UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-28815
FIRST LITCHFIELD FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1241321
- ------------------------------------------- ---------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
13 North Street, Litchfield, CT 06759
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (860) 567-8752
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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____________________________ _________________________________________
____________________________ _________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Indicate by check mark whether the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes |_| No |X|
Indicate by check mark whether the Registrant: (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. Yes |_| No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.;
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the Registrant's most recently completed second fiscal
quarter $25,717,416.
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. April 14, 2009 - 2,356,875
DOCUMENTS INCORPORATED BY REFERENCE
PART III. Portions of the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 20, 2009.
TABLE OF CONTENTS
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PART I
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ITEM 1 - BUSINESS 1
ITEM 1A. RISK FACTORS 12
ITEM 1B. UNRESOLVED STAFF COMMENTS 12
ITEM 2 - PROPERTIES 12
ITEM 3 - LEGAL PROCEEDINGS 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
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ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES 13
ITEM 6 - SELECTED FINANCIAL DATA 15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 16
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 27
ITEM 9A(T) - CONTROLS AND PROCEDURES 27
ITEM 9B - OTHER INFORMATION 27
PART III
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ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 28
ITEM 11 - EXECUTIVE COMPENSATION 28
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS 28
ITEM 13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 28
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES 28
PART IV
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ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 29
SIGNATURES 33
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PART I
ITEM 1. BUSINESS
Business of the Company
First Litchfield Financial Corporation, a Delaware corporation (the "Company")
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended. The Company was formed in 1988 and has one banking subsidiary, The
First National Bank of Litchfield (the "Bank"), a national banking association
organized under the laws of the United States. The Bank and its predecessors
have been in existence since 1814. The principal executive office of the Company
is located at 13 North Street, Litchfield, CT 06759, and the telephone number is
(860) 567-8752. The Company owns all of the outstanding shares of the Bank. The
Bank has three subsidiaries, Lincoln Corporation and Litchfield Mortgage Service
Corporation, which are Connecticut corporations, and First Litchfield Leasing
Corporation which is a Delaware corporation. The Bank holds a majority ownership
position in First Litchfield Leasing Corporation. The purpose of Lincoln
Corporation is to hold property such as real estate, personal property,
securities, or other assets, acquired by the Bank through foreclosure or
otherwise to compromise a doubtful claim or collect a debt previously
contracted. The purpose of Litchfield Mortgage Service Corporation is to operate
as a passive investment company in accordance with Connecticut law. On June 26,
2003, the Company formed First Litchfield Statutory Trust I for the purpose of
issuing trust preferred securities and investing the proceeds in subordinated
debentures issued by the Company, and on June 26, 2003, the first series of
trust preferred securities were issued. During the second quarter of 2006, the
Company formed a second statutory trust, First Litchfield Statutory Trust II
("Trust II"). Trust II exists for the sole purpose of issuing trust securities
and investing the proceeds in subordinated debentures issued by the Company. In
June 2006, Trust II issued its first series of trust preferred securities. The
Company owns 100% of each Trust's common stock
During the fourth quarter of 2006, the Bank formed First Litchfield Leasing
Corporation for the purpose of providing equipment financing and leasing
products. The Company considers First Litchfield Leasing Corporation as an
operating segment for reporting business line results.
The Bank engages in a wide range of commercial and personal banking activities,
including accepting demand deposits (including Money Market Accounts), accepting
savings and time deposit accounts, making secured and unsecured loans and leases
to corporations, individuals, and others, issuing letters of credit, originating
mortgage loans, and providing personal and corporate trust services. The
business of the Bank is not significantly affected by seasonal factors.
The Bank's lending services include commercial, real estate, and consumer
installment loans and leases. Revenues from the Bank's lending activities
constitute the largest component of the Bank's operating revenues. The loan and
lease portfolio constitutes the major earning asset of the Bank and offers the
best alternative for maximizing interest spread above the cost of funds. The
Bank's loan and lease personnel have the authority to extend credit under
guidelines established and approved by the Board of Directors. Any aggregate
credit which exceeds the authority of the loan or lease officer is forwarded to
the loan committee for approval. The loan committee is composed of various
experienced loan and lease officers and Bank directors. All aggregate credits
that exceed the loan committee's lending authority are presented to the full
Board of Directors for ultimate approval or denial. The loan committee not only
acts as an approval body to ensure consistent application of the Bank's loan and
lease policy, but also provides valuable insight through communication and
pooling of knowledge, judgment, and experience of its members.
The Bank's primary lending area generally includes towns located in Litchfield
and Hartford counties.
The Bank's Trust and Wealth Management Department provides a wide range of
personal and corporate trust and trust-related investment services, including
serving as executor of estates, as trustee under testamentary and intervivos
trusts and various pension and other employee benefit plans, as guardian of the
estates of minors and incompetents, and as escrow agent under various
agreements.
The Bank introduces new products and services as permitted by the regulatory
authorities and desired by the public. The Bank remains committed to meeting the
challenges that require technology. In addition to providing its customers with
access to the latest technological products, such as telephone banking, which
allows customers to handle routine transactions using a standard touch tone
telephone, the Bank is accessible via a home page on the Internet. The Bank also
offers PC banking and bill paying via the Internet at its Website. The Bank also
offers a cash management product; e-Business Advantage, which is geared toward
commercial businesses, municipal and nonprofit customers and provides 24-hour
online account management including real-time account monitoring, managing cash
flow, collecting and making payments electronically, as well as transferring
idle cash.
Competition
In Connecticut generally, and in the Bank's primary service area specifically,
there is intense competition in the commercial banking industry. The Bank's
market area consists principally of towns located in Litchfield County and
Hartford County, although the Bank also competes with other financial
institutions in surrounding counties in Connecticut in obtaining deposits and
providing many types of financial services. The Bank competes with larger
regional and national banks for the business of companies located in the Bank's
market area. The Bank also competes with savings and loan associations, credit
unions, finance companies, personal loan companies, money market funds and other
non-depository financial intermediaries. Many of these financial institutions
have resources many times greater than those of the Bank. In addition, new
financial intermediaries such as money-market mutual funds and large retailers
are not subject to the same regulations and laws that govern the operation of
traditional depository institutions.
1
Changes in federal and state law have resulted in, and are expected to continue
to result in, increased competition. The reductions in legal barriers to the
acquisition of banks by out-of-state bank holding companies resulting from
implementation of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and other recent and proposed changes are expected to continue to
further stimulate competition in the markets in which the Bank operates,
although it is not possible to predict the extent or timing of such increased
competition.
Lending Activities
The Bank's lending policy is designed to correspond with its mission of
remaining a community-oriented bank. The loan and lease policy sets forth
accountability for lending functions in addition to standardizing the
underwriting, credit and documentation procedures. The Bank's target market
regarding lending is in the towns in which a Bank office is located and
contiguous towns. The typical loan and lease customer is an individual or small
business which has a deposit relationship with the Bank. The Bank strives to
provide an appropriate mix in its loan and lease portfolio of commercial loans
leases and loans and leases to individual consumers.
Loan and Lease Portfolio
The Bank's loan and lease portfolio at December 31, 2008 - 2004 was comprised of
the following categories:
(Dollar Amounts in Thousands)
December 31,
--------------------------------------------------------------------------
2008 2007 2006 2005 2004
---------- ---------- ---------- ---------- ----------
Commercial loans $ 46,250 $ 33,642 $ 26,950 $ 21,151 $ 17,911
Commercial leases 19,786 8,634 -- -- --
Real Estate
Construction 38,153 34,809 30,606 28,549 11,597
Residential 193,574 189,557 177,082 145,927 148,662
Commercial 67,455 55,752 53,318 42,145 33,655
Installment 5,113 6,520 7,168 4,334 6,315
Others 129 99 172 47 80
---------- ---------- ---------- ---------- ----------
Total Loans and Leases $ 370,460 $ 329,013 $ 295,296 $ 242,153 $ 218,220
========== ========== ========== ========== ==========
The following table reflects the maturity and sensitivities of the Bank's loan
and lease portfolio at December 31, 2008.
(Dollar Amounts in Thousands)
After one
One Year year through Due after Total
or less five years five years loans and leases
---------- ------------ ---------- ----------------
Commercial loans $ 24,172 $ 10,126 $ 11,952 $ 46,250
Commercial leases -- 15,949 3,837 19,786
Real Estate
Construction 21,927 4,207 12,019 38,153
Residential 56,932 36,681 99,961 193,574
Commercial 9,422 30,633 27,400 67,455
Installment 641 2,661 1,811 5,113
Others 129 -- -- 129
---------- ---------- ---------- ----------
Total Loans and Leases $ 113,223 $ 100,257 $ 156,980 $ 370,460
========== ========== ========== ==========
At December 31, 2008, loans maturing after one year included approximately:
$164,801,000 in fixed rate loans; and $92,436,000 in variable rate loans.
Investment Securities
The primary objectives of the Bank's investment policy are to provide a stable
source of interest income, to provide adequate liquidity necessary to meet short
and long-term changes in the mix of its assets and liabilities, to provide a
means to achieve goals set forth in the Bank's interest rate risk policy and to
provide a balance of quality and diversification to its assets. The
available-for-sale portion of the investment portfolio is expected to provide
funds when demand for acceptable loans and leases increases and is expected to
absorb funds when loan and lease demand decreases.
At December 31, 2008 the carrying value of the Bank's investment portfolio was
$113,502,751 or 21% of total assets. There were no Federal Funds Sold as of
December 31, 2008.
2
The table below presents the amortized cost and fair values of investment
securities held by the Bank at December 31, 2008, 2007 and 2006.
(Dollar Amounts in Thousands)
2008 2007 2006
-------------------------- ----------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
Available-for-sale $ 113,246 $ 113,486 $ 130,145 $ 128,980 $ 150,895 $ 147,780
Held-to-maturity 17 17 34 34 41 40
---------- ---------- ---------- ---------- ---------- ----------
$ 113,263 $ 113,503 $ 130,179 $ 129,014 $ 150,936 $ 147,820
========== ========== ========== ========== ========== ==========
The following tables present the maturity distribution of investment securities
at December 31, 2008, and the weighted average yields of such securities. The
weighted average yields were calculated based on the amortized cost and
tax-effective yields to maturity of each security. The maturity distribution
shown below will differ from the contractual maturities because the issuer has
the ability to prepay or call the security.
(Dollar Amounts in Thousands)
Held-to-maturity
Over One Over Five Weighted
One Year Through Through Over Ten No Average
or Less Five Years Ten Years Years Maturity Total Yield
-------- ---------- --------- -------- -------- --------- --------
Mortgage-Backed Securities $ -- $ -- $ -- $ -- $ 17 $ 17 $ 2.02%
======== ======== ======== ======== ======== ========= ========
Weighted Average Yield -- -- -- -- 2.02% 2.02%
======== ======== ======== ======== ======== =========
Available-for-sale (1)
U.S. Treasury Securities $ -- $ 3,111 $ -- $ -- $ -- $ 3,111 2.34%
U.S. Government Agency Securities 22,500 4,000 -- -- -- 26,500 3.56%
State and Municipal Obligations -- -- 19,931 -- -- 19,931 6.02%
Trust Preferred Securities -- -- -- 493 -- 493 5.73%
Mortgage-Backed Securities -- -- -- -- 60,166 60,166 4.17%
Marketable Equity Securities 1,000 -- 2,000 -- 45 3,045 1.49%
-------- -------- -------- -------- -------- --------- --------
Total $ 23,500 $ 7,111 $ 21,931 $ 493 $ 60,211 $ 113,246 4.88%
======== ======== ======== ======== ======== ========= ========
Weighted Average Yield 3.98% 2.10% 5.84% 5.73% 4.17% 4.33%
======== ======== ======== ======== ======== =========
Total Portfolio $ 23,500 $ 7,111 $ 21,931 $ 493 $ 60,228 $ 113,263 4.33%
======== ======== ======== ======== ======== ========= ========
Total Weighted Average Yield 3.98% 2.10% 5.84% 5.73% 4.17% 4.33%
======== ======== ======== ======== ======== =========
(1) Dollars shown amortized cost amounts.
3
Deposits
The following table summarizes average deposits and interest rates of the Bank
for the years ended December 31, 2008, 2007 and 2006.
(Dollar Amounts in Thousands)
2008 2007 2006
----------------------- ----------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
Non-interest bearing
demand deposits $ 68,864 0.00% $ 68,278 0.00% $ 65,047 0.00%
Money market deposits 83,116 1.88% 75,832 2.96% 74,200 2.20%
Savings deposits 58,788 1.04% 55,026 1.37% 48,141 0.67%
Time deposits 132,813 3.69% 136,764 4.59% 115,559 4.05%
---------- ---------- ---------- ---------- ---------- ----------
$ 343,581 2.06% $ 335,900 2.76% $ 302,947 2.19%
========== ========== ========== ========== ========== ==========
Fixed rate certificates of deposit in amounts of $100,000 or more at December
31, 2008 are scheduled to mature as follows:
(Dollar Amounts in Thousands)
----------------------------------------------
Three months or less $ 12,657
Over three, through six months 7,357
Over six, through twelve months 14,433
Over twelve months 6,557
----------
Total $ 41,004
==========
Return on Equity and Assets
The following table summarizes various operating ratios of the Company for the
past two years:
Years ended December 31,
2008 2007 2006
-------------------------------------
Return on average total
assets (net (loss) income divided by average total assets) (0.85)% 0.39% 0.29%
Return on average shareholders' equity (net
(loss) income divided by average shareholders' equity) (17.10)% 7.25% 5.43%
Equity to assets (average shareholders' equity as a
percent of average total assets) 4.98% 5.43% 5.31%
Dividend payout ratio N/A 70.63% 92.68%
Asset/Liability Management
A principal objective of the Bank is to reduce and manage the exposure of
changes in interest rates on its results of operations and to maintain an
approximate balance between the interest rate sensitivity of its assets and
liabilities within acceptable limits. While interest-rate risk is a normal part
of the commercial banking activity, the Bank desires to minimize its effect upon
operating results. Managing the rate sensitivity embedded in the balance sheet
can be accomplished in several ways. By managing the origination of new assets
and liabilities, or the rollover of the existing balance sheet assets,
incremental change towards the desired sensitivity position can be achieved.
Hedging activities, such as the use of interest rate caps, can be utilized to
create immediate change in the sensitivity position.
The Bank monitors the relationship between interest earning assets and interest
bearing liabilities by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring the Bank's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-bearing liabilities maturing or repricing and the amount
of interest-earning assets maturing or repricing for the same period of time.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to
increase net interest income. During a period of rising interest rates, a
positive gap would tend to increase net interest income, while a negative gap
would tend to adversely affect net interest income.
The information presented in the interest sensitivity table is based upon a
combination of maturities, call provisions, repricing frequencies, prepayment
patterns and management judgment. The distribution of variable rate assets and
liabilities is based upon the repricing interval of
4
the instrument. Management estimates that less than 25% of savings products are
sensitive to interest rate changes based upon analysis of historic and industry
data for these types of accounts.
The following table summarizes the repricing schedule for the Bank's assets and
liabilities and provides an analysis of the Bank's periodic and cumulative GAP
positions.
(Dollar Amounts in Thousands)
As of December 31, 2008
Repriced Within
----------------------------------------------------------------
Under 3 4 to 12 1 to 5 Over 5
Months Months Years Years
----------- ----------- ----------- -----------
Securities available-for-sale $ 16,783 $ 33,756 $ 39,377 $ 23,330
Securities held-to-maturity -- 17 -- --
Loan and Lease Portfolio 107,636 84,384 141,657 36,783
Other -- -- -- 5,753
----------- ----------- ----------- -----------
Total interest earning assets 124,419 118,157 181,034 65,866
Interest-bearing liabilities
Money Market 93,085 -- -- --
Savings 8,521 -- -- 50,061
Time 35,061 62,931 24,119 --
----------- ----------- ----------- -----------
Total interest-bearing deposits 136,667 62,931 24,119 50,061
Borrowed funds 33,906 26,000 39,914 39,006
----------- ----------- ----------- -----------
Total interest-bearing liabilities 170,573 88,931 64,033 89,067
Periodic gap $ (46,154) $ 29,226 $ 117,001 $ (23,201)
=========== =========== =========== ===========
Cumulative gap $ (46,154) $ (16,928) $ 100,073 $ 76,872
=========== =========== =========== ===========
Cumulative gap as a percentage of
total earning assets (9.43)% (3.46)% 20.44% 15.70%
=========== =========== =========== ===========
Supervision and Regulation
The Bank is chartered under the National Bank Act and is subject to the
supervision of, and is regularly examined by, the Office of the Comptroller of
the Currency (the "OCC") and the Federal Deposit Insurance Corporation ("FDIC").
The Company is a bank holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), is registered as such with and is subject to the
supervision of, and the Bank Holding Company laws, of the Federal Reserve Board
("FRB"). The Company, as a bank holding company, is also subject to the
Connecticut Bank Holding Company laws. In addition, the Company's securities are
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and, therefore, is subject to rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain legislation and
regulations affecting the business of the Company and the Bank are discussed
below.
General
As a bank holding company, the Company is subject to the BHC Act. The Company
reports to, registers with, and is examined by the FRB. The FRB also has the
authority to examine the Company's subsidiaries, which includes the Bank.
The FRB requires the Company to maintain certain levels of capital. See "Capital
Standards" herein. The FRB also has the authority to take enforcement action
against any bank holding company that commits any unsafe or unsound practice,
violates certain laws, regulations, or conditions imposed in writing by the FRB.
See "Prompt Corrective Action and Other Enforcement Mechanisms" herein.
Under the BHC Act, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over, or acquires, directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of, any bank or bank holding company. Thus, the Company is required to obtain
the prior approval of the FRB before it acquires merges or consolidates with any
bank, or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the FRB's
approval.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank
5
holding company's financial position. The FRB's policy is that a bank holding
company should not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
Transactions between the Company, the Bank and any future subsidiaries of the
Company are subject to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees, which are unreasonable in
amount or exceed the fair market value of the services rendered (or, if no
market exists, actual costs plus a reasonable profit). Additionally, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
The Emergency Economic Stabilization Act of 2008 and the American Recovery and
Reinvestment Act of 2009 and programs thereunder in which the Company
participates, including the Capital Purchase Program ("CPP") of the Troubled
Asset Relief Program ("TARP") and the Temporary Liquidity Guarantee Program
("TLGP"), contain limitations on increasing dividends on the Common Stock during
the first three years of participation in the CPP and allow the U.S. Government
to unilaterally modify any term or provision of contracts executed under the
CPP. For discussion of these programs and the acts see "Recent Legislation and
Regulatory Initiatives to Address Difficult Market and Economic Conditions"
below.
Capital Standards
The FRB, OCC and other federal banking agencies have adopted risk-based minimum
capital adequacy guidelines intended to provide a measure of capital adequacy
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets, and
transactions, such as letters of credit and recourse arrangements, which are
reported as off- balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. government securities, to
100% for assets with relatively higher credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance sheet
items. The regulators measure risk-adjusted assets and off-balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Trust
preferred securities are currently considered regulatory capital for purposes of
determining the Company's Tier I capital ratios. Tier 2 capital may consist of
limited amounts of the allowance for loan and lease losses, unrealized gains on
equity securities and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital are subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of
Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable; however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following table presents the capital ratios for the Company and the Bank as
of December 31, 2008:
Minimum
The Company's The Bank's Regulatory
Ratio Ratio Capital Level
----- ----- -------------
RISK-BASED CAPITAL RATIO:
Total Capital 11.74% 9.43% 8%
Tier 1 Capital 10.74% 8.43% 4%
TIER 1 LEVERAGE CAPITAL RATIO: 7.85% 6.10% 4%
6
Prompt Corrective Action and Other Enforcement Mechanisms
Each federal banking agency is required to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more of the prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An insured depository institution generally is classified in the following
categories based on capital measures indicated below:
"Well-Capitalized":
Total risk-based capital of 10% or more;
Tier 1 risk-based ratio capital of 6% or more; and
Leverage ratio of 5% or more.
"Adequately Capitalized":
Total risk-based capital of at least 8%;
Tier 1 risk-based capital of at least 4%; and
Leverage ratio of at least 4%.
"Undercapitalized":
Total risk-based capital less than 8%
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4%.
"Significantly Undercapitalized":
Total risk-based capital less than 6%
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
Due to the increased provision for loan and lease losses and the OTTI losses
(see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note Q of the Financial Statements), with the
exception of the total risk-based capital ratio, as of December 31, 2008, the
Bank is classified as "well-capitalized" under the above guidelines. An
institution that, based upon its capital levels, is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment. If an insured depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued by the holding
company. Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. The most
important additional measure is that the appropriate federal banking agency is
required to either appoint a receiver for the institution within 90 days or
obtain the concurrence of the FDIC in another form of action. In addition to
measures taken under the prompt corrective action provisions, commercial banking
organizations may be subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits (in the case of a depository institution), the imposition
of civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the enforcement of
such actions through injunctions or restraining orders based upon a prima facie
showing by the agency that such relief is appropriate. Additionally, a holding
company's inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
Safety and Soundness Standards
The federal banking agencies have established safety and soundness standards for
insured financial institutions covering: (1) internal controls, information
systems and internal audit systems; (2) loan and lease documentation; (3) credit
underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation,
fees and benefits; (7) asset quality and earnings; (8) excessive compensation
for executive officers, directors or principal shareholders which could lead to
material financial loss; and (9) information security standards. If an agency
determines that an institution fails to meet any standard established by the
guidelines, the agency may require the financial
7
institution to submit to the agency an acceptable plan to achieve compliance
with the standard. These guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves. If the agency requires submission
of a compliance plan and the institution fails to timely submit an acceptable
plan or to implement an accepted plan, the agency must require the institution
to correct the deficiency.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. Federal Law
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The Company's ability to pay dividends depends in large part on the ability of
the Bank to pay dividends to the Company. The ability of the Bank to pay
dividends is subject to restrictions set forth in the National Banking Act and
regulations of the OCC. See "Market Price for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" herein.
In addition, provided the Preferred Stock issued to the Treasury, described in
Note L to Consolidated Financial Statements, is held by the Treasury, the Common
Stock dividend may not be increased without the consent of the Treasury for
three (3) years from the date of the investment by the Treasury. On February 24,
2009 and March 27, 2009, the Federal Reserve Board issued supervisory guidance
to all bank holding companies regarding the payment of dividends as well as
stock redemptions and repurchases by bank holding companies. Such guidance
expressed the view that the Board of Directors should ensure that dividends are
prudent relative to the financial position of the institution and that a bank
holding company should inform the FRB in advance of declaring a dividend that
exceeds earnings for the period or that could result in a material adverse
change to an organization's capital structure. The supervisory guidance further
stated that dividends should be eliminated, deferred, or limited if net income
from the past four quarters is not sufficient to fund the dividend or if
prospective earnings retention is not consistent with capital needs or the
condition and future prospects of the institution or if the bank holding company
is in danger of not meeting minimum regulatory capital returns.
Additionally, a bank may not make any capital distribution, including the
payment of dividends, if, after making such distribution, the bank would be in
any of the "under-capitalized" categories under the OCC's Prompt Corrective
Action regulations. Regulation Y requires bank holding companies to provide the
FRB with written notice before purchasing or redeeming equity securities if the
gross consideration for the purchase or redemption, when aggregated with the net
consideration paid by the Company for all such purchases or redemptions during
the preceding twelve (12) months, is equal to ten percent (10%) or more of the
Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company generally
need not obtain FRB approval of any equity security redemption when: (i) the
bank holding company's capital ratios exceed the threshold established for
"well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
However, letters issued by the FRB to the industry dated February 24, 2009 and
March 27, 2009 advise bank holding companies to inform the FRB of proposed stock
repurchases resulting in a net reduction of common or preferred stock below the
amount of such instrument outstanding at the beginning of the quarter in which
the repurchase occurs. In addition, as a recipient of TARP CPP funds, the
Company must communicate with the Treasury as well as the FRB in advance of any
stock redemptions. Generally, during the first three years the Company
participates in the TARP CPP, the approval of the Treasury will be required
before the Company could repurchase any common stock. The Company may redeem the
TARP CPP Preferred Stock at any time in consultation with the Treasury and its
primary supervisory agencies.
The OCC also has the authority to prohibit the Bank from engaging in business
practices which the OCC considers to be unsafe or unsound. It is possible,
depending upon the financial condition of a bank and other factors, that the OCC
could assert that the payment of dividends or other payments in some
circumstances might be such an unsafe or unsound practice and thereby prohibit
such payment.
FDIC Insurance
The Bank's deposits are insured under the Federal Deposit Insurance Act up to
maximum limits by the Deposit Insurance Fund (DIF) and are subject to deposit
insurance assessments.
Congress has temporarily increased FDIC deposit insurance from $100,000 to
$250,000 per depositor through December 31, 2009. Effective April 1, 2006, the
federal deposit insurance limits on certain retirement accounts increased so
that such retirement accounts are separately insured up to $250,000. In
addition, the Bank participates in the TLGP, whereby non-interest bearing
checking accounts and NOW accounts with interest rates no higher than 0.50 %
will be FDIC insured in full.
