SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Soliciting Material Under Rule
|_| Confidential, For Use of the 14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
First Litchfield Financial Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
<page>
FIRST LITCHFIELD FINANCIAL CORPORATION
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
May 16, 2007
<page>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 16, 2007
To the Shareholders of First Litchfield Financial Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of First
Litchfield Financial Corporation (the "Company") will be held at 3:00 p.m. on
Wednesday, May 16, 2007 at the Torrington Country Club, Route 4, Goshen,
Connecticut, for the following purposes:
1. To elect five (5) shareholders to the Board of Directors, four (4) of
whom will serve for a term of three (3) years and one (1) who will
serve for a term of two (2) years, and until their successors are
elected and qualified, as described in the Proxy Statement.
2. To ratify the appointment of McGladrey & Pullen, LLP as the Company's
independent auditors for the year ending December 31, 2007.
3. To adopt the First Litchfield Financial Corporation 2007 Restricted
Stock Plan.
4. To transact such other business as may properly come before the
meeting, or any adjournments thereof.
Only those Shareholders of record at the close of business on the 3rd
day of April, 2007 are entitled to notice of, and to vote at this Annual
Meeting. A list of those Shareholders will be available for inspection by
shareholders for ten (10) days preceding the meeting at the office of the
Assistant Secretary of the Company at the Company's main office, 13 North
Street, Litchfield, Connecticut, and will also be available for inspection by
shareholders at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS OF
FIRST LITCHFIELD FINANCIAL CORPORATION
/s/ George M. Madsen
George M. Madsen
Secretary
April 24, 2007
SHAREHOLDERS ARE REQUESTED TO MARK, DATE, SIGN, AND RETURN THE ENCLOSED PROXY AS
--
SOON AS POSSIBLE REGARDLESS OF WHETHER THEY PLAN TO ATTEND THE MEETING. ANY
- ----------------
PROXY GIVEN BY A SHAREHOLDER MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED,
AND ANY SHAREHOLDER WHO EXECUTES AND RETURNS A PROXY AND WHO ATTENDS THE ANNUAL
MEETING MAY WITHDRAW THE PROXY AT ANY TIME BEFORE IT IS VOTED AND VOTE HIS OR
HER SHARES IN PERSON. A PROXY MAY BE REVOKED BY GIVING NOTICE TO MICHELLE
QUIGLEY, ASSISTANT SECRETARY OF FIRST LITCHFIELD FINANCIAL CORPORATION, IN
WRITING PRIOR TO THE TAKING OF A VOTE.
<page>
Proxy Statement of First Litchfield Financial Corporation
ANNUAL MEETING OF SHAREHOLDERS OF
FIRST LITCHFIELD FINANCIAL CORPORATION
May 16, 2007
SOLICITATION OF PROXIES
The enclosed proxy (the "Proxy") is solicited by the Board of Directors
of FIRST LITCHFIELD FINANCIAL CORPORATION (the "Company"), 13 North Street,
Litchfield, Connecticut, 06759, for use at the Annual Meeting of Shareholders,
to be held on Wednesday, May 16, 2007, and at any and all adjournments thereof.
Any Proxy given may be revoked at any time before it is actually voted on any
matter in accordance with the procedures set forth in the Notice of Annual
Meeting. This Proxy Statement and the enclosed form of Proxy are being mailed to
shareholders (the "Shareholders") on or about April 24, 2007. The cost of
preparing, assembling and mailing this Proxy Statement and the material enclosed
herewith is being borne by the Company. In addition to this solicitation by
mail, directors, officers and employees of the Company, and its subsidiary The
First National Bank of Litchfield (the "Bank"), without additional compensation,
may make solicitations personally or by telephone. Upon request, the Company
will reimburse banks, brokerage firms and others holding shares in their names
or in the names of nominees for their reasonable out-of-pocket expenses in
forwarding Proxies and Proxy materials to the beneficial owners of such shares.
OUTSTANDING STOCK AND VOTING RIGHTS
The Board of Directors of the Company has fixed the close of business
on April 3, 2007 as the Record Date (the "Record Date") for the determination of
Shareholders entitled to notice of and to vote at the Annual Meeting. As of the
Record Date, 2,257,546 shares of the common stock of the Company (par value $.01
per share) were issued and outstanding and held of record by approximately 423
Shareholders (the "Common Stock"), each of which shares is entitled to one vote
on all matters to be presented at the Annual Meeting. The holders of one-third
of the Company's Common Stock must be present, in person or by proxy, at the
Annual Meeting to constitute a quorum. Abstentions and broker non-votes are not
treated as having voted in favor of any proposal and are counted as present for
establishing a quorum. No other class of the Company's capital stock is
outstanding or entitled to vote at the Annual Meeting. Assuming the presence of
a quorum at the Annual Meeting, directors will be elected by a plurality of the
votes of the shares of Common Stock present in person or represented by proxy
and entitled to vote. The affirmative vote of the majority of the votes cast is
required to ratify the appointment of the Company's independent auditors and to
approve the 2007 Restricted Stock Plan. Shareholders' votes will be tabulated by
the persons appointed by the Board of Directors to act as inspectors of election
for the Annual Meeting.
If the enclosed form of Proxy is properly executed and returned to the
Company in time to be voted at the Annual Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked Proxies will be voted FOR the election of the five (5)
nominees for election to the Board of Directors; FOR ratification of appointment
of McGladrey & Pullen, LLP as the Company's independent auditors for the year
ending December 31,
1
<page>
2007; and FOR approval of the 2007 Restricted Stock Plan. The Board of Directors
does not know of any matters other than those described in the Notice of Annual
Meeting that are to come before the Annual Meeting. If any other matters are
properly brought before the Annual Meeting, the persons named in the Proxy will
vote the shares represented by such Proxy upon such matters as determined by a
majority of the Board of Directors. The proxies confer discretionary authority
to vote on any matter of which the Company did not have notice at least 45 days
prior to the date of the Annual Meeting.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS
The following table includes certain information as of April 3, 2007
regarding the principal shareholders (the "Principal Shareholders") of the
Company. With the exception of the Principal Shareholders listed below, the
Company is not aware of any beneficial owner of five percent (5%) or more of the
Company's Common Stock. Percentages are based on 2,257,546 shares of the
Company's Common Stock issued and outstanding as of April 3, 2007.
Percent of
Name and Address Number of Shares and Nature Outstanding
of Beneficial Owner of Beneficial Ownership (1) Common Stock
- ------------------- --------------------------- ------------
William J. Sweetman 115,780(2), (3) 5.13%
101 Talmadge Lane
Litchfield, CT 06759
Helen W. Buzaid 121,872 5.40%
68 Deer Hill Ave.
Danbury, CT 06810
- ---------------------
1. The definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship or
otherwise, has or shares voting power or investment power with respect to such
security.
2. Includes options to purchase 1,202 additional shares of the Company's Common
Stock.
3. Includes 14,998 shares owned by an estate as to which individual has voting
power as fiduciary of said estate.
PROPOSAL (1)
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three (3)
classes, each class being approximately equal in size. Each class of directors
will stand for re-election once every three (3) years. Directors are elected by
a plurality of the votes of shares present in person or represented by proxy at
the meeting and entitled to vote.
Pursuant to the Company's Certificate of Incorporation and Bylaws, the
Board has fixed the number of directorships at thirteen (13). At this Annual
Meeting, five (5) directors are to be elected. The following four (4) directors,
whose terms expire at the 2007 Annual Meeting, are to be elected each for a term
of three (3) years and until their successors are elected and qualified: George
M. Madsen, Alan B. Magary, William J. Sweetman and Patricia D. Werner. The term
of Gregory S.
2
<page>
Oneglia will also expire at the 2007 Annual Meeting. In order to make each class
of directors approximately equal in size, Mr. Oneglia is to be elected for a
term of two (2) years until his successor is elected and qualified. Each nominee
is now serving as a director. Each of the five (5) directors whose terms expire
at this meeting, are nominated for re-election and each has indicated a
willingness to serve as a director. If any of them become unavailable, the Proxy
may be voted for a nominee or nominees who would be designated by the Board of
Directors.
There are no arrangements or understandings between any of the
directors or any other persons pursuant to which any of the above directors have
been selected as directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE ELECTION OF ITS NOMINEES FOR
DIRECTOR
The following sets forth the name and age of each nominee (the first
five (5) directors listed), and each director who will continue his or her term
of office, the year in which each was first elected a director of the Company
and the Bank, and the principal occupation and business experience of each
during the past five (5) years:
NOMINEES FOR ELECTION
Position Held with Expiration Date
Name & Age the Company of Current Term
- ---------- ----------------------------- ---------------
Gregory S. Director of the Company 2007
Oneglia and of the Bank since
2002 (1)
(59)
George M. Director of the Company 2007
Madsen and of the Bank since 1988 (2)
(73)
Alan B. Director of the Company 2007
Magary and of the Bank since 2002 (3)
(64)
William J. Director of the Company 2007
Sweetman and of the Bank since 1990 (4)
(60)
Patricia D. Director of the Company 2007
Werner and of the Bank since 1996 (5)
(60)
3
<page>
CONTINUING DIRECTORS
Position held with Expiration Date
Name & Age the Company of Current Term
- ---------- ----------------------------- ---------------
Joseph J. President and Chief Executive 2009
Greco Officer and Director of the Company
(56) and of the Bank since 2002 (6)
Perley H. Director of the Company 2009
Grimes, Jr. since 1988 and of the
(62) Bank since 1984 (7)
Charles E. Director of the Company 2009
Orr since 1988 and of the
(71) Bank since 1981 (8)
Kathleen A. Director of the Company 2008
Kelley and of the
(54) Bank since 2004 (9)
H. Ray Director of the Company 2008
Underwood and of the Bank since 1998 (10)
(53)
Patrick J. Director of the Company 2008
Boland and of the
(59) Bank since 2006 (11)
John A. Director of the Company 2008
Brighenti and of the
(52) Bank since 2006 (12)
Richard E. Director of the Company 2008
Pugh and of the
(63) Bank since 2006 (13)
- -----------------
1. Mr. Oneglia is Vice-Chairman of O&G Industries, Inc. since 2000. Mr. Oneglia
served as President of O&G Industries, Inc. from 1997 to 2000.
2. Mr. Madsen is retired. He formerly served as President of Roxbury Associates,
Inc.
3. Mr. Magary is retired. He served as principal of Magary Consulting Services
through December 1999.
4. Mr. Sweetman is the President and Owner of Dwan & Co., Inc.
5. Ms. Werner is the head of the Washington Montessori Association, Inc.
6. Mr. Greco has served as the President and Chief Executive Officer of the
Company and the Bank since June 2002. Mr. Greco served as President and Chief
Executive Officer of Marketing Solutions from 1998 to 2002, and served as Senior
Vice President of Hudson United Bancorp from 1993 to 1997.
7. Mr. Grimes is a Partner in the Law Firm of Cramer & Anderson.
8. Mr. Orr is retired. He served as President of New Milford Volkswagen, Inc.
until April 2002.
