Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
T
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended: December 31, 2009
OR
o
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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
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06-1241321
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
|
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13 North Street, Litchfield,
CT
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06759
|
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code (860)
567-8752
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 o No
T
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 o No
T
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 T No
o
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 o No
T
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 o
Accelerated filer o
Non-accelerated filer o Smaller reporting
company T
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes o No
T
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
$12,646,977.
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.
March 31,
2010 - 2,356,875
DOCUMENTS
INCORPORATED BY REFERENCE
TABLE OF
CONTENTS
PART I
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1
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12
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12
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12
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13
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13
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PART II
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13
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15
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15
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25
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26
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27
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27
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28
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PART III
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28
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31
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38
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40
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41
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PART IV
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42
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45
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PART
I
ITEM
1.
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BUSINESS
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Business
of the Company
First
Litchfield Financial Corporation, a Delaware corporation (the “Company”) is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended. The Company was formed in 1988 and has one banking
subsidiary, The First National Bank of Litchfield (the “Bank”), a national
banking association organized under the laws of the United
States. The Bank and its predecessors have been in existence since
1814. The principal executive office of the Company is located at 13
North Street, Litchfield, CT 06759, and the telephone number is (860)
567-8752. The Company owns all of the outstanding shares of the
Bank. The Bank has three subsidiaries, Lincoln Corporation and
Litchfield Mortgage Service Corporation, which are Connecticut corporations, and
First Litchfield Leasing Corporation which is a Delaware corporation. The Bank
holds a majority ownership position in First Litchfield Leasing Corporation. The
purpose of Lincoln Corporation is to hold property such as real estate, personal
property, securities, or other assets, acquired by the Bank through foreclosure
or otherwise to compromise a doubtful claim or collect a debt previously
contracted. The purpose of Litchfield Mortgage Service Corporation is
to operate as a passive investment company in accordance with Connecticut
law. On June 26, 2003, the Company formed First Litchfield Statutory
Trust I for the purpose of issuing trust preferred securities and investing the
proceeds in subordinated debentures issued by the Company, and on June 26, 2003,
the first series of trust preferred securities were issued. During
the second quarter of 2006, the Company formed a second statutory trust, First
Litchfield Statutory Trust II (“Trust II”). Trust II exists for the
sole purpose of issuing trust securities and investing the proceeds in
subordinated debentures issued by the Company. In June 2006, Trust II
issued its first series of trust preferred securities. The Company
owns 100% of each Trust’s common stock.
During
the fourth quarter of 2006, The Bank formed First Litchfield Leasing Corporation
for the purpose of providing equipment financing and leasing
products. The Company considers First Litchfield Leasing
Corporation as an operating segment for reporting business line
results.
The Bank
engages in a wide range of commercial and personal banking activities, including
accepting demand deposits (including Money Market Accounts), accepting savings
and time deposit accounts, making secured and unsecured loans and leases to
corporations, individuals, and others, issuing letters of credit, originating
mortgage loans, and providing personal and corporate trust
services. The business of the Bank is not significantly affected by
seasonal factors.
The
Bank’s lending services include commercial, real estate, and consumer
installment loans and leases. Revenues from the Bank’s lending
activities constitute the largest component of the Bank’s operating
revenues. The loan and lease portfolio constitutes the major earning
asset of the Bank and offers the best alternative for maximizing interest spread
above the cost of funds. The Bank’s loan and lease personnel have the
authority to extend credit under guidelines established and approved by the
Board of Directors. Any aggregate credit which exceeds the authority
of the loan or lease officer is forwarded to the loan committee for
approval. The loan committee is composed of various experienced loan
and lease officers and Bank directors. All aggregate credits that
exceed the loan committee’s lending authority are presented to the full Board of
Directors for ultimate approval or denial. The loan committee not
only acts as an approval body to ensure consistent application of the Bank’s
loan and lease policy, but also provides valuable insight through communication
and pooling of knowledge, judgment, and experience of its members.
The
Bank’s primary lending area generally includes towns located in Litchfield and
Hartford counties.
The
Bank’s Trust and Wealth Management Department provides a wide range of personal
and corporate trust and trust-related investment services, including serving as
executor of estates, as trustee under testamentary and intervivos trusts and
various pension and other employee benefit plans, as guardian of the estates of
minors and incompetents, and as escrow agent under various
agreements.
The Bank
introduces new products and services as permitted by the regulatory authorities
or desired by the public. The Bank remains committed to meeting the
challenges that require technology. In addition to providing its
customers with access to the latest technological products, such as telephone
banking, which allows customers to handle routine transactions using a standard
touch tone telephone, the Bank is accessible via a home page on the Internet.
The Bank also offers PC banking and bill paying via the Internet at its
Website. The Bank also offers a cash management product; e-Business Advantage, which
is geared toward commercial businesses, municipal and nonprofit customers and
provides 24-hour online account management including real-time account
monitoring, managing cash flow, collecting and making payments electronically,
as well as transferring idle cash.
On
October 25, 2009, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) by and among the Company, the Bank and Union Savings Bank
(“Union”) that provides for the merger of the Company and the Bank with and into
Union (the “Merger”). Under the terms of the Merger Agreement,
shareholders of the Company will receive $15.00 cash for each share of Company
common stock they own on the date of the Merger. The transaction is
valued at approximately $35 million. At the Company’s special meeting of
stockholders held on February 19, 2010, holders of the Company’s common stock
voted in favor of the Merger Agreement and Merger. Regulatory
approvals from the State of Connecticut Department of Banking and the Federal
Deposit Insurance Corporation were received on March 19, 2010 and March 17,
2010, respectively. The closing of the Merger is scheduled for April
7, 2010.
Competition
In
Connecticut generally, and in the Bank’s primary service area specifically,
there is intense competition in the commercial banking industry. The
Bank’s market area consists principally of towns located in Litchfield County
and Hartford County, although the Bank also competes with other financial
institutions in surrounding counties in Connecticut in obtaining deposits and
providing many types of financial services. The Bank competes with
larger regional and national banks for the business of companies located in the
Bank’s market area. The Bank also competes with savings and loan
associations, credit unions, finance companies, personal loan companies, money
market funds and other non-depository financial intermediaries. Many of these
financial institutions have resources many times greater than those of the
Bank. In addition, new financial intermediaries such as money-market
mutual funds and large retailers are not subject to the same regulations and
laws that govern the operation of traditional depository
institutions.
Changes
in federal and state law have resulted in, and are expected to continue to
result in, increased competition. The reductions in legal barriers to
the acquisition of banks by out-of-state bank holding companies resulting from
implementation of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and other recent and proposed changes are expected to continue to
further stimulate competition in the markets in which the Bank operates,
although it is not possible to predict the extent or timing of such increased
competition.
Lending
Activities
The
Bank’s lending policy is designed to correspond with its mission of remaining a
community-oriented bank. The loan and lease policy sets forth
accountability for lending functions in addition to standardizing the
underwriting, credit and documentation procedures. The Bank’s target
market regarding lending is in the towns in which a Bank office is located and
contiguous towns. The typical loan and lease customer is an
individual or small business which has a deposit relationship with the
Bank. The Bank strives to provide an appropriate mix in its loan and
lease portfolio of commercial loans leases and loans and leases to individual
consumers.
Loan and Lease
Portfolio
The
Bank’s loan and lease portfolio, which includes loans held for sale, was
comprised of the following categories:
(Dollar
Amounts in Thousands)
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||||||||||||||||||||
December 31,
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||||||||||||||||||||
2009
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2008
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2007
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2006
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2005
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||||||||||||||||
Commercial
loans
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$ | 41,177 | $ | 46,250 | $ | 33,642 | $ | 26,950 | $ | 21,151 | ||||||||||
Commercial
leases
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36,841 | 19,786 | 8,634 | - | - | |||||||||||||||
Real
Estate
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||||||||||||||||||||
Construction
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19,225 | 38,153 | 34,809 | 30,606 | 28,549 | |||||||||||||||
Residential
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169,505 | 193,574 | 189,557 | 177,082 | 145,927 | |||||||||||||||
Commercial
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104,354 | 67,455 | 55,752 | 53,318 | 42,145 | |||||||||||||||
Installment
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4,954 | 5,113 | 6,520 | 7,168 | 4,334 | |||||||||||||||
Others
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69 | 129 | 99 | 172 | 47 | |||||||||||||||
Total
Loans and Leases
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$ | 376,125 | $ | 370,460 | $ | 329,013 | $ | 295,296 | $ | 242,153 |
The
following table reflects the maturity and sensitivities of the Bank’s loan and
lease portfolio at December 31, 2009.
(Dollar
Amounts in Thousands)
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After
one
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One
year
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year through
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Due
after
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Total
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|||||||||||||
or less
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five years
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five years
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loans and leases
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Commercial
loans
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$ | 23,026 | $ | 7,126 | $ | 11,025 | $ | 41,177 | ||||||||
Commercial
leases
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608 | 34,645 | 1,588 | 36,841 | ||||||||||||
Real
Estate
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Construction
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12,339 | 2,339 | 4,547 | 19,225 | ||||||||||||
Residential
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67,881 | 16,746 | 84,878 | 169,505 | ||||||||||||
Commercial
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16,483 | 58,418 | 29,453 | 104,354 | ||||||||||||
Installment
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391 | 2,921 | 1,642 | 4,954 | ||||||||||||
Others
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69 | - | - | 69 | ||||||||||||
Total
Loans and Leases
|
$ | 120,797 | $ | 122,195 | $ | 133,133 | $ | 376,125 |
At
December 31, 2009, loans maturing after one year included approximately:
$160,916,000 in fixed rate loans; and $94,412,000 in variable rate
loans.
Investment
Securities
The
primary objectives of the Bank’s investment policy are to provide a stable
source of interest income, to provide adequate liquidity necessary to meet short
and long-term changes in the mix of its assets and liabilities, to provide a
means to achieve goals set forth in the Bank’s interest rate risk policy, and to
provide a balance of quality and diversification to its assets. The
available-for-sale portion of the investment portfolio is expected to provide
funds when demand for acceptable loans and leases increases and is expected to
absorb funds when loan and lease demand decreases.
At
December 31, 2009 the carrying value of the Bank’s investment portfolio was
$95,426,206 or 18% of total assets. There were no Federal Funds Sold as of
December 31, 2009.
The table
below presents the amortized cost and fair values of investment securities held
by the Bank at December 31, 2009, 2008, and 2007.
(Dollar
Amounts in Thousands)
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||||||||||||||||||||||||
2009
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2008
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2007
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||||||||||||||||||||||
Amortized
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Fair
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Amortized
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Fair
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Amortized
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Fair
|
|||||||||||||||||||
Cost
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Value
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Cost
|
Value
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Cost
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Value
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|||||||||||||||||||
Available-for-sale
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$ | 96,963 | $ | 95,412 | $ | 113,246 | $ | 113,486 | $ | 130,145 | $ | 128,980 | ||||||||||||
Held-to-maturity
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15 | 15 | 17 | 17 | 34 | 34 | ||||||||||||||||||
$ | 96,978 | $ | 95,427 | $ | 113,263 | $ | 113,503 | $ | 130,179 | $ | 129,014 |
The
following tables present the maturity distribution of investment securities at
December 31, 2009, and the weighted average yields of such
securities. The weighted average yields were calculated based on the
amortized cost and tax-effective yields to maturity of each
security. The maturity distribution shown below will differ from the
contractual maturities because the issuer has the ability to prepay or call the
security.
(Dollar
Amounts in Thousands)
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Held-to-maturity
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Over
One
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Over
Five
|
Weighted
|
||||||||||||||||||||||||||
One
Year
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Through
|
Through
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Over
Ten
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No
|
Average
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|||||||||||||||||||||||
or Less
|
Five Years
|
Ten Years
|
Years
|
Maturity
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Total
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Yield
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||||||||||||||||||||||
Mortgage-Backed
Securities
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$ | 4 | $ | 11 | $ | - | $ | - | $ | - | $ | 15 | $ | 2.04 | % | |||||||||||||
Weighted
Average Yield
|
2.26 | % | 1.97 | % | - | - | - | 2.04 | % | |||||||||||||||||||
Available-for-sale
(1)
|
||||||||||||||||||||||||||||
U.S.
Treasury Securities
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$ | 999 | $ | 2,072 | $ | - | $ | - | $ | - | $ | 3,071 | 2.34 | % | ||||||||||||||
U.S.
Government Agency Securities
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4,002 | 19,189 | - | - | - | 23,191 | 1.24 | % | ||||||||||||||||||||
State
and Municipal Obligations
|
- | - | 3,256 | - | - | 3,256 | 4.32 | % | ||||||||||||||||||||
Trust
Preferred Securities
|
- | - | - | 2,995 | - | 2,995 | 0.00 | % | ||||||||||||||||||||
Mortgage-Backed
Securities
|
17,235 | 29,970 | 169 | - | - | 47,374 | 3.21 | % | ||||||||||||||||||||
Marketable
Equity Securities
|
17,076 | - | - | - | - | 17,076 | 0.62 | % | ||||||||||||||||||||
Total
|
$ | 39,312 | $ | 51,231 | $ | 3,425 | $ | 2,995 | $ | - | $ | 96,963 | 2.19 | % | ||||||||||||||
Weighted
Average Yield
|
1.79 | % | 2.49 | % | 4.22 | % | 0.00 | % | 0.00 | % | 2.19 | % | ||||||||||||||||
Total
Portfolio
|
$ | 39,316 | $ | 51,242 | $ | 3,425 | $ | 2,995 | $ | - | $ | 96,978 | 2.19 | % | ||||||||||||||
Total
Weighted Average Yield
|
1.79 | % | 2.49 | % | 4.22 | % | 0.00 | % | 0.00 | % | 2.19 | % |
(1)
Dollars shown at amortized cost amounts.
Deposits
The
following table summarizes average deposits and interest rates of the Bank for
the years ended December 31, 2009, 2008, and 2007.
(Dollar
Amounts in Thousands)
|
||||||||||||||||||||||||
2009
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2008
|
2007
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
Noninterest-bearing
|
||||||||||||||||||||||||
demand
deposits
|
$ | 72,611 | 0.00 | % | $ | 68,864 | 0.00 | % | $ | 68,278 | 0.00 | % | ||||||||||||
Money
market deposits
|
85,412 | 0.84 | % | 83,116 | 1.88 | % | 75,832 | 2.96 | % | |||||||||||||||
Savings
deposits
|
66,725 | 0.47 | % | 58,788 | 1.04 | % | 55,026 | 1.37 | % | |||||||||||||||
Time
deposits
|
146,835 | 2.43 | % | 132,813 | 3.69 | % | 136,764 | 4.59 | % | |||||||||||||||
. | ||||||||||||||||||||||||
$ | 371,583 | 1.24 | % | $ | 343,581 | 2.06 | % | $ | 335,900 | 2.76 | % |
Fixed
rate certificates of deposit in amounts of $100,000 or more at December 31, 2009
are scheduled to mature as follows:
(Dollar Amounts in
Thousands)
|
||||
Three
months or less
|
$ | 31,298 | ||
Over
three, through six months
|
12,371 | |||
Over
six, through twelve months
|
14,701 | |||
Over
twelve months
|
10,231 | |||
Total
|
$ | 68,601 |
Return
on Equity and Assets
The
following table summarizes various operating ratios of the Company for the past
two years:
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Return
(loss) on average total assets (net loss available
|
||||||||
to
common shareholders divided by average total assets)
|
(0.32 | )% | (0.85 | )% | ||||
Return
(loss) on average shareholders' common equity (net
|
||||||||
loss
available to common shareholders divided by average
|
||||||||
shareholders'
common equity)
|
(7.71 | )% | (27.78 | )% | ||||
Equity
to assets (average shareholders' equity as a
|
||||||||
percent
of average total assets)
|
5.99 | % | 4.98 | % | ||||
Dividend
payout ratio
|
N/A | N/A |
Asset/Liability
Management
A
principal objective of the Bank is to reduce and manage the exposure of changes
in interest rates on its results of operations and to maintain an approximate
balance between the interest rate sensitivity of its assets and liabilities
within acceptable limits. While interest-rate risk is a normal part
of the commercial banking activity, the Bank desires to minimize its effect upon
operating results. Managing the rate sensitivity embedded in the
balance sheet can be accomplished in several ways. By managing the
origination of new assets and liabilities, or the rollover of the existing
balance sheet assets, incremental change towards the desired sensitivity
position can be achieved. Hedging activities, such as the use of
interest rate caps, can be utilized to create immediate change in the
sensitivity position.
The Bank
monitors the relationship between interest-earning assets and interest-bearing
liabilities by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring the Bank’s interest rate sensitivity
“gap”. An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-bearing liabilities maturing or
repricing and the amount of interest-earning assets maturing or repricing for
the same period of time. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while a
negative gap would tend to increase net interest income. During a
period of rising interest rates, a positive gap would tend to increase net
interest income, while a negative gap would tend to adversely affect net
interest income.
The
information presented in the interest sensitivity table is based upon a
combination of maturities, call provisions, repricing frequencies, prepayment
patterns, and management judgment. The distribution of variable rate
assets and liabilities is based upon the repricing interval of the
instrument. Management estimates that less than 20% of savings
products are sensitive to interest rate changes based upon analysis of historic
and industry data for these types of accounts.
The
following table summarizes the repricing schedule for the Bank’s assets and
liabilities and provides an analysis of the Bank’s periodic and cumulative GAP
positions.
(Dollar
Amounts in Thousands)
|
||||||||||||||||
As
of December 31, 2009
|
||||||||||||||||
Repriced Within
|
||||||||||||||||
Under
3
|
4
to 12
|
1
to 5
|
Over
5
|
|||||||||||||
Months
|
Months
|
Years
|
Years
|
|||||||||||||
Securities
available-for-sale
|
$ | 30,190 | $ | 32,683 | $ | 24,493 | $ | 9,597 | ||||||||
Securities
held-to-maturity
|
- | 15 | - | - | ||||||||||||
Loan
and Lease Portfolio
|
112,694 | 64,965 | 152,096 | 46,370 | ||||||||||||
Other
|
- | - | - | 5,758 | ||||||||||||
Total
interest-earning assets
|
142,884 | 97,663 | 176,589 | 61,725 | ||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||
Money
Market
|
81,377 | - | - | - | ||||||||||||
Savings
|
- | - | - | 62,810 | ||||||||||||
Time
|
50,936 | 65,347 | 26,486 | - | ||||||||||||
Total
interest-bearing deposits
|
132,313 | 65,347 | 26,486 | 62,810 | ||||||||||||
Borrowed
funds
|
30,720 | 15,000 | 41,500 | 36,047 | ||||||||||||
Total
interest-bearing liabilities
|
163,033 | 80,347 | 67,986 | 98,857 | ||||||||||||
Periodic
gap
|
$ | (20,149 | ) | $ | 17,316 | $ | 108,603 | $ | (37,132 | ) | ||||||
Cumulative
gap
|
$ | (20,149 | ) | $ | (2,833 | ) | $ | 105,770 | $ | 68,638 | ||||||
Cumulative
gap as a percentage of
|
||||||||||||||||
total
earning assets
|
(4.21 | )% | (0.59 | )% | 22.09 | % | 14.33 | % |
Supervision
and Regulation
The Bank
is chartered under the National Bank Act and is subject to the supervision of,
and is regularly examined by, the Office of the Comptroller of the Currency (the
“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).
The
Company is a bank holding company, within the meaning of the Bank Holding
Company Act (“BHC Act”), is registered as such with and is subject to the
supervision of, and the Bank Holding Company laws, of the Federal Reserve Board
(“FRB”). The Company, as a bank holding company, is also subject to
the Connecticut Bank Holding Company laws. In addition, the Company’s
securities are registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) and, therefore, is subject to rules
and regulations of the Securities and Exchange Commission (the
“SEC”). Certain legislation and regulations affecting the business of
the Company and the Bank are discussed below.
General
As a bank
holding company, the Company is subject to the BHC Act. The Company
reports to, registers with, and is examined by the FRB. The FRB also
has the authority to examine the Company’s subsidiaries, which includes the
Bank.
The FRB
requires the Company to maintain certain levels of capital. See
“Capital Standards” herein. The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe or
unsound practice, violates certain laws, regulations, or conditions imposed in
writing by the FRB. See “Prompt Corrective Action and Other
Enforcement Mechanisms” herein.
Under the
BHC Act, a company generally must obtain the prior approval of the FRB before it
exercises a controlling influence over, or acquires, directly or indirectly,
more than 5% of the voting shares or substantially all of the assets of, any
bank or bank holding company. Thus, the Company is required to obtain
the prior approval of the FRB before it acquires, merges, or consolidates with
any bank, or bank holding company. Any company seeking to acquire,
merge, or consolidate with the Company also would be required to obtain the
FRB’s approval.
The FRB
generally prohibits a bank holding company from declaring or paying a cash
dividend which would impose undue pressure on the capital of subsidiary banks or
would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company’s financial position. The
FRB’s policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality, and overall financial
condition.
Transactions
between the Company, the Bank, and any future subsidiaries of the Company are
subject to a number of other restrictions. FRB policies forbid the
payment by bank subsidiaries of management fees, which are unreasonable in
amount or exceed the fair market value of the services rendered (or, if no
market exists, actual costs plus a reasonable profit). Additionally,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit, sale or
lease of property, or furnishing of services. Subject to certain
limitations, depository institution subsidiaries of bank holding companies may
extend credit to, invest in the securities of, purchase assets from, or issue a
guarantee, acceptance, or letter of credit on behalf of an affiliate, provided
that the aggregate of such transactions with affiliates may not exceed 10% of
the capital stock and surplus of the institution, and the aggregate of such
transactions with all affiliates may not exceed 20% of the capital stock and
surplus of such institution. The Company may only borrow from
depository institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
The
Emergency Economic Stabilization Act of 2008 and the American Recovery and
Reinvestment Act of 2009 and programs thereunder in which the Company
participates, including the Capital Purchase Program (“CPP”) of the Troubled
Asset Relief Program (“TARP”) and the Temporary Liquidity Guarantee Program
(“TLGP”), contain limitations on increasing dividends on the Common Stock during
the first three years of participation in the CPP and allow the U.S.
Government to unilaterally modify any term or provision of contracts
executed under the CPP. For discussion of these programs and the acts
see “Recent Legislation and Regulatory Initiatives to Address Difficult Market
and Economic Conditions” below.
Capital
Standards
The FRB,
OCC, and other federal banking agencies have adopted risk-based minimum capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization’s operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are reported as off-
balance sheet items. Under these guidelines, nominal dollar amounts
of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk-adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. government securities, to
100% for assets with relatively higher credit risk, such as business
loans.
A banking
organization's risk-based capital ratios are obtained by dividing its qualifying
capital by its total risk-adjusted assets and off-balance sheet
items. The regulators measure risk-adjusted assets and off-balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital
consists of common stock, retained earnings, noncumulative perpetual preferred
stock, and minority interests in certain subsidiaries, less most other
intangible assets. Trust preferred securities are currently
considered regulatory capital for purposes of determining the Company’s Tier I
capital ratios. Tier 2 capital may consist of limited amounts of the
allowance for loan and lease losses, unrealized gains on equity securities and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of the federal banking agencies. The federal banking
agencies require a minimum ratio of qualifying total capital to risk-adjusted
assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital
to risk-adjusted assets and off-balance sheet items of 4%.
In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage
ratio would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators’ rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio is at least 100 to 200 basis points above the 3% minimum. Thus,
the effective minimum leverage ratio, for all practical purposes, is at least 4%
or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and
ratios.
The
following table presents the capital ratios for the Company and the Bank as of
December 31, 2009:
Minimum
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||||||||||||
The Company's
|
The Bank's
|
Regulatory
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||||||||||
Ratio
|
Ratio
|
Capital Level
|
||||||||||
RISK-BASED
CAPITAL RATIO:
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Total
Capital
|
11.50 | % | 11.09 | % | 8.00 | % | ||||||
Tier
1 Capital
|
10.25 | % | 9.83 | % | 4.00 | % | ||||||
TIER
1 LEVERAGE CAPITAL RATIO:
|
7.34 | % | 7.02 | % | 4.00 | % |
Prompt
Corrective Action and Other Enforcement Mechanisms
Each
federal banking agency is required to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more of the prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital
ratios: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
An
insured depository institution generally is classified in the following
categories based on capital measures indicated below:
“Well-Capitalized”:
Total
risk-based capital of 10% or more;
Tier 1
risk-based ratio capital of 6% or more; and
Leverage
ratio of 5% or more.
“Adequately
Capitalized”:
Total
risk-based capital of at least 8%;
Tier 1
risk-based capital of at least 4%; and
Leverage
ratio of at least 4%.
“Undercapitalized”:
Total
risk-based capital less than 8%;
Tier 1
risk-based capital less than 4%; or
Leverage
ratio less than 4%.
“Significantly
Undercapitalized”:
Total
risk-based capital less than 6%;
Tier 1
risk-based capital less than 3%; or
Leverage
ratio less than 3%.
“Critically
Undercapitalized”:
Tangible
equity to total assets less than 2%.
The Bank
meets the qualitative guidelines of a well capitalized institution under the
above guidelines. An institution that, based upon its capital levels,
is classified as well-capitalized, adequately capitalized, or undercapitalized
may be treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an unsafe or unsound practice
warrants such treatment. At each successive lower capital category,
an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as “critically undercapitalized” unless its capital ratio actually
warrants such treatment. If an insured depository institution is
undercapitalized, it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit an
acceptable capital restoration plan with a guarantee of performance issued by
the holding company. Further restrictions and sanctions are required
to be imposed on insured depository institutions that are critically
undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days or obtain the concurrence of the FDIC in another
form of action. In addition to measures taken under the prompt
corrective action provisions, commercial banking organizations may be subject to
potential enforcement actions by the federal regulators for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation, or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties, and the enforcement of such actions through
injunctions or restraining orders based upon a prima facie showing by the agency
that such relief is appropriate. Additionally, a holding company’s
inability to serve as a source of strength to its subsidiary banking
organizations could serve as a basis for a regulatory action against the holding
company.
Safety
and Soundness Standards
The
federal banking agencies have established safety and soundness standards for
insured financial institutions covering: (1) internal controls, information
systems, and internal audit systems; (2) loan and lease documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees, and benefits; (7) asset quality and earnings; (8) excessive
compensation for executive officers, directors, or principal shareholders which
could lead to material financial loss; and (9) information security
standards. If an agency determines that an institution fails to meet
any standard established by the guidelines, the agency may require the financial
institution to submit to the agency an acceptable plan to achieve compliance
with the standard. These guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves. If the
agency
requires submission of a compliance plan and the institution fails to timely
submit an acceptable plan or to implement an accepted plan, the agency must
require the institution to correct the deficiency.
Restrictions
on Dividends and Other Distributions
The power
of the board of directors of an insured depository institution to declare a cash
dividend or other distribution with respect to capital is subject to statutory
and regulatory restrictions which limit the amount available for such
distribution depending upon the earnings, financial condition, and cash needs of
the institution, as well as general business conditions. Federal Law
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The
Company’s ability to pay dividends depends in large part on the ability of the
Bank to pay dividends to the Company. The ability of the Bank to pay
dividends is subject to restrictions set forth in the National Banking Act and
regulations of the OCC. See “Market Price for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”
herein.
In
addition, provided the Preferred Stock issued to the Treasury, described in Note
N to Consolidated Financial Statements, is held by the Treasury, the Common
Stock dividend may not be increased without the consent of the Treasury for
three (3) years from the date of the investment by the Treasury. On
February 24, 2009 and March 27, 2009, the Federal Reserve Board issued
supervisory guidance to all bank holding companies regarding the payment of
dividends as well as stock redemptions and repurchases by bank holding
companies. Such guidance expressed the view that the Board of
Directors should ensure that dividends are prudent relative to the financial
position of the institution and that a bank holding company should inform the
FRB in advance of declaring a dividend that exceeds earnings for the period or
that could result in a material adverse change to an organization’s capital
structure. The supervisory guidance further stated that dividends
should be eliminated, deferred, or limited if net income from the past four
quarters is not sufficient to fund the dividend or if prospective earnings
retention is not consistent with capital needs or the condition and future
prospects of the institution or if the bank holding company is in danger of not
meeting minimum regulatory capital returns.
Additionally,
a bank may not make any capital distribution, including the payment of
dividends, if, after making such distribution, the bank would be in any of the
“under-capitalized” categories under the OCC’s Prompt Corrective Action
regulations. Regulation Y requires bank holding companies to provide
the FRB with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company’s consolidated net worth. For purposes of Regulation
Y, “net consideration” is the gross consideration paid by a company for all of
its equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company
generally need not obtain FRB approval of any equity security redemption when:
(i) the bank holding company’s capital ratios exceed the threshold established
for “well-capitalized” banks before and immediately after the redemption; (ii)
the bank holding company is well-managed; and (iii) the bank holding company is
not the subject of any unresolved supervisory issues. However,
letters issued by the FRB to the industry dated February 24, 2009 and March 27,
2009 advise bank holding companies to inform the FRB of proposed stock
repurchases resulting in a net reduction of common or preferred stock below the
amount of such instrument outstanding at the beginning of the quarter in which
the repurchase occurs. In addition, as a recipient of TARP CPP funds,
the Company must communicate with the Treasury as well as the FRB in advance of
any stock redemptions. Generally, during the first three years from
December 12, 2008 that the Company’s Preferred Stock issued pursuant to the TARP
CPP is outstanding, the approval of the Treasury will be required before the
Company may repurchase any common stock. The Company may redeem the
TARP CPP Preferred Stock at any time in consultation with the Treasury and its
primary supervisory agencies.
The OCC
also has the authority to prohibit the Bank from engaging in business practices
which the OCC considers to be unsafe or unsound. It is possible,
depending upon the financial condition of a bank and other factors, that the OCC
could assert that the payment of dividends or other payments in some
circumstances might be such an unsafe or unsound practice and thereby prohibit
such payment.
FDIC
Insurance
The
Bank’s deposits are insured under the Federal Deposit Insurance Act up to
maximum limits by the Deposit Insurance Fund (DIF) and are subject to deposit
insurance assessments.
Congress
has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per
depositor through December 31, 2013. Effective April 1, 2006, the
federal deposit insurance limits on certain retirement accounts increased so
that such retirement accounts are separately insured up to
$250,000. In addition, the Bank participates in the TLGP, whereby
noninterest-bearing checking accounts and NOW accounts with interest rates no
higher than 0.50 % will be FDIC insured in full until June 20,
2013.
FDIC
insurance of deposits may be terminated by the FDIC, after notice and a hearing,
upon a finding by the FDIC that the insured institution has engaged in unsafe or
unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition imposed by the FDIC. A bank’s failure to meet the minimum
capital and risk-based capital guidelines discussed below would be considered to
be unsafe and unsound banking practices. The Bank, as a
nationally-chartered FDIC-insured bank, is regulated by the OCC. The
OCC also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the OCC on a quarterly and
annual basis, or as otherwise required by the OCC. FDIC-insured banks, such as
the Bank, pay premium assessments to the FDIC for the insurance of
deposits.
A few
years ago, the FDIC adopted a risk-based insurance assessment system designed to
tie what banks pay for deposit insurance more closely to the risks they
pose. The FDIC also adopted a schedule of rates that the FDIC could
adjust up or down, depending on the needs of the DIF.
Recently,
the FDIC adopted a restoration plan that would increase the reserve ratio to the
1.15% threshold within seven years. As part of that plan, in
December, 2008, the FDIC voted to increase risk-based assessment rates due to
deteriorating financial conditions in the banking industry. Changes
to the risk-based assessment system include increasing premiums for institutions
that rely on excessive amounts of brokered deposits, including CDARS, increasing
premiums for excessive use of secured liabilities, including Federal Home Loan
Bank advances, lowering premiums for smaller institutions with very high capital
levels, and adding financial ratios and debt issuer ratings to the premium
calculations for banks with over $10 billion in assets, while providing a
reduction for their unsecured debt. It is generally expected that
rates will continue to increase in the near future due to the significant cost
of bank failures and the increase in the number of troubled banks.
