UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

|X|   QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
      1934

               For the Quarterly period ended: September 30, 2009

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 or 15(d)  OF THE  SECURITIES
      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                                (I.R.S. Employer
incorporation of organization)                               Identification No.)

   13 North Street, Litchfield, CT                                    06759
   -------------------------------                                    -----
(Address of principal executive offices)                           (Zip Code)

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

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                            Yes |X|         No  |_|

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted  and posted  pursuant to Rule 405 of  Regulation  S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes   [_]      No   [_]


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, a  non-accelerated  filer or a smaller  reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [_]   Accelerated filer [_] Non-accelerated filer [_]

Smaller reporting company [X]

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

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  2,356,875  shares of Common
Stock, par value $.01 per share, were outstanding at November 10, 2009.


<PAGE>


                     FIRST LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q
                                      INDEX
<TABLE>
<CAPTION>
                                                                                       Page
<S>                                                                                    <C>
    Part I - Financial Information

           Item 1 - Financial Statements

           Consolidated Balance Sheets - September 30, 2009 and December 31, 2008
           (unaudited) ............................................................       3

           Consolidated Statements of Operations - Three and Nine months ended
           September 30, 2009 and 2008 (unaudited) ................................       4

           Consolidated Statements of Changes in Shareholders' Equity - Nine months
           ended September 30, 2009 and 2008 (unaudited) ..........................       5

           Consolidated Statements of Cash Flows - Nine months ended
           September 30, 2009 and 2008 (unaudited) ................................       6

           Notes to Consolidated Financial Statements (unaudited) .................       7

           Item 2 - Management's Discussion and Analysis of Financial Condition
           and Results of Operations ..............................................      33

           Item 3 - Quantitative And Qualitative Disclosures About Market Risk ....      53

           Item 4 - Controls and Procedures .......................................      53

    Part II - Other Information

           Item 1 - Legal Proceedings .............................................      53

           Item 1A - Risk Factors .................................................      53

           Item 2 - Unregistered Sales of Equity Securities and
           Use of Proceeds ........................................................      53

           Item 3 - Defaults Upon Senior Securities ...............................      53

           Item 4 - Submission of Matters to a Vote of Security Holders ...........      53

           Item 5 - Other Information .............................................      53

           Item 6 - Exhibits ......................................................      54

    Signatures ....................................................................      56
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)                                          September 30,      December 31,
                                                                                     2009              2008
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>
    ASSETS
         Cash and due from banks                                                 $  43,182,377     $   9,238,320
         Interest - bearing accounts due from banks                                     61,209               463
                                                                                 -------------     -------------
                           CASH AND CASH EQUIVALENTS                                43,243,586         9,238,783
                                                                                 -------------     -------------
         Securities:
             Available for sale securities, at fair value                           98,308,680       113,486,201
             Held to maturity securities (fair value $15,420 -2009
             and $16,553-2008)                                                          15,064            16,550
                                                                                 -------------     -------------
                                    TOTAL SECURITIES                                98,323,744       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                                                            95,000         1,013,216

         Loan and lease receivables, net of allowance for loan and lease
             losses of  $6,084,194 -2009, $3,698,820-2008
                                 NET LOANS AND LEASES                              376,566,884       366,392,079
         Premises and equipment, net                                                 7,098,133         7,370,252
         Foreclosed real estate                                                        547,040                --
         Deferred income taxes                                                       5,327,407         5,082,957
         Accrued interest receivable                                                 1,939,745         2,262,918
         Cash surrender value of life insurance                                     10,710,080        10,416,651
         Due from broker for security sales                                                 --         9,590,823
         Other assets                                                                1,593,294         1,633,727
                                                                                 -------------     -------------

                                        TOTAL ASSETS                             $ 551,203,363     $ 532,257,607
                                                                                 =============     =============
    LIABILITIES
         Deposits:
             Noninterest bearing                                                 $  70,023,494     $  69,548,261
             Interest bearing                                                      312,500,950       273,778,363
                                                                                 -------------     -------------
                                      TOTAL DEPOSITS                               382,524,444       343,326,624

