UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

T	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

o	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 of Incorporation or Organization)		(I.R.S. Employer Identification No.)

13 North Street, Litchfield, CT		06759
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code (860) 567-8752

Securities 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)

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No T

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No T

Indicate by check mark whether the Registrant: (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes T No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. Yes o No T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.;

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company T

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No T

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter $12,646,977.

Note. If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.

March 31, 2010 - 2,356,875

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

PART I

	ITEM 1 -	BUSINESS	1
	ITEM 1A.	RISK FACTORS	12
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	12
	ITEM 2 -	PROPERTIES	12
	ITEM 3 -	LEGAL PROCEEDINGS	13
	ITEM 4 -	RESERVED	13

PART II

	ITEM 5 -	MARKET FOR REGISTRANT’S COMMON EQUITY,
		RELATED STOCKHOLDER MATTERS AND ISSUER
		PURCHASES OF EQUITY SECURITIES	13
	ITEM 6 –	SELECTED FINANCIAL DATA	15
	ITEM 7 –	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
		RESULTS OF OPERATIONS	15
	ITEM 7A –	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
	ITEM 8 -	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	26
	ITEM 9 -	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
		FINANCIAL DISCLOSURE	27
	ITEM 9A(T) –	CONTROLS AND PROCEDURES	27
	ITEM 9B –	OTHER INFORMATION	28

PART III

	ITEM 10 -	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	28
	ITEM 11 -	EXECUTIVE COMPENSATION	31
	ITEM 12 -	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
		RELATED STOCKHOLDER MATTERS	38
	ITEM 13 -	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	40
	ITEM 14 –	PRINCIPAL ACCOUNTANT FEES AND SERVICES	41

PART IV

	ITEM 15 -	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	42

SIGNATURES			45

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PART I

ITEM 1.

BUSINESS

Business of the Company

First Litchfield Financial Corporation, a Delaware corporation (the “Company”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Company was formed in 1988 and has one banking subsidiary, The First National Bank of Litchfield (the “Bank”), a national banking association organized under the laws of the United States. The Bank and its predecessors have been in existence since 1814. The principal executive office of the Company is located at 13 North Street, Litchfield, CT 06759, and the telephone number is (860) 567-8752. The Company owns all of the outstanding shares of the Bank. The Bank has three subsidiaries, Lincoln Corporation and Litchfield Mortgage Service Corporation, which are Connecticut corporations, and First Litchfield Leasing Corporation which is a Delaware corporation. The Bank holds a majority ownership position in First Litchfield Leasing Corporation. The purpose of Lincoln Corporation is to hold property such as real estate, personal property, securities, or other assets, acquired by the Bank through foreclosure or otherwise to compromise a doubtful claim or collect a debt previously contracted. The purpose of Litchfield Mortgage Service Corporation is to operate as a passive investment company in accordance with Connecticut law. On June 26, 2003, the Company formed First Litchfield Statutory Trust I for the purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company, and on June 26, 2003, the first series of trust preferred securities were issued. During the second quarter of 2006, the Company formed a second statutory trust, First Litchfield Statutory Trust II (“Trust II”). Trust II exists for the sole purpose of issuing trust securities and investing the proceeds in subordinated debentures issued by the Company. In June 2006, Trust II issued its first series of trust preferred securities. The Company owns 100% of each Trust’s common stock.

During the fourth quarter of 2006, The Bank formed First Litchfield Leasing Corporation for the purpose of providing equipment financing and leasing products. The Company considers First Litchfield Leasing Corporation as an operating segment for reporting business line results.

The Bank engages in a wide range of commercial and personal banking activities, including accepting demand deposits (including Money Market Accounts), accepting savings and time deposit accounts, making secured and unsecured loans and leases to corporations, individuals, and others, issuing letters of credit, originating mortgage loans, and providing personal and corporate trust services. The business of the Bank is not significantly affected by seasonal factors.

The Bank’s lending services include commercial, real estate, and consumer installment loans and leases. Revenues from the Bank’s lending activities constitute the largest component of the Bank’s operating revenues. The loan and lease portfolio constitutes the major earning asset of the Bank and offers the best alternative for maximizing interest spread above the cost of funds. The Bank’s loan and lease personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit which exceeds the authority of the loan or lease officer is forwarded to the loan committee for approval. The loan committee is composed of various experienced loan and lease officers and Bank directors. All aggregate credits that exceed the loan committee’s lending authority are presented to the full Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the Bank’s loan and lease policy, but also provides valuable insight through communication and pooling of knowledge, judgment, and experience of its members.

The Bank’s primary lending area generally includes towns located in Litchfield and Hartford counties.

The Bank’s Trust and Wealth Management Department provides a wide range of personal and corporate trust and trust-related investment services, including serving as executor of estates, as trustee under testamentary and intervivos trusts and various pension and other employee benefit plans, as guardian of the estates of minors and incompetents, and as escrow agent under various agreements.

The Bank introduces new products and services as permitted by the regulatory authorities or desired by the public. The Bank remains committed to meeting the challenges that require technology. In addition to providing its customers with access to the latest technological products, such as telephone banking, which allows customers to handle routine transactions using a standard touch tone telephone, the Bank is accessible via a home page on the Internet. The Bank also offers PC banking and bill paying via the Internet at its Website. The Bank also offers a cash management product; e-Business Advantage, which is geared toward commercial businesses, municipal and nonprofit customers and provides 24-hour online account management including real-time account monitoring, managing cash flow, collecting and making payments electronically, as well as transferring idle cash.

On October 25, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, the Bank and Union Savings Bank (“Union”) that provides for the merger of the Company and the Bank with and into Union (the “Merger”). Under the terms of the Merger Agreement, shareholders of the Company will receive $15.00 cash for each share of Company common stock they own on the date of the Merger. The transaction is valued at approximately $35 million. At the Company’s special meeting of stockholders held on February 19, 2010, holders of the Company’s common stock voted in favor of the Merger Agreement and Merger. Regulatory approvals from the State of Connecticut Department of Banking and the Federal Deposit Insurance Corporation were received on March 19, 2010 and March 17, 2010, respectively. The closing of the Merger is scheduled for April 7, 2010.

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Competition

In Connecticut generally, and in the Bank’s primary service area specifically, there is intense competition in the commercial banking industry. The Bank’s market area consists principally of towns located in Litchfield County and Hartford County, although the Bank also competes with other financial institutions in surrounding counties in Connecticut in obtaining deposits and providing many types of financial services. The Bank competes with larger regional and national banks for the business of companies located in the Bank’s market area. The Bank also competes with savings and loan associations, credit unions, finance companies, personal loan companies, money market funds and other non-depository financial intermediaries. Many of these financial institutions have resources many times greater than those of the Bank. In addition, new financial intermediaries such as money-market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions.

Changes in federal and state law have resulted in, and are expected to continue to result in, increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Bank operates, although it is not possible to predict the extent or timing of such increased competition.

Lending Activities

The Bank’s lending policy is designed to correspond with its mission of remaining a community-oriented bank. The loan and lease policy sets forth accountability for lending functions in addition to standardizing the underwriting, credit and documentation procedures. The Bank’s target market regarding lending is in the towns in which a Bank office is located and contiguous towns. The typical loan and lease customer is an individual or small business which has a deposit relationship with the Bank. The Bank strives to provide an appropriate mix in its loan and lease portfolio of commercial loans leases and loans and leases to individual consumers.

Loan and Lease Portfolio

The Bank’s loan and lease portfolio, which includes loans held for sale, was comprised of the following categories:

	(Dollar Amounts in Thousands)
	December 31,

	2009		2008		2007		2006		2005
Commercial loans	$	41,177	$	46,250	$	33,642	$	26,950	$	21,151
Commercial leases		36,841		19,786		8,634		-		-
Real Estate
Construction		19,225		38,153		34,809		30,606		28,549
Residential		169,505		193,574		189,557		177,082		145,927
Commercial		104,354		67,455		55,752		53,318		42,145
Installment		4,954		5,113		6,520		7,168		4,334
Others		69		129		99		172		47
Total Loans and Leases	$	376,125	$	370,460	$	329,013	$	295,296	$	242,153

The following table reflects the maturity and sensitivities of the Bank’s loan and lease portfolio at December 31, 2009.

	(Dollar Amounts in Thousands)
			After one
	One year		year through		Due after		Total
	or less		five years		five years		loans and leases
Commercial loans	$	23,026	$	7,126	$	11,025	$	41,177
Commercial leases		608		34,645		1,588		36,841
Real Estate
Construction		12,339		2,339		4,547		19,225
Residential		67,881		16,746		84,878		169,505
Commercial		16,483		58,418		29,453		104,354
Installment		391		2,921		1,642		4,954
Others		69		-		-		69
Total Loans and Leases	$	120,797	$	122,195	$	133,133	$	376,125

At December 31, 2009, loans maturing after one year included approximately: $160,916,000 in fixed rate loans; and $94,412,000 in variable rate loans.

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Investment Securities

The primary objectives of the Bank’s investment policy are to provide a stable source of interest income, to provide adequate liquidity necessary to meet short and long-term changes in the mix of its assets and liabilities, to provide a means to achieve goals set forth in the Bank’s interest rate risk policy, and to provide a balance of quality and diversification to its assets. The available-for-sale portion of the investment portfolio is expected to provide funds when demand for acceptable loans and leases increases and is expected to absorb funds when loan and lease demand decreases.

At December 31, 2009 the carrying value of the Bank’s investment portfolio was $95,426,206 or 18% of total assets. There were no Federal Funds Sold as of December 31, 2009.

The table below presents the amortized cost and fair values of investment securities held by the Bank at December 31, 2009, 2008, and 2007.

	(Dollar Amounts in Thousands)
	2009				2008				2007
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value

Available-for-sale	$	96,963	$	95,412	$	113,246	$	113,486	$	130,145	$	128,980

Held-to-maturity		15		15		17		17		34		34

	$	96,978	$	95,427	$	113,263	$	113,503	$	130,179	$	129,014

The following tables present the maturity distribution of investment securities at December 31, 2009, and the weighted average yields of such securities. The weighted average yields were calculated based on the amortized cost and tax-effective yields to maturity of each security. The maturity distribution shown below will differ from the contractual maturities because the issuer has the ability to prepay or call the security.

	(Dollar Amounts in Thousands)
Held-to-maturity
				Over One			Over Five												Weighted
	One Year			Through			Through			Over Ten			No						Average
	or Less			Five Years			Ten Years			Years			Maturity			Total			Yield

Mortgage-Backed Securities	$	4		$	11		$	-		$	-		$	-		$	15		$	2.04	%

Weighted Average Yield		2.26	%		1.97	%		-			-			-			2.04	%

Available-for-sale (1)

U.S. Treasury Securities	$	999		$	2,072		$	-		$	-		$	-		$	3,071			2.34	%
U.S. Government Agency Securities		4,002			19,189			-			-			-			23,191			1.24	%
State and Municipal Obligations		-			-			3,256			-			-			3,256			4.32	%
Trust Preferred Securities		-			-			-			2,995			-			2,995			0.00	%
Mortgage-Backed Securities		17,235			29,970			169			-			-			47,374			3.21	%
Marketable Equity Securities		17,076			-			-			-			-			17,076			0.62	%
Total	$	39,312		$	51,231		$	3,425		$	2,995		$	-		$	96,963			2.19	%

Weighted Average Yield		1.79	%		2.49	%		4.22	%		0.00	%		0.00	%		2.19	%

Total Portfolio	$	39,316		$	51,242		$	3,425		$	2,995		$	-		$	96,978			2.19	%

Total Weighted Average Yield		1.79	%		2.49	%		4.22	%		0.00	%		0.00	%		2.19	%

(1) Dollars shown at amortized cost amounts.

