U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
First Litchfield Financial Corporation
(Name of Small Business Issuer in Its Charter)
Delaware 06-1241321
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13 North Street, Litchfield, CT 06759
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (860) 567-8752
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business of the Company
First Litchfield Financial Corporation, a Delaware corporation (the
"Company"), is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended. The Company was formed in 1988 and has one banking
subsidiary, The First National Bank of Litchfield (the "Bank"), a national
banking association organized under the laws of the United States. The Bank and
its predecessors have been in existence since 1814. The principal executive
office of the Company is located at 13 North Street, Litchfield, CT 06759, and
the telephone number is (860) 567-8752. The Company owns all of the outstanding
shares of the Bank. The Bank has one subsidiary, Lincoln Corporation, which is a
Connecticut 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 Bank engages in a wide range of commercial and personal banking
activities, including accepting demand deposits, (including Money Market
Accounts), accepting savings and time deposit accounts, making secured and
unsecured loans to corporations, individuals, and others, issuing letters of
credit, originating mortgage loans, and providing personal and corporate trust
services. The business of the Bank is not significantly affected by seasonal
factors.
The Bank's lending services include commercial, real estate, and consumer
installment loans. Revenues from the Bank's lending activities constitute the
largest component of the Bank's operating revenues. The loan portfolio
constitutes the major earning asset of the Bank and offers the best alternative
for maximizing interest spread above the cost of funds. The Bank's loan
personnel have the authority to extend credit under guidelines established and
approved by the Board of Directors. Any aggregate credit which exceeds the
authority of the loan officer is forwarded to the loan committee for approval.
The loan committee is composed of various experienced loan officers and Bank
directors. All aggregate credits that exceed the loan committee's lending
authority are presented to the full Board of Directors for ultimate approval or
denial. The loan committee not only acts as an approval body to ensure
consistent application of the Bank's loan policy, but also provides valuable
insight through communication and pooling of knowledge, judgment, and experience
of its members.
The Bank's primary lending area generally includes towns located in
Litchfield County.
The Bank's Trust Department provides a wide range of personal and corporate
trust and trust- related services, including serving as executor of estates, as
trustee under testamentary and intervivos trusts and various pension and other
employee benefit plans, as guardian of the estates of minors and incompetents,
and as escrow agent under various agreements.
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<PAGE>
The Bank introduces new products and services as permitted by the
regulatory authorities or desired by the public. In 1996, the Bank opened a
supermarket branch in Price Chopper in Torrington, which is open seven days a
week, with extended hours and features a 24 hour automated teller machine. 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 (www.fnbl.com). The Bank is now offering PC banking
via the Internet at its Website.
Competition
In Connecticut generally, and in the Bank's primary service area, there is
intense competition in the commercial banking industry. The Bank's market area
consists principally of towns located in Litchfield County, although the Bank
also competes with other financial institutions in surrounding counties in
Connecticut in obtaining deposits and providing many types of financial
services. The Bank competes with larger regional banks for the business of
companies located in the Bank's market area. The Bank also competes with savings
and loan associations, credit unions, finance companies, personal loan
companies, money market funds and other non-depository financial intermediaries.
Many of these financial institutions have resources many times greater than
those of the Bank. In addition, new financial intermediaries such as
money-market mutual funds and large retailers are not subject to the same
regulations and laws that govern the operation of traditional depository
institutions.
Changes in federal and state law have resulted in and are expected to
continue to result in increased competition. The reductions in legal barriers to
the acquisition of banks by out-of-state bank holding companies resulting from
implementation of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and other recent and proposed changes are expected to continue to
further stimulate competition in the markets in which the Bank operates,
although it is not possible to predict the extent or timing of such increased
competition.
Lending Activities
The Bank's lending policy is designed to correspond with its mission of
remaining a community-oriented bank. The loan policy sets forth accountability
for lending functions in addition to standardizing the underwriting, credit and
documentation procedures. The Bank's target market regarding lending is in the
towns in which a Bank office is located and contiguous towns. The typical loan
customer is an individual or small business which has a deposit relationship
with the Bank. The Bank strives to provide an appropriate mix in its loan
portfolio of commercial loans and loans to individual consumers.
Loan Portfolio
The Bank's loan portfolio at September 30, 1999 and December 31, 1998 -
1994 was comprised of the following categories based upon the nature of
collateral:
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<PAGE>
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
December 31,
----------------------------------------------------
September 30,
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial $ 6,869 $ 4,804 $ 5,680 $ 5,055 $ 5,078 $ 4,417
Real Estate
Construction 6,815 5,716 2,229 4,159 2,199 2,093
Residential 113,504 112,859 105,489 96,441 88,274 84,213
Commercial 19,209 16,555 17,326 14,982 11,680 13,253
Installment 30,070 12,413 11,058 8,936 6,990 5,035
Other 91 91 65 203 241 27
-------- -------- -------- -------- -------- --------
Total Loans $176,558 $152,438 $141,847 $129,776 $114,462 $109,038
======== ======== ======== ======== ======== ========
</TABLE>
The following table reflects the maturity and sensitivities of the Bank's
loan portfolio at September 30, 1999.
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
After one
One year year through Due after Total
or less five years five years loans
-------- ------------ ---------- -----
<S> <C> <C> <C> <C>
Commercial, Financial $ 4,975 $ 790 $ 1,104 $ 6,869
Real estate
Construction 512 1,197 5,106 6,815
Residential 21,043 27,087 65,374 113,504
Commercial 1,687 3,965 13,557 19,209
Installment 8,348 16,534 5,188 30,070
Other 91 -- -- 91
-------- -------- -------- --------
Total Loans $ 36,656 $ 49,573 $ 90,329 $176,558
======== ======== ======== ========
</TABLE>
At September 30, 1999, loans maturing after one year included
approximately: $105,248,000 in fixed rate loans; and $34,654,000 in variable
rate loans.
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<PAGE>
The following table reflects the maturity and sensitivities of the Bank's
loan portfolio at December 31, 1998.
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
After one
One year year through Due after Total
or less five years five years loans
-------- ------------ ---------- -----
<S> <C> <C> <C> <C>
Commercial, Financial $ 4,054 $ 733 $ 17 $ 4,804
Real estate
Construction 900 317 4,499 5,716
Residential 18,129 15,033 79,697 112,859
Commercial 1,503 3,347 11,705 16,555
Installment 5,851 6,398 164 12,413
Other 91 -- -- 91
-------- -------- -------- --------
Total Loans $ 30,528 $ 25,828 $ 96,082 $152,438
======== ======== ======== ========
</TABLE>
At December 31, 1998 loans maturing after one year included approximately:
$84,209,000 in fixed rate loans; and $37,701,000 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, to provide a means to
achieve goals set forth in the Bank's interest rate risk policy and to provide a
balance of quality and diversification to its assets. The available for sale
portion of the investment portfolio is expected to provide funds when demand for
acceptable loans increases and is expected to absorb funds when loan demand
decreases.
At September 30, 1999, the Bank's investment portfolio was $49,745,000 or
20% of total assets. There were no federal funds sold as of September 30, 1999.
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<PAGE>
The table below presents the amortized cost and fair values of investment
securities held by the Bank at September 30, 1999 and 1998.
(Dollar Amounts in Thousands)
1999 1998
--------------------------- ---------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
Available-for-sale $44,785 $43,974 $44,609 $45,023
Held-to-maturity 5,771 5,757 9,061 9,290
------- ------- ------- -------
$50,556 $49,731 $53,670 $54,313
======= ======= ======= =======
The following tables present the maturity distribution of investment
securities at September 30, 1999, and the weighted average yields of such
securities. The weighted average yields were calculated based on the amortized
cost and effective yields to maturity of each security.
Held-to-maturity
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
Over One Over Five Weighted
One Year Through Through Over Ten No Average
Or Less Five Years Ten Years Years Maturity Total Yield
------- ---------- --------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Agencies
and Corporations -- -- -- -- -- -- --
Mortgage-Backed
Securities $4,984 $ 742 $ 45 -- -- $5,771 5.66%
Total 4,984 742 45 -- -- 5,771 5.66%
Weighted Average
Yield 5.25% 8.22% 9.10% -- -- 5.66% --
</TABLE>
Available-for-sale (1)
<TABLE>
<CAPTION>
Over One Over Five Weighted
One Year Through Through Over Ten No Average
Or Less Five Years Ten Years Years Maturity Total Yield
------- ---------- --------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Agencies
and Corporations $ 1,999 $ 8,992 $14,500 -- -- $25,491 6.11%
Mortgage-Backed
Securities 15,982 2,686 626 -- -- 19,294 6.29%
Other -- -- -- -- -- -- --
Total 17,981 11,678 15,126 -- -- 44,785 6.19%
Weighted Average Yield 6.17% 5.97% 6.38% -- -- 6.19% --
Total Portfolio 22,965 12,420 15,171 -- -- 50,556 6.13%
Total Weighted Average
Yield 5.97% 6.11% 6.38% -- -- 6.13% --
</TABLE>
(1) Dollars shown at amortized cost amounts
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<PAGE>
Deposits
The following table summarizes average deposits and interest rates of the
Bank for the nine months ended September 30, 1999 and 1998.
(Dollar Amounts in Thousands)
1999 1998
-------------------- ----------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- --------
Non-interest bearing
demand deposits $ 32,142 -- $ 26,698 --
Now and Money market
account deposits 68,818 2.44% 64,074 2.53%
Savings deposits 10,780 2.44 9,227 2.44
Time deposits 80,418 4.95 88,639 5.62
-------- ---- -------- ----
Total deposits $192,158 3.08% $188,638 3.62%
======== ==== ======== ====
The following table summarizes average deposits and interest rates of the
Bank for the years ended December 31, 1998, 1997 and 1996.
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 27,504 -- $ 23,499 -- $ 20,738 --
Now and Money market
account deposits 63,701 2.54% 60,475 2.48% 58,632 2.35%
Savings deposits 9,277 2.45 8,760 2.45 8,166 2.65
Time deposits 89,059 5.60 85,487 5.74 64,846 5.70
-------- ---- -------- ---- -------- ----
Total deposits $189,541 3.60% $178,221 3.72% $152,382 3.46%
======== ==== ======== ==== ======== ====
</TABLE>
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<PAGE>
Fixed rate certificates of deposit in amounts of $100,000 or more at
September 30, 1999 are scheduled to mature as follows:
(Dollar Amounts in Thousands)
Three months or less $ 6,815
Over three, through six months 1,489
Over six, through twelve months 4,944
Over twelve months 2,374
-------
Total $15,622
=======
Return on Equity and Assets
The following table summarizes various operating ratios of the Company for
the nine months ended September 30, 1999 and 1998 and for the past three years:
<TABLE>
<CAPTION>
Nine months ended
September 30, (1) Years ended December 31,
----------------- -------------------------------
1999 1998 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Return on average total
assets (net income divided by
average total assets) .80% .82% .74% .81% .90%
Return on average
shareholders' equity (net
income divided by
average shareholders' equity) 12.47 12.39 11.25 12.21 12.66
Equity to assets (average
shareholders' equity as a
percent of average total assets) 6.44 6.60 6.56 6.61 7.10
Dividend Payout ratios 31.13 31.31 35.40 32.32 30.15
</TABLE>
(1) Presented on an annualized basis
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<PAGE>
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.
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<PAGE>
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
As of September 30, 1999
Repriced Within
Under 3 4 to 12 1 to 5 Over 5
Months Months Years Years
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Securities available-for-sale $ 3,949 $ 13,780 $ 11,726 $ 14,519
Securities held-to-maturity 1,520 3,464 742 45
Loans held-for-sale -- 917 -- --
Loan Portfolio 32,481 27,951 51,991 64,135
Other -- -- -- 1,992
-------- -------- -------- --------
Total interest earning assets 37,950 46,112 64,459 80,691
-------- -------- -------- --------
Interest-bearing liabilities
Money Market 30,516 -- -- 11,890
Savings -- -- -- 39,583
Time 22,938 32,061 24,897 --
-------- -------- -------- --------
Total interest-bearing deposits 53,454 32,061 24,897 51,473
Borrowed funds 28,964 -- 5,000 --
Collateralized borrowings -- 513 -- --
-------- -------- -------- --------
Total interest-bearing liabilities 82,418 32,574 29,897 51,473
-------- -------- -------- --------
Periodic gap $(44,468) $ 13,538 $ 34,562 $ 29,218
======== ======== ======== ========
Cumulative gap $(44,468) $(30,930) $ 3,632 $ 32,850
======== ======== ======== ========
Cumulative gap as a percentage of
total earning assets (19.40%) (13.49%) 1.58% 14.33%
======== ======== ======== ========
</TABLE>
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
As of December 31, 1998
Repriced Within
Under 3 4 to 12 1 to 5 Over 5
Months Months Years Years
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Securities available-for-sale $ 2,771 $ 17,400 $ 12,533 $ 7,505
Securities held-to-maturity 1,336 4,158 2,564 48
Loans held-for-sale -- 380 -- --
Loan Portfolio 31,452 34,685 37,667 48,634
Other 2,600 __ __ 1,454
-------- -------- -------- --------
Total interest earning assets 38,159 56,623 52,764 57,641
-------- -------- -------- --------
Interest-bearing liabilities
Money Market 29,842 -- -- 12,482
Savings -- -- -- 35,558
Time 31,587 36,608 17,701 --
-------- -------- -------- --------
Total interest-bearing deposits 61,429 36,608 17,701 48,040
Borrowed funds -- -- 5,000 --
Collateralized borrowings -- 270 -- --
-------- -------- -------- --------
Total interest-bearing liabilities 61,429 36,878 22,701 48,040
-------- -------- -------- --------
Periodic gap $(23,270) $ 19,745 $ 30,063 $ 9,601
======== ======== ======== ========
Cumulative gap $(23,270) $ (3,525) $ 26,538 $ 36,139
======== ======== ======== ========
Cumulative gap as a percentage of
total earning assets 11.34% 1.72% 12.93% 17.61%
======== ======== ======== ========
</TABLE>
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<PAGE>
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 the Federal Reserve Board ("FRB"). The Company, as a bank
holding company, is also subject to the Connecticut Bank Holding Company laws.
Certain legislation and regulations affecting the business of the Company and
the Bank are discussed below.
General
As a bank holding company, the Company is subject to the BHC Act. The
Company reports to, registers with, and is examined by the FRB. The FRB also has
the authority to examine the Company's subsidiaries, which includes the Bank.
The FRB requires the Company to maintain certain levels of capital. See
"Capital Standards" herein. The FRB also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound
practice, 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
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<PAGE>
connection with the extension of credit, sale or lease of property, or
furnishing of services. Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
Capital Standards
The FRB, OCC and other federal banking agencies have risk-based 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. Tier 2
capital may consist of a limited amount of the allowance for loan losses 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.
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<PAGE>
The following table presents the capital ratios for the Company and the
Bank as of September 30, 1999:
Minimum
The Company's The Bank's Regulatory
Ratio Ratio Capital Level
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIO:
Total Capital ............ 11.12% 11.10% 8%
Tier 1 Capital ........... 10.37% 10.36% 4%
TIER 1 LEVERAGE CAPITAL RATIO: 6.27% 6.27% 4%
Prompt Corrective Action and Other Enforcement Mechanisms
Each federal banking agency is required to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more of the prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An insured depository institution generally is classified in the following
categories based on capital measures indicated below:
"Well-Capitalized":
Total risk-based capital of 10% or more;
Tier 1 risk-based ratio capital of 6% or more; and
Leverage ratio of 5% or more.
"Adequately Capitalized":
Total risk-based capital of at least 8%;
Tier 1 risk-based capital of at least 4%; and
Leverage ratio of at least 4%.
"Undercapitalized":
Total risk-based capital less than 8%
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4%.
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<PAGE>
"Significantly Undercapitalized":
Total risk-based capital less than 6%
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment. If an insured depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued by the holding
company. Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. The most
important additional measure is that the appropriate federal banking agency is
required to either appoint a receiver for the institution within 90 days or
obtain the concurrence of the FDIC in another form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a prima facie showing by the agency that such relief is
appropriate. Additionally, a holding company's inability to serve as a source of
strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company. The Company and the
Bank are classified as "well-capitalized" under the above guidelines.
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<PAGE>
Safety and Soundness Standards
The federal banking agencies have established safety and soundness
standards for insured financial institutions covering (1) internal controls,
information systems and internal audit systems; (2) loan documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; (7) asset quality and earnings; (8) excessive
compensation for executive officers, directors or principal shareholders which
could lead to material financial loss; and (9) year 2000 issues. 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. 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 of and Dividends on the Registrant's
Common Equity and Related Shareholder Matters" herein.
Additionally, a bank may not make any capital distribution, including the
payment of dividends, if after making such distribution the bank would be in any
of the "under- capitalized" categories under the OCC's Prompt Corrective Action
regulations.
The OCC also has the authority to prohibit the Bank from engaging in
business practices which the OCC considers to be unsafe or unsound. It is
possible, depending upon the financial condition of a bank and other factors,
that the OCC could assert that the payment of dividends or other payments in
some circumstances might be such an unsafe or unsound practice and thereby
prohibit such payment.
FDIC Insurance
The Bank's deposits are insured through the Bank Insurance Fund of the FDIC
up to a maximum of $100,000 per separately insured depositor.
-15-
<PAGE>
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 (ii) 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.
After decades of debate, in November of 1999, Congress passed and President
Clinton signed legislation which repealed the restrictions that prohibited most
affiliations among banking, securities, and insurance firms. The new law, the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S. 900),
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
-16-
<PAGE>
activities by opting to become a "financial holding company." These holding
companies will be subject to oversight by the FRB, in addition to other
regulatory agencies. Under the financial holding company structure, banks will
have a less-restricted ability to purchase or establish broker/dealer
subsidiaries, as well as the option to purchase insurance companies.
Additionally, for the first time, securities and insurance firms will be
permitted to purchase full-service banks.
As a general rule, the individual entities within a financial holding
company structure will be regulated according to the type of services provided -
functional regulation. Under this approach, a financial holding company with
banking, securities, and insurance subsidiaries will have to deal with several
regulatory agencies (e.g., appropriate banking agency, SEC, state insurance
commissioner). A financial holding company that is itself an insurance provider
will be subject to FRB oversight, as well as to regulation by the appropriate
state insurance commissioner. Broker/dealer and insurance firms electing to
become financial holding companies with be subject to FRB regulation. In
addition to permitting financial services providers to enter new lines of
business, the new law gives firms the freedom to streamline existing operations
and potentially reduce costs.
The impact that Gramm-Leach-Bliley Act is likely to have on the Bank and
the Company is difficult to predict. While the Act facilitates the ability of
financial institutions to offer a wide range of financial services, large
financial institutions would appear to be the beneficiaries as a result of this
Act because many community banks are less able to devote the capital and
management resources needed to facilitate broad expansion of financial services.
Impact of Monetary Policies
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
other borrowings, and the interest rate earned by a bank on loans, securities
and other interest-earning assets comprises the major source of banks' earnings.
Thus, the earnings and growth of banks are subject to the influence of economic
conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the FRB. The
FRB implements national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks which are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Company cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting the Bank's net earnings.
Employees
The Company and the Bank employ 75 full-time employees and 10 part-time
employees. Neither the Company nor the Bank are parties to any collective
bargaining agreements, and employee relations are considered good.
-17-
<PAGE>
Forward Looking Statements
This Form 10-SB and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and Bank, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general and
on the markets in which the Company and the Bank do business, and (b)
expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and loan
customers and the introduction of new products and services. Such
forward-looking statements are based on assumptions rather than historical or
current facts and, therefore, are inherently uncertain and subject to risk. For
those statements, the Company claims the protection of the safe harbor for
forward looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The Company notes that a variety of factors could cause the actual results
or experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
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 Securities and Exchange Commission. The Company and Bank do not
undertake any obligation to update or revise any forward-looking statements
subsequent to the date on which they are made.
ITEM 2. FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and the notes
thereto and the other information contained in this Registration Statement. The
selected balance sheet and income statement data as of and for the years ended
December 31, 1998 and 1997, are derived from, and are qualified by reference to
the audited consolidated financial statements of the Company appearing elsewhere
in this Registration Statement. The balance sheet and income statement data as
of and for the years ended December 31, 1996, 1995, and 1994, are derived from
audited consolidated financial statements of the Company not included herein.
The selected balance sheet and income statement data as of and for the nine
months ended September 30, 1999 and 1998, are derived from unaudited
consolidated financial statements of the Company appearing elsewhere in this
Registration Statement which have been prepared by the Company on a basis
consistent with the audited consolidated financial statements appearing
elsewhere in this Registration Statement and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data. All financial ratios for the nine
months ended September 30, 1999 and 1998 have been annualized. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for any subsequent period.
-18-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
September September
30, 1999 30, 1998 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest Income $ 11,710,520 $ 11,100,355 $ 14,884,143 $ 13,921,944 $ 12,082,097 $ 11,371,457 $ 9,585,807
Interest Expense 5,220,839 5,323,537 7,114,181 6,719,113 5,403,379 5,034,665 3,706,523
Net Interest Income 6,489,681 5,776,818 7,769,962 7,202,831 6,678,718 6,336,792 5,879,284
Other Income 1,059,757 1,086,884 1,409,302 1,338,035 1,115,018 1,038,009 982,417
Noninterest Expense 5,457,589 4,697,713 6,550,248 5,875,583 5,321,259 5,009,371 4,753,197
Income before income taxes 2,001,849 2,075,989 2,509,016 2,565,583 2,372,477 2,265,430 2,108,504
Income Taxes 641,219 805,600 972,717 1,009,249 881,243 925,784 865,812
Net Income 1,360,630 1,270,389 1,536,299 1,556,034 1,491,234 1,339,646 1,242,692
Balance Sheet Data
Total Loans 176,557,808 149,439,223 152,438,033 141,846,741 129,775,725 114,461,645 109,037,944
Total Assets 244,343,450 213,227,363 215,337,558 202,115,632 180,521,512 159,952,993 151,109,005
Total Deposits 193,945,707 191,647,843 194,941,472 183,673,260 165,300,656 145,904,840 128,926,727
Total Liabilities 229,503,171 198,765,438 201,026,182 188,648,066 168,239,044 148,634,235 140,854,526
Shareholders' Equity 14,840,279 14,461,925 14,311,376 13,467,566 12,282,468 11,318,758 10,254,479
Total Investments 49,744,556 54,084,191 48,315,612 47,997,248 40,786,611 37,853,697 34,668,199
Allowance for Loan Losses 1,100,686 1,027,724 1,013,949 970,840 998,238 959,259 872,777
Selected Ratios and
Per Share Data
Return on Average Assets .80% .82% .74% .81% .90% .86% .85%
Return on Average Equity 12.47% 12.39% 11.25% 12.21% 12.66% 12.54% 12.43%
Basic Net Income Per Share (1) $ 0.92 $ 0.86 $ 1.04 $ 1.05 $ 1.01 $ .91 $ .81
Diluted Net Income Per Share (1) 0.88 0.82 0.99 1.02 0.98 0.89 0.80
Price Per Share 18.75 18.38 18.50 14.40 13.00 11.20 9.00
Book Value per Share 9.99 10.24 9.70 9.11 8.31 7.67 6.68
Dividends Declared:
Cash 0.30 0.30 0.40 0.38 0.33 0.25 0.19
Stock 5.00% 5.00% 155.00% 5.00% 5.00% 155.00% 5.00%
Cash Dividend Yield 2.13% 2.18% 2.16% 2.64% 2.54% 2.23% 2.11%
</TABLE>
(1) All per share data has been adjusted to give retroactive effect to all
stock dividends and splits.
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion of the financial condition and
results of operations on a consolidated basis for the two years ended December
31, 1998 and 1997, respectively, and for the nine month periods ended September
30, 1999 and 1998, respectively, of the Company. 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").
This discussion should be read in conjunction with the consolidated financial
statements and the related notes of the Company presented elsewhere herein.
FINANCIAL CONDITION
September 30, 1999 as compared to December 31, 1998.
Total assets as of September 30, 1999 were $244,343,450, an increase of
$29,005,892 or 13.5% from year end 1998 total assets of $215,337,558.
Growth in assets was centered in the loan portfolio which increased to
$176,494,779, an increase of $24,803,635 or 16.4% from the December 31, 1998
total of $151,691,144. Significant growth was in installment loans which grew by
$17,656,713 or 142% from the December 31, 1998 balance. This growth was attained
through the aggressive acquisition of consumer loans through indirect dealer
financing of automobiles and boats. In conjunction with the increase in consumer
loans, deferred loan costs have increased as a result of fees paid to dealers
for the referral of such loans to the Bank. Other loan growth during 1999 was in
the mortgage and commercial loan portfolios. Commercial real estate mortgages
grew to $19,209,501 an increase of $2,654,777 or 16% from year end. Commercial
loans also increased by $2,064,387 or 43.0% from year end. Growth in both
commercial loan areas is due to sales initiatives in small business lending.
The Company's securities portfolio totaled $49,744,555 as of September 30,
1999. Nine month growth in the portfolio was minimal at $1,428,943 or 3.0%.
Within the portfolio, available for sale securities totaled $43,973,633 which
increased $3,764,240 or 9.4% from the year end balance of $40,209,393. The
growth in this portion of the securities portfolio is mainly the result of the
reinvestment of amortizing balances in the held to maturity portion of the
investment portfolio. Held to maturity securities decreased by $2,335,297 during
the first nine months of 1999. This decline was due solely to the amortization
and principal payments of mortgage-backed securities.
Bank premises and equipment totaled $2,989,850, an increase of $850,737 or
39.8% from the year end balance of $2,139,113. Growth in premises and equipment
was primarily the result of the renovation of the building housing the trust,
loan operations and executive offices.
-20-
<PAGE>
Other assets increased by $369,404 or 33.4% to the September 30, 1999
balance of $1,476,507. The growth in other assets was caused by increases in
prepaid and deferred benefit related expenses.
Total liabilities were $229,503,171 at September 30, 1999, an increase of
$28,476,989 or 14.6% from the December 31, 1998 balance of $201,026,182. The
growth in liabilities is attributable solely to the increase in Federal Home
Loan Bank advances which also increased by more than $28 million over the nine
month period. The growth in these advances was necessary to fund the growth in
earning assets, specifically in the loan portfolio.
Deposits over the nine month period remained relatively unchanged. The
September 30, 1999 balance of deposits was $193,945,707, a decrease of $995,765
or less than 1% from year end. The mix of deposits however, changed over the
period. Time certificates of deposit in denominations of less than $100,000
decreased by $4,947,260 to $64,273,592 from $69,220,852, while the balances of
savings accounts increased a similar amount from $35,558,082 to $39,582,700.
Management attributes this change to both the consumer's desire to keep liquid
funds as well as the relatively low interest rate environment.
September 30, 1999 as compared to September 30, 1998.
Total assets as of September 30, 1999 amounted to $244,343,450 an increase
of $31,116,087 or 14.59% from $213,227,363 at September 30, 1998. The increase
in assets was due to an increase in the loan portfolio.
Net loans increased $27,862,003 to $176,494,779 at September 30, 1999, from
$148,632,776 at September 30, 1998. The growth in net loans was primarily in
consumer installment loans, which increased by $17,572,424. In conjunction with
the increase in consumer loans, deferred loan costs have increased as a result
of fees paid to dealers for the referral of such loans to the Bank. The
remaining growth in the loan portfolio can be attributed primarily to growth in
residential and commercial real estate mortgages.
Total securities decreased from the September 30, 1998 balance of
$54,084,191 to $49,744,555 at September 30, 1999. This decrease of $4,339,636
can be attributed to a reallocation of earning assets to fund growth in the loan
portfolio.
Net premises and equipment totaled $2,989,850 at September 30, 1999, which
is an increase of $916,806 or 44.23% from $2,073,044 at September 30, 1998. This
increase can be attributed primarily to capitalized costs incurred for the
historic renovation of the building housing the Bank's executive, trust and loan
operation offices.
Other assets amounted to $1,476,507 at September 30, 1999, an increase of
36.42% or $394,166 from $1,082,341 at September 30, 1998. The major components
in this increase were increases in prepaid expenses and increases in assets
associated with employee, officer and director compensation plans.
-21-
<PAGE>
Deferred income taxes totaled $622,783 at September 30, 1999, an increase
of $385,136 from the September 30, 1998 balance of $237,645. This increase is
primarily related to deferred taxes on unrealized gains on investment
securities.
Total liabilities increased $30,737,733 or 15.46% to $229,503,171 from
$198,765,438 at September 30, 1998. The growth in this category can be
attributed to the increase in borrowed money which was utilized to fund loan
growth. While the increase in deposits from September 30, 1998 to September 30,
1999 was only $2,297,864, or 1.20%, the mix of the Bank's deposit liabilities
changed over the year. The change can be attributed to the overall low interest
rate environment and a shift from maturity term deposits into core deposits
without maturities. Accordingly, there was a shift from CD products to more
liquid products such as savings and money market deposits. More specifically, at
September 30, 1999, demand deposits totaled $32,061,496 which is an increase of
$5,429,441 or 20.39% from $26,632,055 at September 30, 1998. Also increasing
were savings deposits which totaled $39,582,700 at September 30, 1999, a 32.93%
increase over the September 30, 1998 balance of $29,778,020. Money market
deposits increased 4.06% to $42,405,803 at September 30, 1999 from $40,753,127
at September 30, 1998. Off-setting the growth in short-term deposits was a
decrease in time deposits of $100,000 or more which decreased 21.28% to
$15,622,116 at September 30, 1999 from $19,844,475 at September 30, 1998. Time
deposits under $100,000 decreased $10,366,574 or 13.89% to $64,273,592 at
September 30, 1999 from $74,640,166 at September 30, 1998.
December 31, 1998 as compared to December 31, 1997.
Total assets increased $13,221,926, or 6.54%, to $215,337,558 at December
31, 1998 from $202,115,632 at the end of 1997. The increase in assets was
primarily due to a higher level of loans which were largely funded by a
corresponding growth in deposits.
Net loans increased $10,629,851, or 7.54%, to $151,691,144 at the end of
1998 from $141,061,293 at the close of 1997. Commercial loans totaled $4,804,229
at December 31, 1998, as compared to $5,680,235 at December 31, 1997. This
decrease of $876,006 or 15.42% can be attributed to the increased competition
for commercial loans. The growth in the Bank's loan portfolio has been primarily
in the consumer sector and specifically in residential mortgage and construction
loans. Real estate construction loans totaled $5,715,670 at December 31, 1998,
as compared to $2,229,453 at December 31, 1997. This increase of $3,486,217 or
156.37% can be attributed to an increase in real estate construction activity.
Real estate residential loans, excluding mortgage loans held-for-sale, totaled
$112,858,948 at December 31, 1998, as compared to $105,488,633 at December 31,
1997. This increase of $7,370,315 or 6.99% primarily reflects aggressive
marketing, a strong economy, a favorable interest rate environment, and
increased activity in the home equity portfolio.
The Bank's securities portfolio did not change significantly at the end of
1998, as compared to the calendar year end 1997. The securities portfolio
increased $318,364 or .66% and amounted to $48,315,612 at December 31, 1998, as
compared with $47,997,248 at December 31, 1997. Within the securities portfolio
$40,209,393 or 83.22% of the portfolio is held as available-for-sale and
-22-
<PAGE>
therefore is available to meet the potential liquidity needs of the Bank. The
unrealized gain on securities available-for-sale decreased to $179,113 at
December 31, 1998, from $293,204 at December 31, 1997. Additionally, at December
31, 1998, held- to-maturity securities decreased 31.33% or $3,697,959 to
$8,106,219 at December 31, 1998 from $11,804,178 at December 31, 1997. This
decrease can be attributed primarily to principal repayments on mortgage-backed
securities, as well as management's decision not to increase its holdings of
securities classified as held-to- maturity.
Federal funds sold, short-term liquidity loans to other commercial banks,
totaled $2,600,000 at December 31, 1998. There were no federal funds sold at
December 31, 1997. The Bank's liquidity position is considered to be adequate to
cover increased loan demand or reduction of deposits.
Other assets increased $341,365, or 44.58%, to $1,107,103 at December 31,
1998 from $765,738 at the end of 1997. This increase can be attributed to the
increase in prepaid benefit cost and other prepaid expenses.
Total liabilities increased $12,378,116, or 6.56%, to $201,026,182 at the
end of 1998 from $188,648,066 at the close of 1997. Deposits, the Bank's primary
source of funds, grew by $11,268,212, or 6.13%, to $194,941,472 at December 31,
1998 from $183,673,260 at December 31, 1997. The Bank attributes this growth to
the convenient hours of operations, locations and drive-up facilities as well as
the competitive interest rates offered by the Bank. Non-interest bearing
accounts increased 18.68% to $31,163,054 from $26,258,590. The aggregate of
non-term accounts which include demand, money market and savings accounts,
increased $11,306,498, or 11.57%, to $109,045,629 at year end 1998 from
$97,739,131 at year end 1997. Time deposits remained relatively unchanged.
RESULTS OF OPERATIONS
Net interest income is the single largest source of the Company's net
income. Net interest income is determined by several factors and is defined as
the difference between interest and dividend income from earning assets,
primarily loans and investment securities, and interest expense due on deposits
and borrowed money. Although there are certain factors which can be controlled
by management policies and actions, certain other factors, such as the general
level of credit demand, FRB monetary policy and changes in tax law are beyond
the control of management.
Nine months ended September 30, 1999 as compared to nine months ended
September 30, 1998.
Net income for the nine months ended September 30, 1999, was $1,360,630
as compared to $1,270,389 for the same period in 1998. For the nine months ended
September 30, 1999, diluted per share income amounted to $.88 as compared to
$.82 from the same period in 1998. Basic net income per share amounted to $.92
for the nine month ended September 30, 1999 as compared to $.86 for the same
period in 1998. The improved results occurred primarily from the growth in net
interest income which occurred from the increase in earning assets. In addition,
the 1999 provision
-23-
<PAGE>
for income taxes incorporates an investment tax credit related to the renovation
of the building housing the executive offices. The credit reduces the Company's
1999 Federal Income tax expense. The result of the benefits of the forgoing
items offset increases in noninterest expense due to salary and infrastructure
expenses.
Calendar year 1998 as compared to Calendar year 1997.
The Company's 1998 net income totaled $1,536,299, down slightly from 1997
earnings of $1,556,034. Similarly, 1998 net income on a diluted per share basis
amounted to $.99 compared to 1997 earnings of $1.02. Basic net income per share
amounted to $1.04 in 1998 as compared to $1.05 for the year ended December 31,
1997. While there was an increase in net interest income resulting from the
increase in earning assets, the slight decline in net income can be attributed
to increased computer service expenses as well as compensation costs incurred by
the Company in connection with its repurchase of Common Stock from officers upon
their exercise of stock options.
Net Interest Income
Nine months ended September 30, 1999 as compared to nine months ended
September 30, 1998.
Net interest and dividend income increased 12.34% to $6,489,681 for the
nine months ended September 30, 1999, as compared with $5,776,818 for the nine
months ended September 30, 1998. This increase occurred as average earning
assets increased $16,636,000 or 8.35% to $215,833,000 in 1999 from $199,197,000
during the first nine months of 1998. This increase was caused by the increase
in the loan portfolio in primarily consumer installment loans and real estate
loans. As shown below, the net interest margin increased to 4.02% for the nine
months ended September 30, 1999 compared to 3.88% for the nine months ended
September 30, 1998. The increase in the net interest margin was due to the
decrease in interest expense from the lower overall cost of funds due to the
growth in demand deposits.
Nine months ended September 30,
(Unaudited)
1999 1998
------------ ------------
Interest income $ 11,710,520 $ 11,100,355
Tax-equivalent adjustment 17,238 19,811
Interest expense (5,220,839) (5,323,537)
------------ ------------
Net interest income $ 6,506,919 $ 5,796,629
============ ============
The following table presents the Company's average balance sheets (computed
on a daily basis), net interest income, and interest rates for the nine months
ended September 30, 1999 and September 30, 1998. Average loans outstanding
include nonaccruing loans. Interest income is presented on a tax-equivalent
basis which reflects a federal tax rate of 34% for all periods presented.
-24-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
Nine months ended September 30,1999 Nine months ended September 30, 1998
----------------------------------------------- ------------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield
Balance Paid Rate Balance Paid Rate
------------- ------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Loans Receivable $ 164,035,000 $ 9,387,141 7.63% $ 144,966,000 $ 8,606,775 7.92%
Securities 51,468,000 2,328,806 6.03 50,547,000 2,360,034 6.23
Federal Funds Sold 330,000 11,811 4.77 3,684,000 153,357 5.55
------------- ------------- ------------- -------------
Total interest earning
assets 215,833,000 11,727,758 7.24 199,197,000 11,120,166 7.44
------------- ------------- ------------- -------------
Allowance for loan
losses (1,054,000) (1,000,000)
Cash & due from banks 5,943,000 4,833,000
Bank premises and 2,539,000 2,076,000
equipment
Net unrealized loss
on securities (49,000) (154,000)
Other Assets 3,586,000 2,777,000
------------- -------------
Total Average Assets $ 226,798,000 $ 207,729,000
============= =============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
NOW/Money market
deposits $ 68,818,000 $ 1,261,565 2.44% $ 64,074,000 $ 1,214,012 2.53%
Savings deposits 10,780,000 197,355 2.44 9,227,000 169,149 2.44
Time deposits 80,418,000 2,982,810 4.95 88,639,000 3,738,090 5.62
Borrowed Funds 19,280,000 779,109 5.39 4,779,000 202,286 5.64
------------- ------------- ------------- -------------
Total interest bearing
liabilities 179,296,000 5,220,839 3.88 166,719,000 5,323,537 4.26
Demand deposits 32,142,000 26,698,000
Other liabilities 814,000 642,000
Shareholders' Equity 14,546,000 13,670,000
------------- -------------
Total Liabilities and
Equity $ 226,798,000 $ 207,729,000
============= =============
Net Interest Income $ 6,506,919 $ 5,796,629
============= ----------- ============= -----------
Net interest spread 3.36% 3.18%
----------- -----------
Net interest margin 4.02% 3.88%
=========== ===========
</TABLE>
-25-
<PAGE>
Calendar year 1998 as compared to Calendar year 1997.
