2.91%. The net
interest spread decreased from the 2005 level of 3.21% to 2.46% primarily due to
increased funding costs, and a lower proportionate share of demand deposit
growth during 2006.
2006 2005
------------ ------------
Interest and dividend income $ 25,805,321 $ 21,665,441
Tax-equivalent adjustment 646,130 428,367
Interest expense (13,114,088) (7,594,052)
------------ ------------
Net interest income $ 13,337,363 $ 14,499,756
============ ============
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, 2006 and 2005. Average loans outstanding include non-accruing
loans. Interest income is presented on a tax-equivalent basis, which reflects a
federal tax rate of 34% for all periods presented.
22
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
2006 2005
----------------------------------------- -----------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ------------- -------- ------------- ------------- --------
ASSETS
Interest Earning Assets:
Loans receivable $ 267,353,000 $ 17,401,364 6.51% $ 237,399,000 $ 14,449,159 6.09%
Securities 188,974,000 8,995,775 4.76 173,223,000 7,625,982 4.40
Federal funds sold and other 1,856,000 54,312 2.93 1,292,000 18,667 1.44
------------ ------------- ------------- -------------
Total interest earning assets 458,183,000 26,451,451 5.77 411,914,000 22,093,808 5.36
Allowance for loan losses (1,935,000) (1,574,000)
Cash & due from banks 15,522,000 14,860,000
Premises and equipment 5,106,000 3,593,000
Net unrealized loss on securities (5,119,000) (2,891,000)
Other assets 17,189,000 15,399,000
------------- -------------
Total Average Assets $ 488,946,000 $ 441,301,000
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 48,141,000 $ 323,492 0.67% $ 55,167,000 $ 115,448 0.21%
Money market deposits 74,200,000 1,631,588 2.20 88,285,000 1,002,312 1.14
Time deposits 115,559,000 4,676,810 4.05 84,771,000 2,312,234 2.73
Borrowed funds 158,442,000 6,482,198 4.09 124,558,000 4,164,058 3.34
------------ ------------- ------------- -------------
Total interest bearing liabilities 396,342,000 13,114,088 3.31 352,781,000 7,594,052 2.15
Demand deposits 65,047,000 61,375,000
Other liabilities 1,598,000 1,819,000
Shareholders' Equity 25,959,000 25,326,000
------------ -------------
Total Liabilities and Equity $ 488,946,000 $ 441,301,000
============= =============
Net interest income $ 13,337,363 $ 14,499,756
============= =============
Net interest spread 2.46% 3.21%
==== ====
Net interest margin 2.91% 3.52%
==== ====
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the year ended December 31, 2006, when compared to the year ended
December 31, 2005 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.
Tax equivalent net interest income for 2006 was $1,162,393 or 8.0% below 2005.
The decrease in net interest income was due to margin compression resulting from
the flat and inverted yield curve experienced during 2006. The 2006 net interest
margin (net interest income divided by average earning assets) decreased from
the previous year's level of 3.52% by 61 basis points to 2.91%. Interest income
on average earning assets for 2006 totaled $26,451,451, which was an increase of
19.7% or $4,357,643 from 2005 interest income of $22,093,808. Interest expense,
however, totaled $13,114,088 for 2006, which was an increase of $5,520,036 from
2005. As shown in the Rate/Volume Analysis below, the decrease in net interest
income was significantly impacted by the increased cost of interest bearing
liabilities which was on average, 116 basis points higher than in 2005. The
related interest income from earning assets only increased by $4,357,643, or 41
basis points, resulting in the overall net decrease in net interest income. The
2006 yield on earning assets was 5.77%, which was an increase of 41 basis points
from the 2005
23
yield of 5.36%. Increases in short-term rates during 2006 as well as a
continuing goal to attain a more profitable mix of earning assets within the
loan portfolio, from residential mortgages to commercial loans and mortgages,
contributed to the increase in yield. Funding costs for 2006 were 3.31% which
was an increase of 116 basis points. This increase is attributed to the
increases in short term rates, intense market competition for time deposits, as
well as the increased reliance on non-core funding.
Offsetting the negative impact of margin compression on 2006 net interest income
was increased net interest income due to earning asset growth, which more than
offset the impact on net interest income of liability volume increases. Average
earning assets grew by $46 million or 11% during 2006 and, net of the effect of
liability volume increases, resulted in increased net interest income of
$1,215,421. Loans, on average, increased nearly $30 million, while investment
securities increased by $16 million.
2006 Compared to 2005
---------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
---------- ----------- -----------
Interest earned on:
Loans Receivable $1,904,751 $ 1,047,454 $ 2,952,205
Investment Securities 723,187 646,606 1,369,793
Other Interest Income 10,644 25,001 35,645
---------- ----------- -----------
Total interest earning assets 2,638,582 1,719,061 4,357,643
---------- ----------- -----------
Interest paid on:
Deposits 151,312 3,050,584 3,201,896
Borrowed money 1,271,849 1,046,291 2,318,140
---------- ----------- -----------
Total interest bearing liabilities 1,423,161 4,096,875 5,520,036
---------- ----------- -----------
Increase (decrease) in net interest income $1,215,421 $(2,377,814) $(1,162,393)
========== =========== ===========
The $1,162,393 decrease in net interest income is primarily the result of
increases in rates. Increases in rates impacted funding costs to a greater
extent than earning asset income and decreased net interest income by
$2,377,814. This decrease in net interest income was mitigated from the net
effect of increased volume of average interest earning assets and interest
bearing liabilities which increased net interest income by $1,215,421.
Noninterest Income
Non-interest income for 2006 totaled $2,272,986, decreasing $626,327, or 21.6%
from 2005 non-interest income of $2,899,313. The decline in non-interest income
is due mainly to the loss on sale of securities totaling $666,702. This loss is
primarily the result of the balance sheet restructuring which occurred in the
fourth quarter, whereby $32 million of low-yielding securities were sold to
enable management to reduce its level of expensive wholesale funding. Management
believes this transaction will proactively add shareholder value as it positions
greater profitability in future earnings. Management does not expect that a
similar balance sheet restructuring will be considered in the foreseeable
future. There was no similar balance sheet transaction during 2005, however,
sales of available for sale securities transacted for yield and price volatility
maintenance purposes resulted in gains totaling $78,949 during 2005.
Other areas of non-interest income had positive 2006 results. Fees from trust
services for 2006 totaled $1,135,891, an increase of $160,086, or 16.4% from the
previous year. This growth is attributed to key wealth management talent
acquired during 2006 and to the customer service and value added products this
area offers in our market. Banking service charges and fees increased 20.7%, or
$210,737 from 2005, as a result of revenue opportunities from deposit accounts
and cash management services.
During the fourth quarter of 2005, the Bank sold approximately $17 million of
residential mortgages in the secondary market. The sale resulted in a gain
totaling $82,858, which is included in other noninterest income for 2005. During
2006 similar sales of residential mortgages totaled $2 million and resulted in
gains totaling $11,389.
Noninterest Expenses
Noninterest expenses totaled $13,202,841 in 2006, an increase of 19.1%, or
$2,121,401 from 2005 noninterest expenses of $11,081,440. Increased costs
related to the growth of the branch franchise as well as to the development of
the wealth management area and the formation of the leasing company were the
significant reasons for the increased costs. These initiatives
24
significantly increased costs in personnel, marketing, occupancy, equipment and
legal expenses. During 2006, the Bank expanded its market by opening full
service branches in Canton and New Milford, Connecticut. Also recognizing the
need and potential for full service facilities, management relocated the
Torrington supermarket branch to a full service branch. The Bank's wealth
management division has strengthened its market potential through the hiring of
key management talent as well as through improved product and service offerings.
Salary and benefits costs totaled $6,852,582, increasing $859,788, or 14.3% from
2005 costs of $5,992,794. This increase reflects the staffing for the new
branches, compliance and wealth management. The increase in benefits costs,
however was mitigated by lower incentive and ESOP costs due to the reduced 2006
earnings. As of December 31, 2006, the number of employees on a full-time
equivalent basis totaled 126 compared to 105 as of December 31, 2005.
Computer services costs totaled $1,029,227 for 2006 which was an increase of
$128,846, or 14.3% from 2005. Increased costs resulting from a higher customer
dependence on e-banking, debit cards, ATMs and cash management products resulted
in this increase. Net occupancy and equipment costs totaled $1,487,465, which
was an increase of $352,111 or 31.0% above 2005 costs. Depreciation, building
maintenance, property taxes and utilities expenses, especially as they relate to
the new offices, caused increases in these expenses. Advertising fees increased
by $231,629 over 2005 costs. This increase was mostly related to branch opening
promotions and related direct mail campaigns. Commission, services and fees
expenses totaled $520,833, increasing $193,956, or 59.3% from 2005. The majority
of this increase relates to sales training, compliance and core processor due
diligence advice. During 2006, the Company contracted to change core processors
and began the conversion process for a new core processing system, which was
substantially completed in early 2007. This new system will significantly
increase customer service capabilities and will also contribute significant
operational efficiencies.
RESULTS OF OPERATIONS - 2005 COMPARED TO 2004
Net interest income is the single largest source of the Company's 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.
Net income for the year totaled $4,035,891 or $1.78 and $1.80 diluted and basic
earnings per share, respectively. Earnings increased 3.1% or $119,656 from 2004
earnings of $3,916,235 or $1.74 and $1.76 diluted and basic earnings per share.
The Company's return on average shareholders' equity totaled 16% for 2005 versus
17% for 2004. The increased profitability resulted from growth in both net
interest income and noninterest income, along with a continued commitment to
manage noninterest expense.
Net Interest Income
Net interest income for the year of 2005 totaled $14,071,389, an increase of
3.5% or $478,195, from 2004. See "Rate/Volume Analysis" on p. 26 for a
description of the various factors that impacted net interest income. Average
earning assets, which represent the Company's balance in loans, investment
securities and Federal funds sold, totaled $412 million for 2005, an increase of
$16 million from 2004 average earning assets of $396 million. This growth was
realized in the commercial lending and mortgage portfolios and was funded
primarily from increases in borrowed funds and demand deposits, and cash flows
resulting from maturities and principal payments in the investment portfolio. As
shown below, the 2005 net interest margin remained at the 2004 level of 3.52%.
Although the net interest spread decreased from the 2004 level of 3.29% to 3.21%
primarily due to increased funding costs, demand deposit growth during 2005
maintained the margin.
2005 2004
------------ ------------
Interest and dividend income $ 21,665,441 $ 19,809,236
Tax-equivalent adjustment 428,367 348,445
Interest expense (7,594,052) (6,216,042)
------------ ------------
Net interest income $ 14,499,756 $ 13,941,639
============ ============
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, 2005 and 2004. 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.
25
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(In thousands)
2005 2004
----------------------------------------- -----------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------------- -------------- ------ -------------- -------------- ------
ASSETS
Interest Earning Assets:
Loans receivable $ 237,399,000 $ 14,449,159 6.09% $ 202,339,000 $ 11,773,081 5.82%
Securities 173,223,000 7,625,982 4.40 192,160,000 8,369,793 4.36
Federal funds sold 1,292,000 18,667 1.44 1,317,000 14,807 1.12
-------------- -------------- -------------- --------------
Total interest earning assets 411,914,000 22,093,808 5.36 395,816,000 20,157,681 5.09
Allowance for loan losses (1,574,000) (1,288,000)
Cash & due from banks 14,860,000 13,119,000
Premises and equipment 3,593,000 2,823,000
Net unrealized (loss) on securities (2,891,000) (1,936,000)
Foreclosed real estate -- 69,000
Other assets 15,399,000 14,208,000
-------------- --------------
Total Average Assets $ 441,301,000 $ 422,811,000
============== ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 55,167,000 $ 115,448 0.21% $ 56,174,000 $ 149,026 0.27%
Money market deposits 88,285,000 1,002,312 1.14 106,266,000 1,240,755 1.17
Time deposits 84,771,000 2,312,234 2.73 89,530,000 2,247,604 2.51
Borrowed funds 124,558,000 4,164,058 3.34 92,566,000 2,578,657 2.79
-------------- -------------- -------------- --------------
Total interest bearing liabilities 352,781,000 7,594,052 2.15 344,536,000 6,216,042 1.80
Demand deposits 61,375,000 54,333,000
Other liabilities 1,819,000 1,343,000
Shareholders' Equity 25,326,000 22,599,000
-------------- --------------
Total Liabilities and Equity $ 441,301,000 $ 422,811,000
============== ==============
Net interest income $ 14,499,756 $ 13,941,639
============== ==============
Net interest spread 3.21% 3.29%
==== ====
Net interest margin 3.52% 3.52%
==== ====
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the year ended December 31, 2005 when compared to the year ended
December 31, 2004 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.
Tax equivalent net interest income for 2005 increased $558,117 or 4.0% over
2004. Interest income on average earning assets for 2005 totaled $22,093,808
which was an increase of 9.6% or $1,936,127 from 2004 interest income of
$20,157,681. Interest expense totaled $7,594,052 for 2005 which was an increase
of $1,378,010 from 2004. As shown in the Rate/Volume Analysis below, the
increase in net interest income primarily relates to interest income on loans
which increased by $2,676,078, reflecting increased volume in the loan portfolio
which, on average, was $35.1 million higher than 2004. The related costs for
funding the higher level of earning assets totaled $651,527, resulting in a
$629,555 net increase from volume considerations.
26
The 2005 net interest margin (net interest income divided by average earning
assets) remained at the previous year's level of 3.52%. The 2005 yield on
earning assets was 5.36%, which was an increase of 27 basis points from the 2004
yield of 5.09%. Increases in short-term rates during 2005 as well as the more
profitable mix of earning assets, from investments to loans, contributed to the
increase in yield. Specifically during 2005, the composition of average earning
assets was 58% loan and 42% investments, whereas, during 2004 this composition
was 51% loans and 49% investments. Funding costs for 2005 were 2.15% which was
an increase of 35 basis points. This increase is attributed to the increases in
short term rates, market competition for time deposits, and most significantly
the increased use of borrowed money to fund earning asset growth and offset the
decreased balances in deposits.