FDIC insurance of deposits may be terminated by the FDIC, after notice and a
hearing, upon a finding by the FDIC that the insured institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition imposed by the FDIC. A bank's failure to meet the minimum capital and
risk-based capital guidelines discussed below would be considered to be unsafe
and unsound banking practices. The Bank, as a nationally-chartered FDIC-insured
bank, is regulated by the OCC. The OCC also conducts its own periodic
examinations of the Bank, and the Bank is required to submit financial and other
reports to the OCC on a quarterly and annual basis, or as otherwise required by
the OCC. FDIC-insured banks, such as the Bank, pay premium assessments to the
FDIC for the insurance of deposits.
8
A few years ago, the FDIC adopted a risk-based insurance assessment system
designed to tie what banks pay for deposit insurance more closely to the risks
they pose. The FDIC also adopted a schedule of rates that the FDIC could adjust
up or down, depending on the needs of the DIF.
Recently, the FDIC adopted a restoration plan that would increase the reserve
ratio to the 1.15% threshold within seven years. As part of that plan, in
December, 2008, the FDIC voted to increase risk-based assessment rates due to
deteriorating financial conditions in the banking industry. Changes to the
risk-based assessment system include increasing premiums for institutions that
rely on excessive amounts of brokered deposits, including CDARS, increasing
premiums for excessive use of secured liabilities, including Federal Home Loan
Bank advances, lowering premiums for smaller institutions with very high capital
levels, and adding financial ratios and debt issuer ratings to the premium
calculations for banks with over $10 billion in assets, while providing a
reduction for their unsecured debt. It is generally expected that rates will
continue to increase in the near future due to the significant cost of bank
failures beginning in the third quarter of 2008 and the increase in the number
of troubled banks. The FDIC recently announced that, in view of the significant
decrease in the deposit insurance funds reserves, it will impose a special
assessment in the second quarter of 2009. Banks must continue to pay base
premium rates on top of any special assessment. Furthermore, banks may be
subject to an "emergency" special assessment in 2009 in addition to other
special assessments and regular premium rates. The amount of an emergency
special assessment imposed on a bank will be determined by the FDIC if such
amount is necessary to provide sufficient assessment income to repay amounts
borrowed from the U.S. Department of Treasury (Treasury); to provide sufficient
assessment income to repay obligations issued to and other amounts borrowed from
insured depository institutions; or for any other purpose the FDIC may deem
necessary.
Inter-Company Borrowings
Bank holding companies are also restricted as to the extent to which they and
their subsidiaries can borrow or otherwise obtain credit from one another or
engage in certain other transactions. The "covered transactions" that an insured
depository institution and its subsidiaries are permitted to engage in with
their nondepository affiliates are limited to the following amounts: (1) in the
case of any one such affiliate, the aggregate amount of covered transactions of
the insured depository institution and its subsidiaries cannot exceed 10% of the
capital stock and the surplus of the insured depository institution; and (2) in
the case of all affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 20% of the
capital stock and surplus of the insured depository institution. In addition,
extensions of credit that constitute covered transactions must be collateralized
in prescribed amounts. "Covered transactions" are defined by statute to include
a loan or extension of credit to the affiliate, a purchase of securities issued
by an affiliate, a purchase of assets from the affiliate (unless otherwise
exempted by the FRB), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
Effects of Government Policy
Legislation adopted in recent years has substantially increased the scope of
regulations applicable to the Bank and the Company and the scope of regulatory
supervisory authority and enforcement power over the Bank and the Company.
Virtually every aspect of the Bank's business is subject to regulation with
respect to such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, reorganizations,
nonbanking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
and bank holding companies set forth above do not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the Company. Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
changes and the impact such changes might have on the Bank and the Company are
difficult to determine.
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 provides
bank holding companies, banks, securities firms, insurance companies, and
investment management firms the option of engaging in a broad range of financial
and related activities by opting to become a "financial holding company." These
holding companies are subject to oversight by the FRB, in addition to other
regulatory agencies. Under the financial holding company structure, financial
institutions have the ability to purchase or establish broker/dealer
subsidiaries, as well as the option to purchase insurance companies.
Additionally, securities and insurance firms are permitted to purchase
full-service banks.
As a general rule, the individual entities within a financial holding company
structure are regulated according to the type of services provided which is
referred to as functional regulation. Under this approach, a financial holding
company with banking, securities, and insurance subsidiaries will have to
interact with several regulatory agencies (e.g., appropriate banking agency,
SEC, state insurance commissioner).
While the Act facilitates the ability of financial institutions to offer a wide
range of financial services, large financial institutions appear to be the
primary beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company has no current plans to
operate within a financial holding company structure.
9
The Sarbanes-Oxley Act of 2002
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Exchange Act to prohibit a registered public
accounting firm from performing specified nonaudit services contemporaneously
with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of
an issuer with responsibility for the appointment, compensation, and oversight
of any registered public accounting firm employed to perform audit services. It
requires each committee member to be a member of the board of directors of the
issuer, and to be otherwise independent. The Sarbanes-Oxley Act further requires
the chief executive officer and chief financial officer of an issuer to make
certain certifications as to each annual or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirement; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
Pursuant to the Sarbanes-Oxley Act, the SEC has adopted rules to require:
o disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o the presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
The Sarbanes-Oxley Act, among other things, also provides for mandated internal
control report and assessment with the annual report and an attestation and a
report on such report by the Company's auditor. In accordance with the
requirements of Section 404, Management's report on internal controls is
included herein at Item 9A(T). The SEC has delayed until fiscal years ending
after December 15, 2009 the auditor's attestation report on internal controls
over financial reporting. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the Company.
The USA Patriot Act
On October 26, 2001, President Bush signed into law The Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "Patriot Act"). On March 10, 2006, the
President signed legislation making permanent certain provisions of the Patriot
Act. The terrorist attacks in September, 2001 have impacted the financial
services industry and led to federal legislation that addresses certain issues
involving financial institutions. Part of the Patriot Act is the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLA").
IMLA authorizes the Secretary of the Treasury, in consultation with the heads of
other government agencies, to adopt special measures applicable to banks, bank
holding companies, and other financial institutions. These measures may include
enhanced recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern, due diligence
requirements concerning the beneficial ownership of certain types of accounts,
and restrictions or prohibitions on certain types of accounts with foreign
financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts. The Bank
has implemented policies and procedures to address the requirements of the
Patriot Act and IMLA.
Recent Legislative and Regulatory Initiatives to Address Difficult Market and
Economic Conditions
On October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which, among other measures, authorizes the
Treasury to purchase from financial institutions and their holding companies up
to $700 billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies, under the TARP CPP. The purpose of
TARP CPP is to restore confidence and stability to the U.S. banking system and
to encourage financial institutions to increase their lending to customers and
to each other. Under the TARP CPP, the Treasury is purchasing equity securities
from participating institutions. The Series A Preferred Stock and warrant
offered by this prospectus were issued by the Company to the Treasury pursuant
to the TARP CPP. The EESA also increased federal deposit insurance on most
deposit accounts from $100,000 to $250,000. This increase is in place until the
end of 2009 and is not covered by deposit insurance premiums paid by the banking
industry.
10
The EESA followed, and has been followed by, numerous actions by the FRB, the
U.S. Congress, the Treasury, the FDIC, the SEC and others to address the current
liquidity and credit crisis that has followed the sub-prime meltdown that
commenced in 2007. These measures include homeowner relief that encourage loan
restructuring and modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment banks; the lowering
of the federal funds rate; emergency action against short selling practices; a
temporary guaranty program for money market funds; the establishment of a
commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address illiquidity and
other weaknesses in the banking sector.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009
("ARRA") was signed into law. The ARRA, more commonly known as the economic
stimulus bill or economic recovery package, is intended to stimulate the economy
and provides for broad infrastructure, education and health spending.
As discussed above, on October 14, 2008, the FDIC announced the establishment of
a temporary liquidity guarantee program to provide full deposit insurance for
all non-interest bearing transaction accounts and guarantees of certain newly
issued senior unsecured debt issued by FDIC-insured institutions and their
holding companies. Insured institutions were automatically covered by this
program from October 14, 2008 until December 5, 2008, unless they opted out
prior to that date. Under the program, the FDIC will guarantee timely payment of
newly issued senior unsecured debt issued on or before June 30, 2009. The debt
includes all newly issued unsecured senior debt including promissory notes,
commercial paper and inter-bank funding. The aggregate coverage for an
institution may not exceed 125% of its debt outstanding on September 30, 2008
that was scheduled to mature before June 30, 2009, or, for certain insured
institutions, 2% of liabilities as of September 30, 2008. The guarantee will
extend to June 30, 2012 even if the maturity of the debt is after that date.
The purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system. The EESA, the ARRA and the other regulatory initiatives
described above may not have their desired effects. If the volatility in the
markets continues and economic conditions fail to improve or worsen, the
Company's business, financial condition, results of operations and cash flows
could be materially and adversely affected.
The Securities Purchase Agreement Between the Company and the Treasury Permits
the Treasury to Impose Certain Additional Restrictions on the Company so long as
the Company Participates in the TARP CPP
The securities purchase agreement the Company entered into with the Treasury in
connection with the Bank's participation in the TARP CPP permits the Treasury to
unilaterally amend the terms of the securities purchase agreement to comply with
any changes in federal statutes after the date of its execution. The ARRA
imposed additional executive compensation and expenditure limits on all current
and future TARP recipients, including the Company, until the Company has repaid
the Treasury. These additional restrictions may impede the Company's ability to
attract and retain qualified executive officers. The ARRA also permits TARP
recipients to repay the Treasury without penalty or requirement that additional
capital be raised, subject to the Treasury's consultation with the Company's
primary federal regulator while the securities purchase agreement required that,
for a period of three years, the Series A Preferred Stock could generally only
be repaid if the Company raised additional capital to repay the securities and
such capital qualified as Tier 1 capital. Additional unilateral changes in the
securities purchase agreement could have a negative impact on the Company's
financial condition and results of operations.
Impact of Monetary Policies
Banking is a business which depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and other
borrowings and the interest rate earned by a bank on loans and leases,
securities and other interest-earning assets comprises the major source of
banks' earnings. Thus, the earnings and growth of banks are subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the FRB. The FRB implements national monetary policy, such as
seeking to curb inflation and combat recession, by its open-market dealings in
United States government securities, by adjusting the required level of reserves
for financial institutions subject to reserve requirements and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the FRB. The actions of the FRB in these areas influence the growth
of bank loans and leases, investments and deposits and also affect interest
rates. The nature and timing of any future changes in such policies and their
impact on the Company cannot be predicted. In addition, adverse economic
conditions could make a higher provision for loan and lease losses a prudent
course and could cause higher loan and lease loss charge-offs, thus adversely
affecting the Bank's net earnings.
Employees
The Company, the Bank and its subsidiaries employ 112 full-time employees and 10
part-time employees. Neither the Company nor the Bank are parties to any
collective bargaining agreements, and employee relations are considered good.
Forward Looking Statements
This Form 10-K and future filings made by the Company with the SEC, as well as
other filings, reports and press releases made or issued by the Company and the
Bank, and oral statements made by executive officers of the Company and Bank,
may include forward-looking statements relating to such matters as (a)
assumptions concerning future economic and business conditions and their effect
on the economy in general and on the markets in which the Company and the Bank
do business, and (b) expectations for increased revenues and earnings for the
Company and Bank through growth resulting from acquisitions, attraction of new
deposit and loan and lease customers and the introduction of new products and
services. Such forward-looking statements are based on assumptions rather than
historical or current facts and, therefore, are inherently uncertain and subject
to risk. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
11
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business conditions in the banking industry generally and
in the specific markets in which the Bank operates; (b) changes in the
legislative and regulatory environment that negatively impact the Company and
Bank through increased operating expenses; (c) increased competition from other
financial and non-financial institutions (d) the impact of technological
advances; and (e) other risks detailed from time to time in the Company's
filings with the SEC.
Such developments could have an adverse impact on the Company's financial
position and results of operation.
Availability of Financial Information
The Company files reports with the SEC. Those reports include the annual report
on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K
and proxy statements, as well as any amendments to those reports. The public may
read and copy any materials that the Company files with the SEC at the SEC's
Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
quarterly and annual reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The Company's website address is: www.fnbl.com.
ITEM 1A. RISK FACTORS
Not applicable as the registrant is not an accelerated filer or large
accelerated filer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable as the registrant is not an accelerated filer or large
accelerated filer.
ITEM 2. PROPERTIES
The Company is not the owner or lessee of any properties. The properties
described below are properties owned or leased by the Bank.
The Bank's main office is located at 13 North Street, Litchfield, Connecticut.
In addition to the Bank's main office in Litchfield, the Bank has branches in
Marble Dale, Washington Depot, Goshen, Canton, New Milford, Roxbury and
Torrington, Connecticut.
During the year ended December 31, 2008, the net rental expenses paid by the
Bank for all of its office properties was approximately $240,000. All properties
are considered to be in good condition and adequate for the purposes for which
they are used. The following table outlines all owned or leased property of the
Bank.
Owned Lease
Location Address Leased Expiration
-------- ------- ------ ----------
Main Office 13 North Street Owned since 1816
Litchfield, CT
Marble Dale Route 202 Leased 2009
Marble Dale, CT
Washington Depot Bryan Plaza Owned since 1959
Washington Depot, CT
Goshen Routes 4 & 63 Owned since 1989
Goshen, CT
Roxbury Route 67 Leased 2009 with one 5-year
Roxbury, CT extension
New Milford Route 202 Leased 2016 with one 10-year
New Milford, CT extension
Torrington 1057 Torringford Street Leased 2026 with option
Torrington, CT to purchase
Canton 188 Albany Turnpike Owned since 2005
Canton, CT
12
Trust Department 40 West Street Owned since 1996
Old Borough Firehouse
Litchfield, CT
Torrington, North 397 Main Street Owned since 2007
Torrington, CT
Finance Department 29 West Street Leased 2009 with one 3-year
Litchfield, CT extension
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank (or any of their properties) are the subject of
any material pending legal proceedings other than routine litigation that is
incidental to their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2008, no matter was submitted to a vote of
Shareholders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Price
The Company's Common Stock is traded on the Over the Counter ("OTC") Bulletin
Board under the symbol FLFL.OB. As of April 14, 2009, there were 2,506,622
shares issued and 2,356,875 shares outstanding, which were held by approximately
403 shareholders. The following information, provided by Oppenheimer and Co.,
sets forth transactions in the Company's Common Stock in each quarter of the two
most recently completed fiscal years:
2007 High/Low
----------------
First Quarter .................. $21.85 $19.10
Second Quarter ................. 20.40 18.60
Third Quarter .................. 19.00 13.50
Fourth Quarter ................. 16.95 14.99
2008 High/Low
----------------
First Quarter .................. $16.40 $13.25
Second Quarter ................. 14.25 11.50
Third Quarter .................. 13.00 10.60
Fourth Quarter ................. 11.00 5.25
On September 20, 2007, the Company approved a stock repurchase program to
acquire in the next twelve months up to an aggregate of 30,000 shares of the
Company's outstanding Common Stock. Pursuant to the repurchase program, shares
purchased during 2007 and 2008 totaled 8,263 and 16,718, respectively. The
repurchase program expired in September 2008 and was not renewed. The Company is
prohibited from repurchasing any shares of Common Stock pursuant to terms of the
CPP in which the Company participates, during the first three years of
participation.
Dividends
All shares of the Company's Common Stock are entitled to participate equally and
ratably in such dividends as may be declared by the Board of Directors out of
funds legally available therefore. During 2007 and 2008, the Company declared
cash dividends of 60 cents per share. During 2007 the Company declared stock
dividends of 5.00%. There were no stock dividends declared for the year ended
December 31, 2008. At their March 26, 2009 meeting, the Company's Board of
Directors declared a quarterly cash dividend of five cents per share, a
reduction from prior quarters in which the Company paid quarterly cash dividends
of fifteen cents per share.
The Company is prohibited from increasing the quarterly common stock dividend
above $.15 per share without the consent of the U. S. Treasury until the third
anniversary of the date of the investment, or December 12, 2011, unless prior to
such third anniversary the senior preferred stock is redeemed in whole or the U.
S. Treasury has transferred all of the senior preferred stock to third parties.
13
The Company's ability to pay dividends is limited by the prudent banking
principles applicable to all bank holding companies and by the provisions of
Delaware Corporate law, which provides that a company may, unless otherwise
restricted by its certificate of incorporation, pay dividends in cash, property
or shares of capital stock out of surplus or, if no surplus exists, out of net
profits for the fiscal year in which declared or out of net profits for the
preceding fiscal year (provided that such payment will not reduce the company's
capital below the amount of capital represented by classes of stock having a
preference upon distributions of assets).
As a practical matter, the Company's ability to pay dividends is generally
limited by the Bank's ability to dividend funds to the Company. As a national
bank, the declaration and payment of dividends by the Bank must be in accordance
with the National Bank Act. More specifically, applicable law provides that the
Board of Directors may declare quarterly, semiannual and annual dividends so
long as the Bank carries at least ten percent (10%) of its net profits for the
preceding half year in its surplus fund, and, in the case of annual dividends,
has carried not less than one-tenth of its net profits of the preceding two
consecutive half year periods in its surplus fund. National banks are required
to obtain the approval of the OCC if the total dividends declared by it in any
calendar year exceed the total of its net profits for that year combined with
any retained net profits of the preceding two years less any required transfers.
In addition to such statutory requirements, the payment of an excessive dividend
which would deplete a bank's capital base to an inadequate level could be
considered to be an unsafe or unsound banking practice and be a basis for
supervisory action by the OCC. Due to the earnings performance in 2008 there was
no undistributed net income of the Bank available for distribution to the
Company as dividends. However, the ability of the Bank to declare and pay such
dividends would be subject to safe and sound banking practices.
Recent Sales of Unregistered Securities
On December 12, 2008 the Company issued Fixed-Rate Cumulative Perpetual
Preferred Stock to the Treasury for $10 million in a private placement exempt
from registration. EESA authorized the U. S. Treasury to appropriate funds to
eligible financial institutions participating in the TARP CPP. The capital
investment included the issuance of preferred shares of the Company and a
warrant to purchase common shares pursuant to a Letter Agreement and a
Securities Purchase Agreement (collectively "the Agreement"). The dividend rate
of 5% increases to 9% after the first five years. Dividend payments are made on
the 15th day of February, May, August and November of each year. The warrant
allows the holder to purchase up to 199,203 shares of the Company's common stock
over a 10-year period at an exercise price per share of $7.53. The preferred
shares and the warrant qualify as Tier 1 regulatory capital. The Agreement
subjects the Company to certain restrictions and conditions including those
related to common dividends, share repurchases, executive compensation, and
corporate governance.
The Company recorded the total $10 million of the preferred shares and the
warrant at their relative fair values of $9,716,000 and $284,000, respectively.
The difference from the par amount of the preferred shares is accreted to
preferred stock over five years using the interest method with a corresponding
adjustment to preferred dividends.
The Company cannot increase the quarterly common stock dividend above $.15 per
share without the consent of the Treasury until the third anniversary of the
date of the investment, or December 12, 2011, unless prior to such third
anniversary the senior preferred stock is redeemed in whole or the Treasury has
transferred all of the senior preferred stock to third parties.
There have been no other sales of unregistered securities in the period covered
by this report.
Securities Authorized for Issuance under Equity Compensation Plans
The following schedule provides information with respect to compensation plans
under which equity securities are authorized for issuance as of December 31,
2008:
Equity Compensation Plan Information
- -----------------------------------------------------------------------------------------------------------------------
Number of
securities to be
issued upon Number of securities
exercise of remaining available for
outstanding future issuance under equity
options, Weighted average exercise compensation plans
warrants and price of outstanding options, (excluding securities
Plan Category rights warrants and rights reflected in Column (a))
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 5,434 $11.93 21,500
by shareholders
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not N/A N/A N/A
approved by shareholders
- -----------------------------------------------------------------------------------------------------------------------
Total 5,434 $11.93 21,500
- -----------------------------------------------------------------------------------------------------------------------
14
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the audited consolidated financial statements and
the notes thereto and the other information contained in this Form 10-K. The
selected balance sheet data as of December 31, 2008 and 2007, and the selected
income statement data for the years ended December 31, 2008 and 2007 are derived
from, and are qualified by reference to, the audited consolidated financial
statements of the Company appearing elsewhere in this Form 10-K. The balance
sheet data as of December 31, 2006, 2005 and 2004, and income statement data for
the years ended December 31, 2006, 2005, and 2004, are derived from audited
consolidated financial statements of the Company not included herein.
At or For the Year Ended December 31,
2008 2007 2006 2005 2004
------------- ------------- ------------- ------------- -------------
Income Statement Data
Interest Income $ 28,188,882 $ 28,098,261 $ 25,805,321 $ 21,665,441 $ 19,809,236
Interest Expense 13,249,297 14,885,202 13,114,088 7,594,052 6,216,042
Net Interest Income 14,939,585 13,213,059 12,691,233 14,071,389 13,593,194
Noninterest (Loss) Income (5,362,105) 3,431,476 2,272,986 2,889,313 2,432,094
Noninterest Expense 15,340,149 14,267,491 13,202,841 11,081,440 10,228,091
(Loss) Income Before Income Taxes (7,598,968) 2,173,044 1,341,378 5,547,234 5,437,197
Income Taxes (3,112,459) 225,702 (67,525) 1,511,343 1,520,962
Net (Loss) Income (4,490,384) 1,947,342 1,408,903 4,035,891 3,915,235
Balance Sheet Data
Total Loans, Leases and
Loans Held for Sale 370,460,285 329,012,939 296,338,181 242,152,589 218,220,157
Allowance for Loan and Lease Losses 3,698,820 2,151,622 2,106,100 1,759,611 1,389,947
Total Investment Securities 113,502,751 129,013,733 147,820,791 182,949,393 173,864,701
Total Assets 532,257,607 507,653,629 501,232,357 467,560,946 424,304,747
Total Deposits 343,326,624 335,617,664 333,428,874 277,870,361 300,847,379
Total Borrowings 138,825,684 140,079,676 137,610,667 157,301,172 96,620,588
Total Liabilities 499,790,343 479,291,017 474,976,163 441,591,209 399,759,074
Shareholders' Equity 32,413,389 28,312,612 26,206,194 25,969,737 24,545,673
Selected Ratios and Per Share Data
Return on Average Assets (0.85)% 0.39% 0.29% 0.91% 0.93%
Return on Average Equity (17.10)% 7.25% 5.43% 15.94% 17.33%
Basic Net (Loss) Income Per Share (1) $ (1.92) $ 0.82 $ 0.60 $ 1.72 $ 1.68
Diluted Net (Loss) Income Per Share (1) (1.92) 0.82 0.59 1.70 1.65
Price Per Common Share (1) 6.23 14.50 21.73 27.25 30.00
Book Value Per Common Share (1) 9.51 11.96 11.63 12.16 12.12
Dividends Declared:
Cash $ 0.60 $ 0.60 $ 0.60 $ 0.57 $ 0.50
Stock -- 5.00% 5.00% 5.00% 5.00%
Cash Dividend Yield 9.63% 4.14% 2.76% 2.09% 1.67%
(1) All per-share data has been adjusted to give retroactive effect to all stock
dividends and splits.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's discussion of financial condition of the Company
on a consolidated basis as of December 31, 2008 and 2007 and results of
operations and analysis of the Company on a consolidated basis for the two years
ended December 31, 2008 and 2007. The consolidated financial statements of the
Company include the accounts of the Company and its wholly-owned subsidiary, The
First National Bank of Litchfield (the "Bank") and the Bank's wholly owned
subsidiaries, Lincoln Corporation and Litchfield Mortgage Service Corporation.
Additionally included in these statements as of December 31, 2008 and 2007, and
for the twelve month periods ended December 31, 2008 and 2007, are the accounts
of First Litchfield Leasing Corporation; a subsidiary in which the Bank owns a
majority interest. This discussion should be read in conjunction with the
consolidated financial statements and the related notes of the Company presented
elsewhere herein.
Critical Accounting Policies
In the ordinary course of business, the Bank has made a number of estimates and
assumptions relating to the reported results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions.
The Bank utilizes a loan and lease review and rating process which classifies
loans and leases according to the Bank's uniform classification system in order
to identify potential problem loans and leases at an early stage, alleviate
weaknesses in the Bank's lending policies, oversee the individual loan and lease
rating system and ensure compliance with the Bank's underwriting, documentation,
compliance and administrative policies. Loans and leases included in this
process are considered by management as being in need of special attention
because of some deficiency related to the credit or documentation, but which are
still considered collectable and performing. Such attention is intended to act
as a preventative measure and thereby avoid more serious problems in the future.
ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance for loan and lease losses
consists of specific, general and unallocated components. The specific component
relates to loans and leases that are classified as either doubtful, substandard
or special mention. For such loans and leases that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan or lease is
lower than the carrying value of that loan or lease. The general component
covers non-classified loans and leases and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's estimate or
probable losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions.