In
September, 2009, the FDIC proposed a rule that was subsequently adopted in final
form by the FDIC board of directors on November 12, 2009 that required insured
depository institutions to prepay their quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011, and 2012, on December 30,
2009, along with each institution’s risk-based deposit insurance assessment for
the third quarter of 2009. For purposes of calculating the amount to prepay, the
FDIC required that institutions use their total base assessment rate in effect
on September 30, 2009 and increase that assessment base quarterly at a 5 percent
annual growth rate through the end of 2012. On September 29, 2009, the FDIC also
increased annual assessment rates uniformly by 3 basis points beginning in 2011
such that an institution’s assessment for 2011 and 2012 would be increased by an
annualized 3 basis points. The Company’s prepayment for 2010, 2011, and 2012
amounted to $2.4 million.
Incremental
to insurance fund assessments, the FDIC assesses deposits to fund the repayment
of debt obligations of the Financing Corporation (“FICO”). FICO is a government
agency-sponsored entity that was formed to borrow the money necessary to carry
out the closing and ultimate disposition of failed thrift institutions by the
Resolution Trust Corporation. The current annualized rate established by the
FDIC is 1.06 basis points.
Inter-Company
Borrowings
Bank
holding companies are also restricted as to the extent to which they and their
subsidiaries can borrow or otherwise obtain credit from one another or engage in
certain other transactions. The “covered transactions” that an
insured depository institution and its subsidiaries are permitted to engage in
with their nondepository affiliates are limited to the following
amounts: (1) in the case of any one such affiliate, the aggregate
amount of covered transactions of the insured depository institution and its
subsidiaries cannot exceed 10% of the capital stock and the surplus of the
insured depository institution; and (2) in the case of all affiliates, the
aggregate amount of covered transactions of the insured depository institution
and its subsidiaries cannot exceed 20% of the capital stock and surplus of the
insured depository institution. In addition, extensions of credit
that constitute covered transactions must be collateralized in prescribed
amounts. “Covered transactions” are defined by statute to include a
loan or extension of credit to the affiliate, a purchase of securities issued by
an affiliate, a purchase of assets from the affiliate (unless otherwise exempted
by the FRB), the acceptance of securities issued by the affiliate as collateral
for a loan, and the issuance of a guarantee, acceptance, or letter of credit for
the benefit of an affiliate. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property, or
furnishing of services.
Effects
of Government Policy
Legislation
adopted in recent years has substantially increased the scope of regulations
applicable to the Bank and the Company and the scope of regulatory supervisory
authority and enforcement power over the Bank and the Company.
Virtually
every aspect of the Bank’s business is subject to regulation with respect to
such matters as the amount of reserves that must be established against various
deposits, the establishment of branches, reorganizations, nonbanking activities,
and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms, and discrimination
in credit transactions.
The
descriptions of the statutory provisions and regulations applicable to banks and
bank holding companies set forth above do not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the Company. Proposals to change the laws and regulations governing
the banking industry are frequently introduced in Congress, in the state
legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Bank and the Company are difficult to determine.
Gramm-Leach-Bliley
Financial Services Modernization Act of 1999
The
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 provides bank
holding companies, banks, securities firms, insurance companies, and investment
management firms the option of engaging in a broad range of financial and
related activities by opting to become a “financial holding
company.” These holding companies are subject to oversight by the
FRB, in addition to other regulatory agencies. Under the financial
holding company structure, financial institutions have the ability to purchase
or establish broker/dealer subsidiaries, as well as the option to purchase
insurance companies. Additionally, securities and insurance firms are
permitted to purchase full-service banks.
As a
general rule, the individual entities within a financial holding company
structure are regulated according to the type of services provided which is
referred to as functional regulation. Under this approach, a
financial holding company with banking, securities, and insurance subsidiaries
will have to interact with several regulatory agencies (e.g., appropriate
banking agency, SEC, state insurance commissioner).
While the
Act facilitates the ability of financial institutions to offer a wide range of
financial services, large financial institutions appear to be the primary
beneficiaries as a result of this Act, because many community banks are less
able to devote the capital and management resources needed to facilitate broad
expansion of financial services. The Company has no current plans to
operate within a financial holding company structure.
The
Sarbanes-Oxley Act of 2002
The
purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws and for other purposes.
The
Sarbanes-Oxley Act amends the Exchange Act to prohibit a registered public
accounting firm from performing specified nonaudit services contemporaneously
with a mandatory audit. The Sarbanes-Oxley Act also vests the audit
committee of an issuer with responsibility for the appointment, compensation,
and oversight of any registered public accounting firm employed to perform audit
services. It requires each committee member to be a member of the
board of directors of the issuer and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In
addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer
is required to prepare an accounting restatement due to the material
noncompliance of the issuer as a result of misconduct with any financial
reporting requirements under the securities laws, the chief executive officer
and chief financial officer of the issuer shall be required to reimburse the
issuer for (1) any bonus or other incentive-based or equity based compensation
received by that person from the issuer during the 12-month period following the
first public issuance or filing with the SEC of the financial document embodying
such financial reporting requirement; and (2) any profits realized from the sale
of securities of the issuer during that 12-month period.
Pursuant
to the Sarbanes-Oxley Act, the SEC has adopted rules to require:
|
·
|
disclosure
of all material off-balance sheet transactions and relationship that may
have a material effect upon the financial status of an issuer;
and
|
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·
|
the
presentation of pro forma financial information in a manner that is not
misleading and which is reconcilable with the financial condition of the
issuer under generally accepted accounting
principles.
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The
Sarbanes-Oxley Act, among other things, also provides for mandated internal
control report and assessment with the annual report and an attestation and a
report on such report by the Company’s auditor. In accordance with
the requirements of Section 404, Management’s report on internal controls is
included herein at Item 9A(T). The SEC has delayed until fiscal years
ending after June 15, 2010 the auditor’s attestation report on internal controls
over financial reporting. The SEC also requires an issuer to
institute a code of ethics for senior financial officers of the
Company.
The
USA Patriot Act
On
October 26, 2001, President Bush signed into law The Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the “Patriot Act”). On March 10, 2006, the
President signed legislation making permanent certain provisions of the Patriot
Act. The terrorist attacks in September, 2001 have impacted the
financial services industry and led to federal legislation that addresses
certain issues involving financial institutions. Part of the Patriot
Act is the International Money Laundering Abatement and Financial Anti-Terrorism
Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury,
in consultation with the heads of other government agencies, to adopt special
measures applicable to banks, bank holding companies, and other financial
institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its
other provisions, IMLA requires each financial institution to: (i) establish an
anti-money laundering program; (ii) establish due diligence policies, procedures
and controls with respect to its private banking accounts and correspondent
banking accounts involving foreign individuals and certain foreign banks; and
(iii) avoid establishing, maintaining, administering, or managing correspondent
accounts in the United States for, or on behalf of, a foreign bank that does not
have a physical presence in any country. In addition, IMLA contains a
provision encouraging cooperation among financial institutions, regulatory
authorities, and law enforcement authorities with respect to individuals,
entities, and organizations engaged in, or reasonably suspected of engaging in,
terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120
hours. IMLA also amends the BHCA and the Bank Merger Act to require
the federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts. The Bank has implemented policies and procedures to
address the requirements of the Patriot Act and IMLA.
Recent
Legislative and Regulatory Initiatives to Address Difficult Market and Economic
Conditions
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which, among other measures, authorizes the
Treasury to purchase from financial institutions and their holding companies up
to $700 billion in mortgage loans, mortgage-related securities, and certain
other financial instruments, including debt and equity securities issued by
financial institutions and their holding companies, under the TARP CPP. The
purpose of TARP CPP is to restore confidence and stability to the U.S. banking
system and to encourage financial institutions to increase their lending to
customers and to each other. Under the TARP CPP, the Treasury is purchasing
equity securities from participating institutions. The Series A Preferred Stock
and warrant offered by this prospectus were issued by the Company to the
Treasury pursuant to the TARP CPP. The EESA also increased federal deposit
insurance on most deposit accounts from $100,000 to $250,000 through December
31, 2009. As part of the Helping Families Save Their Homes Act of
2009, the temporary deposit insurance limit was extended through December 31,
2013. In addition, under the FDIC’s Transaction Account Guarantee
(“TAG”) portion of the Temporary Liquidity Guaranty Program (“TLGP”),
non-interest bearing transaction deposit accounts and interest-bearing
transaction accounts paying 50 basis points or less will be fully insured above
and beyond the $250,000 limit through June 30, 2010.
The EESA
followed, and has been followed by, numerous actions by the FRB, the U.S.
Congress, the Treasury, the FDIC, the SEC and others to address the current
liquidity and credit crisis that has followed the sub-prime meltdown that
commenced in 2007. These measures include homeowner relief that encourage loan
restructuring and modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment banks; the lowering
of the federal funds rate; emergency action against short selling practices; a
temporary guaranty program for money market funds; the establishment of a
commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address illiquidity and
other weaknesses in the banking sector.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
was signed into law. The ARRA, more commonly known as the economic stimulus bill
or economic recovery package, is intended to stimulate the economy and provides
for broad infrastructure, education, and health spending.
As
discussed above, on October 14, 2008, the FDIC announced the establishment of a
temporary liquidity guarantee program to provide full deposit insurance for all
non-interest bearing transaction accounts and guarantees of certain newly issued
senior unsecured debt issued by FDIC-insured institutions and their holding
companies. Insured institutions were automatically covered by this program from
October 14, 2008 until December 5, 2008, unless they opted out prior to that
date. Under the program, the FDIC will guarantee timely payment of newly issued
senior unsecured debt issued on or before June 30, 2009. The debt includes all
newly issued unsecured senior debt including promissory notes, commercial paper
and inter-bank funding. The aggregate coverage for an institution may not exceed
125% of its debt outstanding on September 30, 2008 that was scheduled to mature
before June 30, 2009, or, for certain insured institutions, 2% of liabilities as
of September 30, 2008. The guarantee will extend to June 30, 2012 even if the
maturity of the debt is after that date.
The
purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system. The EESA, the ARRA and the other regulatory initiatives
described above may not have their desired effects. If the volatility in the
markets continues and economic conditions fail to improve or worsen, the
Company’s business, financial condition, results of operations, and cash flows
could be materially and adversely affected.
The
Securities Purchase Agreement Between the Company and the Treasury Permits the
Treasury to Impose Certain Additional Restrictions on the Company so long as the
Company Participates in the TARP CPP
The
securities purchase agreement the Company entered into with the Treasury in
connection with the Bank’s participation in the TARP CPP permits the Treasury to
unilaterally amend the terms of the securities purchase agreement to comply with
any changes in federal statutes after the date of its execution. The ARRA
imposed additional executive compensation and expenditure limits on all current
and future TARP recipients, including the Company, until the Company has repaid
the Treasury. These additional restrictions may impede the Company’s ability to
attract and retain qualified executive officers. The ARRA also permits TARP
recipients to repay the Treasury without penalty or requirement that additional
capital be raised, subject to the Treasury’s consultation with the Company’s
primary federal regulator while the securities purchase agreement required that,
for a period of three years, the Series A Preferred Stock could generally only
be repaid if the Company raised additional capital to repay the securities and
such capital qualified as Tier 1 capital. Additional unilateral changes in the
securities purchase agreement could have a negative impact on the Company’s
financial condition and results of operations.
Impact
of Monetary Policies
Banking
is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
other borrowings and the interest rate earned by a bank on loans and leases,
securities, and other interest-earning assets comprises the major source of
bank’s earnings. Thus, the earnings and growth of banks are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary
policy, such as seeking to curb inflation and combat recession, by its
open-market dealings in United States government securities, by adjusting the
required level of reserves for financial institutions subject to reserve
requirements, and through adjustments to the discount rate applicable to
borrowings by banks which are members of the FRB. The actions of the
FRB in these areas influence the growth of bank loans and leases, investments
and deposits and also affect interest rates. The nature and timing of
any future changes in such policies and their impact on the Company cannot be
predicted. In addition, adverse economic conditions could make a
higher provision for loan and lease losses a prudent course and could cause
higher loan and lease loss charge-offs, thus adversely affecting the Bank’s net
earnings.
Employees
The
Company, the Bank, and its subsidiaries employ 117 full-time employees and 11
part-time employees. Neither the Company nor the Bank is party to any
collective bargaining agreements, and employee relations are considered
good.
Forward
Looking Statements
This Form
10-K and future filings made by the Company with the SEC, as well as other
filings, reports and press releases made or issued by the Company and the Bank,
and oral statements made by executive officers of the Company and Bank, may
include forward-looking statements relating to such matters as (a) assumptions
concerning future economic and business conditions and their effect on the
economy in general and on the markets in which the Company and the Bank do
business, and (b) expectations for increased revenues and earnings for the
Company and Bank through growth resulting from acquisitions, attraction of new
deposit and loan and lease customers, and the introduction of new products and
services. Such forward-looking statements are based on assumptions
rather than historical or current facts and, therefore, are inherently uncertain
and subject to risk. For those statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
The
Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking
statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the Company’s and Bank’s
business include the following: (a) the risk of adverse changes in
business conditions in the banking industry generally and in the specific
markets in which the Bank operates; (b) changes in the legislative and
regulatory environment that negatively impact the Company and Bank through
increased operating expenses; (c) increased competition from other financial and
non-financial institutions (d) the impact of technological advances; and (e)
other risks detailed from time to time in the Company’s filings with the
SEC.
Such
developments could have an adverse impact on the Company’s financial position
and results of operation.
Availability
of Financial Information
The
Company files reports with the SEC. Those reports include the annual report on
Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and
proxy statements, as well as any amendments to those reports. The
public may read and copy any materials that the Company files with the SEC at
the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains quarterly and annual reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The
Company’s website address is: www.fnbl.com.
ITEM
1A.
|
RISK
FACTORS
|
Not
applicable as the registrant is not an accelerated filer or large accelerated
filer.
ITEM
1B.
|
UNRESOLVED STAFF
COMMENTS
|
Not
applicable as the registrant is not an accelerated filer or large accelerated
filer.
ITEM
2.
|
PROPERTIES
|
The
Company is not the owner or lessee of any properties. The properties
described below are properties owned or leased by the Bank.
The
Bank’s main office is located at 13 North Street, Litchfield,
Connecticut. In addition to the Bank’s main office in Litchfield, the
Bank has branches in Marble Dale, Washington Depot, Goshen, Canton, New Milford,
Roxbury and Torrington, Connecticut.
During
the year ended December 31, 2009, the net rental expense paid by the Bank for
all of its office properties was approximately $242,000. All
properties are considered to be in good condition and adequate for the purposes
for which they are used. The following table outlines all owned or
leased property of the Bank.
Owned
|
Lease
|
||
Location
|
Address
|
Leased
|
Expiration
|
Main
Office
|
13
North Street
|
Owned
since 1816
|
|
Litchfield,
CT
|
|||
Marble
Dale
|
Route
202
|
Leased
|
2012
|
Marble
Dale, CT
|
|||
Washington
Depot
|
Bryan
Plaza
|
Owned
since 1959
|
|
Washington
Depot, CT
|
Goshen
|
Routes
4 & 63
|
Owned
since 1989
|
|
Goshen,
CT
|
|||
Roxbury
|
Route
67
|
Leased
|
2014
|
Roxbury,
CT
|
|
||
New
Milford
|
Route
202
|
Leased
|
2016
with one 10-year
|
New
Milford, CT
|
extension
|
||
Torrington
|
1057
Torringford Street
|
Leased
|
2026
with option
|
Torrington,
CT
|
to
purchase
|
||
Canton
|
188
Albany Turnpike
|
Owned
since 2005
|
|
Canton,
CT
|
|||
Trust
Department
|
40
West Street
|
Owned
since 1996
|
|
Old
Borough Firehouse
|
|||
Litchfield,
CT
|
|||
Torrington,
North
|
397
Main Street
|
Owned
since 2007
|
|
Torrington,
CT
|
|||
Finance
Department
|
29
West Street
|
Leased
|
Month-to-Month
Lease
|
Litchfield,
CT
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
Neither
the Company nor the Bank (or any of their properties) is the subject of any
material pending legal proceedings other than routine litigation that is
incidental to its business.
ITEM
4.
|
RESERVED
|
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Price
The
Company’s Common Stock is traded on the Over the Counter (“OTC”) Bulletin Board
under the symbol FLFL.OB. As of March 31, 2010, there were 2,506,622
shares issued and 2,356,875 shares outstanding, which were held by approximately
389 shareholders.
The
following information provided by Oppenheimer and Co., sets forth transactions
in the Company’s Common Stock in each quarter of the two most recently completed
fiscal years:
2008
|
High/Low
|
|||||||
First
Quarter
|
$ | 16.40 | $ | 13.25 | ||||
Second
Quarter
|
14.25 | 11.50 | ||||||
Third
Quarter
|
13.00 | 10.60 | ||||||
Fourth
Quarter
|
11.00 | 5.25 | ||||||
2009
|
High/Low
|
|||||||
First
Quarter
|
$ | 11.00 | $ | 4.25 | ||||
Second
Quarter
|
7.59 | 5.70 | ||||||
Third
Quarter
|
7.24 | 5.55 | ||||||
Fourth
Quarter
|
14.60 | 5.45 |
On
September 20, 2007, the Company approved a stock repurchase program to acquire,
in the next twelve months, up to an aggregate of 30,000 shares of the Company’s
outstanding Common Stock. Pursuant to the repurchase program, shares purchased
during 2008 and 2009 totaled 16,718 and 0, respectively. The repurchase program
expired in September 2008 and was not renewed. The Company is prohibited from
repurchasing any shares of Common Stock pursuant to terms of the TARP CPP in
which the Company participated, during the first three years of participation,
or until December 12, 2011, unless the Preferred Stock is redeemed by the
Company.
Dividends
All
shares of the Company’s Common Stock are entitled to participate equally and
ratably in such dividends as may be declared by the Board of Directors out of
funds legally available therefore. During 2008, the Company declared
cash dividends of 60 cents per share. During 2009, the Company
declared cash dividends of 10 cents per share.
The
Company is prohibited from increasing the quarterly common stock dividend above
$.15 per share without the consent of the U. S. Treasury until the third
anniversary of the date of the investment, or December 12, 2011, unless prior to
such third anniversary the senior preferred stock is redeemed in whole or the U.
S. Treasury has transferred all of the senior preferred stock to third
parties.
The
Company’s ability to pay dividends is limited by the prudent banking principles
applicable to all bank holding companies and by the provisions of Delaware
Corporate law, which provides that a company may, unless otherwise restricted by
its certificate of incorporation, pay dividends in cash, property, or shares of
capital stock out of surplus or, if no surplus exists, out of net profits for
the fiscal year in which declared, or out of net profits for the preceding
fiscal year (provided that such payment will not reduce the company’s capital
below the amount of capital represented by classes of stock having a preference
upon distributions of assets).
As a
practical matter, the Company’s ability to pay dividends is generally limited by
the Bank’s ability to dividend funds to the Company. As a national
bank, the declaration and payment of dividends by the Bank must be in accordance
with the National Bank Act. More specifically, applicable law
provides that the Board of Directors may declare quarterly, semiannual, and
annual dividends so long as the Bank carries at least ten percent (10%) of its
net profits for the preceding half year in its surplus fund, and, in the case of
annual dividends, has carried not less than one-tenth of its net profits of the
preceding two consecutive half year periods in its surplus
fund. National banks are required to obtain the approval of the OCC
if the total dividends declared by it in any calendar year exceed the total of
its net profits for that year combined with any retained net profits of the
preceding two years less any required transfers. In addition to such
statutory requirements, the payment of an excessive dividend which would deplete
a bank's capital base to an inadequate level could be considered to be an unsafe
or unsound banking practice and be a basis for supervisory action by the
OCC. Due to the earnings performance in 2008 and 2009, there was no
undistributed net income of the Bank available for distribution to the Company
as dividends. However, the ability of the Bank to declare and pay
such dividends would be subject to safe and sound banking
practices.
The
Company cannot increase the quarterly common stock dividend above $.15 per share
without the consent of the Treasury until the third anniversary of the date of
the issuance of the Preferred Stock, or December 12, 2011, unless prior to such
third anniversary the Preferred Stock is redeemed in whole or the Treasury has
transferred all of the Preferred Stock to third parties.
The
Merger Agreement prohibits the Company from paying any dividend
The
Agreement with the OCC described in Note T – Certain Supervisory Matters to the
Financial Statements also restricts the Bank’s ability to pay dividends to the
Company.
Recent
Sales of Unregistered Securities
There
have been no sales of unregistered securities in the period covered by this
report.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following schedule provides information with respect to compensation plans under
which equity securities are authorized for issuance as of December 31,
2009:
Equity
Compensation Plan Information
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding
options, warrants
and rights
|
Number of securities remaining
available for future issuance
under equity compensation
plans
(excluding securities reflected
in
Column (a))
|
(a)
|
(b)
|
(c)
|
|
Equity compensation plans approved by
shareholders
|
0
|
0
|
21,500
|
Equity compensation plans not approved by
shareholders
|
N/A
|
N/A
|
N/A
|
Total
|
0
|
$0.00
|
21,500
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
selected consolidated financial data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” the audited consolidated financial statements and
the notes thereto, and the other information contained in this Form
10-K. The selected balance sheet data as of December 31, 2009 and
2008, and the selected statement of operations data for the years ended December
31, 2009 and 2008 are derived from, and are qualified by reference to, the
audited consolidated financial statements of the Company appearing elsewhere in
this Form 10-K. The balance sheet data as of December 31, 2007, 2006
and 2005, and statement of operations data for the years ended December 31,
2007, 2006, and 2005, are derived from audited consolidated financial statements
of the Company not included herein.
At
or For the Year Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Income
Statement Data
|
||||||||||||||||||||
Interest
and Dividend Income
|
$ | 25,038,819 | $ | 28,188,882 | $ | 28,098,261 | $ | 25,805,321 | $ | 21,665,441 | ||||||||||
Interest
Expense
|
9,707,880 | 13,249,297 | 14,885,202 | 13,114,088 | 7,594,052 | |||||||||||||||
Net
Interest Income
|
15,330,939 | 14,939,585 | 13,213,059 | 12,691,233 | 14,071,389 | |||||||||||||||
Noninterest
Income (Loss)
|
4,455,358 | (5,362,105 | ) | 3,431,476 | 2,272,986 | 2,889,313 | ||||||||||||||
Noninterest
Expense
|
18,274,373 | 15,340,149 | 14,267,491 | 13,202,841 | 11,081,440 | |||||||||||||||
(Loss)
Income Before Income Taxes
|
(2,157,285 | ) | (7,598,968 | ) | 2,173,044 | 1,341,378 | 5,547,234 | |||||||||||||
Income
Tax (Benefit) Provision
|
(1,083,354 | ) | (3,112,459 | ) | 225,702 | (67,525 | ) | 1,511,343 | ||||||||||||
Net
(Loss) Income
|
(1,207,409 | ) | (4,490,384 | ) | 1,947,342 | 1,408,903 | 4,035,891 | |||||||||||||
Balance
Sheet Data
|
||||||||||||||||||||
Total
Loans, Leases and
|
||||||||||||||||||||
Loans
Held for Sale
|
376,124,604 | 370,460,285 | 329,012,939 | 296,338,181 | 242,152,589 | |||||||||||||||
Allowance
for Loan and Lease Losses
|
6,068,108 | 3,698,820 | 2,151,622 | 2,106,100 | 1,759,611 | |||||||||||||||
Total
Investment Securities
|
95,426,206 | 113,502,751 | 129,013,733 | 147,820,791 | 182,949,393 | |||||||||||||||
Total
Assets
|
528,508,917 | 532,257,607 | 507,653,629 | 501,232,357 | 467,560,946 | |||||||||||||||
Total
Deposits
|
369,170,787 | 343,326,624 | 335,617,664 | 333,428,874 | 277,870,361 | |||||||||||||||
Total
Borrowings
|
123,266,528 | 138,825,684 | 140,079,676 | 137,610,667 | 157,301,172 | |||||||||||||||
Total
Liabilities
|
497,147,789 | 499,790,343 | 479,291,017 | 474,976,163 | 441,591,209 | |||||||||||||||
Shareholders'
Equity (Controlling Interest)
|
31,173,775 | 32,413,389 | 28,312,612 | 26,206,194 | 25,969,737 | |||||||||||||||
Selected
Ratios and Per Share Data
|
||||||||||||||||||||
Return
(Loss) on Average Assets
|
(0.32 | )% | (0.85 | )% | 0.39 | % | 0.29 | % | 0.91 | % | ||||||||||
Return
(Loss) on Average Equity
|
(7.71 | )% | (27.78 | )% | 7.25 | % | 5.43 | % | 15.94 | % | ||||||||||
Basic
Net (Loss) Income Per Share (1)
|
$ | (0.75 | ) | $ | (1.92 | ) | $ | 0.82 | $ | 0.60 | $ | 1.72 | ||||||||
Diluted
Net (Loss) Income Per Share (1)
|
(0.75 | ) | (1.92 | ) | 0.82 | 0.59 | 1.70 | |||||||||||||
Price
Per Common Share (1)
|
14.55 | 6.23 | 14.50 | 21.73 | 27.25 | |||||||||||||||
Book
Value Per Common Share (1)
|
8.98 | 9.51 | 11.96 | 11.63 | 12.16 | |||||||||||||||
Dividends
Declared:
|
||||||||||||||||||||
Cash
|
$ | 0.10 | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 0.57 | ||||||||||
Stock
|
- | - | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||
Cash
Dividend Yield
|
0.69 | % | 9.63 | % | 4.14 | % | 2.76 | % | 2.09 | % |
(1) All
per-share data has been adjusted to give retroactive effect to all stock
dividends and splits.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
The
following is management’s discussion of financial condition of the Company on a
consolidated basis as of December 31, 2009 and 2008 and results of operations
and analysis of the Company on a consolidated basis for the two years ended
December 31, 2009 and 2008. 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,
as well as First Litchfield Leasing Corporation a subsidiary in which the Bank
has 80% ownership. This discussion should be read in conjunction with
the consolidated financial statements and the related notes of the Company
presented elsewhere herein.
Critical
Accounting Policies
In the
ordinary course of business, the Bank has made a number of estimates and
assumptions relating to the reported results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions.
The Bank
utilizes a loan and lease review and rating process which classifies loans and
leases according to the Bank’s uniform classification system in order to
identify potential problem loans and leases at an early stage, alleviate
weaknesses in the Bank’s lending
policies,
oversee the individual loan and lease rating system, and ensure compliance with
the Bank’s underwriting, documentation, compliance, and administrative
policies. Loans and leases included in this process are considered by
management as being in need of special attention because of some deficiency
related to the credit or documentation, but which are still considered
collectible 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.
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.
Management
reassessed the allowance calculation during the third quarter of 2009. As a
result of this assessment, loan categories were further segmented. Historical
factors were modified to reflect the Company’s loss experience for loan
categories for which the Company has had losses in recent years. Peer
data was used for loan categories for which the Company has not experienced any
losses in the past several years. Qualitative factors were
reevaluated and additional factors were used to more accurately reflect trends
in the portfolio. There were no material changes in loan or lease concentrations
that had a significant effect on the allowance for loan and lease losses
calculation at December 31, 2009. In addition, there were no material
reallocations of the allowance among different parts of the loan or lease
portfolio. The Company recorded a provision of approximately
$3,669,000 for 2009 as compared to a provision of approximately $1,836,000 for
2008. 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 its 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 noninterest 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:
|
·
|
Whether
the Company intends to sell the security and whether it is more likely
than not that the Company will be required to sell the security before the
recovery of its amortized cost basis, which may be
maturity;
|
|
·
|
The
length of time and the extent to which the fair value has been less than
the amortized cost basis;
|
|
·
|
Adverse
conditions specifically related to the security, an industry or a
geographic area;
|
|
·
|
The
historical and implied volatility of the fair value of the
security;
|
|
·
|
The
payment structure of the debt security and the likelihood of the issuer
being able to make payment that increase in the
future;
|
|
·
|
Failure
of the issuer of the security to make scheduled interest or principal
payments;
|
|
·
|
Any
changes to the rating of the security by a rating
agency;
|
|
·
|
Recoveries
or additional declines in fair value subsequent to the balance sheet
date.
|
Adverse
changes in the factors used by management to determine if a security is 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 the third and
fourth quarters of 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. There have been no OTTI losses during
2009. The Company adopted the provisions of the FASB guidance issued
in April 2009 relating to OTTI during the second quarter of 2009. Adoption of
this guidance resulted in the reclassification of $2,511,080 ($1,657,313, net of
tax) of non-credit related OTTI to accumulated other comprehensive income
(“OCI”) which had previously been recognized as a loss in earnings and is
disclosed in Note C - Investment Securities.
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.
As of
December 31, 2009 and December 31, 2008, the Company had recorded net deferred
income tax assets of approximately $5.1 million. The determination of the amount
of deferred income tax assets which are more likely than not to be realized is
primarily dependent on projections of future earnings, which are subject to
uncertainty and estimates that may change given economic conditions and other
factors. A valuation allowance related to deferred tax assets is required when
it is considered more likely than not that all or part of the benefit related to
such assets will not be realized. Management has reviewed the deferred tax
position of the Company at December 31, 2009. The deferred tax position has been
affected by several significant transactions in the past three years. These
transactions included other-than-temporary impairment write-offs of certain
investments and significant permanent differences between accounting and tax
income such as non-taxable municipal security income, which securities have been
sold and replaced with assets which will generate taxable income in the future,
and certain specific expenditures not expected to reoccur. As a result, the
Company is in a cumulative net loss position (pretax income (loss) for a three
year period adjusted for permanent items) as of December 31,
2009. However, under the applicable accounting guidance, the Company
has concluded that it is “more likely than not” that the Company will be able to
realize its deferred tax assets based on the non-recurring nature of these items
and the Company’s expectation of future taxable income. In the
future, management’s conclusion regarding the need for a deferred tax asset
valuation allowance could change, resulting in the establishment of a valuation
allowance for a portion or all of the deferred tax asset. The Company
will continue to analyze the recoverability of its deferred tax assets
quarterly.
FINANCIAL
CONDITION
Total
assets as of December 31, 2009 were $528,508,917, a decrease of $3,748,690, or
.70% from year-end 2008 total assets of $532,257,607.
The net
loan and lease (“loan”) portfolio as of December 31, 2009 totaled $370,617,392
and increased by 1.2% or $4,225,313, from the December 31, 2008 balance of
$366,392,079. The volume of loan growth during 2009 was realized primarily in
commercial mortgages and leases. Construction mortgages totaled
$19,224,992 as of December 31, 2009 which is a decrease of $18,928,511 or 49.6%
over the year-end 2008 balance. The commercial mortgage portfolio
totaled $104,353,804 as of December 31, 2009, increasing $36,898,879 or 54.7%
from the year-end 2008 balance of $67,454,925. Growth in commercial mortgages
has been in fixed and variable rate products to commercial customers located in
our 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 2009, the subsidiary funded over $17 million of loans and
leases. Leases were in amounts ranging from $7,000 to
$2,600,000. Lease receivables were $36,840,994 at December 31,
2009. Management attributes the increase in the business 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, 2009, the
installment loan portfolio totaled $4,954,486, a decrease of 3.1% from the
year-end 2008 balance of $5,113,400. 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 $95,426,206 as of December 31, 2009, a decrease of
15.9% from the December 31, 2008 balance of $113,502,751. 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 and auction rate securities holding such stock, and
two pooled trust preferred securities. There was no
other-than-temporary impairment recorded during the year ended December 31,
2009. The Company adopted the provisions of the FASB guidance issued
in April 2009 relating to OTTI during the second quarter of 2009. Adoption of
this guidance resulted in the reclassification of $2,511,080 ($1,657,313, net of
tax) of non-credit related OTTI to accumulated OCI which had previously been
recognized as a loss in earnings and is disclosed in Note C - Securities to the
financial statements.