2005 Compared to 2004
---------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- --------- -----------
Interest earned on:
Loans Receivable $ 2,114,182 $ 561,896 $ 2,676,078
Investment Securities (832,814) 89,003 (743,811)
Other Interest Income (286) 4,146 3,860
----------- --------- -----------
Total interest earning assets 1,281,082 655,045 1,936,127
----------- --------- -----------
Interest paid on:
Deposits (352,618) 145,227 (207,391)
Borrowed money 1,004,145 581,256 1,585,401
----------- --------- -----------
Total interest bearing liabilities 651,527 726,483 1,378,010
----------- --------- -----------
Increase in net interest income $ 629,555 $ (71,438) $ 558,117
=========== ========= ===========
The $558,117 increase in net interest income reflects increased income of
$629,555 resulting from the net effect of increased volume of average interest
earning assets and interest bearing liabilities. Increases in rates impacted
funding costs to a greater extent and decreased net interest income by $71,438.
The shift within the mix of earning assets from investments to loans increased
the yield on earning assets and, along with increases in rates on earning assets
during the year, substantially offset the increased funding costs.
Noninterest Income
Noninterest income for 2005 totaled $2,899,313, increasing $467,219, or 19.2%
from 2004 noninterest income of $2,432,094. Fees from trust services totaled
$975,805, increasing $88,537 or 10.0% from 2004 trust fee income of $887,268.
Increased accounts under management, and estate settlement fees were the major
causes of the increase. Banking service charges and fees totaled $1,019,424 in
2005, which was an increase of $65,051 or 6.8% from 2004. Growth in these fees
is due to increased overdraft fees, cash management fees and interchange fees
from debit card usage.
During the fourth quarter of 2005, the Bank sold approximately $17 million of
residential mortgages in the secondary market. This sale was completed for the
purpose of increasing the yield on earning assets, addressing interest rate risk
and taking advantage of market opportunities. The sale resulted in a gain
totaling $82,858 which is included in other noninterest income for 2005. There
were no similar transactions in 2004.
Sales of available for sale securities transacted for yield and price volatility
maintenance purposes resulted in gains totaling $78,949 during 2005 compared to
gains of $34,450 in 2004. Finally, offsetting some of the increase in
noninterest income was a decrease in gains on the sale of OREO of $45,138, as
there were no such gains during 2005.
Noninterest Expenses
Noninterest expenses totaled $11,081,440 in 2005, an increase of 8.3% or
$853,349 from 2004 noninterest expenses of $10,228,091. Increased market growth
and improved product delivery resulted in higher costs for salaries, net
occupancy and equipment expenses, advertising and computer services expense.
Additionally, costs pertaining to regulatory compliance contributed to increased
costs for consulting and exam and audit fees.
Salary and benefits costs totaled $5,992,794, increasing $305,032 or 5.4% from
2004 costs of $5,687,762. This increase reflects Management's focus on market
growth and customer service. Specifically, included in the increase is staffing
for the new Canton
27
branch, as well as new positions for sales development, mortgage origination and
deposit operations. As of December 31, 2005, the number of employees on a
full-time equivalent basis totaled 105 compared to 93 as of December 31, 2004.
Computer services costs totaled $900,381 for 2005 which was an increase of
$50,802 or 6.0% from 2004. Increased costs for ancillary services such as
internet banking, cash management, and other banking products contributed to
this increase. Net occupancy and equipment costs totaled $1,135,354 which was an
increase of $101,438 or 9.8% from 2004 costs. Increased depreciation expense on
computer equipment is the primary cause of this increase. Additionally
contributing to this increase were increased costs for building maintenance,
property taxes and utilities expenses. Advertising fees increased by $142,045 or
46.6% over 2004 costs. This increase was due to resources spent on corporate
visibility, branding and market research as well as direct mail campaigns and
classified advertisements for staffing. Commission, services and fees expenses
totaled $326,877, increasing $98,838 or 43.3% from 2004 due mostly to costs
incurred for benefits and balance sheet consulting. Other noninterest expense
totaled $1,664,323, which was an increase of $194,013 or 13.2% from 2004 costs.
These increases resulted from costs incurred for officer recruitment,
outsourcing of the Company's internal audit function, computer software,
contributions, correspondent bank fees, executive relocation expenses and
insurance expense. These increases generally relate to the Company's growth in
various areas over the last year as well as to the regulatory environment.
While the Company's mission is to be the premier provider of financial services
by providing personalized, value-added services to its target market, Management
remains equally devoted to containing noninterest expenses through the efficient
use of technology and cost reduction initiatives.
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, 2002 through 2006
are presented below.
December 31,
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Non-accrual loans $1,504,551 $ 273,330 $1,634,999 $1,424,097 $1,487,475
Other real estate owned -- -- -- 300,000 300,000
---------- ---------- ---------- ---------- ----------
Total non-performing assets $1,504,551 $ 273,330 $1,634,999 $1,724,097 $1,787,475
========== ========== ========== ========== ==========
Loans past due in excess of
ninety days and accruing interest $ 343 $ 4,884 $ -- $ -- $ 56,729
========== ========== ========== ========== ==========
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 non-accrual status are included in the table above. As of
December 31, 2006, there were no restructured loans considered performing.
28
Had the non-accrual loans performed in accordance with their original terms,
gross interest income for the years ended December 31, 2006, 2005 and 2004 would
have increased by approximately $64,000, $9,000 and $14,000, respectively.
The Bank considers all non-accrual loans, other loans past due 90 days or more
based on contractual terms, 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 impairment, a
valuation allowance is established for the amount of impairment.
Critical Accounting Policy
In the ordinary course of business, the Bank has made a number of estimates and
assumptions relating to the reported results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions. The Company believes the following discussion addresses the Bank's
only critical accounting policy, which is the policy that is most important to
the portrayal of the Bank's financial results and requires management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
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 a preventative
measure and thereby avoid more serious problems in the future.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate or probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions.
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.
There were no material changes in loan concentration or loan quality that had a
significant effect on the allowance for loan losses calculation at December 31,
2006. In addition, there were no material changes in the estimation methods and
assumptions used in the Company's allowance for loan losses calculation, and
there were no material reallocations of the allowance among different parts of
the loan portfolio.
29
The following table summarizes the Bank's OREO, past due and non-accrual loans,
and non-performing assets as of December 31, 2006, 2005 and 2004.
December 31,
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Non-accrual loans $ 1,504,551 $ 273,330 $ 1,634,999 $ 1,424,097 $ 1,487,475
Other real estate owned -- -- -- 300,000 300,000
----------- ----------- ----------- ----------- -----------
Total non-performing assets $ 1,504,551 $ 273,330 $ 1,634,999 $ 1,724,097 $ 1,787,475
=========== =========== =========== =========== ===========
Loans past due in excess of ninety
days and accruing interest $ 343 $ 4,884 $ -- $ -- $ 56,729
=========== =========== =========== =========== ===========
Ratio of non-performing assets
to total loans and OREO .51% .11% .75% .90% .95%
Ratio of non-performing assets and loans
past due in excess of ninety days accruing
interest to total loans and OREO .51% .11% .75% .90% .98%
Ratio of allowance for loan losses to total loans .71% .73% .64% .60% .54%
Ratio of allowance for loan losses to
non-performing assets and loans in excess
of ninety days past due and accruing interest 139.95% 632.47% 85.01% 66.67% 54.82%
Ratio of non-performing assets and
loans in excess of ninety days past due and
accruing interest to total shareholders' equity 5.74% 1.07% 6.66% 7.74% 8.78%
Total non-performing assets increased by $1,231,221, or 450.45%, to $1,504,551
at December 31, 2006, from $273,330 at December 31, 2005. The increase in
non-performing assets from year-end 2005 is due mostly to the addition of a
small number of mid-size mortgages, home equity and commercial loans during
2006. Additionally there was approximately $247,000 in purchased sub-prime
consumer loans included in the year end nonperforming total. As of December 31,
2006 and 2005, loans past due in excess of ninety days and accruing interest
totaled $343 and $4,884, respectively.
Total non-performing assets represented .51% of total loans and other real
estate owned at year-end December 31, 2006 compared to .11% at year-end 2005.
The allowance for loan losses as of December 31, 2006 was .71% of total loans.
This is similar to the level from 2005 when the allowance was approximately .73%
of total loans. The allowance for loan losses provided coverage for 140.0% of
non-accrual loans at December 31, 2006, as compared to 632.5% at December 31,
2005. The decrease in the coverage ratio is a result of increased level of
non-performing assets at year end.
Potential Problem Loans
As of December 31, 2006, 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.
Allowance for Loan Losses
As of December 31, 2006, 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.
30
The following table summarizes the activity in the allowance for loan losses for
the years ended December 31, 2002 through 2006. The allowance is maintained at a
level consistent with the identified loss potential and the perceived risk in
the portfolio.
(Dollar Amounts in Thousands)
December 31,
------------------------------------------------
2006 2005 2004 2003 2002
------ ------- ------ ------ ------
Balance, at beginning of period $1,760 $ 1,390 $1,149 $1,011 $ 958
Loans charged-off:
Commercial and financial -- 37 80 30 22
Real estate -- -- -- -- --
Installment loans to individuals 96 60 104 279 227
------ ------- ------ ------ ------
96 97 184 309 249
------ ------- ------ ------ ------
Recoveries on loans charged-off:
Commercial and financial 1 81 -- -- --
Real estate -- -- -- -- --
Installment loans to individuals 21 44 65 147 37
------ ------- ------ ------ ------
22 125 65 147 37
------ ------- ------ ------ ------
Net loan (recoveries)/charge-offs 74 (28) 119 162 212
------ ------- ------ ------ ------
Provisions charged to operations 420 342 360 300 265
------ ------- ------ ------ ------
Balance, at end of period $2,106 $ 1,760 $1,390 $1,149 $1,011
====== ======= ====== ====== ======
Ratio of net charge-offs/(recoveries)
during the period to
average loans outstanding during the period .03% (.01%) .06% .09% .11%
====== ======= ====== ====== ======
Ratio of allowance for loan losses
to total loans .71% .73% .64% .60% .54%
====== ======= ====== ====== ======
During 2006, net charge-offs totaled $74,000, which is a change of $102,000 from
2005 net recoveries of $28,000. The increase in net charge-offs was due to a
higher level of net charge-offs in the installment loan portfolio, as well as to
minimal recoveries experienced in the commercial loan portfolio compared to 2005
commercial loan recoveries of $81,000. Over the last five years, the Bank
continues to experience higher levels of charge-offs, which were directly
related to the consumer loans acquired through the indirect dealer financing of
primarily automobiles, boats and motorcycles. Net charge-offs totaled $75,000
from installment loans in 2006 increasing $59,000 from 2005. The increased level
of net charge-offs is related to losses on indirect loans. Due to the credit
risks associated with this lending, the Bank substantially eliminated future
originations of loans through indirect dealer financing during 2000.
The following table reflects the allowance for loan losses as of December 31,
2006, 2005, 2004, 2003 and 2002.
Analysis of Allowance for Loan Losses
(Amounts in thousands)
December 31,
Loans by Type 2006 2005 2004
- ---------------------------------------------------------------------------------------------------------------
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 $ 204 9.13% $ 357 8.73% $ 261 8.21%
Real Estate
Construction 480 10.36 224 11.79 82 5.31
Residential 769 59.97 411 60.26 550 68.13
Commercial 401 18.05 518 17.40 379 15.42
Installment 181 2.43 54 1.79 58 2.89
Other 17 0.06 38 0.03 39 0.04
Unallocated 54 -- 158 -- 21 --
------------------------------------------------------------------------------------------------
Total $ 2,106 100.00% $ 1,760 100.00% $ 1,390 100.00%
================================================================================================
Loans by Type 2003 2002
- ------------------------------------------------------------------------------
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 $ 224 10.84% $ 71 5.58%
Real Estate
Construction 48 4.82 23 5.29
Residential 314 65.97 330 65.36
Commercial 367 14.11 132 16.18
Installment 170 4.21 237 7.56
Other -- 0.05 -- 0.03
Unallocated 26 -- 218 --
--------------------------------------------------------------
Total $ 1,149 100.00% $ 1,011 100.00%
==============================================================
31
The unallocated portion of the allowance reflects Management's estimate of
probable but unconfirmed 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.
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 funds as well as short-term
borrowings. Additionally, borrowings through repurchase agreements, 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 at the
Federal Home Loan Bank for the years ended December 31:
2006 2005 2004
----------- ----------- -----------
Balance at December 31, $ 1,000,000 $17,116,000 $ --
Maximum Month-End Borrowings 16,346,000 32,354,000 14,000,000
Average Balance 6,463,000 13,573,000 6,851,000
Average Rate at Year-End 5.57% 4.19% --
Average Rate During the Period 5.83% 4.05% 2.02%
The following information relates to the Bank's short-term repurchase agreements
with customers for the years ended December 31:
2006 2005 2004
----------- ----------- -----------
Balance at December 31, $12,206,023 $ 9,974,172 $ 209,588
Maximum Month-End Borrowings 24,544,352 19,083,821 209,588
Average Balance 13,649,712 7,815,990 46,790
Average Rate at Year-End 2.74% 2.48% .76%
Average Rate During the Period 3.19% 2.44% .74%
CONTRACTUAL COMMITMENTS
In the normal course of business the Company enters into certain contractual
obligations. Such obligations include obligations to make future payments on
debt and lease arrangements. See Notes G, H and I of the Notes to Consolidated
Financial Statements. The following table summarizes the Company's significant
contractual obligations at December 31, 2006.
Payments due by period
(Amounts in thousands)
---------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------
Time Deposit Maturities $ 148,543 $ 141,309 $ 5,806 $ 1,430 $ --
Short-term Borrowings 13,206 13,206 -- -- --
Long-term Debt 123,304 35,150 33,050 5,000 50,104
Capital lease obligations 1,869 75 150 151 1,493
Operating lease obligations 1,276 207 312 221 536
--------- --------- --------- --------- ---------
Total $ 288,198 $ 189,945 $ 39,318 $ 6,802 $ 52,133
========= ========= ========= ========= =========
32
OFF-BALANCE SHEET ARRANGEMENTS
See Note O on page F-26 of the consolidated financial statements for the
disclosure of off-balance sheet arrangements.
