SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-28815
--------
FIRST LITCHFIELD FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1241321
- ----------------------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
13 North Street, Litchfield, CT 06759 06759
- -------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (860)567-8752
-------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- -------------------------------- --------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [ X ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $ 17,420,569
----------------
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) $21,946,511
-----------
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 1,514,931
---------
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1 - DESCRIPTION OF BUSINESS 1
ITEM 2 - DESCRIPTION OF PROPERTY 16
ITEM 3 - LEGAL PROCEEDINGS 18
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS 18
PART II
ITEM 5 - MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 19
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS 23
ITEM 7 - FINANCIAL STATEMENTS 36
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 37
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS 37
ITEM 10 - EXECUTIVE COMPENSATION 39
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 44
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 46
ITEM 13 - EXHIBITS AND REPORTS ON
FORM 8-K 48
SIGNATURES 50
- ----------
Documents incorporated by reference.
None
<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.
-1-
<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, Connecticut 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.
-2-
<PAGE>
Loan Portfolio
The Bank's loan portfolio at December 31, 1999 - 1995 was comprised of
the following categories based upon the nature of collateral:
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, Financial $ 8,064 $ 4,804 $ 5,680 $ 5,055 $ 5,078
Real Estate
Construction 7,090 5,716 2,229 4,159 2,199
Residential 115,392 112,859 105,489 96,441 88,274
Commercial 19,822 16,555 17,326 14,982 11,680
Installment 33,115 12,413 11,058 8,936 6,990
Other 123 91 65 203 241
-------- -------- -------- -------- --------
Total Loans $183,606 $152,438 $141,847 $129,776 $114,462
======== ======== ======== ======== ========
</TABLE>
The following table reflects the maturity and sensitivities of the
Bank's loan portfolio at December 31, 1999.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
After one
One year year through Due after Total
or less five years five years loans
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial, Financial $ 6,973 $ 884 $ 207 $ 8,064
Real estate
Construction 6,571 519 __ 7,090
Residential 17,580 15,679 82,133 115,392
Commercial 2,918 4,194 12,710 19,822
Installment 9,427 18,456 5,232 33,115
Other 123 __ __ 123
-------- -------- -------- --------
Total Loans $ 43,592 $ 39,732 $100,282 $183,606
======== ======== ======== ========
</TABLE>
-3-
<PAGE>
At December 31, 1999 loans maturing after one year included
approximately: $107,308,000 in fixed rate loans; and $32,706,000 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 December 31, 1999, the Bank's investment portfolio was $46,889,333
or 18% of total assets. There were no federal funds sold as of December 31,
1999.
The table below presents the amortized cost and fair values of
investment securities held by the Bank at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
1999 1998
--------------------------- ---------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Available-for-sale $43,771 $42,700 $40,030 $40,209
Held-to-maturity 4,189 4,148 8,106 8,276
------- ------- ------- -------
$47,960 $46,848 $48,136 $48,485
======= ======= ======= =======
</TABLE>
-4-
<PAGE>
The following tables present the maturity distribution of investment
securities at December 31, 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 Average
Or Less Five Years Ten Years Years No Maturity Total Yield
------- ---------- --------- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Agencies
and Corporations ___ ___ ___ ___ ___ ___ ___
Mortgage-Backed Securities
$ 3,946 $ 202 $ 41 ___ ___ $ 4,189 5.64%
------- -------- ------- -------- ------- ------- --------
Total $ 3,946 $ 202 $ 41 ___ ___ $ 4,189 5.64%
======= ======== ======= ======= ======= ======== ========
Weighted Average
Yield 5.40% 9.56% 9.10% ___ ___ 5.64% ___
======= ======== ======= ======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Available-for-sale (1)
Over One Over five Weighted
One Year through through Over Ten Average
Or Less Five Years Ten Years Years No Maturity Total Yield
------- ---------- --------- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Agencies
and Corporations $ 2,000 $ 7,992 $14,500 ___ ___ $ 24,492 6.14%
Mortgage-Backed
Securities 15,949 3,074 256 ___ ___ 19,279 6.93%
Other ___ ___ ___ ___ ___ ____ ____
------- -------- ------- ------- ------- -------- --------
Total $17,949 $ 11,066 $14,756 $___ $ ___ $ 43,771 6.48%
======= ======== ======= ======= ======= ======== ========
Weighted Average Yield 6.76% 6.18% 6.37% ___ ___ 6.48% ___
======= ======== ======= ======= ======= ======== ========
Total Portfolio $21,895 $ 11,268 $14,797 ___ ___ $ 47,960 6.41%
======= ======== ======= ======= ======= ======== ========
Total Weighted Average
Yield 6.52% 6.24% 6.38% ___ ___ 6.41% ___
======= ======== ======= ======= ======= ======== ========
</TABLE>
(1) Dollars shown at amortized cost amounts
-5-
<PAGE>
Deposits
The following table summarizes average deposits and interest rates of
the Bank for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
1999 1998 1997
------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------
Non-interest bearing
<S> <C> <C> <C> <C> <C> <C>
demand deposits $ 32,627 ___ $ 27,504 ___ $ 23,499 ___
Now and Money market
account deposits 68,911 2.46% 63,701 2.54% 60,475 2.48%
Savings deposits 10,736 2.45 9,277 2.45 8,760 2.45
Time deposits 80,622 4.97 89,059 5.60 85,487 5.74
------------------------------------------------------------------------
Total deposits $192,896 3.09% $ 189,541 3.60% $ 178,221 3.72%
========================================================================
</TABLE>
Fixed rate certificates of deposit in amounts of $100,000 or more
at December 31, 1999 are scheduled to mature as follows:
(Dollar Amounts in Thousands)
Three months or less $ 6,963
Over three, through six months 2,309
Over six, through twelve months 4,549
Over twelve months 2,982
--------------
Total $ 16,803
==============
-6-
<PAGE>
Return on Equity and Assets
The following table summarizes various operating ratios of the Company
for the past three years:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average total
assets (net income divided by average total
assets) .75% .74% .81%
Return on average
shareholders' equity (net
income divided by
average shareholders' equity) 11.92 11.25 12.21
Equity to assets (average
shareholders' equity as a
percent of average total assets) 6.36 6.56 6.61
Dividend Payout ratios 32.81 35.40 32.32
</TABLE>
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.
-7-
<PAGE>
The information presented in the interest sensitivity table is based
upon a combination of maturities, call provisions, repricing frequencies,
prepayment patterns and Management judgment. The distribution of variable rate
assets and liabilities is based upon the repricing interval of the instrument.
Management estimates that less than 20% of savings products are sensitive to
interest rate changes based upon analysis of historic and industry data for
these types of accounts.
The following table summarizes the repricing schedule for the Bank's
assets and liabilities and provides an analysis of the Bank's periodic and
cumulative GAP positions.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
As of December 31, 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 $ 7,580 $ 10,162 $ 10,961 $ 13,997
Securities held-to-maturity 1,081 2,865 202 41
Loan Portfolio 34,905 33,405 53,190 62,106
Other __ __ __ 2,182
-------- -------- -------- --------
Total interest earning assets 43,566 46,432 64,353 78,326
-------- -------- -------- --------
Interest-bearing liabilities
Money Market 32,644 __ __ 11,467
Savings ___ __ __ 36,557
Time 25,771 32,424 24,380 ___
Total interest-bearing deposits 58,415 32,424 24,380 48,024
Borrowed funds 36,730 ___ 5,000 ___
Collateralized borrowings ___ 830 ___ ___
-------- -------- --------
Total interest-bearing liabilities 95,145 33,254 29,380 48,024
-------- -------- -------- --------
Periodic gap $(51,579) $ 13,178 $ 34,973 $ 30,302
Cumulative gap $(51,579) $ (38,401) $ (3,428) $ 26,874
======== ======== ======== ========
Cumulative gap as a percentage of
total earning assets (22.17%) (16.50%) 1.47% 11.55%
======== ======== ======== ========
</TABLE>
-8-
<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 connection with the extension of credit, sale or
lease of property, or furnishing of services. Subject to certain limitations,
-9-
<PAGE>
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 limited amounts of the
allowance for loan losses, unrealized gains on equity securities and certain
other instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital are subject to certain other requirements and limitations of
the federal banking agencies. The federal banking agencies require a minimum
ratio of qualifying total capital to risk-adjusted assets and off-balance sheet
items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and
off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
-10-
<PAGE>
The following table presents the capital ratios for the Company and the
Bank as of December 31, 1999:
<TABLE>
<CAPTION> Minimum
Regulatory
The Company's The Bank's Capital
Ratio Ratio Level
----- ----- -----
RISK-BASED CAPITAL RATIO:
<S> <C> <C> <C>
Total Capital............. 10.62% 10.54% 8%
Tier 1 Capital........... 9.97% 9.89% 4%
TIER 1 LEVERAGE CAPITAL RATIO: 6.23% 6.22% 4%
</TABLE>
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%.
-11-
<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.
-12-
<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.
-13-
<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.
-14-
<PAGE>
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 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 will 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 74 full-time employees and 9 part-time
employees. Neither the Company nor the Bank are parties to any collective
bargaining agreements, and employee relations are considered good.
-15-
<PAGE>
Forward Looking Statements
This Form 10-KSB 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. 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, 1999, the net rental expenses paid
by the Bank for all of its office properties was approximately $95,000. 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.
-16-
<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
-17-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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 matter was concluded in February,
2000 when the parties agreed to settle the lawsuit for $10,000 without any
admission of wrong doing or liability on the part of the Bank or its agents or
employees.
The suit alleged 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 alleged 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 alleged 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 claimed 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 deemed equitable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
During the fourth quarter of 1999, no matter was submitted to a vote of
Shareholders of the Company.