The Bank makes provisions for loan and lease losses on a quarterly basis as
determined by a continuing assessment of the adequacy of the allowance for loan
and lease losses. The Bank performs an ongoing review of loans and leases in
accordance with an individual loan and lease rating system to determine the
required allowance for loan and lease losses at any given date. The review of
loans and leases is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective and is based on an evaluation of the known and inherent risk
characteristics and size of the loan and lease portfolios, the assessment of
current economic and real estate market conditions, estimates of the current
value of underlying collateral, past loan and lease loss experience, review of
regulatory authority examination reports and evaluations of impaired loans and
leases, and other relevant factors. Loans and leases, including impaired loans
and leases, are charged against the allowance for loan and lease losses when
management believes that the uncollectibility of principal is confirmed. Any
subsequent recoveries are credited to the allowance for loan and lease losses
when received. In connection with the determination of the allowance for loan
and lease losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties, when considered necessary.
There were no material changes in loan and lease concentrations or loan and
lease quality that had a significant affect on the allowance for loan and lease
losses calculation at December 31, 2008. In addition, there were no material
changes in the estimation methods and assumptions used in the Company's
allowance for loan and lease losses calculation, and there were no material
reallocations of the allowance among different parts of the loan and lease
portfolio. The Company recorded a provision of $1,836,000 for 2008 as compared
to a provision of $204,000 for 2007. The increased provision is reflective of
specific allocations related to certain impaired or substandard loans.
Additionally the increased provision was attributable to the weakness in the
economic environment.
OTHER THAN TEMPORARY IMPAIRMENT ("OTTI"): The Company's investment securities
portfolio is comprised of available-for-sale and held-to-maturity investments.
The available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains or losses, net of taxes, reported as accumulated other
comprehensive income or loss in shareholders' equity. The held-to-maturity
portfolio is carried at amortized cost. Management determines the classification
of a security at the time of its purchase.
The Company conducts a periodic review of our investment securities portfolio to
determine if the value of any security has declined below its cost or amortized
cost, and whether such decline is other-than-temporary. If such decline is
deemed other-than-temporary, the security is written down to a new cost basis
and the resulting loss is reported within non-interest income in the
consolidated statement of income.
16
Significant judgment is involved in determining when a decline in fair value is
other-than-temporary. The factors considered by Management include, but are not
limited to:
o The Company's intent and ability to retain the investment for a
period of time sufficient to allow for the anticipated recovery in
market value, which may be until maturity;
o Percentage and length of time by which an issue is below book value;
o Financial condition and near-term prospects of the issuer including
their ability to meet contractual obligations in a timely manner;
o Credit ratings of the security;
o Whether the decline in fair value appears to be issuer specific or,
alternatively, a reflection of general market or industry
conditions;
o Whether the decline is due to interest rates and spreads or credit
risk; and
o The value of underlying collateral.
Adverse changes in Management's assessment of the factors used to determine that
a security was not OTTI could lead to additional impairment charges. Conditions
affecting a security that the Company determined to be temporary could become
other than temporary and warrant an impairment charge. Additionally, a security
that had no apparent risk could be affected by a sudden or acute market
condition and necessitate an impairment charge. During 2008, the Company
recorded OTTI losses totaling $9,422,650 related to the Company's investments in
Freddie Mac and Fannie Mae preferred stock/auction rate securities holding such
stock, and two pooled trust preferred securities.
FINANCIAL CONDITION
Total assets as of December 31, 2008 were $532,257,607, an increase of
$24,603,978, or 4.9% from year-end 2007 total assets of $507,653,629.
The net loan and lease ("loan") portfolio as of December 31, 2008 totaled
$366,392,079 and increased by 11.9% or $38,916,708, from the December 31, 2007
balance of $327,475,371. The volume of loan growth during 2008 was realized
primarily in construction mortgages and commercial loans and leases.
Construction mortgages totaled $38,153,503 as of December 31, 2008 which is an
increase of $3,344,519 or 9.6% over the year-end 2007 balance. The commercial
mortgage portfolio totaled $67,454,925 as of December 31, 2008, increasing over
the year-end 2007 balance of $55,752,240. Consistent with Management's strategy
to migrate to a more profitable composition of earning assets, and through the
acquisition of commercial lending expertise, expanded markets and the addition
of the leasing subsidiary, commercial loan and lease growth was strong during
2008. Commercial loans totaled $46,249,689 as of December 31, 2008 which was an
increase of $12,608,010 or 37.5% from the December 31, 2007 balance of
$33,641,679. Growth in commercial loans has been in both lines of credit and in
term financing and continues to be a result of the sales development and
commercial calling initiatives for traditional and contiguous markets. As a
complement to the Bank's commercial lending product line, First Litchfield
Leasing Corporation began offering equipment financing leases to middle market
companies during 2007. In its second year of operation the subsidiary funded
over $16 million of loans and leases. Leases were in amounts ranging from $7,000
to $2,600,000. Lease receivables were $19,785,870 at December 31, 2008.
Management attributes the second year success of the subsidiary to Bank cross
sales and more importantly to the depth in experience and knowledge of the
subsidiary's management team. As of December 31, 2008, the installment loan
portfolio totaled $5,113,400, a decrease of 21.6% from the year-end 2007 balance
of $6,519,812. The decline in this portfolio is related to the amortization of a
small pool of consumer auto loans purchased by the Company during 2006.
The securities portfolio totaled $113,502,751 as of December 31, 2008, a
decrease of 12.0% from the December 31, 2007 balance of $129,013,733. The
decrease in the portfolio is primarily due to a continued restructuring of the
balance sheet towards a more profitable mix of earning assets which is focused
on loans and leases rather than investments. In addition, during the year ended
December 31, 2008, the Company recorded a loss of $9,422,650 related to the
other-than-temporary impairment of the Company's investments in Freddie Mac and
Fannie Mae preferred stock/auction rate securities holding such stock, and two
pooled trust preferred securities.
Cash and cash equivalents totaled $9,238,783, as of December 31, 2008, which was
a decrease of $12,258,411, or 57.0% compared to the balance of $21,497,194 as of
December 31, 2007. Much of the decrease is due to a lower level of funds
temporarily invested in interest bearing correspondent bank balances resulting
from temporary balance sheet liquidity at year-end 2007.
Net premises and equipment totaled $7,370,252 as of December 31, 2008,
decreasing by $388,509 from the year-end 2007 balance of $7,758,761. Decreases
in premises and equipment during 2008 were primarily related to the disposals of
equipment as well as depreciation expense. During 2008, depreciation and
amortization of bank premises and equipment totaled $734,020 and net purchases
totaled $347,699.
Deferred tax assets totaled $5,082,957 as of December 31, 2008, which is an
increase of $3,755,422, or 282.9% from the December 31, 2007 balance of
$1,327,535. Most of the increase was associated with the increase in the
allowance for loan and lease losses, and the aforementioned OTTI write downs of
the Bank's investments in Freddie Mac and Fannie Mae preferred stock/auction
rate securities holding such stock and two pooled trust preferred securities.
17
Total liabilities were $499,790,343 as of December 31, 2008, an increase of
$20,499,326 from the December 31, 2007 balance of $479,291,017.
Deposits as of December 31, 2008 were $343,326,624, increasing $7,708,960, or
2.3%, from the December 31, 2007 balance of $335,617,664. Non-interest bearing
demand deposits totaled $69,548,261 as of December 31, 2008, which was a 1.4%
decrease from the year-end 2007 balance. Savings deposits totaled $58,582,375,
which was an increase of $2,237,497, or 4.0% from the December 31, 2007 balance.
Growth in savings deposits was due to increases in traditional savings products
including a business savings account. Additionally contributing to the growth in
savings deposits was the popularity of the Bank's health savings accounts (HSA).
Money market deposits totaled $93,085,126, which was an increase of $14,346,420,
or 18.2% from the December 31, 2007 balance of $78,738,706. This increase is
primarily due to continued growth in the competitively priced "Synergy"
relationship money market product introduced during 2006. Higher balances held
for the Bank's trust customers also contributed to this increase. Time
certificates of deposit totaled $122,110,861 as of December 31, 2008, which was
a decrease of 6.1%, or $7,858,953 from year-end 2007. Much of this decrease was
due to lower levels of brokered certificates of deposit through financial
institution counterparties. There were no brokered deposits at year end 2008,
compare to brokered deposits totaling $3,000,000 at year-end 2007. The remaining
cause of the decrease in time certificates of deposit is due to the consumer's
preference for liquidity in their investments.
As of December 31, 2008, Federal Home Loan Bank (FHLBB) advances totaled
$81,608,000 as compared to $91,500,000 as of December 31, 2007. At December 31,
2008, borrowings under repurchase agreements totaled $44,672,571, an increase of
$8,979,798 from the year-end 2007 balance of $35,692,773. As of December 31,
2008 and 2007, included in repurchase agreements was $18,222,571 and
$14,142,773, respectively, of balances in the overnight investment product
offered to the Bank's commercial and municipal cash management customers. At
December 31, 2008, total borrowings under repurchase agreements with financial
institutions and FHLBB advances totaled $108,058,000 compared to the balance of
$113,050,000 at December 31, 2007. As of December 31, 2008 and 2007, obligations
under subordinated debt totaled $10,104,000. The subordinated debt represents
the Company's liability for junior subordinated notes with regard to First
Litchfield Statutory Trust I and II, which were issued in 2003 and 2006,
respectively. At year-end 2008 and 2007, the ratio of borrowed funds to total
assets remained at similar levels of 26.0% and 27.6%, respectively.
Collateralized borrowings totaled $1,375,550 and $1,699,336 as of December 31,
2008 and 2007, respectively. The borrowings are related to participation
agreements for the sale of loans that include provisions for the Bank to
repurchase the loans at its future discretion, and therefore disqualifying the
classification of these loans as sold.
RESULTS OF OPERATIONS - 2008 COMPARED TO 2007
Net interest income is the single largest source of the Company's income. Net
interest income is determined by several factors and is defined as the
difference between interest and dividend income from earning assets, primarily
loans, leases and investment securities, and interest expense due on deposits
and borrowed money.
For the year ended December 31, 2008 the Company reported a net loss available
to common shareholders of $4,516,773 as compared to earnings of $1,947,342 for
the same period in 2007. Basic and diluted loss per common share for the year
ended December 31, 2008 was $1.92, compared to basic and diluted income per
common share of $.82 for the year ended December 31, 2007. The net loss in 2008
is due to the OTTI write-down on Freddie Mac and Fannie Mae preferred
stock/auction rate securities holding such stock, and two trust preferred debt
securities, recorded during the year. The net after tax effect of these charges
reduced 2008 earnings by $6,218,949. Additionally the 2008 provision for loan
and lease losses totaled $1,836,299 and contributed to the loss.
The Company's return on average shareholders' equity totaled (17)% for 2008
versus 7% for 2007.
Net Interest Income
Net interest income for the year of 2008 totaled $14,939,585, an increase of
13.1% or $1,726,526, from 2007. See "Rate/Volume Analysis" below for a
description of the various factors that impacted net interest income. Average
earning assets, which represent the Company's balance in loans, leases,
investment securities and Federal funds sold, totaled $497 million for 2008,
which was a 7.3% increase over the 2007 average of $463 million. Additionally,
the change in the composition of earning assets was significant. Average loans
and leases increased from $311,594,000 and 67% of average earning assets in 2007
to $346,113,000 and 70% of the average earning assets in 2008. The loan and
lease growth was realized in the commercial lending, leasing and mortgage
portfolios and was funded primarily by growth in savings and money market
deposits as well as increases in borrowed money.
The following table presents the Company's average balance sheets (computed on a
daily basis), net interest income, and interest rates for the years ended
December 31, 2008 and 2007. Average loans outstanding include nonaccruing loans.
Interest income is presented on a tax-equivalent basis, which reflects a federal
tax rate of 34% for all periods presented.
2008 2007
------------ ------------
Interest and dividend income $ 28,188,882 $ 28,098,261
Tax-equivalent adjustments 618,353 611,559
Interest expense (13,249,297) (14,885,202)
------------ ------------
Net interest income $ 15,557,938 $ 13,824,618
============ ============
18
As shown below, the 2008 net interest margin increased 14 basis points from the
2007 level of 2.99% to 3.13%. The net interest spread also increased from the
2007 level of 2.43% to 2.70% primarily due to less expensive funding costs.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
2008 2007
---------------------------------------- ----------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Assets
Interest Earning Assets:
Loans and leases $ 346,113,000 $21,593,992 6.24% $ 311,594,000 $21,057,941 6.76%
Investment securities 141,356,000 6,992,756 4.95% 142,460,000 7,250,336 5.09%
Other interest earning assets 9,187,000 220,487 2.40% 9,032,000 401,543 4.45%
------------- ----------- ------------- -----------
Total interest earning assets 496,656,000 28,807,235 5.80% 463,086,000 28,709,820 6.20%
------------- ----------- ----- ------------- ----------- -----
Allowance for loan and
lease losses (2,214,000) (2,130,000)
Cash and due from banks 10,899,000 12,268,000
Premises and equipment 7,533,000 7,679,000
Net unrealized losses on
securities (3,629,000) (2,815,000)
Other assets 17,832,000 17,097,000
------------- -------------
Total Average Assets $ 527,077,000 $ 495,185,000
============= =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 58,788,000 $ 609,306 1.04% $ 55,026,000 752,024 1.37%
Money Market deposits 83,116,000 1,563,305 1.88% 75,832,000 2,241,181 2.96%
Time deposits 132,813,000 4,907,151 3.69% 136,764,000 6,280,686 4.59%
Borrowed funds 152,108,000 6,169,535 4.06% 127,716,000 5,611,311 4.39%
------------- ----------- ------------- -----------
Total interest bearing liabilities 426,825,000 13,249,297 3.10% 395,338,000 14,885,202 3.77%
----------- ----- ----------- -----
Demand deposits 68,864,000 68,278,000
Other liabilities 5,128,000 4,705,000
Shareholders' Equity 26,260,000 26,864,000
------------- -------------
Total liabilities and equity $ 527,077,000 $ 495,185,000
============= =============
Net interest income $15,557,938 $13,824,618
=========== ===========
Net interest spread 2.70% 2.43%
===== =====
Net interest margin 3.13% 2.99%
===== =====
19
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the year ended December 31, 2008 when compared to the year ended
December 31, 2007 in net interest income arising from changes in interest rates
and from changes in asset and liability volume. The change in interest
attributable to both rate and volume has been allocated to the changes in the
rate and the volume on a pro rata basis.
2008 Compared to 2007
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans and leases $ 2,227,018 $(1,690,967) $ 536,051
Investment securities (56,528) (201,052) (257,580)
Other interest earning assets 6,777 (187,833) (181,056)
----------- ----------- -----------
Total interest earning assets 2,177,267 (2,079,852) 97,415
----------- ----------- -----------
Interest paid on:
Deposits 239,956 (2,434,085) (2,194,129)
Borrowed money 1,012,966 (454,742) 558,224
----------- ----------- -----------
Total interest bearing liabilities 1,252,922 (2,888,827) (1,635,905)
----------- ----------- -----------
Increase (decrease) in net interest income $ 924,345 $ 808,975 $ 1,733,320
=========== =========== ===========
Tax equivalent net interest income for 2008 increased $1,733,318 or 12.5% over
2007. The increase in net interest income was due to increased margin resulting
mainly from reduced funding costs in 2008. The 2008 net interest margin (net
interest income divided by average earning assets) increased from the previous
year's level of 2.99% by 14 basis points to 3.13%. Interest income on average
earning assets for 2008 totaled $28,807,235, which was an increase of .3%, or
$97,415 from 2007 interest income on average earning assets of $28,709,820.
Interest expense totaled $13,249,297 for 2008, which was a decrease of
$1,635,905 or 11.0% from 2007.
As shown in the Rate/Volume Analysis above, the improvement in the net interest
margin and increase in net interest income was reflective of the ability to
decrease funding costs at a quicker pace than the corresponding decrease in
yield on earning assets. The 2008 yield on average earning assets was 5.8% which
was a decrease of 40 basis points from the 2007 yield of 6.2%. The related
interest cost from average interest bearing liabilities was 3.1% which was a
decrease of 67 basis points from the 2008 cost of 3.77%. Management's ability to
decrease rates paid on money market and time certificates of deposit was the
critical reason for the improvement in margin. The decrease in costs is
attributed to the decreases in short term rates in the interest rate
environment.
Additionally, mitigating the overall decrease in yield on earning assets was the
additional yield and income resulting from the changes in the earning asset mix.
As shown in the Rate/Volume Analysis above, the increase in net interest income
due to volume totaled $924,345. This increase is due to interest income on loans
which increased by $2,227,018 reflecting increased volume in the loan portfolio
which, on average, was $34.5 million higher than 2007. The related costs for
funding the higher level of earning assets totaled $1,252,922, resulting in a
$924,345 net increase from volume considerations. Funding through borrowed money
averaged $152,108,000 which was an increase of $24,392,000, or 19.1% from the
2007 average.
Noninterest (Loss) Income
Non-interest loss for 2008 totaled $5,362,105, which is a difference of
$8,793,581, or 256.3% from 2007 non-interest income of $3,431,476. The decrease
in noninterest income is the direct result of the $9,422,650 third and fourth
quarter OTTI write downs of the Bank's investments in Freddie Mac and Fannie Mae
preferred stock/auction rate securities holding such stock and two pooled trust
preferred securities. There were no similar balance sheet transactions during
2007. Also during 2008, available for sale securities were sold for the purpose
of enhancing credit quality, shortening the duration of the portfolio and to
deleverage the balance sheet. These sales resulted in net gains totaling
$537,790. Sales of available for sale securities transacted in 2007 for yield
and price volatility maintenance purposes resulted in gains totaling $19,632.
Other areas of non-interest income contributed to the decrease from 2008
results. Fees from trust services for 2008 totaled $1,300,162, a decrease of
$72,837, or 5.3% from the previous year's fees of $1,372,999. This decrease is
the result of the weakened economic and market conditions in spite of new
business growth experienced in the Bank's wealth management business.
Additionally other non-interest income was slightly below 2007 results due to
lower fees from retail investment income. Offsetting these declines were fees
from banking service charges which were up $180,761 or 13.3% from 2007.
Noninterest Expenses
Noninterest expenses totaled $15,340,149 in 2008, an increase of 7.5%, or
$1,072,658 from 2007 noninterest expenses of $14,267,491. The increase in
noninterest expense is due to higher costs in personnel, occupancy, equipment,
and other noninterest expenses. Increased salary and benefits expenses were due
to additional compliance personnel and an increased emphasis on commercial and
small business development. Occupancy cost increases are due to a larger branch
network and its related maintenance costs. The increase in other noninterest
expenses is a result of higher 2008 costs for exam and audit fees as they relate
to regulatory reporting compliance and internal audit initiatives. Also
contributing to the increase were costs for placement fees for key personnel
during the first quarter of 2008.
20
Salary and benefits costs totaled $8,401,740, increasing $471,580, or 5.9% from
2007 costs of $7,930,160. This increase reflects the staffing for the
compliance, and commercial and small business lending. The increase in these
costs, however was mitigated by cost containment strategies for staffing and
group insurance.
Computer services costs totaled $1,028,106 for 2008 which was an increase of
$167,506, or 19.5% from 2007 costs of $860,600. This increase is primarily due
to vendor credits from the Bank's core processor which were used during 2007.
Net occupancy and equipment costs totaled $1,847,298, which was an increase of
$62,649, or 3.5% above 2007 costs. Depreciation, building maintenance, property
taxes and utilities expenses caused increases in these expenses. Advertising
fees totaled $589,733 which was an increase of $120,348 over 2007 costs. This
increase is due primarily to the Bank's image campaign which was launched during
the fourth quarter of 2007 as well as product and publicity promotions.
Commissions, services and fees expenses totaled $396,050, decreasing $109,362,
from 2007. The majority of this expense for 2008 was advice and consulting
relating to corporate initiatives, investment and interest rate risk, lending,
trust, retail and personnel. Other noninterest expenses totaled $2,228,737 and
increased 16.3% over the 2007 expenses. This expense includes costs for
telephone, software, travel, contributions, exam and audit, regulatory
assessments and insurance.
Non-accrual, Past Due, Restructured Loans and Leases and Other Real Estate Owned
The Bank's non-accrual loans and leases ("loans"), other real estate owned
("OREO") and loans and leases past due in excess of ninety days and accruing
interest at December 31, 2004 through 2008 are presented below.
December 31,
2008 2007 2006 2005 2004
---------- ---------- ---------- ---------- ----------
Nonaccrual loans and leases $5,639,735 $2,959,074 $1,504,551 $ 273,330 $1,634,999
Other real estate owned -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $5,639,735 $2,959,074 $1,504,551 $ 273,330 $1,634,999
========== ========== ========== ========== ==========
Loans and leases past due in excess of
90 days and accruing interest $ 19,603 $ 3,111 $ 343 $ 4,884 $ --
========== ========== ========== ========== ==========
The accrual of interest income is generally discontinued when a loan or lease
becomes 90 days past due as to principal or interest, or when, in the judgment
of management, collectibility of the loan, lease or loan interest become
uncertain. When accrual of interest is discontinued, any unpaid interest
previously accrued is reversed from income. Subsequent recognition of income
occurs only to the extent payments are received subject to management's
assessment of the collectibility of the remaining principal and interest. The
accrual of interest on loans and leases past due 90 days or more, including
impaired loans and leases, may be continued when the value of the loan's or
lease's collateral is believed to be sufficient to discharge all principal and
accrued interest income due on the loan or lease, and the loan or lease is in
the process of collection. A non-accrual loan or lease is restored to accrual
status when it is no longer delinquent and collectibility of interest and
principal is no longer in doubt. A loan or lease is classified as a restructured
loan or lease when certain concessions have been made to the original
contractual terms, such as reduction of interest rates or deferral of interest
or principal payments, due to the borrower's financial condition. OREO is
comprised of properties acquired through foreclosure proceedings and acceptance
of a deed in lieu of foreclosure. These properties are carried at the lower of
cost or fair value less estimated costs of disposal. At the time these
properties are obtained, they are recorded at fair value with any difference
between carrying value and fair value reflected as a direct charge against the
allowance for loan and lease losses which establishes a new cost basis. Any
subsequent declines in value are charged to income with a corresponding
adjustment to the allowance for foreclosed real estate. Revenue and expense from
the operation of foreclosed real estate and changes in the valuation allowance
are included in operations. Costs relating to the development and improvement of
the property are capitalized, subject to the limit of fair value. Upon
disposition, gains and losses, to the extent they exceed the corresponding
valuation allowance, are reflected in the statement of income.
Restructured loans and leases on non-accrual status are included in the table
above. As of December 31, 2008 and 2007, there were no restructured loans or
leases considered performing.
Had the non-accrual loans and leases performed in accordance with their original
terms, gross interest income for the years ended December 31, 2008 and 2007
would have increased by approximately $163,000 and $88,000, respectively.
The Bank considers all non-accrual loans and leases, other loans and leases past
due 90 days or more based on contractual terms, and restructured loans and
leases to be impaired. A loan or lease is considered impaired when it is
probable that the Bank will be unable to collect amounts due, both principal and
interest, according to the contractual terms of the loan or lease agreement.
When a loan or lease is impaired, impairment is measured using (1) the present
value of expected future cash flows of the impaired loan or lease discounted at
the loan's or lease's original effective interest rate; (2) the observable
market price of the impaired loan or lease; or (3) the fair value of the
collateral of a collateral-dependent loan or lease. When a loan or lease has
been deemed to have impairment, a valuation allowance is established for the
amount of impairment.
21
The following table summarizes the Bank's OREO, past due and non-accrual loans
and leases, and non-performing assets as of December 31, 2008, 2007, 2006, 2005
and 2004.
December 31,
2008 2007 2006 2005 2004
----------- ----------- ----------- ---------- -----------
Non-accrual loans and leases $ 5,639,735 $ 2,959,074 $ 1,504,551 $ 273,330 $ 1,634,999
Other real estate owned -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Total non-performing assets $ 5,639,735 $ 2,959,074 $ 1,504,551 $ 273,330 $ 1,634,999
=========== =========== =========== ========== ===========
Loans and leases past due in excess of ninety days
and accruing interest $ 19,603 $ 3,111 $ 343 $ 4,884 $ --
=========== =========== =========== ========== ===========
Ratio of non-performing assets to total loans,
leases and OREO 1.52% 0.90% 0.51% 0.11% 0.75%
Ratio of non-performing assets to total loans,
leases past due in excess of ninety days accruing
interest to total loans, leases and OREO 1.53% 0.90% 0.51% 0.11% 0.75%
Ratio of allowance for loan and lease losses to total
loans and leases 1.00% 0.65% 0.71% 0.73% 0.64%
Ratio of allowance for loan and lease losses to
non-performing assets and loans and leases in excess of
ninety days past due and accruing interest 65.36% 72.64% 139.95% 632.47% 85.01%
Ratio of non-performing assets, loans and leases
in excess of ninety days past due and accruing interest
to total shareholders' equity 17.46% 10.46% 5.74% 1.07% 6.66%
Total non-performing assets increased by $2,680,661, or 90.59%, to $5,639,735 at
December 31, 2008, from $2,959,074 at December 31, 2007. The increase in
non-performing assets from year-end 2007 is due mostly to the addition of a
small number of mid-size mortgages and commercial loans and leases during 2008.
Additionally, as of December 31, 2008 there was approximately $170,000 in
purchased sub-prime consumer loans included in nonperforming loans which was a
decrease of $97,000 from December 31, 2007. As of December 31, 2008 and 2007,
loans and leases past due in excess of ninety days and accruing interest totaled
$19,603 and $3,111, respectively.