CAPITAL
At December 31, 2006, total shareholders' equity was $26,206,194 compared to
$25,969,737 at December 31, 2005. From a regulatory perspective, the Bank's
capital ratios place the Bank 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, 2006:
Minimum
Regulatory
Capital Level The Company The Bank
------------- ----------- --------
Tier 1 leverage capital ratio 4% 7.55% 6.94%
Tier 1 risk-based capital ratio 4% 12.57% 11.55%
Total risk-based capital ratio 8% 13.25% 12.24%
Included in the Company's capital used to determine these ratios at December 31,
2006 is $9.8 million related to the Company's investment in First Litchfield
Statutory Trust I, and First Litchfield Statutory Trust II, which is recorded as
subordinated debt in the Company's balance sheets at December 31, 2006. Included
in the Company's capital used to determine these ratios at December 31, 2005 is
$6.8 million related to the Company's investment in First Litchfield Statutory
Trust I, which is recorded as subordinated debt in the Company's balance sheet
at December 31, 2005. Trust preferred securities are currently considered
regulatory capital for purposes of determining the Company's Tier I capital
ratios. On March 1, 2005, the Board of Governors of the Federal Reserve System,
which is the Company's banking regulator, approved final rules that allow for
the continued inclusion of outstanding and prospective issuances of trust
preferred securities in regulatory capital subject to new, more strict
limitations. The Company has until March 31, 2009 to meet the new limitations.
Management does not believe these final rules will have a significant impact on
the Company.
INCOME TAXES
The income tax benefit for 2006 totaled $67,525 in comparison to income tax
expense of $1,511,343 in 2005 and $1,520,962 in 2004. The decrease in income tax
expense between 2006 and 2005 is due to significantly lower levels of taxable
income in 2006, both due to lower overall pretax income as well as a much higher
proportionate share of tax-exempt income from investments in state and municipal
securities and bank-owned life insurance. The decrease in income tax expense
from 2005 to 2004 is due to higher levels of nontaxable income in 2005.
Specifically, increased investments in state and municipal securities, which are
not subject to Federal income tax, resulted in the 2005 tax expense declining
below the 2004 level. This increase in taxes in 2005 was also mitigated by the
Company's investments in state and municipal securities as well as in bank-owned
life insurance. The effective tax rates for 2006, 2005 and 2004 were -5%, 27%
and 28% respectively. Also, in all years, provisions for income taxes included
the tax benefit related to income associated with Litchfield Mortgage Service
Corporation ("LMSC"), which was formed by the Bank in 2000. The income from LMSC
is considered passive investment income pursuant to Connecticut law, under which
LMSC was formed and is operating, and is not subject to state taxes which
resulted in no state tax expense for all 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.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk. The Company's common stock is
traded on the Over the Counter ("OTC") Bulletin Board under the symbol "FLFL".
As a result, the value of its common stock may fluctuate or respond to price
movements relating to the banking industry or other indicia of investment.
The Company manages interest rate risk and liquidity risk through an ALCO
Committee comprised of senior management and other officers. Additionally, the
Company has engaged asset/liability advisors to analyze and forecast the
interest rate risk and recommend balance sheet strategies for the Company. The
committee monitors compliance with the Bank's Asset/Liability Policy which
provides guidelines to analyze and manage gap, which is the difference between
the amount of assets and the amounts of liabilities which mature or reprice
during specific time frames. The Company manages its interest-rate risk
sensitivity through the use of a simulation model that projects the impact of
rate shocks, rate cycles and rate forecast estimates on net interest income.
These simulations take into consideration factors such as maturities,
reinvestment rates, prepayment speeds, repricing limits and other factors. The
results of these simulations are compared to earnings tolerance limits set forth
in the Bank's Asset/Liability Policy. The rate-shock simulation projects the
impact of instantaneous parallel shifts in the yield curve. Management utilizes
different rate scenarios in its simulations as deemed appropriate to the current
interest rate environment.
At December 31, 2006, an instantaneous rate increase of 200 basis points
indicates a negative change of $1,816,000 or a 14.42 % decrease in net interest
income. An instantaneous decrease in rates of 200 basis points indicates a
positive change of $548,000 or a 4.35% increase in net interest income. In
comparison to the December 31, 2005 projections, the Company's 2006 net interest
income projections have been adversely impacted by the inverted and/ flat yield
curve. Should the curve return to a more normalized slope, the impact of the
instantaneous upward shocks would not be as dramatic.
The table below sets forth the estimated changes in the Company's net interest
income which would result from various instantaneous changes in the yield curve.
The Company's interest rate risk and liquidity position have been positively
impacted by the fourth quarter 2006 de-leveraging strategy. Lower yielding,
longer term investments were sold in order to pay off short-term expensive
funding.
Net Interest Income
------------------------------------
Change in Interest Rates Estimated Amount of Percent
(basis points) Value Change Change
- ----------------------------------------- --------- --------- ---------
+200 $ 10,778 $ (1,816) (14.42%)
+100 11,573 (1,022) (8.11%)
Base 12,594
- -100 13,113 519 4.12%
- -200 13,143 548 4.35%
At December 31, 2005, an instantaneous rate increase of 150 basis points
indicates a negative change of $324,000 or a 2.18% decrease in net interest
income. An instantaneous decrease in rates of 200 basis points indicates a
negative change of $776,000 or a 5.22% decrease in net interest income.
The table below sets forth the estimated changes in the Company's net interest
income which would result from various instantaneous changes in the yield curve.
Net Interest Income
-----------------------------------
Change in Interest Rates Estimated Amount of Percent
(basis points) Value Change Change
- ----------------------------------------- --------- --------- ---------
+300 $ 13,747 $ (1,106) (7.44%)
+150 14,529 (324) (2.18%)
Base 14,853
- -200 14,077 (776) (5.22%)
A discussion of credit risk can be found in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-K.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Information
- ----------------------------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2006 and 2005 F-2
Consolidated Statements of Income for the Years Ended
December 31, 2006, 2005 and 2004 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2006, 2005 and 2004 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006, 2005 and 2004 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-32
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 "Company") as of December 31, 2006 and
2005, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). 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, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As described in Note A to the consolidated financial statements, during 2006 the
Company adopted SFAS 123 (R), "Share-Based Payment," and SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans."
/s/ McGladrey & Pullen, LLP
---------------------------
McGladrey & Pullen, LLP
New Haven, Connecticut
March 29, 2007
F-1
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 2005
------------- -------------
ASSETS
Cash and due from banks (Note B) $ 21,501,240 $ 18,711,099
Interest -bearing due from banks 7,696,397 438
------------- -------------
CASH AND CASH EQUIVALENTS 29,197,637 18,711,537
------------- -------------
Securities (Note C):
Available for sale securities, at fair value 147,780,275 182,900,358
Held to maturity securities (fair value $39,974-2006; $47,933-2005) 40,516 49,035
------------- -------------
TOTAL SECURITIES 147,820,791 182,949,393
------------- -------------
Federal Home Loan Bank stock, at cost (Note I) 4,443,400 4,201,200
Federal Reserve Bank stock, at cost 225,850 225,850
Other restricted stock, at cost 80,000 50,000
Loans held for sale 1,042,183 --
Loans Receivable, net of allowance for loan losses of
$2,106,100-2006, $1,759,611-2005 (Notes D and E) 293,900,025 240,681,739
Premises and equipment, net (Note F) 7,440,316 4,247,328
Deferred income taxes (Note J) 2,173,033 1,812,116
Accrued interest receivable 2,598,726 2,349,092
Cash surrender value of insurance (Note K) 9,636,461 9,263,737
Other assets (Notes I and K) 2,673,935 3,068,954
------------- -------------
TOTAL ASSETS $ 501,232,357 $ 467,560,946
============= =============
LIABILITIES
Deposits (Note H):
Noninterest-bearing $ 68,501,750 $ 66,907,502
Interest-bearing 264,927,124 210,962,859
------------- -------------
Total deposits 333,428,874 277,870,361
Federal Home Loan Bank advances (Note I) 67,000,000 73,616,000
Repurchase agreements with financial institutions (Note I) 47,200,000 66,700,000
Repurchase agreements with customers 12,206,023 9,974,172
Junior subordinated debt issued by unconsolidated trust (Note I) 10,104,000 7,011,000
Capital lease obligation (Note G) 1,100,644 --
Due to broker for security purchases -- 3,675,373
Accrued expenses and other liabilities (Note K) 3,936,622 2,744,303
------------- -------------
TOTAL LIABILITIES 474,976,163 441,591,209
------------- -------------
Minority interest 50,000 --
Commitments and contingencies (Notes G, I, K and M) -- --
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--2,372,434 shares, outstanding--2,254,002 shares--2006 and
Issued--2,359,155 shares, outstanding--2,243,188 shares--2005 23,724 22,468
Additional paid-in capital 25,840,623 22,995,010
Retained earnings 3,953,216 6,443,479
Less treasury stock at cost--118,432 shares--2006, 115,967 shares--2005 (794,756) (701,061)
Accumulated other comprehensive loss, net of taxes (Note S) (2,816,613) (2,790,159)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 26,206,194 25,969,737
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 501,232,357 $ 467,560,946
============= =============
See Notes to Consolidated Financial Statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006 2005 2004
------------ ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 17,399,787 $14,447,701 $11,771,218
Interest on:
Mortgage-backed securities 3,367,077 3,593,937 4,632,822
U.S. Treasury and agency securities 2,919,332 2,501,379 2,512,126
State and municipal securities-tax exempt 1,416,669 894,149 717,140
Corporate bonds and other securities 648,144 209,608 161,123
Federal funds sold and other interest income 54,312 18,667 14,807
------------ ----------- -----------
TOTAL INTEREST INCOME 25,805,321 21,665,441 19,809,236
------------ ----------- -----------
INTEREST EXPENSE
Interest on deposits:
Savings 323,492 115,448 149,026
Money market 1,631,588 1,002,312 1,240,755
Time certificates of deposit in denominations
of $100,000 or more 1,284,364 813,775 626,223
Other time certificates of deposit 3,392,446 1,498,459 1,621,381
------------ ----------- -----------
TOTAL INTEREST ON DEPOSITS 6,631,890 3,429,994 3,637,385
Interest on Federal Home Loan Bank advances 2,783,674 1,610,527 932,271
Interest on repurchase agreements 3,011,053 2,112,536 1,331,136
Interest on subordinated debt 682,604 440,995 315,250
Interest on capital lease obligation 4,867 -- --
------------ ----------- -----------
TOTAL INTEREST EXPENSE 13,114,088 7,594,052 6,216,042
------------ ----------- -----------
NET INTEREST INCOME 12,691,233 14,071,389 13,593,194
PROVISION FOR LOAN LOSSES (Note E) 420,000 342,028 360,000
------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,271,233 13,729,361 13,233,194
------------ ----------- -----------
NONINTEREST INCOME
Banking service charges and fees 1,230,161 1,019,424 954,373
Trust income 1,135,891 975,805 887,268
(Losses)gains on sales of available for sale securities (Note C) (666,702) 78,949 34,450
Increase in cash surrender value of insurance 347,975 332,579 333,387
Other 225,661 492,556 222,616
------------ ----------- -----------
TOTAL NONINTEREST INCOME 2,272,986 2,899,313 2,432,094
------------ ----------- -----------
NONINTEREST EXPENSES
Salaries 5,457,435 4,673,028 4,361,742
Employee benefits 1,395,147 1,319,766 1,326,020
Computer services 1,029,227 900,381 849,579
Net occupancy 954,325 705,569 646,504
Equipment 533,140 429,785 387,412
Advertising 678,440 446,811 304,766
Commissions, services and fees 520,833 326,877 228,039
Supplies 187,114 168,050 166,674
Postage 135,441 124,992 139,481
Legal fees 257,553 176,708 201,556
Director fees 177,700 145,150 139,390
OREO and non-performing loan expenses - net -- -- 6,618
Other 1,876,486 1,664,323 1,470,310
------------ ----------- -----------
TOTAL NONINTEREST EXPENSES 13,202,841 11,081,440 10,228,091
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 1,341,378 5,547,234 5,437,197
(BENEFIT) PROVISION FOR INCOME TAXES (Note J) (67,525) 1,511,343 1,520,962
------------ ----------- -----------
NET INCOME $ 1,408,903 $ 4,035,891 $ 3,916,235
============ =========== ===========
EARNINGS PER SHARE (Note L)
BASIC NET INCOME PER SHARE $ .63 $ 1.80 $ 1.76
============ =========== ===========
DILUTED NET INCOME PER SHARE $ .62 $ 1.78 $ 1.74
============ =========== ===========
See Notes to Consolidated Financial Statements.