-18-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
The Company's Common Stock is traded on the Over the Counter ("OTC")
Bulletin Board under the symbol FLFL. As of March 3, 2000, there were 1,514,931
shares issued and outstanding which were held by approximately 433 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
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 did not
redeem any outstanding Common Stock. The program expired in January 2000 and was
not renewed.
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 declared cash
dividends of .40 cents per share and stock dividends of 5.00%.
-19-
<PAGE>
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 December 31, 1999, approximately
$3,260,000, 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.
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).
-20-
<PAGE>
(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).
(h) In February 2000, the Company issued 29,997 shares of common stock to
the Company's President and Chief Executive Officer, Jerome J. Whalen
in exchange for an aggregate consideration of $162,283.77
($5.41/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.
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, 1999 and 1998, 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, 1997, 1996, and 1995, are derived from
audited consolidated financial statements of the Company not included herein.
-21-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data
Interest Income $ 16,031,207 $ 14,884,143 $ 13,921,944 $ 12,082,097 $ 11,371,457
Interest Expense 7,306,503 7,114,181 6,719,113 5,403,379 5,034,665
Net Interest Income 8,724,704 7,769,962 7,202,831 6,678,718 6,336,792
Other Income 1,389,362 1,409,302 1,338,035 1,115,018 1,038,009
Noninterest Expense 7,428,330 6,550,248 5,875,583 5,321,259 5,009,371
Income before income taxes 2,565,736 2,509,016 2,565,583 2,372,477 2,265,430
Income Taxes 810,311 972,717 1,009,249 881,243 925,784
Net Income 1,755,425 1,536,299 1,556,034 1,491,234 1,339,646
Balance Sheet Data
Total Loans 183,606,128 152,438,033 141,846,741 129,775,725 114,461,645
Total Assets 255,973,790 215,337,558 202,115,632 180,521,512 159,952,993
Total Deposits 197,232,782 194,941,472 183,673,260 165,300,656 145,904,840
Total Borrowings 42,560,227 5,270,268 4,245,000 2,350,000 2,300,000
Total Liabilities 241,047,581 201,026,182 188,648,066 168,239,044 148,634,235
Shareholders' Equity 14,926,209 14,311,376 13,467,566 12,282,468 11,318,758
Total Investments 46,889,333 48,315,612 47,997,248 40,786,611 37,853,697
Allowance for Loan Losses 1,014,522 1,013,949 970,840 998,238 959,259
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Ratios and
Per Share Data
Return on Average Assets .75% .74% .81% .90% .86%
Return on Average Equity 11.92% 11.25% 12.21% 12.66% 12.54%
Basic Net Income Per Share (1) $1.18 $1.04 $1.05 $1.01 $ .91
Diluted Net Income Per Share (1) 1.13 0.99 1.02 0.98 0.89
Price Per Share 17.75 18.50 14.40 13.00 11.20
Book Value per Share 10.05 9.70 9.11 8.31 7.67
Dividends Declared:
Cash $0.40 $0.40 $ 0.38 $0.33 $0.25
Stock 5.00% 155.00% 5.00% 5.00% 155.00%
Cash Dividend Yield 2.25% 2.16% 2.64% 2.54% 2.23%
</TABLE>
(1) All per share data has been adjusted to give retroactive effect to all stock
dividends and splits.
-22-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion of financial condition and
results of operations of the Company on a consolidated basis for the two years
ended December 31, 1999 and 1998. The consolidated financial statements of the
Company include the accounts of the Company and its wholly-owned subsidiary, The
First National Bank of Litchfield (the "Bank") and the Bank's wholly owned
subsidiary, Lincoln Corporation. This discussion should be read in conjunction
with the consolidated financial statements and the related notes of the Company
presented elsewhere herein.
FINANCIAL CONDITION
Total assets as of December 31, 1999 were $255,973,790, an increase of
$40,636,232 or 18.9% from year end 1998 total assets of $215,337,558.
The growth in assets was due primarily to increases in the loan
portfolio which increased to $183,808,894 as of December 31, 1999. Such growth
represented an increase of 21.2% or $32,117,750 from total loans of $151,691,144
at December 31, 1998. The loan growth was primarily in installment loans which
increased by $20,701,922 or 166.78% during 1999. This growth was attained
through the acquisition of consumer loans through indirect dealer financing of
automobiles, motorcycles and boats primarily. In conjunction with the increase
in consumer loans, deferred loan costs have increased by $950,228 as a result of
fees paid to dealers for the referral of such loans to the Bank. Other loan
growth during 1999 was experienced in the mortgage and commercial loan
portfolios. At December 31, 1999, commercial real estate mortgages totaled
$19,821,940 which was an increase of $3,267,216 or 19.74% from year end 1998.
Commercial loans also increased by 67.84% or $3,259,323 to a 1999 year end
balance of $8,063,552. The growth in both the commercial mortgage portfolio and
in commercial loans can be attributed to sales initiatives in small business
lending.
The Company's securities portfolio as of December 31, 1999 totaled
$46,889,333. The portfolio decreased slightly by 2.95% or $1,426,279 from
December 31, 1998. Within the portfolio, held to maturity securities decreased
by 48.33% reflecting both the amortization and principal payments of
mortgage-backed securities. The available for sale portion of the securities
portfolio totaled $42,700,482 which was an increase of 6.20% over the prior
year's balance of $40,209,393. The growth was funded primarily from the
reinvestment of amortizing balances in the held to maturity portion of the
portfolio.
Cash and cash equivalents totaled $12,800,196 as of December 31, 1999
increasing 46.18% compared to the balance of $8,756,166 as of December 31, 1998.
The increase in these assets was necessitated by the Bank's need for cash and
liquid funds due to concerns regarding the Year 2000 issue.
-23-
<PAGE>
Net premises and equipment totaled $3,017,976 as of the year end 1999
which was an increase of 41.09% or $878,863 from the year end 1998 balance. This
increase was caused primarily by the renovation of the building housing the
trust, loan operations and executive offices. Also contributing to this increase
were capital expenditures necessary for new product introduction and overall
bank growth.
Other assets increased by $4,334,625 to $5,441,728 as of December 31,
1999. The majority of the increase relates to the fourth quarter purchase of
bank-owned life insurance policies totaling $3,500,000. Such policies are
expected to provide the Company with tax deferred appreciation and are expected
to be used in conjunction with the creation of a long term incentive plan for
employees. Additionally, growth in other assets was caused by increases in
prepaid and deferred benefit expenses.
Total liabilities were $241,047,581 as of December 31, 1999, an
increase of $40,021,399 or 19.91% from the December 31, 1998 balance of
$201,026,182. The majority of the increase in liabilities is due to the increase
in Federal Home Loan Bank advances. Growth in these advances totaled $36,730,000
over the year. These advances funded the growth in earning assets, specifically
in the loan portfolio.
Deposits as of December 31, 1999 were $197,232,782. Deposits increased
minimally by less than 2% during the year. The mix of deposits however,
experienced changes over the period. Time certificates of deposit in
denominations of less than $100,000 decreased by $3,448,700 or 4.98%, while
savings and demand deposit accounts increased by $5,612,137 or 5.15%. Management
attributes this change dually to the consumer's desire to keep liquid funds as
well as to a relatively low interest rate environment.
The increase in collateralized borrowings is due to additional loans
transferred to other institutions under loan participation agreements that were
not recognized as sales.
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 that are
beyond the control of management.
Net income for the year ended December 31, 1999, was $1,755,425, which
was an increase of $219,126 or 14.26% compared to 1998 net income of $1,536,299.
Diluted net income per share amounted to $1.13 increasing from $.99 per share in
1998. Basic net income per share was $1.18 which is an increase of $.14 or
13.46% from 1998. The improved earnings are primarily due to the increase in net
interest income which resulted from the growth in earning assets. In addition,
the 1999 provision for income taxes incorporated an investment tax credit
related to the renovation of the building housing the executive, trust and loan
department offices. The result of the benefits of the forgoing items offset the
increases in noninterest expense due to salary and infrastructure expenses.
-24-
<PAGE>
Net Interest Income
Net interest income for the year ended December 31, 1999 totaled
$8,724,704, an increase of $954,742 or 12.29% from the 1998 total of $7,769,962.
The growth is primarily attributable to the growth in average earning assets
which increased 9.69% from $200,346,000 to $219,763,000. The asset growth was in
the loan portfolio, and related primarily to installment lending as well as
commercial and real estate loan products. As shown below, the net interest
margin increased to 3.98% compared to the 3.89% margin for the year of 1998. The
improvement in the net interest margin is due to increases in the volume of
interest earning assets and decreases in deposit interest rates.
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Interest and dividend income $16,031,207 $14,884,143
Tax-equivalent adjustment 30,512 29,487
Interest expense (7,306,503) (7,114,181)
----------- -----------
Net interest income $ 8,755,216 $ 7,799,449
=========== ===========
</TABLE>
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, 1999 and 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.