         Federal Home Loan Bank advances                                            80,000,000        81,608,000
         Repurchase agreements with financial institutions                          22,500,000        26,450,000
         Repurchase agreements with customers                                       19,409,085        18,222,571
         Junior subordinated debt issued by unconsolidated trust                    10,104,000        10,104,000
         Collateralized borrowings                                                          --         1,375,550
         Capital lease obligation                                                    1,051,421         1,065,563
         Due to broker for security purchases                                               --        12,994,945
         Accrued expenses and other liabilities                                      4,225,497         4,643,090
                                                                                 -------------     -------------

                                   TOTAL LIABILITIES                               519,814,447       499,790,343
                                                                                 -------------     -------------

    EQUITY
    SHAREHOLDERS' EQUITY
         Preferred stock $.00001 par value; 1,000,000 shares authorized,
           10,000 shares outstanding as of 9/30/09 and 12/31/08                             --                --
         Common stock $.01 par value
             Authorized - 5,000,000 shares
             2009 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares
             2008 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares           25,044            25,038
         Additional paid-in capital                                                 37,937,617        37,892,831
         Accumulated deficit                                                        (3,781,940)       (3,325,920)
         Less: Treasury stock at cost- 149,747 as of 9/30/09 and 12/31/08           (1,154,062)       (1,154,062)
         Accumulated other comprehensive loss, net of taxes                         (1,786,077)       (1,024,498)
                                                                                 -------------     -------------
             TOTAL FIRST LITCHFIELD FINANCIAL CORPORATION
                                SHAREHOLDERS' EQUITY                                31,240,582        32,413,389
                                                                                 -------------     -------------
    NONCONTROLLING INTERESTS                                                           148,334            53,875
                                                                                 -------------     -------------
                                        TOTAL EQUITY                                31,388,916        32,467,264
                                                                                 -------------     -------------


          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $ 551,203,363     $ 532,257,607
                                                                                 =============     =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
                                                                    Three Months Ended                  Nine Months Ended
                                                                        September  30,                     September 30,
                                                                   2009              2008             2009               2008
                                                               ------------     -------------     -------------     --------------
<S>                                                            <C>              <C>               <C>               <C>
    INTEREST AND DIVIDEND INCOME
         Interest and fees on loans and leases                 $  5,328,296     $   5,363,809     $  16,217,789     $   16,200,748
                                                               ------------     -------------     -------------     --------------

         Interest and dividends on securities:
             Mortgage-backed securities                             450,007           991,860         1,837,716          2,647,249
             US Treasury and other securities                        87,288           397,073           361,834          1,325,699
             State and municipal securities                         200,673           279,144           626,860            905,529
             Trust Preferred and other securities                    17,976            65,299           120,521            285,075
                                                               ------------     -------------     -------------     --------------
                  Total interest on securities                      755,944         1,733,376         2,946,931          5,163,552
                                                               ------------     -------------     -------------     --------------
         Other interest income                                       27,219            43,482            47,684            210,868
                                                               ------------     -------------     -------------     --------------
                      TOTAL INTEREST AND DIVIDEND INCOME          6,111,459         7,140,667        19,212,404         21,575,168
                                                               ------------     -------------     -------------     --------------