F-3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December
31, 2006, 2005 and 2004
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Shareholders'
Stock Capital Earning Stock Loss Equity
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2003 19,974 16,719,130 6,355,277 (701,061) (110,389) 22,282,931
------------
Comprehensive Income:
Net income -- -- 3,916,235 -- -- 3,916,235
Unrealized holding loss on
available for sale securities,
net of reclassification adjustment
and taxes (Note S) -- -- -- -- (1,112,147) (1,112,147)
------------
Total comprehensive income 2,804,088
------------
Cash dividends declared $.50 per share -- -- (976,494) -- -- (976,494)
5% stock dividend declared
November 17, 2004--101,242 shares
including 5,008 treasury shares 1,012 2,732,522 (2,733,534) -- -- --
Fractional shares paid in cash -- -- (6,392) -- -- (6,392)
Stock options exercised-32,206 shares 322 280,460 -- -- -- 280,782
Tax benefit on stock options
exercised (Note M) -- 160,758 -- -- -- 160,758
------------ ------------ ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2004 21,308 19,892,870 6,555,092 (701,061) (1,222,536) 24,545,673
------------
Comprehensive Income:
Net income -- -- 4,035,891 -- -- 4,035,891
Unrealized holding loss on
available for sale securities,
net of reclassification
adjustment and taxes (Note S) -- -- -- -- (1,567,623) (1,567,623)
------------
Total comprehensive income 2,468,268
------------
Cash dividends declared $.57 per share -- -- (1,172,874) -- -- (1,172,874)
5% stock dividend declared
November 17, 2005--106,787 shares
including 5,259 treasury shares 1,068 2,967,610 (2,968,678) -- -- --
Fractional shares paid in cash -- -- (5,952) -- -- (5,952)
Stock options exercised-9,185 shares 92 73,655 -- -- -- 73,747
Tax benefit on stock options
exercised (Note M) -- 60,875 -- -- -- 60,875
------------ ------------ ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 22,468 22,995,010 6,443,479 (701,061) (2,790,159) 25,969,737
------------
Comprehensive Income:
Net income -- -- 1,408,903 -- -- 1,408,903
Unrealized holding gain on
available for sale securities,
net of reclassification
adjustment and taxes (Note S) -- -- -- -- 734,250 734,250
Adjustment to unfunded pension
liability to adopt SFAS No. 158
(Notes K and S) (760,704) (760,704)
------------
Total comprehensive income 1,382,449
------------
Cash dividends declared $.60 per share -- -- (1,300,535) -- -- (1,300,535)
5% stock dividend declared
November 30, 2006--112,755 shares
including 5,401 treasury shares 1,127 2,592,238 (2,593,365) -- -- --
Fractional shares paid in cash (5,266) (5,266)
Purchase of treasury shares - 5,000 shares -- -- -- (109,000) -- (109,000)
Contribution of treasury shares
to ESOP - 2,414 shares (Note K) 52,287 -- 15,305 67,592
Stock options exercised-12,864 shares 129 138,068 -- -- -- 138,197
Tax benefit on stock options
exercised (Note M) -- 63,020 -- -- -- 63,020
------------ ------------ ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2006 $ 23,724 $ 25,840,623 $ 3,953,216 $ (794,756) $ (2,816,613) $ 26,206,194
============ ============ =========== ============ ============ ============
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,408,903 $ 4,035,891 $ 3,916,235
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Amortization and accretion of premiums and discounts on investment
securities, net 207,376 381,201 404,736
Provision for loan losses 420,000 342,028 360,000
Depreciation and amortization 498,680 401,740 360,933
Deferred income taxes (benefits) (347,290) (96,531) 67,444
Losses (gains) on sales of available for sale securities 666,702 (78,949) (34,450)
Gain on the sales of loans receivable -- (82,858) --
Gain on the sales of foreclosed real estate -- -- (45,138)
Loans originated for sale (2,656,004) -- (277,000)
Proceeds from sales of loans held for sale 1,625,210 -- 279,907
Gains on sales of loans held for sale (11,389) -- (2,907)
Gains on sale of repossessed assets (159) (549) (500)
(Gains) losses on disposals of bank premises and equipment (100) 1,867 2,594
Increase in accrued interest receivable (249,634) (344,028) (10,520)
(Increase) decrease in other assets (190,789) 82,397 (261,493)
Increase in cash surrender value of insurance (347,974) (332,579) (333,387)
(Increase) decrease in deferred loan origination costs (86,416) (90,220) 66,486
Increase in accrued expenses and other liabilities 772,654 416,333 513,896
------------ ------------ ------------
Net cash provided by operating activities 1,709,770 4,635,743 5,006,836
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from principal payments 17,584,308 26,220,847 41,889,998
Purchases (15,850,960) (44,016,696) (85,569,876)
Proceeds from sales 33,625,157 9,687,181 38,877,863
Decrease in due to broker for security purchases (3,675,373) -- --
Held to maturity securities:
Proceeds from maturities and principal payments 8,519 21,911 46,912
Purchase of restricted stock (30,000) -- --
Investment in First Litchfield Statutory Trust II(Note I) (93,000) -- --
Purchase of Federal Home Loan Bank stock (242,200) (1,018,300) (793,100)
Proceeds from the sale of loans -- 17,101,552 --
Net increase in loans (53,571,030) (40,955,177) (26,876,055)
Proceeds from sales of repossessed assets 15,159 21,395 9,500
Purchases of premises and equipment (2,589,641) (1,881,108) (345,227)
Proceeds from sale of premises and equipment 100 -- 100
Purchase of life insurance policies (24,750) (24,750) (287,250)
Proceeds from sale of foreclosed real estate -- -- 345,138
------------ ------------ ------------
Net cash used in investing activities (24,843,711) (34,843,145) (32,701,997)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in savings, money market and demand deposits (9,765,351) (20,277,950) 7,336,189
Net increase (decrease) in certificates of deposit 65,323,864 (2,699,068) (10,045,297)
Proceeds from Federal Home Loan Bank advances 24,000,000 49,000,000 4,000,000
Repayments on Federal Home Loan Bank advances (14,500,000) (22,000,000) (9,700,000)
Net (decrease) increase in overnight Federal Home Loan Bank borrowings (16,116,000) 17,116,000 --
Net (decrease) increase in repurchase agreements with financial institutions (19,500,000) 6,800,000 35,900,000
Net increase in repurchase agreements with customers 2,231,851 9,764,584 209,588
Proceeds from issuance of subordinated debt 3,093,000 -- --
Principal repayments on capital lease obligation (1,383) -- --
Purchase of treasury shares (109,000) -- --
Distribution in cash for fractional shares of common stock (5,266) (5,952) (6,392)
Proceeds from exercise of stock options 138,197 73,747 280,782
Dividends paid on common stock (1,282,891) (1,136,010) (920,062)
Tax benefit of stock options exercised 63,020 60,875 160,758
Minority interest investment in subsidiary 50,000 -- --
------------ ------------ ------------
Net cash provided by financing activities 33,620,041 36,696,226 27,215,566
------------ ------------ ------------
(continued)
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont.
Net increase (decrease) in cash and cash equivalents 10,486,100 6,488,824 (479,595)
CASH AND CASH EQUIVALENTS, at beginning of year 18,711,537 12,222,713 12,702,308
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of year $ 29,197,637 $ 18,711,537 $ 12,222,713
============ ============ ============
SUPPLEMENTAL INFORMATION Cash paid during the year for:
Interest on deposits and borrowings $ 12,987,505 $ 7,155,131 $ 6,126,517
============ ============ ============
Income taxes $ 900,400 $ 950,500 $ 1,350,900
============ ============ ============
Noncash investing and financing activities:
Due to broker for securities purchased $ -- $ 3,675,373 $ --
============ ============ ============
Transfer of loans to repossessed assets $ 19,160 $ 31,687 $ --
============ ============ ============
Accrued dividends declared $ 338,100 $ 320,456 $ 283,592
============ ============ ============
Treasury stock contributed to ESOP $ 67,592 $ -- $ --
============ ============ ============
Change in other assets and other liabilities
related to the unfunded pension liability $ 1,152,582 $ -- $ --
============ ============ ============
Capital lease incurred for acquisition of premises $ 1,102,027 $ -- $ --
============ ============ ============
See Notes to Consolidated Financial Statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the First
Litchfield Financial Corporation (the "Company") 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. These financial statements also include the accounts of First
Litchfield Leasing Corporation, an entity in which the Bank has an eighty
percent ownership. 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
products and 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 Company filed a Form 10-SB registration statement with
the Securities and Exchange Commission (the "SEC") to register the Company's
$.01 par value common stock under the Securities and Exchange Act of 1934 (the
"Exchange Act"). The Company files periodic financial reports with the SEC as
required by the Exchange Act. On June 26, 2003, the Company formed First
Litchfield Statutory Trust I for the purpose of issuing trust preferred
securities and investing the proceeds in subordinated debentures issued by the
Company. On June 16, 2006, the Company formed First Litchfield Statutory Trust
II for the purpose of issuing trust preferred securities and investing the
proceeds in subordinated debentures issued by the Company. (See Note I).
The significant accounting policies followed by the Company 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. The Trust I and Trust II are not included in the consolidated
financial statements. 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 the reported amounts of revenues and
expenses for the reporting period. Actual results could differ from those
estimates. A material estimate that is particularly susceptible to significant
change in the near term relates to the determination of the allowance for loan
losses.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of the Company's
activities are with customers located within Litchfield County, Connecticut.
Note C discusses the types of securities that the Company invests in. Note E
discusses the types of lending that the Company engages in. The Company does not
have any significant loan concentrations to any one industry or customer. Note K
discusses a concentration related to the cash surrender value of the life
insurance.
SEGMENT REPORTING: The Company's only business segment is community banking.
During the periods presented this segment represented all the revenues and
income for the consolidated group and therefore, is the only reported segment as
defined by SFAS No. 131, " Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131)."
As discussed above, the Company formed a leasing company during the fourth
quarter of 2006. As the leasing company was inactive during 2006, the Company
did not present segment disclosure for the leasing company in the current year.
Starting in the first quarter of 2007, the Company will present segment
disclosure for the leasing company in accordance with SFAS 131.
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.
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Trading securities, if any, are carried at fair value, with unrealized gains and
losses recognized in earnings. Securities not classified as held to maturity or
trading, including equity securities with readily determinable fair values,
F-7
are classified as "available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income, net of taxes.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (1)
the length of time and extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
The sale of a held to maturity 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.
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 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 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 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. 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
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 originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors or current investor yield
requirements. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to noninterest income.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. Gains or losses on sales of mortgage loans are
recognized based on the difference between the selling price and the carrying
value of the related mortgage loans sold on the trade date.
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 Company, (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 if the loan is collateral-dependent. When a loan has been deemed to
have an impairment, a valuation allowance is established for the amount of
impairment. The Bank considers all non-accrual loans; other loans past due 90
days or more, based on contractual terms, 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.
F-8
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price if the loan is collateral dependent)
of the impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is maintained to
cover uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions.
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 local market conditions. In
addition, motor vehicles and recreational vehicles, whose value declines rapidly
during the loan term, generally secure a substantial portion of the Bank's
installment loans. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's installment loan portfolio and repossessed assets is
susceptible to changes in local 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 judgment about information available to
them at the time of their examination.
RATE LOCK COMMITMENTS: The Company enters into commitments to originate loans
whereby the interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be
sold are considered to be derivatives. Accordingly, such commitments, along with
any related fees received from potential borrowers, are recorded at fair value
in derivative assets or liabilities, with changes in fair value recorded in the
net gain or loss on sale of mortgage loans. Fair value is based on fees
currently charged to enter into similar agreements, and for fixed-rate
commitments also considers the difference between current levels of interest
rates and the committed rates.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company records derivative financial
instruments in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement requires that all derivatives be recognized as assets or liabilities
in the balance sheet and measured at fair value.
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost for
purchased assets, and for assets under capital lease, at the lower of fair value
or net present value of the minimum lease payments required over the term of the
lease, 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.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets, including premises and
equipment and certain identifiable intangible assets which are held and used by
the Company, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment is indicated by that review, the asset is written
down to its estimated fair value through a charge to noninterest expense.
F-9
FORECLOSED REAL ESTATE: Foreclosed real estate, if any, 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.
REPURCHASE AGREEMENTS WITH CUSTOMERS: Repurchase agreements with customers are
classified as secured borrowings, and generally mature within one to three days
of the transaction date. Repurchase agreements are reflected at the amount of
cash received in connection with the transaction. The Bank may be required to
provide additional collateral based on the fair value of the underlying
securities.
TRUST ASSETS: Assets of the Trust Department, other than trust cash on deposit
at the Bank, are not included in these consolidated financial statements because
they are not assets of the Company. Trust fees are recognized on the accrual
basis of accounting.
INCOME TAXES: The Company 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 in
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.
In September 2006, the FASB issued FASB Statement No. 157 ("FASB 157"), "Fair
Value Measurements," which addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under Generally Accepted Accounting Principles. As a result of FASB 157
there is now a common definition of fair value to be used throughout generally
accepted accounting principles, ("GAAP"). The FASB believes that the new
standard will make the measurement of fair value more consistent and comparable
and improve disclosures about those measures. FASB 157 is effective for fiscal
years beginning after November 15, 2007. The Company does not believe the
adoption of FASB 157 will have a material impact on its statement of operations.
In September 2006, the Financial Accounting Standards Board (the "FASB") issued
FASB Statement No. 158 ("SFAS No. 158"), "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87,88, 106, and 132(R)," which requires companies to recognize a net
liability or asset to report the funded status of their defined benefit pension
and other postretirement benefit plans on their balance sheets. SFAS No. 158
does not change how pensions and other postretirement benefits are accounted for
and reported in the income statement. The required transition method of adoption
is a prospective application and recognizing the funded status of a company's
benefit plans require an offsetting adjustment to accumulated other
comprehensive income in shareholders' equity. The Company's pension plan is in
an underfunded status and the Company recorded a decrease to accumulated other
comprehensive income of approximately $761,000, net of taxes, upon adoption of
SFAS No. 158. Additionally, SFAS No. 158 requires companies to measure plan
assets and obligations as of the same date as the year end balance sheet date.
This requirement is effective for the Company's fiscal year ending December 31,
2008. The Company is currently evaluating the impact of the adoption of this
provision of SFAS No. 158.
STOCK OPTION PLANS: In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement No. 123 (revised 2004), Share-Based Payment ("SFAS No.
123(R)"). SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost is measured based on the fair value of the equity or liability instruments
issued. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase
F-10
plans. SFAS No. 123(R) is a replacement of SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related interpretive guidance. This
statement requires entities to measure the cost of employee services received in
exchange for stock options based on the grant-date fair value of the award, and
to recognize the cost over the period the employee is required to provide
services for the award. SFAS No. 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
The Company elected to adopt SFAS No. 123(R) on January 1, 2006 under the
modified prospective method. Compensation is measured using the fair value of an
award on the grant dates and is recognized over the service period, which is
usually the vesting period. Compensation cost related to the non-vested portion
of awards outstanding as of that date was based on the grant-date fair value of
those awards as calculated under the original provisions of SFAS No 123; that
is, the Company was not required to re-measure the grant-date fair value
estimate of the unvested portion of awards granted prior to the effective date
of SFAS No 123(R).
The Company had applied Accounting Principles Board Opinion No. 25 and related
Interpretations, in accounting for the stock option plan prior to January 1,
2006. Under APB Opinion No. 25, stock options issued prior to 2006 had no
intrinsic value at the grant date and therefore, no compensation cost was
recognized for them. In addition, all stock options outstanding at December 31,
2005 were fully vested and therefore the adoption of SFAS No. 123(R) had no
initial impact on the Company's financial statements. There are no pro forma
disclosures required for 2006, 2005 and 2004 because there were no stock-based
compensation attributed to those years.
EARNINGS PER SHARE: Basic earnings per share represents income available to
common shareholders 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 Company relate to outstanding stock options and are determined
using the treasury stock method.
RELATED PARTY TRANSACTIONS: Directors and officers of the Company 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 are included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities and unfunded pension liabilities, 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 Company
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
Company maintains amounts due from banks and Federal funds sold which, at times,
may exceed federally insured limits. The Company has not experienced any losses
from such concentrations.
RECENT ACCOUNTING PRONOUNCEMENTS: In May 2005, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
154, ("SFAS 154"), "Accounting Changes and Error Corrections," replacing APB
Opinion No. 20 and FASB Statement No. 3, which changes the treatment and
reporting requirements for both accounting errors and changes of accounting
principles, and provides guidance on determining the treatment of the
retrospective application of a change. This Statement applies to all voluntary
changes in accounting principles. The adoption of this statement by the Company
in 2006 had no impact on the Company's financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109."