-25-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1999 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 $167,913,000 $12,940,605 7.71% $146,306,000 $11,589,427 7.92%
Securities 51,439,000 3,103,625 6.03 50,918,000 3,153,235 6.19
Federal Funds Sold 411,000 17,489 4.26 3,122,000 170,968 5.48
------------ ----------- ------------ -----------
Total interest earning
assets 219,763,000 16,061,719 7.31 200,346,000 14,913,630 7.44
------------ ----------- ------------ ----------- -----
Allowance for loan
losses (1,058,000) (1,012,000)
Cash & due from banks 7,397,000 4,795,000
Bank premises and
equipment 2,661,000 2,086,000
Net unrealized loss on
securities (526,000) (148,000)
Other Assets 4,451,000 2,853,000
------------ ------------
Total Average Assets $232,688,000 $208,920,000
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
NOW/Money market
deposits $68,911,000 $1,692,459 2.46% $ 63,701,000 $1,616,309 2.54%
Savings deposits 10,736,000 262,988 2.45 9,277,000 227,469 2.45
Time deposits 80,622,000 4,010,160 4.97 89,059,000 4,988,250 5.60
Borrowed Funds 24,201,000 1,340,896 5.54 5,020,000 282,153 5.62
------------ ----------- ------------ -----------
Total interest bearing
liabilities 184,470,000 7,306,503 3.96 167,057,000 7,114,181 4.26
Demand deposits 32,627,000 27,504,000
Other liabilities 859,000 698,000
Shareholders' Equity 14,732,000 13,661,000
------------ ------------
Total Liabilities and
Equity $232,688,000 $208,920,000
============ ============
Net Interest Income $ 8,755,216 $7,799,449
=========== ==========
----- ----
Net interest spread 3.35% 3.18%
==== ====
Net interest margin 3.98% 3.89%
===== =====
</TABLE>
-26-
<PAGE>
Rate/Volume Analysis
The following table, which is presented on a tax-equivalent basis,
reflects the changes for the year ended December 31,1999 when compared to 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.
<TABLE>
<CAPTION>
1999 Compared to 1998
---------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Interest earned on:
Loans $ 1,672,383 ($ 321,205) $ 1,351,178
Investment Securities 32,028 (81,638) (49,610)
Other Interest Income (122,122) (31,357) (153,479)
----------- ----------- -----------
Total interest earning assets 1,582,289 (434,200) 1,148,089
----------- ----------- -----------
Interest paid on:
Deposits (73,801) (792,620) (866,421)
Borrowed money 1,062,812 (4,069) 1,058,743
----------- ----------- -----------
Total interest bearing liabilities 989,011 (796,689) 192,322
----------- ----------- -----------
Increase in net
interest income $ 593,278 $ 362,489 $ 955,767
=========== =========== ===========
</TABLE>
Of the $955,767 increase in the net interest income, an increase of
$362,489 resulted from increases in interest rates earned or paid during 1999
and an increase of $593,278 is attributed to increases in the volume of average
interest earning assets and interest bearing liabilities.
Noninterest Income
Noninterest income for 1999 totaled $1,389,362 decreasing slightly from
1998 noninterest income of $1,409,302. The overall decrease in noninterest
income is due to the 1998 income generated from the sale of available for sale
securities. These gains totaled $143,640 during 1998 while 1999 gains on the
sale of securities totaled $363. Growth in other areas of noninterest income
such as banking service charges and fees, trust fees and other noninterest
income nearly offset the decrease created by 1998 gain on securities sales.
-27-
<PAGE>
Noninterest Expense
Noninterest expense totaled $7,428,330 increasing $878,082 or 13.41%
from 1998 noninterest expense of $6,550,248. The increase can be attributed to
annual salary adjustments as well as salary 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. Finally, the increase in other noninterest expenses was
caused by insignificant increases in numerous expenses due to the growth of the
Bank.
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 December 31, 1995 through
1999 are presented below. All restructured loans are included in these loan
amounts.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,394,305 $1,168,159 $1,325,896 $2,034,409 $2,606,068
---------- ---------- ---------- ---------- ----------
Other real estate owned ____ ____ 60,000 60,000 ___
---------- ---------- ---------- ---------- ----------
Total non-performing
assets $1,394,305 $1,168,159 $1,385,896 $2,094,409 $2,606,068
========== ========== ========== ========== ==========
Loans past due in excess
of ninety days and
accruing interest $ 33,441 $ 14,239 $ 454 $ 117,631 $ 4,547
========== ========== ========== ========== ==========
</TABLE>
The accrual of interest income is generally discontinued when a loan
becomes 90 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
payments are 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
-28-
<PAGE>
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.
Had the non-accrual loans performed in accordance with their original
terms, gross interest income for the year ended December 31, 1999 would have
increased by approximately $82,000 compared to approximately $88,000 for the
twelve months ended December 31, 1998.
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
-29-
<PAGE>
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 following table summarizes the Bank's OREO, past due and
non-accrual loans, and non-performing assets as of December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 1,394,305 $1,168,159 $1,325,896
Other real estate owned ___ ___ 60,000
----------- ---------- ----------
Total non-performing assets $ 1,394,305 $1,168,159 $1,385,896
=========== ========== ==========
Loans past due in excess of ninety days and
accruing interest $ 33,441 $ 14,239 $ 454
=========== ========== ==========
Ratio of non-performing assets to total loans and
OREO .76% .77% .98%
Ratio of non-performing assets and loans past due
in excess of ninety days accruing interest to
total loans and OREO .78% .78% .98%
Ratio of allowance for loan losses to total loans .55% .67% .68%
Ratio of allowance for loan losses to
non-performing assets and loans in excess of
ninety days past due and accruing interest 71.06% 85.75% 70.03%
Ratio of non-performing assets and loans in excess
of ninety days to past due and accruing interest
to total shareholders' equity 9.57% 8.26% 10.29%
</TABLE>
Total non-performing assets increased by $226,146, or 19.4% to
$1,394,305 at December 31, 1999 from $1,168,159 at December 31, 1998, which is
consistent with the increase in total loans. At December 31, 1999, loans past
due in excess of ninety days and accruing interest increased by $19,202 to
$33,441 compared to a balance of $14,239 at December 31, 1998. The increase in
total non-performing assets in 1999 resulted from increases in non-performing
real estate and installment loans.
Total non-performing assets represented .8% of total loans and other
real estate owned at December 31, 1999 and December 31, 1998. While the
allowance for loan losses decreased to .6% of total loans at December 31, 1999
from .7% for the year ended December 31, 1998, the allowance for loan losses
provided coverage for 72.76% of non-accrual loans at December 31, 1999, as
compared to 86.8% at December 31, 1998.
-30-
<PAGE>
Potential Problem Loans
As of December 31, 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 years ended December 31, 1995 through 1999. The allowance is
maintained at a level consistent with identified loss potential and the
perceived risk in the portfolio.
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
December 31,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, at beginning of period $1,014 $ 971 $ 998 $ 959 $ 873
Loans charged-off:
Commercial and financial __ 7 5 9 26
Real estate 40 68 121 140 __
Installment loans to individuals 86 22 30 14 8
------ ------ ------ ------ ------
126 97 156 163 34
------ ------ ------ ------ ------
Recoveries on loans charged-off:
Commercial and financial __ 2 1 6 3
Real estate __ __ 21 86 2
Installment loans to individuals 6 18 7 10 15
------ ------ ------ ------ ------
6 20 29 102 20
------ ------ ------ ------ ------
Net loans charged-off 120 77 127 61 14
------ ------ ------ ------ ------
Provisions charged to operations 120 120 100 100 100
------ ------ ------ ------ ------
Balance, at end of period $1,014 $1,014 $ 971 $ 998 $ 959
====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs during the
period to
average loans outstanding during
the period .07 .05% .09% .05% .01%
====== ====== ====== ====== ======
Ratio of allowance for loan losses
to total loans .55% .67% .68% .77% .84%
====== ====== ====== ====== ======
</TABLE>
-31-
<PAGE>
The following table reflects the allowance for loan losses as of December 31,
1999, 1998, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
(Amounts in thousands)
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 in Total Loans Loan Losses in Total Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial &
Financial $ 8 4.39% $ 8 3.15% $10 4.00%
Real Estate:
Construction ___ 3.86% ___ 3.75% ___ 1.57%
Residential ___ 62.85% ___ 74.04% ___ 74.37%
Commercial 82 10.79% 137 10.86% 151 12.21%
Installment 104 18.04% ___ 8.14% ___ 7.80%
Other 24 0.07% ___ 0.06% ___ 0.05%
Unallocated 796 ____ 869 ___ 810 ___
------ ------ ------ ------ ---- ------
Total $1,014 100.00% $1,014 100.00% $971 100.00%
====== ====== ====== ====== ==== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
Loans by Type 1996 1995
- --------------------------------------------------------------------------------
Percentage Percentage
Allocation of Loans in Allocation of Loans in
of Each of Each
Allowance Category Allowance Category
for to Total for to Total
Loan Losses Loans Loan Losses Loans
<S> <C> <C> <C> <C>
Commercial &
Financial ___ 3.90% ___ 4.44%
Real Estate:
Construction ___ 3.20% ___ 1.92%
Residential 65 74.31% ___ 77.12%
Commercial 245 11.54% 94 10.20%
Installment ___ 6.89% ___ 6.11%
Other ___ 0.16% ___ 0.21%
Unallocated 688 ___ 865 ___
---- ------ ---- ------
Total $998 100.00% $959 100.00%
==== ====== ==== ======
</TABLE>
-32-
<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 year ended December 31, 1999:
Balance at December 31, 1999 $ 36,730,000
Maximum Month-End Borrowings $ 36,730,000
Average Balance $ 19,200,000
Average Rate 5.55%
CAPITAL
At December 31, 1999, total shareholders' equity was $14,926,209
compared to $14,311,376 at December 31, 1998. 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 December 31, 1999:
Minimum
Regulatory
Capital Level The Company The Bank
------------- ----------- --------
Tier 1
leverage
capital ratio 4% 6.23% 6.22%
Tier 1
risk-based
capital ratio 4% 9.97% 9.89%
Total risk-based
capital ratio 8% 10.62% 10.54%
-33-
<PAGE>
INCOME TAXES
The income tax expense for 1999 totaled $810,311 in comparison to
$972,717 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.
The State of the Bank's Readiness
A Bank wide Y2K compliance program was implemented to determine Y2K
issues and define a plan to ensure Y2K compliance. The compliance program was
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 briefed
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 was completed 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.