    INTEREST EXPENSE
         Interest on deposits:
             Savings                                                 65,163           173,193           255,021            479,079
             Money market                                           131,823           363,373           603,929          1,185,540
             Time certificates of deposit                           937,871         1,130,642         2,774,018          3,976,610
                                                               ------------     -------------     -------------     --------------
                              TOTAL INTEREST ON DEPOSITS          1,134,857         1,667,208         3,632,968          5,641,229
         Interest on Federal Home Loan Bank advances                850,917         1,013,339         2,616,091          3,035,762
         Interest on repurchase agreements                          230,128           398,077           785,004          1,147,314
         Interest on subordinated debt                              139,273           137,523           377,276            453,284
         Interest on collateralized borrowings                       15,686            25,418            58,837             80,221
         Interest on capital lease obligation                        13,973            14,220            42,108             42,837
                                                               ------------     -------------     -------------     --------------
                                  TOTAL INTEREST EXPENSE          2,384,834         3,255,785         7,512,284         10,400,647
                                                               ------------     -------------     -------------     --------------
                                     NET INTEREST INCOME          3,726,625         3,884,882        11,700,120         11,174,521
    PROVISION FOR LOAN AND LEASE LOSSES                           2,682,691           155,000         3,470,280            367,000
                                                               ------------     -------------     -------------     --------------
                     NET INTEREST INCOME AFTER PROVISION
                               FOR LOAN AND LEASE LOSSES          1,043,934         3,729,882         8,229,840         10,807,521
                                                               ------------     -------------     -------------     --------------
    NONINTEREST INCOME (LOSS)
         Banking service charges and fees                           412,883           417,803         1,165,371          1,143,723
         Trust                                                      345,357           319,049           892,896            992,142
         (Losses) gains on available for sale securities             (6,490)       (6,720,523)          314,584         (6,687,682)
         Increase in cash surrender value of life insurance          99,224           101,702           293,429            299,279
         Gains on the sale of loans                                 349,294            17,085           509,552             34,904
         Other                                                       14,767            57,356            83,721            200,041
                                                               ------------     -------------     -------------     --------------
                         TOTAL NONINTEREST INCOME (LOSS)          1,215,035        (5,807,528)        3,259,553         (4,017,593)
                                                               ------------     -------------     -------------     --------------
    NONINTEREST EXPENSE
         Salaries                                                 1,689,178         1,650,937         4,878,218          4,968,276
         Employee benefits                                          440,930           406,287         1,350,877          1,298,126
         Net occupancy                                              290,254           293,833           919,779            898,056
         Equipment                                                  137,492           151,144           434,010            465,528
         Legal fees                                                 128,647            85,703           370,440            203,323
         Directors fees                                              43,925            51,175           137,900            151,475
         Computer services                                          291,898           259,291           870,125            746,378
         Supplies                                                    50,863            58,020           124,537            148,449
         Consulting, services and fees                              189,554            70,393           442,106            314,431
         Postage                                                     37,757            40,056           112,767            113,676
         Advertising                                                 36,050           170,839           349,091            465,209
         FDIC assessments                                           210,829            91,395           930,055            183,744
         Loss due to dishonored items                               768,583                --           768,583                 --
         Other                                                      786,524           423,957         1,877,044          1,419,121
                                                               ------------     -------------     -------------     --------------
                               TOTAL NONINTEREST EXPENSE          5,102,484         3,753,030        13,565,532         11,375,792
                                                               ------------     -------------     -------------     --------------
                                LOSS BEFORE INCOME TAXES         (2,843,515)       (5,830,676)       (2,076,139)        (4,585,864)
    BENEFIT FOR INCOME TAXES                                       (770,444)         (404,786)         (705,887)          (274,945)
                                                               ------------     -------------     -------------     --------------
                NET LOSS BEFORE NONCONTROLLING INTERESTS         (2,073,071)       (5,425,890)       (1,370,252)        (4,310,919)
                               NET INCOME ATTIBUTABLE TO
                                NONCONTROLLING INTERESTS             41,832                --            94,459                 --
                                                               ------------     -------------     -------------     --------------
                                                NET LOSS       $ (2,114,903)    $  (5,425,890)    $  (1,464,711)    $   (4,310,919)
             DIVIDENDS AND ACCRETION ON PREFERRED SHARES            137,874                --           412,910                 --
                                                               ------------     -------------     -------------     --------------
               NET LOSS AVAILABLE TO COMMON SHAREHOLDERS       $ (2,252,777)    $  (5,425,890)    $  (1,877,621)    $   (4,310,919)
                                                               ============     =============     =============     ==============
    LOSS PER SHARE
                         BASIC NET LOSS PER COMMON SHARE       $      (0.96)    $       (2.30)    $       (0.80)    $        (1.82)
                                                               ============     =============     =============     ==============
                        DILUTED NET LOSS PER COMMON SHARE      $      (0.96)    $       (2.30)    $       (0.80)    $        (1.82)
                                                               ============     =============     =============     ==============
    DIVIDENDS PER SHARE                                        $         --     $        0.15     $        0.10     $         0.45
                                                               ============     =============     =============     ==============
</TABLE>

See Notes to Consolidated Financial Statements.