FIN 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and
F-11
transition. FIN 48 applies to all tax positions related to income taxes subject
to FASB Statement No. 109, "Accounting for Income Taxes"("FASB No. 109"). FIN 48
is effective for fiscal years beginning after December 15, 2006. Differences
between the amounts recognized in the statements of financial position prior to
the adoption of FIN 48 and the amounts reported after adoption should be
accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. The Company has not yet completed the process of
evaluating what effect, if any, the adoption of FIN 48 will have on its
financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments," which permits, but does not require, fair value
accounting for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
also subjects beneficial interests in securitized financial assets to the
requirements of SFAS 133. This statement is effective for all financial
instruments acquired, issued, or subject to re-measurement after December 31,
2006. The Company does not expect that the adoption of this statement will have
a material impact on its financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an Amendment of FASB Statement No. 140." The statement amends
SFAS No. 140 by (1) requiring the separate accounting for servicing assets and
servicing liabilities, which arise from the sale of financial assets; (2)
requiring all separately recognized servicing assets and servicing liabilities
to be initially measured at fair value, if practicable; and (3) permitting an
entity to choose between an amortization method or a fair value method for
subsequent measurement for each class of separately recognized servicing assets
and servicing liabilities. This statement is effective for fiscal years
beginning after September 15, 2006. The Company adopted this statement in 2006
and it did not have a material impact on the financial statements.
At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a
final consensus on Issue 06-04, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement periods is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or Accounting Principles Board
Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan, or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The Company is currently assessing the impact
of EITF 06-04 on its financial statements.
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, 2006 and 2005 the Bank
was required to have cash and liquid assets of approximately $6,207,000 and
$5,752,000, respectively, to meet these requirements. In addition, the Bank is
required to maintain $200,000 in the Federal Reserve Bank for clearing purposes.
F-12
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, 2006 and 2005 are as follows:
AVAILABLE FOR SALE
December 31, 2006
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Debt Securities:
U.S. Treasury securities $ 4,011,499 $ -- $ (19,624) $ 3,991,875
U.S. Government Agency securities 38,991,992 -- (1,190,389) 37,801,603
State and Municipal obligations 31,193,318 381,930 (43,720) 31,531,528
Corporate and Other bonds 11,274,073 67,326 (14,649) 11,326,750
------------- ------------- ------------- -------------
85,470,882 449,256 (1,268,382) 84,651,756
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA 1,060,592 -- (18,763) 1,041,829
FNMA 47,084,763 78,779 (1,790,692) 45,372,850
FHLMC 15,279,052 33,758 (546,682) 14,766,128
------------- ------------- ------------- -------------
63,424,407 112,537 (2,356,137) 61,180,807
------------- ------------- ------------- -------------
Marketable Equity Securities 2,000,000 -- (52,288) 1,947,712
------------- ------------- ------------- -------------
Total available for sale securities $ 150,895,289 $ 561,793 $ (3,676,807) $ 147,780,275
============= ============= ============= =============
December 31, 2005
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Debt Securities:
U.S. Treasury securities $ 4,292,659 $ -- $ (58,746) $ 4,233,913
U.S. Government Agency securities 57,955,558 125,130 (1,319,233) 56,761,455
State and Municipal obligations 34,727,011 255,067 (238,212) 34,743,866
Corporate and Other bonds 5,916,080 7,457 (21,037) 5,902,500
------------- ------------- ------------- -------------
102,891,308 387,654 (1,637,228) 101,641,734
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA 5,142,926 -- (107,149) 5,035,777
FNMA 58,192,401 26,658 (2,153,239) 56,065,820
FHLMC 18,901,237 3,865 (712,594) 18,192,508
------------- ------------- ------------- -------------
82,236,564 30,523 (2,972,982) 79,294,105
------------- ------------- ------------- -------------
Marketable Equity Securities 2,000,000 -- (35,481) 1,964,519
------------- ------------- ------------- -------------
Total available for sale securities $ 187,127,872 $ 418,177 $ (4,645,691) $ 182,900,358
============= ============= ============= =============
HELD TO MATURITY
December 31, 2006
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 40,516 $ -- $ (542) $ 39,974
============= ============= ============= =============
F-13
December 31, 2005
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 49,035 $ -- $ (1,102) $ 47,933
============= ============= ============= =============
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2006:
Less than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Investment Securities:
U.S. Treasury securities $ 3,007,031 $ 5,394 $ 984,844 $ 14,230 $ 3,991,875 $ 19,624
U.S. Government Agency securities 2,887,470 112,530 34,914,133 1,077,859 37,801,603 1,190,389
State & Municipal obligations 5,361,502 25,491 1,241,836 18,229 6,603,338 43,720
Corporate & Other bonds 3,880,000 14,649 -- -- 3,880,000 14,649
------------ ------------ ------------ ------------ ------------ ------------
15,136,003 158,064 37,140,813 1,110,318 52,276,816 1,268,382
Mortgage-Backed Securities:
GNMA -- -- 1,065,361 19,305 1,065,361 19,305
FNMA 2,713,210 2,927 35,794,145 1,787,765 38,507,355 1,790,692
FHLMC 444,661 2,665 11,593,313 544,017 12,037,974 546,682
------------ ------------ ------------ ------------ ------------ ------------
3,157,871 5,592 48,452,819 2,351,087 51,610,690 2,356,679
------------ ------------ ------------ ------------ ------------ ------------
Marketable Equity Securities -- -- 1,947,712 52,288 1,947,712 52,288
------------ ------------ ------------ ------------ ------------ ------------
Total $ 18,293,874 $ 163,656 $ 87,541,344 $ 3,513,693 $105,835,218 $ 3,677,349
============ ============ ============ ============ ============ ============
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2005:
Less than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Investment Securities:
U.S. Treasury securities $ 987,656 $ 10,742 $ 3,246,257 $ 48,004 $ 4,233,913 $ 58,746
U.S. Government Agency securities 17,845,690 124,415 35,790,635 1,194,818 53,636,325 1,319,233
State & Municipal obligations 14,579,556 238,212 -- -- 14,579,556 238,212
Corporate & Other bonds 2,895,000 21,037 -- -- 2,895,000 21,037
------------ ------------ ------------ ------------ ------------ ------------
36,307,902 394,406 39,036,892 1,242,822 75,344,794 1,637,228
Mortgage-Backed Securities:
GNMA 4,867,732 96,591 198,440 11,660 5,066,172 108,251
FNMA 15,614,259 623,236 34,446,103 1,530,003 50,060,362 2,153,239
FHLMC -- -- 17,257,496 712,594 17,257,496 712,594
------------ ------------ ------------ ------------ ------------ ------------
20,481,991 719,827 51,902,039 2,254,257 72,384,030 2,974,084
------------ ------------ ------------ ------------ ------------ ------------
Marketable Equity Securities 1,964,519 35,481 -- -- 1,964,519 35,481
------------ ------------ ------------ ------------ ------------ ------------
Total $ 58,754,412 $ 1,149,714 $ 90,938,931 $ 3,497,079 $149,693,343 $ 4,646,793
============ ============ ============ ============ ============ ============
At December 31, 2006, sixty-five securities have unrealized losses. Management
does not believe that any of the unrealized losses are other than temporary as
they primarily relate to debt and mortgage-backed securities issued by the U.S.
Government and U.S. Government agencies, and are due to changes in the interest
rate environment. The Company has both the intent and the ability to hold these
securities until maturity or until the fair value fully recovers. In addition,
management considers the issuers of the securities to be financially sound and
the Company will receive all contractual principal and interest related to these
investments. As a result, management believes that these unrealized losses will
not have a negative impact on future earnings or
F-14
a permanent effect on capital. However, management periodically evaluates
investment alternatives to properly manage the overall balance sheet. The timing
of sales and reinvestments is based on various factors, including management's
evaluation of interest rate risks and liquidity needs.
The amortized cost and fair value of debt securities at December 31, 2006, 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.
December 31, 2006
------------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ 5,000,000 $ 4,970,765 $ -- $ --
Due after one year through five years 10,011,499 9,822,790 -- --
Due after five years through ten years 26,781,824 25,888,113 -- --
Due after ten years 43,677,559 43,970,088 -- --
------------ ------------ ------------ ------------
85,470,882 84,651,756 -- --
Mortgage-backed securities 63,424,407 61,180,807 40,516 39,974
------------ ------------ ------------ ------------
TOTAL DEBT SECURITIES $148,895,289 $145,832,563 $ 40,516 $ 39,974
============ ============ ============ ============
For the years ended December 31, 2006, 2005 and 2004, proceeds from the sales of
available for sale securities were $33,625,157 $9,687,181 and $38,877,863,
respectively. Gross losses of $666,702 were realized on these sales in 2006.
Gross gains of $78,949 and $34,450, respectively, were realized on sales in 2005
and 2004, respectively.
Investment securities with a carrying value of $95,244,000 and $116,818,000 were
pledged as collateral to secure treasury tax and loan, trust assets, securities
sold under agreements to repurchase and public funds at December 31, 2006 and
2005, respectively.
During 2006 and 2005, 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, 2006 and 2005,
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:
2006 2005
----------- -----------
Balance at the beginning of year $ 2,874,780 $ 2,800,077
Advances 234,271 881,589
Repayments (1,114,905) (426,773)
Other changes 477,758 (380,113)
----------- -----------
BALANCE AT END OF YEAR $ 2,471,904 $ 2,874,780
=========== ===========
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.
F-15
NOTE E - LOANS RECEIVABLE
A summary of loans at December 31, 2006 and 2005 is as follows:
2006 2005
------------- -------------
Real estate--residential mortgage $ 177,082,143 $ 145,927,290
Real estate--commercial mortgage 53,318,351 42,144,448
Real estate--construction 30,605,787 28,549,180
Commercial 26,949,985 21,150,306
Installment 7,167,980 4,334,274
Other 171,752 47,091
------------- -------------
TOTAL LOANS 295,295,998 242,152,589
Net deferred loan origination costs 375,177 288,761
Premiums on purchased loans 334,950 --
Allowance for loan losses (2,106,100) (1,759,611)
------------- -------------
NET LOANS $ 293,900,025 $ 240,681,739
============= =============
Changes in the allowance for loan losses for the years ended December 31, 2006,
2005 and 2004, were as follows:
2006 2005 2004
----------- ----------- -----------
Balance at beginning of year $ 1,759,611 $ 1,389,947 $ 1,149,454
Provision for loan losses 420,000 342,028 360,000
Loans charged off (96,072) (97,565) (184,970)
Recoveries of loans previously charged off 22,561 125,201 65,463
----------- ----------- -----------
BALANCE AT END OF YEAR $ 2,106,100 $ 1,759,611 $ 1,389,947
=========== =========== ===========
A summary of nonperforming loans follows:
2006 2005
----------- -----------
Non-accrual loans $ 1,504,551 $ 273,330
Accruing loans contractually past due 90 days or more 343 4,884
----------- -----------
TOTAL $ 1,504,894 $ 278,214
=========== ===========
If interest income on non-accrual loans throughout the year had been recognized
in accordance with the loans' contractual terms, approximately $64,000, $9,000
and $14,000 of additional interest would have been recorded for the years ended
December 31, 2006, 2005 and 2004, respectively.
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, 2006 and 2005:
2006 2005
---------- ----------
Impaired loans receivable for which there is a related allowance for loan losses
determined:
Based on discounted cash flows $ 56,392 $ 12,000
Based on the fair value of collateral 170,677 --
---------- ----------
Total $ 227,069 $ 12,000
========== ==========
Impaired loans receivable for which there is no related allowance for loan
losses determined:
Based on discounted cash flows $1,239,032 $ 266,000
Based on the fair value of collateral 38,793 --
---------- ----------
Total $1,277,825 $ 266,000
========== ==========
Allowance for loan losses related to impaired loans $ 85,261 $ 12,000
========== ==========
F-16
Additional information related to impaired loans is as follows:
2006 2005 2004
-------- -------- ----------
Average recorded investment in impaired loans $745,000 $985,000 $1,236,000
======== ======== ==========
Interest income recognized $ 73,000 $ 5,000 $ 94,000
======== ======== ==========
Cash interest received $ 87,000 $ 15,000 $ 100,000
======== ======== ==========
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, 2006 and 2005
are as follows:
2006 2005
----------- ----------
Land $ 1,102,465 $1,081,345
Buildings and improvements 6,972,685 4,205,304
Furniture and fixtures 3,431,455 2,640,197
Leasehold improvements 308,591 260,080
----------- ----------
11,815,196 8,186,926
Less accumulated depreciation and amortization 4,374,880 3,939,598
----------- ----------
$ 7,440,316 $4,247,328
=========== ==========
Depreciation and amortization expense on premises and equipment for the years
ended December 31, 2006, 2005 and 2004 was $498,680, $401,740 and $360,933
respectively.
Premises under capital lease of $1,102,027 and related accumulated amortization
of $1,383 as of December 31, 2006 is included in buildings and improvements.
NOTE G - LEASES
The Company leases a branch office of the Bank under a twenty-year capital lease
that expires in 2026. In addition, at December 31, 2006, the Company was
obligated under various non-cancellable 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. The Company also
pays certain executory costs under these leases. Net rent expense under
operating leases was approximately $287,000, $153,000 and $151,000 for 2006,
2005 and 2004, respectively. The future minimum payments under the capital lease
and operating leases are as follows:
F-17
Capital Leases Operating Leases
-------------- ----------------
2007 $ 75,000 $ 207,000
2008 75,000 161,000
2009 75,000 151,000
2010 75,000 109,000
2011 75,916 112,000
2012 and thereafter 1,492,833 536,000
----------- ----------
1,868,749 $1,276,000
==========
Less amount representing interest (768,105)
-----------
Present value of future minimum lease
payments-capital lease obligation $ 1,100,644
===========
NOTE H - DEPOSITS
A summary of deposits at December 31, 2006 and 2005 is as follows:
2006 2005
------------ ------------
Noninterest bearing:
Demand $ 68,501,750 $ 66,907,502
Interest bearing:
Savings 45,304,667 48,502,205
Money market 71,079,935 79,241,996
Time certificates of deposit in
denominations of $100,000 or more 72,781,087 27,134,125
Other time certificates of deposit 75,761,435 56,084,533
------------ ------------
264,927,124 210,962,859
------------ ------------
$333,428,874 $277,870,361
============ ============
Included in time deposits as of December 31, 2006 and 2005 are approximately
$25,323,000 and $3,073,000, respectively, of brokered deposits which have
varying maturities through September 2008 and May 2007, respectively.
The following is a summary of time certificates of deposits by contractual
maturity as of December 31, 2006:
2007 $ 141,309,372
2008 5,474,503
2009 339,141
2010 1,258,397
2011 and thereafter 171,109
----------------
Total $ 148,542,522
================
Deposit accounts of officers, directors and their associates aggregated
$5,456,910 and $2,941,815 at December 31, 2006 and 2005, respectively.
