UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(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
------------------- -----------------------------------------
_______________________________ __________________________________________
_______________________________ __________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
(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 |_|
1
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.
Explanatory Note
This Amendment No. 1 on Form 10-K/A ("Form 10-K/A") to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, initially filed
with the Securities and Exchange Commission ("SEC") on April 15, 2009, is being
filed to correct certain inadvertent omissions as applicable, as well as
enhancing the identification and discussion of Management's Discussion and
Analysis of Financial Condition and Results of Operation and certain footnotes
to the Registrant's Consolidated Financial Statements. These changes were
intended to be included in the Registrant's Form 10-K filing on April 15, 2009
however due to an oversight, these changes were not included such filing.
This Form 10-K/A hereby amends:
o Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation to reflect the following:
o Enhanced the Allowance For Loan and Lease Losses discussion to
more clearly describe what constitutes the "specific component
and general component" of the allowance for loan and lease
losses.
o Revised the Financial Condition discussion to clarify that the
volume of loan growth during 2008 was realized primarily in
commercial mortgages and commercial loans and leases.
o Revised the Rate/Volume Analysis to reflect that the tax
equivalent net interest income for 2008 increased by
$1,733,320.
o Revised the discussion regarding Non-Accrual, Past Due,
Restructured Loans and Leases and Other Real Estate Owned to
reference the statement of operations.
o Revised the Noninterest (Loss) Income discussion to reference
2007 results.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note A - Nature of Operations and Significant Accounting
Policies, to reflect the following:
o Removed the definition of Other-Than-Temporary Impairment as
such Policy is duplicative.
o Enhanced the definition of Allowance for Loan and Lease Losses
to more clearly describe what constitutes the "specific
component" of the allowance for loan and lease losses.
o Revised the definition of Foreclosed Real Estate to reference
the statement of operations.
o Revised the definition of Earnings Per Share to clarify the
description of how basic earnings per share is computed.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note C -Securities, to expand the description of equity
securities to include the fair value of a money market fund.
2
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note I - Borrowings and Federal Home Loan Bank Stock, to
expand the description of the Bank's Federal Home Loan Bank
Borrowings and Federal Home Loan Bank Stock. In addition, the
footnote has been revised to include a description of Repurchase
Agreements with Customers.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note J - Income Taxes, to include a reference to the
statement of operations in the description of the income tax
provision.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note O - Financial Instruments with Off-Balance-Sheet Risk,
to clarify that collateral for loans is primarily residential
property. Collateral for leases is primarily equipment.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note R - Fair Value of Financial Instruments and Interest
Rate Risk, to add the explanation that loans and leases held for
sale are valued at quoted market prices. Revised to also reflect
that carrying value of securities measured using Level 2 inputs was
$108,297,630 at December 31, 2008.
o Part II, Item 8, Financial Statements and Supplementary Data.
Revised Note V - Fourth Quarter Adjustments - to amend the
information regarding the Company's reported net loss for the year
ended December 31, 2008, and to correct the figure for impaired
loans at December 31, 2008.
This Form 10-K/A speaks as of the end of our fiscal year ended December 31, 2008
or as of the date of the original filing, as applicable. The foregoing items
have not been updated to reflect other events occurring after the original
filing or to modify or update those disclosures affected by subsequent events.
TABLE OF CONTENTS
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 3
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Item 8. Financial Statements and Supplementary Data 14
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PART IV
Item 15. Exhibits and Financial Statement Schedules 15
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SIGNATURES 20
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
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,
3
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 impaired. For impaired loans
and leases 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-impaired 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.
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.
4
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 commercial 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.
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
5
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
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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
============ ============
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.
6
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%
====== ======
7
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 $1,733,320 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 2007
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.
8
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 operations.
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.
9
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.
10
(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 Allowance of Loans of Allowance of Loans of Allowance of Loans
for Loan and in each for Loan and in each for Loan and in each
Lease Losses Category Lease Losses Category Lease Losses Category
to Total to Total to Total
Loans Loans 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 Allowance of Loans of Allowance of Loans
for Loan and Each for Loan and Each
Lease Losses Category Lease Losses Category
to Total to Total
Loans 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.
11
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.
12
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.
13
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
14
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, 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.
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.
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.
F-8
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 impaired.
For such loans and leases that are 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-impaired 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. 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.
F-9
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 operations.
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.
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.
F-10
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.
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 available to common
shareholders 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.