                                       4
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

<TABLE>
<CAPTION>
                                                                                   Retained               Accumulated
                                                                     Additional    Earnings                 Other          Total
                                Noncontrolling  Preferred  Common     Paid-In  (Accumulated   Treasury  Comprehensive  Shareholders'
                                  Interests       Stock     Stock     Capital     Deficit)     Stock        Loss          Equity
                                 -------------  ---------  ------   ----------  -----------   --------  -------------  -------------
<S>                                  <C>         <C>      <C>       <C>          <C>          <C>          <C>          <C>
Nine months ended
September 30, 2008
Balance, December 31, 2007           $ 50,000    $    --  $ 25,012  $27,858,841  $ 2,623,110  $  (926,964) $(1,267,387) $28,362,612
Adoption of EITF issue,
Acccounting for Deferred
Compensation and Postretirement
Benefits Associated
with Endorsement Split Dollar
Arrangements as of
January 1, 2008                            --         --        --           --      (12,272)          --           --      (12,272)
Comprehensive income (loss):
Net income                                 --         --        --           --   (4,310,919)          --                (4,310,919)
Other comprehensive loss, net
 of taxes:
  Net unrealized holding
            loss on available
            for sale securities            --         --        --           --           --           --   (2,129,230)  (2,129,230)
  Net actuarial loss and
            prior service
            cost for
            pension benefits                                                                                  (537,088)    (537,088)
                                                                                                                        ------------
Other comprehensive loss                                                                                                 (2,666,318)
                                                                                                                        ------------
Total comprehensive loss                                                                                                 (6,977,237)
Cash dividends declared: $0.30
 per share                                 --         --        --           --   (1,063,457)          --           --   (1,063,457)
Purchase of treasury shares                                                                      (227,098)                 (227,098)
Stock options exercised -
 1,893 shares                                                   19       20,464                                              20,483
Tax benefit on stock options
 exercised                                                                2,025                                               2,025
Restricted stock grants and
 expense                                   --         --         5        6,113           --           --           --        6,118
                                     --------    -------  --------   ----------  -----------  -----------  -----------  -----------
Balance, September 30, 2008          $ 50,000    $    --  $ 25,036  $27,887,443  $(2,763,538) $(1,154,062) $(3,933,705) $20,111,174
                                     ========   ========  ========  ===========  ===========  ===========  ===========  ===========

Nine months ended
September 30, 2009
Balance, December 31, 2008           $ 53,875    $    --  $ 25,038  $37,892,831  $(3,325,920) $(1,154,062) $(1,024,498) $32,467,264
Comprehensive income (loss):
Net income (loss)                      94,459         --        --           --   (1,464,711)          --           --   (1,370,252)
Other comprehensive income
  (loss), net of taxes:
  Net unrealized holding
            gain on available
            for sale securities            --         --        --           --           --           --      775,905     775,905
  Net unrealized holding
            loss on cash
            flow hedges                    --         --        --           --           --           --      (27,462)     (27,462)
  Net actuarial gain and
           prior service
           cost for pension
           benefits                        --         --        --           --           --           --      147,291      147,291
                                                                                                                        -----------
Other comprehensive income                                                                                                  895,734
                                                                                                                        -----------
Total comprehensive loss                                                                                                   (474,518)
Cumulative effect of adopting
FASB staff position,
Recognition and Presentation
of Other-than-Temporary
Impairments
(net of $853,767 tax effect)               --         --        --           --    1,657,313           --   (1,657,313)          --
Cash dividends declared:
$0.10 per share                            --         --        --           --     (235,712)          --                  (235,712)
Restricted stock grants
and expense                                --         --         6        6,876           --           --           --        6,882
Preferred stock dividends                                                           (375,000)                              (375,000)
Accretion of discount on
preferred stock                            --         --        --       37,910      (37,910)          --           --           --
                                     --------   --------  --------  -----------  -----------  -----------  -----------  -----------
Balance, September 30, 2009          $148,334   $     --  $ 25,044  $37,937,617  $(3,781,940) $(1,154,062) $(1,786,077) $31,388,916
                                     ========   ========  ========  ===========  ===========  ===========  ===========  ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                        5
<PAGE>