4
<page>
9. Ms. Kelley is the principal in the firm Kelley & Company, CPA's.
10. Mr. Underwood is Secretary and Treasurer of Underwood Services, Inc.
11. Mr. Boland is retired. He formerly served as Chief Operating Officer of
Credit Suisse Inc.
12. Mr. Brighenti is Vice President of Avon Plumbing & Heating.
13. Mr. Pugh is retired. He formerly served as President and Chief Executive
Officer of New Milford Hospital.
CORPORATE GOVERNANCE
--------------------
The Board of Directors and Its Committees
The Board of Directors of the Company met thirteen (13) times in 2006.
With the exception of William J. Sweetman, all directors attended at least 75%
of the aggregate of the total number of meetings of the board of directors and
the total number of meetings held by all committees of the Board on which such
director served during 2006. The Company does not maintain an attendance policy
for directors at the Company's Annual Meetings. Eight of the then ten directors
of the Company attended the Company's Annual Meeting on May 17, 2006.
Board of Directors' Communications with Shareholders
While the Company's Board of Directors does not have a formal process
for shareholders to send communications to the Board, the volume of such
communications has historically been de minimus. Accordingly, the Board
considers the Company's informal process to be adequate to address the Company's
needs. Historically, such informal process has functioned as follows: A Board
recipient of a shareholder communication would forward same to the Chairman and
Chief Executive Officer for appropriate discussion by the Board and the
formulation of an appropriate response. Shareholders may forward written
communications to the Board by addressing such comments to the Board of
Directors of First Litchfield Financial Corporation, 13 North Street,
Litchfield, Connecticut 06759.
The Board of Directors has established several standing committees to
assist in the discharge of its responsibilities. All members are appointed
annually and serve until their successors are named. All committees report their
deliberations and recommendations to the Board. The principal responsibilities,
membership and number of meetings of each committee are described below.
Nominating Committee
The Nominating Committee met two (2) times in 2006. The current
Committee members, all of whom are "independent" in accordance with the
independence standards of the American Stock Exchange ("AMEX"), are: Perley H.
Grimes, Jr., George M. Madsen, Charles E. Orr and H. Ray Underwood. This
Committee reviews and evaluates potential candidates for nomination to the
Boards of Directors of the Company and the Bank, respectively, and recommends
proposed nominees for election as members of the Boards of Directors and
committees.
While the Nominating Committee does not have a formal charter or
written policy, the Company has procedures and guidelines for the selection and
election of directors.
The procedure for nomination of directors by the Nominating Committee
is as follows:
5
<page>
1. The Nominating Committee, selected by the Board from among its
members, identifies potential candidates with input from
management and other directors and obtains background
information on candidates.
2. The Nominating Committee presents proposed candidates to the
Board before contacting such candidates.
3. The Nominating Committee approaches the candidate and if such
candidate is interested, he or she fills out the
questionnaire.
4. After review of the questionnaire, the Board or Nominating
Committee decides whether to nominate the candidate.
In addition, the Company's Bylaws include procedures for nominations by
shareholders. A copy of the Company's Bylaws is available by sending a written
request to or by calling George M. Madsen, Secretary, 13 North Street,
Litchfield, Connecticut 06759; (860) 567-8752. The Nominating Committee's
process for identifying and evaluating nominees for director, including nominees
recommended by shareholders, has historically operated informally and without
any differences in the manner in which nominees recommended by shareholders are
evaluated.
The Nominating Committee considers factors such as those summarized
below in evaluating Director candidates and believes that the Company's Bylaws
and the qualifications and considerations such as those enumerated below provide
adequate guidance and flexibility in evaluating candidates.
o Experience in business or a profession, either active currently or
recently retired, and ability to contribute sound judgment to Bank
matters.
o Participation in community affairs.
o Residency, whether home or business in the Company's primary
marketing area.
o Ability to refer desirable business to the Bank.
o Having integrity, ethical character and good reputation.
o Candidates must be less than 65 years of age when first elected.
o Candidates should be willing and able to attend Board meetings and
Board committee Meetings (each director must participate on at least
one committee) on a regular basis.
o Candidates should not be employed by, or a partner, in any
corporation or business firm which already has an employee or
partner on the Board.
o Candidates should not be close relatives of any member of the board.
o Candidates must not be a director of any other bank.
o Candidates should not have any significant conflict of interest with
the Company or the Bank which cannot be satisfactorily handled by
full disclosure and abstention of voting when appropriate.
The Company has not paid a fee to any third party or parties to
identify or assist in identifying or evaluating potential nominees. The
Nominating Committee does not discriminate on the basis of sex, race, color,
gender, national origin, religion or disability in the evaluation of
6
<page>
candidates. All nominees for election as directors at the 2007 Annual Meeting
were nominated by the Nominating Committee and Board of Directors.
Compensation Committee
The Company does not have a Compensation Committee. Rather, the Bank
has a Compensation Committee. The Compensation Committee met three (3) times in
2006. The Compensation Committee consists solely of independent directors, in
accordance with the AMEX Independence Standards. The current Committee members
are: Alan B. Magary, Gregory S. Oneglia, Charles E. Orr, Richard E. Pugh and
Patricia D. Werner. The Compensation Committee is responsible for developing
policies relating to employee compensation, benefits and incentives, annually
evaluating the president and chief executive officer, and making recommendations
concerning salaries and other types of compensation to the full Board of
Directors of the Bank. The full Board of Directors of the Company reviews and
approves this Committee's recommendations. The Compensation Committee does not
have a charter.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management
the Company's Compensation Discussion and Analysis section of this Proxy
Statement. Based on such review and discussions, the Committee has recommended
to the Board of Directors that the Compensation Discussion and Analysis be
included in this Proxy Statement. The Compensation Discussion and Analysis is
incorporated by reference into the Company's Annual Report on Form 10-K for the
year ended December 31, 2006.
April 23, 2007
First Litchfield Financial Corporation
Compensation Committee:
Alan B. Magary
Gregory S. Oneglia
Charles E. Orr
Richard E. Pugh
Patricia D. Werner
The foregoing Report of the Company's Compensation Committee is
provided in accordance with the rules and regulations of the SEC. Pursuant to
such rules and regulations, this Report shall not be deemed "soliciting
material," filed with the SEC, subject to Regulation 14A and 14C of the SEC or
subject to the liabilities of Section 18 of the Exchange Act.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of the Compensation Committee during
2006 was a current or former officer or employee of the Company or any of its
subsidiaries or, except as disclosed below, engaged in certain transactions with
the Company required to be disclosed by regulations of the SEC. Additionally,
there were no compensation committee "interlocks" during
7
<page>
2006, which generally means that no executive officer of the Company served as a
director or member of the compensation committee of another entity, one of whose
executive officers served as a director or member of the Compensation Committee
of the Company.
Audit/Compliance and Security Committee
The Audit/Compliance and Security Committee (the Audit Committee) met
seven (7) times in 2006. The current Committee members are: Patrick J. Boland,
John A. Brighenti, Alan B. Magary, Kathleen A. Kelley and H. Ray Underwood. In
addition, the Bank's Audit Liaison, Judith Leger, attends the Audit Committee
Meetings. Subject to the more detailed descriptions set forth in its written
Charter, this Committee is responsible for oversight of the internal audit
function, internal accounting controls, security programs and selection of
independent accountants. As of the date of this Proxy Statement, each of the
Audit Committee Members is an "independent director" under the AMEX Listing
Standards. The members of the Audit Committee bring a range of education,
business and professional experience that is beneficial to the Audit Committee's
function of the Company and the Bank and is sufficient to enable the Audit
Committee to fulfill its responsibility. The Board has determined that Kathleen
A. Kelley is an "audit committee financial expert."
Audit Committee Report
The following Report of the Company's Audit Committee is provided in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Pursuant to such rules and regulations, this report
shall not be deemed "soliciting material," filed with the SEC, subject to
Regulation 14A and 14C of the SEC or subject to the liabilities of Section 18 of
the Securities Exchange Act of 1934 (the "Exchange Act").
FIRST LITCHFIELD FINANCIAL CORPORATION
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed the Company's audited
financial statements for the fiscal year ended December 31, 2006 with
management. The Audit Committee has also reviewed and discussed with McGladrey &
Pullen, LLP ("McGladrey"), the Company's independent auditors, certain matters
specified in Statement on Auditing Standards No. 61, communication with Audit
Committees, as may be modified or supplemented.
The Audit Committee has received the written disclosures and the letter
from McGladrey required by Independence Standards Board Standard No. 1, as may
be modified or supplemented, and has discussed McGladrey's independence with
respect to the Company with McGladrey.
Based on the review and discussions referred to in this audit committee
report, the Audit Committee recommended to the Board of Directors that the
Company's audited financial statements be included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006 for filing with the
SEC.
First Litchfield Financial Corporation
Audit Committee:
8
<page>
Kathleen A. Kelley, Chairman
Patrick J. Boland
John A. Brighenti
Alan B. Magary
H. Ray Underwood
SECURITY OWNERSHIP OF DIRECTORS, NOMINEES
AND EXECUTIVE OFFICERS
The following table sets forth the number and percentage of Common
Stock beneficially owned by each current Director, each of the Executive
Officers named in the Summary Compensation Table, and the Directors and
Executive Officers as a group at April 3, 2007. Percentages are based on
2,257,546 shares of the Company's Common Stock issued and outstanding as of
April 3, 2007.
Common Shares
Name Of Beneficially Owned
Beneficial Owner At April 3, 2007 (1) Percent of Class
- ----------------- -------------------- ----------------
Joseph J. Greco 1,697 .08%
Patrick J. Boland 525 .02%
John A. Brighenti 210 .01%
Perley H. Grimes, Jr. 15,019 (2) .67%
Kathleen A. Kelley 1,113 .05%
George M. Madsen 17,294 .77%
Alan B. Magary 254 (3) .01%
Gregory S. Oneglia 16,944 (3) .75%
Charles E. Orr 16,950 (3) .75%
Richard E. Pugh 52 .00%
William J. Sweetman 115,780 (4) 5.13%
H. Ray Underwood 3,738 .17%
Patricia D. Werner 4,635 (5) .21%
Carroll A. Pereira 10,848 (3),(6) .48%
9
<page>
Joelene E. Smith 269 .01%
Robert E. Teittinen 10 (3) .00%
All Directors and Executives 205,338 9.10%
Officers as a group (17 persons)
- --------------------------------
- -----------------------
1. The definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship or
otherwise has or shares voting power or investment power with respect to such
security.
2. Includes options to purchase 1,202 shares of Common Stock.
3. Includes shares owned by, or as to which voting power is shared with, spouse
or children.
4. Includes 14,998 shares owned by an estate as to which individual has voting
power as fiduciary of said estate. In addition, the total for Mr. Sweetman
includes options to purchase 1,202 shares of Common Stock.
5. Includes options to purchase 601 shares of Common Stock.
6. Includes options to purchase 10,352 shares of Common Stock.
EXECUTIVE OFFICERS
The following table sets forth information concerning the current
Executive Officers of the Company and/or the Bank. Unless otherwise indicated,
each person has held the same or a comparable position for the last five years.