NOTE I - BORROWINGS
Federal Home Loan Bank Borrowings
- ---------------------------------
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"), is required to maintain as collateral, an investment in capital stock
of the FHLBB in an amount equal to a certain percentage of its outstanding
residential first mortgage loans. Purchases of Federal Home Loan Bank stock
totaled $242,200 during 2006 and $1,018,300 during 2005. The 2006 and 2005
increases in FHLBB stock are due to capital structure changes implemented during
the second quarter of 2004 by the Federal Home Loan Bank of Boston (FHLBB).
These changes require each institution's stock investment in the FHLBB to be
reflective of that institution's use of FHLBB products. 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 obtain additional advances up to 30% of its total
F-18
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 advances are used as collateral. At December 31, 2006 and 2005,
advances under the Federal Home Loan Bank line of credit totaled $1,000,000 and
$17,116,000 respectively. At December 31, 2006 and 2005, other outstanding
advances from the FHLBB aggregated $66,000,000 and $56,500,000, respectively, at
interest rates ranging from 2.59% to 5.30%, and 2.33% to 4.38%, respectively.
Repurchase Agreements with Financial Institutions
- -------------------------------------------------
At December 31, 2006 and 2005, securities sold under agreements to repurchase
totaled $47,200,000 and $66,700,000, respectively, at interest rates ranging
from 2.40% to 4.19%, and 2.10% to 4.58%, respectively.
Junior Subordinated Debt Issued by Unconsolidated Trusts
- --------------------------------------------------------
The Company has established two Delaware statutory trusts, First Litchfield
Statutory Trust I and First Litchfield Statutory Trust II, for the sole purpose
of issuing trust preferred securities and related trust common securities. The
proceeds from such issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of each trust.
Concurrently with the issuance of the trust preferred securities, the Company
issued guarantees for the benefit of the holders of the trust preferred
securities. The trust preferred securities are issues that qualify, and are
treated by the Company, as Tier 1 regulatory capital. The Company wholly owns
all of the common securities of each trust. The trust preferred securities
issued by each trust rank equally with the common securities in right of
payment, except that if an event of default under the indenture governing the
notes has occurred and is continuing, the preferred securities will rank senior
to the common securities in right of payment.
The table below summarizes the outstanding junior subordinated notes and the
related trust preferred securities issued by each trust as of December 31, 2006:
First Litchfield First Litchfield
Statutory Trust I Statutory Trust II
----------------- ------------------
Junior Subordinated Notes:
Principal balance $ 7,011,000 $ 3,093,000
Annual interest rate 3 mo libor +3.10% 3 mo libor +1.65%
Stated maturity date June 26, 2033 June 30, 2036
Call date June 26, 2008 June 30, 2011
Trust Preferred Securities:
Face value 6,800,000 3,000,000
Annual distribution rate 3 mo libor +3.10% 3 mo libor +1.65%
Issuance date June 2003 June 2006
Distribution dates (1) Quarterly Quarterly
(1) All cash distributions are cumulative
Trust preferred securities are currently considered regulatory capital for
purposes of determining the Company's Tier I capital ratios. On March 1, 2005,
the Board of Governors of the Federal Reserve System, which is the Company's
banking regulator, approved final rules that allow for the continued inclusion
of outstanding and prospective issuances of trust preferred securities in
regulatory capital subject to new, more strict limitations. The Company has
until March 31, 2009 to meet the new limitations. Management does not believe
these final rules will have a significant impact on the Company.
The trust preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated notes at the stated maturity
date or upon redemption on a date no earlier than June 26, 2008 for First
Litchfield Statutory Trust I and June 30, 2011 for First Litchfield Statutory
Trust II. Prior to these respective redemption dates, the junior subordinated
notes may be redeemed by the Company (in which case the trust preferred
securities would also be redeemed) after the occurrence of certain events that
would have a negative tax effect on the Company or the trusts, would cause the
trust preferred securities to no longer qualify as Tier 1 capital, or would
result in a trust being treated as an investment company. Each trust's ability
to pay
F-19
amounts due on the trust preferred securities is solely dependent upon the
Company making payment on the related junior subordinated notes. The Company's
obligation under the junior subordinated notes and other relevant trust
agreements, in aggregate, constitute a full and unconditional guarantee by the
Company of each trust's obligations under the trust preferred securities issued
by each trust. The Company has the right to defer payment of interest on the
notes and, therefore, distributions on the trust preferred securities, for up to
five years, but not beyond the stated maturity date in the table above. During
any such deferral period the Company may not pay cash dividends on its common
stock and generally may not repurchase its common stock.
The contractual maturities of the Company's borrowings at December 31, 2006, by
year, are as follows:
Fixed Floating
Rate Rate Total
------------ ----------- ------------
2007 $ 36,150,000 $ -- $ 36,150,000
2008 21,500,000 -- 21,500,000
2009 4,550,000 7,000,000 11,550,000
2010 5,000,000 -- 5,000,000
2011 -- -- --
Thereafter 40,000,000 10,104,000 50,104,000
------------ ----------- ------------
TOTAL LONG-TERM DEBT $107,200,000 $17,104,000 $124,304,000
============ =========== ============
NOTE J - INCOME TAXES
The components of the income tax (benefit) provision are as follows:
2006 2005 2004
----------- ----------- -----------
Current Provision:
Federal $ 279,765 $ 1,607,874 $ 1,453,518
Deferred (Benefit) Provision:
Federal (347,290) (96,531) 67,444
----------- ----------- -----------
Total $ (67,525) $ 1,511,343 $ 1,520,962
=========== =========== ===========
A reconciliation of the anticipated income tax expense (benefit) (computed by
applying the Federal statutory income tax rate of 34% to the income before
taxes) to the (benefit) provision for income taxes as reported in the statements
of income is as follows:
2006 2005 2004
--------------- --------------- ---------------
Provision for income taxes at statutory Federal rate $ 456,069 34% $1,886,060 34% $ 1,848,647 34%
Increase (decrease) resulting from:
Tax exempt income (482,846) (36) (305,425) (6) (245,138) (4)
Nondeductible interest expense 57,165 4 22,783 1 15,244 --
Non-taxable income from insurance policies (118,311) (9) (113,077) (2) (113,352) (2)
Other 20,398 2 21,002 -- 15,561 --
---------------- --------------- ----------------
(Benefit) provision for income taxes $ (67,525) (5)% $1,511,343 27% $ 1,520,962 28%
================ =============== ================
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at December
31, 2006 and 2005 are presented below:
2006 2005
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 716,073 $ 598,267
Depreciation 101,807 60,137
Accrued expenses 222,719 241,831
Alternative minimum taxes 261,503 --
Unfunded pension liability 391,878 --
Unrealized loss on available for sale securities 1,059,106 1,437,355
----------- -----------
Total gross deferred tax assets 2,753,086 2,337,590
----------- -----------
F-20
Deferred tax liabilities:
Tax bad debt reserve (153,536) (162,932)
Prepaid pension costs (232,209) (247,896)
Net deferred loan costs (127,560) (98,179)
Prepaid expenses and other (66,748) (16,467)
----------- -----------
Total gross deferred tax liabilities (580,053) (525,474)
----------- -----------
Net deferred tax asset $ 2,173,033 $ 1,812,116
=========== ===========
Based on the Company'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, transferred a portion of its
residential and commercial mortgage loan portfolios from the Bank to the PIC. A
substantial portion of the Company'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 2006, 2005 and 2004.
NOTE K - EMPLOYEE BENEFITS
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan (the
"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. During the
first quarter of 2005, the Bank's pension plan was curtailed. Because of this
action, no contributions to the Plan were made by the Bank during 2006 and 2005.
Prior to the Plan's curtailment, the Bank's funding policy was to contribute
amounts to the Plan sufficient to meet the minimum funding requirements set
forth in ERISA, plus such additional amounts as the Bank determined to be
appropriate from time to time. The actuarial information has been calculated
using the projected unit credit method.
As described in Note A, the Company adopted SFAS No. 158 at December 31, 2006
and, as a result, an adjustment to record the Company's unfunded pension
liability of $1,152,582 was made to decrease prepaid pension costs and increase
accrued expenses and other liabilities. This amount, net of deferred taxes of
$391,878, was recorded as an adjustment to accumulated other comprehensive
income of $760,704.
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 2006, 2005 and 2004 using a
measurement date of December 31:
Change in benefit obligation 2006 2005 2004
----------- ----------- -----------
Benefit obligation, beginning $ 3,586,983 $ 3,567,063 $ 3,309,744
Service cost -- -- 259,555
Interest cost 193,161 210,062 192,198
Change in assumptions due to plan amendments -- 813,887 --
Actuarial gain -- (38,658) (51,602)
Curtailment gain -- (644,297) --
Benefits paid (371,412) (321,074) (142,832)
----------- ----------- -----------
Benefit obligation, ending 3,408,732 3,586,983 3,567,063
----------- ----------- -----------
F-21
Change in plan assets:
Fair value of plans assets, beginning 2,981,138 3,077,431 2,736,414
Actual return on plan assets 329,392 224,781 196,749
Employer contribution -- -- 287,100
Benefits paid (371,412) (321,074) (142,832)
----------- ----------- ----------
Fair value of plan assets, ending 2,939,118 2,981,138 3,077,431
----------- ----------- ----------
Funded status at end of year included
in accrued expenses and other liabilities in 2006 $ (469,614) (605,845) (489,632)
===========
Unrecognized net actuarial loss 1,334,951 1,248,449
Unrecognized service cost -- --
----------- -----------
Prepaid benefit cost included in other assets $ 729,106 $ 758,817
=========== ===========
The accumulated benefit obligation was $3,586,983 and $2,868,637 at December 31,
2006 and 2005, respectively. At December 31, 2006, $1,152,582 of net actuarial
gains is included in other comprehensive income. The estimated net gain that
will be amortized from accumulated other comprehensive income into net periodic
benefit cost in 2007 is $67,807.
Components of net periodic benefit cost: 2006 2005 2004
--------- --------- ---------
Service cost $ -- $ -- $ 259,555
Interest cost 193,161 210,062 192,198
Expected return on plan assets (214,862) (233,238) (226,290)
Amortization of prior service cost -- -- --
Amortization of unrealized loss 67,839 52,887 47,853
--------- --------- ---------
Net periodic benefit cost $ 46,138 $ 29,711 $ 273,316
========= ========= =========
Weighted-average assumptions used to determine benefit obligations at December
31:
2006 2005
------- -------
Discount rate 5.50% 5.50%
Rate of compensation increase N/A N/A
Weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31:
2006 2005
------- -------
Discount rate 5.50% 5.50%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase N/A N/A
The pension expense for the Plan was $46,138, $29,711 and $273,316 for the years
ended December 31, 2006, 2005 and 2004, respectively, and is calculated based
upon a number of actuarial assumptions, including an expected long-term rate of
return on Plan assets of 7.50% each year. In developing the expected long-term
rate of return assumption, management evaluated input from its investment
advisor and actuaries, including their review of asset class return expectations
as well as long-term inflation assumptions. Management anticipates that
investments will continue to generate long-term returns averaging at least
7.50%. Management regularly reviews the asset allocations and periodically
rebalances investments when considered appropriate. Management continues to
believe that 7.50% is a conservatively reasonable long-term rate of return on
Plan assets. Management will continue to evaluate the actuarial assumptions,
including the expected rate of return, at least annually, and will adjust as
necessary.
F-22
The Bank's pension plan weighted average asset allocations at December 31, 2006
and 2005 by asset category are as follows:
Percentage of
Plan Assets as of
December 31,
Asset Category 2006 2005
-------------- -----------------
Cash and receivables 2% 2%
Corporate debt and equity securities 13% 15%
Pooled funds/Mutual funds 66% 63%
Government securities 19% 20%
--- ---
Total 100% 100%
=== ===
The purpose of the pension investment program is to provide the means to pay
retirement benefits to participants and their beneficiaries in the amounts and
at the times called for by the Plan. Plan benefits were frozen effective May 1,
2005. No annual contributions were required or made to the Plan in 2006, and
none are expected to be made in 2007.
Plan assets are diversified and invested in accordance with guidelines
established by the Bank's Compensation and Trust Committees. The portfolio is
managed according to a standard Growth and Income Investment Objective model.
The target asset allocation is 60% equity and 40% fixed income exposure.
Rebalancing takes place when the investment mix varies more than 5% of its
Investment Objective model. Equity plan assets are further diversified in
investment styles ranging from large cap, mid cap, small cap and international
through the investment in eight equity mutual funds. Individual corporate,
government agency and municipal bonds/notes, as well as certificates of
deposits, provide fixed income for the plan and are diversified by type, credit
quality and duration. The fifteen to twenty fixed income investments are
laddered by maturity in order to mitigate interest rate sensitivity and income
fluctuations over time.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
2007 $ 186,000
2008 191,000
2009 188,000
2010 200,000
2011 238,000
2012-2016 1,222,000
EMPLOYEE SAVINGS PLAN: The Bank offers an employee savings plan under section
401(k) of the Internal Revenue Code. Under the terms of the Plan, employees may
contribute up to 10% of their pre-tax compensation. For the years ended December
31, 2006 and 2005, the Bank made matching contributions equal to 50% of
participant contributions up to the first 6% of pre-tax compensation of a
contributing participant. The Bank also made a contribution of 3% of pre-tax
compensation for all eligible participants regardless of whether the participant
made voluntary contributions to the 401(k) plan. For the year ended December 31,
2004, the Bank made matching contributions equal to 50% 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 $202,563, $178,279
and $57,432 for 2006, 2005 and 2004, respectively.
OTHER BENEFIT PLANS: 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, 2006 and 2005, accrued supplemental retirement benefits
of $5,000 and $10,000, respectively, are recognized in the Company's balance
sheet related to this plan. Payments to this retiree will be $5,000 per year
through 2007.
Beginning in 1996, the Company offered 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 market value of the related
trust assets and corresponding liability of $198,960 and $313,579 at December
31, 2006, and 2005, respectively are included in the Company's balance sheet.
During 2005, the plan was amended to cease the deferral of any future fees.
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
F-23
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, 2006, 2005 and 2004,
$54,620, $132,938 and $164,998, respectively, were charged to operations under
this plan. The related liability, of $347,115 and $387,688 at December 31, 2006
and 2005, respectively, is included in accrued expenses and other liabilities.