Cash and
cash equivalents totaled $26,798,671, as of December 31, 2009, which was an
increase of $17,559,888, or 190.1% compared to the balance of $9,238,783 as of
December 31, 2008. Cash and cash equivalents is comprised of vault
cash, Federal funds sold, and balances at correspondent banks and the
Federal Reserve Bank. The increase in cash and cash equivalents is
due to the funds from the investment sales and calls temporarily invested at
correspondent banks.
Net
premises and equipment totaled $6,964,928 as of December 31, 2009, decreasing by
$405,324 from the year-end 2008 balance of $7,370,252. Decreases in premises and
equipment during 2009 were primarily related to the disposals of equipment as
well as depreciation expense. During 2009, depreciation and amortization of bank
premises and equipment totaled $682,248, and purchases totaled
$282,257.
Deferred
tax assets totaled $5,118,470 as of December 31, 2009, which is an increase of
$35,513 from the December 31, 2008 balance of $5,082,957. Most of the
increase was associated with the increase in the allowance for loan and lease
losses and decrease in security write downs.
Regulatory
prepaid assessments totaled $2,402,661 as of December 31, 2009, which is an
increase of $2,332,901 from the December 31, 2008 balance of
$69,760. This increase is the result of the FDIC rule that required
insured depository institutions to prepay their quarterly
risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012,
on December 30, 2009, along with each institution’s risk-based deposit insurance
assessment for the third quarter of 2009.
Total
liabilities were $497,147,789 as of December 31, 2009, a decrease of $2,642,554
from the December 31, 2008 balance of $499,790,343.
Deposits
as of December 31, 2009 were $369,170,787, increasing $25,844,163, or 7.53%,
from the December 31, 2008 balance of
$343,326,624. Noninterest-bearing demand deposits totaled $82,214,335
as of December 31, 2009, which was a 18.2% increase from the year-end 2008
balance. Savings deposits totaled $62,810,282, which was an increase
of $4,227,906, or 7.2% from the December 31, 2008 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 $81,376,897, which was a decrease of
$11,708,229, or 12.6% from the December 31, 2008 balance of
$93,085,126. Higher balances held for the Bank’s trust customers also
contributed to the increase in deposits. Time certificates of deposit
totaled $142,769,273 as of December 31, 2009, which was an increase of 16.9%, or
$20,658,412 from year-end 2008. The increase in time deposits is
reflective of the customers’ desire for yield and the shifting of money market
deposits into short term certificates of deposit. Additionally, there
has been growth in the Bank’s CDARs deposits, which provide customers with FDIC
deposit insurance beyond the $250,000 limit. As of December 31, 2009
and 2008, CDARs deposits totaled $20,463,000 and $15,902,000,
respectively.
As of
December 31, 2009, Federal Home Loan Bank (FHLBB) advances totaled $69,000,000
as compared to $81,608,000 as of December 31, 2008. At December 31,
2009, borrowings under repurchase agreements totaled $43,115,947, a decrease of
$1,556,624 from the year-end 2008 balance of $44,672,571. As of December 31,
2009 and 2008, included in repurchase agreements was $20,615,947 and
$18,222,571, respectively, of balances in the overnight investment product
offered to the Bank’s commercial and municipal cash management
customers. At December 31, 2009, total borrowings under repurchase
agreements with financial institutions and FHLBB advances totaled $91,500,000
compared to the balance of $108,058,000 at December 31, 2008. As of
December 31, 2009 and 2008, 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
2009 and 2008, the ratio of borrowed funds to total assets were 23.3% and 26.1%,
respectively.
There
were no collateralized borrowings as of December 31,
2009. Collateralized borrowings totaled $1,375,550 as of December 31,
2008. The borrowings were related to participation agreements for the
sale of loans that included 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 - 2009 COMPARED TO 2008
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
on deposits and borrowed money.
For the
year ended December 31, 2009, the Company reported a net loss available to
common shareholders of $1,758,375 as compared to a net loss of $4,516,773 for
the same period in 2008. Basic and diluted loss per common share for
the year ended December 31, 2009 was $0.75, compared to basic and diluted loss
per common share of $1.92 for the year ended December 31, 2008. The
decrease in net loss available to common shareholders is due primarily to the
loss on available-for-sale securities in 2008 which did not occur in 2009,
partially offset by increases in the provision for loans and lease losses, loss
due to dishonored items, and increases in other noninterest
expenses. The net loss in 2008 is due primarily 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.
The
Company’s return on average shareholders’ equity totaled (8)% for 2009 versus
(28)% for 2008.
Net
Interest Income
Net
interest income for the year of 2009 totaled $15,330,939, an increase of 2.62%
or $391,354, from 2008. 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 $500
million for 2009, which was a .60% increase over the 2008 average of $497
million. Additionally, the change in the composition of earning assets was
significant. Average loans and leases increased from $346,113,000 and
70% of average earning assets in 2008 to $385,949,000 and 77% of the average
earning assets in 2009. 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.
Net
interest income on a fully tax-equivalent basis is comprised of the following
for the years ended December 31,
2009
|
2008
|
|||||||
Interest
and dividend income
|
$ | 25,038,819 | $ | 28,188,882 | ||||
Tax-equivalent
adjustments (1)
|
344,541 | 618,353 | ||||||
Interest
expense
|
(9,707,880 | ) | (13,249,297 | ) | ||||
Net
interest income
|
$ | 15,675,480 | $ | 15,557,938 |
(1)
Interest income is presented on a tax-equivalent basis which reflects a federal
tax rate of 34% for all periods presented.
The
following table presents on a tax-equivalent basis, the Company’s average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates, interest spread, and net interest margin for the years ended December 31,
2009 and 2008. Average loans outstanding include nonaccrual
loans. Interest income is presented on a tax-equivalent basis, which
reflects a federal tax rate of 34% for all periods presented.
DISTRIBUTION
OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY;
INTEREST
RATES AND INTEREST DIFFERENTIAL
2009
|
2008
|
|||||||||||||||||||||||
Interest
|
Interest
|
|||||||||||||||||||||||
Average
|
Earned/
|
Yield/
|
Average
|
Earned/
|
Yield/
|
|||||||||||||||||||
Balance
|
Paid
|
Rate
|
Balance
|
Paid
|
Rate
|
|||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Interest-Earning
Assets:
|
||||||||||||||||||||||||
Loans
and leases
|
$ | 385,949,000 | $ | 21,430,925 | 5.55 | % | $ | 346,113,000 | $ | 21,593,992 | 6.24 | % | ||||||||||||
Investment
securities
|
100,100,000 | 3,887,857 | 3.88 | % | 141,356,000 | 6,992,756 | 4.95 | % | ||||||||||||||||
Other
interest-earning assets
|
13,591,000 | 64,578 | 0.48 | % | 9,187,000 | 220,487 | 2.40 | % | ||||||||||||||||
Total
interest-earning assets
|
499,640,000 | 25,383,360 | 5.08 | % | 496,656,000 | 28,807,235 | 5.80 | % | ||||||||||||||||
Allowance
for loan and
|
||||||||||||||||||||||||
lease
losses
|
(4,341,000 | ) | (2,214,000 | ) | ||||||||||||||||||||
Cash
and due from banks
|
26,666,000 | 10,899,000 | ||||||||||||||||||||||
Premises
and equipment
|
7,192,000 | 7,533,000 | ||||||||||||||||||||||
Net
unrealized losses on
|
||||||||||||||||||||||||
securities
|
(751,000 | ) | (3,629,000 | ) | ||||||||||||||||||||
Foreclosed
real estate
|
282,000 | - | ||||||||||||||||||||||
Other
assets
|
19,144,000 | 17,832,000 | ||||||||||||||||||||||
Total
Average Assets
|
$ | 547,832,000 | $ | 527,077,000 |
Liabilities
and Shareholders’ Equity
Interest-Bearing
Liabilities:
|
||||||||||||||||||||||||
Savings
deposits
|
$ | 66,725,000 | $ | 315,406 | 0.47 | % | $ | 58,788,000 | $ | 609,306 | 1.04 | % | ||||||||||||
Money
Market deposits
|
85,412,000 | 715,142 | 0.84 | % | 83,116,000 | 1,563,305 | 1.88 | % | ||||||||||||||||
Time
deposits
|
146,835,000 | 3,575,012 | 2.43 | % | 132,813,000 | 4,907,151 | 3.69 | % | ||||||||||||||||
Borrowed
funds
|
136,543,000 | 5,102,320 | 3.74 | % | 152,108,000 | 6,169,535 | 4.06 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
435,515,000 | 9,707,880 | 2.23 | % | 426,825,000 | 13,249,297 | 3.10 | % | ||||||||||||||||
Demand
deposits
|
72,611,000 | 68,864,000 | ||||||||||||||||||||||
Other
liabilities
|
6,887,000 | 5,128,000 | ||||||||||||||||||||||
Shareholders’
Equity
|
32,819,000 | 26,260,000 | ||||||||||||||||||||||
Total
liabilities and equity
|
$ | 547,832,000 | $ | 527,077,000 | ||||||||||||||||||||
Net
interest income
|
$ | 15,675,480 | $ | 15,557,938 | ||||||||||||||||||||
Net
interest spread
|
2.85 | % | 2.70 | % | ||||||||||||||||||||
Net
interest margin
|
3.14 | % | 3.13 | % |
Rate/Volume
Analysis
The
following table, which is presented on a tax-equivalent basis, reflects the
changes for the year ended December 31, 2009 when compared to the year ended
December 31, 2008 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.
2009
Compared to 2008
|
||||||||||||
Increase (Decrease) Due to
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest
earned on:
|
||||||||||||
Loans
and leases
|
$ | 2,345,587 | $ | (2,508,654 | ) | $ | (163,067 | ) | ||||
Investment
securities
|
(1,788,321 | ) | (1,316,578 | ) | (3,104,899 | ) | ||||||
Other
interest-earning assets
|
73,983 | (229,892 | ) | (155,909 | ) | |||||||
Total
interest-earning assets
|
631,249 | (4,055,124 | ) | (3,423,875 | ) | |||||||
Interest
paid on:
|
||||||||||||
Deposits
|
579,823 | (3,054,025 | ) | (2,474,202 | ) | |||||||
Borrowed
money
|
(603,234 | ) | (463,981 | ) | (1,067,215 | ) | ||||||
Total
interest-bearing liabilities
|
(23,411 | ) | (3,518,006 | ) | (3,541,417 | ) | ||||||
Increase
(decrease) in net interest income
|
$ | 654,660 | $ | (537,118 | ) | $ | 117,542 |
Tax
equivalent net interest income for 2009 increased $117,542 or .76% from
2008. The increase in net interest income was due to increased margin
resulting mainly from decreased funding costs in 2009. The 2009 net
interest margin (net interest income divided by average earning assets)
increased from the previous year’s level of 3.13% by 1 basis point to
3.14%. Interest income on average earning assets for 2009 totaled
$25,383,360, which was a decrease of 11.89%, or $3,423,875 from 2008 interest
income on average earning assets of $28,807,235. Interest expense
totaled $9,707,880 for 2009, which was a decrease of $3,541,417 or 26.7% from
2008.
As shown
in the Rate/Volume Analysis above, the increase in net interest income was
impacted by the decrease in funding costs. The 2009 yield on average
earning assets was 5.08% which was a decrease of 72 basis points from the 2008
yield of 5.80%. The related interest cost from average
interest-bearing liabilities was 2.23% which was a decrease of 87 basis points
from the 2008 cost of 3.10%. The decrease in costs is attributed to
the decreases in short-term rates in the current 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 $631,249. This increase is due to interest income on
loans which increased by $2,345,587 reflecting increased volume in the loan
portfolio which, on average, was $39.8 million higher than 2008 and a decrease
of $1,788,321 due to the volume of the investment portfolio. In
addition, the cost of funding declined by $23,411 due to reductions in the
volume of interest bearing liabilities, resulting in a $654,660 net increase
from volume considerations. Funding through borrowed money averaged $136,543,000
which was a decrease of $15,565,000, or 10.2% from the 2008
average.
Noninterest
Income (Loss)
Noninterest
income for 2009 totaled $4,455,358, which is a difference of $9,817,463, or
183.1% from 2008 noninterest loss of $5,362,105. The 2008 noninterest loss
largely reflected OTTI charges of $9,422,650 related to the OTTI write downs of
the Bank’s investments in Freddie Mac and Fannie Mae preferred stock and auction
rate securities holding such stock and two pooled trust preferred securities.
There were no similar writedowns during 2009. During 2009, the Company sold $79
million of available-for-sale securities. The purpose of these sales
was to decrease interest rate risk, improve balance sheet liquidity, and reduce
price volatility. The net gains from these sales totaled
$465,737. 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.
Other
areas of noninterest income also contributed to the change from 2008
results. Service charges and fee income totaled $1,614,064, compared
to 2008 income of $1,543,519. The increase from 2008 levels is a result of
revenue opportunities from deposit accounts and cash management
services.
During
2009, the Company sold residential mortgages in the secondary market which
resulted in gains on sales of loans totaling $578,714 compared to sales
transacted during 2008 which resulted in gains totaling
$41,541. Included in those sales was a sale of 94 mortgages totaling
$13 million executed during the third quarter of 2009. These sales
were transacted with the purpose of reducing interest rate risk and improving
the Company’s liquidity position.
Other
noninterest income totaled $173,806 at December 31, 2009, as compared to
$241,423 at December 31, 2008. The decrease is primarily related to
the decline in retail investment income due to the weakened
economy.
Noninterest
Expenses
Noninterest
expenses totaled $18,274,373 in 2009, an increase of 19.1%, or $2,934,224, from
2008 noninterest expenses of $15,340,149. The increase in noninterest
expense is due to higher costs in legal fees, FDIC assessments, computer
services, commissions, services and fees, loss due to dishonored items, and
other noninterest expenses.
Legal
fees totaled $533,130 for 2009 which was an increase of $226,126 or 73.7% from
2008 legal fees of 307,004. This increase is the result of increased
collection fees and merger related expenses. Regulatory assessments
which totaled $1,127,899 for 2009 was an increase of $807,100 or 251.6% over the
2008 costs of $320,799 primarily due to increased premiums and the 2009 special
assessment. Exam and audit fees totaled $804,600 for 2009 which was
an increase of $440,443 or 121% from 2008. Much of this increase is
the result of hiring consultants for Sarbanes Oxley compliance audit
services. Computer services costs totaled $1,123,942 for 2009 which
was an increase of $95,736, or 9.3% from 2008 costs of
$1,028,206. This increase is primarily due to vendor credits
from the Bank’s core processor which were used during
2008. Commissions, services and fees expenses totaled $589,923,
increasing $193,873, from 2008. The majority of this expense for 2009
was advice and consulting relating to corporate initiatives, investment and
interest rate risk, lending, trust, retail and personnel. Also,
during 2009 the Company created an accrual of $768,583 related to the dishonor
of fraudulent items; there were no comparable items in 2008. No
further losses related to these items are anticipated. Other real
estate owned expenses totaled $228,127 for 2009, which includes the loss on sale
of other real estate owned property of $102,180. There was no other
real estate owned as of December 31, 2008. Other noninterest expenses
totaled $1,522,438 and increased 38.2% over the 2008 expenses. This
expense includes costs for travel, contributions, and insurance.
Nonaccrual,
Past Due, Restructured Loans and Leases and Other Real Estate Owned
The
Bank’s nonaccrual 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, 2005 through 2009 are presented below.
December
31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Nonaccrual
loans and leases
|
$ | 12,507,467 | $ | 5,639,735 | $ | 2,959,074 | $ | 1,504,551 | $ | 273,330 | ||||||||||
Other
real estate owned (OREO)
|
312,000 | - | - | - | - | |||||||||||||||
Total
nonperforming assets
|
$ | 12,819,467 | $ | 5,639,735 | $ | 2,959,074 | $ | 1,504,551 | $ | 273,330 | ||||||||||
Loans
and leases past due in excess of
|
||||||||||||||||||||
90
days and accruing interest
|
$ | 9,653 | $ | 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 nonaccrual
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 “troubled debt 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.
At
December 31, 2009 and 2008, there were no loans that were considered as
“troubled debt restructurings.”
Had the
nonaccrual loans and leases performed in accordance with their original terms,
gross interest income for the years ended December 31, 2009 and 2008 would have
increased by approximately $365,000 and $163,000, respectively.
The Bank
considers all nonaccrual loans and leases, other loans and leases past due 90
days or more based on contractual terms, and troubled debt 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.
The
following table summarizes the Bank’s OREO, past due, and nonaccrual loans and
leases, and non-performing assets as of December 31, 2009, 2008, 2007, 2006 and
2005.
December
31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Nonaccrual
loans and leases
|
$ | 12,507,467 | $ | 5,639,735 | $ | 2,959,074 | $ | 1,504,551 | $ | 273,330 | ||||||||||
Other
real estate owned
|
312,000 | - | - | - | - | |||||||||||||||
Total
non-performing assets
|
$ | 12,819,467 | $ | 5,639,735 | $ | 2,959,074 | $ | 1,504,551 | $ | 273,330 | ||||||||||
Loans
and leases past due in excess of ninety days
|
||||||||||||||||||||
and
accruing interest
|
$ | 9,653 | $ | 19,603 | $ | 3,111 | $ | 343 | $ | 4,884 | ||||||||||
Ratio
of non-performing assets to total loans,
|
||||||||||||||||||||
leases
and OREO
|
3.41 | % | 1.52 | % | 0.90 | % | 0.51 | % | 0.11 | % | ||||||||||
Ratio
of non-performing assets and loans and
|
||||||||||||||||||||
leases
past due in excess of ninety days accruing
|
||||||||||||||||||||
interest
to total loans, leases and OREO
|
3.41 | % | 1.53 | % | 0.90 | % | 0.51 | % | 0.11 | % | ||||||||||
Ratio
of allowance for loan and lease losses to total
|
||||||||||||||||||||
loans
and leases
|
1.61 | % | 1.00 | % | 0.65 | % | 0.71 | % | 0.73 | % | ||||||||||
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
|
47.30 | % | 65.36 | % | 72.64 | % | 139.95 | % | 632.47 | % | ||||||||||
Ratio
of non-performing assets, loans and leases
|
||||||||||||||||||||
in
excess of ninety days past due and accruing interest
|
||||||||||||||||||||
to
total shareholders' equity
|
41.15 | % | 17.46 | % | 10.46 | % | 5.74 | % | 1.07 | % |
Total
non-performing assets increased by $7,179,732, or 127.31%, to $12,819,467 at
December 31, 2009, from $5,639,735 at December 31, 2008. The increase
in non-performing assets from year-end 2008 is due mostly to the addition of a
small number of mid-size mortgages and commercial loans and leases during
2009. Additionally, as of December 31, 2009 there was approximately
$94,000 in purchased sub-prime consumer loans included in nonperforming loans
which was a decrease of $76,000 from December 31, 2008. As of
December 31, 2009 and 2008, loans and leases past due in excess of ninety days
and accruing interest totaled $9,653 and $19,603, respectively.
Total
non-performing assets represented 3.41% of total loans, leases, and other real
estate owned at year-end December 31, 2009 compared to 1.52% at year-end
2008. The allowance for loan and lease losses as of December 31, 2009
was 1.61% of total loans and leases, as compared to the level from 2008 when the
allowance was approximately 1.00% of total loans and leases. The
allowance for loan and lease losses was equivalent to 47.30% of nonaccrual loans
and leases at December 31, 2009, as compared to 65.36% at December 31,
2008. The decrease in the coverage ratio is a result of increased
level of non-performing assets at year end 2009.
Potential
Problem Loans and Leases
As of
December 31, 2009, there were no potential problem loans or leases not disclosed
above which cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan or lease repayment
terms.
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, 2005 through 2009. The
allowance is maintained at a level consistent with the identified loss potential
and the perceived risk in the portfolio.
(Dollar
Amounts in Thousands)
|
||||||||||||||||||||
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Balance,
at beginning of period
|
$ | 3,699 | $ | 2,152 | $ | 2,106 | $ | 1,760 | $ | 1,390 | ||||||||||
Loans
and Leases charged-off:
|
||||||||||||||||||||
Commercial
and Real Estate
|
541 | 90 | 16 | - | 37 | |||||||||||||||
Installment
loans
|
1,118 | 287 | 160 | 96 | 60 | |||||||||||||||
1,659 | 377 | 176 | 96 | 97 | ||||||||||||||||
Recoveries
on loans and leases charged-off:
|
||||||||||||||||||||
Commercial
and Real Estate
|
- | - | - | 1 | 81 | |||||||||||||||
Installment
loans
|
359 | 88 | 18 | 21 | 44 | |||||||||||||||
359 | 88 | 18 | 22 | 125 | ||||||||||||||||
Net
loan charge-offs/(recoveries)
|
1,300 | 289 | 158 | 74 | (28 | ) | ||||||||||||||
Provisions
charged to operations
|
3,669 | 1,836 | 204 | 420 | 342 | |||||||||||||||
Balance,
at the end of period
|
$ | 6,068 | $ | 3,699 | $ | 2,152 | $ | 2,106 | $ | 1,760 | ||||||||||
Ratio
of net charge-offs/(recoveries) during the period
|
||||||||||||||||||||
to
average loans and leases outstanding during the period
|
0.35 | % | 0.08 | % | 0.05 | % | 0.03 | % | -0.01 | % | ||||||||||
Ratio
of allowance for loan and lease losses
|
||||||||||||||||||||
to
total loans and leases
|
1.61 | % | 1.00 | % | 0.65 | % | 0.71 | % | 0.73 | % |
During
2009, net charge-offs totaled $1,300,000, which is an increase of $1,011,000
from 2008 net charge-offs of $289,000. The increase in net
charge-offs was due to a higher level of net charge-offs in the installment loan
portfolio. During 2009 and 2008, 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
$759,000 from installment loans in 2009 increasing from $199,000 in
2008. 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, 2009, 2008, 2007, 2006,
and 2005.
Analysis
of Allowance for Loan and Lease Losses
|
||||||||||||||||||||||||||||||||||||||||
(Amounts
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
December
31,
|
||||||||||||||||||||||||||||||||||||||||
Loans
and
|
||||||||||||||||||||||||||||||||||||||||
Leases by Type
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
Allocation
|
Percentage
|
Allocation
|
Percentage
|
Allocation
|
Percentage
|
Allocation
|
Percentage
|
Allocation
|
Percentage
|
|||||||||||||||||||||||||||||||
of
Allowance
|
of
Loans
|
of
Allowance
|
of
Loans
|
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
|
for
Loan and
|
in
each
|
for
Loan and
|
Each
|
|||||||||||||||||||||||||||||||
Lease Losses
|
Category
|
Lease Losses
|
Category
|
Lease Losses
|
Category
|
Lease Losses
|
Category
|
Lease Losses
|
Category
|
|||||||||||||||||||||||||||||||
to
Total
|
to
Total
|
to
Total
|
to
Total
|
to
Total
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
|
Loans
|
|
Loans
|
|
Loans
|
|
Loans
|
|||||||||||||||||||||||||||||||
Commercial
|
$ | 972 | 10.95 | % | $ | 981 | 12.52 | % | $ | 317 | 10.23 | % | $ | 204 | 9.13 | % | $ | 357 | 8.73 | % | ||||||||||||||||||||
Real
Estate
|
||||||||||||||||||||||||||||||||||||||||
Construction
|
406 | 5.11 | % | 570 | 10.32 | % | 231 | 10.58 | % | 480 | 10.36 | % | 224 | 11.79 | % | |||||||||||||||||||||||||
Residential
|
1,894 | 45.05 | % | 1,068 | 52.13 | % | 863 | 57.61 | % | 769 | 59.97 | % | 411 | 60.26 | % | |||||||||||||||||||||||||
Commercial
|
2,315 | 27.75 | % | 678 | 18.26 | % | 465 | 16.94 | % | 401 | 18.05 | % | 518 | 17.40 | % | |||||||||||||||||||||||||
Installment
|
106 | 1.32 | % | 210 | 1.38 | % | 180 | 1.98 | % | 181 | 2.43 | % | 54 | 1.79 | % | |||||||||||||||||||||||||
Other
|
112 | 0.02 | % | 18 | 0.03 | % | 16 | 0.03 | % | 17 | 0.06 | % | 38 | 0.03 | % | |||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||||||||||||||||||
Leases
|
263 | 9.80 | % | 174 | 5.36 | % | 80 | 2.63 | % | - | - | - | - | |||||||||||||||||||||||||||
Unallocated
|
- | - | - | - | - | - | 54 | - | 158 | - | ||||||||||||||||||||||||||||||
Total
|
$ | 6,068 | 100 | % | $ | 3,699 | 100 | % | $ | 2,152 | 100 | % | $ | 2,106 | 100 | % | $ | 1,760 | 100 | % |
The
unallocated portion of the allowance in 2005 and 2006 reflects management’s
estimate of probable but unconfirmed losses inherent in the
portfolio. Such estimates are influenced by uncertainties in economic
conditions, delays in obtaining information, including unfavorable information
about a borrower’s financial condition, difficulty in identifying triggering
events that correlate perfectly to subsequent loss rates, and risk factors that
have not yet manifested themselves in loss allocation factors.
LIQUIDITY
Management’s
objective is to ensure continuous ability to meet cash needs as they arise. Such
needs may occur from time to time as a result of fluctuations in loan 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:
2009
|
2008
|
|||||||
Balance
at December 31,
|
$ | - | $ | 1,608,000 | ||||
Maximum
Month-End Borrowings
|
21,028,000 | 17,300,000 | ||||||
Average
Balance
|
4,848,627 | 4,156,000 | ||||||
Average
Rate at Year-End
|
0.00 | % | 0.46 | % | ||||
Average
Rate during the Period
|
0.28 | % | 1.73 | % |
The
following information relates to the Bank’s short-term repurchase agreements
with customers for the years ended December 31:
2009
|
2008
|
|||||||
Balance
at December 31,
|
$ | 20,615,947 | $ | 18,222,571 | ||||
Maximum
Month-End Borrowings
|
27,035,493 | 23,151,139 | ||||||
Average
Balance
|
20,484,434 | 13,499,884 | ||||||
Average
Rate at Year-End
|
0.68 | % | 1.42 | % | ||||
Average
Rate during the Period
|
0.99 | % | 1.93 | % |
OFF-BALANCE
SHEET ARRANGEMENTS
See Note
Q on page F-36 of the consolidated financial statements for the disclosure of
off-balance sheet arrangements.
CAPITAL
At
December 31, 2009, total shareholders’ equity was $31,361,128 compared to
$32,467,264 at December 31, 2008. From a regulatory perspective, the
Bank’s capital ratios place the Bank in the well-capitalized categories under
applicable regulations. The various capital ratios of the Company and
the Bank are as follows as of December 31, 2009:
Minimum
|
||||||||||||
Regulatory
|
||||||||||||
Capital Level
|
The Company
|
The Bank
|
||||||||||
Tier
1 leverage capital ratio
|
4 | % | 7.34 | % | 7.02 | % | ||||||
Tier
1 risk-based capital ratio
|
4 | % | 10.25 | % | 9.83 | % | ||||||
Total
risk-based capital ratio
|
8 | % | 11.50 | % | 11.09 | % |
Included
in the Company’s capital used to determine these ratios at December 31, 2009 and
December 31, 2008 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,
2009 and 2008, 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,
stricter limitations. The Company has until March 31, 2011,
(previously 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 United
States Department of the Treasury’s Troubled Assets Relief Program (“TARP”)
Capital Purchase Program (“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 CPP was to insure that the Company and the Bank
maintained their well-capitalized status given the uncertain economic
environment.
On
December 12, 2008, under the TARP CPP, the Company sold 10,000 shares of senior
preferred stock to the U.S. Treasury, having a liquidation amount equal to
$1,000 per share, or $10,000,000. Although the Company was
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 its existing operations as well as anticipated future
growth. Additional information concerning the TARP CPP is included in
the Company’s 2008 Form 10-K/A Amendment Number One, as filed with the
Securities Exchange Commission on April 23, 2009.
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, as the cumulative dividend rate on the
senior preferred stock issued in the TARP CPP increases from 5% to 9% in 2013,
the Company will incur increased capital costs if the senior preferred stock is
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 2009 totaled $1,083,354 in comparison to income tax
benefit of $3,112,459 in 2008. The change in income tax benefit
between 2009 and 2008 is due to the pretax loss in 2008, as a result of the OTTI
charges during the year. The effective tax rates for 2009 and 2008
were (50) % and (41) %, respectively. Also, in both years, provisions
for income taxes included the tax benefit related to income associated with
Litchfield Mortgage Service Corporation (“LMSC”), which was formed by the Bank
in 2000. The income from LMSC is considered passive investment income
pursuant to Connecticut law, under which LMSC was formed and is operating, and
is not subject to state taxes which resulted in no state tax expense for all
years.
IMPACT OF INFLATION AND CHANGING
PRICES
The
Consolidated Financial Statements and related notes thereto presented elsewhere
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative value of money over time due to
inflation. Unlike many industrial companies, most of the assets and
virtually all of the liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on
the Company’s performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as inflation.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable as the registrant is not an accelerated filer or large accelerated
filer.
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, 2009 and 2008
|
F-2
|
Consolidated
Statements of Operations for the Years Ended
|
|
December
31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Changes in Shareholders’ Equity for the
|
|
Years
Ended December 31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Cash Flows for the Years
|
|
Ended
December 31, 2009 and 2008
|
F-5
to F-6
|
Notes
to Consolidated Financial Statements
|
F-7
to F-46
|
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, 2009 and
2008, 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, 2009 and 2008, 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, the Company
changed the manner in which it accounts for their endorsement split-dollar life
insurance arrangements in 2008 and noncontrolling interest in 2009 upon the
adoption of new accounting pronouncements.