-34-
<PAGE>
The Risks of the Bank's Y2K Issues
The failure to resolve a material Y2K problem could have resulted in
the interruption in, or failure of, certain business activities or Bank
operations. From a customer's perspective, a Y2K problem could have affected 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 completed
all aspects of its customer awareness plan which included quarterly mailings and
educated customers through information provided by Bank staff.
From a liquidity perspective, a bank could have been exposed to
potential liquidity concerns if significant funds were withdrawn by worried
consumers. The Bank developed a contingency plan to ensure that adequate funds
were and 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 a bank failed to adequately satisfy regulatory requirements, it could have
been subject to formal or informal regulatory enforcement actions.
The Costs to Address the Bank's Y2K Issues and Results
The costs to modify computer systems to solely correct Y2K problems
were expensed when incurred. The 1998 Y2K expenses amounted to approximately
$16,500 and the 1999 Y2K expenses in this regard were $37,000. The Bank is
pleased that it successfully transitioned into the new century without any
interruptions in service and without disruption to the Bank or its customers.
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.
-35-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PART F/S FINANCIAL STATEMENTS
Annual Financial Information
- ----------------------------
Independent Auditor's Report ...............................................F-1
Consolidated Balance Sheets at December 31, 1999
and 1998 ....................................................................F-2
Consolidated Statements of Income for the Years Ended
December 31, 1999 and 1998...................................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1999 and 1998 ......................................F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998.............................................F-5
Notes to Consolidated Financial Statements ..........................F-6 to F-19
-36-
<PAGE>
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, 1999
and 1998, 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Litchfield
Financial Corporation and Subsidiary as of December 31, 1999 and 1998, 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 29, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note B) $ 12,800,196 $ 6,156,166
Federal funds sold --- 2,600,000
------------ ------------
CASH AND CASH EQUIVALENTS 12,800,196 8,756,166
------------ ------------
Securities (Note C):
Available for sale securities:
U.S. Treasuries and other securities (amortized cost $24,491,689-1999
and $18,488,318-1998) 23,663,850 18,781,410
Mortgage-backed securities (amortized cost $19,279,026-1999
and $21,541,962-1998) 19,036,632 21,427,983
Held to maturity securities:
Mortgage-backed securities (market value $4,147,716-1999
and $8,275,648-1998) 4,188,851 8,106,219
------------ ------------
TOTAL SECURITIES 46,889,333 48,315,612
----------- ------------
Federal Home Loan Bank stock, at cost (Note H) 2,100,000 1,372,400
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 115,392,170 112,858,948
Real estate--commercial mortgage 19,821,940 16,554,724
Real estate--construction 7,090,241 5,715,670
Commercial 8,063,552 4,804,229
Installment 33,114,855 12,412,933
Other 123,370 91,529
------------ ------------
TOTAL LOANS 183,606,128 152,438,033
Net deferred loan origination costs 1,217,288 267,060
Allowance for loan losses (1,014,522) (1,013,949)
------------ ------------
NET LOANS 183,808,894 151,691,144
------------ ------------
Bank premises and equipment, net (Note F) 3,017,976 2,139,113
Deferred income taxes (Note J) 378,450 280,819
Accrued interest receivable 1,455,363 1,213,751
Other assets (Note K) 5,441,728 1,107,103
------------ ------------
TOTAL ASSETS $255,973,790 $215,337,558
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES Deposits (Note I):
Noninterest bearing:
Demand $ 33,990,059 $ 31,163,054
Interest bearing:
Savings 36,556,699 35,558,082
Money market 44,111,008 42,324,493
Time certificates of deposit in denominations of $100,000 or more 16,802,864 16,674,991
Other time certificates of deposit 65,772,152 69,220,852
------------ ------------
TOTAL DEPOSITS 197,232,782 194,941,472
------------ ------------
Federal Home Loan Bank advances (Note H) 41,730,000 5,000,000
Collateralized borrowings 830,227 270,268
Accrued expenses and other liabilities 1,254,572 814,442
------------ ------------
TOTAL LIABILITIES 241,047,581 201,026,182
------------ ------------
Commitments and contingencies (Notes G, H, K, M and O) --- ---
SHAREHOLDERS' EQUITY (Notes L, M, N, and Q)
Preferred stock $.00001 par value; 1,000,000 shares authorized,
no shares outstanding
Common stock $.01 par value
Authorized--5,000,000 shares-1999, 2,500,000-1998
Issued--1,567,353 shares, outstanding--1,484,934 shares--1999 and
Issued--1,483,051 shares, outstanding--1,404,556 shares--1998 15,674 14,831
Capital surplus 10,933,465 9,476,362
Retained earnings 5,324,445 5,484,708
Less: Treasury stock at cost--82,419 shares--1999, 78,495 shares--1998 (701,061) (701,061)
Accumulated other comprehensive income - net unrealized (loss) gain on available
for sale securities (net of taxes) (Note S) (646,314) 36,536
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 14,926,209 14,311,376
------------ --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $255,973,790 $ 215,337,558
============ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 1998
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 12,910,093 $ 11,559,941
------------- -------------
Interest and dividends on securities:
Mortgage-backed 1,489,756 1,882,400
U.S. Treasury and other 1,613,869 1,270,834
Deposits with banks 28 57
Other interest income 17,461 170,911
------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 16,031,207 14,884,143
------------ ------------
INTEREST EXPENSE
Interest on deposits:
Savings 512,773 451,028
Money market 1,442,674 1,392,750
Time certificates of deposit in denominations
of $100,000 or more 543,704 678,964
Other time certificates of deposit 3,466,456 4,309,286
------------ ------------
TOTAL INTEREST ON DEPOSITS 5,965,607 6,832,028
Interest on Federal Home Loan Bank advances 1,340,154 282,153
Interest on borrowed money 742 ---
------------ ------------
TOTAL INTEREST EXPENSE 7,306,503 7,114,181
------------ ------------
NET INTEREST INCOME 8,724,704 7,769,962
PROVISION FOR LOAN LOSSES (Note E) 120,000 120,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,604,704 7,649,962
------------ ------------
NONINTEREST INCOME
Banking service charges and fees 480,764 453,238
Trust 714,100 649,008
Gains on sales of available for sale securities 363 143,640
Other 194,135 163,416
------------ ------------
TOTAL NONINTEREST INCOME 1,389,362 1,409,302
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NONINTEREST EXPENSES
Salaries 2,893,736 2,623,583
Employee benefits (Note K) 718,202 708,053
Net occupancy 475,863 421,572
Equipment 433,848 391,852
Legal fees 147,302 82,997
Director fees 147,705 106,255
Computer services 726,996 553,766
Supplies 215,361 184,511
Commissions, services and fees 235,272 190,652
Postage 103,601 96,704
Advertising 224,062 148,222
OREO and non-performing loan expenses - net 6,020 1,440
Other 1,100,362 1,040,641
--------------- ----------------
TOTAL NONINTEREST EXPENSES 7,428,330 6,550,248
--------------- ----------------
INCOME BEFORE INCOME TAXES 2,565,736 2,509,016
PROVISIONS FOR INCOME TAXES (Note J) 810,311 972,717
--------------- ----------------
NET INCOME $ 1,755,425 $ 1,536,299
=============== ================
INCOME PER SHARE (Note L)
BASIC NET INCOME PER SHARE $ 1.18 $ 1.04
=============== ================
DILUTED NET INCOME PER SHARE $ 1.13 $ .99
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 5,577 $ 7,962,259 $5,848,472 $ (421,922) $ 73,180 $ 13,467,566
----------- ----------- ----------- ---------- ------------ ------------
Comprehensive Incom:
Net income --- --- 1,536,299 --- --- 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) --- --- (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) --- --- (4,855)
Stock options exercised - 16,184 shares 162 166,974 --- --- --- 167,136
Purchase of Treasury Shares - 22,260 shares --- --- --- (279,139) --- (279,139)
----------- ----------- ----------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1998 14,831 9,476,362 5,484,708 (701,061) 36,536 14,311,376
Comprehensive Income:
Net income --- --- 1,755,425 --- --- 1,755,425
Unrealized holding loss on available
for sale securities, net of taxes (Note S) --- --- --- --- (682,850) (682,850)
-----------
Total comprehensive income 1,072,575
-----------
Cash dividends declared $.40 per share --- --- (572,071) --- --- (572,071)
5% stock dividend declared
November 24, 1999--74,430 shares
including 3,924 Treasury shares 744 1,338,996 (1,339,740) --- --- ---
Fractional shares paid in cash --- --- (3,877) --- --- (3,877)
Stock options exercised - 9,872 shares 99 118,107 --- --- --- 118,206
----------- ----------- ----------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1999 $ 15,674 $10,933,465 $ 5,324,445 $ (701,061) $ (646,314) $ 14,926,209
=========== =========== =========== ========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
------------- -------------
<S> <C> <C>
Net income $ 1,755,425 $ 1,536,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of premiums and discounts
on investment securities, net 52,119 62,118
Provision for loan losses 120,000 120,000
Depreciation and amortization 384,664 360,343
Deferred income taxes 348,955 (44,731)
Gains on sales of available for sale securities (363) (143,640)
Loss on sale of foreclosed real estate --- 918
Loans originated for sale (542,550) (379,600)
Proceeds from sales of loans held for sale 922,150 ---
Gain on disposals of bank premises and equipment 546 6,065
(Increase) decrease in accrued interest receivable (241,612) 114,585
Increase in other assets (834,625) (341,365)
Increase in deferred loan origination costs (950,228) (81,668)
Increase in accrued expenses and other liabilities 432,843 72,215
------------- -------------
Net cash provided by operating activities (1,447,324) 1,281,539
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITES
Available for sale mortgage-backed securities:
Proceeds from maturities and principal payments 7,241,022 8,238,585
Purchases (6,965,909) (12,491,014)
Proceeds from sales 1,956,322 2,570,052
Available for sale U.S. Treasury and other investment securities:
Proceeds from maturities 2,000,000 10,500,000
Purchases (8,998,878) (17,992,990)
Proceeds from sales 1,000,000 5,155,000
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 4,012,530 3,720,493
Purchases of Federal Home Loan Bank Stock (727,600) (201,100)
Net increase in loans (31,287,522) (10,668,183)
Purchases of bank premises and equipment (1,264,244) (434,368)
Proceeds from sale of bank premises and equipment 171 ---
Purchase of life insurance policies (3,500,000) ---
Proceeds from sale of foreclosed real estate --- 59,082
------------- -------------
Net cash used in investing activities (36,534,108) (11,544,443)
------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 5,612,137 11,306,498
Net decrease in certificates of deposit (3,320,827) (38,286)
Net increase in borrowings under Federal Home Loan
Bank advances 36,730,000 755,000
Net increase in collateralized borrowings 559,959 270,268
Distribution in cash for fractional shares of common stock (3,877) (4,855)
Proceeds from exercise of stock options 118,206 167,136
Purchases of Treasury stock --- (279,139)
Dividends paid on common stock (564,784) (526,566)
------------- --------------
Net cash provided by financing activities 39,130,814 11,650,056
------------- -------------
Net increase in cash and cash equivalents 4,044,030 1,387,152
CASH AND CASH EQUIVALENTS, at beginning of year 8,756,166 7,369,014
------------- -------------
CASH AND CASH EQUIVALENTS, at end of year $ 12,800,196 $ 8,756,166
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 7,134,525 $ 7,143,042
============= =============
Income taxes $ 889,656 $ 1,090,446
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999
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, and the
Bank's wholly owned subsidiary, Lincoln Corporation. 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.