At December 31, 2006 and 2005, unvested benefits earned under this plan were
approximately $107,000 and $167,000, respectively.
In 2005, the Bank established an Employee Stock Ownership Plan ("ESOP"), for the
benefit of its eligible employees. The ESOP invests in the stock of the Company
providing participants with the opportunity to participate in any increases in
the value of Company stock. Under the ESOP, eligible employees, which represent
substantially all full-time employees, are awarded shares of the Company's stock
which are allocated among participants in the ESOP in proportion to their
compensation. The Board determines the total amount of compensation to be
awarded under the plan. That amount of compensation divided by the fair value of
the Company's shares at the date the shares are transferred to the plan
determines the number of shares contributed to the plan. Dividends are allocated
to participant accounts in proportion to their respective shares. For the years
ended December 31, 2006 and 2005, $0 and $67,592 was charged to operations under
the ESOP. During 2006, the Company contributed 2,414 shares to the ESOP which
are held by the ESOP at December 31, 2006. The Company did not contribute any
shares to the ESOP during 2005. Under the terms of the ESOP, the Company is
required to repurchase shares from participants upon death or termination. The
fair value of shares subject to repurchase at December 31, 2006 is approximately
$50,000.
Effective January 1, 2006, the Bank entered into supplemental retirement
agreements with three of the Bank's Senior Officers. At December 31, 2006,
accrued supplemental retirement benefits of $104,000 are recognized in the
Company's balance sheet related to these plans. Upon retirement, the plans
provide for payments to these individuals ranging from 10% to 25% of the three
year average of the executive's compensation prior to retirement for the life
expectancy of the executive at the retirement date.
The Bank has an investment in, and is the beneficiary of, life insurance
policies on the lives of certain current and former 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 $9,636,000 and $9,264,000 at December 31, 2006 and 2005,
respectively. In addition, these assets are unsecured and are maintained with
six insurance carriers.
The Company 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
Company 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
In November 2006, 2005 and 2004, the Board of Directors declared 5% stock
dividends payable on December 29, 2006, December 30, 2005, and December 31,
2004, respectively. Payment of these dividends resulted in the issuance of
112,755, 106,787 and 101,242 additional common shares in December 2006, 2005 and
2004, respectively. 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 additional paid-in capital. Fractional
shares were payable in cash on an equivalent share basis of $23.00 for the 2006
stock dividend, $27.80 for the 2005 stock dividend and $27.00 for the 2004 stock
dividend. Weighted-average shares and per share data have been restated to give
effect to all stock dividends and splits.
F-24
The following is information about the computation of net income per share for
the years ended December 31, 2006, 2005 and 2004. Shares outstanding include all
shares contributed to the ESOP as all such shares have been allocated to the
participants. The 2005 and 2004 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, 2006
---------------------------------------
Net Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common stockholders $ 1,408,903 2,249,301 $ .63
===========
Effect of Dilutive Securities
Options Outstanding -- 10,169
----------- -----------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $ 1,408,903 2,259,470 $ .62
=========== =========== ===========
For the Year Ended December 31, 2005
---------------------------------------
Net Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common stockholders $ 4,035,891 2,237,593 $ 1.80
===========
Effect of Dilutive Securities
Options Outstanding -- 23,618
----------- -----------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $ 4,035,891 2,261,211 $ 1.78
=========== =========== ===========
For the Year Ended December 31, 2004
---------------------------------------
Net Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common stockholders $ 3,916,235 2,223,033 $ 1.76
===========
Effect of Dilutive Securities
Options Outstanding -- 31,388
----------- -----------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $ 3,916,235 2,254,421 $ 1.74
=========== =========== ===========
NOTE M - STOCK OPTION PLANS
At December 31, 2006, the Company had one fixed option plan, which is described
below. Effective January 1, 2006, the Company adopted SFAS No. 123(R) utilizing
the modified prospective approach. Prior to the adoption of SFAS No. 123(R), the
Company accounted for the stock options grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method),
and accordingly, recognized no compensation expense for stock option grants.
Because there were no unvested share-based awards at January 1, 2006, the
adoption of this statement had no initial effect on the Company's financial
statements.
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 3,544 shares of the Company's common stock. Automatic annual
grants of an additional 601 shares for each director were given for each of the
four following years.
F-25
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 Company's stock at the date of the grant. No option
may be exercised until 12 months after it is granted at which time options fully
vest. Options are exercisable for a period of ten years from the grant thereof.
Activity in the option plan for officers and outside directors for 2006, 2005
and 2004 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.)
2006 2005 2004
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Number of Average Exercise Number of Average Exercise Number of Average Exercise
Shares Price Per Share Shares Price Per Share Shares Price Per Share
------------------------------ ------------------------------ ------------------------------
Options outstanding at the
beginning of the year 30,406 10.23 40,528 9.49 77,795 8.55
Granted -- -- -- -- -- --
Exercised 13,505 10.23 10,122 7.28 37,267 7.53
Cancelled -- -- -- -- -- --
------------------------------ ------------------------------ ------------------------------
Options outstanding and
exercisable at end of year 16,901 10.22 30,406 10.23 40,528 9.49
============================== ============================== ==============================
At December 31, 2006, exercise prices ranged from $8.08 to $12.52 with an
average remaining contractual life of 1.2 years and a weighted average exercise
price of $10.22.
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 16,901.
The intrinsic value of options outstanding and exercisable at December 31, 2006,
2005 and 2004 is $180,120 and $517,611 and $831,154, respectively. The intrinsic
value of options exercised during the years ended December 31, 2006, 2005 and
2004 was $143,805, $202,090 and $837,261, respectively.
NOTE N - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Company 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 Company 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, 2006, the Bank had retained earnings of approximately $25,161,000,
of which approximately $6,011,000 was available for distribution to the Company
as dividends without prior regulatory approval.
Under Federal Reserve regulation, the Bank is also limited to the amount it may
loan to the Company, unless such loans are collateralized by specified
obligations. At December 31, 2006, the amount available for transfer from the
Bank to the Company 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.
F-26
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, 2006 and 2005 related to these items are summarized below:
2006 2005
--------------- ---------------
Contract Amount Contract Amount
--------------- ---------------
Loan commitments:
Approved loan commitments $12,285,000 $10,021,000
Unadvanced portion of construction loans 8,701,000 13,141,000
Unadvanced portion of:
Commercial lines of credit 24,158,000 20,524,000
Home equity lines of credit 31,535,000 25,472,000
Overdraft protection 712,000 627,000
Credit Cards 2,612,000 2,511,000
Standby letters of credit 2,211,000 2,620,000
----------- -----------
$82,214,000 $74,916,000
=========== ===========
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. As of January 1, 2003, newly issued or modified guarantees that are
not derivative contracts have been recorded on the Company's consolidated
balance sheet at their fair value at inception. No liability related to
guarantees was required to be recorded at December 31, 2006 and 2005.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which arose during the
course of business and are pending against the Company. 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 Company.
NOTE P - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2006 and 2005, the Bank paid approximately
$73,000 and $119,000, respectively, for rent and legal fees, to companies, the
principals of which are Directors of the Company.
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 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 and 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, 2006 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
F-27
(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, 2006 the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, 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 Company's and 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, 2006:
The Company
- -----------
Total Capital to Risk Weighted Assets $40,824,000 13.25% $24,556,000 8% N/A N/A
Tier I Capital to Risk Weighted Assets 38,719,000 12.57 12,278,000 4 N/A N/A
Tier I Capital to Average Assets 38,719,000 7.55 20,500,000 4 N/A N/A
The Bank
- --------
Total Capital to Risk Weighted Assets $37,599,000 12.24% $24,494,000 8% $30,618,000 10%
Tier I Capital to Risk Weighted Assets 35,493,000 11.55 12,250,000 4 18,374,000 6
Tier I Capital to Average Assets 35,493,000 6.94 20,457,000 4 25,571,000 5
As of December 31, 2005:
The Company
- -----------
Total Capital to Risk Weighted Assets $37,252,000 14.12% $21,106,000 8% N/A N/A
Tier I Capital to Risk Weighted Assets 35,493,000 13.45 10,556,000 4 N/A N/A
Tier I Capital to Average Assets 35,493,000 7.80 18,202,000 4 N/A N/A
The Bank
- --------
Total Capital to Risk Weighted Assets $34,182,000 13.00% $21,035,000 8% $26,294,000 10%
Tier I Capital to Risk Weighted Assets 32,423,000 12.33 10,518,000 4 15,778,000 6
Tier I Capital to Average Assets 32,423,000 7.14 18,164,000 4 22,705,000 5
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 or 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 Company.
Management uses its best judgment in estimating the fair value of the Company'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 Company could have realized in a sales transaction at either December 31,
2006 or 2005. The estimated fair value amounts for 2006 and 2005 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.
F-28
The information presented should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only required for
a limited portion of the Company'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 Company's disclosures and those of other
companies or banks may not be meaningful.
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 fair value of the Federal Home Loan Bank stock, Federal Reserve Bank stock
and other restricted stock is estimated to equal the carrying value, due to the
historical experience that these stocks are redeemed at par.
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.
The fair value of loans held for sale is based on quoted market prices.
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.
The recorded book balances and estimated fair values of the Company's financial
instruments at December 31, 2006 and 2005 are as follows:
2006 2005
--------------------------- ---------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Financial Assets:
Cash and due from banks $ 29,197,637 $ 29,197,637 $ 18,711,537 $ 18,711,537
Available for sale securities 147,780,275 147,780,275 182,900,358 182,900,358
Held to maturity securities 40,516 39,974 49,035 47,933
Federal Home Loan Bank stock 4,443,400 4,443,400 4,201,200 4,201,200
Federal Reserve Bank stock 225,850 225,850 225,850 225,850
Other restricted stock 80,000 80,000 50,000 50,000
Loans held for sale 1,042,183 1,044,269 -- --
Loans, net 293,900,025 287,636,158 240,681,739 235,006,485
Accrued interest receivable 2,598,726 2,598,726 2,349,092 2,349,092
F-29
Financial Liabilities:
Savings deposits 45,304,667 45,304,667 48,502,205 48,502,205
Money market and demand deposits 139,581,685 139,581,684 146,149,498 146,149,498
Time certificates of deposit 148,542,522 148,804,248 83,218,658 83,382,968
Federal Home Loan Bank advances 67,000,000 66,045,391 73,616,000 72,488,403
Repurchase agreements with
financial institutions 47,200,000 46,447,584 66,700,000 65,393,412
Repurchase agreements with customers 12,206,023 12,206,023 9,974,172 9,974,174
Subordinated debt 10,104,000 10,104,000 7,011,000 7,011,000
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 2006 and 2005.
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.
NOTE S - OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive loss is comprised of the following at December
31, 2006 and 2005:
2006 2005
---------- ----------
Unrealized losses on available for sale securities,
net of taxes $2,055,909 $2,790,159
Unfunded pension liability, net of taxes 760,704 --
---------- ----------
$2,816,613 $2,790,159
========== ==========
Other comprehensive income for the years ended December 31, 2006, 2005 and 2004
is as follows:
2006
-----------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
----------- ----------- -----------
Unrealized holding gains arising during the period $ 445,798 $ (151,571) $ 294,227
Add: reclassification adjustment for losses recognized in net income 666,702 (226,679) 440,023
----------- ----------- -----------
Unrealized holding gain on available for sale securities,
net of taxes 1,112,500 (378,250) 734,250
----------- ----------- -----------
Unfunded pension liability (1,152,582) 391,878 (760,704)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $ (40,082) $ 13,628 $ (26,454)
=========== =========== ===========
2005
-----------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
----------- ----------- -----------
Unrealized holding losses on available for sale securities
arising during the period $(2,296,237) $ 780,721 $(1,515,516)
Less: reclassification adjustment for gains recognized in net income (78,949) 26,842 (52,107)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $(2,375,186) $ 807,563 $(1,567,623)
=========== =========== ===========
F-30
2004
-----------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
----------- ----------- -----------
Unrealized holding losses on available for sale securities
arising during the period $(1,650,622) $ 561,212 $(1,089,410)
Less: reclassification adjustment for gains recognized in net income (34,450) 11,713 (22,737)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $(1,685,072) $ 572,925 $(1,112,147)
=========== =========== ===========
NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION
FIRST LITCHFIELD FINANCIAL CORPORATION
Condensed Balance Sheets December 31,
-------------------------
2006 2005
----------- -----------
Assets
Cash and due from banks $ 3,167,243 $ 2,973,162
Investment in The First National Bank of Litchfield 32,687,814 29,700,579
Investment in First Litchfield Statutory Trusts I,II 304,000 211,000
Other assets 503,388 423,647
----------- -----------
Total Assets $36,662,445 $33,308,388
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Subordinated debt $10,104,000 $ 7,011,000
Other liabilities 352,251 327,651
----------- -----------
Total Liabilities 10,456,251 7,338,651
----------- -----------
Shareholders' equity 26,206,194 25,969,737
----------- -----------
Total Liabilities and Shareholders' Equity $36,662,445 $33,308,388
=========== ===========
Condensed Statements of Income Years Ended December 31,
-----------------------------------------
2006 2005 2004
---- ---- ----
Dividends from subsidiary $ 1,900,000 $ 1,600,000 $ 955,000
Other expenses, net 764,705 516,979 392,822
----------- ----------- -----------
Income before taxes and equity in earnings of subsidiary 1,135,295 1,083,021 562,178
Income tax benefit 259,919 175,772 133,366
----------- ----------- -----------
Income before equity in undistributed earnings of subsidiary 1,395,214 1,258,793 695,544
Equity in undistributed earnings of subsidiary 13,689 2,777,098 3,220,691
----------- ----------- -----------
Net income $ 1,408,903 $ 4,035,891 $ 3,916,235
=========== =========== ===========
Condensed Statements of Cash Flows
Years Ended December 31,
-----------------------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net Income $ 1,408,903 $ 4,035,891 $ 3,916,235
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiary (13,689) (2,777,098) (3,220,691)
Other, net (9,766) 127,013 31,129
----------- ----------- -----------
Cash provided by operating activities 1,385,448 1,385,806 726,673
----------- ----------- -----------
Cash flows from investing activities:
Investment in First Litchfield Statutory Trust II (93,000) -- --
Investment in The First National Bank of Litchfield (3,000,000) -- --
----------- ----------- -----------
Cash used in investing activities (3,093,000) -- --
----------- ----------- -----------
F-31
Parent Company only, Cash Flows, cont.