Net interest and dividend income increased 7.87% or $567,131 to $7,769,962
for the year ended December 31, 1998 from $7,202,831 in 1997. The positive
effect of the increased level of earning assets exceeded the negative effect of
the higher level of interest bearing liabilities during the year. During 1998,
average earning assets increased 8.26%. However, the yield on earning assets
decreased by 10 basis points due to increased rate competition for loans as well
as a lower interest rate environment. Conversely, costs to fund earning assets
declined only slightly, with the effect of the lower interest rate environment
being partially offset by intense rate competition for deposits. The interest
paid on time certificates of deposit in denominations of $100,000 or more
increased 13.3 % to $678,964 at December 31, 1998 compared to $599,112 at
December 31, 1997. The reason for this increase can be attributed to higher
average levels of these certificate of deposits during the calendar year.
Interest expense on Federal Home Loan Bank Advances increased to $282,153 from
$96,553 at calendar year end 1998 compared to 1997. This increase can be
attributed to higher daily borrowing levels to fund earning assets throughout
the year. Other interest income increased to $170,911 for the year end December
31, 1998 from $50,078 in 1997. This increase can be attributed to higher average
balances on federal funds sold. The net interest margin was 3.89% in 1998,
compared to 3.91% in 1997. On a fully taxable equivalent basis, net interest
income increased $567,951, or 7.85%, in 1998, as shown below:
1998 1997
------------ ------------
Interest income $ 14,884,143 $ 13,921,944
Tax-equivalent adjustment 29,486 28,666
Interest expense (7,114,181) (6,719,113)
------------ ------------
Net interest income $ 7,799,448 $ 7,231,497
============ ============
The following table presents the Company's average balance sheets (computed
on a daily basis), net interest income and interest rates for the years ended
December 31, 1998 and 1997. Average loans outstanding include nonaccruing loans.
Interest income is presented on a tax- equivalent basis which reflects a federal
tax rate of 34% for all periods presented.
-26-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield
Balance Paid Rate Balance Paid Rate
------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Loans Receivable $ 146,306,000 $11,589,427 7.92% $ 135,803,000 $ 10,845,231 7.99%
Securities 50,918,000 3,153,235 6.19 48,319,000 3,055,229 6.32
Federal Funds Sold 3,122,000 170,968 5.48 932,000 50,151 5.38
------------- ----------- ------------- -------------
Total interest earning
assets 200,346,000 14,913,630 7.44 185,054,000 13,950,611 7.54
------------- ----------- ------------- -------------
Allowance for loan
losses (1,012,000) (957,000)
Cash & due from banks 4,795,000 4,547,000
Bank premises and 2,086,000 2,168,000
equipment
Net unrealized
loss on securities (148,000) (151,000)
Other Assets 2,853,000 2,449,000
------------- -------------
Total Average Assets $ 208,920,000 $ 193,110,000
============= =============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities
NOW/Money market
deposits $ 63,701,000 $ 1,616,309 2.54% 60,475,000 $ 1,498,007 2.48%
Savings deposits 9,277,000 227,469 2.45 8,760,000 214,584 2.45
Time deposits 89,059,000 4,988,250 5.60 85,487,000 4,908,333 5.74
Borrowed Funds 5,020,000 282,153 5.62 1,640,000 98,189 5.99
------------- ----------- ------------- -------------
Total interest bearing
liabilities 167,057,000 7,114,181 4.26 156,362,000 6,719,113 4.30
Demand deposits 27,504,000 23,499,000
Other liabilities 698,000 506,000
Shareholders' Equity 13,661,000 12,743,000
------------- -------------
Total Liabilities and
Equity $ 208,920,000 $ 193,110,000
============= =============
Net Interest Income $ 7,799,449 $ 7,231,498
============= ----------- ============= -----------
Net interest spread 3.18% 3.24%
=========== ===========
Net interest margin 3.89% 3.91%
=========== ===========
</TABLE>
-27-
<PAGE>
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis, reflects
the changes for the nine months ended September 30, 1999 when compared to the
nine months ended September 30, 1998 in net interest income arising from changes
in interest rates and from asset and liability volume, including mix. The change
in interest attributable to both rate and volume has been allocated to the
changes in the rate and the volume on a pro rata basis.
9/30/99 Compared to 9/30/98
---------------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans $ 1,100,061 ($ 319,695) $ 780,366
Investment Securities 42,509 (73,737) (31,228)
Other Interest Income (122,655) (18,891) (141,546)
----------- ----------- -----------
Total interest earning assets 1,019,915 (412,323) 607,592
----------- ----------- -----------
Interest paid on:
Deposits (60,186) (619,335) (679,521)
Borrowed money 586,398 (9,575) 576,823
----------- ----------- -----------
Total interest bearing liabilities 526,212 (628,910) (102,698)
----------- ----------- -----------
Increase in net
interest income $ 493,703 $ 216,587 $ 710,290
=========== =========== ===========
-28-
<PAGE>
The following table, which is presented on a tax-equivalent basis, reflects
the changes for the year ended December 31, 1998 in net interest income arising
from changes in interest rates and from asset and liability volume, including
mix. The change in interest attributable to both rate and volume has been
allocated to the changes in the rate and the volume on a pro rata basis.
1998 Compared to 1997
Increase (Decrease) Due to
Volume Rate Total
---------- ---------- ----------
Interest earned on:
Loans $ 832,624 ($ 88,428) $ 744,196
Investment Securities 161,887 (63,881) 98,006
Other Interest Income 119,914 903 120,817
---------- ---------- ----------
Total interest earning assets 1,114,425 (151,406) 963,019
---------- ---------- ----------
Interest paid on:
Deposits 309,516 (98,413) (211,103)
Borrowed money 190,333 (6,368) 183,965
---------- ---------- ----------
Total interest bearing liabilities 499,849 (104,781) 395,068
---------- ---------- ----------
Increase in net interest income
$ 614,576 ( $46,625) $ 567,951
========== ========== ==========
Of the $567,951 increase in the net interest income, a decrease of $46,625
resulted from decreases in interest rates earned or paid during 1998 and an
increase of $614,576 is attributed to increases in the volume of average
interest earning assets and interest bearing liabilities.
Noninterest Income
Nine months ended September 30, 1999 as compared to nine months ended
September 30, 1998.
Noninterest income for the nine months ended September 30, 1999 totaled
$1,059,757 which is a decrease of $27,127 from $1,086,884 September 30, 1998.
The decrease in noninterest income can be attributed to the fact that there were
securities gains on sales of securities of $143,640 in 1998, while there were no
securities gains in 1999. Partially off-setting the decrease
-29-
<PAGE>
in these gains, was an increase in trust income of $48,744 resulting from
expansion of the Bank's trust services, as well as an increase in commissions
from the sale of mutual funds of $61,588.
Calendar year 1998 compared to Calendar year 1997.
Noninterest income for 1998 totaled $1,409,302 an increase of $71,267 or
5.33% from $1,338,035 for the year ended December 31, 1997. This increase can be
attributed to gains on the sales of available for sale securities effectuated in
1998. The gains on the sale of available for sale securities increased $109,272
to $143,640 as compared to $34,368 in 1997. The gains were the result of
management's realignment of the investment portfolio to take advantage of the
rate environment and risk tolerances.
Other noninterest income decreased from the 1997 total of $210,180 to
$163,416 in 1998. This $46,764 or 22.2% decline was due to the gain on the
disposal of a loan during 1997 totaling $55,438. No similar gains occurred in
1998.
Noninterest Expense
Nine months ended September 30, 1999 as compared to nine months ended
September 30 1998.
For the nine months ended September 30, 1999 noninterest expense totaled
$5,457,589, an increase of $759,876 or 16.18% from $4,697,713 for the nine
months ended September 30, 1998. The increase can be attributed to annual salary
adjustments and advertising costs associated with hiring additional personnel
required to support loan growth. Additionally, the Bank experienced increases in
consulting and legal fees and increases in costs associated with computer
services to support new products and services offered by the Bank. The increase
in other noninterest expenses was caused by insignificant increases in numerous
expenses due to the growth of the Bank.
1998 compared to 1997.
Noninterest expense increased $674,665, or 11.48% from $5,875,583 in
December 31, 1997. The increase was primarily the result of increased technology
costs. During 1998, the Bank converted to a statement imaging system, upgraded
its ATM card to a debit card, installed telephone banking and transitioned to a
new client/server core banking system. Additionally, salary and benefit costs
increased due to increases to lending and non-deposit investment products
personnel. Other noninterest expenses increased primarily due to costs incurred
by the Company in connection with its repurchase of Common Stock from officers
upon their exercise of stock options.
Non-accrual, Past Due and Restructured Loans and Other Real Estate Owned
The Bank's non-accrual loans, other real estate owned and loans past due in
excess of ninety days and accruing interest at September 30, 1999 and December
31, 1994 through 1998 are presented below. All restructured loans are included
in these loan amounts.
-30-
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
September 30,
1999 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $1,248,510 $1,168,159 $1,325,896 $2,034,409 $2,606,068 $1,906,034
Other real estate
owned -- -- 60,000 60,000 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total non-
performing
assets $1,248,510 $1,168,159 $1,385,896 $2,094,409 $2,606,068 $1,906,034
========== ========== ========== ========== ========== ==========
Loans past due in
excess of ninety days
and accruing interest $ 40,926 $ 14,239 $ 454 $ 117,631 $ 4,547 $ 2,050
========== ========== ========== ========== ========== ==========
</TABLE>
The accrual of interest income is generally discontinued when a loan
becomes 90 days past due as to principal or interest, or when, in the judgment
of management, collectibility of the loan or loan interest become uncertain.
When accrual of interest is discontinued, any unpaid interest previously accrued
is reversed from income. Subsequent recognition of income occurs only to the
extent payment is received subject to management's assessment of the
collectibility of the remaining principal and interest. The accrual of interest
on loans past due 90 days or more, including impaired loans, may be continued
when the value of the loan's collateral is believed to be sufficient to
discharge all principal and accrued interest income due on the loan and the loan
is in the process of collection. A non-accrual loan is restored to accrual
status when it is no longer delinquent and collectibility of interest and
principal is no longer in doubt. A loan is classified as a restructured loan
when certain concessions have been made to the original contractual terms, such
as reduction of interest rates or deferral of interest or principal payments,
due to the borrower's financial condition. OREO is comprised of properties
acquired through foreclosure proceedings and acceptance of a deed in lieu of
foreclosure. These properties are carried at the lower of cost or fair value
less estimated costs of disposal. At the time these properties are obtained,
they are recorded at fair value through a direct charge against the allowance
for loan losses, which establishes a new cost basis. Any subsequent declines in
value are charged to income with a corresponding adjustment to the allowance for
foreclosed real estate. Revenue and expense from the operation of foreclosed
real estate and changes in the valuation allowance are included in operations.
Costs relating to the development and improvement of the property are
capitalized, subject to the limit of fair value of the collateral. Upon
disposition, gains and losses, to the extent they exceed the corresponding
valuation allowance, are reflected in the statement of income.
-31-
<PAGE>
Had the non-accrual loans performed in accordance with their original
terms, gross interest income for the nine months ended September 30, 1999 would
have increased by approximately $66,000 compared to approximately $64,000 for
the nine months ended September 30, 1998 and gross interest income for the year
ended 1998 would have increased by approximately $88,000 compared to an increase
of approximately $119,000 for the year ended 1997.
The Bank utilizes a loan review and rating process which classifies loans
according to the Bank's uniform classification system in order to identify
potential problem loans at an early stage, alleviate weaknesses in the Bank's
lending policies, oversee the individual loan rating system and ensure
compliance with the Bank's underwriting, documentation, compliance and
administrative policies. Loans included in this process are considered by
Management as being in need of special attention because of some deficiency
related to the credit or documentation, but which are still considered
collectable and performing. Such attention is intended to act as preventative
measures and thereby avoid more serious problems in the future.
The Bank considers all non-accrual loans, other loans past due 90 days or
more and restructured loans to be impaired. A loan is considered impaired when
it is probable that the creditor will be unable to collect amounts due, both
principal and interest, according to the contractual terms of the loan
agreement. When a loan is impaired, impairments is measured using (1) the
present value of expected future cash flows of the impaired loan discounted at
the loan's original effective interest rate, (2) the observable market price of
the impaired loan or (3) the fair value of the collateral of a
collateral-dependent loan. When a loan has been deemed to have an impairment, a
valuation allowance is established for the amount of impairment.
The Bank makes provisions for loan losses on a quarterly basis as
determined by a continuing assessment of the adequacy of the allowance for loan
losses. The Bank performs an ongoing review of loans in accordance with an
individual loan rating system to determine the required allowance for loan
losses at any given date. The review of loans is performed to estimate potential
exposure to losses. Management's judgment in determining the adequacy of the
allowance is based on an evaluation of the known and inherent risk
characteristics and size of the loan portfolios, the assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of impaired loans, and other relevant
factors. Loans, including impaired loans, are charged against the allowance for
loan losses when management believes that the collectibility of principal is
unlikely. Any subsequent recoveries are credited to the allowance for loan
losses when received. In connection with the determination of the allowance for
loan losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties, when considered necessary.
-32-
<PAGE>
The following table summarizes the Bank's OREO, past due and non-accrual
loans, and non-performing assets as of September 30, 1999 and December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------------------------------------
1999 1998 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Nonaccrual loans $ 1,248,510 $ 1,168,159 $ 1,325,896 $ 2,034,409
Other real estate owned -- -- 60,000 60,000
------------- ------------- ------------- -------------
Total non-performing assets $ 1,248,510 $ 1,168,159 $ 1,385,896 $ 2,094,409
============= ============= ============= =============
Loans past due in excess of ninety days and
accruing interest $ 40,926 $ 14,239 $ 454 $ 117,631
============= ============= ============= =============
Ratio of non-performing assets to total loans
and OREO .71% .77% .98% 1.62%
Ratio of non-performing assets and loans past
due in excess of ninety days accruing interest to
total loans and OREO .73% .78% .98% 1.72%
Ratio of allowance for loan losses to total loans .62% .67% .68% .77%
Ratio of allowance for loan losses to non-
performing assets and loans in excess of ninety
days past due and accruing interest 85.36% 85.75% 70.03% 45.13%
Ratio of non-performing assets and loans in
excess of ninety days to past due and accruing
interest to total shareholders' equity 8.69% 8.26% 10.29% 18.01%
</TABLE>
Total non-performing assets increased by $80,351, or 6.8%, to $1,248,510 at
September 30, 1999 from $1,168,159 at December 31, 1998. In 1998, total
non-performing assets decreased to $1,168,159 or 16% from $1,385,896 at December
31, 1997. At September 30, 1999, loans past due in excess of ninety days and
accruing interest increased by $26,687 to $40,926 compared to balances of
$14,239 and $454 respectively, at December 31, 1998 and 1997. The increase in
total non- performing assets in the first nine months of 1999 resulted from
increases in non-performing real estate and installment loans.
Total non-performing assets represented .7% of total loans and other real
estate owned at September 30, 1999, as compared to .7% and 1% respectively, at
December 31, 1998 and 1997. Improvement in this ratio is the result of
reductions in non-performing assets and the increase in total loans. While the
allowance for loan losses decreased to .6% of total loans at September 30, 1999
from .7% for the year ended December 31, 1998, the allowance for loan losses
provided coverage for 88.2% of non-accrual loans at September 30, 1999, as
compared to 86.8% and 73.2%, respectively, at December 31, 1998 and 1997.
-33-
<PAGE>
Potential Problem Loans
As of September 30, 1999, there were no potential problem loans not
disclosed above which cause management to have serious doubts as to the ability
of such borrowers to comply with their present loan repayment terms.
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan
losses for the nine months ended September 30, 1999 and for the years ended
December 31, 1994 through 1998. The allowance is maintained at a level
consistent with identified loss potential and the perceived risk in the
portfolio.
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ----------------------------------------------------------
1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of period $1,014 $ 971 $ 998 $ 959 $ 873 $1,066
Loans charged-off:
Commercial and financial -- 7 5 9 26 7
Real estate -- 68 121 140 -- 202
Installment loans to individuals 6 22 30 14 8 16
------ ------ ------ ------ ------ ------
6 97 156 163 34 225
------ ------ ------ ------ ------ ------
Recoveries on loans charged-off:
Commercial and financial -- 2 1 6 3 23
Real estate -- -- 21 86 2 --
Installment loans to individuals 3 18 7 10 15 9
------ ------ ------ ------ ------ ------
3 20 29 102 20 32
------ ------ ------ ------ ------ ------
Net loans charged-off 3 77 127 61 14 193
------ ------ ------ ------ ------ ------
Provisions charged to operations 90 120 100 100 100 --
------ ------ ------ ------ ------ ------
Balance, at end of period $1,101 $1,014 $ 971 $ 998 $ 959 $ 873
====== ====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to
average loans outstanding
during the period -- .05% .09% .05% .01% .19%
------ ------ ------ ------ ------ ------
Ratio of allowance for loan
losses to total loans .62% .67% .68% .77% .84% .80%
====== ====== ====== ====== ====== ======
</TABLE>
-34-
<PAGE>
The following table reflects the allowance for loan losses as of September 30,
1999 and December 31, 1998, 1997, 1996, 1995 and 1994
Analysis of Allowance for
Loan Losses (Amounts in thousands)
<TABLE>
<CAPTION>
As of September 30, As of December 31,
Loans by Type 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Allocation of of Loans in Allocation of of Loans in Allocation of of Loans in
Allowance for Each Category Allowance for Each Category Allowance for Each Category
Loan Losses in Total Loans Loan Losses to Total Loans Loan Losses to Total Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial &
Financial $ 17 3.89% $ 8 3.15% $ 10 4.00%
Real Estate:
Construction -- 3.86% -- 3.75% -- 1.57%
Residential 15 64.29% -- 74.04% -- 74.37%
Commercial 98 10.88% 137 10.86% 151 12.21%
Installment 4 17.03% -- 8.14% -- 7.80%
Other -- 0.05% -- 0.06% -- 0.05%
Unallocated 967 -- 869 -- 810 --
-------------------------------------------------------------------------------------------
Total $1,101 100.00% $1,014 100.00% $ 971 100.00%
===========================================================================================
<CAPTION>
As of December 31,
Loans by Type 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Allocation of of Loans in Allocation of Loans in Allocation of Loans in
Allowance for Each of Each of Each
Loan Losses Category Allowance Category Allowance Category
to Total for to Total for to Total
Loans Loan Losses Loans Loan Loans
Losses
<S> <C> <C> <C> <C> <C> <C>
Commercial &
Financial -- 3.90% -- 4.44% -- 4.05%
Real Estate:
Construction -- 3.20% -- 1.92% -- 1.92%
Residential 65 74.31% -- 77.12% -- 77.23%
Commercial 245 11.54% 94 10.20% -- 12.16%
Installment -- 6.89% -- 6.11% 5 4.62%
Other -- 0.16% -- 0.21% -- 0.02%
Unallocated 688 -- 865 -- 868 --
--------------------------------------------------------------------------------
Total $ 998 100.00% $ 959 100.00% $ 873 100.00%
================================================================================
</TABLE>
-35-
<PAGE>
LIQUIDITY
Management's objective is to ensure continuous ability to meet cash needs
as they arise. Such needs may occur from time to time as a result of
fluctuations in loan demand and the level of total deposits. Accordingly, the
Bank has a liquidity policy that provides flexibility to meet cash needs. The
liquidity objective is achieved through the maintenance of readily marketable
investment securities as well as a balanced flow of asset maturities and prudent
pricing on loan and deposit products. Management believes that the liquidity is
adequate to meet the Company's future needs.
The Bank is a member of the Federal Home Loan Bank System which provides
credit to its member banks. This enhances the liquidity position of the Bank by
providing a source of available overnight as well as short-term borrowings.
Additionally, federal funds and the sale of mortgage loans in the secondary
market are available to fund short term cash needs.
SHORT-TERM BORROWINGS
The following information relates to the Bank's short-term borrowings for
the nine months ended September 30, 1999:
Balance at September 30, 1999 $28,964,000
Maximum Month-End Borrowings $28,964,000
Average Balance $14,278,000
Average Rate 5.35%
CAPITAL
At September 30, 1999, total shareholders' equity was $14,840,279 compared
to $14,481,925 at September 30, 1998. Total shareholders' equity was $14,311,376
at December 31, 1998, an increase of $843,810 from $13,467,566 at December 31,
1997. From a regulatory perspective, the Company's and the Bank's capital ratios
place each entity in the well-capitalized categories under applicable
regulations. The various capital ratios of the Company and the Bank are as
follows as of September 30, 1999 and December 31, 1998.
-36-
<PAGE>
Minimum
Regulatory
Capital Level The Company The Bank
------------- ----------- --------
Tier 1
leverage
capital ratio 4% 6.27% 6.27%
Tier 1
risk-based
capital ratio 4% 10.37% 10.36%
Total risk-based
capital ratio 8% 11.12% 11.10%
INCOME TAXES
Income tax expense for 1998 was $972,717 compared to income tax expense of
$1,009,249 in 1997. This decrease can be attributed to a decrease in taxable
income. The income tax expense for the nine months ended September 30, 1999
totaled $641,219 in comparison to $805,600 in 1998. The 1999 provision for
income taxes incorporates an investment tax credit related to the renovation of
the building housing the executive offices thereby decreasing income tax expense
for the year.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles 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.
DISCLOSURES RELATING TO THE YEAR 2000
The "Year 2000 issue" ("Y2K") relates to a wide array of potential computer
issues which may arise from the inability of computer hardware and software to
properly process date-sensitive data relating to the Year 2000, years thereafter
and certain dates in the Year 1999.
-37-
<PAGE>
The State of the Bank's Readiness
A Bank wide Y2K compliance program has been implemented to determine Y2K
issues and define a plan to ensure Y2K compliance. The compliance program is
segmented by phases; awareness, inventory, assessment, renovation, validation,
implementation and post-implementation. In 1997, a Y2K committee was formed
which is comprised of the senior management of the Bank. This committee
currently briefs the Board of Directors monthly on the progress of the Y2K
effort. The compliance program as it relates to awareness, inventory,
assessment, renovation, validation and implementation is essentially complete
regarding mission critical systems as well as all other pertinent systems.
The awareness phase involved the dissemination of Y2K information bank-wide
and the establishment of a multi-disciplined team to plan and develop a strategy
to coordinate all aspects of the problem. The inventory phase involved listing
each piece of hardware, software and any other products used by the Bank that
contain embedded microchips. The assessment phase involved analyzing the results
of the inventory phase and determining the most cost-effective solutions. The
renovation phase involved correcting or replacing all known deficiencies in our
products or systems. The validation phase tested the new or upgraded systems and
the implementation certified the systems as Y2K ready.
The Risks of the Bank's Y2K Issues
Failure to resolve a material Y2K problem could result in the interruption
in, or failure of, certain business activities or Bank operations. From a
customer's perspective, a Y2K problem could affect a borrower's ability to repay
a loan if their employer or business was impacted. To raise customers' level of
awareness regarding this issue, the Bank has completed all aspects of its
customer awareness plan which included quarterly mailings and have educated
customers through information provided by Bank staff.
From a liquidity perspective, the Bank is exposed to a withdrawal crisis if
significant funds are withdrawn by worried consumers. The Bank developed a
contingency plan to ensure that adequate funds are available from multiple
sources.
The Bank is subject to examination by the OCC which is actively reviewing
the adequacy of banks' compliance efforts with regulatory guidelines. If the
Bank fails to adequately satisfy regulatory requirements, it may be subject to
formal or informal regulatory enforcement actions. Management does not consider
this to be a probable outcome given the Bank's current state of preparation for
Y2K.
-38-
<PAGE>
The Costs to Address the Bank's Y2K Issues
Any costs to modify computer systems to solely correct Y2K problems are
expensed when incurred. The 1998 Y2K expenses amounted to approximately $16,500
and the 1999 expenses in this regard are estimated to be $42,500.
The Bank's Contingency Plan
As part of its contingency planning, the Bank has developed a Y2K business
resumption plan which supplements its Disaster Recovery Policy. In the event of
a loss of power, heat or telephone service, the Bank plans to re-deploy employee
resources, as necessary, to help ensure manual completion of critical
operational functions. The Bank has tested the business resumption plan.
The Bank has developed contingency plans for its mission critical systems
and will continue to refine these plans. However, there can be no assurance that
the Bank's efforts in this regard will be sufficient to avoid unforeseen
business interruptions or other problems caused by Y2K issues.
ITEM 3. DESCRIPTION OF PROPERTY
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, Roxbury and Torrington,
Connecticut.
During the year ended December 31, 1998, the net rental expenses paid by
the Bank for all of its office properties was approximately $77,000. 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, but does not include Other Real Estate Owned.
-39-
<PAGE>
Owned/ Lease
Location Address Leased Expiration
- -------- ------- ------ ----------
Main Office 13 North Street Owned since 1816
Litchfield, CT
Marble Dale Route 202 Leased 2000
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 Lease 2004 with
Roxbury, CT one 5 year
extension
Torrington 990 Torringford Street Leased 2001 with
Torrington, CT two 5 year
extensions
Trust Department 40 West Street Owned since 1996
Old Borough Firehouse
Litchfield, CT
Accounting 15 Meadow Street Leased Month to
Department Litchfield, CT month
Lease
-40-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Principal Shareholders
The following table includes certain information as of December 30, 1999
regarding the principal shareholders (the "Principal Shareholders") of the
Company. With the exception of the Principal Shareholders listed below, the
Company is not aware of any beneficial owner of five percent (5%) or more of the
Company's Common Stock.
Percent of
Name and Address Number of Shares Outstanding
of Beneficial Owner Beneficially Owned (1) Common Stock
- ------------------- ---------------------- ------------
Donald K. Peck 111,144(2) 7.48%
Litchfield, CT
William J. Sweetman 81,367(3),(4) 5.46%
Litchfield, CT
- ----------
(1) The definition of beneficial owner includes any person who, directly
or indirectly, through any contract, agreement or understanding,
relationship or otherwise has or shares voting power or investment
power with respect to such security.
(2) Includes shares owned by, or as to which voting power is shared with
spouse.
(3) Includes options to purchase 4,232 additional shares of the Company's
Common Stock.
(4) Includes 11,956 shares owned by an estate as to which individual has
voting power as fiduciary of said estate.
(B) Security Ownership of Directors And Executive Officers
The following table sets forth the number and percentage of Common Stock
beneficially owned by each Director of the Company and the Bank and by all the
Company's and the Bank's Directors and Executive Officers as a group at December
30, 1999. Unless indicated otherwise in a footnote, the Directors and Executive
Officers possess sole voting and investment power with respect to all shares
shown.
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<PAGE>
Common Shares
Name Of Beneficially Owned
Beneficial Owner At December 30, 1999 (1) Percent of Class
- ---------------- ------------------------ ----------------
Clayton L. Blick 11,545(2) .77%
Ernest W. Clock 22,822(2)(3) 1.53%
John H. Field 7,010(2) .47%
Bernice D. Fuessenich 9,060(2) .61%
Perley H. Grimes, Jr 16,765(2) 1.12%
Thomas A. Kendall 52 .003%
George M. Madsen 13,304(2) .89%
Charles E. Orr 12,053(2) .81%
William J. Sweetman 81,367(2)(4) 5.46%
H. Ray Underwood 110 .007%
Patricia D. Werner 3,298(5) .22%
Jerome J. Whalen 57,602(3)(6) 3.74%
Carroll A. Pereira 14,233(3)(7) .95%
Philip G. Samponaro 17,980(8) 1.20%
Revere H. Ferris 26,287(9) 1.76%
All Directors and Executive
Officers as a group
(15 persons) 293,488 19.54%
(1) The definition of beneficial owner includes any person who, directly
or indirectly, through any contract, agreement or understanding,
relationship or otherwise has or shares voting power or investment
power with respect to such security.
(2) Includes options to purchase 4,232 shares of common stock.
(3) Includes shares owned by, or as to which voting power is shared with,
spouse, children or controlled business.
(4) Includes 11,956 shares owned by an estate as to which individual has
voting power as fiduciary of said estate.
(5) Includes options to purchase 2,948 shares of common stock.
(6) Includes options to purchase 56,578 shares of common stock exercisable
within 60 days.
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<PAGE>
(7) Includes options to purchase 14,042 shares of common stock exercisable
within 60 days.
(8) Includes options to purchase 17,237 shares of common stock exercisable
within 60 days.
(9) Includes options to purchase 7,354 shares of common stock exercisable
within 60 days. In addition, the total for Mr. Ferris includes 7,062
shares of common stock held in trusts for which Mr. Ferris serves as
trustee.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information concerning the Directors and
Executive Officers of the Company. Unless otherwise indicated, each person has
held the same or a comparable position with his present employer for the last
five years. The Directors of the Company are elected for a term of three years
with approximately one-third of the Directors elected in any one year. The
Directors of the Bank and the officers of the Bank and the Company are all
elected for terms of one year.
Position Held with Expiration Date
Name and Age the Company of Current Term
- ------------ ------------------ ---------------
Clayton L. Director of the Company 2002
Blick since 1988 and of the
(82) Bank since 1953 (1)
Ernest W. Chairman of the Board of 2001
Clock Directors; Director of the
(75) Company since 1988 and of
the Bank since 1973 (2)
John H. Director of the Company 2000
Field and the Bank since 1990 (3)
(74)
Bernice D. Director of the Company 2002
Fuessenich since 1988 and of the
(81) Bank since 1978 (4)
Perley H. Director of the Company 2000
Grimes, Jr. since 1988 and of the
(55) Bank since 1984 (5)
Thomas A. Director of the Company 2000
Kendall and of the Bank since 1999 (6)
(44)
George M. Director of the Company 2001
Madsen and the Bank since 1988 (7)
(65)
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<PAGE>
Position Held with Expiration Date
Name and Age the Company of Current Term
- ------------ ------------------ ---------------
Charles E. Director of the Company 2000
Orr since 1988 and of the
(64) Bank since 1981 (8)
William J. Director of the Company 2001
Sweetman and the Bank since 1990 (9)
(53)
H. Ray Director of the Company 2002
Underwood and of the
(46) Bank since 1998 (10)
Patricia D. Director of the Company 2001
Werner and the Bank since 1996 (11)
(53)
Jerome J. President, Chief Executive Officer 2002
Whalen and Director of the Company
(57) and of the Bank since 1990 (12)
Carroll A. Senior Vice President and Chief N/A
Pereira Financial Officer of the Bank and
(44) Treasurer of the Company since 1984
Philip G. Senior Vice President, Chief N/A
Samponaro Administrator, Cashier and
(58) Secretary of the Bank since 1976
Revere H. Senior Vice President and N/A
Ferris Senior Loan Officer of the Bank
(58) since 1997 (13)
John S. Newton Senior Vice President and N/A
(61) Trust Officer of the Bank
since 1999 (14)
- ----------
(1) Mr. Blick is a Partner in the Law Firm of Cramer & Anderson.
(2) Mr. Clock is Chairman of the Board of F. North Clark Insurance Agency.
(3) Mr. Field is retired. He served as Executive Vice President of Union
Carbide Corporation until December 1986.
(4) Ms. Fuessenich is a realtor and an owner of the Fuessenich Agency.
(5) Mr. Grimes is a Partner in the Law Firm of Cramer & Anderson.
(6) Mr. Kendall is a self employed investor.
(7) Mr. Madsen is retired. He formally served as President of Roxbury
Associates, Inc.
(8) Mr. Orr is President of New Milford Volkswagen, Inc.
(9) Mr. Sweetman is the President and owner of Dwan & Co., Inc.
(10) Mr. Underwood is Secretary and Treasurer of Underwood Services, Inc.
(11) Ms. Werner is the head of the Washington Montessori Association, Inc.
(12) Mr. Whalen has served as the President of the Company and the Bank
since March 1, 1990.
(13) Mr. Ferris has served as Senior Vice President and Senior Loan Officer
of the Bank since 1997. Mr. Ferris served as a Vice President and Loan
Officer from January, 1997 through December, 1997 and served as
Assistant Vice President and Loan Officer from January, 1996 through
December, 1996. From 1994 through December, 1995, Mr. Ferris was self
employed as a financial consultant.
(14) Mr. Newton has served as Senior Vice President and Trust Officer of
the Bank since April, 1999. Prior to joining the Bank, Mr. Newton
served as Vice President and Senior Trust Officer of The Bank of
Western Massachusetts from October, 1995 to April, 1999. Prior to
joining The Bank of Western Massachusetts, Mr. Newton served as Vice
President and Senior Account Executive for Fidelity Management Trust
Company from February, 1994 to May, 1995.
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<PAGE>
There are no arrangements or understandings between any of the Directors or
any other persons pursuant to which any of the above Directors have been
selected as Directors.
ITEM 6. EXECUTIVE COMPENSATION
The following table provides certain information regarding the compensation
paid by the Company and the Bank to certain Executive Officers of the Company
and the Bank for services rendered in all capacities during the fiscal years
ended December 31, 1999, 1998 and 1997. Other than the Named Executive Officers
set forth below (the "Named Executive Officers") Ms. Pereira (whose compensation
exceeded $100,000 for the 1998 calendar year) and Mr. Whalen, no other
individual employed by the Company and/or the Bank received aggregate
compensation of $100,000 or more during the fiscal year ended December 31, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------------------
Long Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
Annual Restricted
Name and Principal Other Stock Options/
Compensation Annual Awards SARs LTIP All Other
Position Year Salary($)(1)(2) Bonus($) Compensation ($) (#) Payout($) Compensation ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerome J. Whalen 1999 $186,454 $ $ $5,576(3) $460(4)
President and Chief 1998 $162,564 5,576(3) $422(4)
Executive Officer 1997 $152,268 5,320(3) $383(4)
Carroll A. Pereira 1999 $96,472 3,677(3)
Treasurer 1998 $79,737 3,677(3) $32,560(5)
1997 $78,137 3,344(3)
</TABLE>
- ----------
(1) The Company furnishes the Named Executive Officers with certain
non-cash compensation and other personal benefits aggregating less
than 10% of their cash compensation.
(2) All employees of the Bank, including the above officers, are eligible
after 1 year of service to participate in the Bank's 401k deferred
compensation plan. The Bank's contribution of up to 75% of the first
4% of each employee's voluntary salary reduction contributed to the
401k plan becomes immediately vested. The Officer's compensation above
is without deduction for their 401k contribution and is exclusive of
the Bank's matching contribution.
(3) Options granted pursuant to the 1994 Stock Option Plan for officers
and outside directors. The numbers of options have been adjusted to
reflect stock splits and dividends. (See "1994 Stock Option Plan for
Officers and Outside Directors").
(4) Amount reflects the Named Executive Officer's taxable benefit portion
of the Split Dollar Life Insurance policy for the benefit of the Named
Executive Officer pursuant to the 1994 Supplemental Employee
Retirement Plan Agreement. (See "1994 Supplemental Employee Retirement
Plan for Mr. Whalen").
(5) This can be attributed to the exercise of stock options by the Named
Executive Officer.
OPTION/SAR Grants in Last Fiscal Year
The following table contains information regarding options granted to the
Named Executive Officers of the Company during 1999. All shares purchased upon
the exercise of any option must be paid in full at the time of purchase. The
number of options granted and the per share exercise prices have been adjusted
to reflect stock splits and dividends.
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<PAGE>
Individual Grants
- --------------------------------------------------------------------------------
Number of Percent of
Securities Total/Options
Underlying SARs Granted Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted (#)(1) in Fiscal Year ($/sh) Date
- --------------------------------------------------------------------------------
Jerome J. Whalen 5,576 33.6% $17.62 01/29/09
President and
Chief Executive Officer
Carroll A. Pereira 3,677 22.1% $17.62 01/29/09
Treasurer
- ----------
(1) Options granted pursuant to the 1994 Stock Option Plan for Officers and
Outside Directors. (See "1994 Stock Option Plan for Officers and
Directors"). The number of securities underlying options granted and the
per share exercise prices have been adjusted to reflect stock splits and
dividends.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth information regarding stock options that
were exercised, if any, during the last fiscal year, and unexercised stock
options held by the Named Executive Officers of the Company. The number of
options and the per share exercise prices have been adjusted to reflect stock
splits and dividends.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Name Shares Acquired Value Realized at FY-End (#) At FY-End ($)(1)
on Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jerome J. Whalen 0 0 56,578 $523,745
President and Chief
Executive Officer
Carroll A. Pereira 0 0 14,042 $ 66,255
Treasurer
</TABLE>
- ----------
(1) Represents the difference between the closing bid price of the Company's
common stock at December 31, 1999, $17.75, and the exercise price of
options, multiplied by the number of options.
-46-
<PAGE>
Agreements with Management
While there are no employment contracts between the Company and any of its
Executive Officers, there are change of control agreements between the Bank and
its Executive Officers. These agreements provide that in certain instances if
the Executive Officer is terminated or reassigned within twenty-four (24) months
following the occurrence of a change of control (as such term is defined in the
Change of Control Agreements), then such individual shall be entitled to receive
an amount as provided by such agreement equal to twenty-four (24) months salary,
reasonable legal fees and expenses incurred by the Executive Officer as a result
of such termination or reassignment, and continued participation in certain
benefit plans.