On January 7, 2000, the Corporation filed a Form 10-SB registration statement
with the Securities and Exchange Commission (the "SEC") to register the
Corporation's $.01 par value common stock under the Securities and Exchange Act
of 1934 (the "Exchange Act"). Upon effectiveness of the registration statement,
the Corporation will file periodic financial reports with the SEC as required by
the Exchange Act.
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.
<PAGE>
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 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.
F-6
<PAGE>
TRANSFER OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
LOANS RECEIVABLE: Loans receivable are stated at current unpaid principal
balances net of the allowance for loan losses and deferred loan origination fees
and costs. 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.
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.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses, material estimate
susceptible to significant change in the near-term, is established as losses are
estimated to have occurred through a provision for losses charged against
operations and is maintained at a level that management considers adequate to
absorb losses in the loan portfolio. Management's judgement in determining the
adequacy of the allowance is inherently subjective and is based on an evaluation
of the known and inherent risk characteristics and size of the loan 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.
<PAGE>
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
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.
F-7
<PAGE>
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.
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.
COMPREHENSIVE INCOME: 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.
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.
<PAGE>
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.
RECLASSIFICATIONS: Certain 1998 amounts have been reclassified to conform with
the 1999 presentation. Such reclassifications had no effect on net income.
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, 1999 the Bank was
required to have cash and liquid assets of approximately $2,444,000 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE December 31, 1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities $ 9,991,689 $ 12,364 $ (84,353) $ 9,919,700
U.S. Government Agency Securities 14,500,000 -- (755,850) 13,744,150
------------ ------------ ------------ ------------
24,491,689 12,364 (840,203) 23,663,850
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA 14,856,771 -- (179,594) 14,677,177
FNMA 4,422,255 5,600 (68,400) 4,359,455
------------ ------------ ------------ ------------
19,279,026 5,600 (247,994) 19,036,632
------------ ------------ ------------ ------------
Total available for sale securities $ 43,770,715 $ 17,964 $ (1,088,197) $ 42,700,482
============ ============ ============ ============
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
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>
HELD TO MATURITY
December 31, 1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities:
GNMA securities $ 372,082 $ 2,618 $ (3,583) $ 371,117
FNMA securities 2,272,271 --- (26,947) 2,245,324
FHLMC securities 1,544,498 3,641 (16,864) 1,531,275
--------------- -------------- ------------- --------------
Total held to maturity securities $ 4,188,851 $ 6,259 $ (47,394) $ 4,147,716
=============== ============== ============= ==============
<CAPTION>
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
=============== ============== ============= =============
</TABLE>
<PAGE>
The amortized cost and fair value of securities at December 31, 1999, 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.
<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 $ 1,999,455 $ 1,993,130 $ -- $ --
Due after one year through five years 7,992,234 7,926,570 -- --
Due after five years through ten years 14,500,000 13,744,150 -- --
----------- ----------- ----------- -----------
24,491,689 23,663,850 -- --
Mortgage-backed securities 19,279,026 19,036,632 4,188,851 4,147,716
----------- ----------- ----------- -----------
TOTAL $43,770,715 $42,700,482 $ 4,188,851 $ 4,147,716
=========== =========== =========== ===========
</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 $7,725,052 during
1998. Gross gains of $158,530 and gross losses of $14,890 were realized on these
sales. Proceeds from the sales of available for sale securities were $2,956,322
during 1999. Gross gains of $4,080 and gross losses of $3,717 were realized on
these sales.
Investment securities with a carrying value of $4,714,000 and $2,315,000 were
pledged as collateral to secure treasury tax and loan, trust assets and public
funds at December 31, 1999 and 1998, respectively.
During 1999 and 1998, there were no transfers of securities from the available
for sale category into the held to maturity or trading categories, and there
were no securities classified as held to maturity that were transferred to
available for sale or trading categories.
F-9
<PAGE>
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, 1999, 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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance at the beginning of year $ 2,694,547 $ 1,634,660
Advances 8,468,941 6,455,064
Repayments (7,749,587) (6,359,735)
Other changes 26,293 964,558
----------- -----------
BALANCE AT END OF YEAR $ 3,440,194 $ 2,694,547
=========== ===========
</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.
NOTE E - ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING LOANS
Changes in the allowance for loan losses for the years ended December 31, 1999
and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 1,013,949 $ 970,840
Provision for loan losses 120,000 120,000
Loans charged off (125,725) (96,867)
Recoveries of loans previously charged off 6,298 19,976
----------- -----------
BALANCE AT END OF YEAR $ 1,014,522 $ 1,013,949
=========== ===========
<CAPTION>
A summary of nonperforming loans follows: 1999 1998
----------- -----------
<S> <C> <C>
Nonaccrual loans $ 1,394,305 $ 1,168,159
Accruing loans contractually past due 90 days or more 33,441 14,239
----------- -----------
TOTAL $ 1,427,746 $ 1,182,398
=========== ===========
</TABLE>
<PAGE>
If interest income on nonaccrual loans throughout the year had been recognized
in accordance with the loans' contractual terms, approximately $82,000 and
$88,000 of additional interest would have been recorded for the years ended
December 31, 1999 and 1998, respectively. Included in the nonaccrual loans at
December 31, 1999 are two loans which total $366,000 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Loans receivable for which there is a related allowance for credit losses,
determined:
Based on discounted cash flows $ 316,000 $ 837,000
Based on the fair value of collateral 415,000 --
---------- ----------
Total $ 731,000 $ 837,000
========== ==========
Loans receivable for which there is no related allowance for credit losses
determined:
Based on discounted cash flows $1,425,000 $1,237,000
Based on the fair value of collateral 198,000 585,000
---------- ----------
Total $1,623,000 $1,822,000
========== ==========
Allowance for credit losses related to impaired loans $ 135,000 $ 137,000
========== ==========
Average recorded investment in impaired loans $2,354,000 $2,966,000
========== ==========
Interest income recognized $ 136,000 $ 224,000
========== ==========
Cash interest received $ 175,000 $ 264,000
========== ==========
</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.
F-10
<PAGE>
The Bank has established credit policies applicable to each type of lending
activity in which it engages, evaluates the creditworthiness of each customer
and, in most cases, extends credit of up to 80% of the market value of the
collateral at the date of the credit extension depending on the Bank's
evaluation of the borrowers' creditworthiness and type of collateral. The market
value of collateral is monitored on an ongoing basis and additional collateral
is obtained when warranted. Real estate is the primary form of collateral. Other
important forms of collateral are marketable securities, time deposits,
automobiles, boats, motorcycles and recreational vehicles. While collateral
provides assurance as a secondary source of repayment, the bank ordinarily
requires the primary source of repayment to be based on the borrower's ability
to generate continuing cash flows. The Bank's policy for real estate collateral
requires that, generally, the amount of the loan may not exceed 80% of the
original appraised value of the property. Private mortgage insurance is required
for the portion of the loan in excess of 80% of the original appraised value of
the property. For installment loans, the Bank may loan up to 100% of the value
of the collateral.
NOTE F - BANK PREMISES AND EQUIPMENT
The major categories of bank premises and equipment as of December 31 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 674,849 $ 674,849
Buildings 2,966,010 2,154,957
Furniture and fixtures 2,124,813 1,885,332
Leasehold improvements 193,989 197,526
---------- ----------
5,959,661 4,912,664
Less accumulated depreciation and amortization 2,941,685 2,773,551
---------- ----------
$3,017,976 $2,139,113
========== ==========
</TABLE>
Depreciation and amortization expense on bank premises and equipment for the
years ended December 31, 1999 and 1998 was $384,664 and $360,343, respectively.