Name and Age Position Held with the Company and/or Bank
- ------------ ------------------------------------------
Joseph J. Greco (56) President, Chief Executive Officer
and Director of the Company and of the Bank
since 2002 (1)
Carroll A. Pereira (51) Treasurer of the Company, Senior Vice
President and Chief Financial Officer of
the Bank since 1984
Joelene E. Smith (48) Senior Vice President and Operations Officer
of the Bank since 2003 (2)
Robert E. Teittinen (56) Senior Vice President and Senior Loan Officer
of the Bank since 2005 (3)
Frederick F. Judd III (42) Senior Vice President and Trust Officer of the
Bank since 2006 (4)
1. Mr. Greco has served as President and Chief Executive of the Company and Bank
since June 17, 2002. Prior to joining the Bank and Company, Mr. Greco served as
President and Chief Executive Officer of Marketing Solutions from 1998 to 2002,
and served as Senior Vice President of Hudson United Bancorp from 1993 to 1997.
2. Ms. Smith has served as Senior Vice President and Operations Officer of the
Bank since 2003. Prior to that, Ms. Smith served as Vice President of Operations
and Information Systems and in similar capacities since her employment with the
Bank in 1977.
3. Mr. Teittinen has served as Senior Vice President and Senior Loan Officer of
the Bank since 2005. Prior to joining the
10
<page>
Company, Mr. Teittinen was a Senior Vice President with TD Banknorth and headed
up their Waterbury Commercial Lending Unit from 2002 to 2005. He served as Vice
President of Webster Bank from 1995 to 2002 and Vice President of Shawmut
National Bank from 1989 to 1995.
4. Mr. Judd has served as Senior Vice President and Senior Trust and Wealth
Management Officer of the Bank since 2006. Prior to joining the Company, Mr.
Judd was a Senior Vice President and Regional Manager with Webster Financial
Advisors from 2003 to 2006. He served as Vice President of Business Development
of Webster Financial Advisors from 1999 to 2003. Prior to that, he served as
Vice President and Managing Partner of Bookwalter & Associates from 1993 to
1999.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of First Litchfield Financial Corporation
First Litchfield Financial Corporation is a bank holding company that,
through its subsidiary, The First National Bank of Litchfield, offers commercial
banking, trust and wealth management services to its customers. The Executive
Officers of First Litchfield Financial Corporation are also executive officers
of The First National Bank of Litchfield. Executive officers of the Company
currently receive no separately allocated compensation in their capacities as
executive officers of the Company but are compensated as executive officers of
the Bank.
The Compensation Committee ("Compensation Committee") reviews and
approves compensation levels for the executive officers and oversees and
administers the executive compensation programs. The Company currently pays no
direct compensation to any of its officers because the Company's officers are
compensated as officers of the Bank.
For purposes of this Compensation Discussion and Analysis the
compensation plans and practices of the Company are considered the same as the
Bank.
Set forth below is a discussion of the Bank's compensation program as
it pertains to its principal executive officer, principal financial officer, and
the Company's other most highly-compensated executive officers in 2006. These
five persons are referenced throughout as the "Named Executive Officers." The
discussion focuses on compensation and practices relating to the most recently
completed fiscal year.
Compensation Philosophy and Objectives
The Company's general compensation philosophy is to provide an overall
compensation that is sufficient to attract, motivate and retain employees of
outstanding ability and potential. The Company's compensation decisions within
this philosophy are guided by two key principles:
o First, actual compensation over time should be driven by the
Company's and the employee's performance; and
o Second, compensation should be aligned with the interests of
the Company's shareholders.
The elements of compensation consist of a salary, short-term incentive
compensation, long-term incentive compensation, benefits, perquisites and
certain post-employment compensation. The
11
<page>
Company believes that these elements in combination provide a compensation which
is competitive with similarly situated companies in the financial services
industry.
Setting Executive Compensation
Based on the foregoing philosophy and objectives, the Compensation
Committee assesses the compensation provided to the Named Executive Officers
based on the individual's performance and overall performance of the Company. In
making compensation decisions, the Committee makes reference to published
compensation survey data from organizations that conduct compensation surveys of
financial services organizations. The Committee reviews the total compensation
for the executive officers relative to the published compensation surveys.
The Committee receives recommendations from the Chief Executive Officer
regarding compensation for other executive officers, including the Named
Executive Officers (other than the Chief Executive Officer). The Committee
considers, but is not bound to and does not always accept, the Chief Executive
Officer's recommendations with respect to executive compensation. The Committee
uses these recommendations as a component of its overall assessment of executive
performance before making any final decisions regarding adjustments to
compensation for individual executives. The performance measures include
financial and non-financial objectives.
2006 Executive Compensation Components
For the fiscal year ending December 31, 2006, the primary components of
compensation for the Named Executive Officers were:
o Salary;
o Short-term Incentive Compensation;
o Long-term Incentive Compensation;
o Benefits and Perquisites; and,
o Certain Post-employment Compensation
Salary
The Bank has established salary ranges for all management positions.
For the named executives, the Compensation Committee additionally takes into
consideration an individual's performance, level of expertise, responsibilities,
length of service to the Company and comparable levels of remuneration paid to
executives of other companies of comparable size and development within the
industry. The individual does not participate in the review, discussion or
decisions of the Compensation Committee regarding this remuneration.
The Committee reviews the Chief Executive Officer's performance
annually and adjusts his compensation. The annual review is based on an
assessment of the Chief Executive
12
<page>
Officer's performance as measured by such factors as the Company's financial
performance, attainment of objectives, development and execution of strategic
initiatives. The Committee also utilizes annual survey information of salaries
paid to chief executive officers of peer banks and other financial institutions.
On the basis of all of the foregoing, the Committee granted Mr. Greco an
increase in salary of $10,000 for 2007. The Chief Executive Officer does not
participate in the review, discussion or decision of the Committee regarding his
remuneration.
The Company provides the Named Executive Officers and other executive
officers with a salary to compensate them for services rendered during the
fiscal year. A salary range exists for each Named Executive Officer. Salary
ranges are determined for each executive according to his or her position and
responsibility and compensation data as disclosed by published compensation
surveys. Actual salaries are determined by the Committee, subject to Board
approval, and determined based on the following primary factors:
o Compensation data as disclosed by published compensation
surveys;
o Internal review of the executive's compensation, both
individually and relative to other officers;
o Individual performance of the executive; and the
recommendation of the Chief Executive Officer relative to the
performance of the individual Named Executive Officers.
Performance factors include adherence to budget; completion of
assigned projects; and, support of strategic initiatives; and
o Level of experience relative to the position's
responsibilities.
Other than Mr. Teittinen, who received an increase in salary of $10,000 for
2007, the Chief Executive Officer recommended that no adjustment be made to the
compensation paid to the remaining Named Executive Officers in 2007, based upon
the overall performance of the Company in 2006.
Short-term Incentive Compensation
The Company has a Management Incentive plan for senior management and
officers in key positions of the Bank, including the Named Executive Officers.
This plan recognizes that both salary and incentive compensation play important
roles in attracting, retaining and motivating that talent, which is critical to
the success of the Company. The Management Incentive Plan includes components
that tie both Company-wide and individual goals to incentive compensation.
Company-wide goals include achieving net income levels in accordance with the
Company's annual budget. Individual goals are determined based on strategic and
annual business objectives for each executive's area of responsibility.
The Company utilized the services of Clark Consulting, a compensation
consulting firm to assist the Committee in the development of this plan. The
Company continues to utilize the service of Clark Consulting to perform peer
group analysis on different forms of compensation to ensure that the Bank's
compensation levels remain competitive as well as to keep the Committee current
of various incentive and benefit plans available in the Bank's market place. In
2005, in accordance with achieving the Plan's Company-wide and individual
officer goals, Mr. Greco was awarded incentive compensation of approximately
6.7% of his salary, Mr. Newton, Mrs. Pereira, and Mr. Teittinen were awarded
incentive compensation equal to approximately 5% of their respective salaries.
These awards were paid in 2006. No awards were earned with respect to the
Company's 2006 performance.
Long-term Incentive Compensation
13
<page>
The Bank has entered into Long Term Incentive Retirement Agreements
(the "Executive Incentive Agreements") with certain Executive Officers,
including the Named Executive Officers, to encourage the Executives to remain
employees of the Bank. The Executive Incentive Agreements trigger the award of
deferred bonuses to the Executive Officers if specified Bank performance
objectives are achieved based upon a formula approved by the Board of Directors
and upon which tax deferred earnings will accrue at rates which will generally
range between 4% and 15%. Amounts are awarded after the end of each fiscal year.
Such awards will immediately vest 20% per additional year of service subsequent
to the year with respect to which the award is granted with 100% vesting upon a
change in control, termination without cause, or at normal retirement or at age
55 with 20 years of service. No awards were earned with respect to the Company's
2006 performance.
In concert with the Executive Incentive Agreements, the Bank has
invested in universal cash surrender value life insurance with a cash surrender
value of $9.6 million as of December 31, 2006. Insurance policies were acquired
on the lives of all but two (2) of the Bank's Executive Officers and four (4)
non-senior officers, which are designed to recover the costs of the Bank's
Executive Incentive Agreements. The policy death benefit has been structured to
indemnify the Bank against the death benefit provision of these benefit
agreements. The policies were paid with a single premium. Policy cash values
will earn interest at a current rate of approximately 4.0% and policy mortality
costs will be charged against the cash value monthly. There are no load or
surrender charges associated with the policies. For additional information
regarding Executive Incentive Agreements, see "Long Term Incentive and Deferred
Compensation Plans" below.
Because the Committee believes that equity-based incentive compensation
is a valuable means to align executive officers with shareholder interests and
motivate management to increase shareholder value in the long term, the
Company's Board approved a Restricted Stock Plan which will be submitted to
Shareholders at the Annual Meeting. The 2007 Restricted Stock Plan, if approved
by Shareholders, will provide that up to 25,000 shares of Common Stock may be
issued to the Company's Executive Officers and other key employees. For more
information regarding the proposed Restricted Stock Plan, please see Proposal
(3), Approval of the 2007 Restricted Stock Plan, below.
Post-employment Compensation
Effective January 1, 2006, the Bank entered into supplemental
retirement agreements with Joseph J. Greco and Carroll A. Pereira. At December
31, 2006, accrued supplemental retirement benefits pursuant to such agreements
recognized for purposes of financial reporting was $96,000. Upon retirement of
such Executives, the Agreements 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.
Benefits and Perquisites
The Named Executive Officers participate in employee benefit programs
available to other employees of the Company. These benefits include life
insurance, medical and dental care programs, long-term disability insurance,
health savings accounts, as well as participation in the Bank's 401k
14
<page>
and ESOP programs. The Company previously had a defined benefit pension plan
that was discontinued and frozen in 2005. Certain Named Executive Officers had
accrued benefits under the plan that have been frozen and do not accrue any
additional benefit under the previously discontinued plan.