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Deposits

The following table summarizes average deposits and interest rates of the Bank for the years ended December 31, 2009, 2008, and 2007.

	(Dollar Amounts in Thousands)
	2009					2008					2007
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate

Noninterest-bearing
demand deposits	$	72,611		0.00	%	$	68,864		0.00	%	$	68,278		0.00	%

Money market deposits		85,412		0.84	%		83,116		1.88	%		75,832		2.96	%
Savings deposits		66,725		0.47	%		58,788		1.04	%		55,026		1.37	%

Time deposits		146,835		2.43	%		132,813		3.69	%		136,764		4.59	%
				.
	$	371,583		1.24	%	$	343,581		2.06	%	$	335,900		2.76	%

Fixed rate certificates of deposit in amounts of $100,000 or more at December 31, 2009 are scheduled to mature as follows:

(Dollar Amounts in Thousands)
Three months or less	$	31,298
Over three, through six months		12,371
Over six, through twelve months		14,701
Over twelve months		10,231
Total	$	68,601

Return on Equity and Assets

The following table summarizes various operating ratios of the Company for the past two years:

	Years ended December 31,
	2009			2008
Return (loss) on average total assets (net loss available
to common shareholders divided by average total assets)		(0.32	)%		(0.85	)%

Return (loss) on average shareholders' common equity (net
loss available to common shareholders divided by average
shareholders' common equity)		(7.71	)%		(27.78	)%

Equity to assets (average shareholders' equity as a
percent of average total assets)		5.99	%		4.98	%

Dividend payout ratio		N/A			N/A

Asset/Liability Management

A principal objective of the Bank is to reduce and manage the exposure of changes in interest rates on its results of operations and to maintain an approximate balance between the interest rate sensitivity of its assets and liabilities within acceptable limits. While interest-rate risk is a normal part of the commercial banking activity, the Bank desires to minimize its effect upon operating results. Managing the rate sensitivity embedded in the balance sheet can be accomplished in several ways. By managing the origination of new assets and liabilities, or the rollover of the existing balance sheet assets, incremental change towards the desired sensitivity position can be achieved. Hedging activities, such as the use of interest rate caps, can be utilized to create immediate change in the sensitivity position.

The Bank monitors the relationship between interest-earning assets and interest-bearing liabilities by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Bank’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-bearing liabilities maturing or repricing and the amount of interest-earning assets maturing or repricing for the same period of time. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to increase net interest income. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to adversely affect net interest income.

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The information presented in the interest sensitivity table is based upon a combination of maturities, call provisions, repricing frequencies, prepayment patterns, and management judgment. The distribution of variable rate assets and liabilities is based upon the repricing interval of the instrument. Management estimates that less than 20% of savings products are sensitive to interest rate changes based upon analysis of historic and industry data for these types of accounts.

The following table summarizes the repricing schedule for the Bank’s assets and liabilities and provides an analysis of the Bank’s periodic and cumulative GAP positions.

	(Dollar Amounts in Thousands)
	As of December 31, 2009
	Repriced Within

	Under 3			4 to 12			1 to 5			Over 5
	Months			Months			Years			Years

Securities available-for-sale	$	30,190		$	32,683		$	24,493		$	9,597
Securities held-to-maturity		-			15			-			-
Loan and Lease Portfolio		112,694			64,965			152,096			46,370
Other		-			-			-			5,758
Total interest-earning assets		142,884			97,663			176,589			61,725


Interest-bearing liabilities
Money Market		81,377			-			-			-
Savings		-			-			-			62,810
Time		50,936			65,347			26,486			-
Total interest-bearing deposits		132,313			65,347			26,486			62,810

Borrowed funds		30,720			15,000			41,500			36,047
Total interest-bearing liabilities		163,033			80,347			67,986			98,857
Periodic gap	$	(20,149	)	$	17,316		$	108,603		$	(37,132	)

Cumulative gap	$	(20,149	)	$	(2,833	)	$	105,770		$	68,638

Cumulative gap as a percentage of
total earning assets		(4.21	)%		(0.59	)%		22.09	%		14.33	%

Supervision and Regulation

The Bank is chartered under the National Bank Act and is subject to the supervision of, and is regularly examined by, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).

The Company is a bank holding company, within the meaning of the Bank Holding Company Act (“BHC Act”), is registered as such with and is subject to the supervision of, and the Bank Holding Company laws, of the Federal Reserve Board (“FRB”). The Company, as a bank holding company, is also subject to the Connecticut Bank Holding Company laws. In addition, the Company’s securities are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and, therefore, is subject to rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain legislation and regulations affecting the business of the Company and the Bank are discussed below.

General

As a bank holding company, the Company is subject to the BHC Act. The Company reports to, registers with, and is examined by the FRB. The FRB also has the authority to examine the Company’s subsidiaries, which includes the Bank.

The FRB requires the Company to maintain certain levels of capital. See “Capital Standards” herein. The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, violates certain laws, regulations, or conditions imposed in writing by the FRB. See “Prompt Corrective Action and Other Enforcement Mechanisms” herein.

Under the BHC Act, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over, or acquires, directly or indirectly, more than 5% of the voting shares or substantially all of the assets of, any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges, or consolidates with any bank, or bank holding company. Any company seeking to acquire, merge, or consolidate with the Company also would be required to obtain the FRB’s approval.

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The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The FRB’s policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.

Transactions between the Company, the Bank, and any future subsidiaries of the Company are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees, which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Additionally, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services. Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with all affiliates may not exceed 20% of the capital stock and surplus of such institution. The Company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary.

The Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and programs thereunder in which the Company participates, including the Capital Purchase Program (“CPP”) of the Troubled Asset Relief Program (“TARP”) and the Temporary Liquidity Guarantee Program (“TLGP”), contain limitations on increasing dividends on the Common Stock during the first three years of participation in the CPP and allow the U.S. Government to unilaterally modify any term or provision of contracts executed under the CPP. For discussion of these programs and the acts see “Recent Legislation and Regulatory Initiatives to Address Difficult Market and Economic Conditions” below.

Capital Standards

The FRB, OCC, and other federal banking agencies have adopted risk-based minimum capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are reported as off- balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk-adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans.

A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. The regulators measure risk-adjusted assets and off-balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock, and minority interests in certain subsidiaries, less most other intangible assets. Trust preferred securities are currently considered regulatory capital for purposes of determining the Company’s Tier I capital ratios. Tier 2 capital may consist of limited amounts of the allowance for loan and lease losses, unrealized gains on equity securities and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.

In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators’ rating. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table presents the capital ratios for the Company and the Bank as of December 31, 2009:

							Minimum
	The Company's			The Bank's			Regulatory
	Ratio			Ratio			Capital Level
RISK-BASED CAPITAL RATIO:
Total Capital		11.50	%		11.09	%		8.00	%

Tier 1 Capital		10.25	%		9.83	%		4.00	%

TIER 1 LEVERAGE CAPITAL RATIO:		7.34	%		7.02	%		4.00	%

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Prompt Corrective Action and Other Enforcement Mechanisms

Each federal banking agency is required to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more of the prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

An insured depository institution generally is classified in the following categories based on capital measures indicated below:

“Well-Capitalized”:

Total risk-based capital of 10% or more;

Tier 1 risk-based ratio capital of 6% or more; and

Leverage ratio of 5% or more.

“Adequately Capitalized”:

Total risk-based capital of at least 8%;

Tier 1 risk-based capital of at least 4%; and

Leverage ratio of at least 4%.

“Undercapitalized”:

Total risk-based capital less than 8%;

Tier 1 risk-based capital less than 4%; or

Leverage ratio less than 4%.

“Significantly Undercapitalized”:

Total risk-based capital less than 6%;

Tier 1 risk-based capital less than 3%; or

Leverage ratio less than 3%.

“Critically Undercapitalized”:

Tangible equity to total assets less than 2%.

The Bank meets the qualitative guidelines of a well capitalized institution under the above guidelines. An institution that, based upon its capital levels, is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratio actually warrants such treatment. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. The most important additional measure is that the appropriate federal banking agency is required to either appoint a receiver for the institution within 90 days or obtain the concurrence of the FDIC in another form of action. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties, and the enforcement of such actions through injunctions or restraining orders based upon a prima facie showing by the agency that such relief is appropriate. Additionally, a holding company’s inability to serve as a source of strength to its subsidiary banking organizations could serve as a basis for a regulatory action against the holding company.

Safety and Soundness Standards

The federal banking agencies have established safety and soundness standards for insured financial institutions covering: (1) internal controls, information systems, and internal audit systems; (2) loan and lease documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees, and benefits; (7) asset quality and earnings; (8) excessive compensation for executive officers, directors, or principal shareholders which could lead to material financial loss; and (9) information security standards. If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. If the

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agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency.

Restrictions on Dividends and Other Distributions

The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition, and cash needs of the institution, as well as general business conditions. Federal Law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.

The Company’s ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Company. The ability of the Bank to pay dividends is subject to restrictions set forth in the National Banking Act and regulations of the OCC. See “Market Price for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” herein.

In addition, provided the Preferred Stock issued to the Treasury, described in Note N to Consolidated Financial Statements, is held by the Treasury, the Common Stock dividend may not be increased without the consent of the Treasury for three (3) years from the date of the investment by the Treasury. On February 24, 2009 and March 27, 2009, the Federal Reserve Board issued supervisory guidance to all bank holding companies regarding the payment of dividends as well as stock redemptions and repurchases by bank holding companies. Such guidance expressed the view that the Board of Directors should ensure that dividends are prudent relative to the financial position of the institution and that a bank holding company should inform the FRB in advance of declaring a dividend that exceeds earnings for the period or that could result in a material adverse change to an organization’s capital structure. The supervisory guidance further stated that dividends should be eliminated, deferred, or limited if net income from the past four quarters is not sufficient to fund the dividend or if prospective earnings retention is not consistent with capital needs or the condition and future prospects of the institution or if the bank holding company is in danger of not meeting minimum regulatory capital returns.