NOTE G - LEASE COMMITMENTS
At December 31, 1999, 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
$95,000 and $77,000 for 1999 and 1998, respectively. The future minimum payments
under operating leases are as follows:
2000 $ 54,000
2001 37,000
2002 14,000
Thereafter 17,000
------------
$ 122,000
============
<PAGE>
NOTE H - FEDERAL HOME LOAN BANK STOCK AND ADVANCES
The Bank, which is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"), purchased $727,600 of FHLBB capital stock during 1999 and $201,100 of
FHLBB capital stock during 1998. The Bank is required to maintain an investment
in capital stock of the FHLBB in an amount equal to a certain percentage 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 FHLBB, 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
FHLBB, the Bank is required to maintain qualified collateral, as defined in the
FHLBB Statement of Credit Policy, free and clear of liens, pledges and
encumbrances for the advances. FHLBB 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, 1999 totaled $41,730,000,
$5,000,000 at a rate of 5.45% due in April 2003 and $36,730,000 at an average
rate of 4.80% 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, 1999:
2000 $ 58,195,376
2001 22,910,778
2002 706,678
2003 and thereafter 762,184
-------------
TOTAL $ 82,575,016
=============
Deposit accounts of officers, directors and their associates aggregated
$1,137,933 and $1,132,416 at December 31, 1999 and 1998, respectively.
F-11
<PAGE>
NOTE J - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current:
Federal $ 385,242 $ 813,270
State 76,114 204,178
----------- -----------
461,356 1,017,448
----------- -----------
Deferred:
Federal 290,114 (43,493)
State 58,841 (1,238)
----------- -----------
348,955 (44,731)
----------- -----------
TOTAL $ 810,311 $ 972,717
=========== ===========
</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>
1999 1998
------------------ ---------------------
<S> <C> <C> <C> <C>
Provisions for income taxes at statutory
Federal rate $ 872,350 34% $ 853,065 34%
Increase (decrease) resulting from:
Connecticut corporation income tax
net of federal tax benefit 143,938 6 122,272 5
Tax exempt income (20,717) (1) (19,595)(1)
Federal and state tax credits (203,850) (8) -- --
Nondeductible interest expense 2,322 -- 1,740 --
Other 16,268 1 15,235 1
--------- ------- --------- ------
Provision for income taxes $ 810,311 32% $ 972,717 39%
========= ======= ========= ======
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 395,156 $ 401,625
Unrealized loss on securities 423,919 --
Depreciation 185,064 162,365
All other 219,420 175,148
----------- -----------
Total gross deferred tax assets 1,223,559 739,138
----------- -----------
Deferred tax liabilities:
Tax bad debt reserve (175,889) (178,869)
Prepaid pension costs (174,613) (142,060)
Net deferred loan costs (474,134) (105,489)
Unrealized gain on securities -- (22,667)
Prepaid expenses and other (20,473) (9,234)
----------- -----------
Total gross deferred tax liabilities (845,109) (458,319)
----------- -----------
Net deferred tax asset $ 378,450 $ 280,819
=========== ===========
</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.
F-12
<PAGE>
The following table sets forth the plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 1999 and 1998 using a
measurement date of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning $ 1,612,868 $ 1,505,805
Service cost 141,292 128,716
Interest cost 112,901 113,723
Actuarial gain -- (78,962)
Benefits paid (54,291) (56,414)
----------- -----------
Benefit obligation, ending 1,812,770 1,612,868
----------- -----------
Change in plan assets:
Fair value of plans assets, beginning 2,280,861 1,832,694
Actual return on plan assets 173,591 346,041
Employer contribution 145,547 158,540
Benefits paid (54,291) (56,414)
----------- -----------
Fair value of plan assets, ending 2,545,708 2,280,861
----------- -----------
Funded status 732,938 667,993
Unrecognized net actuarial gain (175,695) (173,169)
Unrecognized service cost (108,942) (136,178)
----------- -----------
Prepaid benefit cost $ 448,301 $ 358,646
=========== ===========
Components of net periodic benefit cost:
Service cost $ 141,292 $ 128,716
Interest cost 112,901 113,723
Expected return on plan assets (171,065) (137,452)
Amortization of prior service cost (27,236) (27,236)
Recognized net actuarial loss -- 2,496
----------- -----------
Net periodic benefit cost $ 55,892 $ 80,247
=========== ===========
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>
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 $69,194 for 1999 and $64,127 for 1998.
<PAGE>
OTHER BENEFIT PLANS: Effective September 1, 1994, the Bank entered into a
supplemental retirement plan with the President/Chief Executive Officer. At
December 31, 1999 and 1998, accrued supplemental retirement benefits of $44,766
and $37,510 respectively, are recognized in the Corporation's balance sheet
related to this plan. For the years ended December 31, 1999 and 1998, $7,256 and
$0 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, 1999 and 1998, accrued supplemental retirement benefits of $20,200 and
$13,400 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 cost of the related trust
assets and corresponding liability of $200,874 and $120,000 at December 31,
1999, and 1998, 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.
In connection with the anticipated adoption, in 2000, of a long-term incentive
compensation plan, the Bank purchased life insurance policies with an aggregate
cash surrender value of $3.5 million at December 31, 1999, which is included in
other assets in the consolidated balance sheets.
NOTE L - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
In 1999, the Corporation's shareholders approved an increase in the authorized
shares of common stock from 2,500,000 shares to 5,000,000 shares, and authorized
1,000,000 shares of a class of preferred stock.
F-13
<PAGE>
On November 24, 1999 and November 25, 1998, the Board of Directors declared 5%
stock dividends payable on December 30, 1999 and December 31, 1998,
respectively. Payment of these dividends resulted in the issuance of 74,430
additional common shares in December 1999 and 70,455 additional common shares in
December 1998. 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 for the 1999 stock dividend and
$19.25 for the 1998 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.
Weighted-average shares and per share data have been restated to give effect to
all stock dividends and splits.
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. In January 2000,
the resolution expired and was not renewed.
The following is information about the computation of net income per share for
the years ended December 31, 1999 and 1998. The 1998 information has been
restated to give retroactive effect to all stock dividends and stock splits for
the periods presented.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
------------------------------------
Net Per Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common stockholders $1,755,425 1,483,899 $ 1.18
========
Effect of Dilutive Securities
Options Outstanding -- 64,603
---------- ---------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $1,755,425 1,548,502 $ 1.13
========== ========== ========
</TABLE>
<PAGE>
<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 1,481,485 $ 1.04
========
Effect of Dilutive Securities
Options Outstanding -- 70,565
---------- ----------
Diluted Net Income Per Share
Income available to common stockholders
plus assumed conversions $1,536,299 1,552,050 $ .99
========== ========== ========
</TABLE>
NOTE M - STOCK OPTION PLANS
At December 31, 1999, 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, 1999 1998
------------- -------------
<S> <C> <C> <C>
Net income As Reported $ 1,755,425 $ 1,536,299
Pro forma $ 1,706,635 $ 1,493,032
Basic net income per share As Reported $ 1.18 $ 1.04
Pro forma $ 1.15 $ 1.01
Diluted net income per share As Reported $ 1.13 $ .99
Pro forma $ 1.10 $ .96
</TABLE>
F-14
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing mode with the following weighted-average
assumptions used for grants in 1999 and 1998: dividend yield of 2.0% in 1999 and
2.6% in 1998; expected volatility of 17.5% in 1999 and 16% in 1998; risk free
interest rates of 5.65% and 5.26%, respectively for 1999 and 1998; 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 of $55 per share 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, 1999, 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.
There were no options exercised in 1999 and 551 options were exercised in 1998.
At December 31, 1999, 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 granted 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 were given for each
of the four following years.
The stock option plan for officers grants options based upon individual officer
performance.
Under both the director and officer plans, the price per share of the option is
the fair market value of the 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 1999 and 1998
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.)
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---------------------------- ------------------------------
Weighted Average Weighted Average
Number of Exercise Number of Exercise
Shares Price Per Share Shares Price Per Share
------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 95,776 $ 10.09 91,289 $ 8.75
Granted 16,607 17.62 24,136 13.75
Exercised 10,365 11.40 19,649 8.36
Cancelled -- -- -- --
------- ------
Options outstanding at end of year 102,018 11.18 95,776 10.09
======= ======
Options exercisable at end of year 85,411 9.93 71,640 8.86
======= ======
Weighted average fair value of options
granted during the year $ 4.58 $ 3.15
======= =========
</TABLE>
At December 31, 1999, exercise prices ranged from $6.43 to $17.62 with an
average remaining contractual life of 6.7 years and a weighted average exercise
price of $11.18.
During 1999, the option plan for officers and directors expired. Shares reserved
for issuance of common stock under all the option plans is equal to the amount
of options outstanding at the end of the year or 132,015.
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, 1999, the Bank had retained earnings of approximately $12,180,500
of which approximately $3,260,000 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, 1999, the maximum amount available for transfer
from the Bank to the Corporation in the form of loans approximated 10% of
consolidated net assets.
F-15
<PAGE>
NOTE O - COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
instruments include commitments to extend credit and unused lines of credit, and
expose the Bank to credit risk in excess of the amounts recognized in the
balance sheets.
The contractual amounts of commitments to extend credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral become worthless. The Bank
uses the same credit policies in making off-balance-sheet commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
believes that the Bank controls the credit risk of these financial instruments
through credit approvals, credit limits, monitoring procedures and the receipt
of collateral as deemed necessary. Total credit exposures at December 31, 1999
and 1998 related to these items are summarized below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Contract Amount Contract Amount
--------------- ---------------
<S> <C> <C>
Loan commitments:
Approved mortgage and equity loan commitments $ 2,818,600 $ 6,390,294
Approved commercial loan commitments -- 410,000
Unadvanced portion of construction loans 2,612,000 2,706,408
Unadvanced portion of:
Commercial lines of credit 3,169,000 3,464,962
Home equity lines of credit 13,667,000 11,735,902
Overdraft protection 510,000 485,474
Credit Cards 1,386,000 1,135,251
Floor plans 200,640 267,764
Standby letters of credit 160,000 125,000
----------- -----------
$24,523,240 $26,721,055
=========== ===========
</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.