The Company provides certain Named Executive Officers with other
recurring cash and non-cash forms of compensation not normally available to
other employees of the Company. These include Executive Life Insurance benefits
and Executive Disability Insurance. Also, in 2006, the Company paid country club
membership annual dues for Joseph J. Greco, to be used for business development,
networking and other business-related purposes that are intended to benefit the
Company. The Company determined that such fees were reasonable in relation to
the potential benefits from Joseph J. Greco's activities and that paying for
these fees is consistent with the practices of other financial services
organizations with which the Company competes for executive talent. In addition
as part of its compensation package, the Company also provides Joseph J. Greco
with a monthly car allowance. The Company does not pay club membership dues or a
monthly car allowance for any of the other Named Executive Officers.
Change in Control Agreements
The Company has entered into Change in Control Agreements with certain
key employees, including the Named Executive Officers. The Agreements are
designed to promote stability and continuity of senior management and provide
the Company's executives with the ability to fairly negotiate a potential
corporate transaction on behalf of shareholders. The Company believes such
agreements are necessary to attract, retain, and motivate executive talent. For
a summary of the terms of the Change in Control Agreements and information
regarding the payments and benefits that each Named Executive Officer would
receive upon a change in control of the Company, see "Potential Payments Upon
Termination or Change in Control" set forth below.
Tax Considerations
The Committee intends that all incentive payments be deductible unless
maintaining deductibility would undermine the Company's ability to meet its
primary compensation objectives or is otherwise not in the Company's best
interest. At this time, all compensation paid by the Company to the Named
Executive Officers is deductible under Section 162(m) of the Internal Revenue
Code. The Company also takes into account the tax effects of various forms of
compensation and the potential for excise taxes to be imposed on the Company's
executive officers which might have the effect of frustrating the purpose(s) of
such compensation.
In addition, the Company has not provided any executive officer or
director with a gross-up or other reimbursement for tax amounts the executive
might pay pursuant to Section 280G of the Internal Revenue Code. Section 280G
and related Internal Revenue Code sections provide that executive officers and
directors who hold significant shareholder interests, and certain other service
providers could be subject to significant additional taxes if they receive
payments or benefits in connection with a change in control of the Company that
exceeds certain limits, and that the Company or its successor could lose a
deduction on the amounts subject to the additional tax.
15
<page>
SUMMARY COMPENSATION TABLE
The following table provides certain information regarding the
compensation paid to the Named Executive Officers of the Company for services
rendered in all capacities during the fiscal year ended December 31, 2006. All
compensation expense was paid by the Bank.
<table>
<caption>
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Qualified
Non-Equity Deferred
Name and Principal Stock Option Incentive Plan Compensation All Other
Position Year Salary Bonus Awards Award Compensation Earnings Compensation Total
($) ($) ($) ($) ($) ($)(1) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- ------------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Joseph J. Greco - 2006 236,032 17,600 (2) 82,830 50,303(3) 386,765
President and Chief
Executive Officer of
the Bank and
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Frederick F. Judd III 2006 144,996 7,581 (4) 152,577
- - Senior Vice
President and Trust
Officer of the Bank
- ------------------------------------------------------------------------------------------------------------------------------------
Carroll A. Pereira - 2006 125,850 7,216 (2) 12,918 54,386 (5) 200,370
Treasurer of the
Company, Senior
Vice President and
Chief Financial
Officer of the Bank
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Teittinen 2006 131,032 3,900 (2) 14,428 (6) 149,360
- - Senior Vice
President, Senior
Loan Officer of the
Bank
- ------------------------------------------------------------------------------------------------------------------------------------
John S. Newton - 2006 60,628 87,294 (7) 9,410 (8) 157,332
Senior Vice
President and Trust
Officer of the Bank
- ------------------------------------------------------------------------------------------------------------------------------------
</table>
1. Amount represents an accrued expense associated with the supplemental
employee retirement plan for the benefit of the Named Executive Officers.
2. Cash incentive bonus earned in 2005 but was paid in 2006
3. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer $13,692. Amount also includes
fees paid to country clubs $10,150, vehicle allowance $2,568, medical insurance
$3,860, health savings account $5,000, dental insurance $699, life insurance
$1,050, long-term disability insurance $396, executive life insurance $4,918,
executive disability insurance $3,770, and contributions to the ESOP for the
Named Executive Officer $4,200.
4. Amount represents payments for medical insurance $4,729, dental insurance
$412, life insurance $525, long-term disability insurance $271 and executive
life insurance $1,644.
5. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer $7,514. Additionally, the amount
includes $30,508 which can be attributed to the exercise of stock options by the
Named Executive Officer. This amount also includes medical insurance $9,553,
dental insurance $699, life insurance
16
<page>
$1,050, long-term disability insurance $311, executive life insurance $1,087,
executive disability insurance $896 and contributions to the ESOP for the Named
Executive Officer $2,768.
6. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer $1,950. Amount also represents
payments for medical insurance $1,504, health savings account $2,500, dental
insurance $234, life insurance $1,050, long-term disability insurance $318,
executive life insurance $5,876 and executive disability insurance $996.
7. Amount includes cash incentive bonus of $4,000 which was earned in 2005 but
paid in 2006. Amount also includes $83,294 for the payout of Mr. Newton's long
term incentive plan upon his retirement.
8. Amount includes the Bank's matching contribution to the Bank's 401(k) plan
for the benefit of the Named Executive Officer $3,055. Amount also represents
payments for medical insurance $3,161, dental insurance $182, life insurance
$284, long-term disability insurance $146 and contributions to the ESOP for the
Named Executive Officer $2,582.
Agreements with Management
While there are no employment contracts between the Company and any of
its Executive Officers, there are change of control agreements between the Bank
and its Executive Officers. These agreements provide that in certain instances,
if the Executive Officer is terminated or reassigned within twenty-four (24)
months following the occurrence of a change of control (as such term is defined
in the Change of Control Agreements), then such individual shall be entitled to
receive an amount as provided by such agreement equal to twenty-four (24) months
salary, reasonable legal fees and expenses incurred by the Executive Officer as
a result of such termination or reassignment, and continued participation in
certain benefit plans.
More information regarding such Change in Control Agreements is
provided below under "Potential Payments upon Termination or Change in Control".
Agreements with Employees
While there are no employment contracts between the Company and any of
its employees, there are change of control agreements between the Bank and
twenty (20) employees who have been employed by the Bank for more than ten
years. These agreements provide that in certain instances, if the employee is
terminated or reassigned within six (6) months following the occurrence of a
change of control (as such term is defined in the Change of Control Agreements),
then such individual shall be entitled to receive an amount as provided by such
agreement equal to six (6) months salary, reasonable legal fees and expenses
incurred by the employee as a result of such termination or reassignment, and
continued participation in certain benefit plans.
1994 Stock Option Plan for Officers and Outside Directors
On May 4, 1994, Shareholders approved a stock option plan for officers
and outside directors of the Company and the Bank, respectively (the "1994 Stock
Option Plan"). The Plan expired on May 4, 1999.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth outstanding option awards and unvested
stock awards held by the Bank's Named Executive Officers and Directors as of
December 31, 2006.
17
<page>
<table>
<caption>
- ----------------------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
- ----------------------------------------------------------------------------------------------------------------------------------
Equity
Equity Incentive
Incentive Plan
Market Plan Awards:
Value Awards: Market or
Equity of Number Payout
Incentive Number Shares of Value of
Plan of or Unearned Unearned
Awards: Shares Units Shares, Shares,
Number of Number of Number of or Units of Units or Unites or
Securities Securities Securities of Stock Stock Other Other
Underlying Underlying Underlying That That Rights Rights
Unexercised Unexercised Unexercised Option Have Have That Have That
Options Options Unearned Exercise Option Not Not Not Have Not
(#) (#) Options Price Expiration Vested Vested Vested Vested
Name Exercisable Unexercisable (#) ($) Date (#) ($) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Carroll A. Pereira 5,176 0 0 9.48 1/29/08 0 0 0 0
Carroll A. Pereira 5,176 0 0 12.52 1/29/09 0 0 0 0
Perley H. Grimes, Jr 601 0 0 8.08 6/01/07 0 0 0 0
Perley H. Grimes, Jr 601 0 0 11.36 6/01/08 0 0 0 0
William J. Sweetman 601 0 0 8.08 6/01/07 0 0 0 0
William J. Sweetman 601 0 0 11.36 6/01/08 0 0 0 0
Patricia D. Werner 3,544 0 0 8.10 5/04/07 0 0 0 0
Patricia D. Werner 601 0 0 11.36 6/01/08 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
</table>
Option Exercises and Stock Vested
The following table sets forth information with respect to each of the
Named Executive Officers concerning the exercise of stock options and the
vesting of stock during the fiscal year ended December 31, 2006.
<table>
<caption>
- ---------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
- ---------------------------------------------------------------------------------------------------------------
Number of Shares Number of Shares
Acquired on Value Realized on Acquired on Value Realized on
Exercise Exercise Vesting Vesting
Name (#) ($)(1) (#) ($)
- ---------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Carroll A. Pereira 1,951 30,508 0 0
- ---------------------------------------------------------------------------------------------------------------
</table>
- ---------------------
1. Value realized calculated based on the difference between the market price of
the Company's Common Stock on the date of exercise and the exercise price.
18
<page>
401(k) 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. Participants vest immediately in both their
own contributions and the Bank's contributions. Employee savings plan expense
was $202,563 and $178,279 for 2006 and 2005, respectively.
Employee Stock Ownership Plan
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 year ended December 31, 2005, $67,592 was charged to operations under
the ESOP. There were no amounts charged to operations during 2006. 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.
POST EMPLOYMENT COMPENSATION
Noncontributory Defined Benefit Pension Plan
The Bank has a noncontributory defined benefit pension plan that covers
substantially all employees who have completed one year of service and have
attained age 21. The benefits are based on years of service and the employee's
compensation during the last five (5) years of employment. The Bank's funding
policy is to contribute amounts to the plan sufficient to meet the minimum
funding requirements set forth in ERISA, plus such additional amounts as the
Bank may determine to be appropriate from time to time. During the first quarter
of 2005, the Bank's pension plan was curtailed.
The plan was frozen effective May 1, 2005. No new employees will be
eligible for the Plan and no further benefits will be earned. Benefits payable
at normal retirement age (generally age 65) to an existing participant will be
based on service and participation credit and earnings history through May 1,
2005.
19
<page>
Pension benefits are based upon average salary (determined as of each
November 15th) during the highest five (5) consecutive plan years of services
prior to the date the plan was frozen. The amount of the annual benefit is 1.55%
of average salary per year of service (to a maximum of 25 years). This benefit
formula may be modified to conform with changes in the pension laws. Internal
Revenue Code Section 401 (a)(17) limits earnings used to calculate qualified
plan benefits to $210,000 for 2005. This limit was used in the preparation of
the following table.