Agreements with Employees
While there are no employment contracts between the Company and any of its
employees, there are change of control agreements between the Bank and
twenty-seven (27) employees who have been employed by the Bank for more than ten
years. These agreements provide that in certain instances if the employee is
terminated or reassigned within six (6) months following the occurrence of a
change of control (as such term is defined in the Change of Control Agreements),
then such individual shall be entitled to receive an amount as provided by such
agreement equal to six (6) months salary, reasonable legal fees and expenses
incurred by the employee as a result of such termination or reassignment, and
continued participation in certain benefit plans.
Long Term Incentive and Deferred Compensation Plans
On November 24, 1999, the Bank authorized the adoption of a non-qualified
Long Term Deferred Incentive Plan ("LTDIP") for its executive officers. In the
event it is fully implemented, which is expected to occur during the first or
second calendar quarters of 2000, the LTDIP will trigger the award of deferred
bonuses to executive officers if specified bank performance objectives are
achieved, based upon a formula approved by the Board of Directors and upon which
tax deferred earnings will accrue at rates which will generally range between 4%
and 15%. Amounts will be awarded after the end of each fiscal year, beginning in
2000. Such awards will vest 20% per additional year of service subsequent to the
year with respect to which the award is granted with 100% vesting upon a change
in control, termination without cause, or, at normal retirement or at age 55
with 20 years of service. If a participant dies while serving as an executive
officer of the Bank, the amount payable to the participant's beneficiary will be
in an amount equal to the participant's projected retirement benefit (as defined
in the LTDIP) if the Bank acquires and maintains a corporate like insurance
policy on the life of the participant at the time of death (see below).
Effective November 24, 1999, the Bank authorized the adoption of an Outside
Director Deferred Compensation Plan ("DDCP"). In the event it is fully
implemented, which is expected to occur during the first or second calendar
quarters of 2000, the DDCP will award a director with a right to earn and defer
the receipt of a bonus in an amount or percentage of director and retainer fees,
and have earnings accrue on such amounts at a rate between 4% and 15% and
generally equivalent to the appreciation in the Company's stock price over the
period of time for which the fees are in the
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<PAGE>
DDCP if specified bank performance objectives are achieved. All amounts in the
DDCP will generally be vested 20% per additional year of service with 100%
vesting upon a change in control, at normal retirement or full term years of
service. If a participant dies while serving as an outside director of the Bank,
the amount payable to the participant's beneficiary will be the amount equal to
the participant's projected retirement benefit (as defined in the DDCP) if the
Bank has acquired and maintains a corporate life insurance policy on the life of
the participant at the time of death (see below).
In concert with LTDIP and DDCP, the Bank plans to invest $3.5 million in
universal cash surrender value life insurance. Insurance policies are expected
to be acquired on the lives of each of the Bank's 5 executive officers and all
but three of the Bank's directors which are designed to recover the costs of the
Bank's LTDIP and DDCP. The policy death benefit will indemnify the Bank against
the death benefit provision of these benefit plans. The policies will be paid
with a single premium. Policy cash values will earn interest at a current rate
of approximately 5.5% and policy mortality costs will be charged against the
cash value monthly. There are no load or surrender charges associated with the
policies.
Supplemental Employee Retirement Plan for President Whalen
Effective September 1, 1994, the Bank entered into a Supplemental Employee
Retirement Plan Agreement (SERP) with Jerome J. Whalen, President and CEO. The
SERP was amended in 1998. The purpose of the SERP is to provide President Whalen
with increased retirement benefits through a trust arrangement, such that his
total retirement payments from all sources will approximate 60% of his last
three years annual compensation. The premium paid by the Bank on the policy to
fund the SERP during 1998 was $37,250. Upon the death of Mr. Whalen, the Bank
expects to recover its costs from the face amount of the policy. Upon
termination of employment, prior to retirement, Mr. Whalen may continue the
policy, provided he makes all future premium payments.
1990 Stock Option Agreement with President Whalen
The Board of Directors, with shareholder approval on April 11, 1990,
granted the Company's President, Jerome J. Whalen, stock options to purchase a
maximum of 3,000 shares of the Company's Common Stock (the "1990 Plan"). The
options have a term of ten years from the 1990 date of grant. The original
exercise price was $55.00 per share which was the fair market value of the
Common Stock on March 1, 1990, the date Mr. Whalen joined the Company as
President and Chief Executive Officer. On May 4, 1994, an amendment to the 1990
Plan was approved by shareholders thereby increasing the number of stock options
available to President Whalen on December 31, 1994 to 3,829 at an adjusted price
of $43.08 per share. As a result of stock splits and dividends, as of December
30, 1999, President Whalen has options to purchase 29,997 shares at a price of
$5.41 per share pursuant to the 1990 Plan.
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<PAGE>
1994 Stock Option Plan For Officers and Outside Directors
On May 4, 1994, Shareholders approved a stock option plan for officers and
outside directors of the Company and the Bank, respectively (the "1994 Stock
Option Plan"). The Plan expired on May 4, 1999. Pursuant to the 1994 Stock
Option Plan, in 1995, the Board of Directors granted options to President
Whalen, which as a result of stock splits, stock dividends and exercises allows
Mr. Whalen to purchase 4,789 shares of the Company's Common Stock at $7.43 per
share, 5,320 shares of Common Stock at $9.46 per share and 5,320 shares of
common stock of $11.23 per share, and 5,576 shares at an exercise price of
$13.33 per share. In January, 1999, the Board granted options to President
Whalen, which as a result of a stock dividend, allows Mr. Whalen to purchase
5,576 shares at an exercise price of $17.62 per share, which may not be
exercised until January 29, 2000.
Pursuant to the 1994 Stock Option Plan, in January 1995, the Board of
Directors granted stock options to Mr. Samponaro which as a result of stock
splits and dividends allows him to purchase 3,195 shares of the Company's Common
Stock at $7.43 per share. In January 1996, the Board granted stock options to
Ms. Pereira and Mr. Samponaro which as a result of stock splits and dividends
allow each such individual to purchase 3,344 shares of the Company's Common
Stock at $9.46 per share. In January 1997, the Board granted stock options to
Ms. Pereira and Mr. Samponaro which as a result of stock splits and dividends
allows such individuals to purchase 3,344 shares of Common Stock at an exercise
price of $11.23 per share. In January 1998, the Board granted stock options to
Ms. Pereira and Messrs. Ferris, and Samponaro which as a result of stock splits
and dividends allow such individuals to each purchase 3,677 shares of Common
Stock at an exercise price of $13.33 per share. In January, 1999, the Board
granted options to each of these individuals, which as a result of a stock
dividend, allows each individual to purchase 3,677 shares at an exercise price
of $17.62 per share, which may not be exercised prior to January 29, 2000.
Pursuant to the 1994 Stock Option Plan, with the exceptions of Patricia D.
Werner who became a director in 1996, H. Ray Underwood who became a Director in
1998 and Thomas A. Kendall who became a Director in 1999, each outside director
who is not an officer of the Company or the Bank ("Outside Director") has
received stock options, which are presently exercisable, to purchase a total of
4,232 shares of the Company's Common Stock. More specifically, in May 1994, each
Outside Director was granted options, which as a result of stock splits and
dividends allows such individuals to purchase 2,520 shares of Common Stock at
$6.43 per share. Moreover, in June, 1995, each Outside Director was granted
options, which as a result of stock splits and dividends allows such individuals
to purchase 428 shares of Common Stock at $7.46 per share. In June 1996, each
Outside Director was granted options, which as a result of stock splits and
dividends, allows such individuals to purchase 428 shares of Common Stock at
$10.22 per share. In June, 1997, each Outside Director was granted options which
as a result of stock splits and dividends allows such individuals to purchase
428 shares of Common Stock at an exercise price of $11.33 per share. In June
1998, each Outside Director was granted options, which as a result of a stock
dividend, allows each individual to purchase 428 shares of Common Stock at an
exercise price of $15.94. Moreover,
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<PAGE>
Patricia D. Werner has options to purchase 2,948 shares of Common Stock
consisting of options to acquire 2,520 shares at $11.39 per share and options to
acquire 428 shares at $15.94 per share.
Director Compensation
In 1999, each Director of the Company who was not an employee of the Bank,
received $300 for each Board meeting attended and $200 for each committee
meeting attended. The Chairman of the Board of Directors also receives an annual
retainer of $4,000 and each non-officer director of the Company also receives an
annual retainer of $2,500 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.
Beginning in 1996, the Company offers directors the option to defer their
directors' fees. If deferred, the fees are held in a trust account with the
Bank. The Bank has no control over the trust.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had and expects to have in the future, transactions in the
ordinary course of its business with Directors, Officers, principal shareholders
and their associates, on substantially the same terms, including interest rates
and collateral on loans, as those prevailing at the same time for comparable
transactions with others, on terms that do not involve more than the normal risk
of collectibility or present other unfavorable features. The aggregate dollar
amount of these loans was $2,694,547 and $1,634,660 at December 31, 1998 and
1997, respectively. During 1998, $6,455,064 of new loans were made, and
repayments totaled $6,359,735. At December 31, 1998, all loans to Officers,
Directors, principal shareholders and their associates were performing in
accordance with the contractual terms of the loans.
Clayton L. Blick and Perley H. Grimes, Jr., both of whom are Directors of
the Company and the Bank, are partners in Cramer & Anderson, a law firm which
renders certain legal services to the Bank in connection with various matters.
During 1998 and 1997, the Bank paid Cramer & Anderson $68,722 and $86,134,
respectively for legal services rendered, a portion of which was reimbursed to
the Bank by third parties.
Ernest W. Clock, Director of the Company and the Bank, is the Chairman of
F. North Clark Insurance Agency, Inc., which serves as insurance agent for many
of the Bank's insurance needs. In 1998, and 1997, the Bank paid insurance
premiums to F. North Clark Insurance Agency, Inc. in the aggregate amount, of
$74,345 and $76,053, respectively
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<PAGE>
ITEM 8. DESCRIPTION SECURITIES
The following summary of the terms of the capital shares of the Company
does not purport to be complete and is qualified in its entirety by reference to
the Company's Certificate of Incorporation and Bylaws, which are filed as
Exhibits to this Form 10-SB.
Common Stock
The Company is authorized to issue 5,000,000 shares of Common Stock (par
value $.01 per share), of which 1,484,924 shares were issued and outstanding as
of December 30, 1999. Each share of Common Stock has the same relative rights
and is identical in all respects to each other share of the Common Stock. Shares
of Common Stock are not deposits and are not insured by the FDIC.
Holders of the Common Stock are entitled to one vote per share on each
matter properly submitted to shareholders, including the election of directors.
Holders of the Common Stock do not have the right to cumulate votes for the
election of director, and they have no preemptive rights with respect to any
shares that may be issued. All shares of the Common Stock currently outstanding
are fully paid and nonassessable. Holders of the Common Stock are entitled to
receive dividends when and as declared by the Board of Directors out of funds
legally available for distribution.
In the event of any liquidation of dissolution of the Company, the holder
of the Common Stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Company, after payment of the
liquidation preferences of all outstanding shares of preferred stock, all
remaining assets of the Company available for distribution, in cash or in kind.
The transfer agent and registrar for the Company's Common Stock is
Registrar and Transfer Company.
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors may, without action of the shareholders of the Company, issue from
time to time shares of the Company's preferred stock in one or more series with
distinctive serial designations, preferences, limitations and other rights. The
Company is authorized to issue 1,000,000 shares of Preferred Stock (par value
$0.00001 per share).
The Board of Directors is authorized to determine, among other things, with
respect to each series which may be issued: (i) the dividend rate, conditions of
payment of dividends, and dividend preferences, if any; (ii) whether, and upon
what terms, such series would be redeemable and, if so, the redemption price and
terms and conditions of redemption; (iii) the preference, if any, to which such
series would be entitled in the event of voluntary or involuntary liquidation,
dissolution or winding up the Company; (iv) whether or not a sinking fund would
be provided for the redemption of such series and, if so, the terms and
conditions thereof; (v) whether, and upon what terms, such
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<PAGE>
series would be convertible into or exchangeable for shares of any other class
of capital stock or other series of preferred stock; and (vi) whether, and to
what extent, the holders of such series would enjoy voting rights, if any, in
addition to those prescribed by law.
The Company has no present plans for the issuance of any shares of
preferred stock. Accordingly, it is not possible to state the actual effect of
the issuance of the preferred stock upon the rights of holders of the Common
Stock, until the Board of Directors determines the specific rights of the
holders of a series of the preferred stock. However, such effect might include:
(a) restrictions on dividends on the Common Stock if dividends on preferred
stock have not been paid; (b) dilution of the voting power of the Common Stock
to the extent that the preferred stock has voting rights; (c) dilution of the
equity interest of the Common Stock to the extent that the preferred stock is
converted into Common Stock; or (d) reduction in the extent to which the Common
Stock is entitled to share in the Company's assets upon liquidation until
satisfaction of any liquidation preference granted the holders of the preferred
stock is satisfied. Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of the outstanding voting stock. Accordingly, the issuance of preferred stock
may be used as an "anti-takeover" device without further action on the part of
the shareholders of the Company.
Absence of Cumulative Voting
The Company's Certificate of Incorporation does not provide for cumulative
voting in the election of Directors. Under the Delaware corporation law,
shareholders do not have cumulative voting rights unless such rights are
specifically provided for in the Certificate of Incorporation.
Without cumulative voting, holders of a majority of the voting shares
present at an annual meeting will be able to elect all of the Directors to be
elected at that meeting, and no persons holding shares or proxies representing
less than a majority of the shares present will be able to elect any Director,
as they might if cumulative voting were applicable. The absence of cumulative
voting is intended to prevent any entity or group which has accumulated a
significant minority block of shares from obtaining representation on the Board
of Directors of the Company unless and until such entity or group is able to
persuade enough of the remaining shareholders of the Company to vote for its
representatives so that it controls a majority of the votes.
Increased Vote and Fair Price Provisions For Business Combinations
The Company's Certificate of Incorporation requires the approval by holders
of at least eighty percent (80%) of the outstanding shares of the Company's
voting stock for any merger, consolidation, sale of substantially all the assets
or similar business combination, unless the transaction is approved by at least
a majority of the "Continuing Directors" then in office and the terms of the
offer meet a fair price test. In the event such approval is obtained, the
business combination would require only the vote, if any, required by Delaware
law. Delaware law generally requires the favorable vote of a majority of the
outstanding shares of stock to authorize a merger or sale of all or
substantially all of the assets not in the regular course of business, unless
the particular company's certificate of incorporation provides for a greater
vote.
-52-
<PAGE>
The Company's Certificate of Incorporation provides that the Company has
elected to be governed by Section 203 of title 8 of the Delaware Code. This
statute generally prevents "business combinations" between an "interested
stockholder" and the Company for a three-year period following the date such
person becomes an interested stockholder unless (i) the Board of Directors
approved the business combination prior to the date the person became an
interested stockholder, (ii) the transaction which transforms the stockholder
into an interested stockholder results in the interested stockholder owning at
least 85% of the outstanding voting stock (excluding for purposes of determining
that percentage share owned by officers who are also directors and certain
shares owned by employee stock plans), or (iii) the Board of Directors approves
the business combination after the person becomes an interested stockholder and
the proposed combination is authorized by two-thirds vote of the outstanding
stock not owned by the interested stockholder. There are certain limited
exceptions to the restrictions of Section 203. The antitakeover protections of
Section 203 are in addition to those expressly contained in the Company's
certificate of incorporation and bylaws. The constitutionality of Section 203
has been upheld by the Delaware courts.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Price
The Company's Common Stock is traded on the Over the Counter ("OTC")
Bulletin Board under the symbol FLFL. As of December 31, 1999, there were
1,484,924 shares issued and outstanding which were held by approximately 430
shareholders. The following information, provided by Fahnestock and Co. sets
forth transactions in the Company's common stock as of the end of the most
recently completed fiscal quarter of the current fiscal year and of each quarter
of the two most recently completed fiscal years:
1997 High / Low
----------
First Quarter................. $13.00 $13.00
Second Quarter............ 13.30 13.00
Third Quarter............... 13.40 13.30
Fourth Quarter............. 14.40 14.00
1998 High / Low
----------
First Quarter................. $18.00 $16.10
Second Quarter............ 18.00 16.30
Third Quarter............... 20.00 19.00
Fourth Quarter............. 18.50 18.50
1999 High / Low
----------
First Quarter................. $19.25 $18.75
Second Quarter............ 20.25 19.50
Third Quarter............... 20.00 19.25
Fourth Quarter............. 19.75 17.00
-53-
<PAGE>
In January 1999, the Company's Board of Directors approved an 80,000 share
Common Stock buyback program. As part of this program, the Company has not
redeemed any outstanding Common Stock.
Dividends
All shares of the Company's Common Stock are entitled to participate
equally and ratably in such dividends as may be declared by the Board of
Directors out of funds legally available therefore. During 1998 and 1997, the
Company declared annual cash dividends of $.40 and $.38 per share, respectively.
In addition, during 1998 and 1997, the Company declared annual stock dividends
of 155.00% and 5.00%, respectively. During 1999, the Company has declared cash
dividends of .40 cents per share and stock dividends of 5.00%.
The Company's ability to pay dividends is limited by the prudent banking
principles applicable to all bank holding companies and by the provisions of
Delaware Corporate law, which provides that a company may, unless otherwise
restricted by its certificate of incorporation, pay dividends in cash, property
or shares of capital stock out of surplus or, if no surplus exists, out of net
profits for the fiscal year in which declared or out of net profits for the
preceding fiscal year (provided that such payment will not reduce the company's
capital below the amount of capital represented by classes of stock having a
preference upon distributions of assets).
As a practical matter, the Company's ability to pay dividends is generally
limited by the Bank's ability to dividend funds to the Company. As a national
bank, the declaration and payment of dividends by the Bank must be in accordance
with the National Bank Act. More specifically, applicable law provides that the
Board of Directors may declare quarterly, semiannual and annual dividends so
long as the Bank carries at least ten percent (10%) of its net profits for the
preceding half year in its surplus fund, and, in the case of annual dividends,
has carried not less than one-tenth of its net profits of the preceding two
consecutive half year periods in its surplus fund. National banks are required
to obtain the approval of the Office of the Comptroller of the Currency if the
total dividends declared by it in any calendar year exceed the total of its net
profits for that year combined with any retained net profits of the preceding
two years less any required transfers. In addition to such statutory
requirements, the payment of an excessive dividend which would deplete a bank's
capital base to an inadequate level could be considered to be an unsafe or
unsound banking practice and be a basis for supervisory action by the Office of
the Comptroller of the Currency. As of September 30, 1999, approximately
$3,200,000, of the undistributed net income of the Bank was theoretically
available for distribution to the Company as dividends. However, the ability of
the Bank to declare and pay such dividends would be subject to safe and sound
banking practices.
-54-
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
Except as described below, the Company is not involved in any pending
material legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. Such routine legal proceedings, in the aggregate,
are believed by management to be immaterial to the Company's financial condition
or results of operations.
The First National Bank of Litchfield, the Company's subsidiary, was sued
in the Superior Court in Litchfield, Connecticut in a civil action No. CV
98-0077737-S1 served on August 31, 1998 in a matter captioned Russell B. Rhea v.
The First National Bank of Litchfield.
The suit alleges that the Chief Financial Officer ("CFO") of American Boot
Company, of which Plaintiff was the Chief Executive Officer, forged the
signature of Russell B. Rhea to the signature card account, which allegedly
violated a Bank policy that there must be a witness for each of the two
individuals signing the account card. The Plaintiff alleges the following: the
CFO of American Boot Company deposited a personal check drawn on an account at
another financial institution, in the CFO's name, which account it was later
learned had previously been closed. The Bank then allowed the CFO of American
Boot Company to withdraw the funds prior to the check being paid, thereby
creating an overdraft in the American Boot Company account. Thereafter,
unbeknownst to the Plaintiff, the CFO of American Boot Company forged Mr. Rhea's
name to a wire transfer order in the amount of $91,000, which allowed that sum
to be returned to the other financial institution which had credited First
National Bank of Litchfield with the amount of the bad check because it had
failed to give a timely notice of dishonor as required by Federal Reserve
Regulations. That Plaintiff claims that the wire caused a loss to the American
Boot Company. Plaintiff claims that as a result of the Bank's alleged negligence
and failure to follow its policies, his investment in American Boot Company was
lost.
In suing The First National Bank of Litchfield, Plaintiff alleges that The
First National Bank of Litchfield failed to follow its policy and that The First
National Bank of Litchfield owed a duty to Plaintiff Rhea, to investigate the
transactions of the CFO of American Boot Company and protect Plaintiff Rhea from
the alleged fraudulent actions of the CFO of American Boot Company through
American Boot Company's accounts at The First National Bank of Litchfield. The
plaintiff claims damages, including but not limited to, the loss in value of his
investment in American Boot Company; interest; costs and attorney fees and such
other relief as the court deems equitable.
The First National Bank of Litchfield has denied the allegations that it
owed or breached any duty to Plaintiff or that it is liable for any losses
incurred by Plaintiff. The First National Bank of Litchfield intends to
vigorously defend these claims and believes that the claims are not likely to
result in any material adverse effect on the financial condition of the Company.
-55-
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There were no changes in or disagreements with the accountants of the
Company or the Bank during the 24 month period prior to December 31, 1999, or
subsequently.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company has issued the following securities
pursuant to the purchasers' exercise of options in accordance with the Company's
stock option plans for executive officers and outside directors.
(a) In March 1998, the Company issued 525 shares of common stock to the
Company's President and Chief Executive Officer, Jerome J. Whalen in
exchange for aggregate consideration of $2,982.00 ($5.68/share).
(b) In April 1998, the Company issued 2,400 shares of common stock to the
Estate of William H. Risley, a former director of the Company, in exchange
for aggregate consideration of $16,200 ($6.75/share), 408 shares in
exchange for aggregate consideration of $3,194.64 ($7.83/share) and 408
shares in exchange for aggregate consideration of $4,373.76 ($10.72/share).
(c) In November 1998, the Company issued an aggregate of 3,043 shares of common
stock to the Company's Treasurer, Carroll A. Pereira in exchange for
aggregate consideration of $23,735.40 ($7.80/share).
(d) In November 1998, the Company issued 3,043 shares of common stock to Walter
Hunt, the Bank's Executive Vice President and Senior Loan Officer, in
exchange for aggregate consideration of $23,735.40 ($7.80/share), 3,185
shares in exchange for aggregate consideration of $31,627.05 ($9.93/share)
and 3,185 shares in exchange for an aggregate consideration of $37,551.15
($11.79/share).
(e) In December 1998, the Company issued an aggregate of 3,043 shares of common
stock to the Bank's Senior Vice President and Senior Trust Officer, Miles
C. Borzilleri in exchange for aggregate consideration of $23,735.40
($7.80/share).
(f) In January 1999, the Company issued an aggregate of 3,185 shares of common
stock to Miles C. Borzilleri in exchange for aggregate consideration of
$31,627.05 ($9.93/share).
(g) In February 1999, the Company issued 3,185 shares of common stock to Miles
C. Borzilleri in exchange for aggregate consideration of $37,551.15
($11.79/share) and 3,502 shares in exchange for aggregate consideration of
$49,028.00 ($14.00/share).
All of the above transactions were exempt from registration under the
Securities Act of 1933, as amended pursuant to Section 4(2), as they were
transactions by an issuer not involving any public offering.
-56-
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Delaware law and the Company's Certificate of Incorporation authorize the
Company to indemnify Officers, Directors and certain individuals associated with
the Company. In general, Article IX of the Company's Certificate of
Incorporation authorizes the Company to indemnify any person who was or is a
party to any threatened, pending or completed action, suit or proceeding, and
any appeal therein, whether civil, criminal, administrative, arbitrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, trustee, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, trustee, employee or agent of another company, association,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines, penalties and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, and any appeal therein, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, that he or she had reasonable cause to believe that his or
her conduct was unlawful.
-57-
<PAGE>
PART F/S FINANCIAL STATEMENTS
Annual Financial Information
Independent Auditor's Report ...............................................F-1
Consolidated Balance Sheets at December 31, 1998
and 1997 ....................................................................F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997...................................................F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1998 and 1997 ..............................F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997.............................................F-5
Notes to Consolidated Financial Statements ..........................F-6 to F-18
Interim Financial Information
Consolidated Balance Sheets as of September 30, 1999 and
September 30, 1998 (Unaudited)..............................................F-19
Consolidated Statements of Income for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited).....................................F-20
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited)........................F-21
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)...............................F-22
Notes to Unaudited Consolidated Financial Statements........................F-23
-58-
<PAGE>
[LETTERHEAD McGLADREY & PULLEN, LLP] RSM
Certified Public Accountants International
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
First Litchfield Financial Corporation and Subsidiary
Litchfield, Connecticut
We have audited the accompanying consolidated balance sheets of First Litchfield
Financial Corporation and Subsidiary (the "Corporation") as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audtis 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 significent 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
--------------------------
McGladrey & Pullen, LLP
New Haven, Connecticut
February 5, 1999, except
with regard to Note 6 as
to which the date is
November 24, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Years ended December 31, 1998 1997
-------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks (Note B) $ 6,156,166 $ 7,369,014
Federal funds sold 2,600,000 --
-------------- -------------
Cash and Equivalents 8,756,166 7,369,014
-------------- -------------
Securities (Note C)
Available for sale securities:
U.S. Treasuries and other securities (amortized cost $18,488,318-1998
and $15,985,903-1997) 18,781,410 16,179,390
Mortgage-backed securities (amortized cost $21,541,962-1998
and $19,913,963-1997) 21,427,983 20,013,680
Held to maturity securities:
Mortgage-backed securities (market value $8,275,648-1998
and $11,993,691-1997) 8,106,219 11,804,178
-------------- -------------
Total Securities 48,315,612 47,997,248
-------------- -------------
Federal Home Loan Bank stock, at cost (Note H) 1,372,400 1,171,300
Federal Reserve Bank stock, at cost 81,850 81,850
Loans Held For Sale 379,600 --
Loans Receivable (Notes D and E):
Real estate--residential mortgage 112,858,948 105,488,633
Real estate--commercial mortgage 16,554,724 17,325,673
Real estate--construction 5,715,670 2,229,453
Commercial 4,804,229 5,680,235
Installment 12,412,933 11,058,165
Other 91,529 64,582
-------------- -------------
Total Loans 152,438,033 141,846,741
-------------- -------------
Net deferred loan origination costs 267,060 185,392
Allowance for loan losses (1,013,949) (970,840)
-------------- -------------
Net Loans 151,691,144 141,061,293
-------------- -------------
Bank premises and equipment, net (Note F) 2,139,113 2,071,153
Foreclosed real estate -- 60,000
Deferred income taxes (Note J) 280,819 209,700
Accrued interest receivable 1,213,751 1,328,336
Other assets (Note K) 1,107,103 765,738
-------------- -------------
Total Assets $ 215,337,558 $ 202,115,632
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Deposits (Note I)
Noninterest bearing:
Demand $ 31,163,054 $ 26,258,590
Interest bearing:
Savings 35,558,082 32,371,390
Money market 42,324,493 39,109,151
Time certificates of deposit in denominations of $100,000 or more 16,674,991 16,697,303
Other time certificates of deposit 69,220,852 69,236,826
-------------- -------------
Total Deposits 194,941,472 183,673,260
-------------- -------------
Federal Home Loan Bank advances (Note H) 5,000,000 4,245,000
Collateralized borrowings 270,268 --
Accrued taxes and other liabilities 814,442 729,806
-------------- -------------
Total Liabilities 201,026,182 188,648,066
-------------- -------------
Commitments and contingencies (Notes G, H, K, M and O) -- --
SHAREHOLDERS' EQUITY (Notes L, M, N and Q)
Common stock $.01 par value
Authorized--2,500,000 shares
Issued--1,483,051 shares, outstanding--1,404,556 shares--1998
Issued--557,746 shares, outstanding--536,604 shares--1997 14,831 5,577
Capital surplus 9,476,362 7,962,259
Retained earnings 5,484,708 5,848,472
Less: Treasury stock at cost--78,495 shares--1998, 21,142 shares--1997 (701,061) (421,922)
Accumulated other comprehensive income - net unrealized gain on available
for sale securities (net of taxes) (Note S) 36,536 73,180
-------------- -------------
Total Shareholders' Equity 14,311,376 13,467,566
-------------- -------------
Total Liabilities & Shareholders' Equity $ 215,337,558 $ 202,115,632
============== ==============
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years Ended December 31, 1998 1997
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 11,559,941 $ 10,816,565
Interest and dividends on securities:
Mortgage-backed 1,882,400 1,818,488
U.S. Treasury and other 1,270,834 1,236,740
Deposits with banks 57 73
Other interest income 170,911 50,078
------------ ------------
Total Interest Income 14,884,143 13,921,944
------------ ------------
INTEREST EXPENSE
Interest on deposits:
Savings 451,028 427,173
Money market 1,392,750 1,285,419
Time certificates of deposit in denominations
of, $100,000 or more 678,964 599,112
Other time certificates of deposit 4,309,286 4,309,221
------------ ------------
Total Interest on Deposits 6,832,028 6,620,925
Interest on Federal Home Loan Bank advances 282,153 96,553
Interest on borrowed money -- 1,635
------------ ------------
Total Interest Expense 7,114,181 6,719,113
------------ ------------
Net Interest Income 7,769,962 7,202,831
------------ ------------
Provision for Loan Losses (Note E) 120,000 100,000
------------ ------------
Net Interest Income After Provision
for Loan Losses 7,649,962 7,102,831
------------ ------------
NONINTEREST INCOME
Banking service charges and fees 453,238 454,282
Trust 649,008 639,205
Gains on sales of available for sale securities 143,640 34,368
Other 163,416 210,180
------------ ------------
Total Noninterest Income 1,409,302 1,338,035
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NONINTEREST EXPENSES
Salaries 2,623,583 2,503,847
Employee benefits (Note K) 708,053 645,103
Net occupancy 421,572 396,997
Equipment 391,852 368,885
Regulatory assessments and deposit insurance 81,998 76,885
Computer services 553,766 380,867
Supplies 184,511 174,098
Commissions, services and fees 190,652 149,343
Postage 96,704 101,207
Insurance 83,468 89,964
Advertising 148,222 126,982
OREO and non-performing loan expenses (income) - net 1,440 (1,696)
Other 1,064,427 863,101
------------ ------------
Total Noninterest Expenses 6,550,248 5,875,583
------------ ------------
Income Before Income Taxes 2,509,016 2,565,283
------------ ------------
Provisions for Income Taxes (Note J) 972,717 1,009,249
------------ ------------
Net Income $ 1,536,299 $ 1,556,034
============ ============
INCOME PER SHARE (Note L)
Basic Net Income Per Share $ 1.04 $ 1.05
============ ============
Diluted Net Income Per Share $ .99 $ 1.02
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997, and 1996
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ............................... 5,313 7,038,768 5,719,138
------------ ------------ ------------
Comprehensive Income:
Net income .......................................... -- -- 1,556,034
Unrealized holding gain on available
for sale securities, net of taxes (Note S) ....... -- -- --
Total comprehensive income ..........................
Cash dividends declared $.96 per share ................. -- -- (496,861)
5% stock dividend declared
November 25, 1997--26,393 shares
including 1,006 Treasury shares .................. 264 923,491 (923,755)
Fractional shares paid in cash ......................... -- -- (6,084)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 ............................. 5,577 7,962,259 5,848,472
------------ ------------ ------------
Comprehensive Income
Net income .......................................... -- -- 1,536,299
Unrealized holding loss on available
for sale securities net of taxes (Note S) ........ -- -- --
Total comprehensive income .......................
Cash dividends declared $.54 per share ................. -- -- (538,987)
5 for 2 stock split in the form of a 150% stock dividend
April 30, 1998--838,666 shares
including 31,713 treasury shares ................. 8,387 (8,387) --
5% stock dividend declared
November 25, 1998 - 70,455 shares
including 3,380 treasury shares .................. 705 1,355,516 (1,356,221)
Fractional shares paid in cash ......................... -- -- (4,855)
Stock options exercised - 16,184 shares ................ 162 166,974 --
Purchase of Treasury Shares - 22,260 shares ............ -- -- --
------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 ............................. $ 14,831 $ 9,476,362 $ 5,484,708
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME EQUITY
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ............................... (421,922) (58,829) 12,282,468
------------ ------------ ------------
Comprehensive Income:
Net income .......................................... -- -- 1,556,034
Unrealized holding gain on available
for sale securities, net of taxes (Note S) ....... -- 132,009 132,009
------------
Total comprehensive income .......................... 1,688,043
------------
Cash dividends declared $.96 per share ................. -- -- (496,861)
5% stock dividend declared
November 25, 1997--26,393 shares
including 1,006 Treasury shares .................. -- -- --
Fractional shares paid in cash ......................... -- -- (6,084)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 ............................. (421,922) 73,180 13,467,566
------------ ------------ ------------
Comprehensive Income
Net income .......................................... -- -- 1,536,299
Unrealized holding loss on available
for sale securities net of taxes (Note S) ........ -- (36,644) (36,644)
------------
Total comprehensive income ....................... 1,499,655
------------
Cash dividends declared $.54 per share ................. -- -- (538,987)
5 for 2 stock split in the form of a 150% stock dividend
April 30, 1998--838,666 shares
including 31,713 treasury shares ................. -- -- --
5% stock dividend declared
November 25, 1998 - 70,455 shares
including 3,380 treasury shares .................. -- -- --
Fractional shares paid in cash ......................... -- -- (4,855)
Stock options exercised - 16,184 shares ................ -- -- 167,136
Purchase of Treasury Shares - 22,260 shares ............ (279,139) -- (279,139)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 ............................. $ (701,061) $ 36,536 $ 14,311,376
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 1,536,299 $ 1,556,034
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion of premiums and discounts on investment securities, net 62,118 29,278
Provision for loan losses ........................................................ 120,000 100,000
Depreciation and amortization .................................................... 360,343 334,265
Deferred income taxes ............................................................ (44,731) (62,826)
Gains on sales of available for sale securities .................................. (143,640) (34,368)
Gain on sale of loan ............................................................. -- (55,438)
Loss on sale of foreclosed real estate ........................................... 918 --
Loan originated for sale ......................................................... (379,600) --
Gain on disposals of bank premises and equipment ................................. 6,065 1,148
Decrease (increase) in accrued interest receivable ............................... 114,585 (99,698)
Increase in other assets ......................................................... (341,365) (99,538)
Increase in deferred loan origination costs ...................................... (81,668) (49,639)
Increase in accrued taxes and other liabilities .................................. 72,215 135,325
------------ ------------
Net cash provided by operating activities ........................................ 1,281,539 1,754,543
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale mortgage-backed securities:
Proceeds from maturities and principal payments .................................. 8,238,585 2,282,171
Purchases ........................................................................ (12,491,014) (17,853,964)
Proceeds from sales .............................................................. 2,570,052 1,601,304
Available for sale U.S. Treasury and other investment securities:
Proceeds from maturities ......................................................... 10,500,000 5,000,000
Purchases ........................................................................ (17,992,990) (4,988,650)
Proceeds from sales .............................................................. 5,155,000 3,543,124
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments .................................. 3,720,493 3,432,413
Purchases ........................................................................ -- --
Purchases of Federal Home Loan Bank Stock ........................................... (201,100) (95,100)
Proceeds from sale of loan .......................................................... -- 401,633
Net increase in loans ............................................................... (10,668,183) (12,564,609)
Purchases of bank premises and equipment ............................................ (434,368) (312,274)
Proceeds from sale of foreclosed real estate ........................................ 59,082 20,000
------------ ------------
Net cash used in investing activities ............................................ (11,544,443) (19,533,952)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits ........................... 11,306,498 6,850,871
Net (decrease) increase in certificates of deposit .................................. (38,286) 11,521,733
Net increase in borrowings under Federal Home Loan
Bank advances .................................................................... 755,000 1,895,000
Net increase in collateralized borrowings ........................................... 270,268 --
Distribution in cash for fractional shares of common stock .......................... (4,855) (6,084)
Proceeds from exercise of stock options ............................................. 167,136 --
Purchases of Treasury stock ......................................................... (279,139) --
Dividends paid on common stock ...................................................... (526,566) (490,768)
------------ ------------
Net cash provided by financing activities ........................................ 11,650,056 19,770,752
------------ ------------
Net increase in cash and cash equivalents ........................................ 1,387,152 1,991,343
CASH AND CASH EQUIVALENTS, at beginning of year ..................................... 7,369,014 5,377,671
------------ ------------
CASH AND CASH EQUIVALENTS, at end of year ........................................... $ 8,756,166 $ 7,369,014
============ ============
SUPPLEMENTAL INFORMATION
Noncash investing and financing activities:
Transfer of loans to other real estate owned ..................................... $ -- $ 128,000
============ ============
Loans originated from sales of foreclosed real estate ............................ $ -- $ 108,000
============ ============
Cash paid during the year for:
Interest on deposits and borrowings .............................................. $ 7,143,042 $ 6,666,772
============ ============
Income taxes ..................................................................... $ 1,090,446 $ 1,027,687
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the First
Litchfield Financial Corporation (the "Corporation") and The First National Bank
of Litchfield (the "Bank"), a nationally-chartered commercial bank. 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 services include demand, savings,
NOW, money market and time deposits; residential and commercial mortgages,
consumer installment and other loans as well as trust services. The Bank is
subject to competition from other financial institutions. The Bank is also
subject to the regulations of certain federal agencies and undergoes periodic
regulatory examinations.
The significant accounting policies followed by the Corporation 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 generally accepted accounting principles
and general practices within the banking industry. All significant intercompany
balances and transactions have been eliminated. 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 revenues and
expenses for the 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 losses, and
the valuation of deferred tax assets.