<PAGE>
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, 1999 and 1998, the Bank paid approximately
$139,000 and $143,000, respectively, for insurance and legal fees, to companies,
the principals of which are Directors of the Corporation.
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.
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, 1999, 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.
F-16
<PAGE>
As of December 31, 1999, 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>
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Purposes
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk
Weighted Assets $16,568,273 10.54% $12,575,539 8% $15,719,424 10%
Tier I Capital to Risk
Weighted Assets 15,553,751 9.89 6,290,698 4 9,436,047 6
Tier I Capital to Average
Assets 15,553,751 6.22 10,002,412 4 12,503,015 5
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
</TABLE>
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.
<PAGE>
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, 1999 or 1998. The estimated fair value
amounts for 1999 and 1998 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.
Fixed rate 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.
F-17
<PAGE>
Variable rate 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.
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 12,800,196 $ 12,800,196 $ 6,156,166 $ 6,156,166
Federal Funds sold -- -- 2,600,000 2,600,000
Available for sale securities 42,700,482 42,700,482 40,209,393 40,209,393
Held to maturity securities 4,188,851 4,147,716 8,106,219 8,275,648
Federal Home Loan Bank stock 2,100,000 2,100,000 1,372,400 1,372,400
Federal Reserve Bank stock 81,850 81,850 81,850 81,850
Loans held for sale -- -- 379,600 379,600
Loans, net 183,808,894 179,303,140 151,691,144 152,397,684
Accrued interest receivable 1,455,363 1,455,363 1,213,751 1,213,751
Financial Liabilities:
Savings deposits 36,556,699 36,556,699 35,558,082 35,558,082
Money market and demand deposits 78,101,067 78,101,067 73,487,547 73,487,547
Time certificates of deposit 82,575,016 82,564,243 85,895,843 86,650,450
Federal Home Loan Bank Advances 41,730,000 41,542,296 5,000,000 4,986,538
Collateralized borrowings 830,227 830,227 270,268 270,268
</TABLE>
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1999 and 1998.
<PAGE>
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>
1999
---------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
<S> <C> <C> <C>
Unrealized holding losses arising during the period $(1,283,764) $ 582,102 $ (701,662)
Less: reclassification adjustment for gains recognized in net income 34,418 (15,606) 18,812
----------- ----------- -----------
Unrealized holding loss on available for sale securities, net of taxes $(1,249,346) $ 566,496 $ (682,850)
=========== =========== ===========
<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 losses 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)
=========== =========== ===========
</TABLE>
F-18
<PAGE>
NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRST LITCHFIELD FINANCIAL CORPORATION
Condensed Balance Sheets
December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 165,722 $ 429,256
Investment in The First National Bank of Litchfield 14,907,437 13,976,647
Other assets 6,462 46,679
----------- -----------
Total Assets $15,079,621 $14,452,582
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Other liabilities $ 153,412 $ 141,206
----------- -----------
Total Liabilities 153,412 141,206
Shareholders' equity 14,926,209 14,311,376
----------- -----------
$15,079,621 $14,452,582
=========== ===========
<CAPTION>
Condensed Statements of Income Years Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Dividends from subsidiary $ 155,000 $ 1,044,600
Other expenses, net 19,512 137,777
----------- -----------
Income before taxes and equity in earnings of subsidiary 135,488 906,823
Income tax benefit (6,298) (46,679)
----------- -----------
Income before equity in undistributed earnings of subsidiary 141,786 953,502
Equity in undistributed earnings of subsidiary 1,613,639 582,797
----------- -----------
Net income $ 1,755,425 $ 1,536,299
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Years Ended December 31,
- ---------------------------------- ------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,755,425 $ 1,536,299
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,613,639) (582,797)
Other, net 45,135 (41,093)
----------- -----------
Cash provided by operating activities 186,921 912,409
Cash flows from financing activities:
Stock options exercised 118,206 167,136
Purchase of treasury stock -- (279,139)
Distribution in cash for fractional shares of common stock (3,877) (4,855)
Dividends paid on common stock (564,784) (526,566)
----------- -----------
Cash used by financing activities (450,455) (643,424)
----------- -----------
Net (decrease) increase in cash and cash equivalents (263,534) 268,985
Cash and cash equivalents at the beginning of the year 429,256 160,271
----------- -----------
Cash and cash equivalents at the end of the year $ 165,722 $ 429,256
=========== ===========
</TABLE>
F-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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)
-37-
<PAGE>
Position Held with Expiration Date
Name and Age the Company of Current Term
- ------------ ----------- ---------------
George M. Director of the Company 2001
Madsen and the Bank since 1988 (7)
(65)
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.
-38-
<PAGE>
(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 Vice President from January, 1997
through December, 1997 and served as Assistant Vice President 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 serviced as Vice President and Senior
Account Executive for Fidelity Management Trust Company from February, 1994
to May, 1995.
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 10. 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 cash compensation exceeded $100,000 for the 1998 calendar year), Mr.
Whalen and Messrs. Ferris and Samponaro (whose cash compensation exceeded
$100,000 for the 1999 calendar year), no other individual employed by the
Company and/or the Bank received aggregate cash compensation of $100,000 or more
during the fiscal year ended December 31, 1999, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------------------------- --------------------------------
Restricted
Name and Other Annual Stock Options/
Principal Compensation Awards SARs LTIP All Other
Position Year Salary($)(1)(2) Bonus($) ($) ($) (#) Payout($) 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 $170,746 5,576 (3) $ 5,844 (5)
Executive Officer 1997 $160,411 5,320 (3) $ 383 (4)
of the Bank and
Company
Revere H. Ferris 1999 $102,316 3,677 (3)
Senior Vice 1998 $ 75,229 3,677 (3)
President 1997 $ 55,232
of the Bank
Carroll A. Pereira 1999 $ 96,472 3,677 (3)
Treasurer of the 1998 $ 85,457 3,677 (3) $ 26,546 (6)
Company and 1997 $ 83,372 3,344 (3)
Chief Financial
Officer of the Bank
Philip G. 1999 $101,796 3,677 (3)
Samponaro 1998 $ 94,196 3,677 (3)
Senior Vice 1997 $ 84,096 3,344 (3)
President of the
Bank and Secretary
of the Company
</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.
-39-
<PAGE>
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. Amount includes 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, $422. Additionally, the amount includes $5,422 which can be
attributed to the exercise of stock options by the Named Executive Officer.
6. This can be attributed to the exercise of stock options by the Named
Executive Officer.
OPTION/SAR Grants in Last Fiscal Year
The following table contains information regarding options granted to
the Named Executive Officers of the Company during 1999. All shares purchased
upon the exercise of any option must be paid in full at the time of purchase.
The number of options granted and the per share exercise prices have been
adjusted to reflect stock splits and dividends.
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total/Options
Underlying SARs Granted Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted (#)(1) in Fiscal Year ($/sh) Date
- ---- -------------- -------------- ------ ----
<S> <C> <C> <C> <C>
Jerome J. Whalen 5,576 33.6% $17.62 01/29/09
President and
Chief Executive Officer
to the Bank and Company
Revere H. Ferris 3,677 22.1% $17.62 01/29/09
Senior Vice President
of the Bank
Carroll A. Pereira 3,677 22.1% $17.62 01/29/09
Treasurer of the Company
and Chief Financial
Officer
of the Bank
3,677 22.1% $17.62 01/29/09
Philip G. Samponaro
Senior Vice President of
the Bank and Secretary of
the Company
</TABLE>
- -------------------
1. Options granted pursuant to the 1994 Stock Option Plan for Officers and
Outside Directors. (See "1994 Stock Option Plan for Officers and
Directors"). The number of securities underlying options granted and the
per share exercise prices have been adjusted to reflect stock splits and
dividends.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth information regarding stock options that
were exercised, if any, during the last fiscal year, and unexercised stock
options held by the Named Executive Officers of the Company. The number of
options and the per share exercise prices have been adjusted to reflect stock
splits and dividends.
-40-
<PAGE>
<TABLE>
<CAPTION>
Number of
Securities/Underlying Value of Unexercised
Unexercised In-the-Money
Shares Acquired Value Realized Options/SARs Options/SARs
Name on Exercise (#) ($) at FY-End (#) At FY-End ($)(1)
- ---- --------------- --- ------------- ----------------
<S> <C> <C> <C> <C>
Jerome J. Whalen 0 0 56,578 $523,745
President and Chief
Executive Officer of
the Bank and the
Company
Revere H. Ferris 0 0 7,354 $ 16,730
Senior Vice President
of the Bank
Carroll A. Pereira 0 0 14,042 $66,255
Treasurer of the
Company and Chief
Financial Officer of
the Bank
Philip G. Samponaro 0 0 17,237 $ 99,227
Senior Vice President
of the Bank and
Secretary of the
Company
</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.
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.
<PAGE>
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-eight (28) 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.
-41-
<PAGE>
Long Term Incentive and Deferred Compensation Plans
The Bank expects to create a non-qualified Long Term Deferred Incentive
Plan ("LTDIP") for its executive officers. In the event it is adopted and
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. 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).
The Bank expects to create an Outside Director Deferred Compensation
Plan ("DDCP"). In the event it is adopted and 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 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 has invested $3.5 million in
universal cash surrender value life insurance. Insurance policies were 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 were 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
-42-
<PAGE>
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
31, 1999, President Whalen had options to purchase 29,997 shares at a price of
$5.41 per share pursuant to the 1990 Plan. In accordance with the Plan, Mr.