<table>
<caption>
- ------------------------------------------------------------------------------------------
Present
Number of Value of Payments
Years Credited Accumulated During Last
Service Benefit Fiscal Year
Name Plan Name (#) ($) ($)
- ------------------------------------------------------------------------------------------
(a) (b) (c) (d)(1) (e)
- ------------------------------------------------------------------------------------------
<s>
First National
Bank of
Joseph J. Greco Litchfield
Pension Plan 2 11,962 0
- ------------------------------------------------------------------------------------------
First National
Bank of
Carroll A. Pereira Litchfield
Pension Plan 19 81,348 0
- ------------------------------------------------------------------------------------------
</table>
1. Column (d) - assumptions for calculating the Present Value of
Accumulated Benefit:
Discount rate: 5.50%
Mortality table: 194 Group Mortality Table RP2000 Healthy Annuitant
Table projected to 2015 - used for postretirement
only; no pre-retirement mortality assumption was
included.
Long Term Incentive and Deferred Compensation Plans
During November and December 2000, the Bank entered into Long Term
Incentive Retirement Agreements (the "Executive Incentive Agreements") with its
Executive Officers to encourage the Executives to remain employees of the Bank.
In November, 2005, and April 2006, the Bank entered into Long Term Incentive
Retirement Agreements with Robert Teittinen, the Bank's Senior Vice-President
and Senior Loan Officer and Frederick F. Judd III, the Bank's Senior
Vice-President and Senior Trust Officer. The Executive Incentive Agreements
provide for the award of deferred bonuses of from 4.6% to 16.1% of the Executive
Officer's base salary if the Bank's earnings growth is at least 5% and its
return on equity is at least 11%; the formula for such awards may be revised by
the Board of Directors. Amounts are awarded after the end of each fiscal year.
No awards were earned with respect to the Company's 2006 performance.
Tax-deferred earnings on such awards accrue annually on such amounts at a rate
equivalent to the rate of appreciation in the Company's stock price in the
preceding year, with a guaranteed minimum of 4% and a maximum of 15%. Such
awards are immediately vested with respect to 20% of the award and an additional
20% vests for each additional year of service and the award is 100% vested upon
a change in control, upon termination disability, at normal retirement of 65 or
retirement at age 55 with 20 years of service. If the Executive Officer dies
while serving as an executive officer of the Bank, the amount payable to the
participant's beneficiary is equivalent to the participant's projected
retirement benefit (as defined in the Executive Incentive Agreements). Upon
retirement, the Executive Officer's total deferred compensation, including
earnings thereon, may be paid out in one lump sum, or paid in equal annual
installments over fifteen (15) years, during which payout period earnings
continue to accrue at the rate in effect at the date of retirement; in the case
of early retirement, the Executive
20
<page>
Officer may elect to defer commencement of the payment of benefits, during which
period earnings continue to accrue at the rate in effect at the date of early
retirement.
In concert with the Executive and Director Incentive Agreements
(described below), the Bank has invested in universal cash surrender value life
insurance with a cash surrender value of $9.6 million as of December 31, 2006.
Insurance policies were acquired on the lives of all but two (2) of the Bank's
Executive Officers, four (4) non-senior officers and all but one (1) of the
Bank's directors which are designed to recover the costs of the Bank's Executive
and Director Incentive Agreements. The policy death benefit has been structured
to indemnify the Bank against the death benefit provision of these benefit
agreements. The policies were paid with a single premium. Policy cash values
will earn interest at a current rate of approximately 4.0% and policy mortality
costs will be charged against the cash value monthly. There are no load or
surrender charges associated with the policies.
Supplemental Retirement Plan
Effective January 1, 2006, the Bank entered into supplemental
retirement agreements with Joseph J. Greco and Carroll A. Pereira. At December
31, 2006, accrued supplemental retirement benefits of $96,000 are recognized in
the Company's balance sheet related to these plans for these individuals. Upon
retirement, the plans provide for payments to these individuals ranging from 10%
to 25% of the three year average of the executive's compensation prior to
retirement for the life expectancy of the executive at the retirement date.
<table>
<caption>
- ---------------------------------------------------------------------------------------------------------------------
Executive Registrant Aggregate Aggregate
contributions in contributions in earnings in Aggregate balance at last
last FY last FY last FY withdrawals/distributions FYE
Name ($) ($) ($) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
- ---------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Joseph J. Greco 0 82,830 0 0 82,830
- ---------------------------------------------------------------------------------------------------------------------
Carroll A. Pereira 0 12,918 0 0 12,918
- ---------------------------------------------------------------------------------------------------------------------
</table>
Potential Payments Upon Termination or Change in Control
Pursuant to the Change in Control Agreements between the Company and
each of the Named Executive Officers, each executive is eligible to receive
payments and other benefits, subject to certain conditions described below, in
the event the executive is terminated, involuntarily reassigned more that fifty
(50) miles from Litchfield, Connecticut, or has an involuntary reduction in
compensation, duties or responsibilities during the twenty-four (24) month
period following a change in control.
21
<page>
For purposes of the Agreements, a "Change in Control" means the
occurrence of one or more of the following events:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Company by any person (or persons
working in concert) or entity after the date hereof;
(b) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Bank by any person or entity other
than the Company;
(c) A merger, consolidation or reorganization to which the Bank or
the Company is a party, if, as a result thereof, individuals
who were directors of the Bank or Holding Company, immediately
before such transaction shall cease to constitute a majority
of the Board of Directors of the surviving entity;
(d) A sale of all or substantially all of the assets of the Bank
or the Company to another party;
(e) The assumption of all or substantially all of the deposits of
the Bank by another party other than the Federal Deposit
Insurance Corporation; or
(f) During any twenty-four (24) month period, individuals who at
the beginning of such period constitute the Board of Directors
of the Bank and the Company, cease for any reason (other than
death or disability) to constitute at least a majority thereof
unless the election or the nomination for election by the
stockholders of the Bank and the stockholders of Company,
respectively, of each new director was approved by a vote of
at least a majority of the directors of the Bank or of Company
as applicable, then still in office who were directors of the
Bank or the Company, as applicable, at the beginning of the
period.
The circumstances in which and the estimated amounts to be paid to the
Named Executive Officers under the Agreements are as follows:
(a) If, within twenty-four (24) months after a Change in Control
as defined above, shall have occurred, the Named Executive
Officers' employment with the Bank terminates or is reassigned
(except by an agency acting with proper jurisdiction, or by a
board of directors for cause or as a result of death,
retirement or disability), then the Bank and/or its successor
shall pay the Named Executive Officers within five (5) days
after the Date of Termination an amount equal to the sum of:
(i) Two (2) years of Named Executive Officer's annual
compensation based upon the most recent aggregate
base salary paid to the Named Executive Officer in
the twelve (12) month period immediately preceding
his/her termination or reassignment less amounts
previously paid to Employee from the date of Change
in Control; plus
22
<page>
(ii) Reasonable legal fees and expenses incurred by the
Named Executive Officer as a result of such
termination or reassignment (including all such fees
and expenses, if any, incurred in contesting or
disputing any such termination or reassignment or in
seeking to obtain or enforce any right or benefit
provided for by the Change in Control Agreement).
(b) The Bank and/or its successors shall maintain in full force
and effect for the Named Executive Officer's continued
benefit, for the two (2) year period beginning upon a Change
in Control, all life insurance, medical, health and accident
and disability policies, plans, programs or arrangements which
were in effect immediately prior to the Change in Control.
(c) In the event the Named Executive Officer should obtain other
employment or be compensated for services rendered to any
depository or lending institution, then any payments provided
for in the agreements shall be reduced by any compensation
earned by the Named Executive Officer as the result of
employment or consulting after the Date of Termination or
Reassignment.
(d) It is the intention of the parties to the Agreements that no
payments by the Bank to or for the Named Executive Officer's
benefit under the Agreements shall be non-deductible to the
Bank by reason of the operation of Section 280G of the
Internal Revenue Code. Accordingly, if by reason of the
operation of said Section 280G of the Internal Revenue Code,
any such payments exceed the amount that can be deducted by
the Bank, the amount of such payments shall be reduced to the
maximum that can be deducted by the Bank. To the extent that
payments in excess of the amount that can be deducted by the
Bank have been made to and for the Named Executive Officer's
benefit, they shall be refunded with interest at the
applicable rate provided under Section 1274(d) of the Internal
Revenue Code, or at such other rate as may be required in
order that no such payment to or for the Named Executive
Officer's benefit shall be non-deductible pursuant to Section
280G of the Internal Revenue Code. Any payments made under the
agreements that are not deductible by the Bank as result of
losses that have been carried forward by the Bank for Federal
tax purposes, shall not be deemed a nondeductible amount.
Assuming a December 31, 2006 termination event, the aggregate value of
payments and benefits to which each Named Executive Officer would be entitled in
the event the executive terminates employment would be as follows:
-------------------------------------------------------------------
Benefit and
Salary Health
Name Payments Programs Total
($) ($) ($)
-------------------------------------------------------------------
Joseph J. Greco 470,000 38,498 508,498
-------------------------------------------------------------------
Carroll A. Pereira 250,000 27,169 277,169
-------------------------------------------------------------------
Robert E. Teittinen 260,000 24,679 284,679
-------------------------------------------------------------------
Frederick F. Judd III 350,000 26,800 376,800
-------------------------------------------------------------------
23
<page>
Additional information regarding Post-Employment Compensation is set
forth in the Compensation Discussion and Analysis portion of this Proxy
Statement.
BOARD OF DIRECTORS COMPENSATION
In 2006, each director of the Company who was not an employee of the
Bank, received $400 for each Board meeting attended and $350 for each committee
meeting attended. The Chairman of the Board of Directors also receives an annual
retainer of $7,500 and each non-officer director of the Company also receives an
annual retainer of $6,000 for serving as a director. Directors who are employees
of the Bank receive no additional compensation for their services as members of
the Board or any Board committee.