Total non-performing assets represented 1.52% of total loans, leases and other
real estate owned at year-end December 31, 2008 compared to .90% at year-end
2007. The allowance for loan and lease losses as of December 31, 2008 was 1.00%
of total loans and leases. As compared to the level from 2007 when the allowance
was approximately .65% of total loans and leases. The allowance for loan and
lease losses was equivalent to 65.36% of non-accrual loans and leases at
December 31, 2008, as compared to 72.64% at December 31, 2007. The decrease in
the coverage ratio is a result of increased level of non-performing assets at
year end 2008.
Potential Problem Loans and Leases
As of December 31, 2008, there were eight loans totaling $3.2 million which are
not disclosed above which cause Management to have concern as to the ability of
the borrowers to comply with the present loan repayment terms. The Bank's
carrying value of these loans totaled $3.2 million at December 31, 2008. These
loans are still accruing interest but are classified as impaired. Although these
loans are currently performing, Management views them as having potential and
well-defined weaknesses that could jeopardize the liquidation of the debt.
Allowance for Loan and Lease Losses
The following table summarizes the activity in the allowance for loan and lease
losses for the years ended December 31, 2004 through 2008. The allowance is
maintained at a level consistent with the identified loss potential and the
perceived risk in the portfolio.
22
(Dollar Amounts in Thousands)
December 31,
------------------------------------------------------------
2008 2007 2006 2005 2004
------- ------- ------- ------- -------
Balance, at beginning of period $ 2,152 $ 2,106 $ 1,760 $ 1,390 $ 1,149
Loans and Leases charged-off:
Commercial and financial 90 16 -- 37 80
Real estate -- -- -- -- --
Installment loans to individuals 287 160 96 60 104
------- ------- ------- ------- -------
377 176 96 97 184
------- ------- ------- ------- -------
Recoveries on loans and leases charged-off:
Commercial and financial -- -- 1 81 --
Real estate -- -- -- -- --
Installment loans to individuals 88 18 21 44 65
------- ------- ------- ------- -------
88 18 22 125 65
------- ------- ------- ------- -------
Net loan charge-offs/(recoveries) 289 158 74 (28) 119
------- ------- ------- ------- -------
Provisions charged to operations 1,836 204 420 342 360
------- ------- ------- ------- -------
Balance, at the end of period $ 3,699 $ 2,152 $ 2,106 $ 1,760 $ 1,390
======= ======= ======= ======= =======
Ratio of net charge-offs/(recoveries) during the period
to average loans and leases outstanding during the period 0.08% 0.05% 0.03% -0.01% 0.06%
======= ======= ======= ======= =======
Ratio of allowance for loan and lease losses
to total loans and leases 1.00% 0.65% 0.71% 0.73% 0.64%
======= ======= ======= ======= =======
During 2008, net charge-offs totaled $289,000, which is an increase of $131,000
from 2007 net chargeoffs of $158,000. The increase in net charge-offs was due to
a higher level of net charge-offs in the installment loan portfolio. During 2008
and 2007 the Bank experienced higher levels of charge-offs, which were primarily
related to a pool of subprime consumer auto loans the Bank purchased during
2006. Net charge-offs totaled $199,000 from installment loans in 2008 increasing
$57,000 from 2007. The increased level of net charge-offs is related to losses
on loans whereby the collateral asset value was considerably less than the loan
amount.
The following table reflects the allowance for loan and lease losses as of
December 31, 2008, 2007, 2006, 2005 and 2004.
Analysis of Allowance for Loan and Lease Losses
(Amounts in thousands)
December 31,
Loans and
Leases by Type 2008 2007 2006
- -------------- ----------------------- ------------------------ -----------------------
Allocation Percentage Allocation Percentage Allocation Percentage
of of Loans of of Loans of of Loans
Allowance in each Allowance in each Allowance in each
for Loan Category for Loan Category for Loan Category
and Lease to Total and Lease to Total and Lease to Total
Losses Loans Losses Loans Losses Loans
----------------------- ------------------------ -----------------------
Commercial $ 981 12.52% $ 317 10.23% $ 204 9.13%
Real Estate
Construction 570 10.32% 231 10.58% 480 10.36%
Residential 1,068 52.13% 863 57.61% 769 59.97%
Commercial 678 18.26% 465 16.94% 401 18.05%
Installment 210 1.38% 180 1.98% 181 2.43%
Other 18 0.03% 16 0.03% 17 0.06%
Commercial
Leases 174 5.36% 80 2.63% -- --
Unallocated -- -- -- -- 54 --
---------------------------------------------------------------------------
Total $3,699 100% $2,152 100% $2,106 100%
===========================================================================
Loans and
Leases by Type 2005 2004
- -------------- ----------------------- -----------------------
Allocation Percentage Allocation Percentage
of of Loans of of Loans
Allowance Each Allowance Each
for Loan Category for Loan Category
and Lease to Total and Lease to Total
Losses Loans Losses Loans
----------------------- -----------------------
Commercial $ 357 8.73% $ 261 8.21%
Real Estate
Construction 224 11.79% 82 5.31%
Residential 411 60.26% 550 68.13%
Commercial 518 17.40% 379 15.42%
Installment 54 1.79% 58 2.89%
Other 38 0.03% 39 0.04%
Commercial
Leases -- -- -- --
Unallocated 158 -- 21 --
-----------------------------------------------
Total $1,760 100% $1,390 100%
===============================================
The unallocated portion of the allowance reflects Management's estimate of
probable but unconfirmed losses inherent in the portfolio. Such estimates are
influenced by uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, difficulty in identifying triggering events that correlate perfectly
to subsequent loss rates, and risk factors that have not yet manifested
themselves in loss allocation factors.
23
LIQUIDITY
Management's objective is to ensure continuous ability to meet cash needs as
they arise. Such needs may occur from time to time as a result of fluctuations
in loan and lease demand and the level of total deposits. Accordingly, the Bank
has a liquidity policy that provides flexibility to meet cash needs. The
liquidity objective is achieved through the maintenance of readily marketable
investment securities as well as a balanced flow of asset maturities and prudent
pricing on loan, lease and deposit products. Management believes that the
liquidity is adequate to meet the Company's future needs.
The Bank is a member of the Federal Home Loan Bank System, ("FHLB") which
provides credit to its member banks. This enhances the liquidity position of the
Bank by providing a source of available overnight as well as short-term
borrowings. Additionally, borrowings through repurchase agreements, federal
funds and the sale of mortgage loans in the secondary market are available to
fund short-term cash needs. The Company is aware of recent news and FHLB member
bank press releases regarding the financial strength of the FHLB system. The
Company is actively monitoring its ability to borrow from the FHLB Bank of
Boston and has determined additional sources of liquidity as part of the
aforementioned liquidity policy.
SHORT-TERM BORROWINGS
The following information relates to the Bank's short-term borrowings at the
Federal Home Loan Bank for the years ended December 31:
2008 2007
----------- -----------
Balance at December 31, $ 1,608,000 $ --
Maximum Month-End Borrowings 17,300,000 17,307,000
Average Balance 4,156,000 3,090,000
Average Rate at Year-End 0.46% --
Average Rate during the Period 1.73% 3.99%
The following information relates to the Bank's short-term repurchase agreements
with customers for the years ended December 31:
2008 2007
----------- -----------
Balance at December 31, $18,222,571 $14,142,773
Maximum Month-End Borrowings 23,151,139 15,342,920
Average Balance 13,499,884 10,259,208
Average Rate at Year-End 1.42% 3.34%
Average Rate during the Period 1.93% 3.47%
OFF-BALANCE SHEET ARRANGEMENTS
See Note O on page F-30 of the consolidated financial statements for the
disclosure of off-balance sheet arrangements.
CAPITAL
At December 31, 2008, total shareholders' equity was $32,413,389 compared to
$28,312,612 at December 31, 2007. From a regulatory perspective, with the
exception of the total risk-based capital ratio, the Bank's capital ratios place
the Bank in the well-capitalized categories under applicable regulations. As of
December 31, 2008, the Bank's total risk-based capital ratio was 9.41%. The
various capital ratios of the Company and the Bank are as follows as of December
31, 2008:
Minimum
Regulatory
Capital Level The Company The Bank
------------- ----------- --------
Tier 1 leverage capital ratio 4% 7.85% 6.10%
Tier 1 risk-based capital ratio 4% 10.74% 8.43%
Total risk-based capital ratio 8% 11.74% 9.43%
Included in the Company's capital used to determine these ratios at December 31,
2008 and December 31, 2007 is $9.8 million related to the Company's investment
in First Litchfield Statutory Trust I and First Litchfield Statutory Trust II,
which is recorded as subordinated debt in the Company's balance sheets at
December 31, 2008 and 2007, respectively. Trust preferred securities are
currently considered regulatory capital for purposes of determining the
Company's Tier I capital ratios. On March 1, 2005, the Board of Governors of the
Federal Reserve System, which is the Company's banking regulator, approved final
rules that allow for the continued inclusion of outstanding and prospective
issuances of trust preferred securities in regulatory capital subject to new,
more strict limitations. The Company has until March 31, 2009 to meet the new
limitations. Management does not believe these final rules will have a
significant impact on the Company. On December 12, 2008 the Company participated
in the CPP (also known as TARP capital), and issued $10,000,000 of cumulative
perpetual preferred stock with a common stock warrant attached to the U. S.
Treasury. The Company's purpose in participating in the TARP Capital Purchase
program was to insure that the Company and the Bank maintained its
well-capitalized status given the uncertain economic environment.
24
On December 12, 2008, under the TARP CPP, the Company sold 10,000 shares of
senior preferred stock to the Treasury, having a liquidation amount equal to
$1,000 per share, or $10,000,000. Although the Company is currently
well-capitalized under regulatory guidelines, the Board of Directors believed it
was advisable to take advantage of the TARP CPP to raise additional capital to
ensure that during these uncertain times, the Company is well-positioned to
support the Company's existing operations as well as anticipated future growth.
Additional information concerning the TARP CPP is included elsewhere in this
Form 10-K and in Note L to the Consolidated Financial Statements.
The Company expects that it (and the banking industry as a whole) may be
required by market forces and/or regulation to operate with higher capital
ratios than in the recent past. In addition, on the preferred stock issued in
the CPP capital preferred dividend increases from 5% to 9% in 2013, making it
much more expensive as a source of capital if not redeemed at or prior to that
time. Therefore, in addition to maintaining higher levels of capital, the
Company's capital structure may be subject to greater variation over the next
few years than has been true historically.
INCOME TAXES
The income tax benefit for 2008 totaled $3,112,459 in comparison to income tax
expense of $225,702 in 2007. The change in income tax expense between 2008 and
2007 is due to the pretax loss in 2008, as a result of the OTTI charges during
the year. The effective tax rates for 2008 and 2007 were (41) % and 10%,
respectively. Also, in both years, provisions for income taxes included the tax
benefit related to income associated with Litchfield Mortgage Service
Corporation ("LMSC"), which was formed by the Bank in 2000. The income from LMSC
is considered passive investment income pursuant to Connecticut law, under which
LMSC was formed and is operating, and is not subject to state taxes which
resulted in no state tax expense for all years.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes thereto presented
elsewhere herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative value of money over time due
to inflation. Unlike many industrial companies, most of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as the registrant is not an accelerated filer or large
accelerated filer.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Information
- ----------------------------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2008 and 2007 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2008 and 2007 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2008 and 2007 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2008 and 2007 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-38
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Litchfield Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of First Litchfield
Financial Corporation and Subsidiary (the "Company") as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Litchfield
Financial Corporation and Subsidiary as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
As described in Note A to the consolidated financial statements, during 2008 the
Company adopted EITF No. 06-4, "Accounting for Endorsement Split-Dollar Life
Insurance Arrangements."
We were not engaged to examine management's assertion about the effectiveness of
the Company's internal control over financial reporting as of December 31, 2008
included in the accompanying Management's Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
April 14, 2009
F-1
CONSOLIDATED BALANCE SHEETS
As of December 31, 2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 9,238,320 $ 10,876,445
Interest - bearing accounts due from banks 463 10,620,749
------------- -------------
CASH AND CASH EQUIVALENTS 9,238,783 21,497,194
------------- -------------
Securities:
Available for sale securities, at fair value 113,486,201 128,979,548
Held to maturity securities (fair value $16,553-2008 and $33,712-2007) 16,550 34,185
------------- -------------
TOTAL SECURITIES 113,502,751 129,013,733
------------- -------------
Federal Home Loan Bank stock, at cost 5,427,600 5,067,400
Federal Reserve Bank stock, at cost 225,850 225,850
Other restricted stock, at cost 100,000 95,000
Loans held for sale 1,013,216 --
Loan and lease receivables, net of allowance for loan and lease
losses of $3,698,820 -2008, $2,151,622 -2007
NET LOANS AND LEASES 366,392,079 327,475,371
Premises and equipment, net 7,370,252 7,758,761
Deferred income taxes 5,082,957 1,327,535
Accrued interest receivable 2,262,918 2,609,606
Cash surrender value of insurance 10,416,651 10,020,540
Due from broker for security sales 9,590,823 --
Other assets 1,633,727 2,562,639
------------- -------------
TOTAL ASSETS $ 532,257,607 $ 507,653,629
============= =============
LIABILITIES
Deposits:
Noninterest bearing $ 69,548,261 $ 70,564,267
Interest bearing 273,778,363 265,053,397
------------- -------------
TOTAL DEPOSITS 343,326,624 335,617,664
------------- -------------
Federal Home Loan Bank advances 81,608,000 91,500,000
Repurchase agreements with financial institutions 26,450,000 21,550,000
Repurchase agreements with customers 18,222,571 14,142,773
Junior subordinated debt issued by unconsolidated trust 10,104,000 10,104,000
Collateralized borrowings 1,375,550 1,699,336
Capital lease obligation 1,065,563 1,083,567
Due to broker for security purchases 12,994,945 --
Accrued expenses and other liabilities 4,643,090 3,593,677
------------- -------------
TOTAL LIABILITIES 499,790,343 479,291,017
------------- -------------
Minority interest 53,875 50,000
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized 2008 -
10,000 shares issued and outstanding
2007 - no shares issued and outstanding -- --
Common stock $.01 par value; 5,000,000 shares authorized
2008 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares
2007 - Issued - 2,501,229 shares, outstanding - 2,368,200 shares 25,038 25,012
Additional paid-in capital 37,892,831 27,858,841
(Accumulated deficit) retained earnings (3,325,920) 2,623,110
Less: Treasury stock at cost- 149,747 in 2008, 133,029 in 2007 (1,154,062) (926,964)
Accumulated other comprehensive loss, net of taxes (1,024,498) (1,267,387)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 32,413,389 28,312,612
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 532,257,607 $ 507,653,629
============= =============
See Notes to Consolidated Financial Statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2008 2007
------------ ------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases $ 21,579,957 $ 21,053,610
------------ ------------
Interest and dividends on securities:
Mortgage-backed securities 3,320,225 2,564,052
US Treasury and other securities 1,580,125 2,129,407
State and municipal securities 1,118,924 1,355,523
Trust Preferred and other securities 369,164 594,126
------------ ------------
Total interest on securities 6,388,438 6,643,108
Other interest income 220,487 401,543
------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 28,188,882 28,098,261
------------ ------------
INTEREST EXPENSE
Interest on deposits:
Savings 609,306 752,024
Money market 1,563,305 2,241,181
Time certificates of deposit in denominations
of $100,000 or more 1,918,298 2,618,965
Other time certificates of deposit 2,988,853 3,661,721
------------ ------------
TOTAL INTEREST ON DEPOSITS 7,079,762 9,273,891
Interest on Federal Home Loan Bank advances 3,970,574 3,270,982
Interest on repurchase agreements 1,430,176 1,395,488
Interest on subordinated debt 606,396 791,523
Interest on collateralized borrowings 105,393 95,395
Interest on capital lease obligation 56,996 57,923
------------ ------------
TOTAL INTEREST EXPENSE 13,249,297 14,885,202
------------ ------------
NET INTEREST INCOME 14,939,585 13,213,059
PROVISION FOR LOAN AND LEASE LOSSES 1,836,299 204,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 13,103,286 13,009,059
------------ ------------
NONINTEREST INCOME
Banking service charges and fees 1,543,519 1,362,758
Trust 1,300,162 1,372,999
(Losses) gains on available for sale securities (8,884,860) 19,632
Increase in cash surrender value of insurance 396,110 384,079
Other 282,964 292,008
------------ ------------
TOTAL NONINTEREST (LOSS) INCOME (5,362,105) 3,431,476
------------ ------------
NONINTEREST EXPENSE
Salaries 6,670,676 6,351,946
Employee benefits 1,731,064 1,578,214
Net occupancy 1,233,420 1,157,703
Equipment 613,878 626,946
Legal fees 307,004 246,815
Directors fees 198,400 208,403
Computer services 1,028,206 860,600
Supplies 193,217 202,381
Commissions, services and fees 396,050 505,412
Postage 149,864 143,070
Advertising 589,733 469,385
Other 2,228,637 1,916,616
------------ ------------
TOTAL NONINTEREST EXPENSE 15,340,149 14,267,491
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (7,598,968) 2,173,044
(BENEFIT) PROVISION FOR INCOME TAXES (3,112,459) 225,702
------------ ------------
NET (LOSS) INCOME BEFORE MINORITY INTEREST (4,486,509) 1,947,342
MINORITY INTEREST (3,875) --
------------ ------------
NET (LOSS) INCOME (4,490,384) 1,947,342
------------ ------------
DIVIDENDS ON PREFERRED SHARES 26,389 --
------------ ------------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS (4,516,773) 1,947,342
============ ============
INCOME (LOSS) PER COMMON SHARE
BASIC NET (LOSS) INCOME PER COMMON SHARE $ (1.92) $ 0.82
============ ============
DILUTED NET (LOSS) INCOME PER COMMON SHARE $ (1.92) $ 0.82
============ ============
DIVIDENDS PER COMMON SHARE $ 0.60 $ 0.60
============ ============
See Notes to Consolidated Financial Statements.
F-3
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained
Additional Earnings
Preferrred Common Paid-In (Accumulated
Stock Stock Capital Deficit)
----------- ----------- ----------- -----------
Balance, December 31, 2006 -- 23,724 25,840,623 3,953,216
Comprehensive income:
Net income -- -- -- 1,947,342
Other comprehensive income,
net of taxes
Net unrealized holding gain on
available for sale securities -- -- -- --
Net actuarial gain for pension
benefits -- -- -- --
Other comprehensive income
Total comprehensive income
Cash dividends declared: $0.60 per share -- -- -- (1,371,563)
5% stock dividend declared
November 29,2007-118,873 shares
including 6,334 treasury shares -- 1,189 1,900,779 (1,901,968)
Fractional shares paid in cash -- -- -- (3,917)
Purchase of treasury shares- 8,263 shares -- -- -- --
Stock options exercised - 9,922 shares -- 99 87,388 --
Tax benefit on stock options
exercised -- -- 30,051 --
----------- ----------- ----------- -----------
Balance, December 31, 2007 -- 25,012 27,858,841 2,623,110
Comprehensive loss:
Net loss -- -- -- (4,490,384)
Other comprehensive income, net of taxes:
Net unrealized holding gain on available
for sale securities -- -- -- --
Net actuarial loss for pension benefits -- -- -- --
Other comprehensive income
Total comprehensive loss
Cash dividends declared: $0.60 per share -- -- -- (1,416,888)
Preferred stock dividends -- -- -- (26,389)
Purchase of treasury shares - 16,718 shares -- -- -- --
Stock options exercised - 1,893 shares -- 19 20,463 --
Tax benefit on stock options exercised -- -- 2,025 --
Restricted stock grants and expense -- 7 8,405 --
Issuance of preferred stock and warrants -- -- 10,000,000 --
Accretion of preferred stock -- -- 3,097 (3,097)
Adoption of EITF 06-4 -- -- -- (12,272)
----------- ----------- ----------- -----------
Balance, December 31, 2008 $ -- 25,038 37,892,831 (3,325,920)
=========== =========== =========== ===========
Accumulated
Other Total
Treasury Comprehensive Shareholders'
Stock Loss Equity
----------- ----------- -------------
Balance, December 31, 2006 (794,756) (2,816,613) 26,206,194
Comprehensive income:
Net income -- 1,947,342
Other comprehensive income,
net of taxes
Net unrealized holding gain on
available for sale securities -- 1,286,413 1,286,413
Net actuarial gain for pension
benefits -- 262,813 262,813
-----------
Other comprehensive income 1,549,226
-----------
Total comprehensive income 3,496,568
-----------
Cash dividends declared: $0.60 per share -- -- (1,371,563)
5% stock dividend declared
November 29,2007-118,873 shares
including 6,334 treasury shares -- -- --
Fractional shares paid in cash -- -- (3,917)
Purchase of treasury shares- 8,263 shares (132,208) -- (132,208)
Stock options exercised - 9,922 shares -- -- 87,487
Tax benefit on stock options
exercised -- -- 30,051
----------- ----------- -----------
Balance, December 31, 2007 (926,964) (1,267,387) 28,312,612
-----------
Comprehensive loss:
Net loss -- (4,490,384)
Other comprehensive income, net of taxes:
Net unrealized holding gain on available
for sale securities -- 927,584 927,584
Net actuarial loss for pension benefits -- (684,695) (684,695)
-----------
Other comprehensive income 242,889
-----------
Total comprehensive loss (4,247,495)
-----------
Cash dividends declared: $0.60 per share -- -- (1,416,888)
Preferred stock dividends -- (26,389)
Purchase of treasury shares - 16,718 shares (227,098) -- (227,098)
Stock options exercised - 1,893 shares -- -- 20,482
Tax benefit on stock options exercised -- -- 2,025
Restricted stock grants and expense -- -- 8,412
Issuance of preferred stock and warrants -- -- 10,000,000
Accretion of preferred stock -- -- --
Adoption of EITF 06-4 -- -- (12,272)
----------- ----------- -----------
Balance, December 31, 2008 (1,154,062) (1,024,498) 32,413,389
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-4
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (4,490,384) $ 1,947,342
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Minority interest in earnings at subsidiary 3,875 --
Amortization and accretion of premiums and discounts on investment
securities, net 146,828 177,406
Provision for loan and lease losses 1,836,299 204,000
Depreciation and amortization 734,020 751,259
Deferred income taxes (3,868,274) 47,413
Loss on impairment write-down of available for sale securities 9,422,650 --
Gains on sales of available for sale securities (537,790) (19,632)
Loans originated for sale (4,225,152) (4,015,817)
Proceeds from sales of loans held for sale 3,232,832 5,093,056
Gains on sales of loans held for sale (20,896) (35,056)
Losses on sale of repossessed assets 32,024 --
Losses (gains) on disposals of bank premises and equipment 2,188 (17,677)
Stock based compensation 8,412 --
Decrease (increase) in accrued interest receivable 346,688 (10,880)
Decrease in other assets 863,573 182,315
Increase in cash surrender value of insurance (396,111) (384,079)
Increase in deferred loan origination costs (116,571) (70,494)
(Decrease) increase in accrued expenses and other liabilities (292,494) 38,125
------------ ------------
Net cash provided by operating activities 2,681,717 3,887,281
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from principal payments 45,521,948 10,224,784
Purchases (77,949,889) (5,928,540)
Proceeds from sales 43,699,152 16,295,820
Held to maturity securities:
Proceeds from maturities and principal payments 17,635 6,331
Purchase of restricted stock (5,000) (15,000)
Purchase of Federal Home Loan Bank stock (360,200) (634,500)
Redemption of Federal Home Loan Bank stock -- 10,500
Net increase in loans and leases (40,604,639) (33,779,870)
Proceeds from sales of repossessed assets 256,873 --
Purchases of premises and equipment (347,699) (1,074,027)
Proceeds from sale of premises and equipment -- 22,000
------------ ------------
Net cash used in investing activities (29,771,819) (14,872,502)
------------ ------------
F-5
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont.