Whalen exercised his options to purchase 29,997 shares of common stock in
February, 2000.
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.
-43-
<PAGE>
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, 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 $250 for each committee
meeting attended. The Chairman of the Board of Directors also receives an annual
retainer of $6,000 and each non-officer director of the Company also receives an
annual retainer of $5,000 for serving as a director. Directors who are employees
of the Bank receive no additional compensation for their services as members of
the Board or any board committee.
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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(A) Principal Shareholders
The following table includes certain information as of March 3, 2000
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.
-44-
<PAGE>
Percent of
Name and Address Number of Shares Outstanding
of Beneficial Owner Beneficially Owned (1) Common Stock
- ------------------- ---------------------- ------------
Donald K. Peck 111,144 (2) 7.34%
Litchfield, CT
William J. Sweetman 90,867 (3), (4) 5.98%
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
March 3, 2000. Unless indicated otherwise in a footnote, the Directors and
Executive Officers possess sole voting and investment power with respect to all
shares shown.
Common Shares
Name Of Beneficially Owned
Beneficial Owner At March 3, 2000 (1) Percent of Class
- ---------------------- -------------------- ----------------
Clayton L. Blick 11,545 (2) (3) .76%
Ernest W. Clock 22,822 (2) (3) 1.50%
John H. Field 7,010 (2) .46%
Bernice D. Fuessenich 9,060 (2) .60%
Perley H. Grimes, Jr 16,765 (2) 1.10%
Thomas A. Kendall 552 .036%
George M. Madsen 13,782 (2) .91%
-45-
<PAGE>
Common Shares
Name Of Beneficially Owned
Beneficial Owner At March 3, 2000 (1) Percent of Class
- ---------------------- -------------------- ----------------
Charles E. Orr 12,053 (2) .79%
William J. Sweetman 90,867 (2) (4) 5.98%
H. Ray Underwood 110 .007%
Patricia D. Werner 3,298 (5) .22%
Jerome J. Whalen 42,602 (3) (6) 2.76%
Carroll A. Pereira 14,233 (3)(7) .93%
Philip G. Samponaro 18,919 (8) 1.24%
Revere H. Ferris 31,345 (9) 2.05%
All Directors and Executive 294,963 19.34%
Officers as a group (15 persons)
- --------------------------------
(1) The definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship
or otherwise has or shares voting power or investment power with respect to
such security.
(2) Includes options to purchase 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 26,581 shares of common stock exercisable
within 60 days.
(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. Includes 939 shares of common stock held in a trust for
which Mr. Samponaro is a beneficiary.
(9) Includes options to purchase 7,354 shares of common stock exercisable
within 60 days. In addition, the total for Mr. Ferris includes 12,062
shares of common stock held in trusts for which Mr. Ferris serves as
trustee.
ITEM 12. 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
$3,440,194 and $2,694,547 at December 31, 1999 and 1998, respectively.
During 1999, $8,468,941 of new loans were made, and repayments totaled
$7,749,587. At December 31, 1999, all loans to Officers, Directors,
principal shareholders and their associates were performing in accordance
with the contractual terms of the loans. (1)
-46-
<PAGE>
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 1999 and 1998, the Bank paid Cramer & Anderson $66,185 and $68,722,
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 1999, and 1998, the Bank paid insurance
premiums to F. North Clark Insurance Agency, Inc. in the aggregate amount, of
$72,472 and $74,345, respectively.
-47-
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
3.1 Certificate of Incorporation of First Litchfield Financial
Corporation, as amended. Exhibit is incorporated by reference to
Exhibit 3.1 set forth in the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission
on January 7, 2000.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
Exhibit is incorporated by reference to Exhibit 3.2 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
4. Specimen Common Stock Certificate. Exhibit is incorporated by
reference to Exhibit 4. set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
10.1 1990 Stock Option Plan for Company's President and Chief
Executive Officer, as amended. Exhibit is incorporated by
reference to Exhibit 10.1 set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
10.2 1994 Stock Option Plan for Officers and Outside Directors.
Exhibit is incorporated by reference to Exhibit 10.2 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.3 Supplemental Executive Retirement Agreement between Company and
Jerome J. Whalen. Exhibit is incorporated by reference to Exhibit
10.3 set forth in the Company's Registration Statement on Form
10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
10.4 Change in Control Agreement between Jerome J. Whalen and Company.
Exhibit is incorporated by reference to Exhibit 10.4 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.5 Change in Control Agreement between Philip G. Samponaro and
Company. Exhibit is incorporated by reference to Exhibit 10.5 set
forth in the Company's Registration Statement on Form 10-SB as
filed with the Securities and Exchange Commission on January 7,
2000.
10.6 Change in Control Agreement between Carroll A. Pereira and
Company. Exhibit is incorporated by reference to Exhibit 10.6 set
forth in the Company's Registration Statement on Form 10-SB as
filed with the Securities and Exchange Commission on January 7,
2000.
-48-
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
10.7 Change in Control Agreement between John S. Newton and Company.
Exhibit is incorporated by reference to Exhibit 10.7 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.8 Change in Control Agreement between Revere H. Ferris and Company.
Exhibit is incorporated by reference to Exhibit 10.8 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
10.9 Supplemental Employee Retirement Agreement between the Company
and Walter Hunt. Exhibit is incorporated by reference to Exhibit
10.9 set forth in the Company's Registration Statement on Form
10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
10.10 Deferred Directors' Fee Plan. Exhibit is incorporated by
reference to Exhibit 10.10 set forth in the Company's
Registration Statement on Form 10-SB as filed with the Securities
and Exchange Commission on January 7, 2000.
10.11 Form of Employee Change in Control Agreement. Exhibit is
incorporated by reference to Exhibit 10.11 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
21. List of Subsidiaries of First Litchfield Financial Corporation.
Exhibit is incorporated by referenceto Exhibit 21 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
27. Financial Data Schedule.
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
-49-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 29, 2000 FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Jerome J. Whalen
---------------------
Jerome J. Whalen, President,
Chief Executive Officer and
Treasurer
Dated: February 29, 2000 By: /s/ Carroll A. Pereira
-----------------------
Carroll A. Pereira,
Principal Accounting Officer
-50-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Jerome J. Whalen President, Chief Executive February 29, 2000
- ----------------------
Jerome J. Whalen Officer and Director
/s/ Clayton L. Blick Director February 29, 2000
- ---------------------
Clayton L. Blick
/s/ Ernest W. Clock Director March 2, 2000
- --------------------
Ernest W. Clock
/s/ John H. Field Director February 29, 2000
- -------------------
John H. Field
/s/ Bernice D. Fuessenich Director February 29, 2000
- -------------------------
Bernice D. Fuessenich
/s/ Perley H. Grimes, Jr. Director February 29, 2000
- -------------------------
Perley H. Grimes, Jr.
/s/ Thomas A. Kendall Director March 1, 2000
- -----------------------
Thomas A. Kendall
/s/ George M. Madsen Director March 1, 2000
- ---------------------
George M. Madsen
/s/ Charles E. Orr Director February 29, 2000
- ------------------
Charles E. Orr
/s/ William J. Sweetman Director February 29, 2000
- -----------------------
William J. Sweetman
/s/ H. Ray Underwood Director February 29, 2000
- ---------------------
H. Ray Underwood
/s/ Patricia D. Werner Director February 29, 2000
- -----------------------
Patricia D. Werner
</TABLE>
-51-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 12,800,196 6,156,166
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 2,600,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 42,700,482 40,209,393
<INVESTMENTS-CARRYING> 4,188,851 8,106,219
<INVESTMENTS-MARKET> 4,147,716 8,275,648
<LOANS> 183,606,128 152,438,033
<ALLOWANCE> 1,014,522 1,013,949
<TOTAL-ASSETS> 255,973,790 215,337,558
<DEPOSITS> 197,232,782 194,941,472
<SHORT-TERM> 36,730,000 0
<LIABILITIES-OTHER> 1,254,572 1,084,710
<LONG-TERM> 5,830,227 5,000,000
0 0
0 0
<COMMON> 15,674 14,831
<OTHER-SE> 14,910,535 14,296,545
<TOTAL-LIABILITIES-AND-EQUITY> 255,973,790 215,337,558
<INTEREST-LOAN> 12,910,093 11,559,941
<INTEREST-INVEST> 3,103,625 3,153,234
<INTEREST-OTHER> 17,489 170,968
<INTEREST-TOTAL> 16,031,207 14,884,143
<INTEREST-DEPOSIT> 5,965,607 6,832,028
<INTEREST-EXPENSE> 7,306,503 7,114,181
<INTEREST-INCOME-NET> 8,724,704 7,769,962
<LOAN-LOSSES> 120,000 120,000
<SECURITIES-GAINS> 363 143,640
<EXPENSE-OTHER> 7,428,330 6,550,248
<INCOME-PRETAX> 2,565,736 2,509,016
<INCOME-PRE-EXTRAORDINARY> 2,565,736 2,509,016
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,755,425 1,536,299
<EPS-BASIC> 1.18 1.04
<EPS-DILUTED> 1.13 .99
<YIELD-ACTUAL> 3.98 3.89
<LOANS-NON> 1,394,305 1,168,159
<LOANS-PAST> 33,441 14,239
<LOANS-TROUBLED> 0 133,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,013,949 970,840
<CHARGE-OFFS> 125,725 96,867
<RECOVERIES> 6,298 19,976
<ALLOWANCE-CLOSE> 1,014,522 1,013,949
<ALLOWANCE-DOMESTIC> 218,000 145,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 796,000 869,000
</TABLE>