INVESTMENT IN 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. The classification of those securities
and the related accounting policies are as follows:
Held to Maturity Securities: Securities classified as held to maturity are
those debt securities the Bank has both the positive intent and ability to
hold to maturity regardless of changes in market conditions, liquidity needs
or changes in general economic conditions. These securities are carried at
cost, adjusted for amortization of premium and accretion of discount,
computed by a method which approximates the interest method, over the period
to maturity. The sale of a 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.
Available for Sale Securities: Securities classified as available for sale
are those debt securities that the Bank intends to hold for an indefinite
period of time but not necessarily to maturity and equity securities not
classified as held for trading. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Bank's assets
<PAGE>
and liabilities, liquidity needs, regulatory capital considerations, and
other similar factors. Available for sale securities are carried at fair
value. Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Amortization of
premiums and accretion of discounts, computed by a method which approximates
the interest method, are recognized in interest income over the period to
maturity. Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Trading Securities: Trading securities, if any, which are generally held for
the short term in anticipation of market gains, are carried at fair value.
Realized and unrealized gains and losses on trading account assets are
recognized in the statement of income.
A decline in market value of a security below amortized cost that is deemed
other than temporary is charged to earnings, resulting in the establishment of a
new cost basis for the security. Gains and losses on the sale of securities are
recognized at the time of sale on a specific identification basis.
INTEREST AND FEES ON LOANS: Interest on loans is included in income as earned
based on contractual rates applied to principal amounts outstanding. The accrual
of interest income is generally discontinued when a loan becomes 90 days past
due as to principal or interest, or when, in the judgement of management,
collectibility of the loan or loan interest become uncertain. When accrual of
interest is discontinued, any unpaid interest previously accrued is reversed
from income. Subsequent recognition of income occurs only to the extent payment
is received subject to management's assessment of the collectibility of the
remaining principal and interest. The accrual of interest on loans past due 90
days or more, including impaired loans, may be continued when the value of the
loan's collateral is believed to be sufficient to discharge all principal and
accrued interest income due on the loan and the loan is in the process of
collection. A nonaccrual loan is restored to accrual status when it is no longer
delinquent and collectibility of interest and principal is no longer in doubt.
Loan origination fees and certain direct loan origination costs are deferred and
the net amount is amortized as an adjustment of the related loan's yield. The
Bank generally amortizes these amounts over the contractual life of the related
loans, utilizing a method which approximates the interest method.
LOANS HELD FOR SALE: Loans held for sale are those loans the Bank has the intent
to sell in the foreseeable future, and are carried at the lower of aggregate
cost or market value, taking into consideration all open positions. Gains and
losses on sales of loans are recognized at the trade dates, and are determined
by the difference between the sales proceeds and the carrying value of the
loans.
LOANS RECEIVABLE: Loans receivable are stated at current unpaid principal
balances net of the allowance for loan losses and deferred loan origination
fees. Management has the ability and intent to hold its loans for the
foreseeable future or until maturity or payoff.
A loan is classified as a restructured loan when certain concessions have been
made to the original contractual terms, such as reductions of interest rates or
deferral of interest or principal payments, due to the borrowers' financial
condition.
<PAGE>
A loan is considered impaired when it is probable that the creditor will be
unable to collect amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When a loan is impaired, impairment is
measured using (1) the present value of expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. When a loan has been deemed to have
an impairment, a valuation allowance is established for the amount of
impairment. The Bank considers all nonaccrual loans, other loans past due 90
days or more and restructured loans to be impaired. The Bank's policy with
regard to the recognition of interest income on impaired loans is consistent
with that of loans not considered impaired.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses, a material estimate
susceptible to significant change in the near-term, is established through a
provision for losses charged against operations and is maintained at a level
that management considers adequate to absorb potential losses in the loan
portfolio. Management's judgement in determining the adequacy of the allowance
is based on an evaluation of the known and inherent risk characteristics and
size of the loan portfolios, the assessment of current economic and real estate
market conditions, estimates of the current value of underlying collateral, past
loan loss experience, review of regulatory authority examination reports and
evaluations of impaired loans, and other relevant factors. Loans, including
impaired loans, are charged against the allowance for loan losses when
management believes that the collectibility of principal is unlikely. Any
subsequent recoveries are credited to the allowance for loan losses when
received. In connection with the determination of the allowance for loan losses
and the valuation of foreclosed real estate, management obtains independent
appraisals for significant properties, when considered necessary.
The Bank's mortgage loans are collateralized by real estate located principally
in Litchfield County, Connecticut. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and real estate acquired
through foreclosure is particularly susceptible to changes in market conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance or write-downs may be necessary based on changes in
economic conditions, particularly in Connecticut. In addition, the Office of the
Comptroller of the Currency (the "OCC"), as an integral part of their
examination process, periodically reviews the Bank's allowance for loan losses
and valuation of other real estate. The OCC may require the Bank to recognize
additions to the allowance or write-downs based on their judgements about
information available to them at the time of their examination.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are carried at cost 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.
FORECLOSED REAL ESTATE: Foreclosed real estate is comprised of properties
acquired through foreclosure proceedings and acceptance of a deed in lieu of
foreclosure. These properties are carried at the lower of cost or fair value
less estimated costs of disposal. At the time these properties are obtained,
they are recorded at fair value through a direct charge against the allowance
for loan losses, which establishes a new cost basis. Any subsequent declines in
value are charged to income with a corresponding adjustment to the allowance for
foreclosed real estate. Revenue and expense from the operation of foreclosed
<PAGE>
real estate and changes in the valuation allowance are included in operations.
Costs relating to the development and improvement of the property are
capitalized, subject to the limit of fair value of the collateral. Upon
disposition, gains and losses, to the extent they exceed the corresponding
valuation allowance, are reflected in the statement of income.
COLLATERALIZED BORROWINGS: Collateralized borrowings represent the portion of
loans transferred to other institutions under loan participation agreements.
Such transfers were not recognized as sales due to recourse provisions and/or
restrictions on the participant's right to transfer their portion of the loan.
INCOME TAXES: The Bank 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 which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets may
be reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan that
covers substantially all employees. Pension costs are accrued based on the
projected unit credit method and the Bank's policy is to fund annual
contributions in amounts necessary to meet the minimum funding standards
established by the Employee Retirement Income Security Act (ERISA) of 1974.
STOCK OPTION PLANS: SFAS No. 123, "Accounting for Stock-Based Compensation"
established a fair value based method of accounting for stock-based compensation
plans under which compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. The statement
allows a company to continue to measure compensation cost for such plans under
Accounting Principles Board Opinion (APB) 25, "Accounting for Stock Issued to
Employees." Under APB 25, no compensation cost is recognized if, at the grant
date, the exercise price of the options is equal to the fair market value of the
common stock. The Corporation has elected to continue to follow the accounting
in APB 25. SFAS No. 123 requires companies which elect to continue to follow the
accounting in APB 25 to disclose in the notes to their financial statements pro
forma net income and income per share as if the fair value based method of
accounting had been applied.
EARNINGS PER SHARE: SFAS No. 128, "Earnings per Share," which superseded APB
Opinion No. 15, requires the presentation of earnings per share by all entities
that have common stock or potential common stock, such as stock options,
outstanding which trade in a public market. The Corporation is required to
present basic earnings per share and diluted earnings per share in its income
statements. Basic per share amounts are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted per-share amounts
assume exercise of all potential common stock instruments in weighted-average
shares outstanding, unless the effect is antidilutive. In addition, for those
entities with complex capital structures, the statement also requires a
reconciliation of the numerator and denominator used in the computation of both
basic and diluted per share amounts to be disclosed.
<PAGE>
The Company initially applied SFAS No. 128 for the year ended December 31, 1997
and, as required by SFAS No. 128, has restated all per share information for the
prior periods to conform with the December 31, 1997 presentation.
RELATED PARTY TRANSACTIONS: Directors and officers of the Corporation and Bank
and their affiliates have been customers of and have had transactions with the
Bank, and it is expected that such persons will continue to have such
transactions in the future. Management believes that all deposit accounts,
loans, services and commitments comprising such transactions were made in the
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers who are not directors or officers. In the
opinion of the management, the transactions with related parties did not involve
more than normal risks of collectibility or favored treatment or terms, or
present other unfavorable features. Notes D, I, M, and P contain details
regarding related party transactions.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME: The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, 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. The adoption of SFAS No. 130
had no effect on the Company's net income or shareholders' equity.
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 Bank
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Generally, Federal funds sold have a one
day maturity. Cash flows from loans and deposits are reported net. The Bank
maintains amounts due from banks and Federal funds sold which, at times, may
exceed federally insured limits. The Bank has not experienced any losses from
such concentrations.
TRUST ASSETS: Assets of the trust department, other than trust cash on deposit
at the Bank, are not included in these financial statements because they are not
assets of the Bank. Trust fees are recognized on the accrual basis of
accounting.
NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its respective transaction
accounts and nonpersonal time deposits. At December 31, 1998 the Bank was
required to have cash and liquid assets of approximately $1,552,000 to meet
these requirements. In addition, the Bank is required to maintain $200,000 in
the Federal Reserve Bank for clearing purposes.
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, 1998 and 1997 are as follows:
<PAGE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
December 31, 1998
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities $ 10,988,568 $ 287,692 $ -- $ 11,276,260
U.S. Government Agency Securities 7,499,750 9,650 (4,250) 7,505,150
------------ ------------ ------------- -------------
18,488,318 297,342 (4,250) 18,781,410
------------ ------------ ------------- -------------
Mortgage-Backed Securities:
FHLMC 706,302 6,262 -- 712,564
GNMA 14,687,742 18,156 (123,432) 14,582,466
FNMA 6,147,918 487 (15,452) 6,132,953
------------ ------------ ------------- -------------
21,541,962 24,905 (138,884) 21,427,983
------------ ------------ ------------- -------------
Total available for sale securities $ 40,030,280 $ 322,247 $ (143,134) $ 40,209,393
============ ============ ============= =============
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities $ 15,985,903 $ 196,917 $ (3,430) $ 16,179,390
------------ ------------ ------------- -------------
Mortgage-Backed Securities:
FHLMC 953,747 4,262 -- 958,009
GNMA 13,033,978 98,743 -- 13,132,721
FNMA 5,926,238 1,350 (4,638) 5,922,950
------------ ------------ ------------- -------------
19,913,963 104,355 (4,638) 20,013,680
------------ ------------ ------------- -------------
Total available for sale securities $ 35,899,866 $ 301,272 $ (8,068) $ 36,193,070
============ ============ ============= =============
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SECURITIES (Continued)
<TABLE>
<CAPTION>
HELD TO MATURITY
December 31, 1998
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities:
GNMA securities $ 591,917 $ -- $ (9,734) $ 582,183
FNMA securities 4,041,294 67,155 -- 4,108,449
FHLMC securities 3,473,008 153,099 (41,091) 3,585,016
------------ ------------ ------------- -------------
Total held to maturity securities $ 8,106,219 $ 220,254 $ (50,825) $ 8,275,648
============ ============ ============= =============
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities:
GNMA securities $ 983,511 $ 9,070 $ (5,224) $ 987,357
FNMA securities 5,952,755 56,539 -- 6,009,294
FHLMC securities 4,867,912 166,438 (37,310) 4,997,040
------------ ------------ ------------- -------------
Total held to maturity securities $ 11,804,178 $ 232,047 $ (42,534) $ 11,993,691
============ ============ ============= =============
</TABLE>
The amortized cost and fair value of securities at December 31, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- -------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,999,658 $ 2,025,940 $ -- $ --
Due after one year through five years 16,488,660 16,755,470 -- --
------------ ------------ ------------- -------------
18,488,318 18,781,410 -- --
Mortgage-backed securities 21,541,962 21,427,983 8,106,219 8,275,648
------------ ------------ ------------- -------------
TOTAL $ 40,030,280 $ 40,209,393 $ 8,106,219 $ 8,275,648
============ ============ ============= =============
</TABLE>
Given both contractual payments as well as estimated prepayments, the expected
remaining lives of mortgage-backed securities ranges from two to five years.
Proceeds from the sales of available for sale securities were $5,144,428 during
1997. Gross gains of $48,055 and gross losses of $13,687 were realized on these
sales. Proceeds from the sales of available for sale securities were $7,725,052
during 1998. Gross gains of $158,530 and gross losses of $14,890 were realized
on these sales.
Investment securities with a carrying value of $2,315,000 and $2,262,000 were
pledged as collateral to secure treasury tax and loan, trust assets and public
funds at December 31, 1998 and 1997, respectively.
The unamortized net unrealized loss on certain mortgage-backed securities
transferred from the available for sale category to the held to maturity
category during 1994 (subsequent to the adoption of SFAS No. 115), of $121,887
at December 31, 1998, and $171,388 at December 31, 1997, is included, net of tax
benefit, as a reduction of shareholders' equity and is being amortized on a
level yield basis over the lives of the related mortgage-backed securities.
During 1998 and 1997, 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, 1998, 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:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Balance at the beginning of year $ 1,634,660 $ 1,410,672
Advances 6,455,064 5,175,452
Repayments (6,359,735) (4,951,464)
Other changes 964,558 --
------------ -------------
BALANCE AT END OF YEAR $ 2,694,547 $ 1,634,660
============ =============
</TABLE>
Other changes in loans to related parties resulted from loans to individuals who
ceased being related parties during the year, as well as existing loans
outstanding at the beginning of the year to individuals who became related
parties during the year.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING LOANS
Changes in the allowance for loan losses for each of the two years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Balance at beginning of year $ 970,840 $ 998,238
Provision for loan losses 120,000 100,000
Loans charged off (96,867) (156,266)
Recoveries of loans previously charged off 19,976 28,868
------------ -------------
Balance at End of Year $ 1,013,949 $ 970,840
============ =============
</TABLE>
A summary of nonperforming loans follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Nonaccrual loans $ 1,168,159 $ 1,325,896
Accruing loans contractually past due 90 days or more 14,239 454
------------ -------------
Total $ 1,182,398 $ $1,326,350
============ =============
</TABLE>
If interest income on nonaccrual loans throughout the year had been recognized
in accordance with the loans' contractual terms, approximately $88,000 and
$119,000 of additional interest would have been recorded for the years ended
December 31, 1998 and 1997, respectively. Included in the nonaccrual loans at
December 31, 1998 are two loans which total $367,000 of which 90% is guaranteed
by a U.S. Government agency.
The following information relates to impaired loans, which include all
nonaccrual loans and other loans past due 90 days or more, and all restructured
loans, as of and for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Loans receivable for which there is a related allowance 1998 1997
for credit losses, determined: ------------ -------------
<S> <C> <C>
Based on discounted cash flows $ 837,000 $ 1,239,000
Based on the fair value of collateral -- --
------------ -------------
Total $ 837,000 $ 1,239,000
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Loans receivable for which there is no related allowance
for credit losses determined:
Based on discounted cash flows $ 1,237,000 $ 1,346,000
Based on the fair value of collateral 585,000 --
------------ -------------
Total $ 1,822,000 $ 1,346,000
============ =============
Allowance for credit losses related to impaired loans $ 137,000 $ 153,000
============ =============
Average recorded investment in impaired loans $ 2,966,000 $ 3,039,000
============ =============
Interest income recognized $ 224,000 $ 143,000
============ =============
Cash interest received $ 264,000 $ 143,000
============ =============
</TABLE>
The Bank has no commitments to lend additional funds to borrowers whose loans
are impaired.
The Bank's lending activities are conducted principally in the Litchfield County
section of Connecticut. The Bank grants single-family and multi-family
residential loans, commercial real estate loans, commercial business loans and a
variety of consumer loans. In addition, the Bank grants loans for the
construction of residential homes, residential developments and for land
development projects. Although lending activities are diversified, a substantial
portion of many of the Bank's customers' net worth is dependent on real estate
values in the Bank's market area.
The Bank 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 and time deposits. 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
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.
<PAGE>
NOTE F - BANK PREMISES AND EQUIPMENT
The major categories of bank premises and equipment as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Land $ 674,849 $ 674,849
Buildings 2,154,957 2,004,611
Furniture and fixtures 1,885,332 1,850,797
Leasehold improvements 197,526 197,526
------------ -------------
4,912,664 4,727,783
Less accumulated depreciation and amortization 2,773,551 2,656,630
------------ -------------
$ 2,139,113 $ 2,071,153
============ =============
</TABLE>
Depreciation and amortization expense on bank premises and equipment for the
years ended December 31, 1998 and 1997 was $360,343 and $334,265, respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - LEASE COMMITMENTS
At December 31, 1998, the Corporation was obligated under various noncancellable
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. Net rent expense under operating leases was approximately
$77,000 and $52,000 for 1998 and 1997, respectively. The future minimum payments
under operating leases are as follows:
1999 $ 81,000
2000 40,000
2001 23,000
--------
Total $144,000
========
NOTE H - FEDERAL HOME LOAN BANK STOCK AND ADVANCES
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLB"), purchased $201,100 of FHLB capital stock during 1998 and $95,100 of
FHLB capital stock during 1997. The Bank is required to maintain an investment
in capital stock of the FHLB in an amount equal to 1% of its outstanding
residential first mortgage loans. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provision of the Federal
Home Loan Bank. As a member of the FHLB, the Bank has access to a preapproved
line of credit of up to 2% of its total assets and the capacity to borrow up to
30% of its total assets. In accordance with an agreement with the FHLB, the Bank
is required to maintain qualified collateral, as defined in the FHLB Statement
of Credit Policy, free and clear of liens, pledges and encumbrances for the
advances. FHLB stock and other loans and investments which aggregate
approximately 100% of the outstanding advance are used as collateral. Federal
Home Loan Bank advances as of December 31, 1998 totaled $5,000,000 at a rate of
5.45% due in April 2003. Federal Home Loan Bank advances as of December 31, 1997
totaled $4,245,000 at a rate of 7.05% due on an overnight basis.
NOTE I - DEPOSITS
The following is a summary of time certificates of deposits by contractual
maturity as of December 31, 1998:
1999 $68,196,943
2000 15,875,380
2001 914,135
2002 and after 909,385
-----------
$85,895,843
===========
Deposit accounts of officers, directors and their associates aggregated
$1,132,416 and $475,766 at December 31, 1998 and 1997, respectively.
<PAGE>
NOTE J - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Current:
Federal $ 813,270 $ 848,887
State 204,178 223,188
------------ -------------
1,017,448 1,072,075
Deferred:
Federal (43,493) (47,499)
State (1,238) (15,327)
------------ -------------
(44,731) (62,826)
------------ -------------
Total $ 972,717 $ 1,009,249
============ =============
</TABLE>
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
provision for income taxes as reported in the statements of income is as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ------------------
<S> <C> <C> <C> <C>
Provisions for income taxes at statutory federal rate $ 853,065 34% $ 872,196 34%
Increase (decrease) resulting from:
Connecticut corporation income tax net of federal tax benefit 122,272 5 138,262 5
Tax exempt income (19,595) (1) (19,242) (1)
Nondeductible interest expense 1,740 -- 1,984 --
Other 15,235 1 16,049 1
---------- -- --------- --
Provisions for income taxes $ 972,717 39% $1,009,249 39%
========== == ========== ==
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 401,625 $ 390,958
Depreciation 162,365 131,375
All other 175,148 127,481
------------ -------------
Total gross deferred tax assets 739,138 649,814
------------ -------------
Deferred tax liabilities:
Tax bad debt reserve (178,869) (181,850)
Prepaid pension costs (142,060) (112,858)
Unrealized gain on securities (22,667) (49,055)
Prepaid expenses and other (114,723) (96,351)
------------ -------------
Total gross deferred tax liabilities (458,319) (440,114)
------------ -------------
Net deferred tax asset $ 280,819 $ 209,700
============ =============
</TABLE>
Based on the Corporation's earning history and amount of income taxes paid in
prior years, management believes that it is more likely than not that the
deferred tax asset will be realized.
NOTE K - EMPLOYEE BENEFITS
PENSION PLAN: The Bank has a noncontributory defined benefit pension plan that
covers substantially all employees who have completed one year of service and
have attained age 21. The benefits are based on years of service and the
employee's compensation during the last five years of employment. The Bank's
funding policy is to contribute amounts to the Plan sufficient to meet the
minimum funding requirements set forth in ERISA, plus such additional amounts as
the Bank may determine to be appropriate from time to time. The actuarial
information has been calculated using the projected unit credit method.
At December 31, 1998, the Bank adopted SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits," which changed the information
required to be disclosed for its pension plan. The 1997 information has also
been presented in accordance with the new requirements.
<PAGE>
The following table sets forth the plan's funding status and amounts recognized
in the consolidated balance sheets at December 31, 1998 and 1997 using a
measurement date of December 31:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning $ 1,505,805 $ 1,390,713
Service Cost 128,716 94,300
Interest cost 113,723 103,951
Actuarial gain (78,962) (83,159)
Benefits paid (56,414) --
------------ -------------
Benefit obligation, ending 1,612,868 1,505,805
============ =============
Change in plan assets:
Fair value of plans assets, beginning 1,832,694 1,697,869
Actual return on plan assets 346,041 357,999
Employer contribution 158,540 134,610
Benefits paid (56,414) (357,784)
------------ -------------
Fair value of plan assets, ending 2,280,861 1,832,694
============ =============
Funded status 667,993 326,889
Unrecognized net actuarial loss (gain) (173,169) 110,309
Unrecognized service cost (136,178) (148,439)
------------ -------------
Prepaid benefit cost $ 358,646 $ 288,759
============ =============
Components of net periodic benefit cost:
Service cost $ 128,716 $ 94,300
Interest cost 122,129 103,951
Expected return on plan assets (137,452) (127,340)
Amortization of prior service cost (27,236) (27,236)
Recognized net actuarial loss 2,496 --
------------ -------------
Net periodic benefit cost $ 88,653 $ 43,675
============ =============
Weighted-average assumptions:
Discount rate 7.00% 7.00%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 5.00% 5.00%
</TABLE>
In 1997, an employee of the Bank retired and the Bank made a lump-sum
distribution of plan assets to this employee of approximately $300,000 in
exchange for this individual's right to receive future pension benefits. This
plan settlement resulted in a gain of approximately $6,900 which is included in
the 1997 net periodic pension cost.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - EMPLOYEE BENEFITS (Continued)
EMPLOYEE SAVINGS PLAN: The Bank offers an employee savings plan under section
401(k) of the Internal Revenue Code. Under terms of the Plan, employees may
contribute up to 10% of their pre-tax compensation. Currently, the Bank makes
matching contributions equal to 75% of participant contributions up to the first
4% of pre-tax compensation of a contributing participant. Participants vest
immediately in both their own contributions and the Bank's contributions.
Employee savings plan expense was $64,127 for 1998 and $56,938 for 1997.
OTHER BENEFIT PLANS: Effective September 1, 1994, the Bank entered into a
supplemental retirement plan with the President/Chief Executive Officer. At
December 31, 1998 and 1997, accrued supplemental retirement benefits of $37,510
are recognized in the Corporation's balance sheet related to this plan. For the
years ended December 31, 1998 and 1997, $0 and $20,726 of related expenses are
included in operations.
Effective December 31, 1996, the Bank entered into a supplemental retirement
plan with the Bank's Senior Lending Officer, who retired in 1997. At December
31, 1998 and 1997, accrued supplemental retirement benefits of $13,400 and
$6,700, respectively, are recognized in the Corporation's balance sheet related
to this Plan. Payments to this retiree will be $5,000 per year through 2008.
Beginning in 1996, the Corporation offers directors the option to defer their
directors' fees. If deferred, the fees are held in a trust account with the
Bank. The Bank has no control over the trust. The market value of the related
trust assets and corresponding liability of $120,000 and $68,000 at December 31,
1998, and 1997, respectively are included in the Corporation's balance sheet.
The Corporation 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
Corporation has similar agreements with other members of management which
provide for cash severance of six months annual compensation if termination or
reassignment of duties occurs within six months following a change of control,
and provide for the continuation of health and other insurance benefits for a
period of six months following a change in control.
NOTE L - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
On November 24, 1999, the Board of Directors declared a 5% stock dividend
payable on December 30, 1999. All per share, weighted average share and stock
option data have been revised to give effect to this dividend.
<PAGE>
On November 25, 1998 and November 25, 1997, the Board of Directors declared 5%
stock dividends payable on December 31, 1998 and December 31, 1997,
respectively. Payment of these dividends resulted in the issuance of 70,455
additional common shares in December 1998 and 26,393 additional common shares in
December 1997. The market value of the shares issued was charged to retained
earnings. The par value of the shares issued was credited to common stock and
the remainder was credited to capital surplus. Fractional shares were payable in
cash on an equivalent share basis of $19.25 for the 1998 stock dividend and
$35.00 for the 1997 stock dividend.
During 1998, the Corporation purchased 22,260 shares (22,998 shares after giving
effect to the stock split) of its stock at a price of $17.35 per share. On April
30, 1998, the Corporation declared a 5 for 2 stock split in the form of a 150%
stock dividend payable on June 15, 1998 in common stock of the Corporation. This
action resulted in the issuance of 838,666 additional common shares and
fractional shares were payable in cash on an equivalent share basis of $16.90.
In November, 1997, the Board of Directors of the Corporation adopted a
resolution authorizing the Corporation to repurchase up to 20,000 shares of the
Corporation's common stock from time to time for a period of one year, at prices
to be determined by the Corporation and sellers at the time of each transaction.
The resolution was renewed in January 1999 for a period of one year, and the
number of shares subject to repurchase was increased to 80,000.
As described in Note A, the Corporation adopted SFAS No. 128, "Earnings per
Share," as of December 31, 1997. The following is information about the
computation of net income per share for the years ended December 31, 1998 and
1997. Weighted-average shares and per share data have been restated to give
effect to all stock dividends and splits.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
------------------------------------------------
NET PER SHARE
INCOME SHARES AMOUNT
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common stockholders $ 1,536,299 1,481,463 $ 1.04
------------ --------- =============
Effect of Dilutive Securities
Options Outstanding -- 67,173
------------ ---------
Diluted Net Income Per Share
Income available to common stockholders plus assumed conversions $ 1,536,299 1,548,636 $ .99
============ ========= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common stockholders $ 1,556,034 1,479,015 $ 1.05
------------ --------- =============
Effect of Dilutive Securities
Options Outstanding -- 43,698
------------ ---------
Diluted Net Income Per Share
Income available to common stockholders plus assumed conversions $ 1,556,034 1,522,713 $ 1.02
============ ========= =============
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK OPTION PLANS
At December 31, 1998, the Corporation has two fixed option plans, which are
described below. As permitted by SFAS No. 123, the Corporation has elected to
continue to measure compensation costs for stock based compensation plans using
the intrinsic value based method of accounting presented under APB Opinion No.
25 and related interpretations, and to make pro forma disclosure of net income
and earnings per share, as if the fair value method of accounting defined by
SFAS No. 123 had been applied. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
options granted been determined consistent with the SFAS No. 123, the
Corporation's net income and earnings per share amounts would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
------------ -------------
<S> <C> <C> <C>
Net income As Reported $ 1,536,299 $ 1,556,034
Pro forma $ 1,493,032 $ 1,530,930
Basic net income per share As Reported $ 1.04 $ 1.05
Pro forma $ 1.01 $ 1.04
Diluted net income per share As Reported $ .99 $ 1.02
Pro forma $ .96 $ 1.00
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997: dividend yield of 2.6% in 1998 and
3.3% for 1997; expected volatility of 16% in 1998 and 6.9% in 1997; risk free
interest rates of 5.26% and 6.40%, respectively for 1998 and 1997; and expected
lives of 6 to 8 years.
OPTION PLAN FOR PRESIDENT
In 1990 the Board of Directors granted the Corporation's President/Chief
Executive Officer certain stock options to purchase a maximum of 3,000 shares of
the Corporation's common stock. The exercise price is $55 per share which was
the fair market value of the common stock on March 1, 1990, the date the
President joined the Corporation. The stock options are exercisable for up to
20% of the 3,000 shares approved per annum (600 shares), and expire ten years
from the grant thereof. The options are cumulative so that if shares are not
purchased in any particular year, such shares may be purchased in a subsequent
year.
In 1994, the Board of Directors amended the plan to provide for adjustments in
the price and number of options granted upon the occurrence of changes in the
Corporation's capital structure. The effect of this amendment, as of December
31, 1998, was to retroactively increase the number of options to 30,548 to
include the effect of the annual 5% stock dividends paid since April 11, 1990 as
well as the stock splits of February 8, 1995 and April 30, 1998.
<PAGE>
There were 551 options exercised in 1998, and no options exercised in 1997. At
December 31, 1998, there were outstanding and exercisable options for the
purchase of 29,997 shares at a price of $5.41 per share.
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 grants each director an
initial option of 2,520 shares of the Corporation's common stock. Automatic
annual grants of an additional 428 shares for each director will be 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
will be the fair market value of the Corporation's stock at the date of the
grant. No option may be exercised until 12 months after it is granted. Options
are exercisable for a period of ten years from the grant thereof.
Activity in the option plan for officers and outside directors for 1998 and 1997
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.)
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 91,717 $ 8.76 66,649 $ 7.82
Granted 24,136 13.75 25,068 11.26
Exercised 20,077 8.42 -- --
Cancelled -- -- -- --
------ ------
Options outstanding at end of year 95,776 10.09 91,717 8.76
====== ======
Options exercisable at end of year 71,640 8.85 66,649 7.82
====== ======
Weighted average fair value of options
granted during the year $ 3.15 $1.80
====== =====
</TABLE>
At December 31, 1998, exercise prices ranged from $6.43 to $15.94 with an
average remaining contractual life of 7.5 years and a weighted average exercise
price of $10.09.
At December 31, 1998, the Corporation has reserved 158,163 shares of common
stock for issuance under the stock option plans.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Corporation 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 Corporation 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, 1998, the Bank had retained earnings of approximately $11,249,700
of which approximately $2,690,000 was available for distribution to the
Corporation as dividends without prior regulatory approval.
Under Federal Reserve regulation, the Bank is also limited to the amount it may
loan to the Corporation, unless such loans are collateralized by specified
obligations. At December 31, 1998, the maximum amount available for transfer
from the Bank to the Corporation in the form of loans approximated 10% of
consolidated net assets.
NOTE 0 - 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 becomes 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, 1998
and 1997 related to these items are summarized below:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Contract Contract
Amount Amount
------------- -------------
<S> <C> <C>
Loan commitments:
Approved mortgage and equity loan commitments $ 6,390,294 $ 2,888,792
Approved commercial loan commitments 410,000 850,000
Unadvanced portion of construction loans 2,706,408 1,371,003
Unadvanced portion of:
Commercial lines of credit 3,464,962 2,041,014
Home equity lines of credit 11,735,902 11,267,435
Overdraft protection 485,474 475,206
Credit Cards 1,135,251 829,671
Floor plans 267,764 829,156
Standby letters of credit 125,000 65,000
------------- -------------
$ 26,721,055 $ 20,617,277
============= =============
</TABLE>
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held is primarily residential
property. Interest rates on the above are primarily variable. Standby letters of
credit are written commitments issued by the Bank to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. These financial instruments are recorded in the financial statements
when they become payable.
The Bank has entered into a contract for the renovation of a building for
$715,000. The renovation is expected to be completed in 1999, and approximately
$70,000 has been expended under this contract at December 31, 1998.
LEGAL PROCEEDINGS
The Corporation is involved in various legal proceedings which arose during the
course of business and are pending against the Corporation. 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 Corporation.
NOTE P - RELATED PARTY TRANSACTIONS
For the years ended December 31, 1998 and 1997, the Bank paid approximately
$143,000 and $162,000, respectively, for insurance and legal fees, to companies,
the principals of which are Directors of the Corporation.
<PAGE>
NOTE Q - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REGULATORY CAPITAL (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier 1 Capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 Capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
Tier 1 capital consists of common shareholders' equity, noncumulative and
cumulative perpetual preferred stock, and minority interests less goodwill.
Total capital includes the allowance for loan losses (up to a certain amount),
perpetual preferred stock (not included in Tier 1), hybrid capital instruments,
term subordinated debt and intermediate-term preferred stock. Risk adjusted
assets are assets adjusted for categories of on and off-balance sheet credit
risk.
As of December 31, 1998, the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There were no conditions or events since that notification
that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios compared to required regulatory
amounts and ratios are presented below:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PURPOSES
------------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $14,954,060 12.24% $9,773,895 8% $12,217,369 10%
Tier I Capital (to Risk Weighted Assets) 13,940,111 11.41 4,886,980 4 7,330,470 6
Tier I Capital (to Average Assets) 13,940,111 6.51 8,565,352 4 10,706,690 5
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $14,328,156 12.80% $8,955,097 8% $11,193,872 10%
Tier I Capital (to Risk Weighted Assets) 13,357,315 11.93 4,478,563 4 6,717,845 6
Tier I Capital (to Average Assets) 13,357,315 6.76 7,903,737 4 9,879,671 5
</TABLE>
<PAGE>
The Corporation is also considered to be well capitalized under the regulatory
framework specified by the Federal Reserve. Actual and required ratios are not
substantially different from those shown above.
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value of other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Corporation.
Management uses its best judgement in estimating the fair value of the
Corporation's financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Corporation could have realized in a sales
transaction at either December 31, 1998 or 1997. The estimated fair value
amounts for 1998 and 1997 have been measured as of their respective year-ends,
and have not been reevaluated or updated for purposes of these financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year-end.
The information presented should not be interpreted as an estimate of the fair
value of the entire Corporation since a fair value calculation is only required
for a limited portion of the Corporation's assets and liabilities. Due to the
wide range of valuation techniques and the degree of subjectivity used in making
the estimate, comparisons between the Corporation's disclosures and those of
other companies or banks may not be meaningful.
The fair value of the Federal Home Loan Bank stock and Federal Reserve Bank
stock is estimated to equal the carrying value, due to the historical experience
that these stocks are redeemed at par.
The fair value of securities is based on quoted market prices or dealer quotes,
if available, or if not available, on dealer quotes for similar instruments.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential mortgages,
commercial mortgages, construction mortgages, commercial, installment and other
loans. Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The majority of residential mortgages are priced by a broker using market rates
for similar loans.
Fixed rate installment and commercial mortgage loans were priced using the
discounted cash flow method. The fair value was determined using a discount rate
equivalent to the prevailing market rate for similar loans.
<PAGE>
Variable rate installment and commercial mortgage loans were valued at carrying
value due to the frequent repricing characteristics of the portfolio.
The remaining portfolio, such as collateral, home equity lines and overdraft
protection loans were valued at carrying value due to the frequent repricing
characteristics of the portfolios. The fair value of fees associated with
off-balance-sheet lending commitments is based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counter parties' credit standings.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK (Continued)
All nonperforming loans were valued using the discounted cash flow method. The
fair values of the assets were determined using a discount rate commensurate
with the anticipated risks and repayment period.
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, and money market accounts, is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit and other borrowings is based on the discounted value of contractual
cash flows that applies interest rates currently offered or that would be paid
for deposits or borrowings of similar remaining maturities to a schedule of
aggregate expected maturities.
Cash and due from banks, federal funds sold, interest income receivable, and
short term borrowings are short term, and therefore, book value is a reasonable
estimate of fair value.
The recorded book balances and estimated fair values of the Corporation's
financial instruments at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ------------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 6,156,166 $ 6,156,166 $ 7,369,014 $ 7,369,014
Federal Funds sold 2,600,000 2,600,000 -- --
Available for sale securities 40,209,393 40,209,393 36,193,070 36,193,070
Held to maturity securities 8,106,219 8,275,648 11,804,178 11,993,691
Federal Home Loan Bank stock 1,372,400 1,372,400 1,171,300 1,171,300
Federal Reserve Bank stock 81,850 81,850 81,850 81,850
Loans held for sale 379,600 379,600 -- --
Loans, net 151,691,144 152,397,684 141,061,293 141,640,497
Accrued interest receivable 1,213,751 1,213,751 1,328,336 1,328,336
Financial Liabilities:
Savings deposits 35,558,082 35,558,082 32,271,390 32,371,390
Money market and demand deposits 73,487,547 73,487,547 65,367,741 65,367,741
Time certificates of deposit 85,895,843 86,650,450 85,934,129 86,262,676
Federal Home Loan Bank Advances 5,000,000 4,986,538 4,245,000 4,245,000
Collateralized borrowings 270,268 270,268 -- --
</TABLE>
<PAGE>
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1998 and 1997.
The Bank assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, the fair values
of the Bank's financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the Bank. Management
attempts to match maturities of assets and liabilities to the extent believed
necessary to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and
by investing in securities with terms that mitigate the Bank's overall interest
rate risk.