Additionally, a bank may not make any capital distribution, including the payment of dividends, if, after making such distribution, the bank would be in any of the “under-capitalized” categories under the OCC’s Prompt Corrective Action regulations. Regulation Y requires bank holding companies to provide the FRB with written notice before purchasing or redeeming equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the Company for all such purchases or redemptions during the preceding twelve (12) months, is equal to ten percent (10%) or more of the Company’s consolidated net worth. For purposes of Regulation Y, “net consideration” is the gross consideration paid by a company for all of its equity securities purchased or redeemed during the period, minus the gross consideration received for all of its equity securities sold during the period other than as part of a new issue. However, a bank holding company generally need not obtain FRB approval of any equity security redemption when: (i) the bank holding company’s capital ratios exceed the threshold established for “well-capitalized” banks before and immediately after the redemption; (ii) the bank holding company is well-managed; and (iii) the bank holding company is not the subject of any unresolved supervisory issues. However, letters issued by the FRB to the industry dated February 24, 2009 and March 27, 2009 advise bank holding companies to inform the FRB of proposed stock repurchases resulting in a net reduction of common or preferred stock below the amount of such instrument outstanding at the beginning of the quarter in which the repurchase occurs. In addition, as a recipient of TARP CPP funds, the Company must communicate with the Treasury as well as the FRB in advance of any stock redemptions. Generally, during the first three years from December 12, 2008 that the Company’s Preferred Stock issued pursuant to the TARP CPP is outstanding, the approval of the Treasury will be required before the Company may repurchase any common stock. The Company may redeem the TARP CPP Preferred Stock at any time in consultation with the Treasury and its primary supervisory agencies.

The OCC also has the authority to prohibit the Bank from engaging in business practices which the OCC considers to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors, that the OCC could assert that the payment of dividends or other payments in some circumstances might be such an unsafe or unsound practice and thereby prohibit such payment.

FDIC Insurance

The Bank’s deposits are insured under the Federal Deposit Insurance Act up to maximum limits by the Deposit Insurance Fund (DIF) and are subject to deposit insurance assessments.

Congress has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2013. Effective April 1, 2006, the federal deposit insurance limits on certain retirement accounts increased so that such retirement accounts are separately insured up to $250,000. In addition, the Bank participates in the TLGP, whereby noninterest-bearing checking accounts and NOW accounts with interest rates no higher than 0.50 % will be FDIC insured in full until June 20, 2013.

FDIC insurance of deposits may be terminated by the FDIC, after notice and a hearing, upon a finding by the FDIC that the insured institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule or order of, or condition imposed by the FDIC. A bank’s failure to meet the minimum capital and risk-based capital guidelines discussed below would be considered to be unsafe and unsound banking practices. The Bank, as a nationally-chartered FDIC-insured bank, is regulated by the OCC. The OCC also conducts its own periodic examinations of the Bank, and the Bank is required to submit financial and other reports to the OCC on a quarterly and annual basis, or as otherwise required by the OCC. FDIC-insured banks, such as the Bank, pay premium assessments to the FDIC for the insurance of deposits.

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A few years ago, the FDIC adopted a risk-based insurance assessment system designed to tie what banks pay for deposit insurance more closely to the risks they pose. The FDIC also adopted a schedule of rates that the FDIC could adjust up or down, depending on the needs of the DIF.

Recently, the FDIC adopted a restoration plan that would increase the reserve ratio to the 1.15% threshold within seven years. As part of that plan, in December, 2008, the FDIC voted to increase risk-based assessment rates due to deteriorating financial conditions in the banking industry. Changes to the risk-based assessment system include increasing premiums for institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, lowering premiums for smaller institutions with very high capital levels, and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt. It is generally expected that rates will continue to increase in the near future due to the significant cost of bank failures and the increase in the number of troubled banks.

In September, 2009, the FDIC proposed a rule that was subsequently adopted in final form by the FDIC board of directors on November 12, 2009 that required insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. For purposes of calculating the amount to prepay, the FDIC required that institutions use their total base assessment rate in effect on September 30, 2009 and increase that assessment base quarterly at a 5 percent annual growth rate through the end of 2012. On September 29, 2009, the FDIC also increased annual assessment rates uniformly by 3 basis points beginning in 2011 such that an institution’s assessment for 2011 and 2012 would be increased by an annualized 3 basis points. The Company’s prepayment for 2010, 2011, and 2012 amounted to $2.4 million.

Incremental to insurance fund assessments, the FDIC assesses deposits to fund the repayment of debt obligations of the Financing Corporation (“FICO”). FICO is a government agency-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The current annualized rate established by the FDIC is 1.06 basis points.

Inter-Company Borrowings

Bank holding companies are also restricted as to the extent to which they and their subsidiaries can borrow or otherwise obtain credit from one another or engage in certain other transactions. The “covered transactions” that an insured depository institution and its subsidiaries are permitted to engage in with their nondepository affiliates are limited to the following amounts: (1) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and the surplus of the insured depository institution; and (2) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute covered transactions must be collateralized in prescribed amounts. “Covered transactions” are defined by statute to include a loan or extension of credit to the affiliate, a purchase of securities issued by an affiliate, a purchase of assets from the affiliate (unless otherwise exempted by the FRB), the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance, or letter of credit for the benefit of an affiliate. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.

Effects of Government Policy

Legislation adopted in recent years has substantially increased the scope of regulations applicable to the Bank and the Company and the scope of regulatory supervisory authority and enforcement power over the Bank and the Company.

Virtually every aspect of the Bank’s business is subject to regulation with respect to such matters as the amount of reserves that must be established against various deposits, the establishment of branches, reorganizations, nonbanking activities, and other operations. Numerous laws and regulations also set forth special restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms, and discrimination in credit transactions.

The descriptions of the statutory provisions and regulations applicable to banks and bank holding companies set forth above do not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Bank and the Company are difficult to determine.

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 provides bank holding companies, banks, securities firms, insurance companies, and investment management firms the option of engaging in a broad range of financial and related activities by opting to become a “financial holding company.” These holding companies are subject to oversight by the FRB, in addition to other regulatory agencies. Under the financial holding company structure, financial institutions have the ability to purchase or establish broker/dealer subsidiaries, as well as the option to purchase insurance companies. Additionally, securities and insurance firms are permitted to purchase full-service banks.

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As a general rule, the individual entities within a financial holding company structure are regulated according to the type of services provided which is referred to as functional regulation. Under this approach, a financial holding company with banking, securities, and insurance subsidiaries will have to interact with several regulatory agencies (e.g., appropriate banking agency, SEC, state insurance commissioner).

While the Act facilitates the ability of financial institutions to offer a wide range of financial services, large financial institutions appear to be the primary beneficiaries as a result of this Act, because many community banks are less able to devote the capital and management resources needed to facilitate broad expansion of financial services. The Company has no current plans to operate within a financial holding company structure.

The Sarbanes-Oxley Act of 2002

The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws and for other purposes.

The Sarbanes-Oxley Act amends the Exchange Act to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer and to be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report.

In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer as a result of misconduct with any financial reporting requirements under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for (1) any bonus or other incentive-based or equity based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the SEC of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period.

Pursuant to the Sarbanes-Oxley Act, the SEC has adopted rules to require:

disclosure of all material off-balance sheet transactions and relationship that may have a material effect upon the financial status of an issuer; and

the presentation of pro forma financial information in a manner that is not misleading and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles.

The Sarbanes-Oxley Act, among other things, also provides for mandated internal control report and assessment with the annual report and an attestation and a report on such report by the Company’s auditor. In accordance with the requirements of Section 404, Management’s report on internal controls is included herein at Item 9A(T). The SEC has delayed until fiscal years ending after June 15, 2010 the auditor’s attestation report on internal controls over financial reporting. The SEC also requires an issuer to institute a code of ethics for senior financial officers of the Company.

The USA Patriot Act

On October 26, 2001, President Bush signed into law The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”). On March 10, 2006, the President signed legislation making permanent certain provisions of the Patriot Act. The terrorist attacks in September, 2001 have impacted the financial services industry and led to federal legislation that addresses certain issues involving financial institutions. Part of the Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.

Among its other provisions, IMLA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLA contains a provision encouraging cooperation among financial institutions, regulatory authorities, and law enforcement authorities with respect to individuals, entities, and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts. The Bank has implemented policies and procedures to address the requirements of the Patriot Act and IMLA.

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Recent Legislative and Regulatory Initiatives to Address Difficult Market and Economic Conditions

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA), which, among other measures, authorizes the Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities, and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies, under the TARP CPP. The purpose of TARP CPP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the TARP CPP, the Treasury is purchasing equity securities from participating institutions. The Series A Preferred Stock and warrant offered by this prospectus were issued by the Company to the Treasury pursuant to the TARP CPP. The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000 through December 31, 2009. As part of the Helping Families Save Their Homes Act of 2009, the temporary deposit insurance limit was extended through December 31, 2013. In addition, under the FDIC’s Transaction Account Guarantee (“TAG”) portion of the Temporary Liquidity Guaranty Program (“TLGP”), non-interest bearing transaction deposit accounts and interest-bearing transaction accounts paying 50 basis points or less will be fully insured above and beyond the $250,000 limit through June 30, 2010.

The EESA followed, and has been followed by, numerous actions by the FRB, the U.S. Congress, the Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourage loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. The ARRA, more commonly known as the economic stimulus bill or economic recovery package, is intended to stimulate the economy and provides for broad infrastructure, education, and health spending.

As discussed above, on October 14, 2008, the FDIC announced the establishment of a temporary liquidity guarantee program to provide full deposit insurance for all non-interest bearing transaction accounts and guarantees of certain newly issued senior unsecured debt issued by FDIC-insured institutions and their holding companies. Insured institutions were automatically covered by this program from October 14, 2008 until December 5, 2008, unless they opted out prior to that date. Under the program, the FDIC will guarantee timely payment of newly issued senior unsecured debt issued on or before June 30, 2009. The debt includes all newly issued unsecured senior debt including promissory notes, commercial paper and inter-bank funding. The aggregate coverage for an institution may not exceed 125% of its debt outstanding on September 30, 2008 that was scheduled to mature before June 30, 2009, or, for certain insured institutions, 2% of liabilities as of September 30, 2008. The guarantee will extend to June 30, 2012 even if the maturity of the debt is after that date.

The purpose of these legislative and regulatory actions is to stabilize the U.S. banking system. The EESA, the ARRA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, the Company’s business, financial condition, results of operations, and cash flows could be materially and adversely affected.

The Securities Purchase Agreement Between the Company and the Treasury Permits the Treasury to Impose Certain Additional Restrictions on the Company so long as the Company Participates in the TARP CPP

The securities purchase agreement the Company entered into with the Treasury in connection with the Bank’s participation in the TARP CPP permits the Treasury to unilaterally amend the terms of the securities purchase agreement to comply with any changes in federal statutes after the date of its execution. The ARRA imposed additional executive compensation and expenditure limits on all current and future TARP recipients, including the Company, until the Company has repaid the Treasury. These additional restrictions may impede the Company’s ability to attract and retain qualified executive officers. The ARRA also permits TARP recipients to repay the Treasury without penalty or requirement that additional capital be raised, subject to the Treasury’s consultation with the Company’s primary federal regulator while the securities purchase agreement required that, for a period of three years, the Series A Preferred Stock could generally only be repaid if the Company raised additional capital to repay the securities and such capital qualified as Tier 1 capital. Additional unilateral changes in the securities purchase agreement could have a negative impact on the Company’s financial condition and results of operations.

Impact of Monetary Policies

Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings and the interest rate earned by a bank on loans and leases, securities, and other interest-earning assets comprises the major source of bank’s earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements, and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB in these areas influence the growth of bank loans and leases, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on the Company cannot be predicted. In addition, adverse economic conditions could make a higher provision for loan and lease losses a prudent course and could cause higher loan and lease loss charge-offs, thus adversely affecting the Bank’s net earnings.