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 15,567,912 20,761,499
Net decrease in certificates of deposit (7,858,952) (18,572,709)
Proceeds from Federal Home Loan Bank advances -- 112,000,000
Repayments on Federal Home Loan Bank advances (11,500,000) (86,500,000)
Net increase (decrease) in overnight Federal Home Loan Bank borrowings 1,608,000 (1,000,000)
Net increase (decrease) in repurchase agreements with financial institutions 4,900,000 (25,650,000)
Net increase in repurchase agreements with customers 4,079,798 1,936,750
Net (decrease) increase in collateralized borrowings (323,786) 1,699,336
Proceeds from issuance of preferred stock and warrants 10,000,000 --
Principal repayments on capital lease obligation (18,004) (17,077)
Purchase of treasury shares (227,098) (132,208)
Distribution in cash for fractional shares of common stock -- (3,917)
Proceeds from exercise of stock options 20,482 87,487
Tax benefit of stock options exercised 2,025 30,051
Dividend paid on common stock (1,418,686) (1,354,434)
------------- -------------
Net cash provided by financing activities 14,831,691 3,284,778
------------- -------------
Net decrease in cash and cash equivalents (12,258,411) (7,700,443)
CASH AND CASH EQUIVALENTS, at the beginning of year 21,497,194 29,197,637
------------- -------------
CASH AND CASH EQUIVALENTS, at end of year $ 9,238,783 $ 21,497,194
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 13,368,965 $ 15,155,901
============= =============
Income taxes $ 1,000 $ 750
============= =============
Noncash investing and financing activities:
Due to broker for securities purchased $ 12,994,945 $ --
============= =============
Due from broker for securities purchased $ 9,590,823 $ --
============= =============
Transfer of loans to repossessed assets $ 224,481 $ 71,018
============= =============
Accrued dividends declared $ 379,820 $ 355,229
============= =============
Increase in leases and other liabilities for
equipment payable related to financed leases $ 256,278 $ --
============= =============
Increase in liabilities and decrease in retained earnings for
adoption of EITF 06-4 $ 12,272 $ --
============= =============
Change in other assets and other liabilities
related to unfunded pension liability $ (1,037,417) $ 398,201
============= =============
See Notes to Consolidated Financial Statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the First
Litchfield Financial Corporation (the "Company") and The First National Bank of
Litchfield (the "Bank"), a nationally-chartered commercial bank, and the Bank's
wholly owned subsidiaries, Litchfield Mortgage Service Corporation and Lincoln
Corporation, and First Litchfield Leasing Corporation, an entity in which the
Bank has an eighty percent ownership. Deposits in the Bank are insured up to
specified limits by the Bank Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank provides a full
range of banking services to individuals and businesses located primarily in
Northwestern Connecticut. These products and services include demand, savings,
NOW, money market and time deposits, residential and commercial mortgages,
consumer installment and other loans and leases as well as trust services. The
Bank is subject to competition from other financial institutions. The Bank is
also subject to the regulations of certain federal agencies and undergoes
periodic regulatory examinations.
On January 7, 2000, the Company filed a Form 10-SB registration statement with
the Securities and Exchange Commission (the "SEC") to register the Company's
$.01 par value common stock under the Securities and Exchange Act of 1934 (the
"Exchange Act"). The Company files periodic financial reports with the SEC as
required by the Exchange Act. On June 26, 2003, the Company formed First
Litchfield Statutory Trust I (`Trust I') for the purpose of issuing trust
preferred securities and investing the proceeds in subordinated debentures
issued by the Company. On June 16, 2006, the Company formed First Litchfield
Statutory Trust II (`Trust II') for the purpose of issuing trust preferred
securities and investing the proceeds in subordinated debentures issued by the
Company. (See Note I).
The significant accounting policies followed by the Company and the methods of
applying those policies are summarized in the following paragraphs:
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and general practices within the banking
industry. All significant intercompany balances and transactions have been
eliminated. Trust I and Trust II are not included in the consolidated financial
statements as they do not meet the requirements for consolidation. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities, as of the date of the balance
sheet and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan and lease losses and the
evaluation of investment securities for other-than-temporary impairment.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of the Company's
activities are with customers located within Litchfield County, Connecticut.
Note C discusses the types of securities that the Company invests in. Note E
discusses the types of lending and lease financing that the Company engages in.
The Company does not have any significant loan and lease concentrations to any
one industry or customer. Note K discusses a concentration related to the cash
surrender value of the life insurance.
SEGMENT REPORTING: The Company has two business segments, community banking and
commercial leasing. During the periods presented these segments represented all
the revenues and income for the consolidated group and therefore, are the only
reported segments as defined by Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131).
DEBT AND MARKETABLE EQUITY SECURITIES: Management determines the appropriate
classification of securities at the date individual investment securities are
acquired, and the appropriateness of such classification is reassessed at each
balance sheet date.
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Trading securities, if any, are carried at fair value, with unrealized gains and
losses recognized in earnings. Securities not classified as held to maturity or
trading, including equity securities with readily determinable fair values, are
classified as "available for sale" and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive
income, net of taxes.
F-7
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other-than-temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (1)
the length of time and extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
The sale of a held maturity security within three months of its maturity date or
after collection of at least 85% of the principal outstanding at the time the
security was acquired is considered a maturity for purposes of classification
and disclosure.
OTHER-THAN-TEMPORARY IMPAIRMENT ("OTTI"): The Company's investment securities
portfolio is comprised of available-for-sale and held-to-maturity investments.
The available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains or losses, net of taxes, reported as accumulated other
comprehensive income or loss in shareholders' equity. The held-to-maturity
portfolio is carried at amortized cost. Management determines the classification
of a security at the time of its purchase.
The Company conducts a periodic review of our investment securities portfolio to
determine if the value of any security has declined below its cost or amortized
cost, and whether such decline is other-than-temporary. If such decline is
deemed other-than-temporary, the security is written down to a new cost basis
and the resulting loss is reported within non-interest income in the
consolidated statement of income.
Significant judgment is involved in determining when a decline in fair value is
other-than-temporary. The factors considered by Management include, but are not
limited to:
o The Company's intent and ability to retain the investment for a
period of time sufficient to allow for the anticipated recovery in
market value, which may be until maturity;
o Percentage and length of time by which an issue is below book value;
o Financial condition and near-term prospects of the issuer including
their ability to meet contractual obligations in a timely manner;
o Ratings of the security;
o Whether the decline in fair value appears to be issuer specific or,
alternatively, a reflection of general market or industry
conditions;
o Whether the decline is due to interest rates and spreads or credit
risk; and
o The value of underlying collateral.
Adverse changes in Management's assessment of the factors used to determine that
a security was not OTTI could lead to additional impairment charges. Conditions
affecting a security that the Company determined to be temporary could become
other than temporary and warrant an impairment charge. Additionally, a security
that had no apparent risk could be affected by a sudden or acute market
condition and necessitate an impairment charge.
INTEREST AND FEES ON LOANS AND LEASES: Interest on loans and leases is included
in income as earned based on contractual rates applied to principal amounts
outstanding. The accrual of interest income is generally discontinued when a
loan or lease becomes 90 days past due as to principal or interest, or when, in
the judgment of management, collectibility of the loan, lease, loan interest or
lease interest become uncertain. When accrual of interest is discontinued, any
unpaid interest previously accrued is reversed from income. Subsequent
recognition of income occurs only to the extent payment is received subject to
management's assessment of the collectibility of the remaining principal and
interest. The accrual of interest on loans and leases past due 90 days or more,
including impaired loans and leases, may be continued when the value of the
loan's or lease's collateral is believed to be sufficient to discharge all
principal and accrued interest income due on the loan or lease and the loan or
lease is in the process of collection. A non-accrual loan or lease is restored
to accrual status when it is no longer delinquent and collectibility of interest
and principal is no longer in doubt. Loan and lease origination fees and certain
direct loan and lease origination costs are deferred and the net amount is
amortized as an adjustment of the related loan's or lease's yield. The Bank
generally amortizes these amounts over the contractual life of the related loans
and leases, utilizing a method which approximates the interest method.
F-8
LOANS HELD FOR SALE: Loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors or current investor yield
requirements. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to noninterest income. Mortgage loans held for sale are
generally sold with the mortgage servicing rights retained by the Company. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold on the trade date.
TRANSFER OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the transferred assets and no condition both constrains the transferee
from taking advantage of that right and provides more than a trivial benefit for
the transferor, and (3) the transferor does not maintain effective control over
the transferred assets through either (a) an agreement that both entitles and
obligates the transferor to repurchase or redeem the assets before maturity or
(b) the ability to unilaterally cause the holder to return specific assets,
other than through a cleanup call. Transfers that are not accounted for as sales
are accounted for as secured borrowings.
LOANS AND LEASES RECEIVABLE: Loans and leases receivable, other than those held
for sale, are reported at their principal amount outstanding, net of unearned
discounts and unamortized nonrefundable fees and direct costs associated with
their origination or acquisition. Management has the ability and intent to hold
its loans and leases for the foreseeable future or until maturity or payoff.
Leases are for equipment to customers under leases that qualify as direct
financing leases for financial reporting. Under the direct financing method of
accounting, the minimum lease payments to be received under the lease contract,
together with the estimated residual value, are recorded as lease receivables
when the lease contract is signed and the leased property is delivered to the
customer. The excess of the minimum lease payments and residual values over the
cost of the equipment is recorded as unearned income. Unearned income is
recognized at an effective level yield method over the life of the lease
contract. Lease payments are recorded when due under the lease contract.
A loan or lease is classified as a restructured loan or lease when certain
concessions have been made to the original contractual terms, such as reductions
of interest rates or deferral of interest or principal payments, due to the
borrowers' financial condition.
A loan or lease is considered impaired when it is probable that the creditor
will be unable to collect amounts due, both principal and interest, according to
the contractual terms of the loan or lease agreement. When a loan or lease is
impaired, impairment is measured using (1) the present value of expected future
cash flows of the impaired loan or lease discounted at the loan's or lease's
original effective interest rate, (2) the observable market price of the
impaired loan or lease or (3) the fair value of the collateral if the loan or
lease is collateral-dependent. When a loan or lease has been deemed to have an
impairment, a valuation allowance is established for the amount of impairment.
The Bank considers all non-accrual loans and leases; other loans or leases past
due 90 days or more, based on contractual terms, and restructured loans or
leases to be impaired.
ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance for loan and lease losses is
established as losses are estimated to have occurred through a provision for
loan and lease losses charged to earnings. Loan and lease losses are charged
against the allowance when management believes the uncollectibility of a loan or
lease balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan and lease losses is evaluated on a regular basis by
management and is based upon management's periodic review of the collectibility
of the loans or leases in light of historical experience, the nature and volume
of the loan or lease portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans and leases that are classified as either
doubtful, substandard or special mention. For such loans and leases that are
also classified as impaired, an allowance is established when the discounted
cash flows (or observable market price or collateral value if the loan or lease
is collateral dependent) of the impaired loan or lease is lower than the
carrying value of that loan or lease. The general component covers
non-classified loans and leases and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is maintained to
cover uncertainties that could affect management's estimate of probable losses.
F-9
The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions.
The Bank's mortgage loans and leases are collateralized by real estate located
principally in Litchfield County, Connecticut. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan and lease portfolio
is susceptible to changes in local market conditions. In addition, medical
equipment secures a substantial portion of the Leasing Company's lease
portfolio. Accordingly, the ultimate collectibility of a substantial portion of
the lease portfolio is susceptible to changes in the medical equipment market.
Management believes that the allowance for loan and lease losses is adequate.
While management uses available information to recognize losses on loans and
leases, future additions to the allowance or write-downs may be necessary based
on changes in economic conditions, particularly in Connecticut. In addition, the
Office of the Comptroller of the Currency (the "OCC"), as an integral part of
its examination process, periodically reviews the Bank's allowance for loan and
lease losses. The OCC may require the Bank to recognize additions to the
allowance or write-downs based on their judgment about information available to
them at the time of their examination.
RATE LOCK COMMITMENTS: The Company enters into commitments to originate loans
and leases whereby the interest rate on the loan or lease is determined prior to
funding (rate lock commitments). Rate lock commitments on mortgage loans that
are intended to be sold are considered to be derivatives. Accordingly, such
commitments, along with any related fees received from potential borrowers, are
recorded at fair value in other assets or liabilities, with changes in fair
value recorded in the net gain or loss on sale of mortgage loans. Fair value is
based on fees currently charged to enter into similar agreements, and for
fixed-rate commitments also considers the difference between current levels of
interest rates and the committed rates.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company records derivative financial
instruments in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivatives be recognized as assets or liabilities in the balance sheet and
measured at fair value.
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost for
purchased assets, and for assets under capital lease, at the lower of fair value
or net present value of the minimum lease payments required over the term of the
lease, net of accumulated depreciation and amortization. Depreciation is charged
to operations using the straight-line method over the estimated useful lives of
the related assets, which range from three to forty years. Leasehold
improvements are capitalized and amortized over the shorter of the terms of the
related leases or the estimated economic lives of the improvements. Gains and
losses on dispositions are recognized upon realization. Maintenance and repairs
are expensed as incurred and improvements are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets, including premises and
equipment and certain identifiable intangible assets which are held and used by
the Company, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment is indicated by that review, the asset is written
down to its estimated fair value through a charge to noninterest expense.
FORECLOSED REAL ESTATE: Foreclosed real estate, if any, is comprised of
properties acquired through foreclosure proceedings or acceptance of a deed in
lieu of foreclosure. These properties are carried at the lower of cost or fair
value less estimated costs of disposal. At the time these properties are
obtained, they are recorded at fair value with any difference between the
carrying value and fair value reflected as a direct charge against the allowance
for loan and lease losses, which establishes a new cost basis. Any subsequent
declines in value are charged to income with a corresponding adjustment to the
allowance for foreclosed real estate. Revenue and expense from the operation of
foreclosed real estate and changes in the valuation allowance are included in
operations. Costs relating to the development and improvement of the property
are capitalized, subject to the limit of fair value. Upon disposition, gains and
losses, to the extent they exceed the corresponding valuation allowance, are
reflected in the statement of income.
COLLATERALIZED BORROWINGS: Collateralized borrowings represent the portion of
loans transferred to other institutions under loan participation agreements
which were not recognized as sales due to recourse provisions and/or
restrictions on the participant's right to transfer their portion of the loan.
REPURCHASE AGREEMENTS WITH CUSTOMERS: Repurchase agreements with customers are
classified as secured borrowings, and generally mature within one to three days
of the transaction date. Repurchase agreements are reflected at the amount of
cash received in connection with the transaction. The Bank may be required to
provide additional collateral based on the fair value of the underlying
securities.
F-10
TRUST ASSETS: Assets of the Trust Department, other than trust cash on deposit
at the Bank, are not included in these consolidated financial statements because
they are not assets of the Company. Trust fees are recognized on the accrual
basis of accounting.
INCOME TAXES: The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
tax assets may be reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
When tax returns are filed, it is highly certain that some positions taken will
be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. The evaluation of a tax position taken is
considered by itself and not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit more than fifty percent likely of being
realized upon settlement with the applicable taxing authority.
Interest and penalties associated with unrecognized tax benefits, if any, would
be classified as additional provision for income taxes in the statement of
income.
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan that
covers substantially all employees. Pension costs are accrued based on the
projected unit credit method and the Bank's policy is to fund annual
contributions in amounts necessary to meet the minimum funding standards
established by the Employee Retirement Income Security Act (ERISA) of 1974.
In September 2006, the Financial Accounting Standards Board (the "FASB") issued
FASB Statement No. 158 ("SFAS No. 158"), "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)," which requires companies to recognize a net
liability or asset to report the funded status of their defined benefit pension
and other postretirement benefit plans on their balance sheets. The Company
adopted
SFAS No. 158 effective December 31, 2006 and as a result of the adoption, a
liability was recognized for the under funded status of the Company's qualified
pension plan and the net impact was recognized as an after-tax charge to
accumulated other comprehensive income. Subsequent to December 31, 2006, changes
in the under funded status of the plan are recognized as a component of other
comprehensive income.
SFAS 158 also requires an employer to measure the funded status of a plan as of
the employer's year-end reporting date. The Company adopted the measurement date
provisions of SFAS No. 158 in 2008 and there was no impact to the financial
statements upon adoption.
STOCK OPTION PLANS: In December 2004, the FASB issued Statement No. 123 (revised
2004), Share-Based Payment ("SFAS No. 123(R)"). SFAS No. 123(R) requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost is measured based on the fair value of the
equity or liability instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including stock options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. SFAS No. 123(R) is a replacement of SFAS No. 123, "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related interpretive guidance. This
statement requires entities to measure the cost of employee services received in
exchange for stock options based on the grant-date fair value of the award, and
to recognize the cost over the period the employee is required to provide
services for the award. SFAS No. 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
F-11
The Company elected to adopt SFAS No. 123(R) on January 1, 2006 under the
modified prospective method. Compensation is measured using the fair value of an
award on the grant dates and is recognized over the service period, which is
usually the vesting period. Compensation cost related to the unvested portion of
awards outstanding as of that date was based on the grant- date fair value of
those awards as calculated under the original provisions of SFAS No 123; that
is, the Company was not required to re-measure the grant-date fair value
estimate of the unvested portion of awards granted prior to the effective date
of SFAS No 123(R).
EARNINGS PER SHARE: Basic earnings per share represents income available to
common shareholders and is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common shares that may be
issued by the Company relate to outstanding stock options and are determined
using the treasury stock method.
RELATED PARTY TRANSACTIONS: Directors and officers of the Company and Bank and
their affiliates have been customers of and have had transactions with the Bank,
and it is expected that such persons will continue to have such transactions in
the future. Management believes that all deposit accounts, loans and leases,
services and commitments comprising such transactions were made in the ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other customers who are not directors or officers. In the opinion of the
management, the transactions with related parties did not involve more than
normal risks of collectibility or favored treatment or terms, or present other
unfavorable features. Notes D, H, and P contain details regarding related party
transactions.
COMPREHENSIVE INCOME: Accounting principles generally require that recognized
revenue, expenses, gains and losses are included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities and defined benefit pension liabilities, are
reported as a separate component of the shareholders' equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
STATEMENTS OF CASH FLOWS: Cash and due from banks, Federal funds sold and
interest-earning deposits in banks are recognized as cash equivalents in the
statements of cash flows. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Generally, Federal funds sold have a
one-day maturity. Cash flows from loans, leases and deposits are reported net.
The Company maintains amounts due from banks and Federal funds sold which, at
times, may exceed federally insured limits. The Company has not experienced any
losses from such concentrations.
FAIR VALUE
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurement. SFAS
No. 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS No. 157, the
three categories within the hierarchy are as follows:
- --------------------------------------------------------------------------------
Level 1 Quoted prices in active markets for identical assets and
liabilities.
- --------------------------------------------------------------------------------
Level 2 Observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities in
active markets, quoted prices in markets that are not
active; and model-based valuation techniques for which
all significant inputs are observable or can be
corroborated by observable market data for substantially
the full term of the assets or liabilities.
- --------------------------------------------------------------------------------
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as
instruments for which the determination of fair value
requires significant management judgment or estimation.
- --------------------------------------------------------------------------------
F-12
In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date
of FASB Statement No. 157, which permits a one-year deferral for the
implementation of SFAS No. 157 with regard to nonfinancial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis.
In October 2008, the FASB issued Staff Positions No. FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active
("FSP No. 157-3"). FSP No. 157-3 amends SFAS No. 157 and clarifies its
application in an inactive market. In reaction to the recent financial crisis,
this FSP provides clarification as to whether to use direct market information
or internally generated estimates of the fair value of financial assets when a
market is not active. Application issues addressed by FSP No. 157-3 include: i)
how management's internal assumptions should be considered when measuring fair
value when relevant observable data do not exist, ii) how observable market
information in a market that is not active should be considered when measuring
fair value, and iii) how the use of market quotes should be considered when
assessing the relevance of observable and unobservable data available to measure
fair value. FSP No. 157-3 was effective upon its October 10, 2008 issuance. This
FSP did not have an impact on the Company's financial statements.
The Company adopted SFAS No. 157 for the fiscal year beginning January 1, 2008,
except for nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis
for which delayed application is permitted as described above. The adoption of
SFAS No. 157 did not have an impact on the Company's financial statements, and
the adoption of the remaining provisions of SFAS No. 157 is not expected to have
a material impact on the Company's financial statements.
See Note R for additional information regarding fair value.
RECENT ACCOUNTING PRONOUNCEMENTS: In September 2006, the FASB ratified Emerging
Issues Task Force ("EITF") Issue No. 06-4, "Accounting for Deferred Compensation
and Postretirement Benefits Associated with Endorsement Split-Dollar Life
Insurance Arrangements" ("EITF 06-4"), and in March 2007, the FASB ratified EITF
Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements" ("EITF 06-10"). EITF 06-4 requires deferred compensation
or postretirement benefit aspects of an endorsement-type split-dollar life
insurance arrangement to be recognized as a liability by the employer and states
the obligation is not effectively settled by the purchase of a life insurance
policy. The liability for future benefits should be recognized based on the
substantive agreement with the employee, which may be either to provide a future
death benefit or to pay for the future cost of the life insurance. EITF 06-10
provides recognition guidance for postretirement benefit liabilities related to
collateral assignment split-dollar life insurance arrangements, as well as
recognition and measurement of the associated asset on the basis of the terms of
the collateral assignment split-dollar life insurance arrangement. EITF 06-4 and
EITF 06-10 are effective for fiscal years beginning after December 15, 2007. The
adoption of EITF 06-4 resulted in a decrease to retained earnings of $12,272.
In February 2007, the FASB issued SFAS No, 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No, 115 (Statement 159) which permits an entity to choose to measure
certain financial instruments and certain other items at fair value, on an
instrument-by-instrument basis. Once an entity has elected to record eligible
items at fair value, the decision is irrevocable and the entity should report
unrealized gains and losses on items for which the fair value option has been
elected in earnings. Statement 159 is effective for fiscal years beginning after
November 15, 2007. At the effective date, an entity may elect the fair value
option for eligible items that exist at that date with the effect of the first
measurement to fair value reported as a cumulative-effect adjustment to the
opening balance of retained earnings. There was no impact on the consolidated
financial statements of the Company as a result of the adoption of Statement 159
during the first quarter of 2008 since the Company has not elected the fair
value option for any eligible items, as defined in Statement 159.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by the Company taking
place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a
calendar year-end company is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009. The
Company will assess the impact of SFAS 141(R) if and when a future acquisition
occurs.
F-13
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financials statements and
separate from the parent's equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interests. SFAS 160
is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
The Company is currently evaluating the impact, if any, the adoption of SFAS 160
will have on its financial position, results of operations and cash flows.
In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB Statement No. 128, Earnings per Share. This FSP shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period EPS
data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of this FSP. Early application is not permitted. The Company does
not expect this FSP to have a significant effect on the Company's financial
statements.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, "Employers'
Disclosures about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1"). FSP
FAS 132(R)-1 requires more detailed disclosures about employers' plan assets in
a defined benefit pension or other postretirement plan, including employers'
investment strategies, major categories of plan assets, concentrations of risk
within plan assets, and inputs and valuation techniques used to measure the fair
value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
measurements using significant unobservable inputs (Level 3), disclosure of the
effect of the measurements on changes in plan assets for the period. The
disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for
fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, it will not have an impact on the Company's financial
statements.
NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its respective transaction
accounts and nonpersonal time deposits. At December 31, 2008 and 2007 the Bank
was required to have cash and liquid assets of approximately $235,000 and
$148,000, respectively, to meet these requirements. In addition, the Bank is
required to maintain $200,000 in the Federal Reserve Bank for clearing purposes
at both December 31, 2008 and 2007.