<table>
<caption>
Director Compensation Table
-----------------------------------------------------------------------------------------------------------------------------
Change in
Pension Value
and Nonqualified
Non-Equity Deferred
Fees Earned or Stock Option Incentive Plan Compensation All Other
Name Paid in Cash Awards Awards Compensation Earnings Compensation Total
-----------------------------------------------------------------------------------------------------------------------------
($)(1) ($) ($) ($)(2) ($) ($) ($)
-----------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Patrick J. Boland 10,550 0 0 0 0 0 10,550
-----------------------------------------------------------------------------------------------------------------------------
John A. Brighenti 11,450 0 0 0 0 0 11,450
-----------------------------------------------------------------------------------------------------------------------------
Joseph J. Greco 0(3) 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
Perley H. Grimes, Jr. 18,150 0 0 7,325 0 10,984 (4) 36,459
-----------------------------------------------------------------------------------------------------------------------------
Kathleen A. Kelley 16,000 0 0 5,870 0 0 21,870
-----------------------------------------------------------------------------------------------------------------------------
George M. Madsen 18,550 0 0 7,757 0 0 26,307
-----------------------------------------------------------------------------------------------------------------------------
Alan B. Magary 15,400 0 0 6,749 0 0 22,149
-----------------------------------------------------------------------------------------------------------------------------
Gregory S. Oneglia 16,750 0 0 7,325 0 0 24,075
-----------------------------------------------------------------------------------------------------------------------------
Charles E. Orr 19,650 0 0 9,547 0 0 29,197
-----------------------------------------------------------------------------------------------------------------------------
Thomas A. Kendall 1,150 0 0 4,200 0 13,399 (5) 18,749
-----------------------------------------------------------------------------------------------------------------------------
Richard E. Pugh 5,700 0 0 0 0 0 5,700
-----------------------------------------------------------------------------------------------------------------------------
William Sweetman 10,250 0 0 5,021 0 11,242 (4) 26,513
-----------------------------------------------------------------------------------------------------------------------------
H. Ray Underwood 17,500 0 0 6,173 0 0 23,673
-----------------------------------------------------------------------------------------------------------------------------
Patricia D. Werner 12,850 0 0 6,446 0 0 19,296
-----------------------------------------------------------------------------------------------------------------------------
</table>
- ---------------
1. All directors' fees are paid in cash.
2. Amount represents awards granted pursuant to the Long Term Incentive and
Deferred Compensation Plans which were earned in 2005 and paid in 2006. All
amounts in the Director Incentive Agreements will be immediately vested with
respect to 20% of the award and an additional 20% is vested for each additional
year of service, with 100% vesting upon a change in control, at normal
retirement at age 72, regardless of years of service, or retirement prior to age
72 with at least ten years of service.
3. As an officer of the Company and Bank, Director Greco received no
compensation for his services as a Director.
4. Amount represents the value of stock options that were previously issued and
vested, that were exercised in 2006. The value is based on the difference
between the option price and market price on the date of exercise.
5. Amount represents payout of long term incentive award to Mr. Kendall upon his
retirement from the Board.
24
<page>
Long Term Incentive and Deferred Compensation Plans
During November and December 2000, the Bank entered into Long Term
Incentive Retirement Agreements with each of its Directors (the "Director
Incentive Agreements") to reward past service and encourage continued service of
each Director. In December 2002, the Bank entered into Long Term Incentive
Retirement Agreements with two newly appointed directors, Gregory S. Oneglia and
Alan B. Magary. In September 2004, the Bank entered into a Long Term Incentive
Retirement Agreement with director, Kathleen A. Kelley.
The Director Incentive Agreements will award a director with a right to
earn and defer the receipt of a bonus in an amount or percentage ranging from
14.5% to 50%, depending on the return on equity in the preceding year and
earnings growth in the preceding year, provided that there is no award if the
return on equity in the preceding year is less than 11% and earnings growth in
the preceding year is less than 5%, of the director's retainer, meeting fees and
committee fees. Earnings accrue annually on such amounts at a rate equivalent to
the appreciation in the Company's stock price in the preceding year, with a
guaranteed minimum of 4% and a maximum of 15%. No awards were earned with
respect to the Company's 2006 performance. All amounts in the Director Incentive
Agreements will be immediately vested with respect to 20% of the award and an
additional 20% is vested for each additional year of service, with 100% vesting
upon a change in control, at normal retirement at age 72, regardless of years of
service, or retirement prior to age 72 with at least ten years of service. If
the Director becomes disabled prior to retirement, the Director will receive the
entire balance in their deferral account at termination of employment. Upon
retirement, the Director's total deferred compensation, including earnings
thereon, may be paid out in one lump sum, or paid in equal annual installments
over ten (10) years, during which payout period earnings continue to accrue as
stated above.
Directors' Fees Plan
The Bank offers Directors the option to defer their Directors' fees. If
deferred, the fees are held in a trust account with the Bank. The Bank has no
control over the trust. The market value of the related trust assets and
corresponding liability was $198,960 and $313,579 at December 31, 2006, and
2005, respectively. During 2005, the plan was amended to cease the deferral of
any future fees.
Policies and Procedures for the Review, Approval or Ratification of Transactions
with Related Persons
Pursuant to the Company's written Code of Ethics and Conflicts of
Interest Policy, all business dealings and transactions between the Company and
its officers, directors, principal shareholders and employees or their related
interests, must be conducted in an arm's-length fashion. Any consideration paid
or received by the Company in such a transaction must be on terms and under
circumstances that are substantially the same or as favorable as those
prevailing at the time for comparable business dealings with unaffiliated third
parties. Related parties of the Company must fully disclose to the Board of
Directors any personal interest they have in matters affecting the Company.
25
<page>
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS,
AND CERTAIN CONTROL PERSONS
The Bank has had and expects to have in the future, transactions in the
ordinary course of its business with Directors, Officers, principal shareholders
and their associates, on substantially the same terms, including interest rates
and collateral on loans, as those prevailing at the same time for comparable
transactions with others, on terms that do not involve more than the normal risk
of collectibility or present other unfavorable features. The aggregate dollar
amount of these loans was $2,471,904 and $2,874,780 at December 31, 2006 and
2005, respectively. During 2006, $234,271 of new loans were made, and repayments
totaled $1,114,905. At December 31, 2006, all loans to Officers, Directors,
principal shareholders and their associates were performing in accordance with
the contractual terms of the loans.
Perley H. Grimes, Jr., Director of the Company and the Bank is a
partner in Cramer & Anderson, a law firm which renders certain legal services to
the Bank in connection with various matters. During 2006 and 2005, the Bank paid
Cramer & Anderson $30,700 and $66,180, respectively for legal services rendered,
a portion of which was reimbursed to the Bank by third parties.
Gregory Oneglia, Director of the Company and the Bank, is a one-sixth
owner of property that is leased by the Bank for a branch. During 2006 and 2005,
the Bank paid rent expense for that property in the amount of $42,300.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company's
directors, executive officers, and any person holding more than ten percent
(10%) of the Company's Common Stock file with the SEC reports of ownership and
changes in ownership of the Company's Common Stock and that such individuals
furnish the Company with copies of the reports.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, with the exception of
Perley H. Grimes, Jr., who filed a Form 4 late, the Company believes that all of
its executive officers and directors complied with all Section 16(a) filing
requirements applicable to them.
PROPOSAL (2)
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee, in its capacity as a committee of the Board of
Directors has selected McGladrey & Pullen, LLP as independent auditors to audit
the consolidated financial statements of the Company for the fiscal year ending
December 31, 2007. McGladrey & Pullen, LLP has served as the accountants for the
Company for the fiscal year ended December 31, 2006. McGladrey & Pullen, LLP's
opinion on the Consolidated Financial Statements of First Litchfield Financial
Corporation and subsidiary for the year ended December 31, 2006 is included in
the First Litchfield Financial Corporation 2006 Annual Report on Form 10-K.
26
<page>
During the period covering the fiscal years ended December 31, 2006 and
2005, McGladrey & Pullen, LLP and RSM McGladrey, Inc. performed the following
professional services:
First Litchfield Financial Corporation
Principal Accountant Fees and Services
Years Ended December 31, 2006 and 2005
Description 2006 2005
Audit Fees, consist of fees for professional $161,165 $141,227
services rendered for the audit of the
consolidated financial statements and review
of financial statements included in
quarterly reports on Form 10-Q and services
connected with statutory and regulatory
filings or engagements.
Audit-related Fees are fees principally for $ 10,200 $ 9,500
professional services rendered for the
audits of the FHLB Qualified Collateral
Report and the financial statements of
Common Trust Fund A, and consultations on
various accounting matters.
Tax Fees consist of fees for tax return $ 14,800 $ 11,500
preparation, planning and tax advice for the
Company and Common Trust Fund A.
All Other Fees $ 0 $ 0
Independence
The Audit Committee of the Board of Directors of the Company has
considered and determined that the provision of services rendered by McGladrey &
Pullen, LLP relating to audit related and tax service matters above, is
compatible with maintaining the independence of such accountants.
A representative of McGladrey & Pullen, LLP will be available at the
Annual Meeting to answer questions and will be afforded the opportunity to make
a statement if he or she desires to do so.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of
Independent Auditor
The Audit Committee's policy is to require pre-approval of all audit
and non-audit services provided by the independent auditors, other than those
listed under the de minimus exception. These services may include audit
services, audit-related services, tax services and other services. Pre-approval
is detailed as to a particular service or category of services, and is generally
subject to a specific budget. The Audit Committee has delegated pre-approval
authority to its Chairman when expeditious delivery of services is necessary.
The independent auditors and management are required to report to the full Audit
Committee regarding the extent of services provided by independent auditors in
accordance with this pre-approval, and the fees for the services performed to
date. All of the audited-related fees, or tax fees or other fees paid in 2006
was approved per the
27
<page>
Audit Committee's pre-approval policies.
Required Vote For Ratification of the Independent Auditors
The affirmative vote of a majority of the shares represented at the
meeting is required to ratify the appointment of the independent auditors for
the year ending December 31, 2007.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE FOR RATIFICATION OF THE INDEPENDENT AUDITORS
PROPOSAL (3)
APPROVAL OF THE 2007 RESTRICTED STOCK PLAN
On April 4, 2007, the Board of Directors adopted the First Litchfield
Financial Corporation 2007 Restricted Stock Plan (the "Restricted Stock Plan").
The Board believes that restricted stock awards can serve as an important
element in attracting and retaining executive officers and key employees who are
expected to contribute to the Company's growth and success. The Company does not
currently have a restricted stock plan.
Summary of Restricted Stock Plan
The following is a brief summary of the Restricted Stock Plan. The
following summary is qualified in its entirety by reference to the Restricted
Stock Plan, a copy of which is included as Appendix A to this Proxy Statement
and incorporated herein by reference.
Shares Subject to the Restricted Stock Plan
The number of shares of Common Stock which may be issued under the
Restricted Stock Plan may not exceed 25,000 shares. If any restricted stock
award is terminated, surrendered, canceled or forfeited, the unused shares of
Common Stock covered by such restricted stock award will again be available for
grant under the Restricted Stock Plan.
On April 12, 2007, the last reported sale price of Common Stock on the
over-the-counter market was $18.90 per share.
Eligibility to Receive Stock Awards
The Corporation's executive officers and other key employees are
eligible to be granted restricted stock awards under the Restricted Stock Plan.
The granting of restricted stock awards under the Restricted Stock Plan is
discretionary and the Board cannot currently determine whether restricted stock
awards will be granted in the future to any particular person or group. No
awards of restricted stock have made to date.
28
<page>
Description of Restricted Stock Grants
Restricted stock granted pursuant to the Restricted Stock Plan is
subject to forfeiture in the event that the conditions specified in the
applicable restricted stock agreement are not satisfied prior to the end of the
applicable restriction period established for such restricted stock award. The
restricted stock becomes vested, and not subject to forfeiture, in one or more
installments, upon the happening of certain events, upon the passage of a
specified period of time, upon the fulfillment of certain conditions or upon the
achievement by the Company or the Bank of certain performance goals, or any
combination of the above, as the Compensation Committee shall decide in each
case when the restricted stock is awarded.