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Employees

The Company, the Bank, and its subsidiaries employ 117 full-time employees and 11 part-time employees. Neither the Company nor the Bank is party to any collective bargaining agreements, and employee relations are considered good.

Forward Looking Statements

This Form 10-K and future filings made by the Company with the SEC, as well as other filings, reports and press releases made or issued by the Company and the Bank, and oral statements made by executive officers of the Company and Bank, may include forward-looking statements relating to such matters as (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Company and the Bank do business, and (b) expectations for increased revenues and earnings for the Company and Bank through growth resulting from acquisitions, attraction of new deposit and loan and lease customers, and the introduction of new products and services. Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of the Company’s and Bank’s business include the following: (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates; (b) changes in the legislative and regulatory environment that negatively impact the Company and Bank through increased operating expenses; (c) increased competition from other financial and non-financial institutions (d) the impact of technological advances; and (e) other risks detailed from time to time in the Company’s filings with the SEC.

Such developments could have an adverse impact on the Company’s financial position and results of operation.

Availability of Financial Information

The Company files reports with the SEC. Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains quarterly and annual reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company’s website address is: www.fnbl.com.

ITEM 1A.

RISK FACTORS

Not applicable as the registrant is not an accelerated filer or large accelerated filer.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable as the registrant is not an accelerated filer or large accelerated filer.

ITEM 2.

PROPERTIES

The Company is not the owner or lessee of any properties. The properties described below are properties owned or leased by the Bank.

The Bank’s main office is located at 13 North Street, Litchfield, Connecticut. In addition to the Bank’s main office in Litchfield, the Bank has branches in Marble Dale, Washington Depot, Goshen, Canton, New Milford, Roxbury and Torrington, Connecticut.

During the year ended December 31, 2009, the net rental expense paid by the Bank for all of its office properties was approximately $242,000. All properties are considered to be in good condition and adequate for the purposes for which they are used. The following table outlines all owned or leased property of the Bank.

	Owned	Lease
Location	Address	Leased	Expiration

Main Office	13 North Street	Owned since 1816
	Litchfield, CT

Marble Dale	Route 202	Leased	2012
	Marble Dale, CT

Washington Depot	Bryan Plaza	Owned since 1959
	Washington Depot, CT

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Goshen	Routes 4 & 63	Owned since 1989
	Goshen, CT

Roxbury	Route 67	Leased	2014
	Roxbury, CT

New Milford	Route 202	Leased	2016 with one 10-year
	New Milford, CT		extension

Torrington	1057 Torringford Street	Leased	2026 with option
	Torrington, CT		to purchase

Canton	188 Albany Turnpike	Owned since 2005
	Canton, CT

Trust Department	40 West Street	Owned since 1996
	Old Borough Firehouse
	Litchfield, CT

Torrington, North	397 Main Street	Owned since 2007
	Torrington, CT

Finance Department	29 West Street	Leased	Month-to-Month Lease
	Litchfield, CT

ITEM 3.

LEGAL PROCEEDINGS

Neither the Company nor the Bank (or any of their properties) is the subject of any material pending legal proceedings other than routine litigation that is incidental to its business.

ITEM 4.

RESERVED

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price

The Company’s Common Stock is traded on the Over the Counter (“OTC”) Bulletin Board under the symbol FLFL.OB. As of March 31, 2010, there were 2,506,622 shares issued and 2,356,875 shares outstanding, which were held by approximately 389 shareholders.

The following information provided by Oppenheimer and Co., sets forth transactions in the Company’s Common Stock in each quarter of the two most recently completed fiscal years:

2008	High/Low
First Quarter	$	16.40	$	13.25
Second Quarter		14.25		11.50
Third Quarter		13.00		10.60
Fourth Quarter		11.00		5.25

2009	High/Low
First Quarter	$	11.00	$	4.25
Second Quarter		7.59		5.70
Third Quarter		7.24		5.55
Fourth Quarter		14.60		5.45

On September 20, 2007, the Company approved a stock repurchase program to acquire, in the next twelve months, up to an aggregate of 30,000 shares of the Company’s outstanding Common Stock. Pursuant to the repurchase program, shares purchased during 2008 and 2009 totaled 16,718 and 0, respectively. The repurchase program expired in September 2008 and was not renewed. The Company is prohibited from repurchasing any shares of Common Stock pursuant to terms of the TARP CPP in which the Company participated, during the first three years of participation, or until December 12, 2011, unless the Preferred Stock is redeemed by the Company.

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Dividends

All shares of the Company’s Common Stock are entitled to participate equally and ratably in such dividends as may be declared by the Board of Directors out of funds legally available therefore. During 2008, the Company declared cash dividends of 60 cents per share. During 2009, the Company declared cash dividends of 10 cents per share.

The Company is prohibited from increasing the quarterly common stock dividend above $.15 per share without the consent of the U. S. Treasury until the third anniversary of the date of the investment, or December 12, 2011, unless prior to such third anniversary the senior preferred stock is redeemed in whole or the U. S. Treasury has transferred all of the senior preferred stock to third parties.

The Company’s ability to pay dividends is limited by the prudent banking principles applicable to all bank holding companies and by the provisions of Delaware Corporate law, which provides that a company may, unless otherwise restricted by its certificate of incorporation, pay dividends in cash, property, or shares of capital stock out of surplus or, if no surplus exists, out of net profits for the fiscal year in which declared, or out of net profits for the preceding fiscal year (provided that such payment will not reduce the company’s capital below the amount of capital represented by classes of stock having a preference upon distributions of assets).

As a practical matter, the Company’s ability to pay dividends is generally limited by the Bank’s ability to dividend funds to the Company. As a national bank, the declaration and payment of dividends by the Bank must be in accordance with the National Bank Act. More specifically, applicable law provides that the Board of Directors may declare quarterly, semiannual, and annual dividends so long as the Bank carries at least ten percent (10%) of its net profits for the preceding half year in its surplus fund, and, in the case of annual dividends, has carried not less than one-tenth of its net profits of the preceding two consecutive half year periods in its surplus fund. National banks are required to obtain the approval of the OCC if the total dividends declared by it in any calendar year exceed the total of its net profits for that year combined with any retained net profits of the preceding two years less any required transfers. In addition to such statutory requirements, the payment of an excessive dividend which would deplete a bank's capital base to an inadequate level could be considered to be an unsafe or unsound banking practice and be a basis for supervisory action by the OCC. Due to the earnings performance in 2008 and 2009, there was no undistributed net income of the Bank available for distribution to the Company as dividends. However, the ability of the Bank to declare and pay such dividends would be subject to safe and sound banking practices.

The Company cannot increase the quarterly common stock dividend above $.15 per share without the consent of the Treasury until the third anniversary of the date of the issuance of the Preferred Stock, or December 12, 2011, unless prior to such third anniversary the Preferred Stock is redeemed in whole or the Treasury has transferred all of the Preferred Stock to third parties.

The Merger Agreement prohibits the Company from paying any dividend

The Agreement with the OCC described in Note T – Certain Supervisory Matters to the Financial Statements also restricts the Bank’s ability to pay dividends to the Company.

Recent Sales of Unregistered Securities

There have been no sales of unregistered securities in the period covered by this report.

Securities Authorized for Issuance under Equity Compensation Plans

The following schedule provides information with respect to compensation plans under which equity securities are authorized for issuance as of December 31, 2009:

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column (a))
	(a)	(b)	(c)
Equity compensation plans approved by shareholders	0	0	21,500
Equity compensation plans not approved by shareholders	N/A	N/A	N/A
Total	0	$0.00	21,500

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ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements and the notes thereto, and the other information contained in this Form 10-K. The selected balance sheet data as of December 31, 2009 and 2008, and the selected statement of operations data for the years ended December 31, 2009 and 2008 are derived from, and are qualified by reference to, the audited consolidated financial statements of the Company appearing elsewhere in this Form 10-K. The balance sheet data as of December 31, 2007, 2006 and 2005, and statement of operations data for the years ended December 31, 2007, 2006, and 2005, are derived from audited consolidated financial statements of the Company not included herein.

	At or For the Year Ended December 31,
	2009			2008			2007			2006			2005
Income Statement Data
Interest and Dividend Income	$	25,038,819		$	28,188,882		$	28,098,261		$	25,805,321		$	21,665,441
Interest Expense		9,707,880			13,249,297			14,885,202			13,114,088			7,594,052
Net Interest Income		15,330,939			14,939,585			13,213,059			12,691,233			14,071,389
Noninterest Income (Loss)		4,455,358			(5,362,105	)		3,431,476			2,272,986			2,889,313
Noninterest Expense		18,274,373			15,340,149			14,267,491			13,202,841			11,081,440
(Loss) Income Before Income Taxes		(2,157,285	)		(7,598,968	)		2,173,044			1,341,378			5,547,234
Income Tax (Benefit) Provision		(1,083,354	)		(3,112,459	)		225,702			(67,525	)		1,511,343
Net (Loss) Income		(1,207,409	)		(4,490,384	)		1,947,342			1,408,903			4,035,891

Balance Sheet Data
Total Loans, Leases and
Loans Held for Sale		376,124,604			370,460,285			329,012,939			296,338,181			242,152,589
Allowance for Loan and Lease Losses		6,068,108			3,698,820			2,151,622			2,106,100			1,759,611
Total Investment Securities		95,426,206			113,502,751			129,013,733			147,820,791			182,949,393
Total Assets		528,508,917			532,257,607			507,653,629			501,232,357			467,560,946
Total Deposits		369,170,787			343,326,624			335,617,664			333,428,874			277,870,361
Total Borrowings		123,266,528			138,825,684			140,079,676			137,610,667			157,301,172
Total Liabilities		497,147,789			499,790,343			479,291,017			474,976,163			441,591,209
Shareholders' Equity (Controlling Interest)		31,173,775			32,413,389			28,312,612			26,206,194			25,969,737

Selected Ratios and Per Share Data

Return (Loss) on Average Assets		(0.32	)%		(0.85	)%		0.39	%		0.29	%		0.91	%
Return (Loss) on Average Equity		(7.71	)%		(27.78	)%		7.25	%		5.43	%		15.94	%
Basic Net (Loss) Income Per Share (1)	$	(0.75	)	$	(1.92	)	$	0.82		$	0.60		$	1.72
Diluted Net (Loss) Income Per Share (1)		(0.75	)		(1.92	)		0.82			0.59			1.70
Price Per Common Share (1)		14.55			6.23			14.50			21.73			27.25
Book Value Per Common Share (1)		8.98			9.51			11.96			11.63			12.16
Dividends Declared:
Cash	$	0.10		$	0.60		$	0.60		$	0.60		$	0.57
Stock		-			-			5.00	%		5.00	%		5.00	%
Cash Dividend Yield		0.69	%		9.63	%		4.14	%		2.76	%		2.09	%

(1) All per-share data has been adjusted to give retroactive effect to all stock dividends and splits.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion of financial condition of the Company on a consolidated basis as of December 31, 2009 and 2008 and results of operations and analysis of the Company on a consolidated basis for the two years ended December 31, 2009 and 2008. The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiary, The First National Bank of Litchfield (the “Bank”) and the Bank’s wholly-owned subsidiaries, Lincoln Corporation and Litchfield Mortgage Service Corporation, as well as First Litchfield Leasing Corporation a subsidiary in which the Bank has 80% ownership. This discussion should be read in conjunction with the consolidated financial statements and the related notes of the Company presented elsewhere herein.