F-14
NOTE C - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of securities which are classified as available for sale
and held to maturity at December 31, 2008 and 2007 are as follows:
AVAILABLE FOR SALE December 31, 2008
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt Securities:
U.S. Treasury securities $ 3,110,574 $ 107,876 $ -- $ 3,218,450
U.S. Government Agency securities 26,500,000 65,763 (3,386) 26,562,377
State and Municipal Obligations 19,931,000 77,501 (376,069) 19,632,432
Trust Preferred Securities 493,615 -- -- 493,615
------------ ------------ ------------ ------------
50,035,189 251,140 (379,455) 49,906,874
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA 9,495,917 12 (8,094) 9,487,835
FNMA 35,675,421 467,875 (263,567) 35,879,729
FHLMC 14,994,269 210,723 (9,228) 15,195,764
------------ ------------ ------------ ------------
60,165,607 678,610 (280,889) 60,563,328
------------ ------------ ------------ ------------
Marketable Equity Securities 3,045,878 -- (29,879) 3,015,999
------------ ------------ ------------ ------------
Total available for sale securities $113,246,674 $ 929,750 $ (690,223) $113,486,201
============ ============ ============ ============
December 31, 2007
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt Securities:
U.S. Treasury securities $ 4,007,040 $ 62,179 $ -- $ 4,069,219
U.S. Government Agency securities 30,992,780 8,895 (106,435) 30,895,240
State and Municipal Obligations 31,190,175 364,035 (49,871) 31,504,339
Trust Preferred Securities 4,898,731 -- (445,731) 4,453,000
------------ ------------ ------------ ------------
71,088,726 435,109 (602,037) 70,921,798
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA 674,447 -- (16,521) 657,926
FNMA 40,041,144 221,704 (996,597) 39,266,251
FHLMC 12,311,134 61,541 (295,091) 12,077,584
------------ ------------ ------------ ------------
53,026,725 283,245 (1,308,209) 52,001,761
------------ ------------ ------------ ------------
Marketable Equity Securities 6,030,000 54,000 (28,011) 6,055,989
------------ ------------ ------------ ------------
Total available for sale securities $130,145,451 $ 772,354 $ (1,938,257) $128,979,548
============ ============ ============ ============
HELD TO MATURITY December 31, 2008
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA $ 16,550 $ 3 $ -- $ 16,553
============ ============ ============ ============
December 31, 2007
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA $ 34,185 $ -- $ (473) $ 33,712
============ ============ ============ ============
F-15
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2008:
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Investment Securities
U.S. Government Agency securities $ 7,996,614 $ 3,386 $ -- $ -- $ 7,996,614 $ 3,386
State & Municipal obligations 8,804,717 303,267 2,574,433 72,802 11,379,150 376,069
----------- ----------- ----------- ----------- ----------- -----------
16,801,331 306,653 2,574,433 72,802 19,375,764 379,455
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities
GNMA -- -- 465,643 8,094 465,643 8,094
FNMA 10,067,156 112,219 4,209,833 151,348 14,276,989 263,567
FHLMC -- -- 1,351,769 9,228 1,351,769 9,228
----------- ----------- ----------- ----------- ----------- -----------
10,067,156 112,219 6,027,245 168,670 16,094,401 280,889
----------- ----------- ----------- ----------- ----------- -----------
Marketable Equity Securities -- -- 1,970,122 29,879 1,970,122 29,879
----------- ----------- ----------- ----------- ----------- -----------
Total $26,868,487 $ 418,872 $10,571,800 $ 271,351 $37,440,287 $ 690,223
=========== =========== =========== =========== =========== ===========
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2007:
Less than 12 Months 12 Months or More Total
-------------------------- ----------------------------- -------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------------------- ----------------------------- -------------------------------
Investment Securities
U.S. Government Agency securities $ -- $ -- $ 21,893,564 $ 106,435 $ 21,893,564 $ 106,435
State & Municipal obligations 8,077,673 49,871 -- -- 8,077,673 49,871
Corporate & Other bonds 4,453,000 445,731 -- -- 4,453,000 445,731
------------ ---------- ------------- ------------- ------------- ----------
12,530,673 495,602 21,893,564 106,435 34,424,237 602,037
------------ ---------- ------------- ------------- ------------- ----------
Mortgage-Backed Securities
GNMA 348,421 6,769 327,981 9,752 676,402 16,521
FNMA 110,712 817 27,637,383 995,780 27,748,095 996,597
FHLMC -- -- 9,546,400 295,091 9,546,400 295,091
------------ ---------- ------------- ------------- ------------- ----------
459,133 7,586 37,511,764 1,300,623 37,970,897 1,308,209
------------ ---------- ------------- ------------- ------------- ----------
Marketable Equity Securities -- -- 1,971,989 28,011 1,971,989 28,011
------------ ---------- ------------- ------------- ------------- ----------
Total $ 12,989,806 $ 503,188 $ 61,377,317 $ 1,435,069 $ 74,367,123 $ 1,938,257
============ ========== ============= ============ ============= ===========
At December 31, 2008, thirty-seven securities have unrealized losses. The
following summarizes, by investment security type, the basis for the conclusion
that the applicable investment securities within the Company's available for
sale portfolio were not other-than-temporarily impaired at December 31, 2008:
Trust Preferred Securities--As of December 31, 2008 there were no unrealized
losses on the Company's investment in corporate bonds and notes. This compares
to the unrealized losses of $445,731 at December 31, 2007. As of December 31,
2008, this portfolio consisted of two pooled trust preferred securities. During
the third quarter of 2008, the Company recorded an other-than-temporary
impairment charge of $1,916,100 on one of these securities due to a credit
rating downgrade at that time. Subsequent to December 31, 2008, both securities
were downgraded to a rating of Ca, indicating a more severe deterioration in the
creditworthiness of the underlying issuers of these securities. As a result, the
Company recorded additional other-than-temporary impairment charges of
$2,476,552 as of December 31, 2008 related to these securities.
Equity securities--The unrealized losses on the Company's investment in four
marketable equity securities totaled $29,879 which was similar to the unrealized
loss of $28,011 as of December 31, 2007. The unrealized loss as of December 31,
2008 is after the other-than-temporary impairment charges of $5.0 million for
the year ended December 31, 2008. This portfolio consists of two marketable
investment funds with a total fair value of $2,970,171 and perpetual preferred
stock of government sponsored enterprises which have been written down to a fair
value of $2 at December 31, 2008. Given the small unrealized loss remaining in
this segment of the portfolio, and the Company's ability and intent to hold the
investments for a reasonable period of time sufficient for a forecasted recovery
of amortized cost, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
Mortgage-backed securities--The unrealized losses on the Company's investment in
mortgage-backed securities decreased from $1,308,209 at December 31, 2007 to
$280,889 at December 31, 2008. There were no other-than-temporary impairment
charges for mortgage-backed securities for the year ended December 31, 2008.
These securities are U.S. Government Agency or sponsored agency securities and
the contractual cash flows for these investments are performing as expected.
Management believes the decline in fair value is attributable to investors'
perception of credit and the lack of liquidity in the marketplace. The Company
expects to collect all principal and interest on these securities and has the
ability and intent to hold these investments until a recovery of amortized cost,
which may be at maturity. The Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
F-16
State and Municipal Obligations--The unrealized losses on the Company's
investment in state and municipal obligations increased from $49,871 at December
31, 2007 to $376,069 at December 31, 2008. There were no other-than-temporary
impairment charges for these securities during 2008. The increase in the
unrealized loss at December 31, 2008 is attributable to concerns about the
economy, credit, lack of bank participation in this market and downgrades of the
monoline insurers as well as some perceived lack of credibility of the credit
rating agencies. At this point, all securities are performing, the Company is
receiving all interest and principal payments as contractually agreed, and all
these securities are rated as investment grade. The Company does not consider
these investments to be other-than-temporarily impaired at December 31, 2008.
U.S. Government Agency Securities--The unrealized losses on the Company's
investment in these securities decreased from $106,435 at December 31, 2007 to
$3,386 at December 31, 2008. Given the small unrealized loss remaining in this
segment of the portfolio, and the Company's ability and intent to hold the
investments for a reasonable period of time sufficient for a recovery of
amortized cost, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
The amortized cost and fair value of debt securities at December 31, 2008, by
contractual maturity, are shown below. Actual maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the securities may be called or prepaid with or without call or
prepayment penalties. Because mortgage-backed securities are not due at a single
maturity date, they are not included in the maturity categories in the following
maturity summary.
December 31,2008
---------------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ -- $ -- $ -- $ --
Due after one year through five years 25,110,576 25,272,025 -- --
Due after five years through ten years 6,403,590 6,443,810 -- --
Due after ten years 18,521,023 18,191,039 -- --
------------ ------------ ------------ ------------
50,035,189 49,906,874 -- --
Mortgage-backed securities 60,165,607 60,563,328 16,550 16,553
------------ ------------ ------------ ------------
TOTAL DEBT SECURITIES $110,200,796 $110,470,202 $ 16,550 $ 16,553
============ ============ ============ ============
For the years ended December 31, 2008 and 2007, proceeds from the sales of
available for sale securities were $43,699,152 and $16,295,820 , respectively.
Gross gains of $825,103 and gross losses of $287,313 were realized on sales in
2008 and gross gains of $19,632 were realized on sales in 2007. In addition,
during the year ended December 31, 2008, the Company recorded a loss of
$9,422,650 related to the other-than-temporary impairment of the Company's
investments in Freddie Mac and Fannie Mae preferred stock auction rate
securities holding such stock, and two pooled trust preferred securities.
Investment securities with a carrying value of $76,450,000 and $62,582,000 were
pledged as collateral to secure treasury tax and loan, trust assets, securities
sold under agreements to repurchase and public funds at December 31, 2008 and
2007, respectively.
During 2008 and 2007, there were no transfers of securities from the available
for sale category into the held to maturity or trading categories, and there
were no securities classified as held to maturity that were transferred to
available for sale or trading categories.
The OTTI charge in the fourth quarter was related to the impairment write-down
on two trust preferred investment securities. The write-down was the result of
the significant downgrading of these investments by Moody's credit rating
agency. The downgrades were the result of continued weak economic conditions,
the number of interest payment deferrals and the exposure of these securities
issued by small to medium sized U. S. community banks and insurance companies to
the crisis in the financial industry.
F-17
NOTE D - LOANS TO RELATED PARTIES
In the normal course of business the Bank has granted loans to officers and
directors of the Bank and to their associates. As of December 31, 2008 and 2007,
all loans to officers, directors and their associates were performing in
accordance with the contractual terms of the loans. Changes in these loans to
persons considered to be related parties are as follows:
2008 2007
----------- -----------
Balance at the beginning of year $ 2,219,055 $ 2,471,904
Advances 383,945 596,691
Repayments (406,636) (792,962)
Other changes (118,491) (56,578)
----------- -----------
Balance at the end of year $ 2,077,873 $ 2,219,055
=========== ===========
Other changes in loans to related parties resulted from loans to individuals who
ceased being related parties during the year, as well as existing loans
outstanding at the beginning of the year to individuals who became related
parties during the year.
NOTE E - LOAN AND LEASE RECEIVABLES
A summary of loans and leases receivable at December 31, 2008 and 2007 is as
follows:
2008 2007
------------- -------------
Real estate- residential mortgage $ 192,561,108 $ 189,556,668
Real estate- commercial mortgage 67,454,925 55,752,240
Real estate- construction 38,153,503 34,808,984
Commercial loans 46,249,689 33,641,679
Commercial leases (net of unearned discount of $2,657,871) 19,785,870 8,634,199
Installment 5,113,400 6,519,812
Other 128,574 99,357
------------- -------------
TOTAL LOANS AND LEASES 369,447,069 329,012,939
Net deferred loan origination costs 562,242 445,671
Premiums on purchased loans 81,588 168,383
Allowance for loan and lease losses (3,698,820) (2,151,622)
------------- -------------
NET LOANS AND LEASES $ 366,392,079 $ 327,475,371
============= =============
Changes in the allowance for loan and lease losses for the years ended December
31, 2008 and 2007, were as follows:
2008 2007
------------- -------------
Balance at the beginning of year $ 2,151,622 $ 2,106,100
Provision for loan and lease losses 1,836,299 204,000
Loans and leases charged off (377,071) (176,777)
Recoveries of loans and leases previously charged off 87,970 18,299
------------- -------------
BALANCE AT END OF YEAR $ 3,698,820 $ 2,151,622
============= =============
A summary of nonperforming loans and leases follows:
2008 2007
------------- -------------
Non-accrual loans and leases $ 5,639,735 $ 2,959,074
Accruing loans and leases contractually past due 90 days or more 19,603 3,111
------------- -------------
TOTAL $ 5,659,338 $ 2,962,185
============= =============
If interest income on non-accrual loans and leases throughout the year had been
recognized in accordance with their contractual terms, approximately $163,000
and $88,000 of additional interest would have been recorded for the years ended
December 31, 2008 and 2007, respectively.
F-18
The following information relates to impaired loans and leases, which include
all nonaccrual loans and leases and other loans and leases past due 90 days or
more, and all restructured loans and leases, as of and for the years ended
December 31, 2008 and 2007:
2008 2007
---------- ----------
Loans and leases receivable for which there is a related allowance for loan
and lease losses $6,225,481 $ 327,027
========== ==========
Loans and leases receivable for which there is no related allowance for loan
and lease losses $2,657,655 $2,632,047
========== ==========
Allowance for loan and lease losses related to impaired loans and leases $ 939,066 $ 181,119
========== ==========
Additional information related to impaired loans and leases is as follows:
2008 2007
---------- ----------
Average recorded investment in impaired loans and leases $4,646,000 $1,865,000
========== ==========
Interest income recognized $ 600,000 $ 228,000
========== ==========
Cash interest received $ 540,000 $ 186,000
========== ==========
The Bank's lending activities are conducted principally in the Litchfield County
section of Connecticut. The Bank grants single-family and multi-family
residential loans, commercial real estate loans, commercial business loans and a
variety of consumer loans. In addition, the Bank grants loans for the
construction of residential homes, residential developments and for land
development projects. Although lending activities are diversified, a substantial
portion of many of the Bank's customers' net worth is dependent on real estate
values in the Bank's market area. The Bank's leasing activities are conducted
primarily in the New England states as well as in New Jersey. The leasing
company's activities are primarily equipment financing.
The Bank has established credit policies applicable to each type of lending
activity in which it engages, evaluates the creditworthiness of each customer
and, in most cases, extends credit of up to 80% of the market value of the
collateral at the date of the credit extension depending on the Bank's
evaluation of the borrowers' creditworthiness and type of collateral. The market
value of collateral is monitored on an ongoing basis and additional collateral
is obtained when warranted. Real estate is the primary form of collateral. Other
important forms of collateral are marketable securities, time deposits,
automobiles, boats, motorcycles and recreational vehicles. While collateral
provides assurance as a secondary source of repayment, the Bank ordinarily
requires the primary source of repayment to be based on the borrower's ability
to generate continuing cash flows. The Bank's policy for real estate collateral
requires that, generally, the amount of the loan may not exceed 80% of the
original appraised value of the property. Private mortgage insurance is required
for the portion of the loan in excess of 80% of the original appraised value of
the property. For installment loans, the Bank may loan up to 100% of the value
of the collateral. For leases, the leasing company will lend 100% of the asset
value financed.
NOTE F - PREMISES AND EQUIPMENT
The major categories of premises and equipment as of December 31, 2008 and 2007
are as follows:
2008 2007
---- ----
Land $ 1,245,465 $ 1,245,465
Buildings and improvements 7,740,270 7,584,199
Furniture and fixtures 3,617,064 3,597,603
Leasehold improvements 220,761 212,106
----------- -----------
12,823,560 12,639,373
Less accumulated depreciation and amortization 5,453,308 4,880,612
----------- -----------
$ 7,370,252 $ 7,758,761
=========== ===========
Depreciation and amortization expense on premises and equipment for the years
ended December 31, 2008 and 2007 was $734,020 and $751,259, respectively.
Included in buildings and improvements, premises under capital lease totaled
$1,100,644, and related accumulated amortization as of December 31, 2008 and
2007 totaled $110,202 and $55,101, respectively.
F-19
NOTE G - LEASES
The Company leases a branch office of the Bank under a twenty-year capital lease
that expires in 2026. In addition, at December 31, 2008, the Company was
obligated under various non-cancellable operating leases for office space.
Certain leases contain renewal options and provide for increased rentals based
principally on increases in the average consumer price index. The Company also
pays certain executory costs under these leases. Net rent expense under
operating leases was approximately $240,000 and $242,000 for 2008 and 2007,
respectively. The future minimum payments under the capital lease and operating
leases are as follows:
Capital Lease Operating Leases
------------- ----------------
2009 $ 75,000 $ 151,053
2010 75,000 108,742
2011 75,917 112,018
2012 86,000 115,365
2013 86,000 118,819
2014 and thereafter 1,320,833 301,630
----------- -----------
1,718,750 $ 907,627
===========
Less amount representing interest (653,187)
-----------
Present value of future minimum lease
payments-capital lease obligation $ 1,065,563
===========
NOTE H - DEPOSITS
A summary of deposits at December 31, 2008 and 2007 is as follows:
2008 2007
---- ----
Noninterest bearing:
Demand $ 69,548,261 $ 70,564,267
------------ ------------
Interest bearing:
Savings 58,582,376 56,344,878
Money market 93,085,126 78,738,706
Time certificates of deposit in
denominations of $100,000 or more 41,003,855 52,345,036
Other time certificates of deposit 81,107,006 77,624,777
------------ ------------
Total interest bearing 273,778,363 265,053,397
------------ ------------
$343,326,624 $335,617,664
============ ============
Included in deposits as of December 31, 2008 are approximately $15,902,000 of
brokered deposits which have varying maturities through December 2009.
The following is a summary of time certificates of deposits by contractual
maturity as of December 31, 2008:
2009 95,891,432
2010 24,494,209
2011 528,997
2012 556,922
2013 639,301
-----------
Total 122,110,861
===========
Deposit accounts of officers, directors and their associates aggregated
$4,965,692 and $9,015,747 at December 31, 2008 and 2007, respectively.
NOTE I - BORROWINGS
Federal Home Loan Bank Borrowings
- ---------------------------------
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"), is required to maintain as collateral,
F-20
an investment in capital stock of the FHLBB in an amount equal to a certain
percentage of its outstanding residential first mortgage loans. Purchases of
Federal Home Loan Bank stock totaled $360,200 during 2008 and $634,500 during
2007. There were no redemptions during 2008. Redemptions during 2007 amounted to
$10,500. The 2008 and 2007 increases in FHLBB stock are due to capital structure
changes implemented during the second quarter of 2004 by the Federal Home Loan
Bank of Boston (FHLBB). These changes require each institution's stock
investment in the FHLBB to be reflective of that institution's use of FHLBB
products. As a member of the FHLBB, the Bank has access to a preapproved line of
credit of up to 2% of its total assets and the capacity to obtain additional
advances up to 30% of its total assets. In accordance with an agreement with the
FHLBB, the Bank is required to maintain qualified collateral, as defined in the
FHLBB Statement of Products Policy, free and clear of liens, pledges and
encumbrances for the advances. FHLBB stock and certain loans which aggregate
approximately 100% of the outstanding advances are used as collateral. At
December 31, 2008, advances under the Federal Home Loan Bank line of credit
totaled $1,608,000. At December 31, 2007, there were no advances under the
Federal Home Loan Bank line of credit. At December 31, 2008 and 2007, other
outstanding advances from the FHLBB aggregated $80,000,000 and $91,500,000,
respectively, at interest rates ranging from 3.95% to 4.59%, and 3.27% to 4.70%,
respectively.
Repurchase Agreements with Financial Institutions
- -------------------------------------------------
At December 31, 2008 and 2007, securities sold under agreements to repurchase
totaled $26,450,000 and $21,550,000, respectively, at interest rates ranging
from 3.19% to 3.635%, and 3.20% to 4.19%, respectively.
Collateralized Borrowings
- -------------------------
Collateralized borrowings amounted to $1,375,550 and $1,699,336 as of December
31, 2008 and 2007, respectively. Pursuant to FASB Statement No. 140, certain
loan participation agreements did not qualify for sale accounting due to buyback
provisions included within the agreement, thus the Company has not surrendered
control over the transferred loans and has accounted for the transfers as
collateralized borrowings.
Junior Subordinated Debt Issued by Unconsolidated Trusts
- --------------------------------------------------------
The Company has established two Delaware statutory trusts, First Litchfield
Statutory Trust I and First Litchfield Statutory Trust II, for the sole purpose
of issuing trust preferred securities and related trust common securities. The
proceeds from such issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of each trust.
Concurrently with the issuance of the trust preferred securities, the Company
issued guarantees for the benefit of the holders of the trust preferred
securities. The trust preferred securities are issues that qualify, and are
treated by the Company, as Tier 1 regulatory capital. The Company wholly owns
all of the common securities of each trust. The trust preferred securities
issued by each trust rank equally with the common securities in right of
payment, except that if an event of default under the indenture governing the
notes has occurred and is continuing, the preferred securities will rank senior
to the common securities in right of payment.
The table below summarizes the outstanding junior subordinated notes and the
related trust preferred securities issued by each trust as of December 31, 2008:
First Litchfield First Litchfield
Statutory Trust I Statutory Trust II
-------------------- ---------------------
Junior Subordinated Notes:
Principal balance $ 7,011,000 $ 3,093,000
Annual interest rate 3 mo libor + 3.10% 3 mo libor + 1.65%
Stated maturity date June 26,2033 June 30,2036
Call date June 26,2008 June 30,2011
Trust Preferred Securities:
Face value 6,800,000 3,000,000
Annual distribution rate 3 mo libor + 3.10% 3 mo libor + 1.65%
Issuance date June 1,2033 June 1,2006
Distribution dates (1) Quarterly Quarterly
(1) All cash distributions are cumulative
F-21
Trust preferred securities are currently considered regulatory capital for
purposes of determining the Company's Tier I capital ratios. On March 1, 2005,
the Board of Governors of the Federal Reserve System, which is the Company's
banking regulator, approved final rules that allow for the continued inclusion
of outstanding and prospective issuances of trust preferred securities in
regulatory capital subject to new, more strict limitations. The Company has
until March 31, 2009 to meet the new limitations. Management does not believe
these final rules will have a significant impact on the Company.
The trust preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated notes at the stated maturity
date or upon redemption on a date no earlier than June 26, 2008 for First
Litchfield Statutory Trust I and June 30, 2011 for First Litchfield Statutory
Trust II. Prior to these respective redemption dates, the junior subordinated
notes may be redeemed by the Company (in which case the trust preferred
securities would also be redeemed) after the occurrence of certain events that
would have a negative tax effect on the Company or the trusts, would cause the
trust preferred securities to no longer qualify as Tier 1 capital, or would
result in a trust being treated as an investment company. Each trust's ability
to pay amounts due on the trust preferred securities is solely dependent upon
the Company making payment on the related junior subordinated notes. The
Company's obligation under the junior subordinated notes and other relevant
trust agreements, in aggregate, constitute a full and unconditional guarantee by
the Company of each trust's obligations under the trust preferred securities
issued by each trust. The Company has the right to defer payment of interest on
the notes and, therefore, distributions on the trust preferred securities, for
up to five years, but not beyond the stated maturity date in the table above.
During any such deferral period the Company may not pay cash dividends on its
common stock and generally may not repurchase its common stock.
The contractual maturities of the Company's borrowings at December 31, 2008, by
year, are as follows:
Fixed Floating
Rate Rate Total
------------ ----------- ------------
2009 $ 15,034,000 $ -- $ 15,034,000
2010 15,090,000 -- 15,090,000
2011 97,000 -- 97,000
2012 5,104,000 -- 5,104,000
2013 22,612,000 -- 22,612,000
Thereafter 49,889,000 10,104,000 59,993,000
------------ ----------- ------------
TOTAL LONG-TERM DEBT $107,826,000 $10,104,000 $117,930,000
============ =========== ============
NOTE J - INCOME TAXES
The components of the income tax (benefit) provision are as follows:
2008 2007
----------- -----------
Current Provision: $ 755,815 $ 178,289
Federal
Deferred (Benefit) Provision (3,868,274) 47,413
----------- -----------
Federal $(3,112,459) $ 225,702
=========== ===========
A reconciliation of the anticipated income tax expense (computed by applying the
Federal statutory income tax rate of 34% to the income before taxes) to the
(benefit) provision for income taxes as reported in the statements of income is
as follows:
2008 2007
------------------ -----------------
(Benefit) provision for income taxes at statutory
Federal rate $(2,583,649) (34)% $ 738,835 34%
Increase (decrease) resulting from:
Tax exempt interest income (451,306) (6)% (464,076) (21)%
Nondeductible interest expense 47,273 1% 62,718 3%
Tax exempt income from insurance policies (134,677) (2)% (130,587) (6)%
Other 9,900 -- 18,812 --
------------------ -----------------
(Benefit) Provision for income taxes $(3,112,459) (41)% $ 225,702 10%
=================== =================
F-22
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at December
31, 2008 and 2007 are presented below:
2008 2007
----------- -----------
Deferred tax assets:
Allowance for loan and lease losses $ 1,257,598 $ 731,552
Depreciation 207,789 140,883
Accrued expenses 387,740 282,836
Alternative minimum taxes 452,992 261,503
Unfunded pension liability 609,211 256,490
Unrealized loss on available for sale securities -- 396,407
Securities write-downs 3,203,701 --
----------- -----------
Total gross deferred tax assets 6,119,031 2,069,671
----------- -----------
Deferred tax liabilities:
Tax bad debt reserve (153,536) (153,536)
Prepaid pension costs (268,902) (246,976)
Net deferred loan and lease costs (191,162) (151,528)
Leases (338,328) (151,856)
Unrealized gain on available for sale securities (81,439) --
Prepaid expenses and other (2,707) (38,240)
----------- -----------
Total gross deferred tax liabilities (1,036,074) (742,136)
----------- -----------
Net deferred tax asset $ 5,082,957 $ 1,327,535
=========== ===========
Based on the Company's income taxes paid in prior years and expected future
earnings, management believes that it is more likely than not that the deferred
tax asset will be realized.
Effective for taxable years commencing after December 31, 1998, financial
services institutions doing business in Connecticut are permitted to establish a
"passive investment company" ("PIC") to hold and manage loans secured by real
property. PICs are exempt from Connecticut corporation business tax, and
dividends received by the financial services institution's parent from PICs are
not taxable. In August 2000, the Bank established a PIC, as a wholly-owned
subsidiary, and beginning in October 2000, transferred a portion of its
residential and commercial mortgage loan portfolios from the Bank to the PIC. A
substantial portion of the Company's interest income is now derived from the
PIC, an entity that has been organized as a state tax exempt entity, and
accordingly there is no provision for state income taxes in 2008 and 2007.
NOTE K - EMPLOYEE BENEFITS
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan (the
"Plan") that covers substantially all employees who have completed one year of
service and have attained age 21. The benefits are based on years of service and
the employee's compensation during the last five years of employment. During the
first quarter of 2005, the Bank's pension plan was curtailed. Prior to the
Plan's curtailment, the Bank's funding policy was to contribute amounts to the
Plan sufficient to meet the minimum funding requirements set forth in ERISA,
plus such additional amounts as the Bank determined to be appropriate from time
to time. The actuarial information has been calculated using the projected unit
credit method.