In the event of a change of control of the Company, all shares of
restricted stock will become fully vested. Also, upon the death or disability of
a participant, all shares of restricted stock awarded to him or her will become
fully vested. Generally, any shares of restricted stock that have not vested on
the date of termination of employment are forfeited by such person when such
person terminates employment with the Company.
Administration
The Restricted Stock Plan is administered by the Company's Compensation
Committee, whose members are appointed by the Board of Directors. The
Compensation Committee has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the Restricted Stock
Plan and to interpret the provisions of the Restricted Stock Plan. Subject to
any applicable limitations contained in the Restricted Stock Plan, the
Compensation Committee selects the recipients of stock awards and determines:
o the quantity of such stock awards; and
o the conditions, terms and limitations of restricted stock awards to
be set forth in a restricted stock agreement.
In the event of a reorganization, recapitalization, stock dividend or
stock split, or combination or other change in the Common Stock identified by
the Compensation Committee, the Compensation Committee, in its sole discretion,
may make such adjustments, if any, in (i) the number and type of shares
authorized for issuance by the Restricted Stock Plan and (ii) the number and
type of shares specified in any applicable restricted stock agreement.
Amendment or Termination
No restricted stock grant may be made under the Restricted Stock Plan
after April 4, 2017. The Compensation Committee may at any time amend, suspend
or terminate the Restricted Stock Plan.
29
<page>
Federal Income Tax Consequences
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to restricted stock grants
granted under the Restricted Stock Plan.
Tax Consequences to the Holder
A participant will not recognize taxable income upon the grant of a
restricted stock award, unless the participant makes an election under Section
83(b) of the Internal Revenue Code (a Section 83(b) Election"). If the
participant makes a Section 83(b) Election within 30 days of the date of the
grant, then the participant will recognize ordinary compensation income, for the
year in which the restricted stock award is granted, in an amount equal to the
difference between the fair market value of the Common Stock at the time the
restricted stock award is granted and the purchase price paid for the Common
Stock, if any. If a participant makes a Section 83(b) Election and then forfeits
the Common Stock, such participant will not be permitted to reverse the amount
of ordinary income recognized, but will have a capital loss of such amount. If a
Section 83(b) Election is not made, the participant will recognize ordinary
compensation income at the time that the forfeiture provisions or restrictions
on transfer lapse, in an amount equal to the difference between the fair market
value of the Common Stock at the time of such lapse and the original purchase
price paid for the Common Stock, if any.
The participant will have a tax basis in the Common Stock acquired upon
a restricted stock award equal to the sum of the price paid, if any, and the
amount of ordinary compensation income recognized.
Upon the disposition of the Common Stock acquired pursuant to a stock
award, the participant will recognize a capital gain or loss equal to the
difference between the sale price of the Common Stock and the participant's tax
basis in the Common Stock. The gain or loss will be a long-term capital gain or
loss if the shares are held for more than one year. For this purpose, the
holding period will begin just after the date on which the forfeiture provisions
or restrictions lapse if a Section 83(b) Election is not made, or just after the
date the restricted stock award is granted, if a Section 83(b) Election is made.
This description is only a summary of current law and does not reflect
any tax consequences in any other jurisdiction. Each participant is urged to
seek advice from his or her personal tax adviser.
Tax Consequences to the Company
The Company generally will be entitled to a business expense deduction
with respect to any ordinary compensation income recognized by a participant
under the Restricted Stock Plan at the same time that the participant recognizes
ordinary compensation income. Any such deduction will be subject to the
limitations of Section 162(m) of the Internal Revenue Code. In general, the sale
of any Common Stock acquired under the Restricted Stock Plan will not have any
tax consequences to the Company.
30
<page>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE FOR APPROVAL OF THE 2007 RESTRICTED STOCK PLAN
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any other matters to be presented for action by the
shareholders at the 2007 Annual Meeting. If, however, any other matters not now
known are properly brought before the meeting, the persons named in the
accompanying Proxy will vote such Proxy in accordance with the determination of
a majority of the Board of Directors.
PROPOSALS OF SHAREHOLDERS
Under the Company's Bylaws, for business proposed by a shareholder
(other than director nomination) to be a proper subject for action at an Annual
Meeting of Shareholders, in addition to any requirement of law, the shareholder
must timely request that the proposal be included in the Company's proxy
statement for the meeting. The Company received no such request from any
shareholder with respect to the 2007 Annual Meeting.
In order to be included in the Company's proxy statement and form of
proxy for the 2008 Annual Meeting of Shareholders and in order to be a proper
subject for action at that meeting, proposals of shareholders intended to be
presented to that meeting must be received at the Company's principal executive
offices by December 16, 2007, pursuant to proxy soliciting regulations of the
SEC. The SEC's rules contain standards as to what shareholder proposals are
required to be in the proxy statement. Any such proposal will be subject to 17
C.F.R. ss.240.14a-8 of the rules and regulations promulgated by the SEC. Nothing
in this paragraph shall be deemed to require the Company to include in its proxy
statement and form of proxy for such meeting any shareholder proposal which does
not meet the requirements of the SEC in effect at the time. In addition, under
the Company's Bylaws, shareholders who wish to nominate a director or bring
other business before an annual meeting must comply with the following:
You must be a shareholder of record and must have given timely notice
in writing to the Secretary of the Company.
Your notice must contain specific information required in the Company's
Bylaws.
Any other proposal for consideration by shareholders at the Company's
2008 annual meeting of shareholders must be delivered to, or mailed to and
received by, the Company's Assistant Secretary of the Company not less than 45
days nor more than 90 days prior to the date of the meeting if the Company gives
at least 30 days notice or prior public disclosure of the meeting date to
shareholders.
Shareholder proposals should be mailed to: Secretary, George M. Madsen,
First Litchfield Financial Corporation, P.O. Box 578, 13 North Street,
Litchfield, Connecticut 06759.
31
<page>
ANNUAL REPORT TO SHAREHOLDERS
The Company files with the Securities and Exchange Commission Annual
Reports on Form 10-K. A copy of the Company's Annual Report on Form 10-K,
without exhibits and Annual Report to Shareholders, including consolidated
financial statements, may be obtained without charge upon written request to:
Carroll A. Pereira, Treasurer, First Litchfield Financial Corporation, P.O. Box
578, 13 North Street, Litchfield, Connecticut 06759.
By Order of the Board of Directors
/s/ George M. Madsen
April 24, 2007 George M. Madsen
Secretary
32
<page>
Appendix A
FIRST LITCHFIELD FINANCIAL CORPORATION
2007 RESTRICTED STOCK PLAN
ARTICLE I
Purpose of Plan
---------------
The 2007 Restricted Stock Plan (the "Plan") of First Litchfield
Financial Corporation, a Delaware corporation (the "Corporation"), is
established effective as of April 4, 2007 (the "Effective Date") for present and
future executives, and other key employees of the Corporation and The First
National Bank of Litchfield (the "Bank"), as may be selected by the Committee.
The Plan is intended to advance the best interests of the Corporation and its
stockholders by providing those persons who have a substantial responsibility
for its management and growth with additional incentives by allowing them to
acquire an ownership interest in the Corporation and thereby encouraging them to
contribute to the success of the Corporation and the Bank.
ARTICLE II
Definitions
-----------
For purposes of the Plan, the following terms shall have the meanings
set forth below:
"Board" shall mean the Board of Directors of the Corporation.
-----
"Change of Control" shall mean (a) a reorganization, merger,
-------------------
consolidation or sale of substantially all of the assets of the Corporation, or
a similar transaction in which the Corporation is not the resulting entity or
(b) individuals who constitute the Incumbent Board cease for any reason to
constitute a majority thereof.
"Committee" shall mean the Compensation Committee of the Board or such
---------
other committee which may be designated by the Board to administer the Plan. The
Committee shall be composed of two or more Non-Employee Directors, as defined in
Rule 16b-3 under the 1934 Act, as such Rule 16b-3 may be amended from time to
time, as appointed from time to time to serve by the Board.
"Common Stock" shall mean shares of the Corporation's Common Stock, par
------------
value $0.01 per share, or if the outstanding shares of Common Stock are
hereafter changed into or exchanged for different shares or securities of the
Corporation, such other shares or securities.
"Disability" shall mean the Participant's inability to perform
----------
substantially all normal duties of the Participant's position, as determined by
the Committee in its sole discretion. As a condition to such determination, the
Committee may require the Participant to submit to such physical or mental
evaluations and tests as the Committee deems appropriate.
33
<page>
"Incumbent Board" shall mean the members of the Board on the Effective
----------------
Date of the Plan, provided that any person becoming a member of the Board
subsequent to such Effective Date, whose election was approved by a vote of at
least three-quarters of the members of the Board comprising the Incumbent Board,
or whose nomination for election by members of stockholders was approved by the
nominating committee serving under an Incumbent Board, shall be considered as
though he or she were a member of the Incumbent Board.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
--------
"Participant" shall mean any present and future executive or other key
-----------
employee of the Corporation or the Bank who has been selected to participate in
the Plan by the Committee.
"Person" shall mean an individual, a partnership, a corporation, a
------
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Restricted Stock Grants" shall have the meaning set forth Section 5.1.
-----------------------
"Termination of Service" shall mean the Participant's ceasing to be
-----------------------
employed by the Corporation or the Bank for any reason whatsoever, voluntary or
involuntary, other than by reason of death or Disability or an approved leave of
absence.
ARTICLE III
Administration
--------------
The Plan shall be administered by the Committee, provided that if for
-------------
any reason the Committee shall not have been appointed by the Board, all
authority and duties of the Committee under the Plan shall be vested in and
exercised by the Board. Subject to the limitations of the Plan, the Committee
shall have the sole and complete authority to: (i) select Participants to
receive Restricted Stock Grants, (ii) award Restricted Stock Grants to any
Participant at any time prior to the termination of this Plan in such quantity,
at such price, on such terms and subject to such conditions as are consistent
with this Plan and established by the Committee from time to time, (iii) impose
such limitations, restrictions and conditions upon any Restricted Stock Grant
made to any Participant as it shall deem appropriate, (iv) interpret the Plan
and adopt, amend and rescind administrative guidelines and other rules and
regulations relating to the Plan, (v) correct any defect or omission or
reconcile any inconsistency in the Plan or in any Restricted Stock Grants
awarded thereunder and (vi) make all other determinations and take all other
actions necessary or advisable for the implementation and administration of the
Plan. Determinations by the Board or the Committee under the Plan including,
without limitation, determinations of the Participants eligible for the
Restricted Stock Grants, the form, amount and timing of Restricted Stock Grants,
the terms and provisions of Restricted Stock Grants, and the writings evidencing
Restricted Stock Grants, need not be uniform and may be made selectively among
Participants who receive Restricted Stock Grants hereunder, whether or not such
Participants are similarly situated. The Board's or Committee's determinations
on matters within its authority shall be conclusive and binding upon the
Participants,
34
<page>
the Corporation and all other Persons. All expenses associated with the
administration of the Plan shall be borne by the Corporation.