Critical Accounting Policies

In the ordinary course of business, the Bank has made a number of estimates and assumptions relating to the reported results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions.

The Bank utilizes a loan and lease review and rating process which classifies loans and leases according to the Bank’s uniform classification system in order to identify potential problem loans and leases at an early stage, alleviate weaknesses in the Bank’s lending

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policies, oversee the individual loan and lease rating system, and ensure compliance with the Bank’s underwriting, documentation, compliance, and administrative policies. Loans and leases included in this process are considered by management as being in need of special attention because of some deficiency related to the credit or documentation, but which are still considered collectible and performing. Such attention is intended to act as a preventative measure and thereby avoid more serious problems in the future.

ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance for loan and lease losses consists of specific, general, and unallocated components. The specific component relates to loans and leases that are classified as impaired. For impaired loans and leases, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan or lease is lower than the carrying value of that loan or lease. The general component covers non-impaired loans and leases and is based on historical loss experience adjusted for qualitative factors.

The Bank makes provisions for loan and lease losses on a quarterly basis as determined by a continuing assessment of the adequacy of the allowance for loan and lease losses. The Bank performs an ongoing review of loans and leases in accordance with an individual loan and lease rating system to determine the required allowance for loan and lease losses at any given date. The review of loans and leases is performed to estimate potential exposure to losses. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on an evaluation of the known and inherent risk characteristics and size of the loan and lease portfolios, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan and lease loss experience, review of regulatory authority examination reports and evaluations of impaired loans and leases, and other relevant factors. Loans and leases, including impaired loans and leases, are charged against the allowance for loan and lease losses when management believes that the uncollectibility of principal is confirmed. Any subsequent recoveries are credited to the allowance for loan and lease losses when received. In connection with the determination of the allowance for loan and lease losses and the valuation of foreclosed real estate, management obtains independent appraisals for significant properties, when considered necessary.

Management reassessed the allowance calculation during the third quarter of 2009. As a result of this assessment, loan categories were further segmented. Historical factors were modified to reflect the Company’s loss experience for loan categories for which the Company has had losses in recent years. Peer data was used for loan categories for which the Company has not experienced any losses in the past several years. Qualitative factors were reevaluated and additional factors were used to more accurately reflect trends in the portfolio. There were no material changes in loan or lease concentrations that had a significant effect on the allowance for loan and lease losses calculation at December 31, 2009. In addition, there were no material reallocations of the allowance among different parts of the loan or lease portfolio. The Company recorded a provision of approximately $3,669,000 for 2009 as compared to a provision of approximately $1,836,000 for 2008. The increased provision is reflective of specific allocations related to certain impaired or substandard loans. Additionally the increased provision was attributable to the weakness in the economic environment.

OTHER THAN TEMPORARY IMPAIRMENT (“OTTI”): The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investments. The available-for-sale portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. The held-to-maturity portfolio is carried at amortized cost. Management determines the classification of a security at the time of its purchase.

The Company conducts a periodic review of its investment securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is reported within noninterest income in the consolidated statement of income.

Significant judgment is involved in determining when a decline in fair value is other-than-temporary. The factors considered by management include, but are not limited to:

Whether the Company intends to sell the security and whether it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost basis, which may be maturity;

The length of time and the extent to which the fair value has been less than the amortized cost basis;

Adverse conditions specifically related to the security, an industry or a geographic area;

The historical and implied volatility of the fair value of the security;

The payment structure of the debt security and the likelihood of the issuer being able to make payment that increase in the future;

Failure of the issuer of the security to make scheduled interest or principal payments;

Any changes to the rating of the security by a rating agency;

Recoveries or additional declines in fair value subsequent to the balance sheet date.

Adverse changes in the factors used by management to determine if a security is OTTI could lead to additional impairment charges. Conditions affecting a security that the Company determined to be temporary could become other-than-temporary and warrant an impairment charge. Additionally, a security that had no apparent risk could be affected by a sudden or acute market condition and necessitate an impairment charge. During the third and fourth quarters of 2008, the Company recorded OTTI losses totaling $9,422,650 related to the Company’s investments in Freddie Mac and Fannie Mae preferred stock/auction rate securities holding such stock, and two pooled trust preferred securities. There have been no OTTI losses during 2009. The Company adopted the provisions of the FASB guidance issued in April 2009 relating to OTTI during the second quarter of 2009. Adoption of this guidance resulted in the reclassification of $2,511,080 ($1,657,313, net of tax) of non-credit related OTTI to accumulated other comprehensive income (“OCI”) which had previously been recognized as a loss in earnings and is disclosed in Note C - Investment Securities.

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INCOME TAXES: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets may be reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2009 and December 31, 2008, the Company had recorded net deferred income tax assets of approximately $5.1 million. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has reviewed the deferred tax position of the Company at December 31, 2009. The deferred tax position has been affected by several significant transactions in the past three years. These transactions included other-than-temporary impairment write-offs of certain investments and significant permanent differences between accounting and tax income such as non-taxable municipal security income, which securities have been sold and replaced with assets which will generate taxable income in the future, and certain specific expenditures not expected to reoccur. As a result, the Company is in a cumulative net loss position (pretax income (loss) for a three year period adjusted for permanent items) as of December 31, 2009. However, under the applicable accounting guidance, the Company has concluded that it is “more likely than not” that the Company will be able to realize its deferred tax assets based on the non-recurring nature of these items and the Company’s expectation of future taxable income. In the future, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the establishment of a valuation allowance for a portion or all of the deferred tax asset. The Company will continue to analyze the recoverability of its deferred tax assets quarterly.

FINANCIAL CONDITION

Total assets as of December 31, 2009 were $528,508,917, a decrease of $3,748,690, or .70% from year-end 2008 total assets of $532,257,607.

The net loan and lease (“loan”) portfolio as of December 31, 2009 totaled $370,617,392 and increased by 1.2% or $4,225,313, from the December 31, 2008 balance of $366,392,079. The volume of loan growth during 2009 was realized primarily in commercial mortgages and leases. Construction mortgages totaled $19,224,992 as of December 31, 2009 which is a decrease of $18,928,511 or 49.6% over the year-end 2008 balance. The commercial mortgage portfolio totaled $104,353,804 as of December 31, 2009, increasing $36,898,879 or 54.7% from the year-end 2008 balance of $67,454,925. Growth in commercial mortgages has been in fixed and variable rate products to commercial customers located in our traditional and contiguous markets. As a complement to the Bank’s commercial lending product line, First Litchfield Leasing Corporation began offering equipment financing leases to middle market companies during 2007. In 2009, the subsidiary funded over $17 million of loans and leases. Leases were in amounts ranging from $7,000 to $2,600,000. Lease receivables were $36,840,994 at December 31, 2009. Management attributes the increase in the business of the subsidiary to Bank cross sales and, more importantly, to the depth in experience and knowledge of the subsidiary’s management team. As of December 31, 2009, the installment loan portfolio totaled $4,954,486, a decrease of 3.1% from the year-end 2008 balance of $5,113,400. The decline in this portfolio is related to the amortization of a small pool of consumer auto loans purchased by the Company during 2006.

The securities portfolio totaled $95,426,206 as of December 31, 2009, a decrease of 15.9% from the December 31, 2008 balance of $113,502,751. The decrease in the portfolio is primarily due to a continued restructuring of the balance sheet towards a more profitable mix of earning assets which is focused on loans and leases rather than investments. In addition, during the year ended December 31, 2008, the Company recorded a loss of $9,422,650 related to the other-than-temporary impairment of the Company’s investments in Freddie Mac and Fannie Mae preferred stock and auction rate securities holding such stock, and two pooled trust preferred securities. There was no other-than-temporary impairment recorded during the year ended December 31, 2009. The Company adopted the provisions of the FASB guidance issued in April 2009 relating to OTTI during the second quarter of 2009. Adoption of this guidance resulted in the reclassification of $2,511,080 ($1,657,313, net of tax) of non-credit related OTTI to accumulated OCI which had previously been recognized as a loss in earnings and is disclosed in Note C - Securities to the financial statements.

Cash and cash equivalents totaled $26,798,671, as of December 31, 2009, which was an increase of $17,559,888, or 190.1% compared to the balance of $9,238,783 as of December 31, 2008. Cash and cash equivalents is comprised of vault cash, Federal funds sold, and balances at correspondent banks and the Federal Reserve Bank. The increase in cash and cash equivalents is due to the funds from the investment sales and calls temporarily invested at correspondent banks.

Net premises and equipment totaled $6,964,928 as of December 31, 2009, decreasing by $405,324 from the year-end 2008 balance of $7,370,252. Decreases in premises and equipment during 2009 were primarily related to the disposals of equipment as well as depreciation expense. During 2009, depreciation and amortization of bank premises and equipment totaled $682,248, and purchases totaled $282,257.

Deferred tax assets totaled $5,118,470 as of December 31, 2009, which is an increase of $35,513 from the December 31, 2008 balance of $5,082,957. Most of the increase was associated with the increase in the allowance for loan and lease losses and decrease in security write downs.

Regulatory prepaid assessments totaled $2,402,661 as of December 31, 2009, which is an increase of $2,332,901 from the December 31, 2008 balance of $69,760. This increase is the result of the FDIC rule that required insured depository institutions to prepay their quarterly

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risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009.

Total liabilities were $497,147,789 as of December 31, 2009, a decrease of $2,642,554 from the December 31, 2008 balance of $499,790,343.

Deposits as of December 31, 2009 were $369,170,787, increasing $25,844,163, or 7.53%, from the December 31, 2008 balance of $343,326,624. Noninterest-bearing demand deposits totaled $82,214,335 as of December 31, 2009, which was a 18.2% increase from the year-end 2008 balance. Savings deposits totaled $62,810,282, which was an increase of $4,227,906, or 7.2% from the December 31, 2008 balance. Growth in savings deposits was due to increases in traditional savings products including a business savings account. Additionally contributing to the growth in savings deposits was the popularity of the Bank’s health savings accounts (HSA). Money market deposits totaled $81,376,897, which was a decrease of $11,708,229, or 12.6% from the December 31, 2008 balance of $93,085,126. Higher balances held for the Bank’s trust customers also contributed to the increase in deposits. Time certificates of deposit totaled $142,769,273 as of December 31, 2009, which was an increase of 16.9%, or $20,658,412 from year-end 2008. The increase in time deposits is reflective of the customers’ desire for yield and the shifting of money market deposits into short term certificates of deposit. Additionally, there has been growth in the Bank’s CDARs deposits, which provide customers with FDIC deposit insurance beyond the $250,000 limit. As of December 31, 2009 and 2008, CDARs deposits totaled $20,463,000 and $15,902,000, respectively.