F-23
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 2008 and 2007 using a
measurement date of December 31:
2008 2007
----------- ---------
Change in benefit obligation
Benefit obligation, beginning $ 3,270,153 $3,408,732
Service Cost -- --
Interest Cost 187,272 184,166
Actuarial loss (19,938) (31,536)
Benefits paid (441,864) (291,209)
----------- ---------
Benefit obligation, ending 2,995,623 3,270,153
----------- ---------
Change in plan assets:
Fair value of plan assets, beginning 3,242,172 2,939,118
Actual return on plan assets (905,594) 494,263
Employer contribution 100,000 100,000
Benefits paid (441,864) (291,209)
----------- ---------
Fair value of plan assets, ending 1,994,714 3,242,172
----------- ---------
Funded status at end of year included
in accrued expenses and other liabilities $(1,000,909) $ (27,981)
=========== =========
The accumulated benefit obligation was $2,995,623 and $3,270,153 at December 31,
2008 and 2007, respectively. At December 31, 2008 and 2007, $1,791,798 and
$754,381, respectively of net actuarial losses are included in accumulated other
comprehensive loss. The estimated net loss that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost in 2009 is
$95,741.
2008 2007
----------- ---------
Components of net periodic benefit cost and other
amounts recognized in other comprehensive income:
Service cost $ -- $ --
Interest cost 187,272 184,166
Expected return on plan assets (206,533) (200,249)
Amortization of unrealized loss 54,772 72,651
----------- ---------
Net periodic benefit cost 35,511 56,568
----------- ---------
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
Net loss (gain) 1,037,417 (398,201)
----------- ---------
Total recognized in net periodic
benefit cost and other comprehensive loss (income) $ 1,072,928 $(341,633)
=========== =========
F-24
Weighted-average assumptions used to determine benefit obligations at December
31:
2008 2007
-------- --------
Discount rate 6.00% 6.00%
Rate of compensation increase N/A N/A
Weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31:
2008 2007
-------- --------
Discount rate 6.00% 6.00%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase N/A N/A
The pension expense for the Plan was $35,511 and $56,568 for the years ended
December 31, 2008 and 2007, respectively, and is calculated based upon a number
of actuarial assumptions, including an expected long-term rate of return on Plan
assets of 7.50% each year. In developing the expected long-term rate of return
assumption, management evaluated input from its investment advisor and
actuaries, including their review of asset class return expectations as well as
long-term inflation assumptions. Management anticipates that investments will
continue to generate long-term returns averaging at least 7.50%. Management
regularly reviews the asset allocations and periodically rebalances investments
when considered appropriate. Management continues to believe that 7.50% is a
conservatively reasonable long-term rate of return on Plan assets. Management
will continue to evaluate the actuarial assumptions, including the expected rate
of return, at least annually, and will adjust as necessary.
The Bank's pension plan weighted average asset allocations at December 31, 2008
and 2007 by asset category are as follows:
Percentage of
Plan Assets as of
December 31,
Asset Category 2008 2007
-------------- ---- ----
Cash and receivables 10% 7%
Corporate debt and equity securities 63% 66%
Pooled funds/ Mutual funds 8% 13%
Government securities 19% 14%
---------------------
Total 100% 100%
=====================
The purpose of the pension investment program is to provide the means to pay
retirement benefits to participants and their beneficiaries in the amounts and
at the times called for by the Plan. Plan benefits were frozen effective May 1,
2005. The Bank made a $100,000 contribution to the Plan during both 2008 and
2007, Contributions of $54,167 are anticipated to be made in 2009.
Plan assets are diversified and invested in accordance with guidelines
established by the Bank's Compensation and Trust Committees. The portfolio is
managed according to a standard Growth and Income Investment Objective model.
The target asset allocation is 60% equity and 40% fixed income exposure.
Rebalancing takes place when the investment mix varies more than 5% of its
Investment Objective model. Equity plan assets are further diversified in
investment styles ranging from large cap, mid cap, small cap and international.
Individual corporate, government agency and municipal bonds/notes, fixed income
mutual funds and exchange traded funds, as well as certificates of deposits,
provide fixed income for the plan and are diversified by type, credit quality
and duration. The fixed income investments are laddered by maturity in order to
mitigate interest rate sensitivity and income fluctuations over time.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
2009 $ 191,000
2010 203,000
2011 241,000
2012 239,000
2013 234,000
2014-2018 1,178,000
F-25
EMPLOYEE SAVINGS PLAN: The Bank offers an employee savings plan under section
401(k) of the Internal Revenue Code. Under the terms of the Plan, employees may
contribute up to 10% of their pre-tax compensation. For the years ended December
31, 2008 and 2007, 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 $273,483 and $237,461 for 2008 and 2007, respectively.
OTHER BENEFIT PLANS: Beginning in 1996, the Company offered directors the option
to defer their directors' fees. If deferred, the fees are held in a trust
account with the Bank. The Bank has no control over the trust. The fair value of
the related trust assets and corresponding liability of $93,234 and $180,951 at
December 31, 2008, and 2007, respectively are included in the Company's balance
sheet. During 2005, the plan was amended to cease the deferral of any future
fees.
In 2000, the Bank adopted a long-term incentive compensation plan for its
executive officers and directors. Under this plan, officers and directors are
awarded deferred incentive compensation annually based on the earnings
performance of the Bank. Twenty percent of each award vests immediately and the
remainder vests ratably over the next four years, however, awards are
immediately vested upon change of control of the Bank, or when the participants
reach their normal retirement date or early retirement age, as defined. In
addition, interest is earned annually on the vested portion of the awards. Upon
retirement, the participants' total deferred compensation, including earnings
thereon, may be paid out in one lump sum, or paid in equal annual installments
over fifteen years for executive officers and ten years for directors. For the
years ended December 31, 2008 and 2007 , $53,001 and $72,702, respectively, were
charged to operations under this plan. The related liability, of $465,237 and
$419,187 at December 31, 2008 and 2007, respectively, is included in accrued
expenses and other liabilities. At December 31, 2007, unvested benefits earned
under this plan were approximately $19,000.
In 2005, the Bank established an Employee Stock Ownership Plan ("ESOP"), for the
benefit of its eligible employees. The ESOP invests in the stock of the Company
providing participants with the opportunity to participate in any increases in
the value of Company stock. Under the ESOP, eligible employees, which represent
substantially all full-time employees, are awarded shares of the Company's stock
which are allocated among participants in the ESOP in proportion to their
compensation. The Board determines the total amount of compensation to be
awarded under the plan. That amount of compensation divided by the fair value of
the Company's shares at the date the shares are transferred to the plan
determines the number of shares contributed to the plan. Dividends are allocated
to participant accounts in proportion to their respective shares. For the years
ended December 31, 2008 and 2007, there were no expenses incurred under the
ESOP. During 2006, the Company contributed 2,414 shares to the ESOP, and no
shares were contributed to the ESOP during 2008 or 2007. 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,
2008 is less than $25,000.
Effective January 1, 2006, the Bank entered into supplemental retirement
agreements with three of the Bank's Senior Officers. At December 31, 2008 and
2007, accrued supplemental retirement benefits of $377,000 and $214,000,
respectively, are recognized in the Company's balance sheet related to these
plans. Upon retirement, the plans provide for payments to these individuals
ranging from 10% to 25% of the three year average of the executive's
compensation prior to retirement for the life expectancy of the executive at the
retirement date.
The Bank has an investment in, and is the beneficiary of, life insurance
policies on the lives of certain current and former directors and officers. The
purpose of these life insurance investments is to provide income through the
appreciation in cash surrender values of the policies, which is used to offset
the costs of the long-term incentive compensation plan as well as other employee
benefit plans. These policies have aggregate cash surrender values of
approximately $10,417,000 and $10,021,000 at December 31, 2008 and 2007,
respectively. In addition, these assets are unsecured and are maintained with
four insurance carriers.
The Company has agreements with certain members of senior management which
provide for cash severance payments equal to two times annual compensation for
the previous year, upon involuntary termination or reassignment of duties
inconsistent with the duties of a senior executive officer, within 24 months
following a "change in control" (as such terms are defined in the agreements).
In addition, the agreements provide for the continuation of health and other
insurance benefits for a period of 24 months following a change in control. The
Company has similar agreements with other members of management which provide
for cash severance of six months annual compensation if termination or
reassignment of duties occurs within six months following a change of control,
and provide for the continuation of health and other insurance benefits for a
period of six months following a change in control.
F-26
The Company has agreements under split-dollar life insurance arrangements with
certain members of management which provide for the payment of fixed amounts to
such individual's beneficiaries. In conjunction with the adoption of EITF 06-4
on January 1, 2008, the Company recorded an increase to accrued expenses of
$12,272 related to these agreements. At December 31, 2008, $41,431 is included
in accrued expenses related to these agreements.
NOTE L - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
In November 2007, the Board of Directors declared 5% stock dividends payable on
December 31, 2007. Payment of these dividends resulted in the issuance of
118,873 additional common shares in December 2007. There were no stock dividends
declared in 2008. The market value of the shares issued was charged to retained
earnings, the par value of the shares issued was credited to common stock and
the remainder was credited to additional paid-in capital. Fractional shares were
payable in cash on an equivalent share basis of $16.00 for the 2007 stock
dividend. Weighted-average shares and per share data have been restated to give
effect to all stock dividends and splits.
On December 12, 2008 the Company issued Fixed-Rate Cumulative Perpetual
Preferred Stock to the U. S. Department of the Treasury for $10 million in a
private placement exempt from registration. EESA authorized the U. S. Treasury
to appropriate funds to eligible financial institutions participating in the
TARP C P P. The capital investment included the issuance of preferred shares of
the Company and a warrant to purchase common shares pursuant to a Letter
Agreement and a Securities Purchase Agreement (collectively the "Agreement").
[there are none] The dividend rate of 5% increases to 9% after the first five
years. Dividend payments are made on the 15th day of February, May, August and
November of each year. The warrant allows the holder [it is transferable] to
purchase up to 199,203 shares of the Company's common stock over a 10-year
period at an exercise price per share of $7.53. The preferred shares and the
warrant qualify as Tier 1 regulatory capital. The Agreement subjects the Company
to certain restrictions and conditions including those related to common
dividends, share repurchases, executive compensation, and corporate governance.
The following is information about the computation of net (loss) income per
share for the years ended December 31, 2008 and 2007. Shares outstanding include
all shares contributed to the ESOP as all such shares have been allocated to the
participants.
For the Year Ended December 31, 2008
----------------------------------------------
Weighted
Net Average Per Share
Loss Shares Amount
----------- ----------- -----------
Basic Net Loss Per Share
Loss available to common stockholders $(4,516,773) 2,362,897 $ (1.92)
===========
Effect of Dilutive Securitites
Options/unvested restricted shares outstanding -- -- --
----------- -----------
Diluted Net Loss Per Share
Loss available to common stockholders plus assumed conversions $(4,516,773) 2,362,897 $ (1.92)
=========== =========== ===========
For the Year Ended December 31, 2007
----------------------------------------------
Weighted
Net Average Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common stockholders $ 1,947,342 2,369,210 $ 0.82
===========
Effect of Dilutive Securities
Options outstanding -- 3,513
----------- -----------
Diluted Net Income Per Share
Income available to common stockholders plus assumed conversions $ 1,947,342 2,372,723 $ 0.82
=========== =========== ===========
For the year ended December 31, 2008, the effect of stock options and unvested
restricted shares was not considered because the effect would have been
anti-dilutive.
F-27
NOTE M - STOCK OPTION PLANS
At December 31, 2008, the Company had one fixed option plan, which is described
below. Effective January 1, 2006, the Company adopted SFAS No. 123(R) utilizing
the modified prospective approach. Prior to the adoption of SFAS No. 123(R), the
Company accounted for the stock options grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method),
and accordingly, recognized no compensation expense for stock option grants.
Because there were no unvested share-based awards at January 1, 2006, the
adoption of this statement had no initial effect on the Company's financial
statements.
STOCK COMPENSATION PLAN: During 2007 the Company approved a restricted stock
plan (the "2007 Plan") for senior management. These awards vest at the end of a
five-year period, or earlier if the senior manager ceases to be a senior manager
for any reason other than cause, for example, retirement. The holders of these
awards participate fully in the rewards of stock ownership of the Company,
including voting and dividend rights. The senior managers are not required to
pay any consideration to the Company for the restricted stock awards. The
Company measures the fair value of the awards based on the average of the high
price and low price at which the Company's common stock traded on the date of
the grant. For the year ended December 31, 2008, $8,412 was recognized as
compensation expense under the 2007 Plan. At December 31, 2008, unrecognized
compensation cost of $37,473 related to these awards is expected to vest over a
weighted average period of 4 years.
A summary of unvested shares as of and for the year ended December 31, 2008 is
as follows:
Weighted Average
Grant Date
Shares Fair Value
-------- ----------------
Unvested shares, beginning of year -- $ --
Shares granted during the year 3,500 13.11
Shares vested during the year -- --
-------- ------------
Unvested shares, end of year 3,500 $ 13.11
======== ============
OPTION PLAN FOR OFFICERS AND OUTSIDE DIRECTORS
A stock option plan for officers and outside directors was approved by the
shareholders during 1994. The price and number of options in the plan have been
adjusted for all stock dividends and splits.
The stock option plan for directors automatically granted each director an
initial option of 3,721 shares of the Company's common stock. Automatic annual
grants of an additional 631 shares for each director were given for each of the
four following years.
The stock option plan for officers, grants options based upon individual officer
performance.
Under both the director and officer plans, the price per share of the option is
the fair market value of the Company's stock at the date of the grant. No option
may be exercised until 12 months after it is granted at which time options fully
vest. Options are exercisable for a period of ten years from the grant thereof.
F-28
Activity in the option plan for officers and outside directors for 2008 and 2007
is summarized as follows: (The number of shares and price per share have been
adjusted to give retroactive effect to all stock dividends and splits.)
2008 2007
-------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
-------------------- -----------------------
Options outstanding at the beginning of the year 7,327 $ 11.64 17,744 $ 9.74
Granted -- -- -- --
Exercised 1,893 10.82 10,417 8.40
Cancelled -- -- -- --
-------- --------
Options outstanding and exercisable at end of year 5,434 $ 11.93 7,327 $ 11.64
======== ========
At December 31, 2008, the remaining contractual life was 1 month.
Shares reserved for issuance of common stock under all the option plans is equal
to the amount of options outstanding at the end of 2008 or 5,434.
The intrinsic value of options outstanding and exercisable at December 31, 2008
and 2007 is $0 and $20,932, respectively. The intrinsic value of options
exercised during the years ended December 31, 2008 and 2007 was $0 and $63,571,
respectively.
NOTE N - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Company from its assets which are mainly provided by
dividends from the Bank. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends, loans or advances. The approval of the Comptroller of the Currency is
required to pay dividends in excess of the Bank's earnings retained in the
current year plus retained net profits for the preceding two years. As of
December 31, 2008, the Bank had retained earnings of approximately $26,102,000,
of which there was no undistributed net income available for distribution to the
Company as dividends.
Under Federal Reserve regulation, the Bank is also limited in the amount it may
loan to the Company, unless such loans are collateralized by specified
obligations. At December 31, 2008, the amount available for transfer from the
Bank to the Company in the form of loans is limited to 10% of the Bank's capital
stock and surplus.
NOTE O - COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
instruments include commitments to extend credit and unused lines of credit, and
expose the Bank to credit risk in excess of the amounts recognized in the
balance sheets.
The contractual amounts of commitments to extend credit represent the amounts of
potential accounting loss should: the contract be fully drawn upon; the customer
default; and the value of any existing collateral become worthless. The Bank
uses the same credit policies in making off-balance-sheet commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
believes that the Bank controls the credit risk of these financial instruments
through credit approvals, credit limits, monitoring procedures and the receipt
of collateral as deemed necessary. Total credit exposures at December 31, 2008
and 2007 related to these items are summarized below:
F-29
2008 2007
Contract Amount Contract Amount
--------------- ---------------
Loan and lease commitments:
Approved loan and lease commitments $ 18,336,000 $ 16,791,000
Unadvanced portion of:
Construction loans 13,979,000 15,061,000
Commercial lines of credit 76,817,000 49,189,000
Home equity lines of credit 34,932,000 31,922,000
Overdraft protection and other consumer lines 961,000 994,000
Credit cards 3,618,000 3,362,000
Standby letters of credit 2,173,000 2,773,000
------------- -------------
$ 150,816,000 $ 120,092,000
============= =============
Loan and lease commitments are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral for loans and leases held is
primarily residential property. Collateral for leases is primarily equipment.
Interest rates on the above are primarily variable. Standby letters of credit
are written commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan and lease facilities
to customers. As of January 1, 2003, newly issued or modified guarantees that
are not derivative contracts have been recorded on the Company's consolidated
balance sheet at their fair value at inception. No liability related to
guarantees was required to be recorded at December 31, 2008 and 2007.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which arose during the
course of business and are pending against the Company. Management believes the
ultimate resolution of these actions and the liability, if any, resulting from
such actions will not materially affect the financial condition or results of
operations of the Company.
NOTE P - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2008 and 2007, the Bank paid approximately
$8,500 and $25,000, respectively, for rent and legal fees, to companies, the
principals of which are Directors of the Company. During the year ended December
31, 2007, the Company paid approximately $421,000 to a company, the principal
which is a Director of the Company, for rent and the purchase of branch
property.
NOTE Q - REGULATORY CAPITAL
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2008 that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
F-30
Tier 1 capital consists of common shareholders' equity, noncumulative and
cumulative perpetual preferred stock, and minority interests less goodwill.
Total capital includes the allowance for loan and lease losses (up to a certain
amount), perpetual preferred stock (not included in Tier 1), hybrid capital
instruments, term subordinated debt and intermediate-term preferred stock. Trust
preferred securities are currently considered regulatory capital for purposes of
determining the Company's Tier I capital ratios. Risk adjusted assets are assets
adjusted for categories of on and off-balance sheet credit risk.
As of December 31, 2008 the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. Due to the increased provision for loan and lease losses as
well as the OTTI losses, as of December 31, 2008 the Bank was not considered
well capitalized. During the first quarter of 2009 the Company contributed
$4,000,000 in capital to the Bank. As a result of this action, as of March 31,
2009, the Bank met all conditions to be considered well capitalized. There were
no conditions or events since that notification that management believes have
changed the Bank's category.
The Company's and Bank's actual capital amounts and ratios compared to required
regulatory amounts and ratios are presented below:
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Purposes
------------------------ --------------------- -------------------------
As of December 31, 2008: Amount Ratio Amount Ratio Amount Ratio
------------------------ --------------------- -------------------------
The Company
- -----------
Total Capital to Risk Weighted Assets $43,361,000 11.74% $29,548,000 8% N/A N/A
Tier I Capital to Risk Weighted Assets 39,662,000 10.74% 14,772,000 4% N/A N/A
Tier I Capital to Average Assets 39,662,000 7.85% 20,210,000 4% N/A N/A
The Bank
- --------
Total Capital to Risk Weighted Assets $34,778,000 9.43% $29,504,000 8% $36,880,000 10%
Tier I Capital to Risk Weighted Assets 31,079,000 8.43% 14,747,000 4% 22,120,000 6%
Tier I Capital to Average Assets 31,079,000 6.10% 20,380,000 4% 25,475,000 5%
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Purposes
------------------------ --------------------- -------------------------
As of December 31, 2007: Amount Ratio Amount Ratio Amount Ratio
------------------------ --------------------- -------------------------
The Company
- -----------
Total Capital to Risk Weighted Assets $41,561,000 12.61% $25,367,000 8% $ N/A N/A
Tier I Capital to Risk Weighted Assets 39,409,000 11.96% 13,180,000 4% N/A N/A
Tier I Capital to Average Assets 39,409,000 8.04% 19,606,000 4% N/A N/A
The Bank
- --------
Total Capital to Risk Weighted Assets $38,312,000 11.65% $26,309,000 8% $32,886,000 10%
Tier I Capital to Risk Weighted Assets 36,160,000 11.00% 13,149,000 4% 19,724,000 6%
Tier I Capital to Average Assets 36,160,000 7.36% 19,652,000 4% 24,565,000 5%
F-31
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
Effective January 1, 2008, the Company adopted SFAS No. 157, which, defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements. As
defined in SFAS No. 157, fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, the
Company uses various methods including market, income and cost approaches. Based
on these approaches, the Company often utilizes certain assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk or the risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market corroborated, or generally unobservable
inputs. The Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. Based on the
observability of the inputs used in the valuation techniques the Company is
required to provide the following information according to the fair value
hierarchy described in Note A. The fair value hierarchy ranks the quality and
reliability of the information used to determine fair values.
A description of the valuation methodologies used for assets and liabilities
recorded at fair value, and for estimating fair value for financial instruments
not recorded at fair value in accordance with SFAS No. 107, "Disclosures About
Fair Values of Financial Instruments" ("SFAS No. 107"), is set forth below.
Cash and Due From Banks, Federal Funds Sold, Interest Income Receivable, Accrued
Interest Payable, Collateralized Borrowings, and Short-term Borrowings: These
assets and liabilities are short-term, and therefore, book value is a reasonable
estimate of fair value. These financial instruments are not carried at fair
value on a recurring basis.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock and Other Restricted
Stock: Such stock is estimated to equal the carrying value, due to the
historical experience that these stocks are redeemed at par. These financial
instruments are not carried at fair value on a recurring basis.
Available for Sale and Held to Maturity Securities: Where quoted prices are
available in an active market, securities are classified within Level 1 of the
valuation hierarchy. Level 1 securities include U.S. Treasury securities and
certain equity securities that are traded in an active exchange market. If
quoted prices are not available, then fair values are estimated by using pricing
models (i.e., matrix pricing) or quoted prices of securities with similar
characteristics and are classified within Level 2 of the valuation hierarchy.
Examples of such instruments include U.S. Government agency and sponsored agency
bonds, mortgage-backed and debt securities, state and municipal obligations,
corporate and other bonds and equity securities in markets that are not active,
and certain collateral dependent loans. Available for sale securities are
recorded at fair value on a recurring basis, and held to maturity securities are
only disclosed at fair value.
Loans: For variable rate loans which reprice frequently and have no significant
change in credit risk, carrying values are a reasonable estimate of fair values,
adjusted for credit losses inherent in the portfolios. The fair value of fixed
rate loans is estimated by discounting the future cash flows using the year end
rates, estimated using local market data, at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities,
adjusted for credit losses inherent in the portfolios. Loans are generally not
recorded at fair value on a recurring basis. However, from time to time,
nonrecurring fair value adjustments to collateral-dependent impaired loans are
recorded to reflect partial write-downs based on the observable market price or
current appraised value of collateral.
Deposits: The fair value of demand deposits, savings and money market deposits
is the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated using a discounted cash flow calculation
that applies interest rates currently being offered for deposits of similar
remaining maturities to a schedule of aggregated expected maturities on such
deposits. Deposits are not recorded at fair value on a recurring basis.
Long-term debt: The fair value of long-term debt is estimated using a discounted
cash flow calculation that applies current interest rates for borrowings of
similar maturity to a schedule of maturities of such advances. Long-term debt is
not recorded at fair value on a recurring basis.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings. Off-balance sheet instruments are not recorded
at fair value on a recurring basis.
F-32
The following table details the financial instruments that are carried at fair
value and measured at fair value on a recurring basis as of December 31, 2008,
and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine the fair value.
The Company uses models when quotations are not available for certain securities
or in markets where trading activity has slowed or ceased. When quotations are
not available, and are not provided by third party pricing services,
management's judgment is necessary to determine fair value. In situations
involving management judgment, fair value is determined using discounted cash
flow analysis or other valuation models which incorporate available market
information, including appropriate benchmarking to similar instruments, analysis
of default and recovery rates, estimation of prepayment characteristics and
implied volatilities.
Fair Value Measurements at December 31, 2008, Using
Quoted Prices in Significant
December Active Markets for Significant Other Unobservable
31, 2008 Identical Assets Observable Inputs Inputs
Total (Level 1) (Level 2) (Level 3)
-------------- ------------------ ----------------- --------------
Assets:
Available for sale securities $ 113,486,201 $ 5,188,571 $ 108,297,630 $ --
============== ============== ============== ==============
U.S. Treasury securities and one equity security, with a carrying value of
$5,188,571 at December 31, 2008, are the only assets whose fair values are
measured on a recurring basis using Level 1 inputs (active market quotes).
The fair values of other U. S. Government and agency mortgaged backed securities
and debt securities, State and Municipal obligations, other corporate bonds, and
certain equity securities are measured on a recurring basis, using Level 2
inputs of observable market data on similar securities. The carrying value of
these securities totaled $110,267,751 as of December 31, 2008.
The following table details the financial instruments carried at fair value and
measured at fair value on a nonrecurring basis as of December 31, 2008 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine the fair value:
December 31, 2008
----------------------------------------------------------------------------
Quoted Prices in
Active Markets Significant Significant
Balance for Observable Unobservable
as of Identical Assets Inputs Inputs
December 31, 2008 (Level 1) (Level 2) (Level 3)
----------------- ---------------- -------------- --------------
Financial assets held at fair value
Impaired Loans (1) $ 3,271,452 $ -- $ 694,650 $ 2,576,802
============== ============== ============== ==============
(1) Represents carrying value and related write-downs for which adjustments
are based on the appraised value
The Company will apply the fair value measurement and disclosure provisions of
SFAS No. 157 effective January 1, 2009 to nonfinancial assets and liabilities
measured on a nonrecurring basis. The Company may measure the fair value of the
following on a nonrecurring basis: (1) long-lived assets; and (2) other real
estate owned.