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, 2009
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
March
31, 2010
CONSOLIDATED
BALANCE SHEETS
As
of December 31,
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 26,520,349 | $ | 9,238,320 | ||||
Interest-bearing
accounts due from banks
|
278,322 | 463 | ||||||
CASH
AND CASH EQUIVALENTS
|
26,798,671 | 9,238,783 | ||||||
Securities:
|
||||||||
Available
for sale securities, at fair value
|
95,411,705 | 113,486,201 | ||||||
Held
to maturity securities (fair value $14,920-2009 and
$16,553-2008)
|
14,501 | 16,550 | ||||||
TOTAL
SECURITIES
|
95,426,206 | 113,502,751 | ||||||
Federal
Home Loan Bank stock, at cost
|
5,427,600 | 5,427,600 | ||||||
Federal
Reserve Bank stock, at cost
|
225,850 | 225,850 | ||||||
Other
restricted stock, at cost
|
105,000 | 100,000 | ||||||
Loans
held for sale
|
80,000 | 1,013,216 | ||||||
Loan
and lease receivables, net of allowance for loan and lease
|
||||||||
losses
of $6,068,108 –2009 and $3,698,820 –2008
|
||||||||
NET
LOANS AND LEASES
|
370,617,392 | 366,392,079 | ||||||
Premises
and equipment, net
|
6,964,928 | 7,370,252 | ||||||
Foreclosed
real estate
|
312,000 | - | ||||||
Deferred
income taxes
|
5,118,470 | 5,082,957 | ||||||
Accrued
interest receivable
|
1,665,569 | 2,262,918 | ||||||
Cash
surrender value of insurance
|
10,809,172 | 10,416,651 | ||||||
Due
from broker for security sales
|
132,000 | 9,590,823 | ||||||
Regulatory
prepaid assessment
|
2,402,661 | 69,760 | ||||||
Other
assets
|
2,423,398 | 1,563,967 | ||||||
TOTAL
ASSETS
|
$ | 528,508,917 | $ | 532,257,607 | ||||
LIABILITIES
|
- | |||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 82,214,335 | $ | 69,548,261 | ||||
Interest-bearing
|
286,956,452 | 273,778,363 | ||||||
TOTAL
DEPOSITS
|
369,170,787 | 343,326,624 | ||||||
Federal
Home Loan Bank advances
|
69,000,000 | 81,608,000 | ||||||
Repurchase
agreements with financial institutions
|
22,500,000 | 26,450,000 | ||||||
Repurchase
agreements with customers
|
20,615,947 | 18,222,571 | ||||||
Junior
subordinated debt issued by unconsolidated trust
|
10,104,000 | 10,104,000 | ||||||
Collateralized
borrowings
|
- | 1,375,550 | ||||||
Capital
lease obligation
|
1,046,581 | 1,065,563 | ||||||
Due
to broker for security purchases
|
- | 12,994,945 | ||||||
Accrued
expenses and other liabilities
|
4,710,474 | 4,643,090 | ||||||
TOTAL
LIABILITIES
|
497,147,789 | 499,790,343 | ||||||
Commitments
and contingencies
|
||||||||
EQUITY
|
||||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
stock $.00001 par value; 1,000,000 shares authorized
|
||||||||
2009
- 10,000 shares issued and outstanding
|
||||||||
2008
- 10,000 shares issued and outstanding
|
- | - | ||||||
Common
stock $.01 par value; 5,000,000 shares
authorized
|
||||||||
2009
- Issued – 2,506,622 shares, outstanding – 2,356,875
shares
|
||||||||
2008
- Issued – 2,506,622 shares, outstanding – 2,356,875
shares
|
25,046 | 25,038 | ||||||
Additional
paid-in capital
|
37,952,965 | 37,892,831 | ||||||
Accumulated
deficit
|
(3,662,694 | ) | (3,325,920 | ) | ||||
Less:
Treasury stock at cost- 149,747 as of 12/31/09 and
12/31/08
|
(1,154,062 | ) | (1,154,062 | ) | ||||
Accumulated
other comprehensive loss, net of taxes
|
(1,987,480 | ) | (1,024,498 | ) | ||||
TOTAL
FIRST LITCHFIELD FINANCIAL CORPORATION
|
||||||||
SHAREHOLDERS’
EQUITY
|
31,173,775 | 32,413,389 | ||||||
NONCONTROLLING
INTERESTS
|
187,353 | 53,875 | ||||||
TOTAL
EQUITY
|
31,361,128 | 32,467,264 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 528,508,917 | $ | 532,257,607 |
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31,
|
2009
|
2008
|
||||||
INTEREST
AND DIVIDEND INCOME
|
||||||||
Interest
and fees on loans and leases
|
$ | 21,417,284 | $ | 21,579,957 | ||||
Interest
and dividends on securities:
|
||||||||
Mortgage-backed
securities
|
2,258,412 | 3,320,225 | ||||||
US
Treasury and other securities
|
461,864 | 1,580,125 | ||||||
State
and municipal securities
|
696,590 | 1,118,924 | ||||||
Trust
Preferred and other securities
|
140,091 | 369,164 | ||||||
Total
interest on securities
|
3,556,957 | 6,388,438 | ||||||
Other
interest income
|
64,578 | 220,487 | ||||||
TOTAL
INTEREST AND DIVIDEND INCOME
|
25,038,819 | 28,188,882 | ||||||
INTEREST
EXPENSE
|
||||||||
Interest
on deposits:
|
||||||||
Savings
|
315,406 | 609,306 | ||||||
Money
market
|
715,142 | 1,563,305 | ||||||
Time
certificates of deposit
|
3,575,012 | 4,907,151 | ||||||
TOTAL
INTEREST ON DEPOSITS
|
4,605,560 | 7,079,762 | ||||||
Interest
on Federal Home Loan Bank advances
|
3,458,158 | 3,970,574 | ||||||
Interest
on repurchase agreements
|
1,014,154 | 1,430,176 | ||||||
Interest
on subordinated debt
|
515,153 | 606,396 | ||||||
Interest
on collateralized borrowings
|
58,837 | 105,393 | ||||||
Interest
on capital lease obligation
|
56,018 | 56,996 | ||||||
TOTAL
INTEREST EXPENSE
|
9,707,880 | 13,249,297 | ||||||
NET
INTEREST INCOME
|
15,330,939 | 14,939,585 | ||||||
PROVISION
FOR LOAN AND LEASE LOSSES
|
3,669,209 | 1,836,299 | ||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
|
11,661,730 | 13,103,286 | ||||||
NONINTEREST
INCOME (LOSS)
|
||||||||
Banking
service charges and fees
|
1,614,064 | 1,543,519 | ||||||
Trust
|
1,230,515 | 1,300,162 | ||||||
Gains
(losses) from sales and impairment of available for sale
securities
|
465,737 | (8,884,860 | ) | |||||
Increase
in cash surrender value of life insurance
|
392,522 | 396,110 | ||||||
Gains
on sale of loans
|
578,714 | 41,541 | ||||||
Other
|
173,806 | 241,423 | ||||||
TOTAL
NONINTEREST INCOME (LOSS)
|
4,455,358 | (5,362,105 | ) | |||||
NONINTEREST
EXPENSE
|
||||||||
Salaries
|
6,582,013 | 6,670,676 | ||||||
Employee
benefits
|
1,818,638 | 1,731,064 | ||||||
Net
occupancy
|
1,206,163 | 1,233,420 | ||||||
Equipment
|
570,817 | 613,878 | ||||||
Exam
and audit fees
|
804,600 | 364,157 | ||||||
Legal
fees
|
533,130 | 307,004 | ||||||
Directors
fees
|
178,725 | 198,400 | ||||||
Computer
services
|
1,123,942 | 1,028,206 | ||||||
Computer
software
|
298,814 | 280,786 | ||||||
Supplies
|
175,146 | 193,217 | ||||||
Consulting
services and fees
|
589,923 | 396,050 | ||||||
Postage
|
156,140 | 149,864 | ||||||
Telephone
|
183,647 | 161,003 | ||||||
Advertising
|
405,628 | 589,733 | ||||||
Regulatory
assessments
|
1,127,899 | 320,799 | ||||||
Loss
due to dishonored items
|
768,583 | - | ||||||
Other
real estate owned expenses
|
228,127 | - | ||||||
Other
|
1,522,438 | 1,101,892 | ||||||
TOTAL
NONINTEREST EXPENSE
|
18,274,373 | 15,340,149 | ||||||
LOSS
BEFORE INCOME TAXES
|
(2,157,285 | ) | (7,598,968 | ) | ||||
BENEFIT
FOR INCOME TAXES
|
(1,083,354 | ) | (3,112,459 | ) | ||||
NET
LOSS BEFORE NONCONTROLLING INTEREST
|
(1,073,931 | ) | (4,486,509 | ) | ||||
NET
INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
(133,478 | ) | (3,875 | ) | ||||
NET
LOSS
|
(1,207,409 | ) | (4,490,384 | ) | ||||
DIVIDENDS
AND ACCRETION ON PREFERRED SHARES
|
550,966 | 26,389 | ||||||
NET
LOSS AVAILABLE TO COMMON SHAREHOLDERS
|
$ | (1,758,375 | ) | $ | (4,516,773 | ) | ||
LOSS
PER COMMON SHARE
|
||||||||
BASIC
NET LOSS PER COMMON SHARE
|
$ | (0.75 | ) | $ | (1.92 | ) | ||
DILUTED
NET LOSS PER COMMON SHARE
|
$ | (0.75 | ) | $ | (1.92 | ) | ||
DIVIDENDS
PER COMMON SHARE
|
$ | 0.10 | $ | 0.60 |
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained
|
Accumulated
|
|||||||||||||||||||||||||||||||
Additional
|
Earnings
|
Other
|
Total
|
|||||||||||||||||||||||||||||
Noncontrolling
|
Preferred
|
Common
|
Paid-In
|
(Accumulated
|
Treasury
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||||||||
Interests
|
Stock
|
Stock
|
Capital
|
Deficit)
|
Stock
|
Loss
|
Equity
|
|||||||||||||||||||||||||
Balance,
December 31, 2007
|
$ | 50,000 | $ | - | $ | 25,012 | $ | 27,858,841 | $ | 2,623,110 | $ | (926,964 | ) | $ | (1,267,387 | ) | $ | 28,362,612 | ||||||||||||||
Adoption
of Accounting for Deferred Compensation and Postretirement Benefits
Associated with Endorsement Split Dollar Arrangements as of January 1,
2008
|
- | - | - | - | (12,272 | ) | - | - | (12,272 | ) | ||||||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||||
Net
income (loss)
|
3,875 | - | - | - | (4,490,384 | ) | - | - | (4,486,509 | ) | ||||||||||||||||||||||
Other
comprehensive income (loss), net of taxes:
|
||||||||||||||||||||||||||||||||
Net
unrealized holding gain (loss) on
|
||||||||||||||||||||||||||||||||
available
for sale securities
|
- | - | - | - | - | - | 927,584 | 927,584 | ||||||||||||||||||||||||
Net
actuarial loss and prior service
|
||||||||||||||||||||||||||||||||
cost
for pension benefits
|
(684,695 | ) | (684,695 | ) | ||||||||||||||||||||||||||||
Other
comprehensive income
|
242,889 | |||||||||||||||||||||||||||||||
Total
comprehensive loss
|
(4,243,620 | ) | ||||||||||||||||||||||||||||||
Cash
dividends declared: $0.60 per share
|
- | - | - | - | (1,416,888 | ) | - | - | (1,416,888 | ) | ||||||||||||||||||||||
Preferred
stock dividends
|
- | - | - | - | (26,389 | ) | - | - | (26,389 | ) | ||||||||||||||||||||||
Purchase
of treasury shares
|
- | - | - | - | - | (227,098 | ) | - | (227,098 | ) | ||||||||||||||||||||||
Stock
options exercised - 1,893 shares
|
- | - | 19 | 20,463 | - | - | - | 20,482 | ||||||||||||||||||||||||
Tax
benefit on stock options exercised
|
- | - | - | 2,025 | - | - | - | 2,025 | ||||||||||||||||||||||||
Restricted
stock grants and expense
|
- | - | 7 | 8,405 | - | - | - | 8,412 | ||||||||||||||||||||||||
Issuance
of preferred stock and warrants
|
- | - | - | 10,000,000 | - | - | - | 10,000,000 | ||||||||||||||||||||||||
Accretion
of discount on preferred stock
|
- | - | - | 3,097 | (3,097 | ) | - | - | - | |||||||||||||||||||||||
Balance,
December 31, 2008
|
$ | 53,875 | $ | - | $ | 25,038 | $ | 37,892,831 | $ | (3,325,920 | ) | $ | (1,154,062 | ) | $ | (1,024,498 | ) | $ | 32,467,264 | |||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||||
Net
income (loss)
|
133,478 | - | - | - | (1,207,409 | ) | - | - | (1,073,931 | ) | ||||||||||||||||||||||
Other
comprehensive income (loss), net of taxes:
|
||||||||||||||||||||||||||||||||
Net
unrealized holding gain on available
|
||||||||||||||||||||||||||||||||
for
sale securities
|
- | - | - | - | - | - | 224,628 | 224,628 | ||||||||||||||||||||||||
Non-credit
portion of net unrealized
|
||||||||||||||||||||||||||||||||
holding
gain on other-than-temporarily
|
||||||||||||||||||||||||||||||||
impaired
available for sale securities
|
- | - | - | - | - | - | 250,408 | 250,408 | ||||||||||||||||||||||||
Net
unrealized holding gain on cash
|
||||||||||||||||||||||||||||||||
flow
hedges
|
- | - | - | - | - | - | 77,580 | 77,580 | ||||||||||||||||||||||||
Net
actuarial gain and prior service
|
||||||||||||||||||||||||||||||||
cost
for pension benefits
|
- | - | - | - | - | - | 141,715 | 141,715 | ||||||||||||||||||||||||
Other
comprehensive income
|
694,331 | |||||||||||||||||||||||||||||||
Total
comprehensive loss
|
(379,600 | ) | ||||||||||||||||||||||||||||||
Adjustment
to adopt Other-than-Temporary Impairment guidance (net of $853,767 tax
effect)
|
- | - | - | - | 1,657,313 | - | (1,657,313 | ) | - | |||||||||||||||||||||||
Cash
dividends declared: $0.10 per share
|
- | - | - | - | (235,712 | ) | - | - | (235,712 | ) | ||||||||||||||||||||||
Restricted
stock grants and expense
|
- | - | 8 | 9,168 | - | - | - | 9,176 | ||||||||||||||||||||||||
Preferred
stock dividends
|
- | - | - | - | (500,000 | ) | - | - | (500,000 | ) | ||||||||||||||||||||||
Accretion
of discount on preferred stock
|
- | - | - | 50,966 | (50,966 | ) | - | - | - | |||||||||||||||||||||||
Balance,
December 31, 2009
|
$ | 187,353 | $ | - | $ | 25,046 | $ | 37,952,965 | $ | (3,662,694 | ) | $ | (1,154,062 | ) | $ | (1,987,480 | ) | $ | 31,361,128 |
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31,
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (1,207,409 | ) | $ | (4,490,384 | ) | ||
Adjustments
to reconcile net loss to net cash provided
|
||||||||
by
operating activities:
|
||||||||
Net
income attributable to noncontrolling interest
|
133,478 | 3,875 | ||||||
Amortization
of discounts and premiums on investment
|
||||||||
securities,
net
|
360,856 | 146,828 | ||||||
Provision
for loan and lease losses
|
3,669,209 | 1,836,299 | ||||||
Depreciation
and amortization
|
682,248 | 734,020 | ||||||
Deferred
income taxes
|
(393,200 | ) | (3,868,274 | ) | ||||
Loss
on impairment write-down of available for sale securities
|
- | 9,422,650 | ||||||
Gains
on sales of available for sale securities
|
(465,737 | ) | (537,790 | ) | ||||
Loss
on sale of foreclosed real estate
|
102,180 | - | ||||||
Loans
originated for sale
|
(16,292,029 | ) | (4,225,152 | ) | ||||
Proceeds
from sales of loans held for sale
|
30,179,786 | 3,232,832 | ||||||
Gains
on sales of loans held for sale
|
(578,714 | ) | (41,541 | ) | ||||
Losses
on sales of repossessed assets
|
185,865 | 32,024 | ||||||
Losses
on disposals of bank premises and equipment
|
1,876 | 2,188 | ||||||
Stock
based compensation
|
9,176 | 8,412 | ||||||
Decrease
in accrued interest receivable
|
597,349 | 346,688 | ||||||
(Increase)
decrease in other assets
|
(593,766 | ) | 884,218 | |||||
Increase
in prepaid regulatory insurance
|
(2,332,901 | ) | - | |||||
Increase
in cash surrender value of life insurance
|
(392,521 | ) | (396,111 | ) | ||||
Increase
in deferred loan origination costs
|
(76,779 | ) | (116,571 | ) | ||||
Decrease
in accrued expenses and other liabilities
|
(283,199 | ) | (292,494 | ) | ||||
Net
cash provided by operating activities
|
13,305,768 | 2,681,717 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Available
for sale securities:
|
||||||||
Proceeds
from maturities and principal payments
|
28,489,665 | 45,521,948 | ||||||
Purchases
|
(92,386,620 | ) | (77,949,889 | ) | ||||
Proceeds
from sales
|
79,259,963 | 43,699,152 | ||||||
Held
to maturity mortgage-backed securities:
|
||||||||
Proceeds
from maturities and principal payments
|
2,049 | 17,635 | ||||||
Purchase
of restricted stock
|
(5,000 | ) | (5,000 | ) | ||||
Purchase
of Federal Home Loan Bank stock
|
- | (360,200 | ) | |||||
Net
increase in loans and leases
|
(21,036,961 | ) | (40,604,639 | ) | ||||
Proceeds
from sales of repossessed assets
|
56,676 | 256,873 | ||||||
Purchases
of bank premises and equipment
|
(282,257 | ) | (347,699 | ) | ||||
Proceeds
from sale of bank premises and equipment
|
3,457 | - | ||||||
Proceeds
from sale of foreclosed real estate
|
919,860 | - | ||||||
Net
cash used in investing activities
|
(4,979,168 | ) | (29,771,819 | ) |
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Cont.
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
increase in savings, money market, and demand deposits
|
5,185,751 | 15,567,912 | ||||||
Net
increase (decrease) in certificates of deposit
|
20,658,412 | (7,858,952 | ) | |||||
Repayments
on Federal Home Loan Bank advances
|
(11,000,000 | ) | (11,500,000 | ) | ||||
Net
(decrease) increase in Federal Home Loan Bank overnight
borrowings
|
(1,608,000 | ) | 1,608,000 | |||||
Net
(decrease) increase in repurchase agreements with financial
institutions
|
(3,950,000 | ) | 4,900,000 | |||||
Net
increase in repurchase agreements with customers
|
2,393,376 | 4,079,798 | ||||||
Net
decrease in collateralized borrowings
|
(1,375,550 | ) | (323,786 | ) | ||||
Proceeds
from issuance of preferred stock and warrants
|
- | 10,000,000 | ||||||
Principal
repayments on capital lease obligation
|
(18,982 | ) | (18,004 | ) | ||||
Purchase
of treasury shares
|
- | (227,098 | ) | |||||
Proceeds
from exercise of stock options
|
- | 20,482 | ||||||
Tax
benefit of stock options exercised
|
- | 2,025 | ||||||
Dividends
paid on common and preferred stock
|
(1,051,719 | ) | (1,418,686 | ) | ||||
Net
cash provided by financing activities
|
9,233,288 | 14,831,691 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
17,559,888 | (12,258,411 | ) | |||||
CASH
AND CASH EQUIVALENTS, at beginning of year
|
9,238,783 | 21,497,194 | ||||||
CASH
AND CASH EQUIVALENTS, at end of year
|
$ | 26,798,671 | $ | 9,238,783 | ||||
SUPPLEMENTAL
INFORMATION
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
on deposits and borrowings
|
$ | 9,851,507 | $ | 13,368,965 | ||||
Income
taxes
|
$ | 1,000 | $ | 1,000 | ||||
Noncash
investing and financing activities:
|
||||||||
Due
to broker for securities purchased
|
$ | 132,000 | $ | 12,994,945 | ||||
Due
from broker for securities purchased
|
$ | - | $ | 9,590,823 | ||||
Transfer
of loans to repossessed assets
|
$ | 90,423 | $ | 224,481 | ||||
Transfer
of loans to OREO
|
$ | 1,334,040 | - | |||||
Accrued
dividends declared
|
$ | 63,889 | $ | 379,896 | ||||
Increase
in leases and other liabilities for
|
||||||||
equipment
payable related to financed leases
|
$ | 881,313 | $ | 256,278 | ||||
Increase
in mortgage servicing assets
|
$ | 300,241 | $ | 18,556 | ||||
Increase
in liabilities and decrease in retained earnings for the adoption
of
|
||||||||
Accounting
for Deferred Compensation and Postretirement
|
||||||||
Benefit
Aspects of Endorsement Split-Dollar Life Insurance
Arrangements
|
$ | - | $ | 12,272 | ||||
Change
in other liabilities related to unfunded pension liability
|
$ | 214,723 | $ | (1,037,417 | ) | |||
Change
in gross unrealized holding losses on available for sale
securities
|
$ | 719,753 | $ | - | ||||
Transfer
of loans to loans held for sale
|
$ | 13,005,284 | $ | - | ||||
Increase
in other assets for interest rate swaps
|
$ | 117,545 | $ | - | ||||
Transfer
of loans held for sale to loans
|
$ | 329,216 | $ | - |
See Notes
to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
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 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).
On
October 25, 2009, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) by and among the Company, the Bank and Union Savings Bank
(“Union”) that provides for the merger of the Company and the Bank with and into
Union (the “Merger”). Under the terms of the Merger Agreement,
shareholders of the Company will receive $15.00 cash for each share of Company
common stock they own on the date of the Merger. The transaction is
valued at approximately $35 million. At the Company’s special meeting of
stockholders held on February 19, 2010, holders of the Company’s common stock
voted in favor of the Merger Agreement and Merger. Regulatory
approvals from the State of Connecticut Department of Banking and the Federal
Deposit Insurance Corporation were received on March 19, 2010 and March 17,
2010, respectively. The closing of the merger is scheduled for April
7, 2010.
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, the evaluation of
deferred tax assets, valuation of derivative instruments, and the investment
valuation and evaluation of investment securities for other-than-temporary
impairment.
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s
officially recognized source of authoritative U.S. generally accepted accounting
principles (GAAP) applicable to all public and non-public non-governmental
entities, superseding existing FASB, American Institute of Certified Public
Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.
Rules and interpretive releases of the SEC under the authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. All
other accounting literature is considered non-authoritative. The change to the
ASC affects the way companies refer to U.S. GAAP in financial statements and
accounting policies. Citing particular content in the ASC involves specifying
the unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure.
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 M
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 within FASB ASC 280, Segment
Reporting.
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, if any, 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. Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities.
Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment. This
recent accounting guidance amends the recognition guidance for
other-than-temporary impairments of debt securities and expands the financial
statement disclosures for other-than-temporary impairment losses on debt and
equity securities. The recent guidance replaced the “intent and
ability” indication in prior guidance by specifying that (a) if the Company does
not have the intent to sell a debt security prior to recovery which may be
maturity and (b) it is more-likely-than-not that it will not have to sell the
debt security prior to recovery, the security would not be considered
other-than-temporarily impaired unless there is a credit loss. When
the Company does not intend to sell the security, and it is more-likely-than-not
the Company will not have to sell the security before recovery of its cost
basis, it will recognize the credit component of an other-than-temporary
impairment of a debt security in earnings and the remaining portion in other
comprehensive income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-than-temporary impairment is amortized
prospectively over the remaining life of the security on the basis of the timing
of future estimated cash flows of the security. The new guidance did
not change the guidance for equity securities.
The
credit loss component recognized in earnings is identified as the amount of
principal cash flows not expected to be received over the remaining term of the
security as projected based on cash flow projections discounted at the
applicable original yield of the security. The Company adopted the
provisions of the guidance issued in April 2009 relating to other-than-temporary
impairment (“OTTI”) during the second quarter of 2009. Adoption of this guidance
resulted in the reclassification of $2,511,080 ($1,657,313, net of tax) of
non-credit related accumulated OTTI to accumulated other comprehensive income
(“OCI”) which had previously been recognized as a loss in earnings and is
disclosed in Note C - Securities. The Bank recognized no
other-than-temporary impairment charges during 2009.
Prior to
the adoption of the recent accounting guidance on April 1, 2009, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that were deemed to be other than temporary were reflected in earnings as
realized losses. In estimating other-than-temporary impairment
losses, management considered (1) the length of time and the 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 Bank to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Gains and
losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
The sale
of a held to maturity security within three months of its maturity date or after
collection of at least 85% of the principal outstanding at the time the security
was acquired is considered a maturity for purposes of classification and
disclosure.
Transfers
of debt securities into the held to maturity classification from the available
for sale classification are made at fair value on the date of
transfer. The unrealized holding gain or loss on the date of transfer
is retained in accumulated other comprehensive income and in the carrying value
of the held to maturity securities. Such amounts are amortized over
the remaining contractual lives of the securities by the interest
method.
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 nonaccrual 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 troubled debt restructured loan or lease when certain
concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal,
forbearance, or other actions intended to maximize collection.
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 nonaccrual 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 and general 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.
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.
SERVICING: Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. Generally, purchased
servicing rights are capitalized at the cost to acquire the rights.
For sales
of mortgage loans, a portion of the cost of originating the loan is allocated to
the servicing right based on relative fair value. Fair value is based
on market prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Capitalized servicing rights are
reported in other assets and are amortized into non-interest income in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets.
Servicing
assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant risk characteristics, such as interest
rate, loan type and investor type. Impairment is recognized through a
valuation allowance and charge to non-interest income, for an individual
tranche, to the extent that fair value is less than the capitalized amount of
the tranche. If the Bank later determines that all or a portion of
the impairment no longer exists for a particular tranche, a reduction of the
allowance may be recorded as an increase to income.
Servicing
fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. The
amortization of mortgage servicing rights, and any related impairment charge, is
netted against loan servicing fee income.
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:
During 2009, the Company entered into two interest rate swap agreements
to hedge certain interest rate exposures. The Company does not use
derivatives for speculative purposes. The Company accounts for
derivatives in accordance with the FASB ASC Topic on Derivatives and Hedging,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. This accounting guidance requires the Company
to
recognize
all derivatives as either assets or liabilities in its Consolidated Balance
Sheets and to measure those instruments at fair value. The estimated
fair value is based primarily on projected future swap rates.
The
Company applies cash flow hedge accounting to interest rate swaps designated as
hedges of the variability of future cash flows from floating rate liabilities
due to the benchmark interest rate. The Company uses regression
analysis to perform an ongoing prospective and retrospective assessment of these
hedging relationships. Changes in the fair value of these interest
rate swaps are recorded to “net unrealized holding gain on cash flow hedges” as
a component of other comprehensive income (loss) ("OCI") in Shareholders’
equity, to the extent they are effective. Amounts recorded in
accumulated other comprehensive income (loss) are then reclassified to interest
expense as interest on the hedged borrowing is recognized. Any
ineffective portion of the change in fair value of these instruments is recorded
to interest expense.
PREMISES AND EQUIPMENT: Bank
premises and equipment are stated at cost for purchased assets, and for assets
under capital lease, at the lower of fair value or net present value of the
minimum lease payments required over the term of the lease, net of accumulated
depreciation and amortization. Depreciation is charged to operations
using the straight-line method over the estimated useful lives of the related
assets, which range from three to forty years. Leasehold improvements
are capitalized and amortized over the shorter of the terms of the related
leases or the estimated economic lives of the improvements.
Gains and
losses on dispositions are recognized upon realization. Maintenance
and repairs are expensed as incurred, and improvements are
capitalized.
IMPAIRMENT OF LONG-LIVED
ASSETS: Long-lived assets, including premises and equipment
and certain identifiable intangible assets which are held and used by the
Company, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If impairment is indicated by that review, the asset is
written down to its estimated fair value through a charge to noninterest
expense.
FORECLOSED REAL ESTATE:
Foreclosed real estate, if any, is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. These properties are carried at the lower of cost or
fair value less estimated costs of disposal. At the time these
properties are obtained, they are recorded at fair value with any difference
between the carrying value and fair value reflected as a direct charge against
the allowance for loan and lease losses, which establishes a new cost
basis. Any subsequent declines in value are charged to income with a
corresponding adjustment to the allowance for foreclosed real
estate. Revenue and expense from the operation of foreclosed real
estate and changes in the valuation allowance are included in
operations. Costs relating to the development and improvement of the
property are capitalized, subject to the limit of fair value. Upon
disposition, gains and losses, to the extent they exceed the corresponding
valuation allowance, are reflected in the statement of 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
operations.
PENSION PLAN: The Bank has a
noncontributory defined benefit pension plan that covers substantially all
employees. Pension costs are accrued based on the projected unit
credit method and the Bank’s policy is to fund annual contributions in amounts
necessary to meet the minimum funding standards established by the Employee
Retirement Income Security Act (ERISA) of 1974.
In
September 2006, the FASB issued FASB ASC 715-20, Postretirement Benefit Plan
Assets, 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 FASB
ASC 715-20 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.
FASB ASC
715-20 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 FASB ASC 715-20 in
2008 and there was no impact to the financial statements upon
adoption.
STOCK OPTION
PLANS: In December 2004, the FASB issued FASB ASC 718, Share-Based
Payments. FASB ASC 718 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. FASB ASC 718 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. This accounting guidance 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. FASB ASC 718 permits entities to use any option-pricing model
that meets the fair value objective in the guidance. 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.
EARNINGS PER
SHARE: Basic earnings per share represents income available to
common shareholders and is computed by dividing net income (loss) available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share reflect 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, J, and R 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, and the effective portion of cash flow hedges are reported
as a separate component of the shareholders’ equity section of the balance
sheet, such items, along with net income, are components of comprehensive
income.
STATEMENTS OF CASH
FLOWS: Cash and due from banks, Federal funds sold and
interest-earning deposits in banks are recognized as cash equivalents in the
statements of cash flows. For purposes of reporting cash flows, the
Company considers
all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Generally, Federal funds sold have a one-day
maturity. Cash flows from loans, leases, and deposits are reported
net. The Company maintains amounts due from banks and Federal funds
sold which, at times, may exceed federally insured limits. The
Company has not experienced any losses from such concentrations.
FAIR
VALUE
The fair
value of an asset or liability is the price that would be received to sell that
asset or paid to transfer that liability in an orderly transaction occurring in
the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. In estimating fair value, the Company
utilizes valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. Such valuation techniques are
consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. The
guidance issued by the FASB entitled, “Fair Value Measurements” establishes a
fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
Level 1
|
Quoted
prices in active markets for identical assets or liabilities. Level 1
assets include debt and equity securities that are traded in an active
exchange market, as well as U.S. Treasury securities, that are highly
liquid and are actively traded in over-the-counter
markets.
|
Level 2
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2
assets and liabilities include debt securities with quoted prices that are
traded less frequently than exchange-traded instruments whose value is
determined using a pricing model with inputs that are observable in the
market or can be derived principally from or corroborated by observable
market data. This category generally includes other U.S. Government and
agency mortgage-backed and debt securities, state and municipal
obligations, and equity securities quoted in markets that are not active.
Also included are interest rate swaps, certain collateral-dependent
impaired loans, loans held for sale and foreclosed
property.
|
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. For example,
this category could include certain private equity investments, trust
preferred securities and certain collateral-dependent impaired
loans.
|
When
available, quoted market prices are used. In other cases, fair values are based
on estimates using present value or other valuation techniques. These techniques
involve uncertainties and are significantly affected by the assumptions used and
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in certain cases, could not be realized in an immediate
sale of the instrument.
See Note
U for additional information regarding fair value.
RECENT ACCOUNTING
PRONOUNCEMENTS
FASB ASC
810-10, Noncontrolling Interests in Consolidated Financial
Statements - In
December 2007, the FASB issued an amendment to previous guidance on
noncontrolling interest. This amendment 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 existed. In some cases minority interest was reported as a
liability and in others it was reported in the mezzanine section between
liabilities and equity. Specifically, this amendment requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest is included in consolidated
net income on the face of the income statement. This amendment 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 is to be measured using the fair value of the
noncontrolling
equity investment on the deconsolidation date. The amendment also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interests. Earlier adoption was prohibited. The
Company adopted this amendment beginning on January 1, 2009 and with the
adoption, presented $50,000 as equity in the Company’s consolidated financial
statements and modified the presentation of the Company’s financial statements
as of January 1, 2008 and forward.
FASB ASC
718, Share-Based Payment
Transaction - In June 2008, the FASB issued new guidance which 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. This guidance was 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 was adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this guidance. Early application was not
permitted. The Company adopted this guidance for the quarter ended
March 31, 2009. The adoption of this guidance did not have a
significant effect on the Company's financial statements.
FASB ASC
815-10, Derivatives and
Hedging - In March 2008, the FASB
issued guidance which requires expanded disclosure to provide greater
transparency about (i) how and why an entity uses derivative instruments, (ii)
how derivative instruments and related hedge items are accounted for under this
standard, and (iii) how derivative instruments and related hedged items affect
an entity’s financial position, results of operations and cash flows. To meet
those objectives, the standard requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit risk-related contingent features in derivative agreements. The standard
became effective for the Company January 1, 2009 and enhanced disclosures are
included in the Company's financial statements for December 31,
2009.
FASB ASC
325-40, Impairment
Guidance - In January 2009, the
FASB issued impairment guidance which amends previously issued impairment
guidance. The guidance revises impairment guidance for beneficial
interests to make it consistent with the requirements of guidance for
determining whether an impairment of other debt and equity securities has
occurred. The impairment model in the guidance enables greater judgment to be
exercised in determining whether an OTTI loss needs to be recorded. The
impairment model previously provided for in previous guidance limited
management’s use of judgment in applying the impairment model. The guidance was
effective as of January 1, 2009. The adoption of the guidance did not
have a material impact on the Company’s consolidated financial
statements.