Cash flows from financing activities:
Stock options exercised 138,197 73,747 280,782
Distribution in cash for fractional shares of common stock (5,266) (5,952) (6,392)
Proceeds from issuance of subordinated debt 3,093,000 -- --
Contribution of treasury shares to ESOP 67,592 -- --
Purchase of treasury shares (109,000) -- --
Dividends paid on common stock (1,282,890) (1,136,010) (920,061)
----------- ----------- -----------
Cash provided by (used in) financing activities 1,901,633 (1,068,215) (645,671)
----------- ----------- -----------
Net increase in cash and due from banks 194,081 317,591 81,002
Cash and due from banks at the beginning of the year 2,973,162 2,655,571 2,574,569
----------- ----------- -----------
Cash and due from banks at the end of the year 3,167,243 2,973,162 2,655,571
=========== =========== ===========
F-32
ITEM 9. 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, 2006, or subsequently.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
report is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit of
possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There are no changes in the Company's internal control over financial reporting
that occurred during the Company's fourth quarter of 2006 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Directors and Executive Officers of the Registrant
required by this Item pursuant to Item 401 of Regulation S-K is omitted from
this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2007 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, under the Sections "Election of Directors" and "Executive Officers," and
the information included therein is incorporated by reference.
Information required by this Item pursuant to Item 405 of Regulation S-K
regarding compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, is omitted from this report on Form 10-K and is contained in the
Bank's Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on May 16, 2007 to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K, under the Section "Section 16(a) Beneficial
Ownership Reporting Compliance" and the information included therein is
incorporated by reference.
Information required by this Item pursuant to Item 407(c)(3) of Regulation S-K
regarding material changes, if any, to procedures by which shareholders may
recommend nominees to the Board, is omitted from this report on Form 10-K and is
contained in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K, under the Section "Proposals
of Shareholders", and the information included therein is incorporated by
reference.
Information required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding the audit committee and audit committee financial
expert(s), respectively, is omitted from this report on Form 10-K and is
contained in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within
36
120 days after the end of the fiscal year covered by this Form 10-K, under the
Section "Corporate Governance," and the information included therein is
incorporated by reference.
Code of Ethics
- --------------
The Company has adopted a Code of Ethics that applies to the Company's Chief
(Principal) Executive Officer and Chief (Principal) Financial Officer. Such Code
of Ethics may be obtained by any person, without charge, upon request, by
writing to: Carroll A. Pereira, Treasurer, First Litchfield Financial
Corporation, 13 North Street, Litchfield, CT 06759.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item pursuant to Item 402 of Regulation S-K
regarding Directors and Executive Compensation, including the Compensation
Discussion & Analysis, is omitted from this report on Form 10-K and is contained
in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K, under the Sections "Board
Compensation" and "Executive Compensation," and the information included therein
is incorporated by reference.
Information required by this Item pursuant to Item 407(e)(4) of Regulation S-K
is omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Compensation Committee Interlocks
and Insider Participation," and the information included therein is incorporated
by reference.
Information required by this Item pursuant to Item 407(e)(5) is omitted from
this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2007 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, under the Section "Compensation Committee Report," and the information
included therein is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this Item pursuant to Item 403 of Regulation S-K
regarding Security Ownership of Certain Beneficial Owners and Management is
omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Security Ownership of Directors,
Nominees and Executive Officers" and "Security Ownership of Certain Beneficial
Owners", and the information included therein is incorporated by reference.
Information required by this Item pursuant to Item 201(d) of Regulation S-K
regarding securities authorized for issuance under equity compensation plans is
omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Equity Compensation Plan
Information," and the information included therein is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item pursuant to Item 404 of Regulation S-K
regarding Certain Relationships and Related Transactions is omitted from this
report on Form 10-K and is contained in the Company's Definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 16, 2007 to be filed
within 120 days after the end of the fiscal year covered by this Form 10-K,
under the Section "Transactions with Related Persons, Promoters and Certain
Control Persons" and the information included therein is incorporated by
reference.
Information required by this Item pursuant to Item 407(a) of Regulation S-K
regarding the independence of directors is omitted from this report on Form 10-K
and is contained in the Company's Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 16, 2007 to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K, under the Section
"Corporate Governance," and the information included therein is incorporated by
reference.
37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item regarding Principal Accounting Fees and
Services is omitted from this report on Form 10-K and is contained in the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on May 16, 2007 to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K, under the Section "Ratification of the
Appointment of Independent Auditors," and the information included therein is
incorporated by reference.
Information required by this Item regarding pre-approval policies for audit and
non-audit services is omitted from this report on Form 10-K and is contained in
the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on May 16, 2007 to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, under the Section "Policy on Audit
Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditors,"
and the information included therein is incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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 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.
10.5 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.
38
10.6 Deferred Directors' 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
39
10.21 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.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 Early Retirement Agreement between Jerome J. Whalen and The First
National Bank of Litchfield dated April 2, 2002. Exhibit is
incorporated by reference to Exhibit 10.31 set forth in the
Company's 10-QSB for the quarter ended March 31, 2002 as filed
with the Securities and Exchange Commission on May 14, 2002.
10.31 Executive Change in Control Agreement between Joseph J. Greco and
the Company and the Bank. Exhibit is incorporated by reference to
Exhibit 10.32 set forth in the Company's 10-QSB for the quarter
ended June 30, 2002 as filed with the Securities and Exchange
Commission on August 13, 2002.
10.32 Executive Change in Control Agreement between Carroll A. Pereira
and the Company and the Bank. Exhibit is incorporated by
reference to Exhibit 10.33 set forth in the Company's 10-QSB for
the quarter ended June 30, 2002 as filed with the Securities and
Exchange Commission on August 13, 2002.
40
10.33 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.37 set forth in the
Company's 10-QSB for the quarter ended June 30, 2002 as filed
with the Securities and Exchange Commission on August 13, 2002.
10.33.1 The First National Bank of Litchfield Director Incentive
Retirement Agreement between Alan B. Magary and the Bank dated
December 19, 2002. Exhibit is incorporated by reference to
Exhibit 10.38 set forth in the Company's Annual Report in Form
10-KSB for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission on March 31, 2003.
10.34 The First National Bank of Litchfield Director Incentive
Retirement Agreement between Gregory S. Oneglia and the Bank
dated December 19, 2002. Exhibit is incorporated by reference to
Exhibit 10.39 set forth in the Company's Annual Report in Form
10-KSB for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission on March 31, 2003.
10.35 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Joseph J. Greco and the Bank dated
December 19, 2002. Exhibit is incorporated by reference to
Exhibit 10.40 set forth in the Company's Annual Report in Form
10-KSB for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission on March 31, 2003.
10.33 Executive Change in Control Agreement between Carroll A. Pereira
and the Company and the Bank. Exhibit is incorporated by
reference to Exhibit 10.42 set forth in the Company's 10-QSB for
the quarter ended June 30, 2003 as filed with the Securities and
Exchange Commission on August 13, 2003.
10.34 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.46 set forth in the
Company's 10-QSB for the quarter ended June 30, 2003 as filed
with the Securities and Exchange Commission on August 13, 2003.
10.35 Split dollar life agreement between Joelene E. Smith and the
Company. Exhibit is incorporated by reference to Exhibit 10.47
set forth in the Company's 10-QSB for the quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on
August 13, 2003.
10.36 Split dollar life agreement between Laura R. Szablak and the
Company. Exhibit is incorporated by reference to Exhibit 10.48
set forth in the Company's 10-QSB for the quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on
August 13, 2003.
10.37 Split dollar life agreement between Patricia A. Carlson and the
Company. Exhibit is incorporated by reference to Exhibit 10.49
set forth in the Company's 10-QSB for the quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on
August 13, 2003.
10.38 Split dollar life agreement between Kathleen McGarry and the
Company. Exhibit is incorporated by reference to Exhibit 10.50
set forth in the Company's 10-QSB for the quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on
August 13, 2003.
10.39 Split dollar life agreement between Cynthia Showalter and the
Company. Exhibit is incorporated by reference to Exhibit 10.51
set forth in the Company's 10-QSB for the quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on
August 13, 2003.
10.40 Amended and Restated Declaration of Trust of First Litchfield
Statutory Trust I. Exhibit is incorporated by reference to
Exhibit 10.52 set forth in the Company's 10-QSB for the quarter
ended June 30, 2003 as filed with the Securities and Exchange
Commission on August 13, 2003.
10.41 Indenture for the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2033. Exhibit is incorporated
by reference to Exhibit 10.53 set forth in the Company's 10-QSB
for the quarter ended June 30, 2003 as filed with the Securities
and Exchange Commission on August 13, 2003.
10.54 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Joelene E. Smith and the Bank dated
December 22, 2003. Exhibit is incorporated by reference to
Exhibit 10.54 set forth in the
41
Company's 10-KSB for the year ended December 31, 2003 as filed
with the Securities and Exchange Commission on March 30, 2004.
10.43 Early Retirement Agreement between Philip G. Samponaro and The
First National Bank of Litchfield dated January 26, 2004. Exhibit
is incorporated by reference to Exhibit 10.55 set forth in the
Company's 10-KSB for the year ended December 31, 2003 as filed
with the Securities and Exchange Commission on March 30, 2004.
10.44 The First National Bank of Litchfield Director Incentive
Retirement Agreement between Kathleen A. Kelley and the Bank
dated September 1, 2004. Exhibit is incorporated by reference to
Exhibit 10.56 set forth in the Company's 10-QSB for the quarter
ended September 30, 2004 as filed with the Securities and
Exchange Commission on November 14, 2004.
10.57 Amendment to The First National Bank of Litchfield Director
Incentive Retirement Agreement between Alan B. Magary and the
Bank dated August 26, 2004. Exhibit is incorporated by reference
to Exhibit 10.57 set forth in the Company's 10-QSB for the
quarter ended September 30, 2004 as filed with the Securities and
Exchange Commission on November 14, 2004.
10.58 Executive Change in Control Agreement between Robert E. Teittinen
and the Company and the Bank. Exhibit is incorporated by
reference to Exhibit 10.58 set forth in the Company's 10-Q for
the quarter ended September 30, 2005 as filed with the Securities
and Exchange Commission on November 14, 2005.
10.59 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Robert E. Teittinen and the Bank
dated November 21, 2005. Exhibit is incorporated by reference to
Exhibit 10.59 set forth in the Company's 10-K for the year ended
December 31, 2005 as filed with the Securities and Exchange
Commission on March 30, 2006.
10.60 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Joseph J. Greco and the Bank dated
April 27, 2006. Exhibit is incorporated by reference to Exhibit
10.60 set forth in the Company's 10-Q for the quarter ended June
30, 2006 as filed with the Securities and Exchange Commission on
August 14, 2006.
10.61 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Carroll A. Pereira and the Bank
dated April 27, 2006. Exhibit is incorporated by reference to
Exhibit 10.61 set forth in the Company's 10-Q for the quarter
ended June 30, 2006 as filed with the Securities and Exchange
Commission on August 14, 2006.
10.50 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Joelene E. Smith and the Bank dated
April 27, 2006. Exhibit is incorporated by reference to Exhibit
10.62 set forth in the Company's 10-Q for the quarter ended June
30, 2006 as filed with the Securities and Exchange Commission on
August 14, 2006.
10.51 The First National Bank of Litchfield Executive Incentive
Retirement Agreement between Frederick F. Judd, III and the Bank
dated April 28, 2006. Exhibit is incorporated by reference to
Exhibit 10.63 set forth in the Company's 10-Q for the quarter
ended June 30, 2006 as filed with the Securities and Exchange
Commission on August 14, 2006.
10.52 Executive Change in Control Agreement between Joseph J. Greco and
the Company and the Bank dated May 26, 2006. Exhibit is
incorporated by reference to Exhibit 10.64 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
10.53 Executive Change in Control Agreement between Carroll A. Pereira
and the Company and the Bank dated May 26, 2006. Exhibit is
incorporated by reference to Exhibit 10.65 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
10.54 Executive Change in Control Agreement between Joelene E. Smith
and the Company and the Bank dated May 26, 2006. Exhibit is
incorporated by reference to Exhibit 10.66 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
42
10.55 Executive Change in Control Agreement between Robert E. Teittinen
and the Company and the Bank dated May 26, 2006. Exhibit is
incorporated by reference to Exhibit 10.67 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
10.56 Executive Change in Control Agreement between Frederick F. Judd,
III and the Company and the Bank dated May 26, 2006. Exhibit is
incorporated by reference to Exhibit 10.68 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
10.57 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.69 set forth in the
Company's 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on August 14, 2006.
21. List of Subsidiaries of First Litchfield Financial Corporation
23. Consent of McGladrey & Pullen, LLP.
31.1 Certification of Chief Executive Officer of the Company.
31.2 Certification of Chief Financial Officer of the Company.
32.0 Certification of Chief Executive Officer and the Chief Financial
Officer of the Company, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
43
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 29, 2007 FIRST LITCHFIELD FINANCIAL CORPORATION
By: /s/ Joseph J. Greco
-----------------------------------
Joseph J. Greco, President and
Chief Executive Officer
Dated: March 29, 2007 By: /s/ Carroll A. Pereira
--------------------------------
Carroll A. Pereira,
Principal Accounting Officer
and Treasurer
44
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/ Joseph J. Greco President, Chief Executive 3/29/07
- --------------------------------- Officer and Director
Joseph J. Greco
/s/ Patrick J. Boland Director 3/29/07
- ---------------------------------
Patrick J. Boland
/s/ John A. Brighenti Director 3/29/07
- ---------------------------------
John A. Brighenti
/s/ Perley H. Grimes, Jr. Director 3/29/07
- ---------------------------------
Perley H. Grimes, Jr.
/s/ Kathleen A. Kelley Director 3/29/07
- ---------------------------------
Kathleen A. Kelley
/s/ George M. Madsen Director 3/29/07
- ---------------------------------
George M. Madsen
/s/ Alan B. Magary Director 3/29/07
- ---------------------------------
Alan B. Magary
/s/ Gregory S. Oneglia Director 3/29/07
- ---------------------------------
Gregory S. Oneglia
/s/ Charles E. Orr Director 3/29/07
- -------------------------------
Charles E. Orr
/s/ Richard E. Pugh Director 3/29/07
- ---------------------------------
Richard E. Pugh
/s/ William J. Sweetman Director 3/29/07
- ---------------------------------
William J. Sweetman
/s/ H. Ray Underwood Director 3/29/07
- ---------------------------------
H. Ray Underwood
/s/ Patricia D. Werner Director 3/29/07
- ---------------------------------
Patricia D. Werner
45