NOTE S - OTHER COMPREHENSIVE INCOME
Other comprehensive income, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
--------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gains arising during the period $ 42,587 $ (17,035) $ 25,552
Less: reclassification adjustment for gains recognized in net income (103,660) 41,464 (62,196)
--------- --------- ---------
Unrealized holding loss on available for sale securities, net of taxes $ (61,073) $ 24,429 $ (36,644)
========= ========= =========
<CAPTION>
1997
-----------------------------------------
<S> <C> <C> <C>
Unrealized holding gains arising during the period $ 176,319 $ (70,528) $ 105,791
Less: reclassification adjustment for losses recognized in net income 43,696 (17,478) 26,218
--------- --------- ---------
Unrealized holding gain on available for sale securities, net of taxes $ 220,015 $ (88,006) $ 132,009
========= ========= =========
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
Condensed Balance Sheets Years Ended December 31,
------------------------------
1998 1997
------------ -------------
Assets
<S> <C> <C>
Cash and due from banks $ 429,256 $ 160,271
Investment in The First National Bank of Litchfield 13,976,647 13,430,495
Other assets 46,679 5,585
------------ -------------
Total Assets $ 14,452,582 $ 13,596,351
------------ -------------
Liabilities and Shareholders' Equity
Liabilities:
Other liabilities $ 141,206 $ 128,785
------------ -------------
Total Liabilities 141,206 128,785
------------ -------------
Shareholders' Equity 14,311,376 13,467,566
------------ -------------
Total Liabilities and Shareholders' Equity $ 14,452,582 $ 13,596,351
============ =============
<CAPTION>
Condensed Statements of Income Years Ended December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Dividends from subsidiary $ 1,044,600 $ 503,693
Other expenses, net 137,777 16,911
Income before taxes and equity in earnings of subsidiary 906,823 486,782
Income tax benefit (46,679) (5,585)
Income before equity in undistributed earnings of subsidiary 953,502 492,367
Equity in undistributed earnings of subsidiary 582,797 1,063,667
------------ -------------
Net income $ 1,536,299 $ 1,556,034
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Years Ended December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,536,299 $ 1,556,034
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiary (582,797) (1,063,667)
Other, net (41,093) (3,160)
------------ -------------
Cash provided by operating activities 912,409 489,207
------------ -------------
Cash flows from financing activities:
Stock options exercised 167,136 --
Purchase of treasury stock (279,139) --
Distribution in cash for fractional shares of common stock (4,855) (6,084)
Dividends paid on common stock (526,566) (490,768)
------------ -------------
Cash used by financing activities (643,424) (496,852)
------------ -------------
Net increase in cash and cash equivalents 268,985 (7,645)
Cash and cash equivalents at the beginning of the year 160,271 167,916
------------ -------------
Cash and cash equivalents at the end of the year $ 429,256 $ 160,271
============ =============
</TABLE>
NOTE U - YEAR 2000 ISSUE
The Year 2000 ("Y2K") Issue relates to whether computer systems will properly
recognize and process date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or possibly fail. The Bank is heavily dependent on computer processing in
the conduct of substantially all of its business activities.
In 1998 and 1997, the Bank developed and began implementation of a five-base
plan (the "Y2K Plan") for Y2K information systems compliance, including its core
processing system maintained by a service center. Phase I, Awareness, is
management's knowledge and recognition of the Y2K issue and included appointing
a project team to address the impact on the Bank. Phase II, Assessment, deals
with management's determination of the magnitude that the Y2K issue could have
on the Bank. This phase includes an inventory of systems and assessment with
customers and other third parties. Phase III, Resolution, involves the process
of reprogramming and restructuring data files for compliance with the Y2K issue.
This occurs through reprogramming or replacement of all existing systems which
are not Y2K compliant. Phase IV, Validation, is the testing phase of the plan.
Phase V, Implementation is the final phase of the program and involves placing
the revised and tested systems into operation.
For most systems which the Bank has identified as mission critical, the Bank is
currently in phases IV and V of the Y2K Plan. The Bank expects to complete these
phases for all mission critical and nonmission critical systems by June 30,
1999.
The Bank's costs to date for upgrading all existing systems have not been
significant, and the remaining costs to complete the Y2K Plan are not expected
to be significant.
F-18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------
September 30,
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,693,481 $ 4,302,319
------------- -------------
CASH AND CASH EQUIVALENTS 8,693,481 4,302,319
------------- -------------
Securities:
Available for sale securities:
U.S. Treasuries and other securities
(amortized cost $25,490,636-1999 24,934,460 22,441,075
and $21,987,133-1998)
Mortgage-backed securities
(amortized cost $19,294,154-1999
and $22,621,485-1998) 19,039,173 22,581,950
Held to maturity securities:
Mortgage-backed securities
(market value $5,756,931-1999
and $9,289,843-1998) 5,770,922 9,061,166
------------- -------------
TOTAL SECURITIES 49,744,555 54,084,191
------------- -------------
Federal Home Loan Bank stock, at cost 1,910,000 1,372,400
Federal Reserve Bank Stock, at cost 81,850 81,850
Loans Held for Sale 917,268 --
Loans Receivable:
Real estate-residential mortgage 113,503,816 110,248,965
Real estate-commercial mortgage 19,209,501 15,683,141
Real estate-construction 6,815,179 6,027,251
Commercial 6,868,616 4,932,103
Installment 30,069,646 12,497,222
Other 91,050 50,541
------------- -------------
TOTAL LOANS 176,557,808 149,439,223
Net deferred loan origination costs 1,037,657 221,277
Allowance for loan losses (1,100,686) (1,027,724)
------------- -------------
NET LOANS 176,494,779 148,632,776
------------- -------------
Bank premises and equipment, net 2,989,850 2,073,044
Deferred income taxes 622,783 237,645
Accrued interest receivable 1,412,377 1,360,797
Other assets 1,476,507 1,082,341
------------- -------------
TOTAL ASSETS $ 244,343,450 $ 213,227,363
============= =============
<PAGE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Deposits
Noninterest bearing:
Demand $ 32,061,496 $ 26,632,055
Interest bearing:
Savings 39,582,700 29,778,020
Money market 42,405,803 40,753,127
Time certificates of deposit in denominations of
$100,000 or more 15,622,116 19,844,475
Other time certificates of deposit 64,273,592 74,640,166
------------- -------------
TOTAL DEPOSITS 193,945,707 191,647,843
------------- -------------
Federal Home Loan Bank advances 33,964,000 6,200,000
Collateralized borrowings 513,007 --
Accrued taxes and other liabilities 1,080,457 917,595
------------- -------------
TOTAL LIABILITIES 229,503,171 198,765,438
------------- -------------
Commitments & Contingencies -- --
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value;
1,000,000 shares authorized, 0 shares
outstanding -- --
Common stock $.01 par value
Authorized - 5,000,000 shares - 1999,
2,500,000 shares - 1998
Issued - 1,567,353 shares, outstanding -
1,484,934 shares-1999 and
Issued - 1,467,553 shares, outstanding -
1,412,056 shares-1998 15,673 14,675
Capital surplus 10,933,466 9,321,963
Retained earnings 5,082,020 5,377,524
Less: Treasury stock at cost-82,419 shares - 1999,
55,497 shares - 1998 (701,061) (421,922)
Accumulated other comprehensive income -
net unrealized (loss) gain
on available for sale securities (net of taxes) (489,819) 169,685
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 14,840,279 14,461,925
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 244,343,450 $ 213,227,363
============= =============
</TABLE>
See notes to consolidated financial statements
F-19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------
Nine Months ended September 30,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 9,369,903 $ 8,586,964
----------- -----------
Interest and dividends on securities:
Mortgage-backed 1,135,076 1,413,633
U.S. Treasury and other 1,193,714 946,354
Deposits with banks 16 47
Other interest income 11,811 153,357
----------- -----------
TOTAL INTEREST INCOME 11,710,520 11,100,355
----------- -----------
INTEREST EXPENSE
Interest on deposits:
Savings 383,279 340,325
Money market 1,075,641 1,042,836
Time certificates of deposit in denominations
of $100,000 or more 385,340 502,398
Other time certificates of deposit 2,597,470 3,235,692
----------- -----------
TOTAL INTEREST ON DEPOSITS 4,441,730 5,121,251
Interest on Federal Home Loan Bank advances 778,366 202,286
Interest on borrowed money 743 --
----------- -----------
TOTAL INTEREST EXPENSE 5,220,839 5,323,537
----------- -----------
NET INTEREST INCOME 6,489,681 5,776,818
PROVISION FOR LOAN LOSSES 90,000 90,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,399,681 5,686,818
----------- -----------
NONINTEREST INCOME
Banking service charges and fees 350,725 336,943
Trust 535,500 486,756
Gains on sales of available for sale securities -- 143,640
Other 173,532 119,545
----------- -----------
TOTAL NONINTEREST INCOME 1,059,757 1,086,884
----------- -----------
<PAGE>
<CAPTION>
<S> <C> <C>
NONINTEREST EXPENSES
Salaries 2,100,645 1,918,120
Employee benefits 536,598 529,676
Net occupancy 362,102 310,477
Equipment 316,088 283,684
Regulatory assessments and deposit insurance 63,566 61,333
Computer services 535,506 398,861
Supplies 156,994 134,377
Commissions, services and fees 182,685 119,165
Postage 81,127 72,834
Insurance 59,717 63,473
Advertising 170,257 108,573
OREO & non-performing loan expenses - net 3,463 1,440
Other 888,841 695,700
----------- -----------
TOTAL NONINTEREST EXPENSES 5,457,589 4,697,713
----------- -----------
INCOME BEFORE INCOME TAXES 2,001,849 2,075,989
PROVISION FOR INCOME TAXES 641,219 805,600
----------- -----------
NET INCOME $ 1,360,630 $ 1,270,389
=========== ===========
INCOME PER SHARE
BASIC NET INCOME PER SHARE $ 0.92 $ 0.86
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.88 $ 0.82
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 1999 and 1998
Common Capital Retained Treasury
Stock Surplus Earnings Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 5,577 $ 7,962,259 $ 5,848,472 $ (421,922)
Comprehensive income:
Net income -- -- 1,270,389 --
Change in unrealized holding loss on available
for sale securities, net of taxes -- -- -- --
Total comprehensive income
Cash dividends declared
$.44 per share -- -- (397,781) --
5 for 2 stock split in the form of a
150% stock dividend
April 30, 1998--838,666 shares
including 31,713 treasury shares 8,387 (8,387) -- --
Fractional shares paid in cash -- -- (1,504) --
Stock options exercised - 1,424 shares 14 26,736 -- --
5% stock dividend declared
November 25, 1998 - 69,717 shares including
2,642 treasury shares 697 1,341,355 (1,342,052) --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ 14,675 $ 9,321,963 $ 5,377,524 $ (421,922)
============ ============ ============ ============
BALANCE, JANUARY 1, 1999 $ 14,831 $ 9,476,362 $ 5,484,708 $ (701,061)
Comprehensive income:
Net income -- -- 1,360,630 --
Change in unrealized holding loss on available
for sale securities, net of taxes -- -- -- --
Total comprehensive income
Cash dividends declared
$.30 per share -- -- (423,578) --
Stock options exercised - 9,872 shares 98 118,108 -- --
5% stock dividend declared
November 24, 1999 - 74,430 shares including
3,924 treasury shares 744 1,338,996 (1,339,740) --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 $ 15,673 $ 10,933,466 $ 5,082,020 $ (701,061)
============ ============ ============ ============
<PAGE>
<CAPTION>
Accumulated
Other Total
Comprehensive Shareholders'
Income Equity
------------ ------------
<S> <C> <C>
BALANCE, JANUARY 1, 1998 $ 73,180 $ 13,467,566
------------
Comprehensive income:
Net income -- 1,270,389
Change in unrealized holding loss on available
for sale securities, net of taxes 96,505 96,505
------------
Total comprehensive income 1,366,894
Cash dividends declared
$.44 per share -- (397,781)
5 for 2 stock split in the form of a
150% stock dividend
April 30, 1998--838,666 shares
including 31,713 treasury shares -- --
Fractional shares paid in cash -- (1,504)
Stock options exercised - 1,424 shares -- 26,750
5% stock dividend declared
November 25, 1998 - 69,717 shares including
2,642 treasury shares -- --
------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ 169,685 $ 14,461,925
============ ============
BALANCE, JANUARY 1, 1999 $ 36,536 $ 14,311,376
Comprehensive income:
Net income -- 1,360,630
Change in unrealized holding loss on available
for sale securities, net of taxes (526,355) (526,355)
------------
Total comprehensive income 834,275
Cash dividends declared
$.30 per share -- (423,578)
Stock options exercised - 9,872 shares -- 118,206
5% stock dividend declared
November 24, 1999 - 74,430 shares including
3,924 treasury shares -- --
------------ ------------
BALANCE, SEPTEMBER 30, 1999 $ (489,819) $ 14,840,279
============ ============
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
Nine months ended September 30
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,360,630 $ 1,270,389
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of premiums and discounts
on investment securities, net 52,649 40,844
Provision for loan losses 90,000 90,000
Depreciation and amortization 287,591 265,983
Deferred income taxes -- (44,731)
Gains on sale of available for sale securities -- (143,640)
Loss on sale of foreclosed real estate -- 1,440
Loans originated for sale (537,668) --
Loss on disposals of bank premises and equipment 715 1,537
Increase in accrued interest receivable (198,626) (32,461)
Increase in other assets (369,406) (362,161)
Increase in deferred loan origination costs (770,597) (35,885)
Increase in accrued taxes and other liabilities 265,778 182,076
------------ ------------
Net cash provided by operating activities 181,066 1,233,391
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale Mortgage-backed securities:
Proceeds from maturities and principal payments 6,206,309 5,120,120
Purchases (3,994,548) (10,437,895)
Proceeds from sales -- 2,570,052
Available for sale US Treasury and other investment securities:
Proceeds from maturity 2,000,000 5,000,000
Purchases (8,998,813) (15,992,990)
Proceeds from sales -- 5,155,000
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 2,437,143 2,759,893
Purchase of Federal Home Loan Bank Stock (537,600) (201,100)
Net increase in loans (24,123,038) (7,625,598)
Purchase of bank premises and equipment (1,139,043) (269,411)
Proceeds from sale of foreclosed real estate -- 59,082
------------ ------------
Net cash used in investing activities (28,149,590) (13,862,847)
------------ ------------
<PAGE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings, money market and demand deposits 5,004,370 (575,929)
Net (decrease) increase in certificates of deposit (6,000,135) 8,550,512
Net increase in borrowings under Federal Home Loan
Bank advances 28,964,000 1,955,000
Net increase in collateralized borrowings 242,739 --
Distribution in cash for fractional shares of common stock -- (1,504)
Proceeds from exercise of stock options 118,206 26,750
Dividends paid on common stock (423,341) (392,068)
------------ ------------
Net cash provided by financing activities 27,905,839 9,562,761
------------ ------------
Net (decrease) increase in cash and cash equivalents (62,685) (3,066,695)
CASH AND CASH EQUIVALENTS, at beginning of year 8,756,166 7,369,014
------------ ------------
CASH AND CASH EQUIVALENTS, at end of year $ 8,693,481 $ 4,302,319
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 5,100,768 $ 5,249,021
============ ============
Income taxes $ 689,656 $ 855,446
============ ============
</TABLE>
See notes to consolidated financial statements
F-22
<PAGE>
Notes to Unaudited Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The accompanying consolidated
financial statements and related notes should be read in conjunction with
the audited consolidated financial statements of the Corporation and notes
thereto for the fiscal year ended December 31, 1998.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented.
2. The Corporation is required to present basic income per share and diluted
income per share in its income statements. Basic income per share amounts
are computed by dividing net income by the weighted average number of
common shares outstanding. Diluted income per share assumes exercise of all
potential common stock instruments in weighted average shares outstanding,
unless the effect is antidilutive. The Corporation is also required to
provide a reconciliation of the numerator and denominator used in the
computation of both basic and diluted income per share to be disclosed. The
following is information about the computation of income per share for the
nine months ended September 30, 1999 and 1998.
Nine months ended September 30, 1999
<TABLE>
<CAPTION>
Net Income Shares Amount
-----------------------------------------
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common stockholders $ 1,360,630 1,483,554 $ .92
=====
Effect of Dilutive Securities
Options outstanding -- 61,354
----------- ---------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $ 1,360,630 1,544,908 $ .88
=========== ========= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
Net Income Shares Amount
-----------------------------------------
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common stockholders $ 1,270,389 1,481,356 $ .86
=====
Effect of Dilutive Securities
Options outstanding -- 66,990
----------- ---------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $ 1,270,389 1,548,346 $ .82
=========== ========= =====
</TABLE>
3. On November 24, 1999 and November 25, 1998, the Board of Directors declared
5% stock dividends payable on December 30, 1999 and 1998, respectively.
Payment of the dividends resulted in the issuance of 70,506 and 69,717
additional common shares in December, 1999 and December, 1998,
respectively. The market value of the shares issued was charged to retained
earnings. The par value of the shares issued was credited to common stock
and the remainder was credited to capital surplus. Fractional shares were
payable in cash on an equivalent share basis of $18.00 in 1999 and $19.25
in 1998. The effects of the stock dividends have been recognized
retroactively in the shareholders' equity accounts as of September 30,
1999, and 1998, respectively. Weighted-average shares and per share data
give effect to all stock dividends and splits.
4. The increase in Federal Home Loan Bank advances at September 30, 1999 from
September 30, and December 31, 1998 resulted from the utilization at such
advances to fund asset growth.
5. The provision for income taxes as a percentage of income before income
taxes was 32% for the nine months ended September 30, 1999 compared with
39% for the nine months ended September 30, 1998. This decrease was due to
the benefits of state tax credits realized in 1999.
6. The Company intends to register its common stock with the Securities and
Exchange Commission in early 2000.
F-23
<PAGE>
PART III
ITEM 1. INDEX TO AND DESCRIPTION OF EXHIBITS
The Exhibits described in the Exhibit Index immediately following the
signature page of this Form 10-SB (which is incorporated by reference) are
hereby filed as part of this Form 10-SB.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Jerome J. Whalen
-----------------------------------------
Jerome J. Whalen
President and Chief Executive Officer
Dated: January 7, 2000
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
3.1 Certificate of Incorporation of First Litchfield Financial
Corporation, as amended.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
4. Specimen Common Stock Certificate.
10.1 1990 Stock Option Plan for Company's President and Chief
Executive Officer, as amended.
10.2 1994 Stock Option Plan for Officers and Outside Directors.
10.3 Supplemental Executive Retirement Agreement between Company and
Jerome J. Whalen.
10.4 Change in Control Agreement between Jerome J. Whalen and
Company.
10.5 Change in Control Agreement between Philip G. Samponaro and
Company.
10.6 Change in Control Agreement between Carroll A. Pereira and
Company.
10.7 Change in Control Agreement between John S. Newton and Company.
10.8 Change in Control Agreement between Revere H. Ferris and
Company.
10.9 Supplemental Employee Retirement Agreement between the Company
and Walter Hunt.
10.10 Deferred Directors' Fee Plan.
10.11 Form of Employee Change in Control Agreement
21. List of Subsidiaries of First Litchfield Financial Corporation.
27. Financial Data Schedule.
-59-
Exhibit 3.1
STATE OF DELAWARE
CERTIFICATE OF INCORPORATION
OF
FIRST LITCHFIELD FINANCIAL CORPORATION
The undersigned, acting as incorporators of a corporation under the General
Corporation Law of the State of Delaware, adopt the following Certificate of
Incorporation:
Article 1. Corporate Title. The name of the corporation is First Litchfield
Financial Corporation (the "Corporation").
Article 2. Duration. The duration of the Corporation is perpetual.
Article 3. Purpose. The purpose or purposes for which the Corporation is
organized is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
Article 4. Capital Stock. The total number of shares of all classes of the
capital stock which the Corporation has authority to issue is one million shares
all of which shall be common stock, par value one cent ($ .01) per share,
amounting in the aggregate to Ten Thousand dollars ($10,000.00). The shares may
be issued by the Corporation from time to time by a resolution approved by its
Board of Directors without requiring the approval of its shareholders. The
consideration for the issuance of the shares shall be paid in full before their
issuance and shall not be less than the par value per share. Neither promissory
notes nor future services shall constitute payment or part payment for the
issuance of the shares of the Corporation. The consideration for the shares
shall be cash, services actually performed for the Corporation, personal
property, real property, leases of real property or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor or services, as determined by the Board of Directors of the
Corporation, shall be conclusive. Upon payment of such consideration such shares
shall be deemed to be fully paid and nonassessable.
Nothing contained in this Article 4 (or in any resolution or resolutions
adopted by the Board of Directors pursuant hereto) shall entitle the holders of
any class or series of capital stock to more than one vote per share.
<PAGE>
-2-
The holders of the common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to one vote for each
share held by such holder, including the election of directors. There shall be
no cumulative voting rights in the election of directors.
Dividends may be paid on the common stock out of any assets legally
available for the payment of dividends; but only when and as declared by the
Board of Directors.
In the event of any liquidation, dissolution or winding up of the
Corporation the holders of the common stock shall be entitled, after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
Each share of common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common stock.
Article 5. Preemptive Rights. Holders of the capital stock of the
Corporation shall not be entitled to preemptive rights with respect to any
shares or other securities of the Corporation which may be issued or any
securities convertible into any such shares, including, without limitation,
warrants, subscription rights and options to acquire shares.
Article 6. Directors. The Corporation shall be under the direction of a
Board of Directors. The number of directors shall be as set forth in the
Corporation's Bylaws. The Board of Directors shall be divided into three classes
as nearly equal in number as possible, with one class to be elected annually.
When the number of directors is changed by the shareholders or by the Board of
Directors, the Board of Directors shall determine the class or classes to which
the increased of decreased number of directors shall be apportioned; provided,
that the directors in each class shall be as nearly equal in number as possible;
and provided, further, that no decrease in the number of directors shall affect
the term of any director then in office.
The classification shall be such that the term of one class shall expire
each succeeding year. The Corporation's Board of Directors shall initially be
divided into three classes named Class I, Class II and Class III. The terms,
classifications, qualifications and election of the Board of Directors and the
filling of vacancies thereon shall be as provided herein and in the Bylaws.
The persons serving as members of the Board of Directors of The First
National Bank of Litchfield (the "Bank") and the Executive Vice President of the
Bank on the date of incorporation of the Corporation shall be designated the
initial Board of Directors of the Corporation and each such director shall
continue to serve as a director of the Corporation for the remainder of his or
her term as specified below and until their successors are elected and
qualified.
The names and mailing addresses of the initial directors and the classes of
which each director is a member are set forth below:
<PAGE>
-3-
Class I Class II Class III
- ------- -------- ---------
(To serve as (To serve as (To serve as
directors until their directors until their directors until their
successors are successors are successors are
elected and qualified elected and qualified elected and qualified
at the 1989 at the 1990 at the 1991
annual meeting) annual meeting) annual meeting)
George M. Madsen Donald K. Peck Harry R. Hart
Raymond P. Atherton Clayton L. Blick Perley H. Grimes, Jr.
Leonard W. Hutchinson Bernice D. Fuessenich William H. Risley
Ernest W. Clock Richard P. Rogers Charles E. Orr
George D. Ward
Subject to the foregoing, at each annual meeting of shareholders, the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting and until their successors shall be elected and qualified.
Any vacancy occurring in the Board of Directors, including any vacancy
created by reason of an increase in the number of directors, shall be filled for
the unexpired term by the concurring vote of a majority of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successors shall have been elected and qualified.
No director may be removed except for cause, and then only by an
affirmative vote of at least two-thirds of the total votes eligible to be voted
by shareholders at a duly constituted meeting of shareholders called for such
purpose. At least 30 days prior to such meeting of shareholders, written notice
shall be sent to the director or directors whose removal will be considered at
such meeting.
No director shall be personally liable to the Corporation or its
shareholders for monetary damages for breach of a fiduciary duty as a director
other than liability (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
any payment of a dividend or approval of a stock repurchase that is illegal
under Section 174 of the General Corporation Law of the State of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit.
Article 7. Bylaws. The Board of Directors or the shareholders may from time
to time adopt, alter, amend or repeal the Bylaws of the Corporation. Such action
by the Board of Directors shall require the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
Board of Directors called expressly for such purpose. Such action by the
shareholders shall require the affirmative vote of at least two-thirds of the
total votes eligible to be voted at a duly constituted meeting of shareholders
called expressly for such purposes.
<PAGE>
-4-
Article 8. Special Meetings. Special meetings of shareholders may be called
at any time but only by the Chairman of the Board or the President of the
Corporation or by the Board of Directors of the Corporation.
Article 9. Registered Office. The street address of the Corporation's
initial registered office in the State of Delaware is 1209 Orange Street, City
of Wilmington, County of New Castle, and the name of its initial registered
agent at such address is The Corporation Trust Company.
Article 10. Approval for Acquisitions of Control.
Subsection 1. Shareholder Vote and Regulatory Approval Required for
Acquisition of Control at any Time.
No Person shall acquire "Control" (as defined in Subsection 3 hereof) of
the Corporation at any time, unless such acquisition of Control has been
approved prior to its consummation by the affirmative vote of the holders of at
least two-thirds of the outstanding shares of "Voting Stock" (as defined in
Subsection 3 hereof) at a duly constituted meeting of shareholders called for
such purpose; provided, however, that this provision shall not apply if such
acquisition of Control has been approved by at least two-thirds of the directors
then in office at a duly constituted meeting of the board of directors called
for such purpose. In addition, no "Person" (as defined in Subsection 3 hereof)
shall acquire Control of the Corporation at any time without obtaining prior
thereto all regulatory approvals required under applicable statutes and by
regulations adopted thereunder. In the event that Control is acquired without
obtaining all such statutory and regulatory approvals, such acquisition shall
constitute a violation of this Article 10 and the Corporation shall be entitled
to institute a private right of action (seeking injunctive relief as well as
damages) to enforce such statutory and regulatory provisions.
Subsection 2. Excess Shares.
In the event that Control of the Corporation is acquired in violation of
this Article 10, all shares of Voting Stock owned by the Person so acquiring
Control in excess of the number of shares the beneficial ownership of which is
deemed under Subsection 3 hereof to confer Control of the Corporation shall be
considered from and after the date of their acquisition by such Person to be
"excess shares" for purposes of this Article 10. Such excess shares shall
thereafter no longer (i) be entitled to vote on any matter, (ii) be entitled to
take other shareholder action, (iii) be entitled to be counted in determining
the total number of outstanding shares for purposes of any matter involving
shareholder action, or (iv) be transferable, except with the prior written
approval of the Board of Directors or by an independent trustee appointed by the
Board of Directors for the purpose of having such excess shares sold on the open
market or otherwise. The proceeds from the sale by the trustee of such excess
shares shall be paid (i) first, to the trustee in an amount equal to the
trustee's reasonable fees and expenses, (ii) second, to the "beneficial owner"
(as defined in Article 12, Subsection 3, Paragraph C hereof) of such excess
shares in an amount up to such owner's federal income tax basis in such excess
shares, and (iii) third, to the Corporation as to any remaining balance.
<PAGE>
-5-
Subsection 3. Certain Definitions.
For purposes of this Article 10:
A. "Control" means the sole or shared power to vote or to direct the voting
of, or to dispose or to direct the disposition of, 15 percent or more of the
Voting Stock; provided, that the solicitation, holding and voting of proxies
obtained by the Board of Directors of the Corporation shall not constitute
"Control".
B. "Group Acting in Concert" includes Persons seeking to combine or pool
their voting or other interests in the Voting Stock for a common purpose,
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; provided, that a "Group Acting in
Concert" shall not include the Board of Directors of the Corporation in its
solicitation, holding and voting of proxies.
C. "Offer" means every offer to buy or acquire, solicitation of an offer to
sell, tender offer for, or request or invitation for tender of, Voting Stock.
D. "Person" means any individual, firm, corporation or other entity
including a Group Acting in Concert.
E. "Voting Stock" means the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors.
Subsection 4. Inapplicability to Public Offering.
This Article 10 shall not apply to the purchase of securities of the
Corporation by underwriters in connection with a public offering of such
securities.
Article 11. Criteria for Evaluating Certain Offers. The Board of Directors
of the Corporation, when evaluating any offer to (i) make a tender or exchange
offer for the common stock of the Corporation, (ii) merge or consolidate the
Corporation with another institution, or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Corporation, may, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation and its shareholders, give due consideration to all
relevant factors, including without limitation the economic effects of
acceptance of such offer on (a) depositors, and borrowers of the insured banks
or subsidiaries of the Corporation, and on the communities in which such bank(s)
or subsidiaries operate or are located and (b) the ability of such bank(s) or
subsidiaries to fulfill the objectives of an insured institution under
applicable federal and state statutes and regulations.
Article 12. Certain Business Combinations. The votes of shareholders and
directors required to approve any Business Combination shall be as set forth in
this Article 12. The term "Business Combination" is used as defined in
Subsection 1 of this Article 12. All other capitalized terms not otherwise
defined in this Article 12 or elsewhere in this Certificate of Incorporation are
used as defined in Subsection 3 of this Article 12.
<PAGE>
-6-
Subsection 1. Vote Required for Certain Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any
affirmative vote required by law or this Certificate of Incorporation, and
except as otherwise expressly provided in Subsection 2 of this Article 12:
(i) any merger, consolidation or share exchange of the Corporation or
any "Subsidiary" (as hereinafter defined in Subsection 3) with (a) any
"Interested Shareholder" (as hereinafter defined in Subsection 3) or (b)
any other corporation (whether or not itself an Interested Shareholder)
which is, or after the merger, consolidation or share exchange would be, an
Affiliate or Associate (as those terms are hereinafter defined) of such
Interested Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the usual and regular course of business (in one
transaction or a series of transactions in any twelve-month period) to or
with any Interested Shareholder or any Affiliate or Associate of such
Interested Shareholder, other than the Corporation or any of its
Subsidiaries, of any assets of the Corporation or any Subsidiary having,
measured at the time the transaction or transaction are approved by the
Board of Directors of the Corporation, an aggregate book value as of the
end of the Corporation's most recent fiscal quarter of five percent or more
of the total "Market Value" (as hereinafter defined in Subsection 3) of the
outstanding shares of the Corporation or of its net worth as of the end of
its most recent fiscal quarter; or
(iii) any purchase, exchange, lease or other acquisition by the
Corporation or any Subsidiary involving more than five percent of the
assets or business of an Interested Shareholder or any Affiliate or
Associate of an Interested Shareholder; or
(iv) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any equity securities of
the Corporation or any Subsidiary having an aggregate Market Value of five
percent or more of the total Market Value of the outstanding shares of the
Corporation to any Interested Shareholder or any Affiliate or Associate of
any Interested Shareholder, other than the Corporation or any of its
Subsidiaries, except pursuant to the exercise of warrants, rights or
options to subscribe for or purchase securities offered, issued or granted
pro rata to all holders of the "Voting Stock" (as hereinafter defined in
Subsection 3) of the Corporation or any other method affording
substantially proportionate treatment to the holders of Voting Stock; or
(v) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation or any Subsidiary proposed by or on behalf
of an Interested Shareholder or any Affiliate or Associate of such
Interested Shareholder, other than the Corporation or any of its
Subsidiaries; or
(vi) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise
<PAGE>
-7-
involving an Interested Shareholder) which has the effect, directly or
indirectly, in one transaction or a series of transactions, of increasing
the proportionate amount of the outstanding shares of any class of equity
or convertible securities of the Corporation or any Subsidiary which is
directly or indirectly owned by any Interested Shareholder or any Affiliate
or Associate of any Interested Shareholder, other than the Corporation or
any of its Subsidiaries;
shall be approved by affirmative vote of the holders of at least eighty percent
(80%) of the total number of outstanding shares of Voting Stock. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or in any
agreement with any national securities exchange or otherwise.
B. Definition of "Business Combination." The term "Business Combination" as
used in this Article 12 shall mean any transaction which is referred to in any
one or more of clauses (i) through (vi) of paragraph A of this Subsection 1.
Subsection 2. When Higher Vote Is Not Required.
The provisions of Subsection 1 of this Article 12 shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other provision
of this Certificate of Incorporation, if both of the following conditions shall
have been met:
A. The Business Combination shall have been approved by a majority of the
"Continuing Directors" (as hereinafter defined in Subsection 3) then in office
of the Corporation at a duly constituted meeting of the Board of Directors of
the Corporation called for such purpose; and
B. Unless otherwise approved by a majority vote of the "Continuing
Directors" then in office of the Corporation at a duly constituted meeting of
the Board of Directors of the Corporation called for such purpose, the aggregate
of the cash and fair market value of the consideration to be paid to all the
holders of the Capital Stock of the Corporation in connection with the Business
Combination (when adjusted for stock splits, stock dividends, reclassification
of shares or otherwise) shall be equal to the highest price per share paid by
the other party or parties to the Business Combination (the "Acquiring Party")
in acquiring any of the Corporation's Capital Stock; provided, however, that the
consideration to be paid to the holders of the Capital Stock of the Corporation
shall be in the same form as that paid by the Acquiring Party in acquiring the
shares of the Capital Stock held by it except to the extent that any stockholder
of the Corporation shall otherwise agree.
Subsection 3. Certain Definitions.
For Purposes of this Article 12:
A. "Person" shall mean any individual, firm or corporation, partnership,
association, joint stock company, trust, unincorporated organization, group
acting in concert or other entity.
<PAGE>
-8-
B. "Interested Shareholder" shall mean any Person (other than the
Corporation or any Subsidiary) who or which:
(i) is the Beneficial Owner, directly or indirectly, of 10 percent or
more of the voting power of the then outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within the
two- year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of 10 percent or more of the
voting power of the then outstanding Voting Stock.
C. "Beneficial Owner", when used with respect to any Voting Stock, means a
Person:
(i) that, individually or with any of its Affiliates or Associates,
beneficially owns Voting Stock directly or indirectly; or
(ii) that, individually or with any of its Affiliates or Associates,
has (a) the right to acquire Voting Stock (whether such right is
exercisable immediately or only after passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise;
(b) the right to vote or direct the voting of Voting Stock pursuant to
any agreement, arrangement or understanding; or (c) the right to
dispose of or to direct the disposition of Voting Stock pursuant to
any agreement, arrangement or understanding; or
(iii) that, individually or with any of its Affiliates or Associates,
has by agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of Voting Stock with any other
person that beneficially owns, directly or indirectly, such shares of
Voting Stock.
D. For the purposes of determining whether a Person is an Interested
Shareholder pursuant to paragraph B of this Subsection 3, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph C of this Subsection 3 but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
E. "Affiliate" means a Person that directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, a specified person.
F. "Associate," when used to indicate a relationship with any Person,
means: (1) any domestic or foreign corporation or organization, other than the
Corporation or a Subsidiary of the Corporation, of which such Person is an
officer, director or partner or is, directly or indirectly, the Beneficial Owner
of ten percent or more of any class of equity securities; (2) any trust or other
estate
<PAGE>
-9-
in which such Person has a substantial beneficial interest or as to which such
Person serves as a trustee or in a similar fiduciary capacity; and (3) any
relative or spouse of such Person, or any relative of such spouse who has the
same home as such Person or who is a director or officer of the Corporation or
any of its Affiliates.
G. "Subsidiary" means any corporation of which Voting Stock having a
majority of the votes entitled to cast is owned, directly or indirectly, by the
Corporation.
H. "Continuing Director" means any member of the Board of Directors of the
Corporation who is unaffiliated with the Interested Shareholder and who was a
member of the Board of Directors of the Corporation prior to the time that the
Interested Shareholder (including any Affiliate or Associate of such Interested
Shareholder) became an Interested Shareholder, and any successor of a Continuing
Director who is unaffiliated with the Interested Shareholder and is recommended
to succeed a Continuing Director by a majority of Continuing Directors then on
the Board of Directors of the Corporation.
I. "Market Value" means:
(i) in the case of stock, the highest closing sale price during the
30- day period immediately preceding the date in question of a share
of such stock on the composite tape for New York Stock Exchange -
listed stocks, or, if such stock is not quoted on the composite tape,
on the New York Stock Exchange, or, if such stock is not listed on
such exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such
stock is listed, or, if such stock is not listed on any such exchange,
the highest closing sales price or bid quotation with respect to a
share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc.
Automated Quotation System or any then in use, or if no such
quotations are available, the fair market value on the date in
question of a share of such stock as determined by the Board of
Directors of the Corporation in good faith; and
(ii) in the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by a
majority of the Board of Directors of the Corporation in good faith.
J. "Voting Stock" means the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors.
Subsection 4. Powers of the Board of Directors.
A majority of the Continuing Directors then in office shall have the power
and duty to determine for the purposes of this Article 12, on the basis of
information known to them after reasonable inquiry, all of the terms and
provisions of this Article 12 including, without limitation,
<PAGE>
-10-
(A) whether a Person is an Interested Shareholder, (B) the number of shares of
Voting Stock beneficially owned by any Person, (C) whether a Person is an
Affiliate or Associate of another, (D) whether the assets that are the subject
of a Business Combination represent more than five percent of the assets or
business of the Interested Shareholder or any Affiliate or Associate of an
Interested Shareholder, and (E) whether an action is with, proposed by, or on
behalf of an Interested Shareholder or an Affiliate or an Associate thereof, and
the good faith determination of a majority of the Continuing Directors on such
matters shall be conclusive and binding for all the purposes of this Article 12.
Subsection 5. No Effect on Fiduciary Obligations of Interested
Shareholders.
Nothing contained in this Article 12 shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
Article 13. Business Combinations with Interested Stockholders. The
Corporation elects to be governed by Section 203 of Chapter 1, Title 8, of the
Delaware Code relating to the General Corporate law.
Article 14. Shareholder Action. Any action required or permitted to be
taken by the shareholders of the Corporation must be effected at a duly called
annual or special meeting of such holders and may not be affected by any consent
in writing by such holders, unless such consent is unanimous.
Except as provided in Article 12, any merger or consolidation involving the
Corporation shall, as a condition to its effectiveness, be approved by the
affirmative vote of at least two-thirds of the issued and outstanding shares of
each class of capital stock.
Article 15. Amendment of Certificate of Incorporation. Except as set forth
in this Article 15 or as otherwise specifically required by law, no amendment of
any provision of this Certificate of Incorporation shall be made unless such
amendment has been first proposed by the Board of Directors of the Corporation
upon the affirmative vote of at least two-thirds of the directors then in office
at a duly constituted meeting of the Board of Directors called for such purpose
and thereafter approved by the shareholders (as, if, and when shares are issued)
of the Corporation by the affirmative vote of the holders of at least a majority
of the shares entitled to vote thereon at a duly called annual or special
meeting; provided, however, that if such amendment is to the provisions set
forth in this clause of Article 15 or in Article 6, 7, 8, 10, 11, or 14 hereof,
such amendments must be approved by the affirmative vote of the holders of at
least two-thirds of the shares entitled to vote thereon rather than a majority;
provided, further, that if such amendment is to the provisions set forth in this
clause of Article 15 or in Article 12 hereof, such amendment must be approved by
the affirmative vote of the holders of at least 80 percent of the shares
entitled to vote thereon rather than a majority.