As of December 31, 2009, Federal Home Loan Bank (FHLBB) advances totaled $69,000,000 as compared to $81,608,000 as of December 31, 2008. At December 31, 2009, borrowings under repurchase agreements totaled $43,115,947, a decrease of $1,556,624 from the year-end 2008 balance of $44,672,571. As of December 31, 2009 and 2008, included in repurchase agreements was $20,615,947 and $18,222,571, respectively, of balances in the overnight investment product offered to the Bank’s commercial and municipal cash management customers. At December 31, 2009, total borrowings under repurchase agreements with financial institutions and FHLBB advances totaled $91,500,000 compared to the balance of $108,058,000 at December 31, 2008. As of December 31, 2009 and 2008, obligations under subordinated debt totaled $10,104,000. The subordinated debt represents the Company’s liability for junior subordinated notes with regard to First Litchfield Statutory Trust I and II, which were issued in 2003 and 2006, respectively. At year-end 2009 and 2008, the ratio of borrowed funds to total assets were 23.3% and 26.1%, respectively.

There were no collateralized borrowings as of December 31, 2009. Collateralized borrowings totaled $1,375,550 as of December 31, 2008. The borrowings were related to participation agreements for the sale of loans that included provisions for the Bank to repurchase the loans at its future discretion, and therefore, disqualifying the classification of these loans as sold.

RESULTS OF OPERATIONS - 2009 COMPARED TO 2008

Net interest income is the single largest source of the Company’s income. Net interest income is determined by several factors and is defined as the difference between interest and dividend income from earning assets, primarily loans, leases and investment securities, and interest expense on deposits and borrowed money.

For the year ended December 31, 2009, the Company reported a net loss available to common shareholders of $1,758,375 as compared to a net loss of $4,516,773 for the same period in 2008. Basic and diluted loss per common share for the year ended December 31, 2009 was $0.75, compared to basic and diluted loss per common share of $1.92 for the year ended December 31, 2008. The decrease in net loss available to common shareholders is due primarily to the loss on available-for-sale securities in 2008 which did not occur in 2009, partially offset by increases in the provision for loans and lease losses, loss due to dishonored items, and increases in other noninterest expenses. The net loss in 2008 is due primarily to the OTTI write-down on Freddie Mac and Fannie Mae preferred stock/auction rate securities holding such stock, and two trust preferred debt securities, recorded during the year. The net after tax effect of these charges reduced 2008 earnings by $6,218,949.

The Company’s return on average shareholders’ equity totaled (8)% for 2009 versus (28)% for 2008.

Net Interest Income

Net interest income for the year of 2009 totaled $15,330,939, an increase of 2.62% or $391,354, from 2008. See “Rate/Volume Analysis” below for a description of the various factors that impacted net interest income. Average earning assets, which represent the Company’s balance in loans, leases, investment securities and Federal funds sold, totaled $500 million for 2009, which was a .60% increase over the 2008 average of $497 million. Additionally, the change in the composition of earning assets was significant. Average loans and leases increased from $346,113,000 and 70% of average earning assets in 2008 to $385,949,000 and 77% of the average earning assets in 2009. The loan and lease growth was realized in the commercial lending, leasing and mortgage portfolios and was funded primarily by growth in savings and money market deposits as well as increases in borrowed money.

Net interest income on a fully tax-equivalent basis is comprised of the following for the years ended December 31,

	2009			2008
Interest and dividend income	$	25,038,819		$	28,188,882
Tax-equivalent adjustments (1)		344,541			618,353
Interest expense		(9,707,880	)		(13,249,297	)
Net interest income	$	15,675,480		$	15,557,938

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(1) Interest income is presented on a tax-equivalent basis which reflects a federal tax rate of 34% for all periods presented.

The following table presents on a tax-equivalent basis, the Company’s average balance sheet amounts (computed on a daily basis), net interest income, interest rates, interest spread, and net interest margin for the years ended December 31, 2009 and 2008. Average loans outstanding include nonaccrual loans. Interest income is presented on a tax-equivalent basis, which reflects a federal tax rate of 34% for all periods presented.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY;

INTEREST RATES AND INTEREST DIFFERENTIAL

	2009								2008
				Interest								Interest
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
Assets
Interest-Earning Assets:
Loans and leases	$	385,949,000		$	21,430,925		5.55	%	$	346,113,000		$	21,593,992		6.24	%
Investment securities		100,100,000			3,887,857		3.88	%		141,356,000			6,992,756		4.95	%
Other interest-earning assets		13,591,000			64,578		0.48	%		9,187,000			220,487		2.40	%

Total interest-earning assets		499,640,000			25,383,360		5.08	%		496,656,000			28,807,235		5.80	%

Allowance for loan and
lease losses		(4,341,000	)							(2,214,000	)
Cash and due from banks		26,666,000								10,899,000
Premises and equipment		7,192,000								7,533,000
Net unrealized losses on
securities		(751,000	)							(3,629,000	)
Foreclosed real estate		282,000								-
Other assets		19,144,000								17,832,000

Total Average Assets	$	547,832,000							$	527,077,000

Liabilities and Shareholders’ Equity

Interest-Bearing Liabilities:
Savings deposits	$	66,725,000	$	315,406	0.47	%	$	58,788,000	$	609,306	1.04	%
Money Market deposits		85,412,000		715,142	0.84	%		83,116,000		1,563,305	1.88	%
Time deposits		146,835,000		3,575,012	2.43	%		132,813,000		4,907,151	3.69	%
Borrowed funds		136,543,000		5,102,320	3.74	%		152,108,000		6,169,535	4.06	%

Total interest-bearing liabilities		435,515,000		9,707,880	2.23	%		426,825,000		13,249,297	3.10	%

Demand deposits		72,611,000						68,864,000
Other liabilities		6,887,000						5,128,000
Shareholders’ Equity		32,819,000						26,260,000

Total liabilities and equity	$	547,832,000					$	527,077,000

Net interest income			$	15,675,480					$	15,557,938
Net interest spread					2.85	%					2.70	%
Net interest margin					3.14	%					3.13	%

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Rate/Volume Analysis

The following table, which is presented on a tax-equivalent basis, reflects the changes for the year ended December 31, 2009 when compared to the year ended December 31, 2008 in net interest income arising from changes in interest rates and from changes in asset and liability volume. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro rata basis.

	2009 Compared to 2008
	Increase (Decrease) Due to

	Volume			Rate			Total
Interest earned on:
Loans and leases	$	2,345,587		$	(2,508,654	)	$	(163,067	)
Investment securities		(1,788,321	)		(1,316,578	)		(3,104,899	)
Other interest-earning assets		73,983			(229,892	)		(155,909	)
Total interest-earning assets		631,249			(4,055,124	)		(3,423,875	)

Interest paid on:
Deposits		579,823			(3,054,025	)		(2,474,202	)
Borrowed money		(603,234	)		(463,981	)		(1,067,215	)
Total interest-bearing liabilities		(23,411	)		(3,518,006	)		(3,541,417	)
Increase (decrease) in net interest income	$	654,660		$	(537,118	)	$	117,542

Tax equivalent net interest income for 2009 increased $117,542 or .76% from 2008. The increase in net interest income was due to increased margin resulting mainly from decreased funding costs in 2009. The 2009 net interest margin (net interest income divided by average earning assets) increased from the previous year’s level of 3.13% by 1 basis point to 3.14%. Interest income on average earning assets for 2009 totaled $25,383,360, which was a decrease of 11.89%, or $3,423,875 from 2008 interest income on average earning assets of $28,807,235. Interest expense totaled $9,707,880 for 2009, which was a decrease of $3,541,417 or 26.7% from 2008.

As shown in the Rate/Volume Analysis above, the increase in net interest income was impacted by the decrease in funding costs. The 2009 yield on average earning assets was 5.08% which was a decrease of 72 basis points from the 2008 yield of 5.80%. The related interest cost from average interest-bearing liabilities was 2.23% which was a decrease of 87 basis points from the 2008 cost of 3.10%. The decrease in costs is attributed to the decreases in short-term rates in the current interest rate environment.

Additionally, mitigating the overall decrease in yield on earning assets was the additional yield and income resulting from the changes in the earning asset mix. As shown in the Rate/Volume Analysis above, the increase in net interest income due to volume totaled $631,249. This increase is due to interest income on loans which increased by $2,345,587 reflecting increased volume in the loan portfolio which, on average, was $39.8 million higher than 2008 and a decrease of $1,788,321 due to the volume of the investment portfolio. In addition, the cost of funding declined by $23,411 due to reductions in the volume of interest bearing liabilities, resulting in a $654,660 net increase from volume considerations. Funding through borrowed money averaged $136,543,000 which was a decrease of $15,565,000, or 10.2% from the 2008 average.

Noninterest Income (Loss)

Noninterest income for 2009 totaled $4,455,358, which is a difference of $9,817,463, or 183.1% from 2008 noninterest loss of $5,362,105. The 2008 noninterest loss largely reflected OTTI charges of $9,422,650 related to the OTTI write downs of the Bank’s investments in Freddie Mac and Fannie Mae preferred stock and auction rate securities holding such stock and two pooled trust preferred securities. There were no similar writedowns during 2009. During 2009, the Company sold $79 million of available-for-sale securities. The purpose of these sales was to decrease interest rate risk, improve balance sheet liquidity, and reduce price volatility. The net gains from these sales totaled $465,737. During 2008, available-for-sale securities were sold for the purpose of enhancing credit quality, shortening the duration of the portfolio, and to deleverage the balance sheet. These sales resulted in net gains totaling $537,790.

Other areas of noninterest income also contributed to the change from 2008 results. Service charges and fee income totaled $1,614,064, compared to 2008 income of $1,543,519. The increase from 2008 levels is a result of revenue opportunities from deposit accounts and cash management services.

During 2009, the Company sold residential mortgages in the secondary market which resulted in gains on sales of loans totaling $578,714 compared to sales transacted during 2008 which resulted in gains totaling $41,541. Included in those sales was a sale of 94 mortgages totaling $13 million executed during the third quarter of 2009. These sales were transacted with the purpose of reducing interest rate risk and improving the Company’s liquidity position.

Other noninterest income totaled $173,806 at December 31, 2009, as compared to $241,423 at December 31, 2008. The decrease is primarily related to the decline in retail investment income due to the weakened economy.

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Noninterest Expenses

Noninterest expenses totaled $18,274,373 in 2009, an increase of 19.1%, or $2,934,224, from 2008 noninterest expenses of $15,340,149. The increase in noninterest expense is due to higher costs in legal fees, FDIC assessments, computer services, commissions, services and fees, loss due to dishonored items, and other noninterest expenses.

Legal fees totaled $533,130 for 2009 which was an increase of $226,126 or 73.7% from 2008 legal fees of 307,004. This increase is the result of increased collection fees and merger related expenses. Regulatory assessments which totaled $1,127,899 for 2009 was an increase of $807,100 or 251.6% over the 2008 costs of $320,799 primarily due to increased premiums and the 2009 special assessment. Exam and audit fees totaled $804,600 for 2009 which was an increase of $440,443 or 121% from 2008. Much of this increase is the result of hiring consultants for Sarbanes Oxley compliance audit services. Computer services costs totaled $1,123,942 for 2009 which was an increase of $95,736, or 9.3% from 2008 costs of $1,028,206. This increase is primarily due to vendor credits from the Bank’s core processor which were used during 2008. Commissions, services and fees expenses totaled $589,923, increasing $193,873, from 2008. The majority of this expense for 2009 was advice and consulting relating to corporate initiatives, investment and interest rate risk, lending, trust, retail and personnel. Also, during 2009 the Company created an accrual of $768,583 related to the dishonor of fraudulent items; there were no comparable items in 2008. No further losses related to these items are anticipated. Other real estate owned expenses totaled $228,127 for 2009, which includes the loss on sale of other real estate owned property of $102,180. There was no other real estate owned as of December 31, 2008. Other noninterest expenses totaled $1,522,438 and increased 38.2% over the 2008 expenses. This expense includes costs for travel, contributions, and insurance.