F-11
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.
- --------------------------------------------------------------------------------
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.
F-12
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.
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.
F-13
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, a money market fund with
a fair value of $45,828, and perpetual preferred stock of government sponsored
enterprises which have been written down to a fair value of $2
F-16
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.
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.
F-17
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.
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
============= =============
F-18
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.
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
F-19
$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.
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.
F-20
NOTE I - BORROWINGS AND FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank Borrowings and Stock
- -------------------------------------------
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"), is required to maintain as collateral, an investment in capital stock
of the FHLBB in an amount equal to a certain percentage of its outstanding
residential first mortgage loans. Purchases of Federal Home Loan Bank stock
totaled $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. The Company views its
investment in the FHLBB stock as a long-term investment. Accordingly, when
evaluating for impairment, the value is determined based on the ultimate
recovery of the par value rather than recognizing temporary declines in value.
The determination of whether a decline affects the ultimate recovery is
influenced by criteria such as: 1) the significance of the decline in net assets
of the FHLBB as compared to the capital stock amount and length of time a
decline has persisted; 2) impact of legislative and regulatory changes on the
FHLBB and 3) the liquidity position of the FHLBB. The FHLBB announced in
February 2009 that it will suspend its dividend for the first quarter of 2009,
will likely not pay any dividends for the remainder of 2009, and will continue
its moratorium on excess stock repurchases announced in December 2008. The FHLBB
noted their primary concern related to the impact of other-than-temporary
impairment charges recorded on private label mortgage-backed securities (MBS) as
of December 31, 2008. In addition, in March 2009, the FHLBB announced that it
was filing its Form 10-K with the SEC late because of the need to further
evaluate potential additional losses on its MBS.
While the FHLBB announced that it remained adequately capitalized as of December
31, 2008 in its February announcement, the Company is unable to determine if the
potential additional charges to earnings will change this regulatory capital
classification. The Company does not believe that its investment in the FHLBB is
impaired as of this date. However, this estimate could change in the near term
as a result of any of the following events: 1) additional significant impairment
losses are incurred on the MBS causing a significant decline in the FHLBB's
regulatory capital status; 2) the economic losses resulting from credit
deterioration on the MBS increases significantly and 3) capital preservation
strategies being utilized by the FHLBB become ineffective.
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.
Repurchase Agreements with Customers
- ------------------------------------
At December 31, 2008 and 2007, the balance of securities sold under repurchase
agreements with customers was $18,222,571 and $14,142,773, respectively.
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transactions.
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.
F-21
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
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.
F-22
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 operations
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)%
Nondeductable 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-23
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-24
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 to 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)
=========== ===========
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
F-25
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
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.
F-26
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.
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.
F-27
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. The EESA authorized the U. S.
Treasury to appropriate funds to eligible financial institutions participating
in the TARP Capital Purchase Program. 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 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
-------------------------------------------------
Net Weighted 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
-------------------------------------------------
Net Weighted 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.
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.
F-28
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.
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
Number of Exercise Price Number of Exercise 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.
F-29
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:
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 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.
F-30
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.
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%
F-31
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%
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 Held for Sale: The fair value of loans and leases held for sale is based
on quoted market prices.
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.
F-32
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.
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 $108,297,630 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 Significant Significant
Balance Active Markets 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
F-33
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.
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.
F-34
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.
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 $4,490,384 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 $8,883,136 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-36
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.
15
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.
16
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.
17
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 Form of Amended and Restated Executive Incentive Retirement
Agreement dated November 20, 2008 entered with Matthew R. Robison.
10.40 Form of Amended and Restated Executive Incentive Retirement
Agreement dated November 20, 2008 entered with Joelene E. Smith.
10.41 Form of Amended and Restated Executive Incentive Retirement
Agreement dated November 20, 2008 entered with Robert E.
Teittinen.
10.42 Form of First Amended and Restated Supplemental Executive
Retirement Agreement dated November 20, 2008 entered with Joelene
E. Smith.
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 Form of Amended and Restated Director Incentive Retirement
Agreement dated November 20, 2008 entered with Richard E. Pugh.
10.47 Form of Amended and Restated Executive Incentive Retirement
Agreement dated November 20, 2008 entered with Patrick J. Boland.
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.
18
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.
19
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.
First Litchfield Financial Corporation
By: /s/ Joseph J. Greco April 22, 2009
-------------------
President and CEO
20