<PAGE>
-11-
Article 16. Incorporators. The powers of the incorporators shall terminate
upon the filing of this certificate of incorporation. The name and mailing
address of each incorporator are as follows:
Raymond P. Atherton George M. Madsen
Box T Davenport Road
Morris, CT 06763 Roxbury, CT 06783
Clayton L. Blick, Esq. Charles E. Orr
Cramer & Anderson Maple Street
P.O. Box 278 Litchfield, CT 06759
Litchfield, CT 06759
Ernest W. Clock Donald K. Peck
Milton Road West Street
Litchfield, CT 06759 Litchfield, CT 06759
Bernice D. Fuessencich William H. Risley
Camp Dutton Road Prospect Street
Litchfield, CT 06759 Litchfield, CT 06759
Perley H. Grimes, Jr., Esq. Richard Rogers
Cramer & Anderson 6 Heritage Drive
P.O. Box 278 Unionville, CT 06085
Litchfield, CT 06759
Harry R. Hart George D. Ward
Chestnut Hill Road P.O. Box 438
Litchfield, CT 06759 Washington Depot, CT 06794
Leonard W. Hutchinson
Meadow Street
Litchfield, CT 06759
Article 17. Meetings. Meetings of shareholders and of the Board of
Directors may be held within or without the State of Delaware, as the Bylaws may
provide. The books of the corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the board of directors or in the
Bylaws of the Corporation.
<PAGE>
-12-
IN WITNESS WHEREOF WE THE UNDERSIGNED, being each of the incorporators
hereinbefore named, for the purpose of forming a corporation pursuant to the
General Corporation Law of the State of Delaware, do make this certificate,
hereby declaring and certifying that this is our act and deed and the facts
herein stated are true, and accordingly have hereunto set our hands this 18th
day of February, 1988.
/s/ Raymond P. Atherton
- --------------------------------
Raymond P. Atherton
Box T
Morris, CT 06763 /s/ Clayton L. Blick, Esq.
--------------------------
Clayton L. Blick, Esq.
Cramer & Anderson
P.O. Box 278
/s/ Ernest W. Clock Litchfield, CT 06759
- --------------------------------
Ernest W. Clock
Milton Road
Litchfield, CT 06759 /s/ Bernice D. Fuessenich
--------------------------
Bernice D. Fuessenich
Camp Dutton Road
/s/ Perley H. Grimes, Jr. Esq. Litchfield, CT 06759
- -------------------------------
Perley H. Grimes, Jr., Esq.
Cramer & Anderson
P.O. Box 278
Litchfield, CT 06759 /s / Harry R. Hart
--------------------------
Harry R. Hart
Chestnut Hill Road
/s/ Leonard W. Hutchinson Litchfield, CT 06759
- -------------------------------
Leonard W. Hutchinson
Meadow Street
Litchfield, CT 06759 /s/ George M. Madsen
--------------------------
George M. Madsen
Davenport Road
/s/ Charles E. Orr Roxbury, CT 06783
- -------------------------------
Charles E. Orr
Maple Street
Litchfield, CT 06759 /s/ Donald K. Peck
--------------------------
Donald K. Peck
West Street
/s/ William H. Risley Litchfield, CT 06759
- -------------------------------
William H. Risley
Prospect Street
Litchfield, CT 06759 /s/ Richard P. Rogers
--------------------------
Richard P. Rogers
6 Heritage Drive
/s/ George D. Ward Unionville, CT 06085
- -------------------------------
George D. Ward
Upper Church Hill Road
Washington Depot, CT 06794
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FIRST LITCHFIELD FINANCIAL CORPORATION
FIRST LITCHFIELD FINANCIAL CORPORATION, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of First Litchfield
Financial Corporation a resolution was duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the shareholders of said
corporation for consideration thereof. The resolution setting forth the proposed
amendment is as follows:
RESOLVED: To amend the Company's Certificate of Incorporation to increase
the number of shares of authorized Common Stock (par value $.01) from
1,000,000 to 2,500,000.
Said Certificate of Incorporation Article Fourth shall be and read as
follows:
ARTICLE 4. CAPITAL STOCK. The total number of shares of all classes of the
capital stock which the Corporation has authority to issue is two million
five hundred thousand shares all of which shall be common stock, par value
one cent ($ .01) per share, amounting in the aggregate to Twenty-five
Thousand Dollars ($25,000.00). The shares may be issued by the Corporation
from time to time by a resolution approved by its Board of Directors
without requiring the approval of its shareholders. The consideration for
the issuance of the shares shall be paid in full before their issuance and
shall not be less than the par value per share. Neither promissory notes
nor future services shall constitute payment or part payment for the
issuance of the shares of the Corporation. The consideration for the shares
shall be cash, services actually performed for the Corporation, personal
property, real property, leases of real property or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of
such property, labor or services, as determined by the Board of Directors
of the Corporation, shall be conclusive. Upon payment of such consideration
such shares shall be deemed to be fully paid and nonassessable.
Nothing contained in this Article 4 (or in any resolution or resolutions
adopted by the Board of Directors pursuant hereto) shall entitle the
holders of any class or series of capital stock to more than one vote per
share.
The holders of the common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to one vote for
each share held by such holder, including the election of directors. There
shall be no cumulative voting rights in the election of directors.
Dividends may be paid on the common stock out of any assets legally
available for the payment of dividends; but only when and as declared by
the Board of Directors.
<PAGE>
In the event of liquidation, dissolution or winding up of the Corporation
the holders of the common stock shall be entitled, after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution,
in cash or in kind.
Each share of common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common stock.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
the Annual Meeting of the Shareholders of said Corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said First Litchfield Financial Corporation has caused
this certificate to be signed by Jerome J. Whalen, its President and attested by
Philip G. Samponaro, its Secretary this 22nd day of May, 1996.
By: /s/ Jerome J. Whalen
-----------------------
Jerome J. Whalen
Its: President
ATTEST:
By: /s/ Philip G. Samponaro
-----------------------
Philip G. Samponaro
Its: Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FIRST LITCHFIELD FINANCIAL CORPORATION
FIRST LITCHFIELD FINANCIAL CORPORATION, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of First Litchfield
Financial Corporation a resolution was duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and directing that the proposed amendment be
considered at the next annual meeting of the shareholders of said corporation
for consideration thereof. The resolution setting forth the proposed amendment
is as follows:
RESOLVED: To amend First Litchfield Financial Corporation's (the
"Corporation") Certificate of Incorporation to increase the Corporation's
authorized common stock, par value $.01 per share, from 2,500,000 shares to
5,000,000 shares and to create a class of serial preferred stock,
consisting of 1,000,000 shares of preferred stock, par value $ .00001 per
share, which may be issued from time to time in one or more series as
designated by the Board of Directors.
Said Certificate of Incorporation Article Four shall be read as follows:
ARTICLE 4. CAPITAL STOCK. The total number of shares of all classes of the
capital stock which the Corporation has authority to issue is six million
(6,000,000) shares of which five million (5,000,000) shares shall be common
stock, (par value $ .01 per share), amounting in the aggregate to Fifty Thousand
Dollars ($50,000.00) and one million (1,000,000) shares shall be preferred stock
(par value $0.00001 per share), amounting in the aggregate to Ten Dollars
($10.00). The shares may be issued by the Corporation from time to time by a
resolution approved by its Board of Directors without requiring the approval of
its shareholders. The consideration for the issuance of the shares shall be paid
in full before their issuance and shall not be less than the par value per
share. Neither promissory notes nor future services shall constitute payment or
part payment for the issuance of the shares of the Corporation. The
consideration for the shares shall be cash, services actually performed for the
Corporation, personal property, real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the value of such property, labor or services, as determined by the Board of
Directors of the Corporation, shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable.
A description of the different classes and series of the Corporation's
capital stock and a statement of the designations, and the powers, preferences
and rights, and the qualifications, limitations and restrictions of the shares
of each class of and series of capital stock are as follows:
A. COMMON STOCK. Except as provided in this Article 4 (or in any resolution
or resolutions adopted by the Board of Directors pursuant hereto), the holders
of the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holder, including the election of Directors. There shall be no cumulative voting
rights in the election of Directors.
<PAGE>
Wherever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends; but only when and as
declared by the Board of Directors.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
any class having preferences over the common stock in the event of liquidation,
dissolution or winding up of the full preferential amounts of which they are
respectively entitled, the holders of the common stock, and of any class or
series of stock distribution of assets, shall be entitled after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
B. SERIAL PREFERRED STOCK. Except as provided in this Article 4, the Board
of Directors of the Corporation is authorized by resolution or resolutions from
time to time adopted and by filing a certificate pursuant to the applicable law
of the State of Delaware, to provide for the issuance of serial Preferred Stock
in series and to fix and state the voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Each shares of each series
of serial Preferred Stock shall have the same relative rights as and be
identical in all respects with all other shares of the same series.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
the Annual Meeting of the Shareholders of said Corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said First Litchfield Financial Corporation has caused
this certificate to be signed by Jerome J. Whalen, its President and attested by
Philip G. Samponaro, its Secretary this 22nd day of May, 1999.
By: /s/ Jerome J. Whalen
--------------------
Jerome J. Whalen
Its: President
ATTEST:
By: /s/ Philip G. Samponaro
-----------------------
Philip G. Samponaro
Its: Secretary
Exhibit 3.2
BYLAWS
OF
FIRST LITCHFIELD FINANCIAL CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered Office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the board of
directors may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. Meetings of shareholders for the election of
directors or for any other purpose shall be held at such time and place, either
within or without the State of Delaware, as shall be designated from time to
time by the board of directors and stated in the notice of the meetings or in a
duly executed waiver of notice thereof.
Section 2. Annual Meeting. The annual meetings of shareholders shall be
held at such date and hour as shall be designated from time to time by the board
of directors within thirteen months subsequent to the later of the date of
incorporation or the last annual meeting of shareholder and as shall be stated
in the notice of the meeting, at which meetings the shareholders shall be elect
by a plurality vote a board of directors and transact such other business as may
properly be brought before the meeting. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
shareholder entitled to vote at such meeting not less than 20 nor more than 50
days before the date of the meeting. The notice shall also set forth the purpose
or purposes for which the meeting is called.
<PAGE>
-2-
Section 3. Business at Annual Meeting. At an annual meeting of the
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the board of directors, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors, or (c) otherwise properly brought before the meeting of a
shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than forty-five (45) days nor more than ninety (90) days
prior to the meeting; provided however, that in the event that less than thirty
(30) days notice or prior public disclosure of the date of the meeting is given
or made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the shareholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in these bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 3.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the annual meeting that a matter has been brought in accordance with
the provisions of this Section 3, and if he should so determine he shall so
declare to the meeting that a matter has not been brought in accordance with the
provisions of this Section 3 and any such business not properly brought before
the meeting shall not be transacted.
Section 4. Special Meetings. Special meetings of shareholders for any
purpose may be called only as provided in the Certificate of Incorporation.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than 20 nor more than 50 days before the date of the meeting to
each shareholder entitled to vote at such meeting.
Section 5. Quorum. The holders of one-third of the capital stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any
<PAGE>
-3-
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder entitled to vote at the
meeting.
Section 6. Voting. Except as otherwise required by law, the Certificate of
Incorporation or these bylaws, any matter brought before any meeting of
shareholders shall be decided by the affirmative vote of the majority of the
votes cast on the matter. Each shareholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such shareholder.
Section 7. List of Shareholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of shareholders, a complete
list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the shareholders entitled to examine the list
required by Section 7 of this Article II or to vote in person or by proxy at any
meeting of shareholders.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or his duly authorized
attorney-in-fact. Proxies solicited on behalf of the board of directors shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. Proxies shall be valid only
for one meeting, to be specified therein, and any adjournments of such meeting.
Proxies shall be dated and shall be filed with the records of the meeting.
Section 10. Voting of Shares in the Name of Two or More Persons. If shares
or other securities having voting power stand of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the secretary of the Corporation is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is do provided, their acts with respect to voting shall
have the following effect: (1) if only one votes, his act binds all; (2) if more
than one vote, the act of the majority so voting binds all; (3) if more than one
vote but
<PAGE>
-4-
the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or any person voting the shares, or a
beneficiary, if any, may apply to the Court of Chancery of the State of Delaware
or such other court as may have jurisdiction to appoint an additional person to
act with the persons so voting the shares, which shall then be voted as
determined by a majority of such persons and the person appointed by the Court.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this subsection shall be
a majority or even-split in interest.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, but no
trustee shall be entitled to vote shares held by him without a transfer of such
shares into his name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer into his name if authority so to do
is contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgees to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 12. Inspectors of Election. In advance of any meeting of
shareholder, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. If the board of directors so appoints such inspectors, that appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, and on the request of
not less than ten percent of the votes represented at the meeting shall, make
such appointments at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment by the board of directors in advance of the meeting or by the
chairman of the board or the president.
Unless otherwise prescribed by law, the duties of such inspectors shall
include: determining the number of shares of stock entitled to vote, the voting
power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
<PAGE>
-5-
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or the vote with fairness to all shareholders.
Section 13. Conduct of Meetings. The President or the Chairman of the Board
of Directors shall preside over and chair any meetings of shareholders. Unless
another person is appointed by the chairperson of the meeting, the secretary
shall act as secretary to any meetings of shareholders. The chairperson of the
meeting shall have all the powers and authority vested in a presiding officer by
law or practice, including such authority as may be necessary or helpful under
the circumstances in order to conduct an orderly meeting. The Board of Directors
may from time to time adopt Rules for the conduct of the annual or any special
meetings of shareholders, to the extent that such Rules do not conflict with
applicable law or the provisions of the Corporation's Articles of Incorporation
by Bylaws. Unless specifically required by such Rules, or the Bylaws or Articles
of Incorporation of the Corporation, strict compliance with the provisions of
Roberts Rules of Order, or Parliamentary Procedure is not required. Rather, in
accordance with the Rules and these Bylaws, the chairperson shall have the right
and duty to preserve order and conduct the meeting in accordance with such
chairperson's reasonable exercise of good faith in fundamental fairness.
A copy of the Rules of Conduct, as may be adopted from time to time by the
Board of Directors, shall be available for reference at any meeting of
shareholders.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The number of directors shall
be not less than five nor more than 25 shareholders the exact number to be fixed
and determined from time to time by resolution of a majority of the full board
of directors or by majority vote of shareholders voting at the annual meeting;
provided, however, that by majority vote the board of directors may increase the
number of directors to a number which exceeds by less than seven, the number
fixed by shareholders at the last annual meeting, but in no event shall the
total number of directors exceed twenty five (25). Directors need not be
residents of the State of Delaware.
Directors shall be elected only by shareholders at annual meetings of
shareholders, other than the initial board of directors and except as provided
in Section 2 of this Article III in the case of vacancies and newly created
directorships. Each director elected shall hold office for the term for which he
is elected and until his successor is elected and qualified or until his earlier
resignation or removal.
<PAGE>
-6-
Section 2. Classes, Terms of Office, Vacancies. The board of directors
shall divide the directors into three classes; and, when the number of directors
is changed, shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned; provided, further, that no
decrease in the number of directors shall affect the term of any director then
in office. At each annual meeting of shareholders, directors elected to succeed
those whose terms are expiring shall be elected for a term of office to expire
at the third succeeding annual meeting of shareholders and when their respective
successors are elected and qualified.
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled, for the unexpired term, by the
concurring vote of a majority of the directors then in office, whether or not a
quorum, and any director so chosen shall hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor shall have been elected
and qualified.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the board of directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these bylaws
directed or required to be exercised or done by the shareholders. The board of
directors shall annually elect a chairman of the board and a president from
among its members and shall designate, when present, either the chairman of the
board or the president to preside at its meetings.
Section 4. Meetings. The board of directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. The annual regular meeting of the board of directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of the shareholders, or as soon thereafter as
practicable, and, in any event, within 30 days thereof. Additional regular
meetings of the board of directors may be held with or without notice at such
time and at such place as may from time to time be determined by the board of
directors. Special meetings of the board of directors may be called by the
chairman of the board, the president or a majority of directors then in office.
Notice thereof stating the place, date and hour of the meeting shall be given to
each director either by mail or by courier at the address at which the director
is most likely to be reached not less than 48 hours before the date of the
meeting, or by telephone or telegram on 24 hours notice.
Section 5. Quorum. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these bylaws, at all meetings of the board
of directors, a majority of the directors then in office shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the board of directors. If a quorum shall not be present at any meeting of the
board of directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
<PAGE>
-7-
Section 6. Actions Without Meeting. Any action required or permitted to be
taken at any meeting of the board of directors or of any committee thereof may
be taken without a meeting, if all the members of the board of directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board of directors or
committee, as the case may be.
Section 7. Meetings by Means of Conference Telephone. Members of the board
of directors of the Corporation, or any committee designated by the board of
directors, may participate in a meeting of the board of directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in the meeting pursuant to this Section 7 shall constitute
presence in person at such meeting, but shall not constitute attendance for the
purpose of compensation pursuant to Section 8 of this Article III.
Section 8. Compensation. The board of directors shall have the authority to
fix the compensation of directors. The directors may be paid their reasonable
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a reasonable fixed sum for actual attendance at each meeting of the
board of directors. Directors, as such, may receive a stated salary for their
services. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 9. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director of officer is present at or
participates in the meeting of the board of directors or committee thereof which
authorizes the contract of transaction or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the board of directors or the committee, and the board of directors
or committee in good faith authorize the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the board of directors,
a committee thereof or by the shareholders. Common or interested directors may
be counted in determining the presence of a quorum at a meeting of the board of
directors or of a committee which authorizes the contract or transaction.
<PAGE>
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Section 10. Corporate Books. The directors may keep the books of the
Corporation outside of the State of Delaware at such place or places as they may
from time to time determine.
Section 11. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any matter is
taken shall be presumed to have assented to the action taken unless his dissent
or abstention shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the Corporation within five days after the date he received a copy of the
minutes of the meeting. Such right to dissent shall not apply to a director who
voted in favor of such action.
Section 12. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the chairman of the board or the president
of the Corporation. Unless otherwise specified therein such resignation shall
take effect upon receipt thereof by the chairman of the board or the president.
More than five consecutive absences from regular meetings of the board of
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 13.Nominees. Only persons who are nominees in accordance with the
procedures set forth in this Section 13 shall be eligible for election as
directors. Nominations of persons for election to the board of directors of the
Corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 13. Such nominations, other than those made
by or at the direction of the board of directors, shall be made pursuant to
timely notice given in writing to the secretary of the Corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than forty-five (45)
days nor more than ninety (90) days prior to the meeting; provided, however,
that in the event that less than thirty (30) days notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the 15th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such shareholder's
notice shall set forth (a) as to each person whom the shareholder proposes to
nominate for election or reelection as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation which are beneficially owned by such person, and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A, or any successor regulation, under the
Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (b) as to the shareholder giving
notice, (i) the name and address, as they appear on the Corporation's books, of
such shareholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder. At the request of the board of
directors, any person nominated by the board of directors for election as a
director shall
<PAGE>
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furnish to the secretary of the Corporation that information required to be set
forth in a shareholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 13. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with procedures
prescribed by the bylaws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted by a
majority of the full board, may designate the chief executive officer and two or
more other directors to constitute an executive committee. The chairman of the
board shall serve as the chairman of the executive committee, unless a different
director is designated as chairman by the board of directors. The designation of
any committee pursuant to this Article IV and the delegation of authority
thereto shall not operate to relieve the board of directors, or any director, of
any responsibility imposed by law or by regulation.
Section 2. Authority. The executive committee, when the board of directors
is not in session, shall have and may exercise all the power and authority of
the board of directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it, except to the extent, if any, that such powers and
authority shall be limited by the resolution appointing the executive committee;
and except also that the executive committee shall not have the power or
authority of the board of directors with reference to amending the Certificate
of Incorporation; adopting an agreement of merger or consolidation; recommending
to the shareholders the sale, lease or exchange of all or substantially all of
the Corporation's assets or recommending to the shareholders a dissolution of
the Corporation or a revocation of a dissolution; amending the bylaws of the
Corporation; filling a vacancy or creating a new directorship; or approving a
transaction in which any member of the executive committee, directly or
indirectly, has any material beneficial interest; and unless the resolution or
bylaws expressly so provide, the executive committee shall not have the power or
authority to declare a dividend or to authorize the issuance of stock or
securities convertible into or exercisable for stock. The executive committee
must report any action taken to the board of directors at the next board of
directors meeting.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
annual regular meeting of the board of directors following his designation and
until his successor is designated as a member of the executive committee.
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Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by the chairman of the executive committee, any two members thereof or
the chief executive officer upon not less than 24 hours notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to be
taken by the executive committee at a meeting may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the members of the executive committee and the writing or writings are filed
with the minutes of the proceedings of the committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled
by a resolution adopted by a majority of the full board of directors.
Section 8. Resignation and Removal. Any member of the executive committee
may be removed at any time with or without cause by resolution adopted by a
majority of the full board of directors. Any member of the executive committee
may resign from the executive committee at any time by giving written notice to
the chairman of the board or the president of the Corporation. Unless otherwise
specified therein, such resignation shall take effect upon receipt. The
acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee may fix its own rules of
procedure which shall not be inconsistent with these bylaws. It shall keep
regular minutes of its proceedings and report the same to the full board of
directors for its information at the meeting thereof next after the proceedings
shall have been taken.
Section 10. Other Committees. The board of directors by resolution shall
establish an audit committee, composed of at least three directors none of whom
are employees of the Corporation or any subsidiary thereof. The board of
directors by resolution may also establish such other committees composed of
directors as they may determine to be necessary or appropriate for the conduct
of the business of the Corporation and may prescribe the duties and powers
thereof.
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ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall include a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer unless the board of directors designates the chairman of
the board as the chief executive officer. The president shall be a director of
the Corporation. The offices of the secretary and treasurer may be held by the
same person and a vice president may also be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president and senior vice president. The board of directors may
also elect or authorize the appointment of such other officers as the business
of the Corporation may require. The officers shall have such authority and
preform such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. President. Except to the extent that the board of directors
shall have delegated all or a portion of such authority to the chairman of the
board or one or more other officers, the president, or in his absence a director
or other officer of the Corporation appointed by the board of directors, shall
preside at all meetings of the shareholders, and the president shall have
general charge and direction of the business of the Corporation and shall
perform such other duties as are properly required of him by the board of
directors, the certificate of incorporation or by these bylaws.
Section 3. Vice Presidents. In the absence of the president or in the event
of his inability or refusal to act, the vice president (or in the event there
may be more than one vice president, the vice presidents in the order
designated, or in the absence of any designations, then in the order of their
election) shall perform the duties of the president, and, when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president.
Section 4. Secretary. The secretary shall keep the minutes of the meetings
of shareholders, the board of directors and of committees established by the
board of directors and shall give notice of all such meetings as required by
these bylaws. The secretary shall have custody of such minutes, the corporate
seal and the stock certificate records of the Corporation, except to the extent
some other person is authorized to have custody and possession thereof by
resolution of the board of directors.
Section 5. Treasurer. The treasurer shall keep the fiscal accounts of the
Corporation, including an account of all moneys received or disbursed.
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Section 6. Election. The board of directors at its first meeting held
within thirty days after the annual meeting of shareholders shall elect annually
the officers of the Corporation who shall exercise such powers and perform such
duties as shall be set forth in these bylaws and as determined from time to time
by the board of directors; and all officers of the Corporation shall hold office
until their successors are chosen and qualified, or until their earlier
resignation or removal. Any vacancy occurring in any office of the Corporation
shall be filled by the board of directors. The salaries of all officers of the
Corporation shall be fixed by the board of directors.
Section 7. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interest of the Corporation will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contract rights, if any, of the person so removed.
Section 8. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the president and any vice president, and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The board of directors may, by resolution, from time
to time confer like powers upon any other person or persons.
ARTICLE VI
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in name of the Corporation
by (i) the chairman of the board or the president and (ii) by the secretary or
an assistant secretary of the Corporation, representing the number of shares
registered to him, in certificate form.
Section 2. Signatures. Any or all of the signatures on a certificate may be
manual or may be facsimiles thereof. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature or signatures shall have
been used on any such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of issue.
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Section 3. Lost Certificates. The president or any vice president may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the president or any vice president may, in his discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as such officer may require and/or to give the Corporation a
bond in such sum as he may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these bylaws. Transfers of stock shall be made
on the books of the Corporation only by the person named in the certificate or
by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than 50 days nor less than 20 days before the date
of such meeting, nor more than 50 days prior to any other action. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof, except as otherwise required by law.
ARTICLE VII
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee of shareholder, such notice may be given by mail, addressed to
such director, member of a committee or shareholder, at his address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States Mail. Written notice may also be given personally
or by telegram, telex or cable.
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Section 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or shareholder, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of notice thereto.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends a meeting with the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of the shareholders, directors, or members of a committee of directors need be
specified in any other waiver of notice unless so required by the Certificate of
Incorporation or these bylaws.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation and the laws of
the State of Delaware, may be declared by the board of directors at any regular
or special meeting, and may be paid in cash, in property, or in shares of
capital stock of the Corporation.
Subject to the provisions of the General Corporation Law of the State of
Delaware, such dividends may be paid either out of surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Section 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or one such other person
or persons as the board of directors may from time to time designate.
Section 3. Fiscal Year; Annual Audit. The fiscal year of the Corporation
shall end on December 31 of each year. The Corporation shall be subject to an
annual audit as of the end of its fiscal year by independent public accountants
appointed by and responsible to the board of directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
<PAGE>
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ARTICLE IX
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other Than
Those by or in the Right of the Corporation. Subject to Section 3 of this
Article IX, the Corporation shall indemnify any person who was or is a party to
any threatened, pending or completed action, suit or proceeding, and any appeal
therein, whether civil, criminal, administrative, arbitrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys fees), judgments, fines, penalties and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding, and any appeal therein, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding, and any appeal therein, by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Power to Indemnity in Actions, Suits or Proceedings by or in the
Right of the Corporation. Subject to Section 3 of this Article IX, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against amounts paid in
settlement and expenses (including attorneys fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; provided, however, that
no indemnification shall be made against expenses in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation or
against amounts paid in settlement unless and only to the extent that there is a
determination (as set forth in Section 3 of this Article IX) that despite the
adjudication of liability or the settlement, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or amounts paid in settlement.
<PAGE>
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Section 3. Authorization of Indemnification. Any indemnification under this
Article IX (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, trustee, employee or agent is proper in the circumstances
because such director, officer, trustee, employee or agent has met the
applicable standard of conduct set forth in Section 1 or Section 2 of this
Article IX and, if applicable, is fairly and reasonably entitled to indemnity as
set forth in the proviso in Section 2 of this Article IX, as the case may be.
Such determination shall be made (i) by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the shareholders. To the extent,
however, that a director, officer, trustee, employee or agent of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys fees) actually and
reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire board of
directors.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article IX, a person shall be deemed to have acted in good
faith and in manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any association, partnership, joint venture, trust or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 1 or 2 of this Article IX, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court or competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing
<PAGE>
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of such application. Notwithstanding any of the foregoing, unless otherwise
required by law, no director, officer, trustee, employee or agent of the
Corporation shall be entitled to indemnification in connection with any action,
suit or proceeding voluntarily initiated by such person unless the action, suit
or proceeding was authorized by a majority of the entire board of directors.
Section 6. Expenses Payable in Advance. Expenses incurred in connection
with a threatened or pending action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, trustee, employee or agent to repay such amount if it shall be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article IX.
Section 7. Contract, Non-exclusivity and Survival of Indemnification. The
indemnification provided by this Article IX shall be deemed to be a contract
between the Corporation and each director, officer, employee and agent who
serves in such capacity at any time while this Article IX is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any certificate of incorporation,
bylaw, agreement, contract, vote of shareholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 or 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 8. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, trustee, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power or the obligation to indemnify him against such liability under the
provisions of this Article IX.
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Section 9. Meaning of "Corporation" for Purposes of Article IX. For
purposes of this Article IX, references to "the Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article IX with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
ARTICLE X
AMENDMENTS
The board of directors or the shareholders may from time to time amend the
bylaws of the Corporation. Such action by the board of directors shall require
the affirmative vote of at least two- thirds of the directors then in office at
a duly constituted meeting of the board of directors called for such purpose.
Such action by the shareholders shall require the affirmative vote of at least
two-thirds of the total votes eligible to be voted at a duly constituted meeting
of shareholders called for such purpose.
Exhibit 4
NUMBER SHARES
FIRST LITHCHFIELD FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
THIS IS TO CERTIFY CUSIP 320724 10 7
SPECIMEN
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
PAR VALUE $.01 PER SHARE OF
(hereinafter called the "Corporation"), transferable on the books of the
Corporation by the Corporation by the holder hereof in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signature
of its duly authorized officers.
CERTIFICATE OF STOCK
Dated:
(Seal)
First Litchfield Financial Corporation Jerome J. Whalen
Delaware PRESIDENT AND
CHIEF EXECUTIVE
COUNTERSIGNED AND REGISTERED:
REGISTRAR AND TRANSFER COMPANY
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
Exhibit 10.1
1990 STOCK OPTION PLAN FOR THE COMPANY'S PRESIDENT AND
CHIEF EXECUTIVE OFFICER, AS AMENDED
BACKGROUND:
At the Annual Shareholders' Meeting on April 11, 1990, the shareholders of
First Litchfield Financial Corporation approved granting options to the
Company's new president, Jerome J. Whalen ("Mr. Whalen"), to purchase Three
Thousand (3,000) shares of the Company's $.01 par value common stock at
fifty-five ($55.00) Dollars per share (the "Whalen Options"). This exercise
price reflected the fair market value of such shares on the proposed date of
grant, March 1, 1990, the date Mr. Whalen joined the Company. These Whalen
Options were to become exercisable in five tranches of six hundred (600) shares
each, representing twenty (20%) percent per year, over the five year period
March 1, 1990 through March 1, 1994. All Whalen Options were to expire in ten
(10) years on March 1, 2000. In addition, upon Mr. Whalen's death or disability,
the Whalen Options would expire on the earlier of six (6) months following his
death or disability or the date on which such Whalen Options would otherwise
have expired; and upon Mr. Whalen's resignation or discharge, the Whalen Options
would expire on the earlier of one (1) month following his resignation or
discharge or the date on which such Whalen Options would otherwise have expired.
The 1990 grant did not, however, provide for adjustments in the number of shares
subject to Whalen Options or a corresponding adjustment in the number of shares
subject to Whalen Options or a corresponding adjustment in the exercise price of
such Whalen Options upon the occurrence of changes in the Company's capital
structure. In December of 1990 and in December of each year thereafter, the
Company changed its capital structure by declaring a five (5%) percent stock
dividend on or about December 31st of each year.
In 1994, the Company's Board of Directors and shareholders voted to amend
the Whalen Options to provide for both prospective and retroactive adjustment in
the number of shares subject to such Whalen Options resulting from changes in
the Company's capital structure.
<PAGE>
The amendment permits Mr. Whalen to acquire the proportionate interest in
the Company reflected by the grant of Whalen Options in 1990, which interest had
been eroded by the occurrence of certain subsequent changes in the Company's
capital structure. This amendment permits Mr. Whalen to maintain the
proportionate interest reflected by the original grant during the remainder of
the term of these Whalen Options upon the occurrence of changes in the Company's
capital structure.
The amendment provides for adjustments in the number of Whalen Options
granted upon the occurrence of changes in the Company's capital structure by
reason of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combination or exchange of shares, separations, reorganizations,
or liquidations. Such adjustments are made without change in the total price
applicable to the unexercised portion of Whalen Options and with a corresponding
adjustment in the option price per share.
The effect of the amendment was to retroactively adjust the number and
price of the Whalen Options granted to include the effect of the annual five
(5%) percent stock dividends paid by the Company since April 11, 1990.
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Exhibit 10.2
FIRST LITCHFIELD FINANCIAL CORPORATION
1994 STOCK OPTION PLAN FOR OFFICERS AND OUTSIDE DIRECTORS
1. Purpose.
The purpose of this 1994 Stock Option Plan for Officers and Outside
Directors (the "Plan") is to strengthen the financial soundness of First
Litchfield Financial Corporation (the "Company") by focusing management's
attention on the long-term success of the business of the Company, enhancing
shareholder value by providing management an opportunity to purchase shares of
the Company thus aligning their interests in the business with those of other
shareholders, attracting and retaining the continued services of non-employee
directors of the Company with the requisite qualifications and encouraging such
directors to secure or increase on reasonable terms their stock ownership in the
Company. The Board of Directors of the Company (the "Board") believes that the
granting of options under the Plan (the "Options") will promote continuity of
management and increased personal interest in the welfare of the Company by
those who are responsible for shaping and carrying out the long-range plans of
the Company and securing its continued growth and financial success.
2. Effective Date of the Plan.
The plan shall become effective upon its approval by the shareholders of
the Company (the "Effective Date").
3. Stock Subject to Plan.
Eighteen thousand (18,000) of the authorized but unissued shares of the
Company's common stock, $.01 par value per share (the "Shares") have been
reserved for issuance upon the exercise of Options; provided, however, that the
number of Shares so reserved may from time to time be reduced to the extent that
a corresponding number of treasury Shares are set aside for issuance upon the
exercise of Options. If any Options expire or terminate for any reason without
having been exercised in full, the unpurchased Shares subject thereto shall
again be available for the grant of Options.
4. Administration.
The Plan shall be administered by the Committee referred to in Section 5
hereof. Subject to the provisions of the Plan, the Committee shall have complete
authority in its discretion to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to it and to make all other
determinations necessary or advisable for the administration of the Plan;
provided, however, that with respect to the operation of this Plan with respect
to non-employee directors, the Committee shall have no discretion to determine
the non-employee directors who will receive Options, the number of Shares
subject to Options, the terms upon which, the times at which or the periods
within which Shares may be acquired or the Options may be acquired and
exercised.
<PAGE>
5. Committee.
The Committee shall consist of at least three members of the Board each of
whom shall be a disinterested person as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, and as such Rule may be hereafter amended. Each
member of the Committee shall be a person who is not an employee of the Company
or any subsidiary of the Company, and who has not received a grant of an option
to acquire common stock of the Company under any plan maintained by the Company
since the beginning of the preceding fiscal year under any plan maintained by
the Company other than this Plan. The committee shall be appointed by the Board,
which may at any time and from time to time remove any member of the Committee,
with or without cause, appoint additional members to the committee and fill
vacancies, however caused, in the Committee. A majority of the members of the
Committee shall constitute a quorum. All determinations of the Committee shall
be made by a majority of its members. Any decision or determination of the
Committee shall be reduced to writing and signed by all of the members of the
Committee shall be fully effective as if it had been made at a meeting duly
called and held.
6. Eligibility.
An Option may be granted to (a) any person serving as an Officer of the
Company or any subsidiary of the Company on the date of grant whether or not
such person(s) is a member of the Board (the "Officer Participants") in
accordance with Paragraph 7.a. hereof; or (b) members of the Board who are not
otherwise employees of the Company or any of its subsidiaries on the date of
grant (the"Director Participants") in accordance with Paragraph 7.b. hereof. The
Officer Participants and Director Participants shall collectively be referred to
herein as the "Participant" or "Participants."
7. Grant of Options and Option Price.
a. Officer Participants.
(i) The Committee shall from time to time during the five year period
commencing with the Effective date of the Plan recommend to the Board
those individual, full-time employees employed by either the Company
or any subsidiary of the Company serving as an Officer of any such
entity to whom the Committee recommends that an Option be granted and
the number of Shares subject to, and the terms and conditions of, such
Option. In the granting of options, the Committee will give
consideration to the Company's performance relative to the operating
budget and the strategic plan as well as to the individual Officer's
performance.
-2-
<PAGE>
b. Director Participants.
(i) Director Participants on the Effective Date. Each individual who is a
Director Participant on the Effective date shall automatically be
granted on the Effective Date an Option to purchase 300 Shares.
(ii) Future Director Participants. Directors who are newly elected to the
Board after the Effective Date shall receive an automatic grant of an
Option to purchase 300 Shares on the date of such election (or, if
elected by the Board, on the date of the annual meeting of the
shareholders of the Company immediately following such election);
provided, that such automatic grant shall only be made if the director
is a Director Participant on such date, and such automatic grant shall
be subject to pro rata reduction to the extent that the number of
Shares subject to future grant under the Plan is not sufficient to
make the full automatic grants required to be made pursuant to the
Plan on such date.
(iii)Additional Grants. Each director who has been granted an Option
pursuant to clause (i) above shall automatically be granted on June
1st in each of the four years following the year in which the Option
pursuant to clause (i) above shall have been granted to such director,
an additional Option to purchase 50 Shares; provided, that such
automatic grant shall only be made if the director is a Director
Participant on such date, and such automatic grant shall be subject to
pro rata reduction to the intent that the number of Shares subject to
future grant under the Plan is not sufficient to make the full
automatic grants required to be made pursuant to the Plan on such
date.