Nonaccrual, Past Due, Restructured Loans and Leases and Other Real Estate Owned

The Bank’s nonaccrual loans and leases (“loans”), other real estate owned (“OREO”), and loans and leases past due in excess of ninety days and accruing interest at December 31, 2005 through 2009 are presented below.

	December 31,
	2009		2008		2007		2006		2005

Nonaccrual loans and leases	$	12,507,467	$	5,639,735	$	2,959,074	$	1,504,551	$	273,330
Other real estate owned (OREO)		312,000		-		-		-		-
Total nonperforming assets	$	12,819,467	$	5,639,735	$	2,959,074	$	1,504,551	$	273,330

Loans and leases past due in excess of
90 days and accruing interest	$	9,653	$	19,603	$	3,111	$	343	$	4,884

The accrual of interest income is generally discontinued when a loan or lease becomes 90 days past due as to principal or interest, or when, in the judgment of management, collectibility of the loan, lease or loan interest become uncertain. When accrual of interest is discontinued, any unpaid interest previously accrued is reversed from income. Subsequent recognition of income occurs only to the extent payments are received subject to management’s assessment of the collectibility of the remaining principal and interest. The accrual of interest on loans and leases past due 90 days or more, including impaired loans and leases, may be continued when the value of the loan’s or lease’s collateral is believed to be sufficient to discharge all principal and accrued interest income due on the loan or lease, and the loan or lease is in the process of collection. A nonaccrual loan or lease is restored to accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt. A loan or lease is classified as a “troubled debt restructured” loan or lease when certain concessions have been made to the original contractual terms, such as reduction of interest rates or deferral of interest or principal payments, due to the borrower’s financial condition. OREO is comprised of properties acquired through foreclosure proceedings and acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair value less estimated costs of disposal. At the time these properties are obtained, they are recorded at fair value with any difference between carrying value and fair value reflected as a direct charge against the allowance for loan and lease losses which establishes a new cost basis. Any subsequent declines in value are charged to income with a corresponding adjustment to the allowance for foreclosed real estate. Revenue and expense from the operation of foreclosed real estate and changes in the valuation allowance are included in operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value. Upon disposition, gains and losses, to the extent they exceed the corresponding valuation allowance, are reflected in the statement of operations.

At December 31, 2009 and 2008, there were no loans that were considered as “troubled debt restructurings.”

Had the nonaccrual loans and leases performed in accordance with their original terms, gross interest income for the years ended December 31, 2009 and 2008 would have increased by approximately $365,000 and $163,000, respectively.

The Bank considers all nonaccrual loans and leases, other loans and leases past due 90 days or more based on contractual terms, and troubled debt restructured loans and leases to be impaired. A loan or lease is considered impaired when it is probable that the Bank will be unable to collect amounts due, both principal and interest, according to the contractual terms of the loan or lease agreement. When a loan or lease is impaired, impairment is measured using (1) the present value of expected future cash flows of the impaired loan or lease discounted at the loan’s or lease’s original effective interest rate; (2) the observable market price of the impaired loan or lease; or (3) the fair value of the collateral of a collateral-dependent loan or lease. When a loan or lease has been deemed to have impairment, a valuation allowance is established for the amount of impairment.

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The following table summarizes the Bank’s OREO, past due, and nonaccrual loans and leases, and non-performing assets as of December 31, 2009, 2008, 2007, 2006 and 2005.

	December 31,
	2009			2008			2007			2006			2005
Nonaccrual loans and leases	$	12,507,467		$	5,639,735		$	2,959,074		$	1,504,551		$	273,330
Other real estate owned		312,000			-			-			-			-
Total non-performing assets	$	12,819,467		$	5,639,735		$	2,959,074		$	1,504,551		$	273,330
Loans and leases past due in excess of ninety days
and accruing interest	$	9,653		$	19,603		$	3,111		$	343		$	4,884
Ratio of non-performing assets to total loans,
leases and OREO		3.41	%		1.52	%		0.90	%		0.51	%		0.11	%
Ratio of non-performing assets and loans and
leases past due in excess of ninety days accruing
interest to total loans, leases and OREO		3.41	%		1.53	%		0.90	%		0.51	%		0.11	%
Ratio of allowance for loan and lease losses to total
loans and leases		1.61	%		1.00	%		0.65	%		0.71	%		0.73	%
Ratio of allowance for loan and lease losses to
non-performing assets and loans and leases in excess of
ninety days past due and accruing interest		47.30	%		65.36	%		72.64	%		139.95	%		632.47	%
Ratio of non-performing assets, loans and leases
in excess of ninety days past due and accruing interest
to total shareholders' equity		41.15	%		17.46	%		10.46	%		5.74	%		1.07	%

Total non-performing assets increased by $7,179,732, or 127.31%, to $12,819,467 at December 31, 2009, from $5,639,735 at December 31, 2008. The increase in non-performing assets from year-end 2008 is due mostly to the addition of a small number of mid-size mortgages and commercial loans and leases during 2009. Additionally, as of December 31, 2009 there was approximately $94,000 in purchased sub-prime consumer loans included in nonperforming loans which was a decrease of $76,000 from December 31, 2008. As of December 31, 2009 and 2008, loans and leases past due in excess of ninety days and accruing interest totaled $9,653 and $19,603, respectively.

Total non-performing assets represented 3.41% of total loans, leases, and other real estate owned at year-end December 31, 2009 compared to 1.52% at year-end 2008. The allowance for loan and lease losses as of December 31, 2009 was 1.61% of total loans and leases, as compared to the level from 2008 when the allowance was approximately 1.00% of total loans and leases. The allowance for loan and lease losses was equivalent to 47.30% of nonaccrual loans and leases at December 31, 2009, as compared to 65.36% at December 31, 2008. The decrease in the coverage ratio is a result of increased level of non-performing assets at year end 2009.

Potential Problem Loans and Leases

As of December 31, 2009, there were no potential problem loans or leases not disclosed above which cause management to have serious doubts as to the ability of such borrowers to comply with their present loan or lease repayment terms.

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Allowance for Loan and Lease Losses

The following table summarizes the activity in the allowance for loan and lease losses for the years ended December 31, 2005 through 2009. The allowance is maintained at a level consistent with the identified loss potential and the perceived risk in the portfolio.

	(Dollar Amounts in Thousands)
	December 31,
	2009			2008			2007			2006			2005

Balance, at beginning of period	$	3,699		$	2,152		$	2,106		$	1,760		$	1,390
Loans and Leases charged-off:
Commercial and Real Estate		541			90			16			-			37
Installment loans		1,118			287			160			96			60
		1,659			377			176			96			97
Recoveries on loans and leases charged-off:
Commercial and Real Estate		-			-			-			1			81
Installment loans		359			88			18			21			44
		359			88			18			22			125
Net loan charge-offs/(recoveries)		1,300			289			158			74			(28	)
Provisions charged to operations		3,669			1,836			204			420			342
Balance, at the end of period	$	6,068		$	3,699		$	2,152		$	2,106		$	1,760
Ratio of net charge-offs/(recoveries) during the period
to average loans and leases outstanding during the period		0.35	%		0.08	%		0.05	%		0.03	%		-0.01	%
Ratio of allowance for loan and lease losses
to total loans and leases		1.61	%		1.00	%		0.65	%		0.71	%		0.73	%

During 2009, net charge-offs totaled $1,300,000, which is an increase of $1,011,000 from 2008 net charge-offs of $289,000. The increase in net charge-offs was due to a higher level of net charge-offs in the installment loan portfolio. During 2009 and 2008, the Bank experienced higher levels of charge-offs, which were primarily related to a pool of subprime consumer auto loans the Bank purchased during 2006. Net charge-offs totaled $759,000 from installment loans in 2009 increasing from $199,000 in 2008. The increased level of net charge-offs is related to losses on loans whereby the collateral asset value was considerably less than the loan amount.

The following table reflects the allowance for loan and lease losses as of December 31, 2009, 2008, 2007, 2006, and 2005.

	Analysis of Allowance for Loan and Lease Losses
	(Amounts in thousands)
	December 31,
Loans and
Leases by Type	2009					2008					2007					2006					2005
	Allocation		Percentage			Allocation		Percentage			Allocation		Percentage			Allocation		Percentage			Allocation		Percentage
	of Allowance		of Loans			of Allowance		of Loans			of Allowance		of Loans			of Allowance		of Loans			of Allowance		of Loans
	for Loan and		in each			for Loan and		in each			for Loan and		in each			for Loan and		in each			for Loan and		Each
	Lease Losses		Category			Lease Losses		Category			Lease Losses		Category			Lease Losses		Category			Lease Losses		Category
			to Total					to Total					to Total					to Total					to Total
			Loans					Loans					Loans					Loans					Loans

Commercial	$	972		10.95	%	$	981		12.52	%	$	317		10.23	%	$	204		9.13	%	$	357		8.73	%
Real Estate
Construction		406		5.11	%		570		10.32	%		231		10.58	%		480		10.36	%		224		11.79	%
Residential		1,894		45.05	%		1,068		52.13	%		863		57.61	%		769		59.97	%		411		60.26	%
Commercial		2,315		27.75	%		678		18.26	%		465		16.94	%		401		18.05	%		518		17.40	%
Installment		106		1.32	%		210		1.38	%		180		1.98	%		181		2.43	%		54		1.79	%
Other		112		0.02	%		18		0.03	%		16		0.03	%		17		0.06	%		38		0.03	%
Commercial
Leases		263		9.80	%		174		5.36	%		80		2.63	%		-		-			-		-
Unallocated		-		-			-		-			-		-			54		-			158		-
Total	$	6,068		100	%	$	3,699		100	%	$	2,152		100	%	$	2,106		100	%	$	1,760		100	%

The unallocated portion of the allowance in 2005 and 2006 reflects management’s estimate of probable but unconfirmed losses inherent in the portfolio. Such estimates are influenced by uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.

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LIQUIDITY

Management’s objective is to ensure continuous ability to meet cash needs as they arise. Such needs may occur from time to time as a result of fluctuations in loan and lease demand and the level of total deposits. Accordingly, the Bank has a liquidity policy that provides flexibility to meet cash needs. The liquidity objective is achieved through the maintenance of readily marketable investment securities as well as a balanced flow of asset maturities, and prudent pricing on loan, lease, and deposit products. Management believes that the liquidity is adequate to meet the Company’s future needs.