SFAS No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial condition,
for which it is practicable to estimate that value. SFAS No. 107 excludes
certain financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
F-33
The estimated fair value amounts for 2008 and 2007 have been measured as of
their respective year-ends and have not been reevaluated or updated for purposes
of these financial statements subsequent to those respective dates. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than amounts reported at each
year-end.
The information presented should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only required for
a limited portion of the Company's assets and liabilities. Due to the wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful.
The recorded book balances and estimated fair values of the Company's financial
instruments at December 31, 2008 and 2007 are as follows:
2008 2007
------------------------------ ------------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Financial Assets:
Cash and due from banks $ 9,238,783 9,238,783 $ 21,497,194 21,497,194
Available for sale securities 113,486,201 113,486,201 128,979,548 128,979,548
Held to maturity securities 16,550 16,553 34,185 33,712
Federal Home Loan Bank Stock 5,427,600 5,427,600 5,067,400 5,067,400
Federal Reserve Bank Stock 225,850 225,850 225,850 225,850
Other restricted stock 100,000 100,000 95,000 95,000
Loans held for sale 1,013,216 1,013,216 -- --
Loans and leases, net 366,392,079 365,191,872 327,475,371 335,526,483
Accrued interest receivable 2,262,918 2,262,918 2,609,606 2,609,606
Financial Liabilities:
Savings deposits 58,582,376 58,582,376 56,344,878 56,344,878
Money market and demand deposits 162,633,387 162,633,387 149,302,973 149,302,973
Time certificates of deposit 122,110,861 122,607,975 129,969,813 130,267,235
Federal Home Loan Bank advances 81,608,000 86,044,755 91,500,000 96,219,124
Repurchase agreements with
financial institutions 26,450,000 26,316,528 21,550,000 21,421,552
Repurchase agreements with customers 18,222,571 18,222,571 14,142,773 14,142,773
Subordinated debt 10,104,000 10,104,000 10,104,000 10,104,000
Accrued interest payable 611,829 611,829 731,496 731,496
Collateralized borrowings 1,375,550 1,375,550 1,699,336 1,699,336
Loan and lease commitments, rate lock derivative commitments and other
commitments, on which the committed interest rate is less than the current
market rate are insignificant at December 31, 2008 and 2007.
The Bank assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, the fair values
of the Bank's financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the Bank. Management
attempts to match maturities of assets and liabilities to the extent believed
necessary to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans, leases and
deposits and by investing in securities with terms that mitigate the Bank's
overall interest rate risk.
F-34
NOTE S - OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss is comprised of the following at December
31, 2008 and 2007:
2008 2007
----------- -----------
Unrealized (gains) losses on available for sale
securities, net of taxes $ (158,088) $ 769,496
Unfunded pension liability, net of taxes 1,182,586 497,891
----------- -----------
$ 1,024,498 $ 1,267,387
=========== ===========
Other comprehensive income for the years ended December 31, 2008 and 2007 is as
follows:
2008
-----------------------------------------------
Before- Tax Net-of-Tax
Amount Taxes Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $(7,479,430) $ 2,543,006 $(4,936,424)
Less: reclassification adjustment for losses recognized in net loss 8,884,860 (3,020,852) 5,864,008
----------- ----------- -----------
Unrealized holding gain on available for sale securities, net of taxes 1,405,430 (477,846) 927,584
Net pension loss (1,037,417) 352,722 (684,695)
----------- ----------- -----------
Total other comprehensive income, net of taxes $ 368,013 $ (125,124) $ 242,889
=========== =========== ===========
2007
-----------------------------------------------
Before- Tax Net-of-Tax
Amount Taxes Amount
----------- ----------- -----------
Unrealized holding gains arising during the period $ 1,968,743 $ (669,373) $ 1,299,370
Less: reclassification adjustment for gains recognized in net income (19,632) 6,675 (12,957)
----------- ----------- -----------
Unrealized holding gain on available for sale securities, net of taxes 1,949,111 (662,698) 1,286,413
Net pension gain 398,201 (135,388) 262,813
----------- ----------- -----------
Total other comprehensive income, net of taxes $ 2,347,312 $ (798,086) $ 1,549,226
=========== =========== ===========
F-35
NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION
FIRST LITCHFIELD FINANCIAL CORPORATION
Condensed Balance Sheets December 31,
----------------------------
2008 2007
----------- -----------
Assets
Cash and due from banks $ 8,564,235 $ 3,114,290
Investment in The First National Bank of Litchfield 33,629,067 34,863,604
Investment in the First Litchfield Statutory Trusts I, II 304,000 304,000
Other assets 408,973 501,838
----------- -----------
Total Assets $42,906,275 $38,783,732
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Subordinated Debt $10,104,000 $10,104,000
Other liabilities 388,886 367,120
Total Liabilites 10,492,886 10,471,120
Shareholders' equity 32,413,389 28,312,612
Total Liabilities and Shareholders' Equity $42,906,275 $38,783,732
Condensed Statements of Operations Years Ended December 31,
----------------------------
2008 2007
----------- -----------
Dividends from subsidary $ 1,425,000 $ 1,900,000
Other expenses, net 682,166 877,608
----------- -----------
Income before taxes and equity in earnings of subsidiary 742,834 1,022,392
Income tax benefit 231,936 298,386
----------- -----------
Income before equity in undistributed (losses)
earnings of subsidary 974,770 1,320,778
Equity in undistributed (losses) earnings of subsidiary (5,465,154) 626,564
----------- -----------
Net (loss) income $(4,490,384) $ 1,947,342
=========== ===========
Condensed Statements of Cash Flows Years Ended December 31,
----------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net (loss) income $(4,490,384) $ 1,947,342
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Equity in undistributed losses (earnings) of subsidiary 5,465,154 (626,564)
Other, net 98,679 135,247
----------- -----------
Cash provided by operating activities 1,073,449 1,456,025
----------- -----------
Cash flows from investing activities:
Investment in the First National Bank of Litchfield (4,000,000) --
----------- -----------
Cash used in investing activities (4,000,000) --
----------- -----------
Cash flows from financing activities:
Stock options exercised 20,482 87,487
Distribution in cash for financial shares of common stock -- (3,917)
Proceeds from issuance of preferred shares 10,000,000 --
Purchase of treasury shares (227,098) (132,208)
Dividends paid on common stock (1,416,888) (1,354,434)
----------- -----------
Cash provided by (used in) financing activities 8,376,496 (1,403,072)
----------- -----------
Net increase in cash and due from banks 5,449,945 52,953
Cash and due from banks at the beginning of the year 3,114,290 3,167,243
----------- -----------
Cash and due from banks at the end of the year $ 8,564,235 $ 3,114,290
=========== ===========
F-36
NOTE U - SEGMENT REPORTING
Beginning in 2007, with First Litchfield Leasing Corporation fully operational,
the Company has two operating segments for purposes of reporting business line
results. These segments are Community Banking and Leasing. The Community Banking
segment is defined as all the operating results of The First National Bank of
Litchfield. The Leasing segment is defined as the results of First Litchfield
Leasing Corporation. Because First Litchfield Leasing Corporation is a new
subsidiary, methodologies and organizational hierarchies are newly developed and
will be subject to periodic review and revision. The following presents the
operating results and total assets for the segments of First Litchfield
Financial Corporation for the years ended December 31, 2008 and 2007. The
Company uses an internal reporting system to generate information by operating
segment. Estimates and allocations are used for noninterest expenses and income
taxes. The Company uses a matched maturity funding concept to allocate interest
expense to First Litchfield Leasing Corporation. The matched maturity funding
concept utilizes the origination date and the maturity date of the lease to
assign an interest expense to each lease.
For the Year Ended
December 31, 2008
-------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 14,274,471 $ 665,114 $ -- $ 14,939,585
Provision for loan and lease losses 1,742,186 94,113 -- 1,836,299
------------- ------------- ------------- -------------
Net interest income after provision for
loan and lease losses 12,532,285 571,001 -- 13,103,286
Noninterest (loss) income (5,366,133) 4,028 -- (5,362,105)
Noninterest expense 14,970,593 369,556 -- 15,340,149
------------- ------------- ------------- -------------
Income (loss) before income taxes (7,804,441) 205,473 -- (7,598,968)
Income tax provision (benefit) (3,175,720) 63,261 -- (3,112,459)
Minority Interest 3,875 -- -- 3,875
------------- ------------- ------------- -------------
Net income (loss) $ (4,632,596) $ 142,212 $ -- $ (4,490,384)
============= ============= ============= =============
Total assets as of December 31, 2008 $ 509,370,298 $ 23,089,258 $ (201,949) $ 532,257,607
============= ============= ============= =============
For the Year Ended
December 31, 2007
-------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 12,951,760 $ 261,299 $ -- $ 13,213,059
Provision for loan and lease losses 123,726 80,274 -- 204,000
------------- ------------- ------------- -------------
Net interest income after provision for
loan and lease losses 12,828,034 181,025 -- 13,009,059
Noninterest income 3,431,476 -- -- 3,431,476
Noninterest expense 13,948,648 318,843 -- 14,267,491
------------- ------------- ------------- -------------
Income (loss) before income taxes 2,310,862 (137,818) -- 2,173,044
Income tax provision (benefit) 274,159 (48,457) -- 225,702
------------- ------------- ------------- -------------
Net income (loss) $ 2,036,703 $ (89,361) $ -- $ 1,947,342
============= ============= ============= =============
Total assets as of December 31, 2007 $ 535,136,271 $ 10,972,121 $ (38,454,763) $ 507,653,629
============= ============= ============= =============
NOTE V - FOURTH QUARTER ADJUSTMENTS
The Company reported a net loss of $4,516,773 or $1.92 diluted loss per common
share for the year ended December 31, 2008 and a net loss of $205,853 or $.09
diluted loss per common share for the fourth quarter of 2008. During the fourth
quarter the Company recorded a $1,469,299 provision for loan and lease losses
and an impairment charge on available for sale securities of $2,476,552.
Additionally during the fourth quarter the Company recognized the $1,710,200
deferred tax benefit on third quarter impairment losses related to Fannie Mae
and Freddie Mac preferred stock and auction rate securities holding such stock.
F-37
The increased fourth quarter provision for loan and lease losses was primarily
attributable to the increase in impaired loans during the fourth quarter as a
result of the deteriorating market conditions. Impaired loans increased from
$4,719,588 at September 30, 2008 to $8,902,739 at December 31, 2008, most of
which was concentrated in Connecticut. In addition, the Company increased its
general allowance for loan and lease losses component to reflect the current
market conditions and increases in delinquent loans.
During the three months and quarter ended September 30, 2008, the Company
incurred a $5,030,000 loss from the other-than-temporary impairment of Fannie
Mae and Freddie Mac preferred stock and auction rate preferred securities
holding such stock. As of September 30, 2008, these losses were considered
capital losses for Federal income tax purposes, which are only deductible if
such losses are offset against capital gains. Because the Company did not have
any such capital gains in the tax carryback period, and because there were no
tax strategies available to generate future capital gains to utilize such
losses, a deferred tax valuation allowance of $1,710,200 was recorded at
September 30, 2008, which represented the amount of deferred tax benefit related
to the impairment losses. Subsequent to September 30, 2008, the passage of the
Federal Emergency Economic Stabilization Act changed the Federal tax laws to
allow the deductions of losses to be treated as ordinary losses for Federal
Income tax purposes. Therefore, the Company in the fourth quarter of 2008,
recognized the deferred tax benefit of $1,710,200 in the fourth quarter of 2008.
F-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the accountants of the Company
during the 24 month period prior to December 31, 2008, or subsequently.
ITEM 9A(T). CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
report is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit of possible
controls and procedures.
The Company's Management, under the supervision and with the participation of
the Company's Chief Executive Officer and the Company's Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
as of December 31, 2008. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective.
(b) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining, for the Company,
adequate internal control over financial reporting, as such term is defined in
Exchange act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the
supervision and with the participation of the Chief Executive Officer and the
Chief Financial Officer, we conducted an evaluation of the effectiveness of our
control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO"). Based on our evaluation under the
framework, management has concluded that our internal control over financial
reporting was effective as of December 31, 2008. There were no material
weaknesses in the Company's internal control over financial reporting identified
by management.
The annual report does not include an attestation report the Company's
registered public accounting firm, regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only Management's
report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fourth quarter of 2008 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5)
of Regulation S-K is incorporated into this Form 10-K by reference to the
Company's Definitive Proxy Statement (the "Definitive Proxy Statement") for its
2009 Annual Meeting of Shareholders.
Code of Ethics
The Company has adopted a Code of Ethics that applies to the Company's Chief
(Principal) Executive Officer and Chief (Principal) Financial Officer. Such Code
of Ethics may be obtained by any person, without charge, upon request, by
writing to: Carroll A. Pereira, Treasurer, First Litchfield Financial
Corporation, 13 North Street, Litchfield, CT 06759.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 and paragraph (e)(4) and (e)(5) of item 407
of Regulation S-K is incorporated into this Form 10-K by reference to the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 201(d) and Item 403 of Regulation S-K is
incorporated into this Form 10-K by reference to the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Items 404 of Regulation S-K and Item 407(a) of
Regulation S-K is incorporated into this Form 10-K by reference to the
Definitive Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A is incorporated into this
Form 10-K by reference to the Company's Definitive Proxy Statement.
28
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits
EXHIBIT INDEX
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation of First Litchfield Financial
Corporation, as amended. Exhibit is incorporated by reference to
Exhibit 3.1 set forth in the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
3.1.1 Certificate of Designations for the Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, filed December 9, 2008. Exhibit is
incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on December 18, 2008.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
Exhibit is incorporated by reference to Exhibit 3.2 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
4. Specimen Common Stock Certificate. Exhibit is incorporated by
reference to Exhibit 4. set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
4.1 Amended and Restated Declaration of Trust of First Litchfield
Statutory Trust I. Exhibit is incorporated by reference to Exhibit
10.52 set forth in the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 2003 as filed with the Securities and
Exchange Commission on August 13, 2003.
4.2 Indenture for the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2033. Exhibit is incorporated by
reference to Exhibit 10.53 set forth in the Company's Quarterly
report on Form 10-QSB for the quarter ended June 30, 2003 as filed
with the Securities and Exchange Commission on August 13, 2003.
4.3 Indenture dated June 16, 2006, between First Litchfield Financial
Corporation, as issuer, and Wilmington Trust Company, as indenture
trustee. Exhibit is incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-K/A as filed with the
Securities and Exchange Commission on June 30, 2006.
4.4 Guarantee Agreement dated as of June 16, 2006, between First
Litchfield Financial Corporation, and Wilmington Trust Company.
Exhibit is incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-K/A as filed with the Securities
and Exchange Commission on June 30, 2006.
4.5 Form of Junior Subordinated Note. Exhibit is incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form 8-K/A as filed with the Securities and Exchange Commission on
June 30, 2006.
4.6 Warrant to purchase Common Stock dated December 12, 2008. Exhibit is
incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on December 18, 2008.
10.1 1994 Stock Option Plan for Officers and Outside Directors. Exhibit
is incorporated by reference to Exhibit 10.2 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
10.2 Supplemental Employee Retirement Agreement between the Company and
Walter Hunt. Exhibit is incorporated by reference to Exhibit 10.9
set forth in the Company's Registration Statement Annual Report on
Form 10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
10.3 Deferred Directors' Fee Plan. Exhibit is incorporated by reference
to Exhibit 10.10 set forth in the Company's Registration Statement
on Form 10-SB as filed with the Securities and Exchange Commission
on January 7, 2000.
10.4 Split Dollar Agreement with Salisbury Bank as Trustee dated November
21, 2000. Exhibit is incorporated by reference to Exhibit 10.13 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
29
10.5 The Rabbi Trust Agreement with Salisbury Bank as Trustee dated
November 21, 2000. Exhibit is incorporated by reference to Exhibit
10.14 set forth in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2000 as filed with the Securities
and Exchange Commission on April 2, 2001.
10.6 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Jerome J. Whalen and the Bank dated December 28,
2000. Exhibit is incorporated by reference to Exhibit 10.15 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.8 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Carroll A. Pereira and the Bank dated November 30,
2000. Exhibit is incorporated by reference to Exhibit 10.16 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.9 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Philip G. Samponaro and the Bank dated December
19, 2000. Exhibit is incorporated by reference to Exhibit 10.17 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.10 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Revere H. Ferris and the Bank dated November 30,
2000. Exhibit is incorporated by reference to Exhibit 10.18 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.11 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between John S. Newton and the Bank dated December 21,
2000. Exhibit is incorporated by reference to Exhibit 10.19 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.12 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Charles E. Orr and the Bank dated November 29,
2000. Exhibit is incorporated by reference to Exhibit 10.20 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.13 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Patricia D. Werner and the Bank dated November 30,
2000. Exhibit is incorporated by reference to Exhibit 10.21 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.14 The First National Bank of Litchfield Director Incentive Retirement
Agreement between George M. Madsen and the Bank dated December 7,
2000. Exhibit is incorporated by reference to Exhibit 10.23 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.15 The First National Bank of Litchfield Director Incentive Retirement
Agreement between William J. Sweetman and the Bank dated December
20, 2000. Exhibit is incorporated by reference to Exhibit 10.24 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.16 The First National Bank of Litchfield Director Incentive Retirement
Agreement between H. Ray Underwood and the Bank dated December 20,
2000. Exhibit is incorporated by reference to Exhibit 10.25 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.17 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Perley H. Grimes and the Bank dated December 27,
2000. Exhibit is incorporated by reference to Exhibit 10.29 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000 as filed with the Securities and
Exchange Commission on April 2, 2001.
10.17 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Alan B. Magary and the Bank dated December 19,
2002. Exhibit is incorporated by reference to Exhibit 10.38 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2002 as filed with the Securities and
Exchange Commission on March 31, 2003.
30
10.18 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Gregory S. Oneglia and the Bank dated December 19,
2002. Exhibit is incorporated by reference to Exhibit 10.39 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2002 as filed with the Securities and
Exchange Commission on March 31, 2003.
10.19 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Joseph J. Greco and the Bank dated December 19,
2002. Exhibit is incorporated by reference to Exhibit 10.40 set
forth in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2002 as filed with the Securities and
Exchange Commission on March 31, 2003.
10.20 Split dollar life agreement between Joelene E. Smith and the
Company. Exhibit is incorporated by reference to Exhibit 10.47 set
forth in the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003 as filed with the Securities and
Exchange Commission on August 13, 2003.
10.21 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Joelene E. Smith and the Bank dated December 22,
2003. Exhibit is incorporated by reference to Exhibit 10.54 set
forth in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2003 as filed with the Securities and Exchange
Commission on March 30, 2004.
10.22 The First National Bank of Litchfield Director Incentive Retirement
Agreement between Kathleen A. Kelley and the Bank dated September 1,
2004. Exhibit is incorporated by reference to Exhibit 10.56 set
forth in the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2004 as filed with the Securities and
Exchange Commission on November 14, 2004.
10.23 Amendment to The First National Bank of Litchfield Director
Incentive Retirement Agreement between Alan B. Magary and the Bank
dated August 26, 2004. Exhibit is incorporated by reference to
Exhibit 10.57 set forth in the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2004 as filed with the
Securities and Exchange Commission on November 14, 2004.
10.24 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Robert E. Teittinen and the Bank dated November
21, 2005. Exhibit is incorporated by reference to Exhibit 10.59 set
forth in the Company's Annual Report Form 10-K for the year ended
December 31, 2005 as filed with the Securities and Exchange
Commission on March 30, 2006.
10.25 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Joseph J. Greco and the Bank dated
April 27, 2006. Exhibit is incorporated by reference to Exhibit
10.60 set forth in the Company's Annual Report on Form 10-Q for the
quarter ended June 30, 2006 as filed with the Securities and
Exchange Commission on August 14, 2006.
10.26 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Carroll A. Pereira and the Bank dated
April 27, 2006. Exhibit is incorporated by reference to Exhibit
10.61 set forth in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006 as filed with the Securities and
Exchange Commission on August 14, 2006.
10.27 The First National Bank of Litchfield Supplemental Executive
Retirement Agreement between Joelene E. Smith and the Bank dated
April 27, 2006. Exhibit is incorporated by reference to Exhibit
10.62 set forth in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006 as filed with the Securities and
Exchange Commission on August 14, 2006.
10.28 The First National Bank of Litchfield Executive Incentive Retirement
Agreement between Frederick F. Judd, III and the Bank dated April
28, 2006. Exhibit is incorporated by reference to Exhibit 10.63 set
forth in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006 as filed with the Securities and Exchange
Commission on August 14, 2006.
10.29 Executive Change in Control Agreement between Joseph J. Greco and
the Company and the Bank dated May 29, 2008. Exhibit is incorporated
by reference to Exhibit 10.1 set forth in the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008
10.30 Executive Change in Control Agreement between Carroll A. Pereira and
the Company and the Bank dated May 29, 2008. Exhibit is incorporated
by reference to Exhibit 10.1 set forth in the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008.
10.31 Executive Change in Control Agreement between Joelene E. Smith and
the Company and the Bank dated May 29, 2008. Exhibit is incorporated
by reference to Exhibit 10.1 set forth in the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008. 31
31
10.32 Executive Change in Control Agreement between Robert E. Teittinen
and the Company and the Bank dated May 29, 2008. Exhibit is
incorporated by reference to Exhibit 10.1 set forth in the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008.
10.33 Executive Change in Control Agreement between Frederick F. Judd, III
and the Company and the Bank dated May 29, 2008. Exhibit is
incorporated by reference to Exhibit 10.1 set forth in the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008
10.34 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.2 set forth in the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008
10.35 First Litchfield Financial Corporation 2008 Restricted Stock Plan.
Exhibit is incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on July 7, 2008 (File No.
333-144951).
10.36 Form of First Amended and Restated Executive Incentive Retirement
Agreement dated November 20, 2008 entered with Joseph J. Greco,
Frederick F. Judd III and Carroll A. Pereira. Exhibit is
incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on November 24, 2008.
10.37 Form of First Amended and Restated Director Incentive Retirement
Agreements dated November 20, 2008 entered with Perley H. Grimes,
Jr., George M. Madsen, Alan B. Magary, Gregory S. Oneglia, Charles
E. Orr, William J. Sweetman, H. Ray Underwood, Jr., and Patricia D.
Werner. Exhibit is incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K as filed with the Securities
and Exchange Commission on November 24, 2008.
10.38 Form of First Amended and Restated Supplemental Executive Retirement
Agreement dated November 20, 2008 entered with Joseph J. Greco and
Carroll A. Pereira. Exhibit is incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 24, 2008.
10.39 Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered between Matthew R. Robison and the Company
and the Bank.
10.40 Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered between Joelene E. Smith and the Company
and the Bank
10.41 Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered between Robert E. Teittinen and the
Company and the Bank.
10.42 First Amended and Restated Supplemental Executive Retirement
Agreement dated November 20, 2008 entered between Joelene E. Smith
and the Company and the Bank.
10.43 Executive Change in Control Agreement between Matthew R. Robison and
the Company and the Bank dated May 29, 2008. Exhibit is incorporated
by reference to Exhibit 10.1 set forth in the Company's Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on June 4, 2008
10.44 Employee Change in Control Agreement between Linda R. Parady and the
Company and the Bank dated February 9, 2009.
10.45 Executive Change in Control Agreement between Glenn M. Mason and the
Company and the Bank dated February 9, 2009.
10.46 Amended and Restated Director Incentive Retirement Agreement dated
November 20, 2008 entered between Richard E. Pugh and the Company
and the Bank.
10.47 Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered between Patrick J. Boland and the Company
and the Bank.
21. List of Subsidiaries of First Litchfield Financial Corporation
23. Consent of McGladrey & Pullen, LLP.
31.1 Certification of Chief Executive Officer of the Company.
31.2 Certification of Chief Financial Officer of the Company.
32.0 Certification of Chief Executive Officer and the Chief Financial
Officer of the Company, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 2009 FIRST LITCHFIELD FINANCIAL CORPORATION
By: /s/ Joseph J. Greco
-------------------
Joseph J. Greco, President and
Chief Executive Officer
Dated: April 14, 2009 By: /s/ Carroll A. Pereira
----------------------
Carroll A. Pereira,
Principal Accounting Officer
and Treasurer
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Joseph J. Greco President, Chief Executive 4/14/09
- ---------------------------- Officer and Director
Joseph J. Greco
/s/ Patrick J. Boland Director 4/14/09
- ----------------------------
Patrick J. Boland
/s/ John A. Brighenti Director 4/14/09
- ----------------------------
John A. Brighenti
/s/ Perley H. Grimes, Jr. Director 4/14/09
- ----------------------------
Perley H. Grimes, Jr.
/s/ George M. Madsen Director 4/14/09
- ----------------------------
George M. Madsen
/s/ Alan B. Magary Director 4/14/09
- ----------------------------
Alan B. Magary
/s/ Gregory Oneglia Director 4/14/09
- ----------------------------
Gregory Oneglia
/s/ Richard E. Pugh Director 4/14/09
- ----------------------------
Richard E. Pugh
/s/ William J. Sweetman Director 4/14/09
- ----------------------------
William J. Sweetman
/s/ H. Ray Underwood Director 4/14/09
- ----------------------------
H. Ray Underwood
/s/ Patricia D. Werner Director 4/14/09
- ----------------------------
Patricia D. Werner
34