Each director who has been granted an Option pursuant to clause (ii)
above shall automatically be granted on June 1st in each of the
remaining year of the Plan following the year in which the Option
pursuant to clause (ii) above shall have been granted to such
director, an additional Option to purchase 50 Shares; provided, that
such automatic grant shall only be made if the director is a Director
Participant on such date, and such automatic grant shall be subject to
pro rata reduction to the extent that the number of Shares subject to
future grant under the Plan is not sufficient to make the full
automatic grants required to be made pursuant to the Plan on such
date.
c. Price. The initial per Share price to be paid by Participants upon the
exercise of an Option shall be equal to the fair market value of a Share on
the date of grant. For the purposes hereof, the fair market value of a
Share on any date shall be equal to the last reported sales price for the
Shares as reported on the NASDAQ National Market System, on such date, or
if the Shares are not reported on the NASDAQ National Market System, the
average of the closing bid and asked prices for the Shares on such date (or
if no such quotation occurred on that date, on the next preceding date on
which there was such a quotation), as made available for publication by the
National Association of Securities Dealers Automated Quotation System, or
if no prices are available, the fair market value as determined by rules to
be adopted by the Committee.
-3-
<PAGE>
8. Option Period.
Participants shall be granted Options which are exercisable for a period of
ten (10) years from the date of the granting thereof. Notwithstanding the
foregoing and except as set forth in Section 10 hereof, no Option granted under
this Plan shall be exercisable until twelve (12) months after the grant thereof.
9. Exercise of Option.
Subject to Section 8, an Option may be exercised in whole or in part at any
time after the date it is granted and only be a written notice of intent to
exercise the Option with respect to specified number of Shares and payment to
the Company in cash or by certified check, bank draft or postal or express money
order, of the amount of the Option exercise price for the number of Shares with
respect to which the Option is then exercised. The number of Shares which may be
purchased at any one time shall be 10 Shares, a multiple thereof, or the total
number at the time purchasable under the Option.
10. Change of Control.
Upon the occurrence of a Change of Control (as hereinafter defined), any
outstanding Option held by a Participant shall immediately become exercisable
and shall remain exercisable for a period of thirty (30) days following the date
of such Change of Control.
"Change in Control" shall mean an event or events occurring after the
Effective Date hereof as a result of which (a) any Person (as hereinafter
defined), is or becomes the Beneficial Owner (as hereinafter defined), directly
or indirectly, of 50% or more of the combined voting power of the Company's then
outstanding securities without the prior approval of at least two-thirds of the
members of the Company's Board of Directors in office immediately prior to such
Person attaining such percentage interest or (b) more than 50% of the persons
serving as directors of the Company cease to be directors during any twenty-four
(24) month period, except as a result of death or resignation. "Person" shall
have the meaning of such term as used in Section 13(d) and 14 (d) of the
Securities and Exchange Act of 1934, and as such Sections may be hereafter
amended. "Beneficial Owner" shall have the definition of such terms as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, and as such Rule may be
hereafter amended.
11. Transferability.
No Option shall be assignable or transferable except by will and/or by the
laws of descent and distribution and, during the life of any Participant, each
Option granted to the Participant may be exercised only by the Participant.
-4-
<PAGE>
12. Ceasing to be an Officer or Director.
(a) Termination. If a Participant terminates service as an officer or
director for any reason other than those set forth in clause (b)
below, any outstanding Option held by the Participant shall terminate
on the earlier of the date on which such Option would otherwise expire
or sixty (60) days after such termination; provided, however, and
notwithstanding anything in this Plan to the contrary, that if such
Participant's service is terminated for cause, in such event any
outstanding Option held by the Participant shall terminate
immediately.
(b) Disability, Death or Retirement. If a Participant's service as an
officer or director is terminated by disability (which condition
constitutes total disability under the federal Social Security Acts),
death, or retirement upon attaining age sixty-five (65), any
outstanding Option held by the Participant may be exercised by the
Participant or the representative of the Participant's estate or
beneficiaries thereof to whom the Option has been transferred until
the earlier of the date on which such Option would otherwise expire or
twelve (12) months after such termination.
13. Duration of Plan.
Unless sooner terminated, the Plan shall remain in effect for a period of
five years after the Effective Date and shall thereafter terminate. No Options
may be granted after the termination of this Plan; provided, however, that
termination of the Plan shall not affect any Options previously granted, which
Options shall remain in effect until exercised, surrendered or canceled, or
until they have expired, all in accordance with their terms.
14. Changes in Capital Structure.
In the event of changes in the outstanding common stock of the Company by
reasons of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combination or exchange or shares, separations, reorganizations,
or liquidations, the number of Shares available under the Plan in the aggregate
and the number of Shares as to which Options may be granted to any Participant
shall be correspondingly adjusted by the Committee. In addition, the Committee
shall make appropriate adjustments in the number of Shares as to which
outstanding Options, or portions thereof then unexercised, shall relate, to the
end that the Participant's appropriate interest shall be maintained as before
the occurrence of such event; such adjustment shall be made without change in
the total price applicable to the unexercised portion of Options and with a
corresponding adjustment in the option price per Share.
-5-
<PAGE>
15. Rights as Shareholder.
A Participant entitled to Shares as a result of the exercise of an Option
shall not be deemed for any purpose to be, or have rights as, a shareholder of
the Company by virtue of such exercise, except to the extent a stock certificate
is issued therefor and then only from the date such certificate is issued. No
adjustments shall be made for dividends or distributions or other rights for
which the record date is prior to the date such stock certificate is issued.
16. Expenses.
The expense of this Plan shall be paid by the Company.
17. Compliance with Applicable Law.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any certificates evidencing Shares
to be delivered pursuant to the exercise of an Option, unless and until the
Company is advised by its counsel that the issuance and delivery of such
certificates is in compliance with all applicable laws and regulations of
governmental authority. The Company shall in no event be obligated to register
any securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any such law or regulation. The
Committee may require, as a condition of the issuance and delivery of such
certificates and in order to ensure compliance with such laws and regulations,
that the Participant make such covenants, agreements and representations as the
Committee, in it sole discretion, deems necessary and desirable.
18. Application of Funds.
Any cash proceeds received by the Company from the sale of Shares pursuant
to options will be used for general corporate purposes.
19. Amendment of the Plan.
The Board may from time to time suspend or discontinue this Plan or revise
or amend it in any respect whatsoever; provided, however, that any amendment
requiring approval under Rule 16b- 3, as in effect on the Effective Date and as
it may be subsequently amended, shall not be made without the further approval
of the holders of at least a majority of the outstanding shares of the Company's
common stock; and provided, further, that the provisions of Sections 6 and 7.b.
of this Plan may not be amended more than once every six (6) months, except as
otherwise provided in or permitted by Rule 16b-3. No such suspension,
discontinuance, revision or amendment shall in any manner affect any grant
theretofore made without the consent of the Participant or the transferee of the
Participant, unless necessary to comply with applicable law.
-6-
Exhibit 10.3
Split Dollar Life Insurance Agreement
Between
First National Bank of Litchfield
and
Jerome Whalen
(as of September 1, 1994)
THIS AGREEMENT, hereby made this 30th day of March, 1995, by and between
First National Bank of Litchfield (herein referred to as "Bank") and Jerome
Whalen (herein referred to as "Employee"), this Agreement to be effective
September 1, 1994.
W I T N E S S E T H
Whereas, Employee is employed by Bank as President of Bank; and
Whereas, Bank wishes to provide a benefit to Employee through assistance in
the payment by Employee of premiums for life insurance to be maintained on
Employee's life; and
Whereas, Bank has determined that such assistance is best provided through
a split-dollar life insurance arrangement; and
Whereas, Employee has applied for, and is the owner of, the insurance
policy or policies listed in the attached schedule hereto (herein referred to
the "Policy"); and
Whereas, Bank has furnished with an illustration of Bank cost recovery
entitled Cost Recovery Compensation Plan F.D.I.C. Worksheet (A.P.B. 21) The
First National Bank of Litchfield dated January 3, 1995, (herein referred to as
the "Illustration") which illustration shall be attach hereto as Exhibit I, and
shall form a part of this agreement by reference; and
Whereas, Bank and Employee desire to enter this agreement (herein referred
to as the "Agreement") with respect to certain aspects of the Employee owned
Policy; and
Page 1 of 7
<PAGE>
Whereas, Bank and Employee agree to subject the Policy to the terms and
conditions of the Agreement; and
Whereas, the Employee has assigned certain of his interest in the Policy to
Bank as collateral for certain amounts which he owes Bank under the Agreement,
which assignment is by an instrument of assignment filed with the Insurer
(hereinafter referred to as the "Assignment");
Now Therefore, in consideration of the promises and of the mutual covenants
herein contained, the Parties hereto hereby agree as follows;
Section 1:
The Policy shall be subject to the terms and conditions of the Agreement
and of the related Assignment filed with the Insurer in respect of the
Policy. Employee shall be the sole and absolute owner of the Policy, and
may exercise all ownership rights granted to the owner thereof by the terms
of the Policy, except as may otherwise be provided herein, and pursuant to
the Assignment.
Section 2:
(a) Bank shall pay an annual premium for the Policy, in the annual amount
$24,750, during Employee's employment with Bank provided, however, that if
Employee elects to continue his employment with Bank beyond attainment of
age 65, any further premium payments to Insurer shall be the sole and
exclusive obligation of Employee.
(b) The value of the premium payments paid with respect to the Policy shall
be allocated annually between Bank and Employee, subject to which
Employee's allocable share (term insurance allocation and illustrated in
column 6 of the Illustration) shall be paid by Bank as agent for Employee,
and shall be charged to Employee as cash compensation and for all purposes
(including the Assignment) shall be deemed cash compensation rather than
Bank paid premium.
Section 3:
The parties hereto shall take any reasonable action to cause the Assignment
to conform to the provisions of the Agreement, which Assignment shall not
be terminated, altered or amended without the express written consent of
Bank.
Section 4:
(a) Except as otherwise herein provided, Employee shall not sell, assign,
transfer, surrender, pledge, encumber or cancel the Policy without the
express written consent of Bank.
Page 2 of 7
<PAGE>
(b) Employee shall have the right to change the beneficiary or
beneficiaries of the Policy, and to borrow only with regard to the cash
value and death benefit which is in excess of the collaterally assigned
interest of Bank as described in Section 5 and 8 hereof. Employee agrees to
promptly pay all interest on Employee borrowings necessary to maintain that
portion of the Policy's cash value collaterally assigned to Bank, as
described in column (3) of the Illustration.
(c) Bank shall not borrow against the Policy without the express written
consent of Employee.
(d) Upon Employee's termination of employment with Bank, Employee shall
have the right to take any action with regard to the cash value of the
Policy which is in excess of the collaterally assigned interest of Bank
illustrated as column 3 on the attached illustration.
Section 5:
(a) Upon death of the Employee, Banks hall promptly take all actions
necessary to obtain its share of the Policy death benefit.
(b) A death benefit in an amount not in excess of $250,000 shall be paid
directly by the Insurer to the beneficiary or beneficiaries and in the
manner designated by Employee, subject in all respects to the Bank death
benefit as herein described. No amount shall be paid as a death benefit to
the beneficiary or beneficiaries designated by Employee until Bank or
Insurer acknowledges in writing that the full amount due the Bank pursuant
to the terms of the Agreement has been paid. The Bank shall have the
unqualified right to receive the balance of the death benefit provided
under the Policy, or if greater, a minimum death benefit equal to the total
amount of its share of the premium paid hereunder (herein referred to as
"Net Premiums"), plus an amount that would be equal to accrued interest on
Net Premiums compounded annually at four percent (4%). Toward this end, the
total death benefit payable under this Policy:
(i) shall first be applied in satisfaction of the amounts described in
column (5)(A) (Premium Payments & use of Funds) of the Illustration;
(ii) shall next be applied to the death benefit described in column
(9) (Employee Death Benefit) in an amount equal to the lesser of
$250,000 or the remainder of the death benefit payable under the
Policy after payment pursuant to paragraph (i) hereof; and
(iii) shall lastly and to the full extent of the remaining Policy
death benefit, if any, be applied to the death benefit described in
column (5)(B) (Keyperson Death Benefit) of the Illustration.
Page 3 of 7
<PAGE>
The parties hereto agree that the beneficiary designation of the Policy
shall conform to the provisions hereof.
Section 6:
(a) The Agreement shall terminate upon Employee's death, and payment of
proceeds pursuant to Section 5 hereof.
(b) The Bank's obligation to pay premium payments hereunder shall terminate
as of the first occur of the Employee's death, Employee's termination of
employment with the Bank, or Employee's attainment of age 65.
Section 7:
(a) If Employee ceases to be employed by Bank for whatever reason, Employee
has the right to continue to keep the Policy in force either individually
or through a subsequent employer, subject to the requirement that the
Policy cash value shall not be reduced through loans, premium payment
options, or in any manner below the amount needed to repay Bank the Net
Premiums paid by it hereunder.
(b) If Employees ceases to be employed by Bank and continues to keep the
Policy in force, termination of this Agreement shall be pursuant to Section
6(a) hereof.
(c) If Employee ceases to be employed by Bank and does not continue to keep
the Policy in force, this Agreement will terminate immediately and Bank
shall simultaneously be repaid an amount equal to the Net Premiums paid by
Bank and described in column (1) of the Illustration, plus an amount that
would be equal to accrued interest on said Net Premiums compounded annually
a four percent (4%). Provided, however, that in no event shall Bank be paid
an amount greater than the total cash value, as illustrated in column 3 and
8 of the Illustration, as of the date of Employee's termination of
employment.
(d) Notwithstanding whether Employee elects to keep the Policy in force
following termination of employment with Bank, if Employee voluntarily
terminates employment with Bank within the three year period commencing
with execution of the Agreement, Bank shall have the right, in its sole and
exclusive discretion (and to be exercised within the ninety (90) day period
commencing with Employee's date of termination of employment), to require
Employee to pay to Bank a single lump sum payment equal to the all or a
portion, determined pursuant to the provisions of subsection (e) hereof, of
the total Net Premiums (equal to the sum of the amounts illustrated in
column (1) of the Illustration) then paid by Bank, provided such payment
shall not exceed an amount equal to then total cash value under the terms
of the Policy. Such payment shall be made within the ninety (90) day period
following receipt by Employee of written notice of Bank's exercise of its
right.
Page 4 of 7
<PAGE>
(e) For purposes of subsection (d) hereof, the amount Employee shall repay
to Bank shall be determined according to the following schedule.
(i) If the Employee terminates employment with the Bank within the
first year of the Agreement, 100% of the total Net Premiums then paid
by Bank;
(ii) If the Employee terminates employment with the Bank within the
second year of the Agreement, 80% of the total Net Premiums then paid
by Bank;
(iii) If the Employee terminates employment with the Bank with the
third year of the Agreement, 60% of the total Net Premiums then paid
by Bank;
If the Employee terminates employment with the Bank following the third
year of the Agreement, subsection (d) hereof shall not apply.
Section 8:
The parties hereto agree that the Agreement shall take precedence over any
provisions of the Assignment. Bank agrees not to exercise any right
possessed by it under the Assignment except in conformity with this
Agreement.
Section 9:
The Agreement may not be amended, altered or modified except by written
instrument signed by both parties hereto, and may not be otherwise
terminated except as provided herein.
Section 10:
(a) The split-dollar arrangement contemplated herein is an exempt welfare
plan under regulations promulgated under Title I of the Employee Retirement
Income Security Act of 1974 (herein referred to as "ERISA").
(b) For purposes of ERISA, Bank will be the "named fiduciary" and "plan
administrator" of the split-dollar arrangement contemplated herein, and the
Agreement is hereby designated as the written plan instrument.
(c) Employee, or after Employee's death any beneficiary of his, may file a
request for benefits with the plan administrator. If a claim request is
wholly or partially denied, the plan administrator shall furnish the
claimant a notice of its decision within ninety (90) days in writing, and
in a manner to be understood by the claimant, which notice shall contain
the following information:
Page 5 of 7
<PAGE>
(i) the specific reason or reasons for the denial;
(ii) specific reference to pertinent plan provisions upon which the
denial is based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation as
to why such material or information is necessary.
(iv) an explanation of the plan's claim-review procedure describing
the steps to be taken by a claimant who wishes to submit his claim for
review.
(d) A claimant or his authorized representative may, with respect to any
denied claim:
(i) request a review upon written application filed within sixty (60)
days after receipt by the claimant of written notice of the denial of
his claim;
(ii) review pertinent documents; and
(iii) submit issues and comments in writing.
Any request or submission will be in writing and will be directed to the
plan administrator. The plan administrator will have the sole responsibility for
the review of any denied claim and will take all appropriate steps in light of
its findings. The plan administrator will render a decision upon review of a
denied claim within sixty (60) days after receipt of a request for review. If
special circumstances warrant additional time, the decision will be rendered as
soon as possible, but not later than one hundred twenty (120) days after receipt
of request for review. Written notice of any such extension shall be furnished
to the claimant prior to the commencement of the extension. The decision on
review will be in writing and will include specific reasons for the decision
written in a manner to be understood by the claimant, as well as the specific
references of the pertinent provisions of the plan on which the decision is
based. If the decision on review is not furnished to the claimant within the
time limits described above, the claim will be deemed denied on review.
(11) This Agreement shall be binding upon and inure to the benefit of Bank
and its successors and assignees, and upon Employee and his successors,
assignees, heirs, executors, administrators and beneficiaries.
(12) Except as may be preempted by ERISA, this Agreement, and the rights of
the parties hereto, shall be governed by and construed in accordance with
the laws of the State of Connecticut.
(13) In the event Employee voluntarily terminates employment with Bank and
within twenty-four (24) months of the date of such termination, Employee
becomes an officer, director, representative or employee of an entity or a
member of a partnership which
Page 6 of 7
<PAGE>
conducts business in competition with Bank within Litchfield County without
Bank's written consent, Employee shall transfer ownership of the policy to
Bank and forfeit all rights therein. In the event employee shall fail to
sign forms necessary pursuant to this paragraph, Bank is hereby appointed
agent in fact to sign such forms on Employee's behalf.
(14) Nothing in this Agreement shall be construed as creating for Employee
a right to be retained in the service of Bank, or to interfere with Bank's
right to discharge Employee from service with the Bank.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed by its
officer thereunto duly authorized and Employee has hereunto set his hand and
seal, all as of the day and year first above written.
FIRST NATIONAL BANK OF LITCHFIELD
By: /s/ Ernest W. Clock, Chairman
-------------------------------
Its:
EMPLOYEE
/s/ Jerome Whalen
-------------------------------
Jerome Whalen
Page 7 of 7
Exhibit 10.4
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
August 6, 1997
<PAGE>
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ Jerome J. Whalen ("Employee") as President
of the Bank. The Bank and the Holding Company expect that Employee's
contributions and knowledge will continue to be of significant benefit to the
future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of key personnel to the detriment of
the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Bank's
management, including Employee, to their assigned duties in the face of
potential circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
<PAGE>
-2-
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within twenty-four (24) months of such Change in Control
Employee's employment with the Bank and/or its successor terminates or Employee
is reassigned in accordance with Section 3, below. For purposes of this
Agreement, a "Change in Control" shall mean any of the following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of Holding Company as applicable, then still in office who were directors
of the Bank or the Holding Company, as applicable, at the beginning of the
period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or reassignment of his employment as a senior executive
officer of the Bank and/or its successor as provided in this Section 3, within
twenty-four (24) months after such event, unless such employment is terminated
or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
<PAGE>
-3-
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement
shall mean the mandatory termination of employment in accordance with
the retirement policy of the Bank, including (at Employee's sole
election and as set forth in writing) early retirement, generally
applicable to its salaried employees or in accordance with any
retirement arrangement established with Employee's consent with
respect to Employee.
(ii) Termination of employment by the Bank based on disability
shall mean termination because of inability, as a result of incapacity
due to physical or mental illness, to perform the services required as
an employee for a period aggregating six (6) months or more within any
twelve (12) month period, or because Employee becomes or is deemed
disabled under any applicable policy providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of termination
it will promptly furnish Employee with a written Notice of Termination. Any
purported termination of Employee shall be communicated by written Notice of
Termination to the Bank. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall include the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Employee's employment under the provision so indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on which
a Notice of Termination is given; provided that, if within five (5) days after
any Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary or an
involuntary reassignment of Employee's duties, responsibilities, or benefits
inconsistent with those of a senior executive officer of a bank or the
involuntary relocation of Employee's primary duties and responsibilities to an
office or location greater than fifty (50) miles from Litchfield, Connecticut or
action which results in a significant worsening of the Employee's work
conditions (including, but not limited to, a significant change in employment
duties, responsibilities, required hours or otherwise).
<PAGE>
-4-
4. Compensation Upon Termination or Reassignment.
(a) If, within twenty-four (24) months after a Change in Control, as
defined in Section 2 hereof, shall have occurred, Employee's employment
with the Bank terminates or is reassigned as defined in Section 3 (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 Employee within five (5) days after the Date
of Termination an amount equal to the sum of:
(i) Two (2) years of Employee's annual compensation based upon
the most recent aggregate base salary paid to Employee in the twelve
(12) month period immediately preceding his termination or
reassignment less amounts previously paid to Employee from the date of
Change in Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 4 be reduced by any
compensation earned by Employee as the result of employment by another employer
after the Date of Termination or Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no payments
by the Bank to or for Employee's benefit under this Agreement shall be
non-deductible to the Bank by reason of the operation of Section 280G of the
Internal Revenue Code. Accordingly, notwithstanding any other provision hereof,
if by reason of the operation of said Section 280G of the Internal Revenue Code,
any such payments exceed the amount which can be deducted by the Bank, the
amount of such payments shall be reduced to the maximum which can be deducted by
the Bank. To the extent that payments in excess of the amount which can be
deducted by the Bank have been made to and for Employee'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 Employee's benefit shall be non-deductible
pursuant to Section 280G of the Internal Revenue Code. Any payments made
hereunder which are not deductible by the Bank as a result of losses which have
been carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
<PAGE>
-5-
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee'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.
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation,
acquisition of assets or assumption of liabilities or otherwise) to all or
substantially all of the business and/or assets and/or deposits of the
Bank, by agreement, to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required
to perform it if no such succession had taken place. Failure of the Bank
and/or Holding Company to obtain such agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement and shall
entitle Employee to compensation from the Bank in the same amount and on
the same terms as he would be entitled to hereunder if his employment had
terminated as a result of a Termination or Reassignment, as provided in
Section 3 hereof, after a Change in Control, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any
successor to the business, assets and/or deposits as aforesaid which
executes and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die after any rights to receive the amounts contemplated hereby have
accrued to Employee but before such amounts have been paid, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to his devisee, legatee or other designee or,
if there be no such designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
<PAGE>
-6-
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
<PAGE>
-7-
Agreed to this 6th day of August, 1997 by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By: /s/ Ernest W. Clock
----------------------------------------
Its: Chairman
Duly Authorized
EMPLOYEE
Signature: /s/ Jerome J. Whalen
------------------------------------
Printed Name: Jerome J. Whalen
Exhibit 10.5
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
July 29, 1997
<PAGE>
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ Philip G. Samponaro ("Employee") as Senior
Vice President and Cashier of the Bank. The Bank and the Holding Company expect
that Employee's contributions and knowledge will continue to be of significant
benefit to the future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of key personnel to the detriment of
the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Bank's
management, including Employee, to their assigned duties in the face of
potential circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
<PAGE>
-2-
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within twenty-four (24) months of such Change in Control
Employee's employment with the Bank and/or its successor terminates or Employee
is reassigned in accordance with Section 3, below. For purposes of this
Agreement, a "Change in Control" shall mean any of the following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of Holding Company as applicable, then still in office who were directors
of the Bank or the Holding Company, as applicable, at the beginning of the
period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or reassignment of his employment as a senior executive
officer of the Bank and/or its successor as provided in this Section 3, within
twenty-four (24) months after such event, unless such employment is terminated
or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
<PAGE>
-3-
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement shall mean
the mandatory termination of employment in accordance with the retirement policy
of the Bank, including (at Employee's sole election and as set forth in writing)
early retirement, generally applicable to its salaried employees or in
accordance with any retirement arrangement established with Employee's consent
with respect to Employee.
(ii) Termination of employment by the Bank based on disability shall mean
termination because of inability, as a result of incapacity due to physical or
mental illness, to perform the services required as an employee for a period
aggregating six (6) months or more within any twelve (12) month period, or
because Employee becomes or is deemed disabled under any applicable policy
providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of termination
it will promptly furnish Employee with a written Notice of Termination. Any
purported termination of Employee shall be communicated by written Notice of
Termination to the Bank. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall include the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Employee's employment under the provision so indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on which
a Notice of Termination is given; provided that, if within five (5) days after
any Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary or an
involuntary reassignment of Employee's duties, responsibilities, or benefits
inconsistent with those of a senior executive officer of a bank or the
involuntary relocation of Employee's primary duties and responsibilities to an
office or location greater than fifty (50) miles from Litchfield, Connecticut or
action which results in a significant worsening of the Employee's work
conditions (including, but not limited to, a significant change in employment
duties, responsibilities, required hours or otherwise).
4. Compensation Upon Termination or Reassignment.
(a) If, within twenty-four (24) months after a Change in Control, as
defined in Section 2 hereof, shall have occurred, Employee's employment with the
Bank terminates or is reassigned as defined in Section 3 (except by an agency
acting with proper jurisdiction, or by a board
<PAGE>
-4-
of directors for cause or as a result of death, retirement or disability), then
the Bank and/or its successor shall pay Employee within five (5) days after the
Date of Termination an amount equal to the sum of:
(i) Two (2) years of Employee's annual compensation based upon the
most recent aggregate base salary paid to Employee in the twelve (12) month
period immediately preceding his termination or reassignment less amounts
previously paid to Employee from the date of Change in Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 4 be reduced by any
compensation earned by Employee as the result of employment by another employer
after the Date of Termination or Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no payments
by the Bank to or for Employee's benefit under this Agreement shall be
non-deductible to the Bank by reason of the operation of Section 280G of the
Internal Revenue Code. Accordingly, notwithstanding any other provision hereof,
if by reason of the operation of said Section 280G of the Internal Revenue Code,
any such payments exceed the amount which can be deducted by the Bank, the
amount of such payments shall be reduced to the maximum which can be deducted by
the Bank. To the extent that payments in excess of the amount which can be
deducted by the Bank have been made to and for Employee'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 Employee's benefit shall be non-deductible
pursuant to Section 280G of the Internal Revenue Code. Any payments made
hereunder which are not deductible by the Bank as a result of losses which have
been carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee'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.
<PAGE>
-5-
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, acquisition of assets or
assumption of liabilities or otherwise) to all or substantially all of the
business and/or assets and/or deposits of the Bank, by agreement, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession had
taken place. Failure of the Bank and/or Holding Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Employee to compensation from the Bank in the same
amount and on the same terms as he would be entitled to hereunder if his
employment had terminated as a result of a Termination or Reassignment, as
provided in Section 3 hereof, after a Change in Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor
to the business, assets and/or deposits as aforesaid which executes and delivers
the agreement provided for in this Section 6 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should die
after any rights to receive the amounts contemplated hereby have accrued to
Employee but before such amounts have been paid, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there be no such
designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity,
<PAGE>
-6-
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Agreed to this 29th day of July, 1997 by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By: /s/ Jerome J. Whalen
-----------------------
Its: Jerome J. Whalen
Duly Authorized
EMPLOYEE
Signature: /s/ Philip G. Samponaro
------------------------
Printed Name:
Exhibit 10.6
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
July 29, 1997
<PAGE>
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ Carroll A. Pereira ("Employee") as Senior
Vice President and Controller of the Bank. The Bank and the Holding Company
expect that Employee's contributions and knowledge will continue to be of
significant benefit to the future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of key personnel to the detriment of
the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Bank's
management, including Employee, to their assigned duties in the face of
potential circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
<PAGE>
-2-
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within twenty-four (24) months of such Change in Control
Employee's employment with the Bank and/or its successor terminates or Employee
is reassigned in accordance with Section 3, below. For purposes of this
Agreement, a "Change in Control" shall mean any of the following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of Holding Company as applicable, then still in office who were directors
of the Bank or the Holding Company, as applicable, at the beginning of the
period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or reassignment of his employment as a senior executive
officer of the Bank and/or its successor as provided in this Section 3, within
twenty-four (24) months after such event, unless such employment is terminated
or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
<PAGE>
-3-
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement
shall mean the mandatory termination of employment in accordance with
the retirement policy of the Bank, including (at Employee's sole
election and as set forth in writing) early retirement, generally
applicable to its salaried employees or in accordance with any
retirement arrangement established with Employee's consent with
respect to Employee.
(ii) Termination of employment by the Bank based on disability
shall mean termination because of inability, as a result of incapacity
due to physical or mental illness, to perform the services required as
an employee for a period aggregating six (6) months or more within any
twelve (12) month period, or because Employee becomes or is deemed
disabled under any applicable policy providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of
termination it will promptly furnish Employee with a written Notice of
Termination. Any purported termination of Employee shall be communicated by
written Notice of Termination to the Bank. For purposes of this Agreement,
a "Notice of Termination" shall mean a notice which shall include the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on
which a Notice of Termination is given; provided that, if within five (5)
days after any Notice of Termination is given, the party receiving such
Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary
or an involuntary reassignment of Employee's duties, responsibilities, or
benefits inconsistent with those of a senior executive officer of a bank or
the involuntary relocation of Employee's primary duties and
responsibilities to an office or location greater than fifty (50) miles
from Litchfield, Connecticut or action which results in a significant
worsening of the Employee's work conditions (including, but not limited to,
a significant change in employment duties, responsibilities, required hours
or otherwise).
4. Compensation Upon Termination or Reassignment.
(a) If, within twenty-four (24) months after a Change in Control, as
defined in Section 2 hereof, shall have occurred, Employee's employment
with the Bank terminates or is reassigned as defined in Section 3 (except
by an agency acting with proper jurisdiction, or by a board
<PAGE>
-4-
of directors for cause or as a result of death, retirement or disability),
then the Bank and/or its successor shall pay Employee within five (5) days
after the Date of Termination an amount equal to the sum of:
(i) Two (2) years of Employee's annual compensation based upon
the most recent aggregate base salary paid to Employee in the twelve
(12) month period immediately preceding his termination or
reassignment less amounts previously paid to Employee from the date of
Change in Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section
4 be reduced by any compensation earned by Employee as the result of
employment by another employer after the Date of Termination or
Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no
payments by the Bank to or for Employee's benefit under this Agreement
shall be non-deductible to the Bank by reason of the operation of Section
280G of the Internal Revenue Code. Accordingly, notwithstanding any other
provision hereof, if by reason of the operation of said Section 280G of the
Internal Revenue Code, any such payments exceed the amount which can be
deducted by the Bank, the amount of such payments shall be reduced to the
maximum which can be deducted by the Bank. To the extent that payments in
excess of the amount which can be deducted by the Bank have been made to
and for Employee'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 Employee's benefit shall be non-deductible pursuant to
Section 280G of the Internal Revenue Code. Any payments made hereunder
which are not deductible by the Bank as a result of losses which have been
carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee'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.
<PAGE>
-5-
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation,
acquisition of assets or assumption of liabilities or otherwise) to all or
substantially all of the business and/or assets and/or deposits of the
Bank, by agreement, to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required
to perform it if no such succession had taken place. Failure of the Bank
and/or Holding Company to obtain such agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement and shall
entitle Employee to compensation from the Bank in the same amount and on
the same terms as he would be entitled to hereunder if his employment had
terminated as a result of a Termination or Reassignment, as provided in
Section 3 hereof, after a Change in Control, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any
successor to the business, assets and/or deposits as aforesaid which
executes and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die after any rights to receive the amounts contemplated hereby have
accrued to Employee but before such amounts have been paid, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to his devisee, legatee or other designee or,
if there be no such designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity,
<PAGE>
-6-
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Agreed to this 29th day of July, 1997 by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By: /s/ Jerome J. Whalen
-----------------------
Its: President
Duly Authorized
EMPLOYEE
Signature: /s/ Carroll A. Pereira
-----------------------
Printed Name: Carroll A. Pereira
Exhibit 10.7
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
May 10, 1999
<PAGE>
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ John S. Newton ("Employee") as Senior Vice
President of Trust Department of the Bank. The Bank and the Holding Company
expect that Employee's contributions and knowledge will continue to be of
significant benefit to the future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of key personnel to the detriment of
the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Bank's
management, including Employee, to their assigned duties in the face of
potential circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
<PAGE>
-2-
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within twenty-four (24) months of such Change in Control
Employee's employment with the Bank and/or its successor terminates or Employee
is reassigned in accordance with Section 3, below. For purposes of this
Agreement, a "Change in Control" shall mean any of the following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of Holding Company as applicable, then still in office who were directors
of the Bank or the Holding Company, as applicable, at the beginning of the
period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or reassignment of his employment as a senior executive
officer of the Bank and/or its successor as provided in this Section 3, within
twenty-four (24) months after such event, unless such employment is terminated
or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
<PAGE>
-3-
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement
shall mean the mandatory termination of employment in accordance with
the retirement policy of the Bank, including (at Employee's sole
election and as set forth in writing) early retirement, generally
applicable to its salaried employees or in accordance with any
retirement arrangement established with Employee's consent with
respect to Employee.
(ii) Termination of employment by the Bank based on disability
shall mean termination because of inability, as a result of incapacity
due to physical or mental illness, to perform the services required as
an employee for a period aggregating six (6) months or more within any
twelve (12) month period, or because Employee becomes or is deemed
disabled under any applicable policy providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of
termination it will promptly furnish Employee with a written Notice of
Termination. Any purported termination of Employee shall be communicated by
written Notice of Termination to the Bank. For purposes of this Agreement,
a "Notice of Termination" shall mean a notice which shall include the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on
which a Notice of Termination is given; provided that, if within five (5)
days after any Notice of Termination is given, the party receiving such
Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary
or an involuntary reassignment of Employee's duties, responsibilities, or
benefits inconsistent with those of a senior executive officer of a bank or
the involuntary relocation of Employee's primary duties and
responsibilities to an office or location greater than fifty (50) miles
from Litchfield, Connecticut or action which results in a significant
worsening of the Employee's work conditions (including, but not limited to,
a significant change in employment duties, responsibilities, required hours
or otherwise).
4. Compensation Upon Termination or Reassignment.
(a) If, within twenty-four (24) months after a Change in Control, as
defined in Section 2 hereof, shall have occurred, Employee's employment
with the Bank terminates or is reassigned as defined in Section 3 (except
by an agency acting with proper jurisdiction, or by a board
<PAGE>
-4-
of directors for cause or as a result of death, retirement or disability), then
the Bank and/or its successor shall pay Employee within five (5) days after the
Date of Termination an amount equal to the sum of:
(i) Two (2) years of Employee's annual compensation based upon
the most recent aggregate base salary paid to Employee in the twelve
(12) month period immediately preceding his termination or
reassignment less amounts previously paid to Employee from the date of
Change in Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section
4 be reduced by any compensation earned by Employee as the result of
employment by another employer after the Date of Termination or
Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no
payments by the Bank to or for Employee's benefit under this Agreement
shall be non-deductible to the Bank by reason of the operation of Section
280G of the Internal Revenue Code. Accordingly, notwithstanding any other
provision hereof, if by reason of the operation of said Section 280G of the
Internal Revenue Code, any such payments exceed the amount which can be
deducted by the Bank, the amount of such payments shall be reduced to the
maximum which can be deducted by the Bank. To the extent that payments in
excess of the amount which can be deducted by the Bank have been made to
and for Employee'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 Employee's benefit shall be non-deductible pursuant to
Section 280G of the Internal Revenue Code. Any payments made hereunder
which are not deductible by the Bank as a result of losses which have been
carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee'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.
<PAGE>
-5-
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation,
acquisition of assets or assumption of liabilities or otherwise) to all or
substantially all of the business and/or assets and/or deposits of the
Bank, by agreement, to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would be required
to perform it if no such succession had taken place. Failure of the Bank
and/or Holding Company to obtain such agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement and shall
entitle Employee to compensation from the Bank in the same amount and on
the same terms as he would be entitled to hereunder if his employment had
terminated as a result of a Termination or Reassignment, as provided in
Section 3 hereof, after a Change in Control, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any
successor to the business, assets and/or deposits as aforesaid which
executes and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die after any rights to receive the amounts contemplated hereby have
accrued to Employee but before such amounts have been paid, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to his devisee, legatee or other designee or,
if there be no such designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity,
<PAGE>
-6-
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Agreed to this 10th day of May, 1999 by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By: /s/ Jerome J. Whalen
-------------------
Its: President
Duly Authorized
EMPLOYEE
Signature: /s/ John S. Newton
-------------------
Printed Name: John S. Newton
<PAGE>
-7-
FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Jerome J. Whalen
-------------------
Its: President
Duly Authorized
Exhibit 10.8
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
July 1, 1997
<PAGE>
EXECUTIVE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ Revere H. Ferris ("Employee") as Senior
Vice President & Senior Commercial Loan Officer of the Bank. The Bank and the
Holding Company expect that Employee's contributions and knowledge will continue
to be of significant benefit to the future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of key personnel to the detriment of
the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Bank's
management, including Employee, to their assigned duties in the face of
potential circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within twenty-four
<PAGE>
-2-
(24) months of such Change in Control Employee's employment with the Bank and/or
its successor terminates or Employee is reassigned in accordance with Section 3,
below. For purposes of this Agreement, a "Change in Control" shall mean any of
the following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of Holding Company as applicable, then still in office who were directors
of the Bank or the Holding Company, as applicable, at the beginning of the
period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or reassignment of his employment as a senior executive
officer of the Bank and/or its successor as provided in this Section 3, within
twenty-four (24) months after such event, unless such employment is terminated
or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
<PAGE>
-3-
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement shall
mean the mandatory termination of employment in accordance with the
retirement policy of the Bank, including (at Employee's sole election and
as set forth in writing) early retirement, generally applicable to its
salaried employees or in accordance with any retirement arrangement
established with Employee's consent with respect to Employee.