ARTICLE IV
Shares Eligible for Restricted Stock Grants
-------------------------------------------
0.1 Number of Shares of Common Stock. The number of shares of Common
---------------------------------
Stock which may be awarded as Restricted Stock Grants shall not exceed, in the
aggregate, 25,000 shares, provided that the type and the aggregate number of
-------- ----
shares of Common Stock which may be granted under the Plan shall be subject to
adjustment in accordance with the provisions of paragraph 4.2 below, and further
-------
provided that to the extent any shares of Common Stock that are awarded under a
- -------- ----
Restricted Stock Grant that has terminated or been canceled, or any shares of
Common Stock that have been forfeited in any manner, shall again be available
under the Plan. The shares of Common Stock available under the Plan may be
either authorized and unissued shares, treasury shares or a combination thereof,
as the Committee shall determine.
0.2 Adjustments. In the event of a reorganization, recapitalization,
-----------
stock dividend or stock split, or combination or other change, identified by the
Committee, in the Common Stock, the Committee may make such adjustments, if any,
in the number and type of shares authorized for issuance by the Plan as may be
determined to be appropriate and equitable in the sole discretion of the
Committee, provided that fractions of a share will be rounded down to the
nearest whole share.
ARTICLE V
Restricted Stock Grants
-----------------------
5.1 Restricted Stock Grants. The Committee may award shares of Common
------------------------
Stock to Participants, which shares shall be subject to the following terms and
conditions and such other terms and conditions as the Committee may prescribe
("Restricted Stock Grants"):
(a) Restricted Stock Grants may become vested, and not subject to
forfeiture, in one or more installments, upon the happening of certain events,
upon the passage of a specified period of time, upon the fulfillment of certain
conditions or upon the achievement by the Corporation or the Bank of certain
performance goals, as the Committee shall decide in each case when Restricted
Stock Grants are awarded.
(b) In the event of a Change of Control, all of the shares of Common
Stock under a Restricted Stock Grant shall become fully vested, and not subject
to forfeiture, for any Participant who is employed by the Corporation or the
Bank at the time of the Change of Control.
(c) All of the shares of Common Stock under a Restricted Stock Grant shall
become fully vested, and not subject to forfeiture, upon the death or Disability
of any Participant who is employed by the Corporation or the Bank at the time of
the Participant's death or Disability.
(d) Restricted Stock Grants hereunder shall be subject to the terms and
conditions of the Plan and a written agreement (a "Restricted Stock Agreement")
which shall be signed by the
35
<page>
Participant and by the Chairman of the Board, the Chief Executive Officer or the
President of the Corporation for and on behalf of the Corporation and which
shall contain such terms and conditions as the Committee shall deem necessary
and desirable.
5.2 Forfeiture Upon Termination of Service. Except as otherwise
------------------------------------------
provided in Section 5.1 or as otherwise provided by the Committee in the
Restricted Stock Agreement for a Participant's Restricted Stock Grant, any
portion of such Participant's shares of Common Stock that was not vested on the
date of such Participant's Termination of Service shall be forfeited as of such
date.
ARTICLE VI
General Provisions
------------------
6.1 Listing, Registration and Compliance with Laws and Regulations.
------------------------------------------------------------------
Restricted Stock Grants awarded under this Plan shall be subject to the
requirement that if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares of
Common Stock granted under the Plan upon any securities exchange or under any
state or federal securities or other law or regulation, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the award of Restricted Stock Grants under
the Plan, no Restricted Stock Grants may be granted, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee. The
holders of such Restricted Stock Grants shall supply the Corporation with such
certificates, representations and information as the Corporation shall request
and shall otherwise cooperate with the Corporation in obtaining such listing,
registration, qualification, consent or approval. In the case of holders of such
Restricted Stock Grants who are subject to Section 16(b) of the 1934 Act, the
Committee may at any time impose any limitations upon the grant and/or vesting
of Restricted Stock Grants that, in the Committee's discretion, are necessary or
desirable in order to comply with such Section 16(b) and the rules and
regulations thereunder.
6.2 Withholding of Taxes. The Corporation or the Bank shall be
----------------------
entitled, if necessary or desirable, to withhold from any Participant any
amounts due and payable by the Corporation or the Bank to such Participant (or
secure payment from such Participant in lieu of withholding) the amount of any
withholding or other tax due from the Corporation or the Bank with respect to
any shares of Common Stock subject to Restricted Stock Grants, and the
Corporation may defer such issuance unless indemnified to its satisfaction.
6.3 Rights of Participants. Nothing in this Plan or in any Restricted
-----------------------
Stock Agreement shall interfere with or limit in any way the right of the
Corporation or the Bank to terminate any Participant's employment at any time
(with or without cause), nor confer upon any Participant any right to continue
in the employ of the Corporation or the Bank for any period of time or to
continue his or her present (or any other) rate of compensation, and except as
otherwise provided under the Plan or by the Committee in the Restricted Stock
Agreement, in the event of any Participant's termination of employment
(including, but not limited to, the termination by the Corporation or the Bank
without cause), any portion of such Participant's Restricted Stock Grant that
was not previously vested shall be forfeited or expire as of the date of such
termination. No employee shall
36
<page>
have a right to be selected to receive a Restricted Stock Grant or, having been
so elected, to be selected again to receive a Restricted Stock Grant.
6.4 Amendment, Suspension and Termination of Plan. The Committee may
------------------------------------------------
suspend or terminate the Plan or any portion thereof at any time and may amend
from time to time in such respects as the Committee may deem advisable, provided
--------
that no such amendment shall be made without stockholder approval to the extent
- ----
such approval is required by law, agreement or the rules of any exchange upon
which the shares of Common Stock are listed, and further provided that no such
----------------------
amendment, suspension or termination shall impair the rights of Participants in
respect of then outstanding Restricted Stock Grants awarded under this Plan
without the consent of the Participants affected thereby. No Restricted Stock
Grants shall be awarded hereunder after the tenth anniversary of the adoption of
the Plan.
6.5 Amendment, Modification and Cancellation of Agreements. The
------------------------------------------------------------
Committee may amend, modify or cancel any Restricted Stock Agreement in any
manner to the extent that the Committee would have had the authority under the
Plan initially to award such Restricted Stock Agreement, provided that no such
amendment, modification or cancellation shall impair the rights of any
Participant under any or Restricted Stock Agreement without the consent of such
Participant.
6.6 Indemnification. In addition to such other rights of
---------------
indemnification as they may have as members of the Board or the Committee, the
members of the Committee shall be indemnified by the Corporation against all
costs and expenses reasonably incurred by them in connection with any action,
suit or proceeding to which they or any of them may be party by reason of any
action taken or failure to act under or in connection with the Plan or any
awards of Restricted Stock Grants awarded thereunder, and against all amounts
paid by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, provided that
any such Committee member shall be entitled to the indemnification rights set
forth in this paragraph 6.6 only if such member has acted in good faith and in a
manner that such member reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that such conduct was unlawful,
and further provided that upon the institution of any such action, suit or
proceeding a Committee member shall give the Corporation written notice thereof
and an opportunity, at its own expense, to handle and defend the same before
such Committee member undertakes to handle and defend it on his own behalf.
6.7 Term of the Plan. This Plan shall be effective as of the Effective
----------------
Date, subject to the approval of the Plan by the affirmative vote of the
stockholders of the Corporation entitled to vote thereon at the time of such
approval. No Restricted Stock Grants shall be awarded under the Plan after the
tenth anniversary of the Effective Date of the Plan, but Restricted Stock Grants
awarded theretofore shall continue beyond that date in accordance with the terms
of the Restricted Stock Agreements.
* * * * * * * *
37
<page>
PROXY FOR 2007 ANNUAL MEETING OF FIRST LITCHFIELD FINANCIAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FIRST LITCHFIELD FINANCIAL CORPORATION
The undersigned holder(s) of the Common Stock of First Litchfield
Financial Corporation (the "Company") do hereby nominate, constitute and appoint
Herbert L. Curtiss, Jr. and Arthur B. Webster of Litchfield County, Connecticut,
jointly and severally, as our proxies with full power of substitution, for us
and in our name, place and stead to vote all the Common Stock of said Company,
standing in our name on its books on April 3, 2007 at the Annual Meeting of its
shareholders to be held at the Torrington Country Club, Route 4, Goshen,
Connecticut on Wednesday, May 16, 2007 at 3:00 p.m. or at any adjournment
thereof with all the powers the undersigned would possess if personally present,
as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS (1), (2) & (3)
(1) ELECTION OF DIRECTORS:
To re-elect the following four (4) Directors to the Board of Directors
each to serve for a term of three (3) years and until their successors
are elected and qualified, as described in the Proxy Statement
(Nominees: George M. Madsen, Alan B. Magary, William J. Sweetman and
Patricia D. Werner). To re-elect the following one (1) Director to the
Board of Directors to serve for a term of two (2) years and until his
successor is elected and qualified, as described in the Proxy Statement
(Nominee: Gregory S. Oneglia).
[_] FOR ALL NOMINEES [_] WITHHOLD AUTHORITY [_] FOR ALL NOMINEES
TO VOTE FOR ALL NOMINEES EXCEPT AS
WRITTEN BELOW:
-------------------
-------------------
(2) APPOINTMENT OF AUDITORS:
To ratify the appointment of McGladrey & Pullen, LLP as the Company's
independent auditors for the year ending December 31, 2007.
[_] FOR [_] AGAINST [_] ABSTAIN
(3) FIRST LITCHFIELD RESTRICTED STOCK PLAN:
To adopt the First Litchfield Financial Corporation 2007 Restricted
Stock Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
(4) OTHER BUSINESS:
To transact such other business as may properly come before the
meeting, or any adjournments thereof. Management knows of no other
business to be presented by or on behalf of the Company or its
management at the meeting. However, if any other matters are properly
brought before the meeting, the persons named in this Proxy or their
substitutes will vote in accordance with the determination of a
majority of the Board of Directors.
<page>
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATION INDICATED. IF NO
SPECIFICATION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
NOMINEES LISTED IN PROPOSAL 1; "FOR" THE RATIFICATION OF THE COMPANY'S
APPOINTMENT OF INDEPENDENT AUDITORS (PROPOSAL 2); "FOR" THE ADOPTION OF THE
FIRST LITCHFIELD RESTRICTED 2007 STOCK PLAN (PROPOSAL 3) AND IN ACCORDANCE WITH
THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS AS TO ANY OTHER
MATTERS.
DATE: PLEASE SIGN, DATE AND RETURN
-------------------------
(L.S.)
----------------------
(L.S.)
----------------------
Please sign exactly as name
appears. When shares are
held in more than one name,
including joint tenants,
each party should sign. When
signing as attorney,
executor, administrator,
trustee or guardian, give
full title as such.
THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE MEETING BY WRITTEN NOTICE
TO THE COMPANY OR MAY BE WITHDRAWN AND YOU MAY VOTE IN PERSON
SHOULD YOU ATTEND THE ANNUAL MEETING
PLEASE SIGN AND RETURN