The Bank is a member of the Federal Home Loan Bank System (“FHLB”), which provides credit to its member banks. This enhances the liquidity position of the Bank by providing a source of available overnight as well as short-term borrowings. Additionally, borrowings through repurchase agreements, federal funds, and the sale of mortgage loans in the secondary market are available to fund short-term cash needs. The Company is aware of recent news and FHLB member bank press releases regarding the financial strength of the FHLB system. The Company is actively monitoring its ability to borrow from the FHLB Bank of Boston and has determined additional sources of liquidity as part of the aforementioned liquidity policy.

SHORT-TERM BORROWINGS

The following information relates to the Bank’s short-term borrowings at the Federal Home Loan Bank for the years ended December 31:

	2009			2008
Balance at December 31,	$	-		$	1,608,000
Maximum Month-End Borrowings		21,028,000			17,300,000
Average Balance		4,848,627			4,156,000
Average Rate at Year-End		0.00	%		0.46	%
Average Rate during the Period		0.28	%		1.73	%

The following information relates to the Bank’s short-term repurchase agreements with customers for the years ended December 31:

	2009			2008
Balance at December 31,	$	20,615,947		$	18,222,571
Maximum Month-End Borrowings		27,035,493			23,151,139
Average Balance		20,484,434			13,499,884
Average Rate at Year-End		0.68	%		1.42	%
Average Rate during the Period		0.99	%		1.93	%

OFF-BALANCE SHEET ARRANGEMENTS

See Note Q on page F-36 of the consolidated financial statements for the disclosure of off-balance sheet arrangements.

CAPITAL

At December 31, 2009, total shareholders’ equity was $31,361,128 compared to $32,467,264 at December 31, 2008. From a regulatory perspective, the Bank’s capital ratios place the Bank in the well-capitalized categories under applicable regulations. The various capital ratios of the Company and the Bank are as follows as of December 31, 2009:

	Minimum
	Regulatory
	Capital Level			The Company			The Bank

Tier 1 leverage capital ratio		4	%		7.34	%		7.02	%

Tier 1 risk-based capital ratio		4	%		10.25	%		9.83	%

Total risk-based capital ratio		8	%		11.50	%		11.09	%

Included in the Company’s capital used to determine these ratios at December 31, 2009 and December 31, 2008 is $9.8 million related to the Company’s investment in First Litchfield Statutory Trust I and First Litchfield Statutory Trust II, which is recorded as subordinated debt in the Company’s balance sheets at December 31, 2009 and 2008, respectively. Trust preferred securities are currently considered regulatory capital for purposes of determining the Company’s Tier I capital ratios. On March 1, 2005, the Board of Governors of the Federal Reserve System, which is the Company’s banking regulator, approved final rules that allow for the continued inclusion of outstanding and prospective issuances of trust preferred securities in regulatory capital subject to new, stricter limitations. The Company has until March 31, 2011, (previously March 31, 2009), to meet the new limitations. Management does not believe these final rules will have a significant impact on the Company. On December 12, 2008, the Company participated in the United States Department of the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (“CPP” also known as TARP capital), and issued $10,000,000 of cumulative perpetual preferred stock with a common stock warrant attached to the U. S. Treasury. The Company’s purpose in participating in the TARP CPP was to insure that the Company and the Bank maintained their well-capitalized status given the uncertain economic environment.

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On December 12, 2008, under the TARP CPP, the Company sold 10,000 shares of senior preferred stock to the U.S. Treasury, having a liquidation amount equal to $1,000 per share, or $10,000,000. Although the Company was well-capitalized under regulatory guidelines, the Board of Directors believed it was advisable to take advantage of the TARP CPP to raise additional capital to ensure that during these uncertain times, the Company is well-positioned to support its existing operations as well as anticipated future growth. Additional information concerning the TARP CPP is included in the Company’s 2008 Form 10-K/A Amendment Number One, as filed with the Securities Exchange Commission on April 23, 2009.

The Company expects that it (and the banking industry as a whole) may be required by market forces and/or regulation to operate with higher capital ratios than in the recent past. In addition, as the cumulative dividend rate on the senior preferred stock issued in the TARP CPP increases from 5% to 9% in 2013, the Company will incur increased capital costs if the senior preferred stock is not redeemed at, or prior to, that time. Therefore, in addition to maintaining higher levels of capital, the Company’s capital structure may be subject to greater variation over the next few years than has been true historically.

INCOME TAXES

The income tax benefit for 2009 totaled $1,083,354 in comparison to income tax benefit of $3,112,459 in 2008. The change in income tax benefit between 2009 and 2008 is due to the pretax loss in 2008, as a result of the OTTI charges during the year. The effective tax rates for 2009 and 2008 were (50) % and (41) %, respectively. Also, in both years, provisions for income taxes included the tax benefit related to income associated with Litchfield Mortgage Service Corporation (“LMSC”), which was formed by the Bank in 2000. The income from LMSC is considered passive investment income pursuant to Connecticut law, under which LMSC was formed and is operating, and is not subject to state taxes which resulted in no state tax expense for all years.

IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and related notes thereto presented elsewhere herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative value of money over time due to inflation. Unlike many industrial companies, most of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable as the registrant is not an accelerated filer or large accelerated filer.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Annual Financial Information

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets at December 31, 2009 and 2008	F-2

Consolidated Statements of Operations for the Years Ended
December 31, 2009 and 2008	F-3

Consolidated Statements of Changes in Shareholders’ Equity for the
Years Ended December 31, 2009 and 2008	F-4

Consolidated Statements of Cash Flows for the Years
Ended December 31, 2009 and 2008	F-5 to F-6

Notes to Consolidated Financial Statements	F-7 to F-46

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

First Litchfield Financial Corporation and Subsidiary

We have audited the accompanying consolidated balance sheets of First Litchfield Financial Corporation and Subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Litchfield Financial Corporation and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As described in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for their endorsement split-dollar life insurance arrangements in 2008 and noncontrolling interest in 2009 upon the adoption of new accounting pronouncements.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 included in the accompanying “Management’s Report on Internal Control Over Financial Reporting” and accordingly, we do not express an opinion thereon.

/s/ McGladrey & Pullen, LLP

New Haven, Connecticut

March 31, 2010

F-1

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CONSOLIDATED BALANCE SHEETS

As of December 31,	2009			2008

ASSETS
Cash and due from banks	$	26,520,349		$	9,238,320
Interest-bearing accounts due from banks		278,322			463
CASH AND CASH EQUIVALENTS		26,798,671			9,238,783
Securities:
Available for sale securities, at fair value		95,411,705			113,486,201
Held to maturity securities (fair value $14,920-2009 and $16,553-2008)		14,501			16,550
TOTAL SECURITIES		95,426,206			113,502,751

Federal Home Loan Bank stock, at cost		5,427,600			5,427,600
Federal Reserve Bank stock, at cost		225,850			225,850
Other restricted stock, at cost		105,000			100,000
Loans held for sale		80,000			1,013,216

Loan and lease receivables, net of allowance for loan and lease
losses of $6,068,108 –2009 and $3,698,820 –2008
NET LOANS AND LEASES		370,617,392			366,392,079
Premises and equipment, net		6,964,928			7,370,252
Foreclosed real estate		312,000			-
Deferred income taxes		5,118,470			5,082,957
Accrued interest receivable		1,665,569			2,262,918
Cash surrender value of insurance		10,809,172			10,416,651
Due from broker for security sales		132,000			9,590,823
Regulatory prepaid assessment		2,402,661			69,760
Other assets		2,423,398			1,563,967

TOTAL ASSETS	$	528,508,917		$	532,257,607
LIABILITIES		-
Deposits:
Noninterest-bearing	$	82,214,335		$	69,548,261
Interest-bearing		286,956,452			273,778,363
TOTAL DEPOSITS		369,170,787			343,326,624

Federal Home Loan Bank advances		69,000,000			81,608,000
Repurchase agreements with financial institutions		22,500,000			26,450,000
Repurchase agreements with customers		20,615,947			18,222,571
Junior subordinated debt issued by unconsolidated trust		10,104,000			10,104,000
Collateralized borrowings		-			1,375,550
Capital lease obligation		1,046,581			1,065,563
Due to broker for security purchases		-			12,994,945
Accrued expenses and other liabilities		4,710,474			4,643,090

TOTAL LIABILITIES		497,147,789			499,790,343

Commitments and contingencies

EQUITY
SHAREHOLDERS’ EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized
2009 - 10,000 shares issued and outstanding
2008 - 10,000 shares issued and outstanding		-			-
Common stock $.01 par value; 5,000,000 shares authorized
2009 - Issued – 2,506,622 shares, outstanding – 2,356,875 shares
2008 - Issued – 2,506,622 shares, outstanding – 2,356,875 shares		25,046			25,038
Additional paid-in capital		37,952,965			37,892,831
Accumulated deficit		(3,662,694	)		(3,325,920	)
Less: Treasury stock at cost- 149,747 as of 12/31/09 and 12/31/08		(1,154,062	)		(1,154,062	)
Accumulated other comprehensive loss, net of taxes		(1,987,480	)		(1,024,498	)
TOTAL FIRST LITCHFIELD FINANCIAL CORPORATION
SHAREHOLDERS’ EQUITY		31,173,775			32,413,389

NONCONTROLLING INTERESTS		187,353			53,875

TOTAL EQUITY		31,361,128			32,467,264

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	528,508,917		$	532,257,607

See Notes to Consolidated Financial Statements.

F-2

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CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,	2009		2008

INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases	$	21,417,284	$	21,579,957
Interest and dividends on securities:
Mortgage-backed securities		2,258,412		3,320,225
US Treasury and other securities		461,864		1,580,125
State and municipal securities		696,590		1,118,924
Trust Preferred and other securities		140,091		369,164
Total interest on securities		3,556,957		6,388,438
Other interest income		64,578		220,487
TOTAL INTEREST AND DIVIDEND INCOME		25,038,819		28,188,882
INTEREST EXPENSE
Interest on deposits:
Savings		315,406		609,306
Money market		715,142		1,563,305
Time certificates of deposit		3,575,012		4,907,151
TOTAL INTEREST ON DEPOSITS		4,605,560		7,079,762
Interest on Federal Home Loan Bank advances		3,458,158		3,970,574
Interest on repurchase agreements		1,014,154		1,430,176
Interest on subordinated debt		515,153		606,396
Interest on collateralized borrowings		58,837		105,393
Interest on capital lease obligation		56,018		56,996
TOTAL INTEREST EXPENSE		9,707,880		13,249,297
NET INTEREST INCOME		15,330,939		14,939,585
PROVISION FOR LOAN AND LEASE LOSSES		3,669,209		1,836,299
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		11,661,730		13,103,286
NONINTEREST INCOME (LOSS)
Banking service charges and fees		1,614,064		1,543,519
Trust		1,230,515		1,300,162
Gains (losses) from sales and impairment of available for sale securities		465,737		(8,884,860	)
Increase in cash surrender value of life insurance		392,522		396,110
Gains on sale of loans		578,714		41,541
Other		173,806		241,423
TOTAL NONINTEREST INCOME (LOSS)		4,455,358		(5,362,105	)
NONINTEREST EXPENSE
Salaries		6,582,013		6,670,676
Employee benefits		1,818,638		1,731,064
Net occupancy		1,206,163

FIRST LITCHFIELD FINANCIAL CORP 10-K