FASB ASC
820-10, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
- In April 2009 FASB issued this guidance which addresses concerns that Fair
Value Measurements emphasized the use of an observable market transaction even
when that transaction may not have been orderly or the market for that
transaction may not have been active. This provides additional guidance on: (a)
determining when the volume and level of activity for the asset or liability has
significantly decreased; (b) identifying circumstances in which a transaction is
not orderly; and (c) understanding the fair value measurement implications of
both (a) and (b). The effective date of disclosures for this new standard is for
interim and annual reporting periods ending after June 15, 2009. The
Company adopted this guidance on April 1, 2009. The adoption did not
have a material impact on the Company’s consolidated financial statements. See
Notes U for disclosure.
FASB ASC
320-10, Other-Than-Temporary
Impairments - In April 2009, the FASB
issued guidance which (i) changes existing guidance for determining whether an
impairment is other-than-temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under the staff position, 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
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
The guidance became effective for the Company in the quarter ended June 30,
2009, and resulted in the reclassification of $2,511,080 ($1,657,313, net of
tax) of non-credit related OTTI to accumulated OCI which had previously been
recognized in earnings and is disclosed in Note C - Securities.
FASB ASC
820-10, Fair Value
Measurements and Disclosures - In April 2009, the FASB issued guidance
which affirms that the objective of fair value when the market for an asset is
not active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. The guidance requires an entity to
base its conclusion about whether a transaction was not orderly on the weight of
the evidence and expands certain disclosure requirements. The guidance became
effective for the Company in the quarter ended June 30, 2009. See
Note U for disclosure.
FASB ASC
825-10, Interim Disclosure -
Fair Value Measurements - In April 2009, the FASB issued new guidance
which requires a publicly traded company to include disclosures about the fair
value of its financial instruments whenever it issues summarized financial
information for interim reporting periods. In addition, entities must disclose,
in the body or in the accompanying notes of its summarized financial information
for interim reporting periods and in its financial statements for annual
reporting periods, the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not recognized in the
statement of financial position. The guidance became effective for the Company
in the quarter ended June 30, 2009, and its adoption did not have a significant
effect on the Company’s financial position, results of operations, or cash
flows. The Company has included the disclosures required by the guidance in Note
U.
FASB ASC
855-10, Subsequent Events
– In May 2009, the FASB issued guidance on Subsequent Events. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. This guidance defines (i) the period after
the balance sheet date during which a reporting entity’s management should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet date.
The new guidance became effective for the Company’s financial statements for
periods ending after June 15, 2009 and did not have a significant impact on the
Company’s financial statements.
FASB ASC
860, Transfers and Servicing -
In June 2009, the FASB issued guidance which amends prior accounting
guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. The new guidance eliminates the concept
of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The guidance also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The guidance will be effective January 1, 2010 and is not expected to
have a significant impact on the Company’s financial statements.
In
February 2010, the FASB issued guidance which amends the existing guidance
related to Fair Value Measurements and Disclosures. The amendments
will require the following new fair value disclosures:
|
–
|
Separate
disclosure of the significant transfers in and out of Level 1 and Level 2
fair value measurements, and a description of the reasons for the
transfers.
|
|
–
|
In
the rollforward of activity for Level 3 fair value measurements
(significant unobservable inputs), purchases, sales, issuances, and
settlements should be presented separately (on a gross basis rather than
as one net number).
|
In
addition, the amendments clarify existing disclosure requirements, as
follows:
|
–
|
Fair
value measurements and disclosures should be presented for each class of
assets and liabilities within a line item in the statement of financial
position.
|
|
–
|
Reporting
entities should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or Level
3.
|
The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures included in the rollforward of activity for Level 3 fair value
measurements, for which the effective date is for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal
years. The guidance will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.
SUBSEQUENT
EVENTS
At the
Company’s special meeting of stockholders held on February 19, 2010, holders of
the Company’s common stock approved the Merger Agreement. The closing
of the Merger is scheduled for April 7, 2010.
The
Company has evaluated events or transaction that occurred after December 31 2009
and through the date the financial statements were issued for potential
recognition or disclosure in the financial statements.
NOTE
B – RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank
is required to maintain reserves against its transaction accounts and
nonpersonal time deposits. At December 31, 2009, the Bank did not
have cash and liquid asset requirements. At December 31, 2008, the
Bank was required to have cash and liquid assets of approximately $235,000 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, 2009 and 2008. The Company is required to maintain
$300,000 at PNC Bank for the Company’s interest rate swap agreements at December
31, 2009.
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, 2009 and 2008 are as follows:
AVAILABLE
FOR SALE
|
December 31, 2009
|
|||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Debt
Securities:
|
||||||||||||||||
U.S.
Treasury securities
|
$ | 3,071,092 | $ | 56,096 | $ | - | $ | 3,127,188 | ||||||||
U.S.
Government Agency securities
|
23,190,969 | 50,815 | (171,884 | ) | 23,069,900 | |||||||||||
State
and Municipal obligations
|
3,255,823 | 56 | (252,519 | ) | 3,003,360 | |||||||||||
Trust
Preferred Securities - OTTI (1)
|
2,994,928 | - | (2,131,674 | ) | 863,254 | |||||||||||
32,512,812 | 106,967 | (2,556,077 | ) | 30,063,702 | ||||||||||||
Mortgage-Backed
Securities:
|
||||||||||||||||
GNMA
|
442,673 | 9,000 | - | 451,673 | ||||||||||||
FNMA
|
27,348,202 | 538,244 | (9,149 | ) | 27,877,297 | |||||||||||
FHLMC
|
19,583,310 | 376,374 | (4,087 | ) | 19,955,597 | |||||||||||
47,374,185 | 923,618 | (13,236 | ) | 48,284,567 | ||||||||||||
Marketable
Equity Securities
|
17,076,508 | - | (13,072 | ) | 17,063,436 | |||||||||||
Total
available for sale securities
|
$ | 96,963,505 | $ | 1,030,585 | $ | (2,582,385 | ) | $ | 95,411,705 |
|
(1)
|
Net
of other-than-temporary impairment writedowns recognized in earnings,
other than such noncredit- related amounts reclassified on April 1,
2009.
|
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 - OTTI (2)
|
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 |
|
(2)
|
Net
of other-than-temporary impairment writedowns recognized in
earnings.
|
HELD
TO MATURITY
|
December 31, 2009
|
|||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Mortgage-Backed
Securities:
|
||||||||||||||||
GNMA
|
$ | 14,501 | $ | 419 | $ | - | $ | 14,920 |
December 31, 2008
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Mortgage-Backed
Securities:
|
||||||||||||||||
GNMA
|
$ | 16,550 | $ | 3 | $ | - | $ | 16,553 |
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, 2009:
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
|
$ | 18,833,660 | $ | 171,884 | $ | - | $ | - | $ | 18,833,660 | $ | 171,884 | ||||||||||||
State
and Municipal obligations
|
- | - | 2,888,304 | 252,519 | 2,888,304 | 252,519 | ||||||||||||||||||
Trust
Preferred Securities - OTTI (1)
|
863,254 | - | - | 2,131,674 | 863,254 | 2,131,674 | ||||||||||||||||||
19,696,914 | 171,884 | 2,888,304 | 2,384,193 | 22,585,218 | 2,556,077 | |||||||||||||||||||
Mortgage-Backed
Securities
|
||||||||||||||||||||||||
GNMA
|
- | - | - | - | - | - | ||||||||||||||||||
FNMA
|
2,390,851 | 6,859 | 80,275 | 2,290 | 2,471,126 | 9,149 | ||||||||||||||||||
FHLMC
|
310,212 | 3,077 | 65,759 | 1,010 | 375,971 | 4,087 | ||||||||||||||||||
2,701,063 | 9,936 | 146,034 | 3,300 | 2,847,097 | 13,236 | |||||||||||||||||||
Marketable
Equity Securities
|
1,986,928 | 13,072 | - | - | 1,986,928 | 13,072 | ||||||||||||||||||
Total
|
$ | 24,384,905 | $ | 194,892 | $ | 3,034,338 | $ | 2,387,493 | $ | 27,419,243 | $ | 2,582,385 |
|
(1)
|
Net
of other-than-temporary impairment writedowns recognized in earnings,
other than such noncredit-related amounts reclassified on April 1, 2009 in
accordance with the adoption of "Recognition and Presentation of
Other-Than-Temporary Impairments."
|
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
and 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 |
At
December 31, 2009, sixteen securities had unrealized losses. At
December 31, 2009, gross unrealized holding losses on available-for-sale and
held-to-maturity securities totaled $2,582,385. Of the securities
with unrealized losses, there were seven securities that have been in a
continuous unrealized loss position for a period of twelve months or
more. The unrealized losses on these securities totaled $2,387,493 at
December 31, 2009.
Management
conducts a formal review of investment securities on a quarterly basis for the
presence of other-than-temporary impairment (“OTTI”). For the second quarter of
2009, the Company adopted guidance issued by the FASB regarding
other-than-temporary impairment. Management assesses whether OTTI is present
when the fair value of a debt security is less than its amortized cost basis at
the balance sheet date. Under these circumstances as required by the new staff
position, OTTI is considered to have occurred (1) if the Company intends to sell
the security; (2) if it is “more likely than not” that the Company will be
required to sell the security before recovery of its amortized cost basis; or
(3) the present value of expected cash flows is not sufficient to recover the
entire amortized cost basis. The “more likely than not” criteria is a lower
threshold than the “probable” criteria used under previous
guidance.
The
guidance requires that credit-related OTTI is recognized in earnings while
non-credit related OTTI on securities not expected to be sold is recognized in
OCI. Non-credit related OTTI is caused by other factors, including illiquidity.
For
securities
classified as held-to-maturity (“HTM”), the amount of OTTI recognized in OCI is
accreted to the credit-adjusted expected cash flow amounts of the securities
over future periods. Non-credit related OTTI recognized in earnings previous to
April 1, 2009 is reclassified from retained earnings to accumulated OCI. The
Company adopted this guidance effective April 1, 2009. The adoption of this
guidance resulted in the reclassification of $2,511,080, ($1,657,313, net of
tax) of non-credit related OTTI to accumulated OCI which had previously been
recognized as a loss in earnings.
Management’s
OTTI evaluation process takes into consideration current market conditions, fair
value in relationship to cost, extent and nature of change in fair value, issuer
rating changes and trends, volatility of earnings, current analysts’
evaluations, and all available information relevant to the collectability of
debt securities. The Company is also required to considers its ability and
intent to hold equity investments until a forecast recovery of fair value, which
may be maturity for debt securities, and other factors when evaluating the
existence of OTTI in its securities portfolio.
For the
year ended December 31, 2009, the Company did not recognize any OTTI
charges.
For all
security types discussed below where no OTTI is considered to exist at December
31, 2009, management applied the criteria noted above to each investment
individually. That is, for each security evaluated, management concluded that it
does not intend to sell the security and it is more likely than not that
management will be required to sell the security before recovery of its
amortized cost basis which may be maturity for debt securities and as such OTTI
was not recognized as a loss in earnings.
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, 2009:
U.S.
Government Agency Securities—The unrealized losses on the Company’s investment
in these securities increased from $3,386 at December 31, 2008 to $171,884 or
.75% of amortized cost at December 31, 2009. The unrealized losses in
this segment of the portfolio relate mostly to interest
rates. Because the Company does not intend to sell the investments
and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost bases, which may be
maturity, the Company does not consider these investments to be recognized in
earnings as other-than-temporarily impaired at December 31, 2009.
State and
Municipal Obligations—The unrealized losses on the Company’s investment in state
and municipal obligations decreased from $376,069 at December 31, 2008 to
$252,519 or 7.76% of amortized cost at December 31, 2009. There were no
other-than-temporary impairment charges for these securities during 2009. The
decrease in the unrealized loss at December 31, 2009 is attributable to sales in
this sector of the portfolio during the third and fourth quarters. As of
December 31, 2009, 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. Because the Company does not
intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider these
investments to be recognized in earnings as other-than-temporarily impaired at
December 31, 2009.
Trust
Preferred Securities—As of December 31, 2009 the unrealized losses on the
Company’s investment in trust preferred securities totaled $2,131,674 or 71.18%
of amortized cost. As of December 31, 2009, this portfolio consisted
of two pooled trust preferred securities with a carrying value of $2,994,928 and
a market value of $863,254. These securities are in the form of
mezzanine classes which are comprised of bank and insurance
collateral. 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. As previously indicated, the Company
adopted the provisions of OTTI guidance issued by the FASB, and in connection
therewith determined that other-than-temporary impairments at April 1, 2009
consisted of $1,881,572 related to credit losses and $2,511,080 related to other
factors. There was no further other-than-temporary impairment charge
to earnings for the year ended December 31, 2009.
The
unrealized losses on the Company’s trust preferred securities were caused by a
lack of liquidity and uncertainties facing the banking and insurance industries.
During 2009, the Company was notified that these securities will not be
remitting interest payments and that going forward, the Company would be
receiving payments “in kind.” As a result of this, the Company
has discontinued interest accruals on the securities and an impairment loss has
been recorded on one security as discussed above. Based on the aforementioned
valuation analysis to determine expected credit losses prepared on both of these
securities, management expects to fully recover the amortized cost of each
security. However, additional interest deferrals and/or
defaults
could
result in future other-than-temporary impairment charges. Because the Company
does not intend to sell the investments and it is not more likely than not that
the Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired at December 31,
2009.
Mortgage-backed
securities—The unrealized losses on the Company’s investment in mortgage-backed
securities decreased from $280,889 at December 31, 2008 to $13,236 or .03% of
amortized cost at December 31, 2009. There were no other-than-temporary
impairment charges for mortgage-backed securities for the year ended December
31, 2009. 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.
Because the Company does not intend to sell the investments and it is not more
likely than not that the Company will be required to sell the investments before
recovery of their amortized cost bases, which may be maturity, the Company does
not consider these investments to be other-than-temporarily impaired at December
31, 2009.
Marketable
equity securities—The unrealized losses on the Company’s investment in four
marketable equity securities totaled $13,072 or .08% of amortized cost which was
a decrease from the unrealized losses of $29,879 as of December 31, 2008. The
Company recognized other-than-temporary impairment charges of $5.0 million for
the year ended December 31, 2008. This portfolio consists of a marketable
investment fund with a fair value of $1,986,928, a money market fund with a fair
value of $15,076,507, and perpetual preferred stock of government sponsored
enterprises which have been written down to a fair value of $1 at December 31,
2009. Because the Company has the intent and ability to hold the securities to
the recovery of their amortized costs, the Company does not consider these
investments to be other-than-temporarily impaired at December 31,
2009.
The
following table presents a roll-forward of the balance of credit-related
impairment losses on debt securities held at December 31, 2009 for which a
portion of the other-than-temporary impairment was recognized in other
comprehensive loss:
2009
|
||||
Balance
at the beginning of the year
|
$ | - | ||
Credit
component of other-than-temporary impairment not reclassified to
accumulated other
|
||||
comprehensive
loss in conjunction with the adjustment to adopt OTTI
guidance
|
1,881,572 | |||
Additions
for credit component for which other-than-temporary impairment
was
|
||||
not
previously recognized
|
- | |||
Balance
at the end of the year
|
$ | 1,881,572 |
As of
December 31, 2009, debt securities with other-than-temporary impairment losses
related to credit and were recognized in earnings consisted of pooled trust
preferred securities. In accordance with guidance regarding other-than-temporary
impairment issued in April 2009, the Company estimated the portion of loss
attributable to credit using a discounted cash flow model. Significant inputs
for the Trust Preferred Securities included estimated cash flows and prospective
deferrals, defaults, and recoveries based on the underlying seniority status and
subordination structure of the pooled trust preferred debt tranche at the time
of measurement. The valuations of trust preferred securities were based upon
fair value guidance issued in April 2009 using cash flow analysis. Contractual
cash flows and a market rate of return were used to derive fair value for each
of these securities. Factors that affected the market rate of return included
(1) any uncertainty about the amount and timing of the cash flows, (2) credit
risk, (3) liquidity of the instrument, and (4) observable yields from trading
data and bid/ask indications. Credit risk spreads and liquidity premiums were
analyzed to derive the appropriate discount rate. Prospective deferral, default
and recovery estimates affecting projected cash flows were based on an analysis
of the underlying financial condition of the individual issuers, with
consideration of the issuers’ capital adequacy, credit quality, lending
concentrations, and other factors. Assumptions for deferral and constant default
rates were 100% for non-performing in 2009, from 2% to 4.85% for non-performing
during 2010, 3.5% for 2011 and 1% for performing after 2011. The assumptions for
collateral conditional default rates ranged from 0% to 4%, and severity of
defaults assumptions ranged from 69% to 95%. Assumptions for internal
rates of return were from 12% to 17%, and prepayment assumptions were from 0% to
2%.
All cash
flow estimates were based on the securities’ tranche structure and contractual
rate and maturity terms. The Company utilized the services of a third-party
specialist to obtain information about the structure in order to determine how
the underlying, collateral cash flows using the original yield of the
securities, will be distributed to each security issued from the structure. The
present value of the expected cash flows was compared to the Company’s holdings
to determine the credit-related impairment loss.
The
amortized cost and fair value of debt securities at December 31, 2009, 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, 2009
|
||||||||||||||||
Available-for-Sale
Securities
|
Held-to-Maturity Securities
|
|||||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||
Due
in one year or less
|
$ | 999,530 | $ | 1,006,563 | $ | - | $ | - | ||||||||
Due
after one year through five years
|
19,262,531 | 19,293,125 | - | - | ||||||||||||
Due
after five years through ten years
|
6,000,000 | 5,897,400 | - | - | ||||||||||||
Due
after ten years
|
6,250,751 | 3,866,614 | - | - | ||||||||||||
32,512,812 | 30,063,702 | - | - | |||||||||||||
Mortgage-backed
securities
|
47,374,185 | 48,284,567 | 14,501 | 14,920 | ||||||||||||
TOTAL
DEBT SECURITIES
|
$ | 79,886,997 | $ | 78,348,269 | $ | 14,501 | $ | 14,920 |
For the
years ended December 31, 2009 and 2008, proceeds from the sales of
available-for-sale securities were $79,259,963 and $43,699,152,
respectively. Gross gains of $577,621 and gross losses of $111,884
were realized on sales in 2009, and gross gains of $825,103 and gross losses of
$287,313 were realized on sales in 2008. 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 total carrying value of $72,043,000 and $76,450,000 were
pledged as collateral to secure treasury tax and loan, trust deposits,
securities sold under agreements to repurchase, and public funds at December 31,
2009 and 2008, respectively.
During
2009 and 2008, there were no transfers of securities from the available-for-sale
category into the held-to-maturity or trading categories, and there were no
securities classified as held to maturity that were transferred to
available-for-sale or trading categories.
NOTE
D – LOANS TO RELATED PARTIES
In the
normal course of business, the Bank has granted loans to officers and directors
of the Bank and to their associates. As of December 31, 2009 and
2008, 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:
2009
|
2008
|
|||||||
Balance
at the beginning of year
|
$ | 2,077,873 | $ | 2,219,055 | ||||
Advances
|
783,493 | 383,945 | ||||||
Repayments
|
(1,235,943 | ) | (406,636 | ) | ||||
Other
changes
|
24,684 | (118,491 | ) | |||||
Balance
at the end of year
|
$ | 1,650,107 | $ | 2,077,873 |
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, 2009 and 2008 is as
follows:
2009
|
2008
|
|||||||
Real
estate- residential mortgage
|
$ | 169,425,130 | $ | 192,561,108 | ||||
Real
estate- commercial mortgage
|
104,353,804 | 67,454,925 | ||||||
Real
estate- construction
|
19,224,992 | 38,153,503 | ||||||
Commercial
loans
|
41,176,510 | 46,249,689 | ||||||
Commercial
leases (net of unearned discount of $4,426,293 and
|
||||||||
$2,657,871
for 2009 and 2008, respectively)
|
36,840,994 | 19,785,870 | ||||||
Installment
|
4,954,486 | 5,113,400 | ||||||
Other
|
68,688 | 128,574 | ||||||
TOTAL
LOANS AND LEASES
|
376,044,604 | 369,447,069 | ||||||
Net
deferred loan origination costs
|
639,021 | 562,242 | ||||||
Premiums
on purchased loans
|
1,875 | 81,588 | ||||||
Allowance
for loan and lease losses
|
(6,068,108 | ) | (3,698,820 | ) | ||||
NET
LOANS AND LEASES
|
$ | 370,617,392 | $ | 366,392,079 |
Changes
in the allowance for loan and lease losses for the years ended December 31, 2009
and 2008, were as follows:
2009
|
2008
|
|||||||
Balance
at the beginning of year
|
$ | 3,698,820 | $ | 2,151,622 | ||||
Provision
for loan and lease losses
|
3,669,209 | 1,836,299 | ||||||
Loans
and leases charged off
|
(1,658,621 | ) | (377,071 | ) | ||||
Recoveries
of loans and leases previously charged off
|
358,700 | 87,970 | ||||||
Balance
at the end of year
|
$ | 6,068,108 | $ | 3,698,820 |
A summary
of nonperforming loans and leases follows:
2009
|
2008
|
|||||||
Nonaccrual
loans and leases
|
$ | 12,507,467 | $ | 5,639,735 | ||||
Accruing
loans and leases contractually past due 90 days or more
|
9,653 | 19,603 | ||||||
TOTAL
|
$ | 12,517,120 | $ | 5,659,338 |
If
interest income on nonaccrual loans and leases throughout the year had been
recognized in accordance with the contractual terms, approximately $365,000 and
$163,000 of additional interest would have been recorded for the years ended
December 31, 2009 and 2008, respectively.
At
December 31, 2009 and 2008, there were no loans that were considered as
“troubled debt restructurings.”
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, 2009 and 2008:
2009
|
2008
|
|||||||
Loans
and leases receivable for which there is a related allowance for
loan
|
||||||||
and
lease losses
|
$ | 4,974,309 | $ | 6,225,481 | ||||
Loans
and leases receivable for which there is no related allowance for
loan
|
||||||||
and
lease losses
|
$ | 8,056,971 | $ | 2,657,655 | ||||
Allowance
for loan and lease losses related to impaired loans and
leases
|
$ | 1,309,869 | $ | 939,066 |
Additional
information related to impaired loans and leases is as follows:
2009
|
2008
|
|||||||
Average
recorded investment in impaired loans and leases
|
$ | 10,334,000 | $ | 4,646,000 | ||||
Interest
income recognized
|
$ | 601,000 | $ | 600,000 | ||||
Cash
interest received
|
$ | 510,000 | $ | 540,000 |
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 – MORTGAGE SERVICING RIGHTS
Loans
serviced for others are not included in the accompanying statements of financial
condition. The unpaid principal balance of mortgage and other loans
serviced for others was $45,237,400 and $24,801,170 at December 31, 2009 and
2008, respectively.
The
following summarizes the activity pertaining to mortgage servicing rights, along
with the aggregate activity in the related valuation allowances:
2009
|
2008
|
|||||||
Mortgage Servicing Rights:
|
||||||||
Balance
at beginning of year
|
$ | 96,172 | $ | 240,366 | ||||
Mortgage
servicing rights capitalized
|
300,241 | 18,556 | ||||||
Mortgage
servicing rights amortized
|
(141,465 | ) | (22,366 | ) | ||||
Other
changes
|
36,552 | (140,384 | ) | |||||
Balance
at end of year
|
$ | 291,500 | $ | 96,172 | ||||
Valuation Allowances:
|
||||||||
Balance
at beginning of year
|
$ | - | $ | - | ||||
Additions
|
- | - | ||||||
Reductions
|
- | - | ||||||
Balance
at end of year
|
$ | - | $ | - |
The fair
values of the mortgage servicing rights related to these loans were $366,386 and
$96,365, respectively, at December 31, 2009 and 2008.
NOTE
G – OTHER REAL ESTATE OWNED
Other
real estate owned (“OREO”) represents the estimated net realizable value of real
estate received in satisfaction of a non-performing loan through foreclosure
proceedings during 2009. The Bank had no OREO during
2008. A summary of the other real estate owned operations for the
nine months ended December 31, 2009 and 2008 included in other expenses is as
follows:
2009
|
2008
|
|||||||
Expense
of holding other real estate owned
|
$ | 125,947 | $ | - | ||||
Loss
on sale of other real estate owned property
|
102,180 | - | ||||||
Expense
of holding other real estate owned operations, net
|
$ | 228,127 | $ | - |
NOTE
H – PREMISES AND EQUIPMENT
The major
categories of premises and equipment as of December 31, 2009 and 2008 are as
follows:
2009
|
2008
|
|||||||
Land
|
$ | 1,245,465 | $ | 1,245,465 | ||||
Buildings
and improvements
|
7,812,021 | 7,740,270 | ||||||
Furniture
and fixtures
|
3,351,336 | 3,617,064 | ||||||
Leasehold
improvements
|
220,761 | 220,761 | ||||||
12,629,583 | 12,823,560 | |||||||
Less
accumulated depreciation and amortization
|
5,664,655 | 5,453,308 | ||||||
$ | 6,964,928 | $ | 7,370,252 |
Depreciation
and amortization expense on premises and equipment for the years ended December
31, 2009 and 2008 was $682,248 and $734,020, respectively.
Included
in buildings and improvements, premises under capital lease totaled $1,100,644,
and related accumulated amortization as of December 31, 2009 and 2008 totaled
$165,304 and $110,202, respectively.
NOTE
I – 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, 2009, 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 $242,000 and $240,000 for
2009 and 2008, respectively. The future minimum payments under the
capital lease and operating leases are as follows:
Capital
|
Operating
|
|||||||
Lease
|
Leases
|
|||||||
2010
|
$ | 75,000 | $ | 171,466 | ||||
2011
|
75,917 | 174,742 | ||||||
2012
|
86,000 | 150,089 | ||||||
2013
|
86,000 | 139,543 | ||||||
2014
|
86,000 | 127,574 | ||||||
2015
and thereafter
|
1,234,833 | 179,238 | ||||||
1,643,750 | $ | 942,652 | ||||||
Less
amount representing interest
|
(597,169 | ) | ||||||
Present
value of future minimum lease
|
||||||||
payments-capital
lease obligation
|
$ | 1,046,581 |
NOTE
J – DEPOSITS
A summary
of deposits at December 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
Noninterest-bearing:
|
||||||||
Demand
|
$ | 82,214,335 | $ | 69,548,261 | ||||
Interest-bearing:
|
||||||||
Savings
|
62,810,282 | 58,582,376 | ||||||
Money
market
|
81,376,897 | 93,085,126 | ||||||
Time
certificates of deposit in
|
||||||||
denominations
of $100,000 or more
|
68,600,744 | 41,003,855 | ||||||
Other
time certificates of deposit
|
74,168,529 | 81,107,006 | ||||||
Total
interest-bearing
|
286,956,452 | 273,778,363 | ||||||
$ | 369,170,787 | $ | 343,326,624 |
Included
in deposits as of December 31, 2009 and 2008 are approximately $20,463,000 and
$15,902,000, respectively, of brokered deposits which have varying maturities
through December 2010.
The
following is a summary of time certificates of deposits by contractual maturity
as of December 31, 2009:
2010
|
116,283,128 | |||
2011
|
22,347,511 | |||
2012
|
1,337,769 | |||
2013
|
1,002,893 | |||
2014
|
1,797,972 | |||
Total
|
142,769,273 |
Deposit
accounts of officers, directors, and their associates aggregated $14,432,865 and
$4,965,692 at December 31, 2009 and 2008, respectively.
NOTE
K – 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 (“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. There were no purchases of Federal Home Loan Bank
stock during 2009. Purchases of Federal Home Loan Bank stock totaled
$360,200 during 2008. There were no redemptions during 2009 nor
2008. The 2008 increase in FHLBB stock is 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 suspended its dividend
for the first quarter of 2009 and did not pay any dividend for the remainder of
2009. The FHLBB announced in February 2010 that it is unlikely to
declare any dividends for the first two quarters of 2010, 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 as of December 31, 2009.
While the
FHLBB announced that it remained adequately capitalized as of December 31, 2009
in its February 2010 announcement, the Company is unable to determine if the
potential additional charges to earnings will change this regulatory capital
classification. On February 22, 2010, the FHLBB communicated to its
members that the FHLBB recorded a net loss of $186.8 million for the year ending
December 31, 2009. The primary challenge for the FHLBB continues to
be losses due to the other-than-temporary impairment of its investments in
private-label mortgage-backed securities resulting in a credit loss of $444.1
million for the year. The associated non-credit loss on these securities in 2009
was $885.4 million and resulted in an accumulated other comprehensive loss of
$1.0 billion at December 31, 2009. Retained earnings were $142.6 million
at
December
31, 2009, up from an accumulated deficit of $19.7 million at December 31, 2008.
In spite of these losses, the FHLBB remained in compliance with all regulatory
capital ratios as of December 31, 2009.
The FHLBB
explained that the ongoing impact of the economy as well as the housing and
capital markets is likely to continue to provide challenges for the FHLBB. The
underlying credit quality especially as it relates to the FHLBB’s investments in
private-label mortgage-backed securities, remains vulnerable. Trends in
determining future OTTI are still challenging and include: high and prolonged
unemployment rates, declining housing prices, and higher delinquency and
foreclosure rates.
FHLBB’s
management is focused on the long-term agenda: returning the FHLBB to stable
profitability, enhancing the FHLBB’s capital base, and building retained
earnings. They have begun to implement elements of a plan that will, over time,
work to restore the FHLBB to a position where they can once again repurchase
stock, pay members a dividend, and fund the Affordable Housing
Program.
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 mortgage-backed securities causing a significant
decline in the FHLBB’s regulatory capital status; 2) the economic losses
resulting from credit deterioration on the mortgage-backed securities 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, 2009, there were no advances under the Federal Home Loan Bank
line of credit. At December 31, 2008, advances under the Federal Home
Loan Bank line of credit totaled $1,608,000. At December 31, 2009 and
2008, other outstanding advances from the FHLBB aggregated $69,000,000 and
$80,000,000, respectively, at interest rates ranging from 4.15% to 4.59% and
3.95% to 4.59%, respectively.
Repurchase Agreements with
Financial Institutions
At
December 31, 2009 and 2008, securities sold under agreements to repurchase
totaled $22,500,000 and $26,450,000, respectively, at interest rates ranging
from 3.19% to 3.64%, and 3.19% to 3.64%, respectively.
Repurchase Agreements with
Customers
At
December 31, 2009 and 2008, the balance of securities sold under repurchase
agreements with customers was $20,615,947 and $18,222,571,
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
The
Company had no collateralized borrowings as of December 31,
2009. Collateralized borrowings amounted to $1,375,550 as of December
31, 2008. Pursuant to FASB guidance related to the Transfer and
Servicing Topic of the FASB ASC, certain loan participation agreements did not
qualify for sale accounting due to buyback provisions included within the
agreement, thus the Company had not surrendered control over the transferred
loans and accounted for the transfers as collateralized borrowings.
Junior Subordinated Debt
Issued by Unconsolidated Trusts
The
Company has established two Delaware statutory trusts, First Litchfield
Statutory Trust I and First Litchfield Statutory Trust II, for the sole purpose
of issuing trust preferred securities and related trust common securities. The
proceeds from such issuances were used by the trusts to purchase junior
subordinated notes of the Company, which are the sole assets of each
trust.
Concurrently
with the issuance of the trust preferred securities, the Company issued
guarantees for the benefit of the holders of the trust preferred securities. The
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, 2009:
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, 2003
|
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, stricter limitations. The Company
has until March 31, 2011, (previously March 31, 2009), to meet the new
limitations.
The trust
preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the junior subordinated notes at the stated maturity date or
upon redemption on a date no earlier than June 26, 2008 for First Litchfield
Statutory Trust I and June 30, 2011 for First Litchfield Statutory Trust II.