(ii) Termination of employment by the Bank based on disability shall
mean termination because of inability, as a result of incapacity due to
physical or mental illness, to perform the services required as an employee
for a period aggregating six (6) months or more within any twelve (12)
month period, or because Employee becomes or is deemed disabled under any
applicable policy providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of termination
it will promptly furnish Employee with a written Notice of Termination. Any
purported termination of Employee shall be communicated by written Notice of
Termination to the Bank. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall include the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Employee's employment under the provision so indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on which
a Notice of Termination is given; provided that, if within five (5) days after
any Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary or an
involuntary reassignment of Employee's duties, responsibilities, or benefits
inconsistent with those of a senior executive officer of a bank or the
involuntary relocation of Employee's primary duties and responsibilities to an
office or location greater than fifty (50) miles from Litchfield, Connecticut or
action which results in a significant worsening of the Employee's work
conditions (including, but not limited to, a significant change in employment
duties, responsibilities, required hours or otherwise).
4. Compensation Upon Termination or Reassignment.
(a) If, within twenty-four (24) months after a Change in Control, as
defined in Section 2 hereof, shall have occurred, Employee's employment with the
Bank terminates or is reassigned as defined in Section 3 (except by an agency
acting with proper jurisdiction, or by a board
<PAGE>
-4-
of directors for cause or as a result of death, retirement or disability), then
the Bank and/or its successor shall pay Employee within five (5) days after the
Date of Termination an amount equal to the sum of:
(i) Two (2) years of Employee's annual compensation based upon the
most recent aggregate base salary paid to Employee in the twelve (12) month
period immediately preceding his termination or reassignment less amounts
previously paid to Employee from the date of Change in Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 4 be reduced by any
compensation earned by Employee as the result of employment by another employer
after the Date of Termination or Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no payments
by the Bank to or for Employee's benefit under this Agreement shall be
non-deductible to the Bank by reason of the operation of Section 280G of the
Internal Revenue Code. Accordingly, notwithstanding any other provision hereof,
if by reason of the operation of said Section 280G of the Internal Revenue Code,
any such payments exceed the amount which can be deducted by the Bank, the
amount of such payments shall be reduced to the maximum which can be deducted by
the Bank. To the extent that payments in excess of the amount which can be
deducted by the Bank have been made to and for Employee'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 Employee's benefit shall be non-deductible
pursuant to Section 280G of the Internal Revenue Code. Any payments made
hereunder which are not deductible by the Bank as a result of losses which have
been carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee'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.
<PAGE>
-5-
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, acquisition of assets or
assumption of liabilities or otherwise) to all or substantially all of the
business and/or assets and/or deposits of the Bank, by agreement, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession had
taken place. Failure of the Bank and/or Holding Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Employee to compensation from the Bank in the same
amount and on the same terms as he would be entitled to hereunder if his
employment had terminated as a result of a Termination or Reassignment, as
provided in Section 3 hereof, after a Change in Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor
to the business, assets and/or deposits as aforesaid which executes and delivers
the agreement provided for in this Section 6 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should die
after any rights to receive the amounts contemplated hereby have accrued to
Employee but before such amounts have been paid, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there be no such
designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity,
<PAGE>
-6-
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Agreed to this 29th day of July, 1997 by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By: /s/ Jerome J. Whalen
------------------------------
Its: President
Duly Authorized
EMPLOYEE
Signature: /s/ Revere H. Ferris
------------------------------
Printed Name: Revere H. Ferris
Exhibit 10.9
Supplemental Employee Retirement Agreement
Between
First National Bank of Litchfield
and
Walter Hunt
(as of December 1, 1996)
<PAGE>
Supplemental Employee Retirement Agreement
Between
First National Bank of Litchfield
and
Walter Hunt
Table of Contents
Section 1: Eligibility for Benefits ........................................ 1
Section 2: Amount of Benefit ............................................... 2
Section 3: Form and Timing of Benefits ..................................... 2
Section 4: Death Prior to Annuity Starting Date ............................ 2
Section 5: Forfeiture of Benefits .......................................... 2
Section 6: Funding ......................................................... 3
Section 7: Administration .................................................. 3
Section 8: Expense of Administration ....................................... 4
Section 9: Assignment ...................................................... 4
Section 10: Construction ................................................... 4
Section 11: Miscellaneous .................................................. 4
Execution Page ............................................................. 5
<PAGE>
Supplemental Employee Retirement Agreement
Between
First National Bank of Litchfield
and
Walter Hunt
(as of December 1, 1996)
THIS AGREEMENT, hereby made this 1st day of December, 1996, by and between
First National Bank of Litchfield (herein referred to as "Bank") and Walter Hunt
(herein referred to as "Employee"), this Agreement to be effective December 1,
1996.
W I T N E S S E T H
Whereas, Employee is a senior executive employed by the Bank; and
Whereas, Bank wishes to provide a supplemental non-qualified retirement
pension benefit which benefit shall supplement the benefit payable to Employee
under the terms of The First National Bank of Litchfield Retirement Income Plan
(herein referred to as the "Retirement Program");
Now Therefore, in consideration of the mutual covenants and promises herein
contained, and effective as of the first day of December 1, 1996, Bank and
Employee hereby agrees as follows:
Section 1: Eligibility for Benefits
(a) Employee shall become eligible to commence receipt of the benefits
herein described as of the date he shall commence to receive retirement benefits
under the terms of the Retirement Program (herein referred to as the "Annuity
Starting Date").
(b) In the event that Employee shall die prior to receiving the benefit
promised hereunder, such remaining benefits shall be paid to his designated
beneficiary or beneficiaries (herein referred to as "Beneficiary(ies)"),
provided such designation shall be provided to the Bank in writing on a form
furnished to Employee by Bank.
Section 2: Amount of Benefit
As of the Annuity Starting Date, and as of each of the nine anniversary
dates thereafter, Bank shall pay to Employee or, in the event of his death, his
Beneficiary(ies) an annual amount equal to
Page 1 of 5
<PAGE>
Five Thousand Dollars ($5,000). Provided, however, that at no point in time
shall the benefits remaining payable to Employee or his Beneficiary(ies)
hereunder exceed the sum of Fifty Thousand Dollars ($50,000.00), reduced by
amounts previously paid to Employee or his Beneficiary(ies) under the terms of
the Agreement.
Section 3: Form of Timing of Benefits
(a) Payment of the benefits promised hereunder shall, in the case of
retirement or death, be made in ten (10) annual installments commencing upon
Employee's attainment of his Annuity Starting Date, and each anniversary of such
date thereafter. Notwithstanding the foregoing form of payment, Employee may as
of his Annuity Starting Date and each anniversary thereafter prospectively in
writing elect to receive that year's installment in monthly or quarterly
payments provided that, if employee fails to make such election prior to the
such anniversary, payment for that year shall continue to be made in the same
form as was payment for the prior year.
(b) In the event Employee dies following his Annuity Starting Date but
prior to receiving his entire benefit promised hereunder, any death benefit
payable on behalf of Employee shall be paid to his Beneficiary(ies). In the
event that Employee has not furnished the Bank with a duly executed beneficiary
designation form, no death benefit shall be payable hereunder, and the Bank
shall have no further obligation hereunder.
Section 4: Death Prior to Annuity Starting Date
(a) If Employee shall die prior to attainment of his Annuity Starting Date,
his Beneficiary(ies), if any, shall be entitled to the benefits otherwise
payable to Employee. Payment of such benefits shall commence of if Employee's
date of death were Employee's Annuity Starting Date, and shall be paid in the
manner described in Section 3 hereof.
(b) If Employee shall die prior to attainment of his Annuity Starting Date,
and Employee is not survived by any named Beneficiary(ies), not benefits shall
be payable hereunder, and Bank shall have no further obligation hereunder.
Section 5: Forfeiture of Benefits
Notwithstanding any other provision hereunder, future payment of benefits
hereunder to Employee or his Beneficiary(ies) will, at the discretion of the
Bank, be discontinued and forfeited, and the Bank shall have no further
obligation hereunder to Employee or his Beneficiary(ies) if any of the following
circumstances occur:
(a) Employee is discharged from employment with the Bank for cause;
(b) Employee engages in competition with Bank following his
termination of employment with Bank and prior to attaining his Annuity
Starting Date; or
Page 2 of 5
<PAGE>
(c) Employee performs acts of willful malfeasance or gross negligence
in a matter of material importance to Bank, and such acts are
discovered by Bank at any time prior to the date of death of Employee.
The Bank shall have sole and uncontrolled discretion with respect to
the application of the provisions of this subsection and such exercise
of discretion shall be conclusive and binding upon Employee, his
Beneficiary(ies) and all other persons.
Section 6: Funding
All benefits provided under the terms of the Agreement shall be paid from
the general assets of Bank provided that such payments shall be reduced by
payments made to a Employee or his or her beneficiary from any trust or special
or separate fund established by Bank for such purpose. In no event, however,
shall Bank be required to establish such trust or special or separate fund, and
nothing herein contained shall be construed to result in such requirement. To
the extent that Employee or his Beneficiary(ies) shall acquire a right to
payment hereunder, such right shall be no greater than that of an unsecured
general creditor of Bank.
Section 7: Administration
(a) The Bank shall have complete discretionary authority to determine
Employee's eligibility hereunder, to construe the Agreement, and to review
claims for benefit payment under the terms of the Agreement and such
determinations, constructions and reviews shall be binding and conclusive with
respect to all parties hereto.
(b) The Bank shall be entitled to delegate to any agent or to any
subcommittee the authority to perform any act hereunder, including without
limitation those matters involving the exercise of discretionary authority
provided that such delegation shall at all times be subject to revocation by the
Bank.
(c) No employee of the Bank (nor any member of a committee or subcommittee
appointed by the Bank) shall be personally liable by reason of any contract or
other instrument executed by him or her on his or her behalf in his or her
capacity as an employee of the Bank and Bank shall indemnify and hold harmless
against all costs and expense, such Bank employee (or any such member of a
committee or subcommittee appointed by the Bank).
(d) No employee of the Bank (nor any member of a committee or subcommittee
appointed by the Bank) shall be personally liable by reason of a mistake of
judgment made in good faith, and Bank shall indemnify and hold harmless against
all costs and expense, such Bank employee (or any member of a committee or
subcommittee appointed by the Bank), and each officer, employee, or director of
Bank to whom any duty or power has been delegated relating to Agreement
administration, or of management or control of assets related to the
administration of the Agreement unless arising out of such individual's own
fraud or bad faith.
Page 3 of 5
<PAGE>
Section 8: Expense of Administration
Expenses incurred hereunder shall be borne by Bank, and shall have no
effect upon the benefits provided under the terms of the Agreement.
Section 9: Assignment
The Employee (or Beneficiary(ies)) interest in, or right to receive a
benefit hereunder, the Agreement shall in no event be subject in any manner to
sale, transfer, assignment, pledge, attachment, garnishment, or other alienation
or encumbrance of any kind; nor may such interest or right to receive a benefit
be taken, either voluntarily or involuntarily, for the satisfaction of the debts
of, or other obligations or claims against, such person or entity, including
claims for alimony, support, separate maintenance and claims in bankruptcy
proceedings.
Section 10: Construction
The Agreement shall be construed and enforced in accordance with laws of
the State of Connecticut to the extent not preempted by federal law.
Section 11: Miscellaneous
(a) Neither the Agreement nor any action taken by the Bank hereunder shall
be construed as giving Employee a right to employment by Bank, or as in any way
diminishing Bank's right to discharge such Employee from its employ.
(b) Nothing contained herein shall constitute a guaranty by Bank or any
other entity or person that the assets of Bank will be sufficient to pay any
benefit hereunder.
(c) If Employee or his Beneficiary(ies) entitled to payment under the
Agreement are deemed by Bank to be incapable of personally receiving and giving
a valid receipt for such payment, then, unless and until claim therefor shall
have been made by a duly appointed guardian or other legal representative of
such person, Bank may provide for such payment or any part thereof to be made to
any person or institution then contributing toward or providing for the care and
maintenance of such person. Any such payment shall be a payment for the account
of such person and a complete discharge of any liability of Bank under the terms
of the Agreement.
(d) Employee shall keep Bank informed of his current address and the
current address of his Beneficiary(ies). Bank shall not be obligated to search
for the whereabouts of any person. If the location of Employee is not made known
to Bank within one year after the date on which payment of Employee's benefit
hereunder may be made, payment may be made as though Employee had died at the
end of such one-year period. If, within one additional year after such one-year
period has elapsed, or within one year after the actual death of Employee, Bank
is unable to locate any
Page 4 of 5
<PAGE>
Beneficiary(ies) of Employee, Bank shall have no further obligation to pay any
benefit hereunder to Employee or his Beneficiary(ies) or any other person and
such benefit shall be irrevocably forfeited.
(e) Notwithstanding any other provision of the Agreement, neither Bank nor
any individual acting as an employee or agent of Bank shall be liable to
Employee Beneficiary(ies) or any other person for any claim, loss liability or
expense incurred in connection with the Agreement and Bank shall indemnify any
individual acting as such against any such claim, loss or expense including
reasonable attorney fees.
(f) Bank may withhold from any benefit payable hereunder all applicable
federal, state and local taxes associated with such payment.
(g) Notwithstanding the provisions of Section 6 hereof, it is the intent of
Bank that the Agreement be unfunded for purposes of ERISA and the Code, and the
Agreement shall be interpreted in a manner consistent with such intent.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed by its
officer thereunto duly authorized and Employee has hereunto set his hand and
seal, all as of the day and year first above written.
FIRST NATIONAL BANK OF LITCHFIELD
By: /s/ Jerome J. Whalen
---------------------
Its: President 1/21/97
EMPLOYEE
/s/ Walter L. Hunt
Page 5 of 5
Exhibit 10.10
- --------------------------------------------------------------------------------
FIRST NATIONAL BANK OF LITCHFIELD
DEFERRED DIRECTORS' FEE PLAN
- --------------------------------------------------------------------------------
Effective Date January 1, 1996
<PAGE>
ARTICLE I
NAME, PURPOSE AND EFFECTIVE DATE
1.01 Name and Purpose. The plan set forth herein shall be known as the
First National Bank of Litchfield Deferred Directors' Fee Plan (the
"Plan"). The Plan is established by the First National Bank of
Litchfield and shall be maintained for the purpose of providing for
the deferred payment of retainer and meeting fees to the Directors of
the Bank electing to participate in the Plan.
1.02 Effective Date. The Effective Date of the Plan shall be January 1,
1996. The Plan shall only apply to a Director who performs services as
a Board member as such on or after the Effective Date.
ARTICLE II
DEFINITIONS
Wherever used in this Plan, unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
2.01 "Annual Deferral Account" means the account of a Director which is
credited with the Director's retainer and fee deferrals and investment
experience under Article IV.
2.02 "Beneficiary" means the person or persons (including a trust)
designated by the Director on the form provided by the Plan
Administrator to receive any death benefit payable under the Plan. In
the absence of any designation, the Beneficiary shall be the
Director's estate.
2.03 "Bank" means First National Bank of Litchfield.
2.04 "Change of Control" means (i) the acquisition of fifty percent (50%)
or more of the outstanding shares of common stock of the First
Litchfield Financial Corporation (the "Corporation") by any person, or
affiliated persons after January 1, 1996, other than any person
(including individuals, partnerships, corporations, trust and
estates), or affiliated persons that individually, or collectively,
owned at least fifty percent (50%) of such stock on January 1, 1996,
(ii) the dissolution or liquidation of the Corporation, or any merger
or consolidation of the Corporation with another corporation in which
the Corporation is not the surviving corporation, (iii) a change in
the composition of the Board of Directors of the Corporation that
results in more than one-half of the individual members of the Board
neither being (a) directors of the Corporation on a date three (3)
years earlier, nor (b) individuals whose election to the Board was
approved by a majority of the individuals who were directors on the
date described in (a), and were still in office on the date the Board
approved
-2-
<PAGE>
the election of such individuals, or (iv) the sale or other
disposition, of all, or substantially all, the assets of the
Corporation. Notwithstanding the foregoing, a Director may elect in
writing not to have an event considered a change of control as to his
or her Account. Such election must be made within twenty (20) days of
the event that would otherwise be considered a change of control.
2.05 "Code" shall mean the Internal Revenue Code of 1986, as the same may
be amended from time to time.
2.06 "Hardship" means an unforeseeable emergency, or severe financial
hardship, involving a sudden and unexpected severe illness or serious
accident of the Director or of a dependent of the Director, all as
determined by the Plan Administrator.
2.07 "Plan Year" means the calendar year.
2.08 "Plan Administrator" means the individual or group of individuals
chosen by the Board of Directors of the Bank to administer the terms
of the Plan.
Wherever used in the Plan, the masculine shall include the feminine and the
singular shall include the plural, unless the context indicates otherwise.
ARTICLE III
ELIGIBILITY TO PARTICIPATE
3.01 Eligibility. All members of the Board of Directors who receive
Director's fees shall be eligible to participate under the Plan. As of
January 1, 1996, the individuals eligible to participate are those
individuals listed on the attached Appendix A.
ARTICLE IV
DEFERRAL OF DIRECTORS' FEES
4.01 Amounts Payable Under the Plan. The amounts payable under the Plan are
based solely on the value of the Director's interest in the amounts
credited and accumulated on his behalf in his Account. The following
provisions of this Article detail the basis for crediting amounts to
the Accounts of Directors.
4.02 Annual Deferral Election. Each Director may enter into a Fee Deferral
Agreement to defer payment of his retainer or meeting fees in any
amount or percentage allowed under the Fee Deferral Agreement. That
amount so deferred shall be credited to the Director's Account. Except
in the case of either a Director who first becomes eligible to
participate in the Plan after the Effective Date, or the first year
the Plan is effective, the election to defer, or a change of a prior
election, must be made by the Director, prior to the first day of the
Plan Year for which such amount would otherwise be payable in cash to
the Director, but for the
-3-
<PAGE>
deferral election. The election shall be made on forms provided by the
Plan Administrator. A Director may reduce or terminate his election
only as its relates to fees for future service.
In the case of the first year the Plan is effective, or when a
Director first becomes eligible to participate, a Director may make
the election, with respect to retainer and meeting fees earned and
payable after such election, within thirty (30) days of the Plan's
Effective Date, or within thirty (30) days of first becoming eligible
to participate, if later.
Notwithstanding the foregoing, in the event that a Director is to be
paid fees which are in addition to those in effect at the beginning of
the Plan Year on account of agreeing to perform services as a Board
member in addition to those which were contemplated at the beginning
of the Plan Year, the Director may elect to defer all or a portion of
such additional fees; provided, that such election is made prior to
the earlier of (i) the date the additional fee is payable in cash and
(ii) the date the additional services are to be rendered.
4.03 Vesting. The Director shall be fully and immediately vested in all
amounts credited to his Account.
4.04 Investment Options. The Plan Administrator may identify one or more
investment funds in which the Director's Account shall be invested. If
there is more than one such funds, the Plan Administrator may allow
the Director to direct the fund or funds in which his Account is
invested. In such event, the Plan Administrator shall establish rules,
respecting the investment directions, including rules governing the
investment funds offered and manner and frequency of making or
changing such directions. Notwithstanding the foregoing, the Plan
Administrator may specify a rate of investment return for the Account
of any or all Directors in lieu of identifying an investment fund for
such Account.
4.05 Adjustment of Accounts. The Accounts of each Director shall be
adjusted as of the last day of each quarter of the Plan Year, and as
of any additional date or dates within the Plan Year the Plan
Administrator determines to be appropriate, to reflect investment
returns under Section 4.04, and may in the Plan Administrator's
discretion, be charged with expenses that are incurred with respect to
such investments (including, without limitation, brokerage
commissions).
ARTICLE V
PAYMENT OF BENEFITS AND HARDSHIP WITHDRAWALS
5.01 Form of Payment Upon Termination of Deferral Period. Unless an
alternate form of payment has been previously elected by the Director
under Section 5.03, the Director shall receive a single lump sum
payment which may be made in cash or kind the full value of his
Account following the deferral period elected by the Director on the
Fee Deferral Agreement, or if no deferral period is elected, upon the
cessation of his providing services as a Director. Payment shall be
made at the time specified in Section 5.04.
-4-
<PAGE>
5.02 Form of Payment Upon Death. Upon a Director's death, the Director's
Beneficiary shall receive a single lump sum payment of the remaining
value of the Director's Account. Any election made by the Director
under Section 5.03 to receive his benefit in an alternate form of
payment shall not apply to payment under this Section.
5.03 Alternate Form of Payment. The Director may irrevocably elect to
receive payment of his benefit under the Plan in any alternate form of
payment allowed by the Plan Administrator, including periodic or
non-periodic payments. Such election shall be made prior to the
beginning of the calendar year in which the payment of the Director's
benefit would otherwise be made in a lump sum in accordance with
Section 5.04.
5.04 Time of Payment. Payment of the Plan benefit shall be made, or
commence, within thirty (30) days following the end of the deferral
period elected by the Director or within thirty (30) days following the
end of the Plan Year in which the Director ceases to be a member of the
Board if no deferral period is elected; provided, however, that the
Director may be allowed to irrevocably elect a later date of payment or
commencement. Any election by the Director to defer payment shall be
made prior to the beginning of the Plan Year in which the Director
would otherwise receive payment of his benefit in the form of a lump
sum payment. Provided, further, that in the event no deferral period is
elected the Director may elect to accelerate payment to within sixty
(60) days following the date the Director ceases to be a member of the
Board if such election is made before the end of the Plan Year
preceding the Plan Year such cessation occurs. Notwithstanding the
foregoing, in the event of a Change of Control, payment shall be made
in a single lump sum payment within thirty (30) days of such event. If
payment is not made in accordance with the preceding sentence the value
of the Director's Account as of the date of the Change of Control shall
be increased by the greater of (1) 10% per month and (2) the investment
return determined in accordance with Section 4.05, until payment is
made.
5.05 Hardship Withdrawals. At the request of a Director, the Plan
Administrator may, in its sole discretion, distribute all, or part, of
the interest in his Account on account of Hardship. Such distribution
is limited to the amount necessary to satisfy the cause of the
Hardship.
ARTICLE VI
FUNDING
6.01 Funding. The Bank shall not be under any obligation to establish a
fund or trust in order to pay the benefits under the Plan. Payments
shall only be required as benefits become due and payable. No person
shall have any right, other than the right of an unsecured general
creditor, against the Bank, with respect to the benefits payable
hereunder, or which may be payable hereunder, to any Director, or
Beneficiary hereunder.
-5-
<PAGE>
Notwithstanding the foregoing, in order to pay benefits under this
Plan as they become payable, one or more grantor trusts may be
established, within the meaning of Section 671 of the Code, as may be
amended from time to time and, periodically, assets may be transferred
to such trust or trusts. The assets so transferred shall at all times
be subject to the claims of each trust grantor's general creditors,
and neither the Plan, nor any Director or Beneficiary, shall have any
preferred claim or right, or any beneficial ownership interest in, any
such trusts assets prior to the time such assets are paid to a
Director or Beneficiary, and all rights created under this Plan, and
any trust(s) shall be mere unsecured contractual rights.
ARTICLE VII
MISCELLANEOUS
7.01 No Guarantee of Status as a Director. Nothing contained in this Plan
shall be construed as a right of any Director to be continued as a
Director or as a limitation on the right of the Bank to deal with any
Director, as to his continuation on the Board, his discharge, or his
compensation.
7.02 Rights Under Plan. Nothing in this Plan shall be construed to limit,
broaden, restrict, or grant any right to any Director or any
Beneficiary thereof under any other retirement or deferred
compensation plan, nor to grant any additional rights to any such
Director or Beneficiary thereof under any other plan, nor in any way
to limit, modify, repeal or otherwise affect the right to amend or
modify any other such plan.
7.03 Amendments/Termination. The Bank reserves the right to make, from time
to time, amendments to, or to terminate, this Plan by vote duly
adopted by the Board of Directors. If the Plan is terminated the
amount payable to a Director (or Beneficiary) under the Plan as of the
termination date shall not be less than the Director's interest in the
amounts in his Account.
Notwithstanding the foregoing, if there is a Change of Control, no
amendment or termination of the Plan can be made on or after the date
of the Change of Control. In such event the Plan shall not be
terminated until all amounts are paid to participating Directors and
their beneficiaries.
7.04 Nonassignability. Any benefit payable under this Plan shall not be
subject to alienation, assignment, garnishment, pledge, execution,
attachment or levy of any kind and any attempt to cause any benefit to
be subjected shall not be recognized, except to the extent required by
applicable law.
7.05 Plan Administration. The Plan shall be operated and administered by
the Plan Administrator whose decision on all matters involving the
interpretation and administration of the Plan shall be final and
binding.
-6-
<PAGE>
7.06 Governing Law. This Plan shall be construed and enforced in accordance
with, and governed by, the laws of the State of Connecticut, except as
any such laws may be superseded by Federal law.
IN WITNESS WHEREOF, and to evidence the adoption of the Plan, First
National Bank of Litchfield has caused this document to be executed by its duly
authorized officer, and its corporate seal to be hereunto affixed this
twenty-eighth day of September, 1995.
(Seal)
By: /s/ Jerome J. Whalen
----------------------------------------
Title: President and Chief Executive Officer
-7-
<PAGE>
FIRST NATIONAL BANK OF LITCHFIELD ETC.
DEFERRED DIRECTORS' FEE PLAN
APPENDIX A - As of January 1, 1996
Director's Name Initial Date of Participation
-8-
Exhibit 10.11
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
EMPLOYEE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
<PAGE>
EMPLOYEE CHANGE IN CONTROL AGREEMENT
NOT TO BE CONSTRUED AS AN EMPLOYMENT AGREEMENT
THE FIRST NATIONAL BANK OF LITCHFIELD
FIRST LITCHFIELD FINANCIAL CORPORATION
13 North Street
Litchfield, Connecticut
WHEREAS, The First National Bank of Litchfield (the "Bank") and its parent
bank holding company, First Litchfield Financial Corporation (the "Holding
Company"), wish to continue to employ ___________________ ("Employee") as
______________________ of the Bank. The Bank and the Holding Company expect that
Employee's contributions and knowledge will continue to be of significant
benefit to the future growth and success of the Bank;
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that a change in control of the Bank and/or the Holding Company may
occur and that the threat of such change in control may create uncertainty and
may result in the distraction or departure of long term personnel to the
detriment of the Bank and Holding Company and their stockholders;
WHEREAS, the Boards have determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of employees of the Bank
including Employee, to their assigned duties in the face of potential
circumstances involving the possibility of such a change in control;
NOW THEREFORE, in addition to one dollar ($1.00) and other good and
valuable consideration paid by the Bank to Employee and in order to induce
Employee to continue employment with the Bank and to continue to perform
Employee's duties in a manner which is in the best interests of the Bank, the
Bank and Holding Company hereby agree to provide Employee with certain benefits
in the event his employment with the Bank terminates or is reassigned subsequent
to a Change in Control (as defined in Section 2 hereof) under the circumstances
described below.
1. Term of Agreement; Employment Status. This Agreement shall take effect
when signed by all parties and shall remain in full force and effect until June
1, 2002. All employees of Bank and Holding Company, including Employee, are
employees at will. The terms of this Agreement, therefore, do not and are not
intended to create either an express and/or implied contract of employment with
the Bank and/or the Holding Company. This Agreement simply provides certain
potential benefits to Employee in the event that a Change in Control occurs
prior to June 1, 2002 as hereinafter defined.
2. Change in Control. No benefits shall be payable hereunder unless prior
to June 1, 2002 there shall have been a Change in Control as set forth below,
and thereafter within six (6) months of such Change in Control Employee's
employment with the Bank and/or its successor
<PAGE>
-2-
terminates or Employee is reassigned in accordance with Section 3, below. For
purposes of this Agreement, a "Change in Control" shall mean any of the
following:
(a) The acquisition of fifty percent (50%) or more of any class of
equity securities of the Holding 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 Holding
Company;
(c) A merger, consolidation or reorganization to which the Bank or the
Holding 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 Holding 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 Holding 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 the Holding Company, respectively, of each new director was
approved by a vote of at least a majority of the directors of the Bank or
of the Holding Company as applicable, then still in office who were
directors of the Bank or the Holding Company, as applicable, at the
beginning of the period.
3. Termination Following Change in Control. If any of the events described
in Section 2 hereof constituting a Change in Control shall have occurred,
Employee shall be entitled to the benefits provided for in Section 4(a) hereof
upon the termination or material reassignment of his employment duties or
responsibilities as an employee of the Bank and/or its successor as provided in
this Section 3, within six (6) months after such event, unless such employment
is terminated or reassigned: (i) by any regulatory authority (acting with proper
jurisdiction); or (ii) by the Board of Directors for cause; or (iii) because of
Employee's death, retirement or disability. Such benefits shall be reduced by
the amount of any severance paid to Employee by the Bank or its successor.
(a) Retirement; Disability.
(i) Termination of employment by the Bank based on retirement
shall mean the mandatory termination of employment in accordance with
the retirement policy of
<PAGE>
-3-
the Bank, including (at Employee's sole election and as set forth in
writing) early retirement, generally applicable to its salaried
employees or in accordance with any retirement arrangement established
with Employee's consent with respect to Employee.
(ii) Termination of employment by the Bank based on disability
shall mean termination because of inability, as a result of incapacity
due to physical or mental illness, to perform the services required as
an employee for a period aggregating six (6) months or more within any
twelve (12) month period, or because Employee becomes or is deemed
disabled under any applicable policy providing disability insurance.
(b) Notice of Termination. The Bank agrees that in the event of
termination it will promptly furnish Employee with a written Notice of
Termination. Any purported termination of Employee shall be communicated by
written Notice of Termination to the Bank. For purposes of this Agreement,
a "Notice of Termination" shall mean a notice which shall include the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(c) Date of Termination. "Date of Termination" shall mean the date on
which a Notice of Termination is given; provided that, if within five (5)
days after any Notice of Termination is given, the party receiving such
Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement
of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected).
(d) Reassignment. Reassignment shall mean a reduction in base salary
or an involuntary reassignment of Employee's duties, responsibilities, or
benefits materially inconsistent with those of Employee prior to the Change
in Control or the involuntary relocation of Employee's primary duties and
responsibilities to an office or location greater than fifty (50) miles
from Litchfield, Connecticut or action which results in a significant
worsening of the Employee's work conditions (including, but not limited to,
a significant change in employment duties, responsibilities, required work
hours or otherwise).
4. Compensation Upon Termination or Reassignment.
(a) If, within six (6) months after a Change in Control, as defined in
Section 2 hereof, shall have occurred, Employee's employment with the Bank
terminates or is reassigned as defined in Section 3 (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 Employee within five (5) days after the Date of
Termination an amount equal to the sum of:
<PAGE>
-4-
(i) Six (6) months of Employee's annual compensation based upon
the most recent aggregate base salary paid to Employee in the six (6)
month period immediately preceding his termination or reassignment
less amounts previously paid to Employee from the date of Change in
Control; plus
(ii) Reasonable legal fees and expenses incurred by Employee 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 this Agreement).
(b) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section
4 be reduced by any compensation earned by Employee as the result of
employment by another employer after the Date of Termination or
Reassignment, or otherwise.
(c) It is the intention of the parties to this Agreement that no
payments by the Bank to or for Employee's benefit under this Agreement
shall be non-deductible to the Bank by reason of the operation of Section
280G of the Internal Revenue Code. Accordingly, notwithstanding any other
provision hereof, if by reason of the operation of said Section 280G of the
Internal Revenue Code, any such payments exceed the amount which can be
deducted by the Bank, the amount of such payments shall be reduced to the
maximum which can be deducted by the Bank. To the extent that payments in
excess of the amount which can be deducted by the Bank have been made to
and for Employee'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 Employee's benefit shall be non-deductible pursuant to
Section 280G of the Internal Revenue Code. Any payments made hereunder
which are not deductible by the Bank as a result of losses which have been
carried forward by the Bank for Federal tax purposes shall not be deemed a
non-deductible amount for purposes of this Section 4(c).
5. Continuation of Insurance Benefits.
Notwithstanding any other provision in this Agreement to the contrary, the
Bank and/or its successor shall maintain in full force and effect for Employee's
continued benefit, for the six (6) month 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.
6. Successors; Binding Agreement.
(a) The Bank and the Holding Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation,
acquisition of assets or assumption of liabilities or otherwise) to all or
substantially all of the business and/or assets and/or deposits of the
Bank, by agreement, to expressly assume and agree to perform this Agreement
in the same manner
<PAGE>
-5-
and to the same extent that the Bank would be required to perform it if no
such succession had taken place. Failure of the Bank and/or Holding Company
to obtain such agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Bank in the same amount and on the same terms as he
would be entitled to hereunder if his employment had terminated as a result
of a Termination or Reassignment, as provided in Section 3 hereof, after a
Change in Control, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the
Date of Termination. As used in this Agreement, "Bank" shall mean the Bank
as hereinbefore defined and any successor to the business, assets and/or
deposits as aforesaid which executes and delivers the agreement provided
for in this Section 6 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should
die after any rights to receive the amounts contemplated hereby have
accrued to Employee but before such amounts have been paid, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to his devisee, legatee or other designee or,
if there be no such designee, to his estate.
7. Notices. All notices and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank and the Holding
Company shall be directed to the attention of the Board with a copy to the
Chairman of the Board of the Bank and the Chairman of the Board of the Holding
Company or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of address shall
be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such other officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other or failure to comply with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Connecticut and of the United States of America.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
<PAGE>
-6-
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Litchfield,
Connecticut, in accordance with the rules of the American Arbitration
Association then in effect. Notwithstanding the pendency of any such dispute or
controversy, the Bank will pay Employee promptly an amount equal to his full
scheduled compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, base salary) and provide Employee with all
scheduled compensation, benefits and insurance plans in which he was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in accordance with Section 3 hereof. Amounts paid
under this Section 11 are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Agreed to this __ day of ________, ____ by and among Employee, The First
National Bank of Litchfield, and First Litchfield Financial Corporation.
THE FIRST NATIONAL BANK OF
LITCHFIELD
By:__________________________________
Its:
Duly Authorized
EMPLOYEE
Signature:_____________________________
Printed Name:
FIRST LITCHFIELD FINANCIAL
CORPORATION
By:__________________________________
Its:
Duly Authorized
Exhibit 21.
15.1 Subsidiaries of First Litchfield Financial Corporation at December 31,
1999:
Percent
Owned By
First Litchfield
Incorporated In Financial
Subsidiary The State of: Corporation
- ---------- ------------- -----------
First National Bank of Connecticut 100%
Litchfield
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1998 SEP-30-1999
<CASH> 7,369,014 6,156,166 4,302,319 8,693,481
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 0 2,600,000 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 36,190,070 40,209,393 45,023,025 43,973,633
<INVESTMENTS-CARRYING> 11,804,178 8,106,219 9,061,166 5,770,922
<INVESTMENTS-MARKET> 11,993,691 8,275,648 9,289,843 5,756,931
<LOANS> 141,846,741 152,438,033 149,439,223 176,557,808
<ALLOWANCE> 970,840 1,013,949 1,027,724 1,100,686
<TOTAL-ASSETS> 202,115,632 215,337,558 213,227,363 244,343,450
<DEPOSITS> 183,673,260 194,941,472 191,647,843 193,945,707
<SHORT-TERM> 4,245,000 270,268 1,200,000 29,477,007
<LIABILITIES-OTHER> 729,806 814,442 917,595 1,080,457
<LONG-TERM> 0 5,000,000 5,000,000 5,000,000
0 0 0 0
0 0 0 0
<COMMON> 5,577 14,831 14,675 15,673
<OTHER-SE> 13,461,989 14,296,545 14,447,250 14,824,606
<TOTAL-LIABILITIES-AND-EQUITY> 202,115,632 215,337,558 213,227,363 244,343,450
<INTEREST-LOAN> 10,816,565 11,559,941 8,586,964 9,369,903
<INTEREST-INVEST> 3,055,228 3,153,234 2,359,987 2,328,790
<INTEREST-OTHER> 50,151 170,968 153,404 11,827
<INTEREST-TOTAL> 13,921,944 14,884,143 11,100,355 11,710,520
<INTEREST-DEPOSIT> 6,620,925 6,832,028 5,121,251 4,441,730
<INTEREST-EXPENSE> 6,719,113 7,114,181 5,323,537 5,220,839
<INTEREST-INCOME-NET> 7,202,831 7,769,962 5,776,818 6,489,681
<LOAN-LOSSES> 100,000 120,000 90,000 90,000
<SECURITIES-GAINS> 34,368 143,640 143,640 0
<EXPENSE-OTHER> 5,875,583 6,550,248 4,697,713 5,457,589
<INCOME-PRETAX> 2,565,283 2,509,016 2,075,989 2,001,849
<INCOME-PRE-EXTRAORDINARY> 2,565,283 2,509,016 2,075,989 2,001,849
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,556,034 1,536,299 1,270,389 1,360,630
<EPS-BASIC> 1.05 1.04 .86 .92
<EPS-DILUTED> 1.02 .99 .82 .88
<YIELD-ACTUAL> 3.91 3.89 3.88 4.02
<LOANS-NON> 1,325,896 1,168,159 1,073,346 1,248,510
<LOANS-PAST> 454 14,239 0 40,926
<LOANS-TROUBLED> 99,000 133,000 98,000 131,000
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 998,238 970,840 970,840 1,013,949
<CHARGE-OFFS> 156,266 96,867 40,990 6,125
<RECOVERIES> 28,868 19,976 7,874 2,862
<ALLOWANCE-CLOSE> 970,840 1,013,949 1,027,724 1,100,686
<ALLOWANCE-DOMESTIC> 161,000 145,000 159,000 134,000
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 810,000 869,000 869,000 967,000
</TABLE>