Prior to these respective redemption dates, the junior subordinated notes may be
redeemed by the Company (in which case the trust preferred securities would also
be redeemed) after the occurrence of certain events that would have a negative
tax effect on the Company or the trusts, would cause the trust preferred
securities to no longer qualify as Tier 1 capital, or would result in a trust
being treated as an investment company. Each trust’s ability to pay amounts due
on the trust preferred securities is solely dependent upon the Company making
payment on the related junior subordinated notes. The Company’s obligation under
the junior subordinated notes and other relevant trust agreements, in aggregate,
constitute a full and unconditional guarantee by the Company of each trust’s
obligations under the trust preferred securities issued by each trust. The
Company has the right to defer payment of interest on the notes and, therefore,
distributions on the trust preferred securities, for up to five years, but not
beyond the stated maturity date in the table above. During any such deferral
period the Company may not pay cash dividends on its common stock and generally
may not repurchase its common stock.
The
contractual maturities of the Company’s long-term borrowings at December 31,
2009, by year, are as follows:
Fixed
|
Floating
|
|||||||||||
Rate
|
Rate
|
Total
|
||||||||||
2010
|
$ | 15,000,000 | $ | - | $ | 15,000,000 | ||||||
2011
|
- | - | - | |||||||||
2012
|
5,000,000 | - | 5,000,000 | |||||||||
2013
|
22,500,000 | - | 22,500,000 | |||||||||
2014
|
14,000,000 | - | 14,000,000 | |||||||||
Thereafter
|
35,000,000 | 10,104,000 | 45,104,000 | |||||||||
TOTAL
LONG-TERM DEBT
|
$ | 91,500,000 | $ | 10,104,000 | $ | 101,604,000 |
NOTE
L – INCOME TAXES
The
components of the income tax (benefit) provision are as follows:
2009
|
2008
|
|||||||
Current
(Benefit) Provision:
|
$ | (690,154 | ) | $ | 755,815 | |||
Federal
|
||||||||
Deferred
Benefit
|
(393,200 | ) | (3,868,274 | ) | ||||
Federal
|
$ | (1,083,354 | ) | $ | (3,112,459 | ) |
The
allocation of deferred tax provision (benefit) involving items charged to
current year income and items charged directly to equity for the years ended
December 31, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Deferred
tax provision (benefit) allocated to equity
|
$ | 357,687 | $ | (125,124 | ) | |||
Deferred
tax benefit allocated to operations
|
(393,200 | ) | (3,868,274 | ) | ||||
Total
deferred benefit
|
$ | (35,513 | ) | $ | (3,993,398 | ) |
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:
2009
|
2008
|
|||||||||||||||
Benefit
for income taxes at statutory Federal rate
|
$ | (733,477 | ) | (34 | )% | $ | (2,583,649 | ) | (34 | )% | ||||||
Increase
(decrease) resulting from:
|
||||||||||||||||
Tax
exempt interest income
|
(246,964 | ) | (11 | )% | (451,306 | ) | (6 | )% | ||||||||
Nondeductible
interest expense
|
22,829 | 1 | % | 47,273 | 1 | % | ||||||||||
Tax
exempt income from insurance policies
|
(133,457 | ) | (6 | )% | (134,677 | ) | (2 | )% | ||||||||
Other
|
7,715 | - | 9,900 | - | ||||||||||||
Benefit
for income taxes
|
$ | (1,083,354 | ) | (50 | )% | $ | (3,112,459 | ) | (41 | )% |
The tax
effects of temporary differences that give rise to significant components of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008
are presented below:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan and lease losses
|
$ | 2,063,157 | $ | 1,257,598 | ||||
Depreciation
|
257,992 | 207,789 | ||||||
Accrued
expenses
|
485,167 | 387,740 | ||||||
Alternative
minimum taxes
|
421,185 | 452,992 | ||||||
Unfunded
pension liability
|
536,206 | 609,211 | ||||||
Unrealized
loss on available for sale securities
|
527,612 | - | ||||||
Federal
NOL
|
887,249 | - | ||||||
Securities
write-downs
|
1,318,254 | 3,203,701 | ||||||
Total
gross deferred tax assets
|
6,496,822 | 6,119,031 | ||||||
Deferred
tax liabilities:
|
||||||||
Tax
bad debt reserve
|
(153,536 | ) | (153,536 | ) | ||||
Prepaid
pension costs
|
(292,616 | ) | (268,902 | ) | ||||
Net
deferred loan and lease costs
|
(217,267 | ) | (191,162 | ) | ||||
Leases
|
(672,867 | ) | (338,328 | ) | ||||
Unrealized
gain on available for sale securities
|
- | (81,439 | ) | |||||
Unrealized
gain on cash flow hedges
|
(39,966 | ) | - | |||||
Prepaid
expenses and other
|
(2,100 | ) | (2,707 | ) | ||||
Total
gross deferred tax liabilities
|
(1,378,352 | ) | (1,036,074 | ) | ||||
Net
deferred tax asset
|
$ | 5,118,470 | $ | 5,082,957 |
As of
December 31, 2009 and December 31, 2008, the Company had recorded net deferred
income tax assets of approximately $5.1 million. The determination of the amount
of deferred income tax assets which are more likely than not to be realized is
primarily dependent on projections of future earnings, which are subject to
uncertainty and estimates that may change given economic conditions and other
factors. A valuation allowance related to deferred tax assets is required when
it is considered more likely than not that all or part of the benefit related to
such assets will not be realized. Management has reviewed the deferred tax
position of the Company at December 31, 2009. The deferred tax position has been
affected by several significant transactions in the past three years. These
transactions included other-than-temporary impairment write-offs of certain
investments and significant permanent differences between accounting and tax
income such as non-taxable municipal security income, which securities have been
sold and replaced with assets which will generate taxable income in the future,
and certain specific expenditures not expected to reoccur. As a result, the
Company is in a cumulative net loss position (pretax income (loss) for a three
year period adjusted for permanent items) as of December 31,
2009. However, under the applicable accounting guidance, the Company
has concluded that it is “more likely than not” that the Company will be able to
realize its deferred tax assets based on the non-recurring nature of these items
and the Company’s expectation of future taxable income. In the
future, management’s conclusion regarding the need for a deferred tax asset
valuation allowance could change, resulting in the establishment of a valuation
allowance for a portion or all of the deferred tax asset. The Company
will continue to analyze the recoverability of its deferred tax assets
quarterly.
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 2009 and
2008.
Federal
tax returns for all years subsequent to 2006 remain open to
examination. For the Company’s principal state tax jurisdiction of
Connecticut, tax returns for years subsequent to 2005 remain open to
examination. There was $88 in interest and penalties paid during the year ended
December 31, 2009. There were no interest and or penalities paid
during the year ended December 31, 2008. No accrued interest or penalties were
recorded as of December 31, 2009 or December 31, 2008. The Company believes that
it has appropriate support for the income tax positions taken and to be taken on
its tax returns, and that its accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including past experience and
interpretations of tax law applied to the facts of each matter.
NOTE
M – 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. Pursuant to the
Merger Agreement with Union Savings Bank, all liabilities related to the Plan
will be assumed by Union Savings Bank. The actuarial information has
been calculated using the projected unit credit method.
The
following table sets forth the Plan’s funded status and amounts recognized in
the consolidated balance sheets at December 31, 2009 and 2008 using a
measurement date of December 31:
2009
|
2008
|
|||||||
Change
in benefit obligation
|
||||||||
Benefit
obligation, beginning
|
$ | 2,995,623 | $ | 3,270,153 | ||||
Service
Cost
|
- | - | ||||||
Interest
Cost
|
170,800 | 187,272 | ||||||
Actuarial
gain (loss)
|
125,588 | (19,938 | ) | |||||
Benefits
paid
|
(311,223 | ) | (441,864 | ) | ||||
Benefit
obligation, ending
|
2,980,788 | 2,995,623 | ||||||
Change
in plan assets:
|
||||||||
Fair
value of plan assets, beginning
|
1,994,714 | 3,242,172 | ||||||
Actual
return on plan assets
|
434,634 | (905,594 | ) | |||||
Employer
contribution
|
146,225 | 100,000 | ||||||
Benefits
paid
|
(311,223 | ) | (441,864 | ) | ||||
Fair
value of plan assets, ending
|
2,264,350 | 1,994,714 | ||||||
Funded
status at end of year included
|
||||||||
in
accrued expenses and other liabilities
|
$ | (716,438 | ) | $ | (1,000,909 | ) |
The
accumulated benefit obligation was $2,980,788 and $2,995,623 at December 31,
2009 and 2008, respectively. At December 31, 2009 and 2008,
$1,577,075 and $1,791,798, 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 2010 is $78,092.
2009
|
2008
|
|||||||
Components
of net periodic benefit cost and other
|
||||||||
amounts
recognized in other comprehensive income:
|
||||||||
Service
cost
|
$ | - | $ | - | ||||
Interest
cost
|
170,800 | 187,272 | ||||||
Expected
return on plan assets
|
(172,415 | ) | (206,533 | ) | ||||
Amortization
of unrealized loss
|
78,092 | 54,772 | ||||||
Net
periodic benefit cost
|
76,477 | 35,511 | ||||||
Other
changes in plan assets and benefit obligations
|
||||||||
recognized
in other comprehensive income:
|
||||||||
Net
(gain) loss
|
(214,723 | ) | 1,037,417 | |||||
Total
recognized in net periodic
|
||||||||
benefit
cost and other comprehensive (income) loss
|
$ | (138,246 | ) | $ | 1,072,928 |
Weighted-average
assumptions used to determine benefit obligations at December 31:
2009
|
2008
|
|||||||
Discount
rate
|
5.75 | % | 6.00 | % | ||||
Rate
of compensation increase
|
N/A | N/A |
Weighted-average
assumptions used to determine net periodic benefit cost for years ended December
31:
2009
|
2008
|
|||||||
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 $76,477 and $35,511 for the years ended
December 31, 2009 and 2008, 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, 2009 and
2008 by asset category are as follows:
Percentage
of
|
||||||||
Plan
Assets as of
|
||||||||
December
31,
|
||||||||
Asset Category
|
2009
|
2008
|
||||||
Cash
and receivables
|
8 | % | 10 | % | ||||
Corporate
debt and equity securities
|
67 | % | 63 | % | ||||
Pooled
funds/ Mutual funds
|
15 | % | 8 | % | ||||
Government
securities
|
10 | % | 19 | % | ||||
Total
|
100 | % | 100 | % |
Fair
value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information. In
accordance with FASB ASC 820, the fair value estimates are measured within the
fair value hierarchy. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3
measurements).
The fair
value of the Company’s pension plan assets at December 31, 2009 by asset
category are listed in the table below.
Fair Value Measurements
Using
|
||||||||||||||||
Total
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Cash
and Cash equivalents
|
$ | 107,019 | $ | 107,019 | $ | - | $ | - | ||||||||
Certificates
of Deposit
|
80,307 | 80,307 | - | - | ||||||||||||
Equity
Securities
|
||||||||||||||||
U.S.
Companies
|
921,152 | 921,152 | - | - | ||||||||||||
International
Companies
|
188,540 | 188,540 | - | - | ||||||||||||
Equity
Mutual Funds
|
||||||||||||||||
U.S.
Companies
|
60,671 | 60,671 | - | - | ||||||||||||
International
Companies
|
289,636 | 289,636 | - | - | ||||||||||||
Corporate
Bonds
|
398,752 | - | 398,752 | - | ||||||||||||
U.S.
Government Agency Obligations
|
218,273 | 218,273 | - | - | ||||||||||||
Total
Investments
|
$ | 2,264,350 | $ | 1,865,598 | $ | 398,752 | $ | - |
Cash and
Cash equivalents: Carrying value is assumed to represent fair value for cash and
short-term investments.
Certificates
of Deposits: Carrying value is assumed to represent fair value for
certificates of deposit.
Equity
Securities: Included in this category are exchange-traded
common and preferred shares invested in the retail, energy, financial, health
care, industrial, technology, materials and utility sectors. The fair value of
the securities are based on quoted market prices of identical securities in
active markets and, therefore, are classified as Level 1 in the fair value
hierarchy.
Equity
Mutual Funds: Fair value of the fund is based upon the fair
value of the underlying equity securities. The fair value of the underlying
equity securities are based on quoted market prices of identical securities in
active markets and, therefore, are classified as Level 1 in the fair value
hierarchy.
Corporate
Bonds: Included in this category are investments in corporate
bonds where the fair values are estimated by using pricing models (i.e. matrix
pricing) with observable market inputs including recent transactions and/or
benchmark yields or quoted prices of securities with similar characteristics and
are, therefore, classified within Level 2 of the valuation
hierarchy.
U.S.
Government Agency Obligations: Included in this category are
government agency obligations. The U.S. government obligations are measured at
fair value based on quoted prices for identical securities in active markets are
classified as Level 1 of the fair value hierarchy.
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 contribution of $146,225 and
$100,000 to the Plan during 2009 and 2008,
respectively. Contributions of $54,167 are anticipated to be made in
2010.
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:
2010
|
$ | 178,000 | ||
2011
|
$ | 175,000 | ||
2012
|
$ | 172,000 | ||
2013
|
$ | 169,000 | ||
2014
|
$ | 165,000 | ||
2015-2019
|
$ | 704,000 |
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, 2009 and 2008, 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
$292,457 and $273,483 for 2009 and 2008, respectively. Pursuant to
the Merger Agreement with Union Savings Bank, this plan will be terminated and
replaced with Union Savings Bank 401(k) plan. All employees will be
eligible for participation in the employee savings 401(k) plan with Union
Savings Bank.
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 $112,453 and
$93,234 at December 31, 2009, and 2008, 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, 2009 and 2008, $89,279 and $53,001, respectively, were charged to operations
under this plan. The related liability, of $550,754 and $465,237 at
December 31, 2009 and 2008, respectively, is included in accrued expenses and
other liabilities. At December 31,
2009 and
2008, there were no unvested benefits earned under this
plan. Pursuant to the Merger Agreement with Union Savings Bank, all
accrued liabilities under this plan will be paid to participants prior to the
Merger.
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 ESOP. That amount of compensation
divided by the fair value of the Company’s shares at the date the shares are
transferred to the ESOP determines the number of shares contributed to the ESOP.
Dividends are allocated to participant accounts in proportion to their
respective shares. For the years ended December 31, 2009 and 2008,
there were no expenses incurred under the ESOP. No shares were
contributed to the ESOP during 2009 or 2008. 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, 2009 is less than $25,000. Pursuant to the Merger
Agreement with Union Savings Bank, the ESOP will be terminated and participants
payouts will be based upon the $15 per share price as indicated in the Merger
Agreement.
Effective
January 1, 2006, the Bank entered into supplemental retirement agreements with
three of the Bank’s Senior Officers. At December 31, 2009 and 2008,
accrued supplemental retirement benefits of $531,600 and $377,000, 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. Pursuant to the Merger Agreement with Union Savings
Bank, any unvested benefits will immediately vest and will be honored by Union
Savings Bank.
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 $10,809,000 and $10,417,000 at December 31, 2009 and 2008,
respectively. 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. Pursuant to the Merger Agreement with Union Savings Bank,
such benefit plans will be honored by Union Savings Bank.
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
guidance issued by the FASB on January 1, 2008, the Company recorded an increase
to accrued expenses of $12,272 related to these agreements. At
December 31, 2009 and 2008, $42,052 and $41,431, respectively, is included in
accrued expenses related to these agreements. Pursuant to the Merger
Agreement with Union Savings Bank, such benefit plans will be honored by Union
Savings Bank.
NOTE
N – SHAREHOLDERS’ EQUITY AND EARNINGS PER SHARE
There
were no stock dividends declared in 2009 and 2008.
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 Emergency Economic
Stabilization Act of 2008 (“EESA”) authorized the U. S. Treasury to appropriate
funds to eligible financial institutions participating in the Troubled Asset
Relief Program (“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
Company recorded the total $10 million of the preferred shares and the warrant
at their relative fair values of $9,716,000 and $284,000,
respectively. The difference from the par amount of the preferred
shares is accreted to preferred stock over five years using the interest method
with a corresponding adjustment to accumulated deficit.
The
Company cannot increase the quarterly common stock dividend above $.15 per share
without the consent of the Treasury until the third anniversary of the date of
the investment, or December 12, 2011, unless prior to such third anniversary the
senior preferred stock is redeemed in whole or the Treasury has transferred all
of the senior preferred stock to third parties.
The
following is information about the computation of net loss per share for the
years ended December 31, 2009 and 2008. 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,
2009
|
||||||||||||
Net
|
Per
Share
|
|||||||||||
Loss
|
Shares
|
Amount
|
||||||||||
Basic
Net Loss Per Share
|
||||||||||||
Loss
available to common stockholders
|
$ | (1,758,375 | ) | 2,356,875 | $ | (0.75 | ) | |||||
Effect
of Dilutive Securitites
|
||||||||||||
Options
outstanding
|
- | - | - | |||||||||
Diluted
Net Loss Per Share
|
||||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (1,758,375 | ) | 2,356,875 | $ | (0.75 | ) |
For the Year Ended December 31,
2008
|
||||||||||||
Net
|
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 Securities
|
||||||||||||
Options
outstanding
|
- | - | - | |||||||||
Diluted
Net Loss Per Share
|
||||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (4,516,773 | ) | 2,362,897 | $ | (1.92 | ) |
For the
years ended December 31, 2009, there are no options outstanding. The effect of
stock options was not considered because the effect would have been
anti-dilutive for the year ended December 31, 2008.
NOTE
O – STOCK COMPENSATION PLANS
At
December 31, 2008, the Company had one fixed option plan and restricted stock
plan, which are described below.
RESTRICTED STOCK
PLAN: During 2007, the Company approved a restricted stock
plan (the “2007 Plan”) for senior management. The 2007 Plan provides that up to
25,000 shares of Common Stock may be issued to the Company’s Executive Officers
and other key employees. These awards vest in five equal installments
on the annual anniversary dates of the grant or earlier, if the senior manager
ceases to be a senior manager for any reason other than cause, for example,
retirement. As all shares have been issued at date of grant, 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 years ended December
31, 2009 and 2008, $9,176 and $8,412, respectively, were recognized as
compensation expense under the 2007 Plan. At December 31, 2009,
unrecognized compensation cost of $28,296 related to these awards is expected to
vest over a weighted average period of 4 years; however, as a result of the
Merger described in Note A, such awards will become fully vested upon
consummation of the Merger.
A summary
of unvested shares as of and for the year ended December 31, 2009 is as
follows:
Weighted Average
|
||||||||
Grant
Date
|
||||||||
Shares
|
Fair Value
|
|||||||
Unvested
shares, beginning of year
|
3,500 | $ | 13.11 | |||||
Shares
granted during the year
|
- | - | ||||||
Shares
vested during the year
|
- | - | ||||||
Unvested
shares, end of year
|
3,500 | $ | 13.11 |
STOCK
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 2009 and 2008 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.)
2009
|
2008
|
|||||||||||||||
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
|
5,434 | $ | 11.93 | 7,327 | $ | 11.64 | ||||||||||
Granted
|
- | - | - | - | ||||||||||||
Exercised
|
- | - | 1,893 | 10.82 | ||||||||||||
Cancelled
|
5,434 | - | - | - | ||||||||||||
Options
outstanding and exercisable at end of year
|
- | - | 5,434 | $ | 11.93 |
Shares
reserved for issuance of common stock under all the option plans is equal to the
amount of options outstanding at the end of 2009 or 0.
There was
no intrinsic value of options outstanding and exercisable at December 31, 2009
and 2008. The intrinsic value of options exercised during both years
ended December 31, 2009 and 2008 was $0.
NOTE
P – 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, 2009, the Bank had retained earnings of
approximately $31,676,000, 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, 2009, 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
Q – 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, 2009 and
2008 related to these items are summarized below:
2009
|
2008
|
|||||||
Contract Amount
|
Contract Amount
|
|||||||
Loan
and lease commitments:
|
||||||||
Approved
loan and lease commitments
|
$ | 12,984,000 | $ | 18,336,000 | ||||
Unadvanced
portion of:
|
||||||||
Construction
loans
|
7,907,000 | 13,979,000 | ||||||
Commercial
lines of credit
|
57,299,000 | 76,817,000 | ||||||
Home
equity lines of credit
|
33,932,000 | 34,932,000 | ||||||
Overdraft
protection and other consumer lines
|
221,000 | 961,000 | ||||||
Credit
cards
|
5,146,000 | 3,618,000 | ||||||
Standby
letters of credit
|
1,148,000 | 2,173,000 | ||||||
$ | 118,637,000 | $ | 150,816,000 |
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 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, 2009
and 2008.
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
R – RELATED PARTY TRANSACTIONS
For the
years ended December 31, 2009 and 2008, the Bank paid approximately $7,000 and
$8,500, respectively, for legal fees to companies, the principals of which are
Directors of the Company.
NOTE
S – 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
following table) 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 that as of December 31,
2009, the Company and the Bank meet all capital adequacy requirements to which
they are 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, 2009 the most recent notification from the OCC categorized the Bank
as well capitalized
under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There were no conditions or events since that
notification that management believes have changed the Bank’s
category.
As of
December 31, 2008 the most recent notification from the OCC categorized the Bank
as adequately capitalized
under the regulatory framework for prompt corrective
action. 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 and second quarters of 2009 the
Company contributed $4,000,000 and $1,500,000, respectively, in capital to the
Bank. As a result of this action, as of March 31, 2009 and
thereafter, 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, 2009:
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
The Company
|
||||||||||||||||||||||||
Total
Capital to Risk Weighted Assets
|
$ | 43,804,000 | 11.50 | % | $ | 30,472,000 | 8 | % | N/A | N/A | ||||||||||||||
Tier
I Capital to Risk Weighted Assets
|
39,029,000 | 10.25 | % | 15,231,000 | 4 | % | N/A | N/A | ||||||||||||||||
Tier
I Capital to Average Assets
|
39,029,000 | 7.34 | % | 21,269,000 | 4 | % | N/A | N/A | ||||||||||||||||
The Bank
|
||||||||||||||||||||||||
Total
Capital to Risk Weighted Assets
|
$ | 42,100,000 | 11.09 | % | $ | 30,370,000 | 8 | % | $ | 37,962,000 | 10 | % | ||||||||||||
Tier
I Capital to Risk Weighted Assets
|
37,336,000 | 9.83 | % | 15,193,000 | 4 | % | 22,789,000 | 6 | % | |||||||||||||||
Tier
I Capital to Average Assets
|
37,336,000 | 7.02 | % | 21,274,000 | 4 | % | 26,593,000 | 5 | % |
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 | % |
NOTE
T - CERTAIN SUPERVISORY MATTERS
On
November 9, 2009, the Bank entered into a Formal Agreement (the “Agreement”)
with the OCC. The Agreement is a remedial supervisory action with
provisions intended to improve the Bank’s condition and
operations. While not punitive, the Agreement provides a framework
for addressing identified problems, documenting remedial efforts, and preventing
the recurrence of similar problems so that the Bank’s condition will improve and
no longer to be considered to be troubled. Management and the Board
are of the opinion that compliance with the Agreement is in the best interest of
the Bank but will require sustained effort and management
resources.
To
coordinate its compliance efforts pursuant to the Agreement, the Board of the
Bank appointed a Compliance Committee consisting primarily of independent
Directors. The Compliance Committee met, at least monthly to monitor
and report the Bank’s progress to the Board. The Board reviewed the
Bank’s liquidity plans, capital plans, strategic plans, and management and
staffing plans and provided copies of such plans to the OCC along with copies of
the reports of the Compliance Committee and other relevant
information. The Board assessed the adequacy of the Bank’s management
and staffing needs to assure that the Bank is well managed and well
staffed. The Bank also notified the OCC regarding any proposed
changes in the Board, executive management or staff or changes in their duties
or responsibilities.
Pursuant
to the Agreement, the Bank did not utilize brokered deposits without appropriate
FDIC and OCC authorization. In this regard, the only deposits
currently utilized by the Bank which could be characterized as “brokered
deposits” are deposits obtained through the CDARS program. The
Agreement with the OCC does not preclude the Bank from participating in the
CDARS program and the Bank has requested authorization from the FDIC to continue
to participate in such program. The Bank has approximately $20.5
million in CDARS deposits, of which $13 million matured in January
2010.
The
Agreement further required the Bank to enhance its credit risk management
program within the Bank’s loan and lease functions and to develop and adhere to
policies designed to enhance risk rating and risk monitoring. In
addition, the Bank agreed to take appropriate action to improve and maintain
asset quality. The Bank prepared written evaluations of and programs
for collecting any loans greater than $750,000 that are subject to criticism,
regularly review such loans, and only extend additional credit on such loans if
the Bank determines and documents that it is consistent with the Bank’s plan to
collect the loan or strengthen the assets underlying the loan and the action is
necessary to protect the Bank’s interests. In addition, the Bank
enhanced and documented the programs it uses to evaluate, maintain, and document
the adequacy of the Allowance for Loan and Lease Losses, which enhanced programs
were utilized in the evaluation of the Allowance for Loan and Lease Losses for
the third and fourth quarters of 2009, and the Bank provided a copy of this
program and documentation to the OCC.
The
Agreement precludes the Bank from growing at a rate greater than 5% on an annual
basis. In addition to updating its capital plan with appropriate
contingencies, the Agreement would preclude the payment of any dividends
inconsistent with the capital plan or applicable law and without written
non-objection by the OCC. The Merger Agreement with Union Savings
Bank precludes the payment of dividends to the shareholders of the Company’s
common stock pending consummation of the merger.
The Bank
understands that the Agreement with the OCC will remain in place so long as the
Bank remains subject to OCC supervision or until such time as the Agreement is
terminated by the OCC, which will generally not occur until the issues, which
were the basis of the Agreement, have been corrected and verified through an
examination and until there is no basis for supervisory
concern. Failure to comply with the Agreement could result in more
serious supervisory action by the OCC with respect to the Bank, its officers, or
directors.
In
addition to the Agreement, the Bank has been notified that the OCC will require
the Bank to achieve and maintain the following capital ratios by no later than
March 31, 2010:
|
·
|
Total
risk-based capital at least equal to twelve percent (12%) of risk-weighted
assets (as compared with 11.09% maintained by the Bank at December 31,
2009 and 10% generally required of well-capitalized
banks);
|
|
·
|
Tier
1 capital at least equal to ten percent (10%) of risk-weighted assets (as
compared with 9.83% maintained by the Bank at December 31, 2009 and 6%
generally required of well-capitalized banks);
and
|
|
·
|
Tier
1 capital at least equal to eight percent (8%) of adjusted total assets
(as compared with 7.02% maintained by the Bank at December 31, 2009 and 5%
generally required of well-capitalized
banks).
|
The Bank
expects to consummate its Merger with and into Union Savings Bank shortly after
March 31, 2010. The Bank has submitted to the
OCC contingency plans to address compliance with the capital requirements
should the Merger not be consummated.
NOTE
U – FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
Effective
January 1, 2008, the Company adopted FASB ASC 820-10, 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 FASB ASC 820-10, 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 guidance issued by the FASB is set
forth below.
Cash and Due From Banks, Federal
Funds Sold, Accrued Interest 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. Securities measured at fair value in Level 3 include
certain collateralized debt obligations that are backed by trust preferred
securities issued by banks, thrifts, and insurance companies. Management
determined that an orderly and active market for these securities and similar
securities did not exist based on a significant reduction in trading volume and
widening spreads relative to historical levels.
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.
Mortgage Servicing Rights: The
fair value of mortgage servicing rights is estimated using a discounted cash
flow model that applies current estimated prepayments derived from the
mortgage-backed securities market and utilizes a discount rate based on the
current 10-year U.S. Treasury rate adjusted for observable credit
spreads. The Company does not record mortgage servicing rights at
fair value on a recurring basis.
Interest rate swap
derivatives: The fair value of the Bank’s interest rate swap
derivative instruments are determined based on inputs that are readily available
in public markets or can be derived from information available in publicly
quoted markets. Therefore, the Company has categorized these
derivative instruments as Level 2 within the fair value
hierarchy. The Company also considers the credit worthiness of the
counterparty for assets and the credit worthiness of the Company for
liabilities.
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. The Company
considers its credit worthiness in determining the fair value of its
debt.
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, 2009 and 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, 2009, Using
December
31, 2009
Total
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Available-for-sale
securities
|
||||||||||||||||
Debt
Securities:
|
||||||||||||||||
U.S.
Treasury securities
|
3,127,188 | 3,127,188 | - | - | ||||||||||||
U.S.
Government Agency securities
|
23,069,900 | - | 23,069,900 | - | ||||||||||||
State
and Municipal obligations
|
3,003,360 | - | 3,003,360 | - | ||||||||||||
Trust
Preferred Securities - OTTI (1)
|
863,254 | - | - | 863,254 | ||||||||||||
30,063,702 | 3,127,188 | 26,073,260 | 863,254 | |||||||||||||
Mortgage-Backed
Securities:
|
||||||||||||||||
GNMA
|
451,673 | - | 451,673 | - | ||||||||||||
FNMA
|
27,877,297 | - | 27,877,297 | - | ||||||||||||
FHLMC
|
19,955,597 | - | 19,955,597 | - | ||||||||||||
48,284,567 | - | 48,284,567 | - | |||||||||||||
Marketable
Equity Securities
|
17,063,436 | 17,063,436 | - | - | ||||||||||||
Total
Available-for-sale securities
|
$ | 95,411,705 | $ | 20,190,624 | $ | 74,357,827 | $ | 863,254 | ||||||||
Interest
rate swaps
|
$ | 117,545 | $ | - | $ | 117,545 | $ | - |
(1)
|
Net
of other-than-temporary impairment writedowns recognized in earnings,
other than such noncredit- related amounts reclassified on April 1,
2009.
|
Fair
Value Measurements at December 31, 2008, Using
December
31, 2008
Total
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Available-for-sale
securities
|
||||||||||||||||
Debt
Securities:
|
||||||||||||||||
U.S.
Treasury securities
|
3,218,450 | 3,218,450 | - | - | ||||||||||||
U.S.
Government Agency securities
|
26,562,377 | - | 26,562,377 | - | ||||||||||||
State
and Municipal obligations
|
19,632,432 | - | 19,632,432 | - | ||||||||||||
Trust
Preferred Securities - OTTI (2)
|
493,615 | - | 493,615 | - | ||||||||||||
49,906,874 | 3,218,450 | 46,688,424 | - | |||||||||||||
Mortgage-Backed
Securities:
|
||||||||||||||||
GNMA
|
9,487,835 | - | 9,487,835 | - | ||||||||||||
FNMA
|
35,879,729 | - | 35,879,729 | - | ||||||||||||
FHLMC
|
15,195,764 | - | 15,195,764 | - | ||||||||||||
60,563,328 | - | 60,563,328 | - | |||||||||||||
Marketable
Equity Securities
|
3,015,999 | 1,970,121 | 1,045,878 | - | ||||||||||||
Total
Available-for-sale securities
|
$ | 113,486,201 | $ | 5,188,571 | $ | 108,297,630 | $ | - |
(2)
|
Net
of other-than-temporary impairment writedowns recognized in
earnings.
|
As of
December 31, 2009, U.S. Treasury securities and two equity securities, with
carrying values of $20,190,624 are the only assets whose fair values are
measured on a recurring basis, using Level 1 inputs (active market
quotes). At December 31, 2008, U.S. Treasury securities and one
equity security with carrying values of $5,188,571 are the only assets whose
fair values are measured on a recurring basis using Level 1 inputs.
The fair
values of U. S. Government and agency mortgaged-backed securities and debt
securities, State and Municipal obligations, and certain equity securities are
measured on a recurring basis using Level 2 inputs of observable market data on
similar securities. As of December 31, 2009 and 2008, the carrying
values of these securities totaled $74,357,827 and $108,297,630,
respectively.
At
December 31, 2009, trust preferred securities, with carrying values of $863,254
are the only assets whose fair values are measured on a recurring basis, using
Level 3 inputs (unobservable quotes). As of December 31, 2008
Trust preferred securities were recorded as Level 2 inputs as shown in the
reconciliation in the following table.
The
following table shows a reconciliation of the beginning and ending balances for
Level 3 assets:
December 31, 2009
|
||||
Balance
at beginning of year
|
$ | - | ||
Increase
in fair value of securities included in other comprehensive
loss
|
369,639 | |||
Transfers
to level 3 - Trust Preferred securities
|
493,615 | |||
Balance
at end of year
|
$ | 863,254 |
The
following table details the financial instruments carried at fair value and
measured at fair value on a nonrecurring basis as of December 31, 2009 and 2008
and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine the fair value:
December 31, 2009
|
||||||||||||||||
Quoted
Prices in
|
Significant
|
Significant
|
||||||||||||||
Balance
|
Active Markets for
|
Observable
|
Unobservable
|
|||||||||||||
as
of
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
December 31, 2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Financial
assets held at fair value
|
||||||||||||||||
Impaired
Loans (1)
|
$ | 10,939,719 | $ | - | $ | - | $ | 10,939,719 | ||||||||
Mortgage
servicing rights (2)
|
$ | 291,500 | $ | - | $ | 291,500 | $ | - | ||||||||
Loans
held for sale
|
$ | 80,000 | $ | - | $ | 80,000 | $ | - |
(1)
|
Represents
carrying value and related write-downs for which adjustments are based on
the appraised value.
|
(2)
|
Represents
carrying value which is fair value at inception adjusted for amortization
over the period of expected servicing
income.
|
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 | ||||||||
Mortgage
servicing rights (2)
|
$ | 96,172 | $ | - | $ | 96,172 | $ | - | ||||||||
Loans
held for sale
|
$ | 1,013,216 | $ | - | $ | 1,013,216 | $ | - |
(1)
|
Represents
carrying value and related write-downs for which adjustments are based on
the appraised value.
|
(2)
|
Represents
carrying value which is fair value at inception adjusted for amortization
over the period of expected servicing
income.
|
The
following details the non-financial assets that are carried at fair value and
measured at fair value on a non-recurring bases as of December 31, 2009, and
indicates the fair value hierarchy of the valuation techniques utilized by the
Bank to determine the fair value:
December 31, 2009
|
||||||||||||||||
Quoted
Prices in
|
Significant
|
Significant
|
||||||||||||||
Balance
|
Active Markets for
|
Observable
|
Unobservable
|
|||||||||||||
as
of
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
Financial
assets held at fair value
|
December 31, 2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
Other
real estate owned (1)
|
$ | 312,000 | $ | - | $ | 312,000 | $ | - |
(1)
|
Represents
carrying value and related write-downs for which adjustments are based on
the appraised value.
|
The
Company has no other assets or liabilities carried at fair value or measured at
fair value on a non-recurring basis.
The Fair
Value Measurements guidance 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. The
Fair Value Measurements standard 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
recorded book balances and estimated fair values of the Company’s financial
instruments at December 31, 2009 and 2008 are presented in the following
table. The estimated fair value amounts for December 31, 2009 and
2008 have been measured as of the end of the respective periods and have not
been revaluated 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 those respective reporting dates may
be different than amounts reported at period-end.
2009
|
2008
|
|||||||||||||||
Book
|
Estimated
|
Book
|
Estimated
|
|||||||||||||
Value
|
Fair Value
|
Value
|
Fair Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 26,798,671 | $ | 26,798,671 | $ | 9,238,783 | $ | 9,238,783 | ||||||||
Available
for sale securities
|
95,411,705 | 95,411,705 | 113,486,201 | 113,486,201 | ||||||||||||
Held
to maturity securities
|
14,501 | 14,920 | 16,550 | 16,553 | ||||||||||||
Federal
Home Loan Bank Stock
|
5,427,600 | 5,427,600 | 5,427,600 | 5,427,600 | ||||||||||||
Federal
Reserve Bank Stock
|
225,850 | 225,850 | 225,850 | 225,850 | ||||||||||||
Other
restricted stock
|
105,000 | 105,000 | 100,000 | 100,000 | ||||||||||||
Loans
held for sale
|
80,000 | 80,000 | 1,013,216 | 1,013,216 | ||||||||||||
Loans
and leases, net
|
370,617,392 | 381,143,587 | 366,392,079 | 365,191,872 | ||||||||||||
Accrued
interest receivable
|
1,665,569 | 1,665,569 | 2,262,918 | 2,262,918 | ||||||||||||
Interest
rate swaps
|
117,545 | 117,545 | - | - | ||||||||||||
Mortgage
servicing rights
|
291,500 | 366,386 | 96,172 | 96,365 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Savings
deposits
|
62,810,282 | 62,810,282 | 58,582,376 | 58,582,376 | ||||||||||||
Money
market and demand deposits
|
163,591,232 | 163,591,232 | 162,633,387 | 162,633,387 | ||||||||||||
Time
certificates of deposit
|
142,769,273 | 143,690,055 | 122,110,861 | 122,607,975 | ||||||||||||
Federal
Home Loan Bank advances
|
69,000,000 | 70,430,291 | 81,608,000 | 86,044,755 | ||||||||||||
Repurchase
agreements with
|
||||||||||||||||
financial
institutions
|
22,500,000 | 23,175,783 | 26,450,000 | 26,316,528 | ||||||||||||
Repurchase
agreements with customers
|
20,615,947 | 20,615,947 | 18,222,571 | 18,222,571 | ||||||||||||
Subordinated
debt
|
10,104,000 | 10,104,000 | 10,104,000 | 10,104,000 | ||||||||||||
Accrued
interest payable
|
468,202 | 468,202 | 611,829 | 611,829 | ||||||||||||
Collateralized
borrowings
|
- | - | 1,375,550 | 1,375,550 |
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, 2009 and 2008.
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
V – INTEREST RATE SWAPS AND DERIVATIVE INSTRUMENTS
The
Company manages its interest rate risk by using derivative instruments in the
form of interest rate swaps designed to reduce interest rate risk by effectively
converting a portion of floating rate debt into fixed rate debt. This action
reduces the Company’s risk of incurring higher interest costs in periods of
rising interest rates. On February 2, 2009, the Company entered into
two interest rate swap agreements through March of 2014 and 2019, respectively;
however, the settlements under the swaps commenced March 30, 2009. Payments
under the swap agreements will continue on the 30th of
each quarter end. The Company is accounting for the interest rate
swap agreements as effective cash flow hedges. The notional principal amounts of
these swaps were $6,800,000 and $3,000,000 and the variable interest rate
amounts on related debt were swapped for effective fixed rates of 5.79% and
4.86%, respectively. These swaps are designated as cash flow hedges
and qualify for hedge accounting treatment in accordance with the Derivatives
and Hedging Topic issued by the FASB.
In
accordance with this guidance, the Company’s derivative instruments are recorded
as assets or liabilities at fair value. Changes in fair value
derivatives that have been designated as cash flow hedges are included in
“Unrealized gains (losses) on cash flow hedges” as a component of other
comprehensive income to the extent of the effectiveness of such hedging
instruments. Any ineffective portion of the change in fair value of
the designated hedging instruments would be included in the Consolidated
Statements of Income in interest (income) expense. No such adjustment
to income to reflect hedge ineffectiveness on cash flow hedges was recognized
during the year ended December 31, 2009, and management does not anticipate the
recognition of any such adjustment to income throughout the terms of the
swaps. Gains and losses are reclassified from accumulated other
comprehensive income to the Consolidated Statements of Income in the period the
hedged transaction affects earnings.
Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest expense as interest payments are made on the
Company’s variable-rate debt. Amounts in other comprehensive income will be
reclassified into interest expense over the term of the swap agreements to
achieve the fixed rate on the debt.
Over the
next twelve months, the Company estimates that an additional $216,944 will be
reclassified as an increase to interest expense.
The gross
carrying values of the interest rate contracts as of December 31, 2009 totaled
$117,545 and were recorded in other assets on the Consolidated Balance
Sheets. For the year ended December 31, 2009, the amount of income
recognized on the effective portion of these interest rate contracts in
accumulated other comprehensive income on the condensed Consolidated Balance
Sheets was $77,580. For the year ended December 31, 2009,
there were no losses on the effective portion of these interest rate contracts
reclassified from accumulated other comprehensive loss into interest expense of
the Consolidated Statement of Operations. These interest rate swap
agreements contain no credit-risk-related contingency
features. Associated with these swaps, as of December 31, 2009, the
Company was required to post collateral with a fair value totaling $300,000 to
cover the estimated peak exposure of these swaps. No additional
collateral is or will be required to be posted.
NOTE
W – OTHER COMPREHENSIVE LOSS
Accumulated
other comprehensive loss is comprised of the following at December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Unrealized
gains on available for sale securities, net of taxes
|
$ | (382,716 | ) | $ | (158,088 | ) | ||
Unfunded
pension liability, net of taxes
|
1,040,871 | 1,182,586 | ||||||
Unrealized
holding losses on cash flow hedges, net of taxes
|
(77,580 | ) | - | |||||
Temporary
impairments, net of taxes
|
1,406,905 | - | ||||||
$ | 1,987,480 | $ | 1,024,498 |
Other
comprehensive income (loss) for the years ended December 31, 2009 and 2008 is as
follows:
2009
|
||||||||||||
Before- Tax
|
Net-of-Tax
|
|||||||||||
Amount
|
Taxes
|
Amount
|
||||||||||
Unrealized
holding gains arising during the period
|
$ | 1,185,490 | $ | (403,068 | ) | $ | 782,422 | |||||
Less:
reclassification adjustment for gains recognized in net
loss
|
465,737 | (158,351 | ) | 307,386 | ||||||||
Unrealized
holding gain on available for sale securities, net of
taxes
|
719,753 | (244,717 | ) | 475,036 | ||||||||
Unrealized
holding gain on cash flow hedges
|
117,545 | (39,965 | ) | 77,580 | ||||||||
Net
pension gain
|
214,723 | (73,005 | ) | 141,715 | ||||||||
Total
other comprehensive income, net of taxes
|
$ | 1,052,021 | $ | (357,687 | ) | $ | 694,331 |
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
income
|
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 |
NOTE
X – FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION
FIRST
LITCHFIELD FINANCIAL CORPORATION
|
||||||||
Condensed
Balance Sheets
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 1,335,046 | $ | 8,564,235 | ||||
Investment
in The First National Bank of Litchfield
|
39,390,607 | 33,682,942 | ||||||
Investment
in the First Litchfield Statutory Trusts I, II
|
304,000 | 304,000 | ||||||
Other
assets
|
599,490 | 408,973 | ||||||
Total
Assets
|
$ | 41,629,143 | $ | 42,960,150 | ||||
Liabilities
and Shareholder's Equity
|
||||||||
Liabilities:
|
||||||||
Subordinated
Debt
|
$ | 10,104,000 | $ | 10,104,000 | ||||
Other
liabilities
|
164,015 | 388,886 | ||||||
Total
Liabilites
|
10,268,015 | 10,492,886 | ||||||
Shareholders'
equity
|
31,361,128 | 32,467,264 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 41,629,143 | $ | 42,960,150 |
Condensed
Statements of Operations
|
Years Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Dividends
from subsidary
|
$ | - | $ | 1,425,000 | ||||
Other
expenses, net
|
1,007,343 | 682,166 | ||||||
(Loss)
income before taxes and equity in earnings of subsidiary
|
(1,007,343 | ) | 742,834 | |||||
Income
tax benefit
|
342,497 | 231,936 | ||||||
(Loss)
income before equity in undistributed losses of subsidary
|
(664,846 | ) | 974,770 | |||||
Equity
in undistributed losses of subsidiary
|
(542,563 | ) | (5,465,154 | ) | ||||
Net
loss
|
$ | (1,207,409 | ) | $ | (4,490,384 | ) |
Condensed
Statements of Cash Flows
|
Years Ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (1,207,409 | ) | $ | (4,490,384 | ) | ||
Adjustments
to reconcile net loss
|
||||||||
to
cash (used in) provided by operating activities:
|
||||||||
Equity
in undistributed losses of subsidiary
|
542,563 | 5,465,154 | ||||||
Other,
net
|
(12,624 | ) | 100,477 | |||||
Cash
(used in) provided by operating activities
|
(677,470 | ) | 1,075,247 | |||||
Cash
flows from investing activities:
|
||||||||
Investment
in the First National Bank of Litchfield
|
(5,500,000 | ) | (4,000,000 | ) | ||||
Cash
used in investing activities
|
(5,500,000 | ) | (4,000,000 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Stock
options exercised
|
- | 20,482 | ||||||
Proceeds
from issuance of preferred shares
|
- | 10,000,000 | ||||||
Purchase
of treasury shares
|
- | (227,098 | ) | |||||
Dividends
paid on common and preferred stock
|
(1,051,719 | ) | (1,418,686 | ) | ||||
Cash
(used in) provided by financing activities
|
(1,051,719 | ) | 8,374,698 | |||||
Net
(decrease) increase in cash and due from banks
|
(7,229,189 | ) | 5,449,945 | |||||
Cash
and due from banks at the beginning of the year
|
8,564,235 | 3,114,290 | ||||||
Cash
and due from banks at the end of the year
|
$ | 1,335,046 | $ | 8,564,235 |
NOTE
Y – 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. The following presents the operating results and total
assets for the segments of First Litchfield Financial Corporation for the years
ended December 31, 2009 and 2008. 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, 2009
|
||||||||||||||||
Community
|
Elimination
|
Consolidated
|
||||||||||||||
Banking
|
Leasing
|
Entries
|
Total
|
|||||||||||||
Net
interest income
|
$ | 13,824,576 | $ | 1,506,363 | $ | - | $ | 15,330,939 | ||||||||
Provision
for loan and lease losses
|
3,547,169 | 122,040 | - | 3,669,209 | ||||||||||||
Net
interest income after provision for
|
||||||||||||||||
loan
and lease losses
|
10,277,407 | 1,384,323 | - | 11,661,730 | ||||||||||||
Noninterest
income
|
4,451,846 | 3,512 | - | 4,455,358 | ||||||||||||
Noninterest
expense
|
17,885,616 | 388,757 | - | 18,274,373 | ||||||||||||
(Loss)
income before income taxes
|
(3,156,363 | ) | 999,078 | - | (2,157,285 | ) | ||||||||||
Income
tax (benefit) provision
|
(1,415,041 | ) | 331,687 | - | (1,083,354 | ) | ||||||||||
Noncontrolling
interest
|
133,478 | - | - | 133,478 | ||||||||||||
Net
(loss) income
|
$ | (1,874,800 | ) | $ | 667,391 | $ | - | $ | (1,207,409 | ) | ||||||
Total
assets as of December 31, 2009
|
$ | 489,473,237 | $ | 39,237,629 | $ | (201,949 | ) | $ | 528,508,917 |
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 | ||||||||||||
(Loss)
income before income taxes
|
(7,804,441 | ) | 205,473 | - | (7,598,968 | ) | ||||||||||
Income
tax (benefit) provision
|
(3,175,720 | ) | 63,261 | - | (3,112,459 | ) | ||||||||||
Noncontrolling
interest
|
3,875 | - | - | 3,875 | ||||||||||||
Net
(loss) income
|
$ | (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 |
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There
were no changes in or disagreements with the accountants of the Company during
the 24 month period prior to December 31, 2009, or subsequently.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
(a)
Evaluation of disclosure controls and procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s Exchange Act report
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit of
possible controls and procedures.
The
Company’s Management, under the supervision and with the participation of the
Company’s Chief Executive Officer and the Company’s Chief Financial Officer
evaluated the effectiveness of the Company’s disclosure controls and procedures
as of December 31, 2009. Based on the foregoing, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.
(b)
Management’s Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining, for the Company, adequate
internal control over financial reporting, as such term is defined in Exchange
act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under
the supervision and with the participation of the Chief Executive Officer and
the Chief Financial Officer, we conducted an evaluation of the effectiveness of
our control over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the
framework, management has concluded that our internal control over financial
reporting was effective as of December 31, 2009. There were no
material weaknesses in the Company’s internal control over financial reporting
identified by management.
The
annual report does not include an attestation report of the Company’s
independent registered public accounting firm, regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only Management’s report in this annual
report.
(c)
Changes in Internal Control over Financial Reporting
There was
no change in the Company’s internal control over financial reporting that
occurred during the Company’s fourth quarter of 2009 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
A Meeting
of Stockholders of the Company was held on Friday, February 19, 2010 (the
“Special Meeting”). The results of the vote at the Special Meeting
are as follows.
The
proposal “To approve the Agreement and Plan of Merger by and among Union Savings
Bank, First Litchfield Financial Corporation and The First National Bank of
Litchfield dated as of October 25, 2009, and the transactions contemplated
therein, pursuant to which a subsidiary of Union will merger with and into First
Litchfield with First Litchfield being the surviving corporation, and First
Litchfield will be dissolved, and The First National Bank of Litchfield will
merge with and into Union Savings Bank, resulting in Union Savings Bank being
the sole surviving entity” was approved by more than the required two-thirds of
the shares outstanding by the following vote:
Number of
|
Percent
of
|
Percent
of
|
||||||||||
Shares
|
Shares Voted
|
Shares Outstanding
|
||||||||||
FOR:
|
1,879,774 | 91.0 | % | 79.8 | % | |||||||
AGAINST:
|
63,567 | 3.0 | % | 2.7 | % | |||||||
ABSTAIN:
|
126,525 | 6.0 | % | 5.4 | % |
A second
proposal in the notice of the Special Meeting, “To consider and vote upon a
proposal to approve one or more adjournments of the special meeting, if
necessary, to permit further solicitation of proxies if there are not sufficient
votes at the time of the special meeting, or at any adjournment or postponement
of that meeting, to approve the merger agreement,” was not voted upon because
the required vote to approve the merger agreement had been obtained at the time
of the Special Meeting.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
DIRECTORS
The
following sets forth the name and age of each director, the year in which their
terms of office expire, the year in which each was first elected a director of
the Company and the Bank, and the principal occupation and business experience
of each during the past five (5) years:
Positions
Held with
|
Expiration
Date
|
|
Name and Age
|
the Company
|
of Current Term
|
George
M. Madsen (76)
|
Director
of the Company
|
2010
|
and
of the Bank since 1988 (1)
|
||
Alan
B. Magary (67)
|
Director
of the Company
|
2010
|
and
of the Bank since 2002 (2)
|
||
William
J. Sweetman (63)
|
Director
of the Company
|
2010
|
and
of the Bank since 1990 (3)
|
||
Patricia
D. Werner (63)
|
Director
of the Company
|
2010
|
and
of the Bank since 1996 (4)
|
||
Patrick
J. Boland (62)
|
Director
of the Company
|
2011
|
|
and
of the Bank since 2006 (5)
|
|
John
A. Brighenti (55)
|
Director
of the Company
|
2011
|
|
and
of the Bank since 2006 (6)
|
|
Richard
E. Pugh (66)
|
Director
of the Company
|
2011
|
and
of the Bank since 2006 (7)
|
H.
Ray Underwood (56)
|
Director
of the Company
|
2011
|
and
of the Bank since 1998 (8)
|
||
Joseph
J. Greco (59)
|
President
and Chief Executive
|
2012
|
Officer
and Director of the Company
|
||
and
of the Bank since 2002
|
||
Perley
H. Grimes, Jr. (65)
|
Director
of the Company since
|
2012
|
1988
and of the Bank since 1984 (9)
|
||
Gregory
S. Oneglia (62)
|
Director
of the Company
|
2012
|
and
of the Bank since 2002 (10)
|
________________
1.
|
Mr.
Madsen is retired. He formerly served as President of Roxbury
Associates.
|
2.
|
Mr.
Magary is retired. He formerly served as principal of Magary
Consulting Services through December
1999.
|
3.
|
Mr.
Sweetman is the President and Owner of Dwan & Co.,
Inc.
|
4.
|
Ms.
Werner is the head of the Washington Montessori Association,
Inc.
|
5.
|
Mr.
Boland is retired. He formerly served as a Managing Director of
Credit Suisse Inc.
|
6.
|
Mr.
Brighenti is Vice President of Avon Plumbing &
Heating.
|
7.
|
Mr.
Pugh is retired. He formerly served as President and Chief
Executive Officer of New Milford
Hospital.
|
8.
|
Mr.
Underwood is Secretary and Treasurer of Underwood Services,
Inc.
|
9.
|
Mr.
Grimes is a Partner in the law firm of Cramer &
Anderson.
|
10.
|
Mr.
Oneglia is Vice-Chairman of O&G Industries, Inc. since
2000. Mr. Oneglia served as President of
O&G Industries, Inc. from 1997 to
2000.
|
Director
Independence
Each
director other than Mr. Greco, President and Chief Executive Officer of the
Company and the Bank, is “independent” in accordance with the independence
standards of the NYSE AMEX.
Audit/Compliance
and Security Committee
The
current Audit/Compliance and Security Committee members are: Patrick J. Boland,
John A. Brighenti, Alan B. Magary and H. Ray Underwood. Each of the
Audit/Compliance and Security Committee Members is an “independent director”
under the NYSE AMEX Independence Standards. The Board has determined
that Patrick J. Boland is an “audit committee financial expert.”
Nominating
Committee
The
current Nominating Committee members, all of whom are “independent” in
accordance with the independence standards of the NYSE AMEX, are: Perley H.
Grimes, Jr., George M. Madsen, and H. Ray Underwood.
Stockholder
Nominations
The
Company’s Bylaws include procedures for nominations by
stockholders. A copy of the Company’s Bylaws is available by sending
a written request to or by calling George M. Madsen, Secretary, 13 North Street,
Litchfield, Connecticut 06759; (860) 567-8752. There have been no
changes to these procedures from those described in the proxy statement for the
Company’s 2009 Annual Meeting.
Compensation
Committee
The
Compensation Committee of the Company and the Bank consists solely of
independent directors, in accordance with the NYSE AMEX independence
standards. The current Committee members are: Alan B. Magary, Gregory
S. Oneglia, Richard E. Pugh and Patricia D. Werner. All compensation
is paid by the Bank.
EXECUTIVE
OFFICERS
The
following table sets forth information concerning the current Executive Officers
of the Company and/or the Bank. Unless otherwise indicated, each
person has held the same or a comparable position for the last five
years.
Name and
Age
|
Position Held with the
Company and/or Bank
|
Joseph
J. Greco (59)
|
President,
Chief Executive Officer and Director of the Company and of the Bank since
2002. Prior to joining the Bank and Company, Mr. Greco served as President
and Chief Executive Officer of Marketing Solutions from 1998 to 2002, and
served as Senior Vice President of Hudson United Bancorp from 1993 to
1997.
|
Carroll
A. Pereira (54)
|
Treasurer
of the Company, Senior Vice President and Chief Financial Officer of the
Bank since 1984.
|
Joelene
A. Smith (51)
|
Senior
Vice President and Operations Officer of the Bank since 2003. Prior to
that, Ms. Smith served as Vice President of Operations and Information
Systems and in similar capacities since her employment with the Bank in
1977.
|
Robert
E. Teittinen (59)
|
Senior
Vice President and Senior Loan Officer of the Bank since 2005. Prior to
joining the Bank, Mr. Teittinen was a Senior Vice President with TD
Banknorth and headed up their Waterbury Commercial Lending Unit from 2002
to 2005. He served as Vice President of Webster Bank from 1995 to 2002 and
Vice President of Shawmut National Bank from 1989 to
1995.
|
Frederick
F. Judd, III (45)
|
Senior
Vice President and Senior Trust and Wealth Management Officer of the Bank
since 2006. Prior to joining the Bank, Mr. Judd was a Senior Vice
President and Regional Manager with Webster Financial Advisors from 2003
to 2006. He served as Vice President of Business Development of Webster
Financial Advisors from 1999 to 2003. Prior to that, he served as Vice
President and Managing Partner of Bookwalter & Associates from 1993 to
1999.
|
Matthew
R. Robison (53)
|
Senior
Vice President, Retail Banking of the Bank since 2008. Prior to joining
the Bank, from 2000 to 2007, Mr. Robison was an Executive Vice President
and Regional Executive at Sovereign Bank with responsibilities for retail
administration in the Connecticut and Western Massachusetts
markets.
|
There are
no arrangements or understandings between any of the directors or any other
persons pursuant to which any of the above directors has been selected as
nominee.
There are
no family relationships between any of the directors or any of the Executive
Officers.
CODE
OF ETHICS
The
Company has adopted a Code of Ethics that applies to the Company’s Chief
(Principal) Executive Officer and Chief (Principal) Financial
Officer. Such Code of Ethics may be obtained by any person, without
charge, upon request, by writing to: Carroll A. Pereira, Treasurer, First
Litchfield Financial Corporation, 13 North Street, Litchfield, CT
06759.
Pursuant
to the Company’s written Code of Ethics and Conflicts of Interest Policy, all
business dealings and transactions between the Company and its officers,
directors, principal shareholders and employees or their related interests, must
be conducted in an arm’s-length fashion. Any consideration paid or
received by the Company in such a transaction must be on terms and under
circumstances that are substantially the same or as favorable as those
prevailing at the time for comparable business dealings with unaffiliated third
parties. Related parties of the Company must fully disclose to the
Board of Directors any personal interest they have in matters affecting the
Company.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Exchange Act requires that the Company’s directors, Executive
Officers, and any person holding more than ten percent (10%) of the Company’s
Common Stock file with the SEC reports of ownership and changes in ownership of
the Company’s Common Stock and that such individuals furnish the Company with
copies of the reports.
Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons, the Company believes that during
2009 all of its Executive Officers and directors complied with all Section 16(a)
filing requirements applicable to them.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
SUMMARY
COMPENSATION TABLE
The
following table provides certain information regarding the compensation paid to
the Named Executive Officers of the Company for services rendered in all
capacities during the fiscal year ended December 31, 2008 and
2009. All compensation expense was paid by the Bank.
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Award
|
Non-Equity
Incentive Plan Compensation
|
Non-Qualified
Deferred Compensation Earnings
|
All
Other Compensation
|
Total
|
|||||||||||||||||
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)(1)
|
($)
|
($)
|
||||||||||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||
Joseph
J. Greco – President and Chief Executive Officer of the Bank and
Company
|
2009
|
259,904 | 3,933 | 117,966 | 42,160 | (2) | 423,963 | |||||||||||||||||||
2008
|
255,000 | 3,606 | 110,497 | 43,390 | (3) | 412,493 | ||||||||||||||||||||
Frederick
F. Judd III – Senior Vice President and Senior Trust and Wealth Management
Officer of the Bank
|
2009
|
189,100 | 1,311 | 23,882 | (4) | 214,293 | ||||||||||||||||||||
2008
|
182,000 | 1,202 | 24,165 | (5) | 207,367 | |||||||||||||||||||||
Carroll
A. Pereira – Treasurer of the Company, Senior Vice President and Chief
Financial Officer of the Bank
|
2009
|
132,500 | 1,311 | 21,280 | 21,748 | (6) | 176,839 | |||||||||||||||||||
2008
|
130,000 | 1,202 | 19,603 | 22,378 | (7) | 173,183 | ||||||||||||||||||||
______________________
1.
|
Amount
represents an accrued expense associated with the supplemental employee
retirement plan for the benefit of the Named Executive
Officers.
|
2.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$15,147. Amount also includes fees paid to country clubs of
$5,704, vehicle allowance of $1,709, medical insurance of $4,007, health
savings account of $4,000, dental insurance of $742, life insurance of
$540, long-term disability insurance of $558, executive life insurance of
$5,770, and executive disability insurance of
$3,983.
|
3.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$14,550. Amount also includes fees paid to country clubs of
$6,361, vehicle allowance of $2,067, medical insurance of $3,644, health
savings account of $5,000, dental insurance of $721, life insurance of
$710, long-term disability insurance of $558, executive life insurance of
$5,796, and executive disability insurance of
$3,983.
|
4.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$11,085. Amount also includes medical insurance of $4,008,
health savings account of $4,000, dental insurance of $742, life insurance
of $540, long-term disability insurance of $558, executive life insurance
of $2,475, and executive disability insurance of
$474.
|
5.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$10,637. Amount also includes medical insurance of $3,644,
health savings account of $5,000, dental insurance of $721, life insurance
of $710, long-term disability insurance of $553, executive life insurance
of $2,475, and executive disability insurance of
$425.
|
6.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$7,950. This amount also includes medical insurance of $4,008,
health savings account of
$4,000,
|
dental
insurance of $742, life insurance of $540, long-term disability insurance of
$403, executive life insurance of $3,032, and executive disability insurance of
$1,073.
7.
|
Amount
includes the Bank’s payment of matching contribution to the Bank’s 401(k)
plan for the benefit of the Named Executive Officer of
$7,800. This amount also includes medical insurance of $3,644,
health savings account of $5,000, dental insurance of $721, life insurance
of $710, long-term disability insurance of $398, executive life insurance
of $3,032, and executive disability insurance of
$1,073.
|
Agreements
with Named Executive Officers
There are
no employment contracts between the Company and any of its Named Executive
Officers. There are Change in Control Agreements between the Bank and
its Named Executive Officers. These Change in Control Agreements
provide that in certain instances, if the Named Executive Officer is terminated
or reassigned within twenty-four (24) months following the occurrence of a
change of control (as such term is defined in the Change in Control Agreements
to include the Merger), then such Named Executive Officer shall be entitled to
receive an amount as provided by such agreement equal to twenty-four (24)
months’ salary, reasonable legal fees and expenses incurred by the Named
Executive Officer as a result of such termination or reassignment, and continued
participation in certain benefit plans.
More
information regarding such Change in Control Agreements is provided below under
“Change in Control Agreements”.
Agreements
with Employees
While
there are no employment contracts between the Company and any of its employees,
there are change of control agreements between the Bank and those employees who
have been employed by the Bank for more than ten years. These
agreements provide that in certain instances, if the employee is terminated or
reassigned within six (6) months following the occurrence of a change of control
(as such term is defined in the Change of Control Agreements to include the
Merger), then such individual shall be entitled to receive an amount as provided
by such agreement equal to six (6) months’ salary, reasonable legal fees and
expenses incurred by the employee as a result of such termination or
reassignment, and continued participation in certain benefit plans.
Because
the Merger is deemed a change in control, Union will be obligated to honor the
Change in Control Agreements.
2007
Restricted Stock Plan
On May
17, 2007, shareholders approved the 2007 Restricted Stock Plan (the “Restricted
Stock Plan”). The Restricted Stock Plan provides that up to 25,000 shares of
Common Stock may be issued to the Company’s Executive Officers and other key
employees. Shares vest in five (5) equal installments beginning on
the first anniversary date of the grant, and annually
thereafter. Unvested shares will also immediately vest upon a change
in control, death, or retirement. No shares were issued in
2009. As of December 31, 2009, unvested stock awards held by Named
Executive Officers totaled 2,000. All unvested shares held by the
Executive Officers will vest upon the Merger and each will receive $15.00 for
each share.
Outstanding
Equity Awards at Fiscal Year-End
The following table
sets forth outstanding option awards and
unvested stock awards held by the Company’s Named Executive Officers as
of December 31, 2009.
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of Securities Underlying Unexercised
Options (#) Exercisable
|
Number of Securities Underlying Unexercised
Options (#) Unexercisable
|
Equity Incentive Plan Awards: Number of Securities
Underlying Unexercised Unearned Options
(#)
|
Option Exercise Price
($)
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not
Vested
(#)
|
Market Value of Shares or Units of Stock That Have
Not Vested
($)
|
Equity Incentive Plan Awards: Number of Unearned
Shares, Units or Other Rights That Have Not Vested
($)
|
Equity Incentive Plan Awards: Market or Payout
Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
|
||||||||||||||||||||||||
Joseph
J. Greco
|
- | - | - | - | 1,200 | 17,400 | - | - | |||||||||||||||||||||||||
Frederick
R. Judd, III
|
- | - | - | - | 400 | 5,800 | - | - | |||||||||||||||||||||||||
Carroll A. Pereira
|
- | - | - | - | 400 | 5,800 | - | - |
The unvested stock awards
vest in equal installments on February 12, 2010, 2011, 2012 and 2013 and will
fully vest upon consummation of the Merger.
Option
Exercises and Stock Vested
No stock
options were exercised by Named Executive Officers during the fiscal year ended
December 31, 2009. Under the Restricted Stock Plan, 500 shares of
restricted stock vested during the fiscal year ended December 31,
2009.
401(k)
Plan
The Bank
offers an employee savings plan under Section 401(k) of the Internal Revenue
Code. Under the terms of the Plan, employees may contribute up to 10% of their
pre-tax compensation. For the years ended December 31, 2008 and 2009, 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 $292,457 and
$273,483 for 2009 and 2008, respectively. Pursuant to the Merger
Agreement with Union, the Bank’s 401(k) plan will be terminated and replaced
with Union’s 401(k), in which all Company employees will be eligible to
participate.
Employee
Stock Ownership Plan
In 2005,
the Bank established an Employee Stock Ownership Plan (the “ESOP”), for the
benefit of its eligible employees. The ESOP invests in the Common
Stock of the Company, providing participants with the opportunity to participate
in any increases in the value of Common Stock. Under the ESOP,
eligible employees, who are substantially all full-time employees, may be
awarded shares of the Common 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 ESOP. That
amount of compensation divided by the fair value of the Common Stock at the date
the shares are transferred to the ESOP determines the number of shares
contributed to the ESOP. Dividends are allocated to participant
accounts in proportion to their respective shares. There were no
amounts charged to operations during 2008 or 2009 under the ESOP. The
Company did not contribute any shares to the ESOP during 2008 or
2009. Under the terms of the ESOP, the Company is required to
repurchase shares from participants upon their death or termination of
employment. The fair value of the shares of Common Stock subject to
repurchase at December 31, 2009 is less than $25,000.
Participants
in the ESOP, including the Named Executive Officers, will receive $15.00 per
share of Company common stock allocated to their accounts in the ESOP upon the
Merger.
POST
EMPLOYMENT COMPENSATION
Noncontributory
Defined Benefit Pension Plan
The Bank
has a noncontributory defined benefit pension plan (the “Pension Plan”) that
covers substantially all employees who have completed one year of service and
have attained age 21. The benefits are based on years of service and
the employee’s compensation during the last five (5) years of
employment. Prior to the Pension Plan’s curtailment described below,
the Bank’s funding policy was to contribute amounts to the Pension 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
Pension Plan was frozen effective May 1, 2005. No new employees will
be eligible for the Pension Plan and no further benefits will be
earned. Benefits payable at normal retirement age (generally age 65)
to an existing participant will be based on service and participation credit and
earnings history through May 1, 2005.
Pension
benefits are based upon average salary (determined as of each November 15th)
during the highest five (5) consecutive plan years of services prior to the date
the Pension Plan was frozen. The amount of the annual benefit is
1.55% of average salary per year of service (to a maximum of 25
years). This benefit formula may be modified to conform to changes in
the pension laws. Internal Revenue Code Section 401 (a)(17) limited
earnings used to calculate qualified plan benefits to $210,000 for
2005. This limit was used in the preparation of the following
table.
Name
|
Plan Name
|
Number of Years Credited
Service
(#)
|
Present Value of Accumulated
Benefit
($)
|
Payments During Last Fiscal
Year
($)
|
||||||||||
(a)
|
(b)
|
(c)
|
(d)(1)
|
(e)
|
||||||||||
Joseph J. Greco
|
First National Bank of Litchfield Pension
Plan
|
2 | 18,431 | 0 | ||||||||||
Carroll A. Pereira
|
First National Bank of Litchfield Pension
Plan
|
19 | 121,070 | 0 |
|
1.
|
Column
(d) – assumptions for calculating the Present Value of Accumulated
Benefit:
|
Discount rate:
|
5.85%
|
Mortality table:
|
Prescribed-combined
Mortality projected to 2015 used for postretirement only; no
pre-retirement mortality assumption was
included.
|
Pursuant
to the Merger Agreement, all benefits under the Pension Plan will be paid by
Union in accordance with the terms of the Pension Plan after the
Merger.
Long
Term Incentive and Deferred Compensation Plans
The Bank
has entered into Long Term Incentive Retirement Agreements, as amended (the
“Executive Incentive Agreements”) with its Named Executive Officers to encourage
the Named Executive Officers to remain employees of the Bank. The
Executive Incentive Agreements provide for the award of deferred bonuses of from
4.6% to 16.1% of the Named Executive Officer’s base salary if the Bank’s
earnings growth is at least 5% and its return on equity is at least 11%; the
formula for such awards may be revised by the Board of Directors. Amounts are
awarded after the end of each fiscal year. No awards were earned with
respect to the Company’s 2008 performance. Tax-deferred earnings on
such awards accrue annually at a rate equivalent to the rate of appreciation in
the Company’s stock price in the preceding year, with a guaranteed minimum of 4%
and a maximum of 15%. Such awards are immediately vested with respect
to 20% of the award and an additional 20% vests for each additional year of
service and the award is 100% vested upon a change in control, upon termination
due to disability, at normal retirement of 65 or retirement at age 55 with 20
years of service. If the Named Executive Officer dies while serving
as an Executive Officer of the Bank, the amount payable to the participant’s
beneficiary is equivalent to the participant’s projected retirement benefit (as
defined in the Executive Incentive Agreements). Upon retirement, the
Named Executive Officer’s total deferred compensation, including earnings
thereon, may be paid out in one lump sum, or paid in equal annual installments
over fifteen (15) years, during which payout period earnings continue to accrue
at the rate in effect at the date of retirement; in the case of early
retirement, the Named Executive Officer may elect to defer commencement of the
payment of benefits, during which period earnings continue to accrue at the rate
in effect at the date of early retirement. All provisions of the
Executive Retirement Agreements have been structured to be compliant with the
provisions of Section 409A of the Internal Revenue Code. The Bank has
amended its Executive Retirement Agreements with the Named Executive Officers to
make the Agreements compliant with the provisions of the ARRA by prohibiting any
Golden Parachute while any TARP CPP funds received by the Company are
outstanding. See discussion regarding the ARRA set forth
below.
Deferred
amounts will be paid by Union in accordance with the terms of the Executive
Incentive Agreements upon the Merger.
In
concert with the Executive Incentive Agreements and the Director Incentive
Agreements described below, the Bank has invested in universal cash surrender
value life insurance with a cash surrender value of $10.8 million as of December
31, 2009. The insurance policies, which were acquired on the lives of
all but two (2) of the Bank’s Executive Officers, four (4) non-senior officers
and all but one (1) of the Bank’s directors, are designed to recover the costs
of the Bank’s Executive and Director Incentive Agreements. The death
benefits of the policies have been structured to indemnify the Bank against the
death benefit provision of the Executive and Director Incentive
Agreements. The policies were paid with a single
premium. Policy cash values will earn interest at a current rate of
approximately 4.0% and policy mortality costs will be charged against the cash
value monthly. There are no load or surrender charges associated with
the policies.
Supplemental
Retirement Plan
The Bank
has entered into Supplemental Retirement Agreements with Joseph J. Greco and
Carroll A. Pereira. At December 31, 2009, accrued supplemental
retirement benefits of $484,002 are recognized in the Company’s balance sheet
related to the Supplement Retirement Agreement for these Executive
Officers. Upon retirement, the Supplemental Retirement Agreements
provide for payments to these individuals ranging from 10% to 25% of the
three-year average of the Executive Officer’s compensation prior to retirement
for the life expectancy of the Executive Officer at the retirement
date. All provisions of the Supplemental Retirement Agreements have
been structured to be compliant with the provisions of Section 409A of the
Internal Revenue Code. The Bank has amended its Supplemental
Retirement Agreements with the Named Executive Officers to make the Agreements
compliant with the provisions of the ARRA by prohibiting any Golden Parachute
while any TARP funds received by the Company are outstanding. See
discussion regarding the ARRA set forth below.
Upon the
Merger, any unvested benefits will vest immediately and these obligations will
be assumed by Union.
Change
in Control Agreements
Pursuant
to the Change in Control Agreements between the Company and each of the Named
Executive Officers, each Named Executive Officer is eligible to receive payments
and other benefits, subject to certain conditions described below, in the event
the Executive Officer is terminated, involuntarily reassigned more that fifty
(50) miles from Litchfield, Connecticut, or has an involuntary reduction in
compensation, duties or responsibilities during the twenty-four (24) month
period following a change in control.
For
purposes of the Change in Control Agreements, a “Change in Control” means the
occurrence of one or more of the following events:
|
(a)
|
The
acquisition of fifty percent (50%) or more of any class of equity
securities of the Company by any person (or persons working in concert) or
entity after the date hereof;
|
|
(b)
|
The
acquisition of fifty percent (50%) or more of any class of equity
securities of the Bank by any person or entity other than the
Company;
|
|
(c)
|
A
merger, consolidation or reorganization to which the Bank or the Company
is a party, if, as a result thereof, individuals who were directors of the
Bank or Holding Company, immediately before such transaction
shall cease to constitute a majority of the Board of Directors of the
surviving entity;
|
|
(d)
|
A
sale of all or substantially all of the assets of the Bank or the Company
to another party;
|
|
(e)
|
The
assumption of all or substantially all of the deposits of the Bank by
another party other than the Federal Deposit Insurance Corporation;
or
|
|
(f)
|
During
any twenty-four (24) month period, individuals who at the beginning of
such period constitute the Board of Directors of the Bank and the Company,
cease for any reason (other than death or disability) to constitute at
least a majority thereof unless the election or the nomination for
election by the stockholders of the Bank and the stockholders of Company,
respectively, of each new director was approved by a vote of at least a
majority of the directors of the Bank or of Company as applicable, then
still in office who were directors of the Bank or the Company, as
applicable, at the beginning of the
period.
|
The
circumstances in which and the estimated amounts to be paid to the Named
Executive Officers under the Change in Control Agreements are as
follows:
|
(a)
|
If,
within twenty-four (24) months after a Change in Control as defined above,
shall have occurred, the Named Executive Officer’s employment with the
Bank terminates or is reassigned (except by an agency acting with proper
jurisdiction, or by a board of directors for cause or as a result of
death, retirement or disability), then the Bank and/or its successor shall
pay the Named Executive Officer within five (5) days after the date of
termination an amount equal to the sum
of:
|
|
(i)
|
Two
(2) years of the Named Executive Officer’s annual compensation based upon
the most recent aggregate base salary paid to the Named Executive Officer
in the twelve (12) month period immediately preceding his/her termination
or reassignment less amounts previously paid to the Named Executive
Officer from the date of the Change in Control;
plus
|
|
(ii)
|
Reasonable
legal fees and expenses incurred by the Named Executive Officer as a
result of such termination or reassignment (including all such fees and
expenses, if any, incurred in contesting or disputing any such termination
or reassignment or in seeking to obtain or enforce any right or benefit
provided for by the Change in Control
Agreement).
|
|
(b)
|
The
Bank and/or its successors shall maintain in full force and effect for the
Named Executive Officer’s continued benefit, for the two (2) year period
beginning upon a Change in Control, all life insurance, medical, health
and accident and disability policies, plans, programs or arrangements
which were in effect immediately prior to the Change in
Control.
|
|
(c)
|
In
the event the Named Executive Officer should obtain other employment or be
compensated for services rendered to any depository or lending
institution, then any payments provided for in the Change in Control
Agreement shall be reduced by any compensation earned by the Named
Executive Officer as the result of employment or consulting after the date
of termination or reassignment.
|
|
(d)
|
It
is the intention of the parties to the Change in Control Agreements that
no payments by the Bank to or for the Named Executive Officer’s benefit
under the Agreements shall be non-deductible to the Bank by reason of the
operation of Section 280G of the Internal Revenue
Code. Accordingly, if by reason of the operation of said
Section 280G of the Internal Revenue Code, any such
payments
|
exceed
the amount that can be deducted by the Bank, the amount of such payments shall
be reduced to the maximum that can be deducted by the Bank. To the
extent that payments in excess of the amount that can be deducted by the Bank
have been made to and for the Named Executive Officer’s benefit, they shall be
refunded with interest at the applicable rate provided under Section 1274(d) of
the Internal Revenue Code, or at such other rate as may be required in order
that no such payment to or for the Named Executive Officer’s benefit shall be
non-deductible pursuant to Section 280G of the Internal Revenue
Code. Any payments made under the Change in Control Agreements that
are not deductible by the Bank as result of losses that have been carried
forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount.
|
(e)
|
The
Executive Agreements provide that they shall be administered in a manner,
and all provisions shall be interpreted to be, compliant with Section 409A
of the Internal Revenue Code.
|
The
Company participated in the TARP CPP. Notwithstanding the provisions
of the Change in Control Agreements, so long as TARP CPP funds are outstanding,
the Company is precluded from making a payment which constitutes a “Golden
Parachute” payment as defined in the ARRA. The Company has amended
its Change in Control Agreements with the Named Executive Officers to make the
Agreements compliant with the provisions of the ARRA by prohibiting any Golden
Parachute while any TARP CPP funds received by the Company are
outstanding.
Because
the Merger is deemed a change in control, Union will be obligated to honor the
Change in Control Agreements.
BOARD
OF DIRECTORS COMPENSATION
In 2009,
each director of the Company who was not an employee of the Bank, received $400
for each Board meeting attended and $350 for each committee meeting
attended. The Chairman of the Board of Directors, Mr. Boland, also
received an annual retainer of $7,250 and each other non-officer director of the
Company also received an annual retainer of $6,000 for serving as a
director. Directors who are employees of the Bank receive no
additional compensation for their services as members of the Board or any Board
committee.
Director
Compensation Table
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards(3)
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
|
All
Other Compensation
|
Total
|
|||||||||||||||||||||
($)
|
(1) |
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||
Patrick
J. Boland
|
24,500 | - | - | - | - | - | 24,500 | |||||||||||||||||||||
John
A. Brighenti
|
16,300 | - | - | - | - | - | 16,300 | |||||||||||||||||||||
Joseph
J. Greco
|
- | (2) | - | - | - | - | - | - | ||||||||||||||||||||
Perley
H. Grimes, Jr.
|
18,400 | - | - | - | - | - | 18,400 | |||||||||||||||||||||
George
M. Madsen
|
15,300 | - | - | - | - | - | 15,300 | |||||||||||||||||||||
Alan
B. Magary
|
17,400 | - | - | - | - | - | 17,400 | |||||||||||||||||||||
Gregory
S. Oneglia
|
13,550 | - | - | - | - | - | 13,550 | |||||||||||||||||||||
Richard
E. Pugh
|
18,100 | - | - | - | - | - | 18,100 | |||||||||||||||||||||
William
Sweetman
|
11,300 | - | - | - | - | - | 11,300 | |||||||||||||||||||||
H.
Ray Underwood
|
20,100 | - | - | - | - | - | 20,100 | |||||||||||||||||||||
Patricia
D. Werner
|
12,400 | - | - | - | - | - | 12,400 |
_______________
1.
|
All
directors’ fees are paid in cash.
|
2.
|
As
an officer of the Company and Bank, Director Greco received no
compensation for his services as a
Director.
|
3.
|
No
options were awarded in 2009 pursuant to the 1994 Stock Option Plan for
Officers and outside Directors and there were no options outstanding at
December 31, 2009.
|
Long
Term Incentive and Deferred Compensation Plans
The Bank
has entered into Long Term Incentive Retirement Agreements with each of its
directors (the “Director Incentive Agreements”) to reward past service and
encourage continued service of each director.
The
Director Incentive Agreements award a director with the right to earn and defer
the receipt of a bonus in an amount or percentage ranging from 14.5% to 50% of
the director’s retainer, meeting fees and committee fees, depending on the
return on equity and earnings growth in the preceding year, provided that there
is no award if the return on equity in the preceding year is less than 11% and
earnings growth in the preceding year is less than 5%. Earnings
accrue annually on such amounts at a rate equivalent to the appreciation in the
Company’s stock price in the preceding year, with a guaranteed minimum of 4% and
a maximum of 15%. No awards were earned with respect to the Company’s
2007 performance. All amounts in the Director Incentive Agreements
are immediately vested with respect to 20% of the award and an additional 20% is
vested for each additional year of service, with 100% vesting upon a change in
control, at normal retirement at age 72, regardless of years of service, or
retirement prior to age 72 with at least ten years of service. If the
director becomes disabled prior to retirement, the director will receive the
entire balance in their deferral account at termination of
employment. Upon retirement, the director’s total deferred
compensation, including earnings thereon, may be paid out in one lump sum, or
paid in equal annual installments over ten (10) years, during which payout
period earnings continue to accrue as stated above. All provisions of
the Director Incentive Agreements have been structured to be compliant with the
provisions of Section 409A of the Internal Revenue Code.
Deferred
amounts will be paid by Union in accordance with the terms of the Director
Incentive Agreements after the Merger.
Directors’
Fees Plan
The Bank
previously offered directors the option to defer their directors’
fees. If deferred, the fees are held in a trust account with the
Bank. The Bank has no control over the trust. The market
value of the related trust assets and corresponding liability was $112,453 and
$93,234 at December 31, 2009 and 2008, respectively. During 2005, the
plan was amended to cease the deferral of any future fees. Amounts
previously deferred remain in the trust.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
SECURITY OWNERSHIP OF 5% HOLDERS OF COMMON
STOCK
The
following table includes certain information as of February 16, 2010 regarding
the only shareholders (the “Principal Shareholder”) of the Company known to be a
beneficial owner of five percent (5%) or more of the Company’s Common
Stock. Percentages are based on 2,356,875 shares of the Company’s
Common Stock issued and outstanding as of March 31, 2010.
Name
and Address
|
Number of Shares and Nature
|
Percent of Outstanding
|
||||||
of Beneficial Owner
|
of Beneficial Ownership (1)
|
Common Stock
|
||||||
William
J. Sweetman
|
123,568 | (2) | 5.2 | % | ||||
101
Talmadge Lane
|
||||||||
Litchfield,
CT 06759
|
||||||||
Loeb
Arbitrage Management LP
|
140,059 | (3) | 5.9 | % | ||||
Loeb
Arbitrage Fund
|
||||||||
Loeb
Offshore Fund Ltd.
|
||||||||
61
Broadway
|
||||||||
New
York, NY 10006
|
_____________________
1. The
definition of beneficial owner includes any person who, directly or indirectly,
through any contract, agreement or understanding, relationship or otherwise, has
or shares voting power or investment power with respect to such security or has
the right to acquire such voting or investment power within 60
days.
2. As
reported in the amendment to Schedule 13G filed with the SEC on February 16,
2010. Includes 14,347 shares owned by an estate as to which Mr.
Sweetman has voting power as fiduciary of said estate.
3. As
reported in the Schedule 13G filed with the SEC on February 12,
2010.
SECURITY
OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The
following table sets forth the number of shares and percentage of Common Stock
beneficially owned by each current Director, each of the Executive Officers, and
the Directors and Executive Officers as a group at March 31,
2010. Percentages are based on 2,356,875 shares of the Company’s
Common Stock issued and outstanding as of March 31, 2010.
Name
of
Beneficial Owner
|
Common Shares Beneficially Owned
at March 31, 2010 (1)
|
Percent of Class
|
||||||
Joseph
J. Greco
|
7,494 | (2)(3) | * | |||||
Patrick
J. Boland
|
2,021 | * | ||||||
John
A. Brighenti
|
220 | * | ||||||
Perley
H. Grimes, Jr.
|
15,559 | * | ||||||
George
M. Madsen
|
13,985 | * | ||||||
Alan
B. Magary
|
266 | (4) | * | |||||
Gregory
S. Oneglia
|
23,749 | (4) | 1.0 | % | ||||
Richard
E. Pugh
|
54 | * | ||||||
William
Sweetman
|
123,568 | (5) | 5.2 | % | ||||
H.
Ray Underwood
|
6,500 | * | ||||||
Patricia
D. Werner
|
4,866 | * | ||||||
Frederick
R. Judd, III
|
762 | (6) | * | |||||
Carroll
A. Pereira
|
1,645 | (4)(6)(7) | * | |||||
Matthew
R. Robison
|
0 | * | ||||||
Joelene
E. Smith
|
853 | (6)(8) | * | |||||
Robert
E. Teittinen
|
510 | (6) | * | |||||
All
Directors and Executive
|
||||||||
Officers
as a group (16 persons)
|
202,052 | 8.6 | % |
____________________________
1. The
definition of beneficial owner includes any person who, directly or indirectly,
through any contract, agreement or understanding, relationship or otherwise has
or shares voting power or investment power with respect to such security or has
the right to acquire such voting or investment power within 60
days.
2. Includes
1,200 shares of restricted Common Stock.
3. Includes
162 shares held in the Bank’s ESOP.
4. Includes
shares owned by, or as to which voting power is shared with, spouse or
children.
5. Includes
14,347 shares owned by an estate as to which Mr. Sweetman has voting power as
fiduciary of said estate.
6. Includes
400 shares of restricted Common Stock.
7. Includes
95 shares held in the Bank’s ESOP.
8. Includes
71 shares held in the Bank’s ESOP.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following schedule provides information with respect to compensation plans under
which equity securities are authorized for issuance as of December 31,
2009:
Equity
Compensation Plan Information
Number
of
|
|||
securities to be
|
|||
issued
upon
|
|
Number of securities
|
|
exercise
of
|
Weighted
average
|
remaining
available for
|
|
outstanding
|
exercise
price
|
future
issuance under
|
|
options,
|
of
outstanding
|
equity compensation plans
|
|
warrants
and
|
options,
warrants
|
(excluding
securities
|
|
Plan Category
|
rights
|
and rights
|
reflected in Column (a))
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans
|
0
|
N/A
|
0
|
approved by shareholders
|
|||
Equity
compensation plans not
|
0
|
N/A
|
0
|
approved by shareholders
|
|||
Total
|
0
|
N/A
|
0
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The Bank
has had transactions in the ordinary course of its business with directors,
Executive Officers, principal shareholders and their associates on substantially
the same terms, including interest rates and collateral on loans, as those
prevailing at the same time for comparable transactions with others, on terms
that do not involve more than the normal risk of collectibility or present other
unfavorable features. The aggregate dollar amount of these loans was
$2,077,873 and $1,650,107 at December 31, 2008 and 2009,
respectively. During 2009, $783,493 of new loans were made and
repayments totaled $1,235,943. At December 31, 2009, all loans to
Executive Officers, directors, principal shareholders and their associates were
performing in accordance with the contractual terms of the loans.
Perley H.
Grimes, Jr., a director of the Company and the Bank, is a partner in Cramer
& Anderson, a law firm which renders certain legal services to the Bank in
connection with various matters. During 2008 and 2009, the Bank paid
Cramer & Anderson $8,500 and $7,000, respectively, for legal services
rendered, a portion of which was reimbursed to the Bank by third
parties.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
During
the period covering the fiscal years ended December 31, 2008 and 2009, McGladrey
& Pullen, LLP and RSM McGladrey, Inc., (a separate entity which performs
non-audit services,) performed the following professional services:
First Litchfield Financial
Corporation
Principal Accountant Fees and
Services
Years Ended December 31, 2009 and
2008
Description
|
2009
|
2008
|
||||||
Audit Fees, consist of fees for professional services
rendered for the audit of the consolidated financial statements and review
of financial statements included in quarterly reports on Form 10-Q,
services connected with statutory and regulatory filings or engagements
and FHLB Qualified Collateral Report.
|
$ | 348,762 | $ | 260,653 | ||||
Audit Related Fees are fees principally for professional services
rendered for the audit of the Bank’s 401(k) Plan.
|
$ | 19,652 | $ | 23,891 | ||||
Tax Service Fees consist of fees for tax return preparation, IRS
audit consultations, merger related
consultation, planning and tax advice
for the Company.
|
$ | 41,872 | $ | 47,284 | ||||
All Other Fees consist of fees for consultations on the Company’s
Sarbanes-Oxley Section 404 implementation during 2008 and 2009 and
merger-related consultation.
|
$ | 34,579 | $ | 2,000 |
Independence
of Principal Accountant
The Audit
Committee of the Board of Directors of the Company has considered and determined
that the provision of services by McGladrey & Pullen, LLP relating to audit
related services, tax services and other services reported above, is compatible
with maintaining the independence of such accountants.
Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
Accountant
The Audit
Committee’s policy is to require pre-approval of all audit and non-audit
services provided by the independent accountants, other than those listed under
the de minimus exception. These services may include audit services,
audit-related services, tax services and other services. Pre-approval
is detailed as to a particular service or category of services and is generally
subject to a specific budget. The Audit Committee has delegated
pre-approval authority to its Chairman when expeditious delivery of services is
necessary. The independent accountants and management are required to
report to the full Audit Committee the extent of services provided by
independent auditors in accordance with this pre-approval and the fees for the
services performed to date. All of the audited-related fees, tax
fees, or other fees paid in 2009 were approved per the Audit Committee’s
pre-approval policies.
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
(a)
(b)
|
Exhibits
|
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
|
Junior
Subordinated Indenture dated as of 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 Current Report on Form 8-K/A as filed with
the Securities and Exchange Commission on June 30,
2006.
|
4.2
|
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 Current Report
on Form 8-K/A as filed with the Securities and Exchange Commission on June
30, 2006.
|
4.3
|
Form
of Junior Subordinated Note due 2036. Exhibit is incorporated
by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K/A
as filed with the Securities and Exchange Commission on June 30,
2006.
|
4.4
|
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 Form 10-QSB for the quarter ended June 30, 2003 as
filed with the Securities and Exchange Commission on August 14,
2003.
|
4.5
|
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 Form 10-QSB for the quarter ended
June 30, 2003 as filed with the Securities and Exchange Commission on
August 14, 2003.
|
4.6
|
Warrant
to purchase Common Stock dated December 12, 2008. Exhibit is
incorporated by reference to Exhibit 4.1 set forth in the Company’s
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on December 18, 2008.
|
10.1
|
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.
|
10.2
|
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.
|
10.3
|
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.
|
10.4
|
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 14, 2003.
|
10.5
|
Executive
Change in Control Agreement between Joseph J. Greco and the Company and
the Bank dated May 26, 2006. Exhibit is incorporated by
reference to Exhibit 10.64 set forth in the Company’s 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.
|
10.6
|
Executive
Change in Control Agreement between Carroll A. Pereira and the Company and
the Bank dated May 26, 2006. Exhibit is incorporated by
reference to Exhibit 10.65 set forth in the Company’s 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.
|
10.7
|
Executive
Change in Control Agreement between Joelene E. Smith and the Company and
the Bank dated May 26, 2006. Exhibit is incorporated by
reference to Exhibit 10.66 set forth in the Company’s 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.
|
10.8
|
Executive
Change in Control Agreement between Robert E. Teittinen and the Company
and the Bank dated May 26, 2006. Exhibit is incorporated by
reference to Exhibit 10.67 set forth in the Company’s 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.
|
10.9
|
Executive
Change in Control Agreement between Frederick F. Judd, III and the Company
and the Bank dated May 26, 2006. Exhibit is incorporated by
reference to Exhibit 10.68 set forth in the Company’s 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.
|
10.10
|
Form
of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.69 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.
|
10.11
|
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.
|
10.12
|
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 30, 2008 (File No.
333-144951).
|
10.13
|
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 set forth in the Company’s Current Report on
Form 8-K as filed with the Securities and Exchange Commission on November
24, 2008.
|
10.14
|
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
set forth in the Company’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 24,
2008.
|
10.15
|
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
set forth in the Company’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on November 24,
2008.
|
10.16
|
Form
of Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered with Matthew R. Robison. Exhibit is
incorporated by reference to Exhibit 10.39 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.17
|
Form
of Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered with Joelene E. Smith. Exhibit is
incorporated by reference to Exhibit 10.40 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.18
|
Form
of Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered with Robert E. Teittinen. Exhibit is
incorporated by reference to Exhibit 10.41 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.19
|
Form
of First Amended and Restated Supplemental Executive Retirement Agreement
dated November 20, 2008 entered with Joelene E. Smith. Exhibit
is incorporated by reference to Exhibit 10.42 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.20
|
Form
of Amended and Restated Director Incentive Retirement Agreement dated
November 20, 2008 entered with Richard E. Pugh. Exhibit is
incorporated by reference to Exhibit 10.46 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.21
|
Form
of Amended and Restated Executive Incentive Retirement Agreement dated
November 20, 2008 entered with Patrick J. Boland. Exhibit is
incorporated by reference to Exhibit 10.47 set forth in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008
as filed with the Securities and Exchange Commission on April 23,
2009.
|
10.22
|
Agreement
and Plan of Merger dated as of October 25, 2009 by and among Union Savings
Bank, First Litchfield Financial Corporation and The First National Bank
of Litchfield. Exhibit is incorporated by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on October 28,
2009.
|
List
of Subsidiaries of First Litchfield Financial
Corporation.
|
Consent
of McGladrey & Pullen, LLP.
|
24.
|
Powers
of Attorney. See Signature
Page.
|
Certification
of Chief Executive Officer of the Company pursuant to Rule
13a-14(a)/15d-14(a).
|
Certification
of Chief Financial Officer of the Company pursuant to Rule
13a-14(a)/15d-14(a).
|
Certification
of Chief Executive Officer and the Chief Financial Officer of the Company
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
|
Certification
of Chief Executive Officer of the Company pursuant to §111(b)(4) of the
Emergency Economic Stabilization Act of 2008, as
amended.
|
Certification
of Chief Financial Officer of the Company pursuant to §111(b)(4) of the
Emergency Economic Stabilization Act of 2008, as
amended.
|
(c)
|
Financial
Statement Schedules.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March
31, 2010
|
FIRST
LITCHFIELD FINANCIAL CORPORATION
|
||
By:
|
/s/ Joseph J. Greco
|
||
Joseph
J. Greco, President and
|
|||
Chief
Executive Officer
|
|||
Dated: March
31, 2010
|
By:
|
/s/ Carroll A. Pereira
|
|
Carroll
A. Pereira,
|
|||
Principal
Accounting Officer
|
|||
and
Treasurer
|
POWER
OF ATTORNEY
Know All
Persons by These Presents, that each person whose signature appears below
constitutes and appoints Joseph J. Greco and Carroll A. Pereira and each of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities to sign any and all amendments to this Form 10-K, and
to file same, with all exhibits thereto, and other documents in connection
therewith, with full power and authority to do and perform each and every act
and thing requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Title
|
Date
|
|
/s/ Joseph J. Greco
|
President,
Chief Executive
|
03/31/10
|
|
Joseph
J. Greco
|
Officer
and Director
|
||
/s/ Patrick J. Boland
|
Director
|
03/31/10
|
|
Patrick
J. Boland
|
|||
/s/ John A. Brighenti
|
Director
|
03/31/10
|
|
John
A. Brighenti
|
|||
/s/ Perley H. Grimes, Jr.
|
Director
|
03/31/10
|
|
Perley
H. Grimes, Jr.
|
|||
/s/ George M. Madsen
|
Director
|
03/31/10
|
|
George
M. Madsen
|
|||
/s/ Alan B. Magary
|
Director
|
03/31/10
|
|
Alan
B. Magary
|
|||
/s/ Gregory Oneglia
|
Director
|
03/31/10
|
|
Gregory
Oneglia
|
|||
/s/ Richard E. Pugh
|
Director
|
03/31/10
|
|
Richard
E. Pugh
|
|||
/s/ William J. Sweetman
|
Director
|
03/31/10
|
|
William
J. Sweetman
|
|||
/s/ H. Ray Underwood
|
Director
|
03/31/10
|
|
H.
Ray Underwood
|
|||
/s/ Patricia D. Werner
|
Director
|
03/31/10
|
|
Patricia
D. Werner
|
46