<TABLE>
<CAPTION>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)                                                        September 30,
                                                                                                    2009               2008
                                                                                               ------------       ------------
<S>                                                                                            <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                                   $ (1,464,711)      $ (4,310,919)
    Adjustments to reconcile net loss to net cash provided by operating activities:
                 Net income attributable to non-controlling interest                                 94,459                 --
                 Amortization (accretion) of discounts and premiums
                   on investment securities, net                                                    277,333           (124,184)
                 Provision for loan and lease losses                                              3,470,280            367,000
                 Depreciation and amortization                                                      520,171            550,204
                 Loss on impairment write-down of available for sale securities                          --          6,946,098
                 Gains on sale of available for sale securities                                    (314,584)          (258,416)
                 Loss on sale of foreclosed real estate                                              55,640                 --
                 Losses on sales of repossessed assets                                              185,865             26,275
                 Loans originated for sale                                                      (13,283,029)        (2,124,000)
                 Proceeds from sales of loans held for sale                                      27,447,044          2,143,887
                 Gains on sales of loans held for sale                                             (509,552)           (34,904)
                 (Gain) losses on disposals of bank premises and equipment                           (3,457)             2,188
                 Deferred income taxes                                                             (705,887)                --
                 Stock based compensation                                                             6,883              6,118
                 Decrease in accrued interest receivable                                            323,173            309,132
                 Increase in other assets                                                           (39,065)          (235,487)
                 Increase in cash surrender value of life insurance                                (293,429)          (299,279)
                 Increase in deferred loan origination costs                                        (74,537)           (90,048)
                 Decrease in accrued expenses and other liabilities                                (911,673)        (1,024,395)
                                                                                               ------------       ------------
                     Net cash provided by operating activities                                   14,780,924          1,849,270
                                                                                               ------------       ------------
    CASH FLOWS FROM INVESTING ACTIVITIES
    Available for sale securities:
                 Proceeds from maturities and principal payments                                 52,361,754         29,370,830
                 Purchases                                                                      (76,402,584)       (58,903,339)
                 Proceeds from sales                                                             37,027,093         43,804,423
    Held to maturity mortgage-backed securities:
                 Proceeds from maturities and principal payments                                      1,486              2,952
    Inrcease in due from broker for security sale                                                        --        (11,643,821)
    Purchase of restricted stock                                                                     (5,000)            (5,000)
    Purchase of Federal Home Loan Bank stock                                                             --           (360,200)
    Net increase in loans and leases                                                            (26,811,335)       (22,637,407)
    Purchase of bank premises and equipment                                                        (248,052)          (129,143)
    Proceeds from sale of bank premises and equipment                                                 3,457                 --
    Proceeds from sale of foreclosed real estate                                                    419,360                 --
    Proceeds from sales of repossessed assets                                                        56,676            214,532
                                                                                               ------------       ------------
                 Net cash used in investing activities                                          (13,597,145)       (20,286,173)
                                                                                               ------------       ------------
    CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase in savings, money market and demand deposits                                     3,733,149         11,907,339
    Net increase (decrease) in certificates of deposit                                           35,464,671         (6,797,900)
    Repayments on Federal Home Loan Bank advances                                                        --         (4,500,000)
    Net (decrease) increase in Federal Home Loan Bank overnight borrowings                       (1,608,000)           941,000
    Net (decrease) increase in repurchase agreements with financial institutions                 (3,950,000)         4,900,000
    Net increase (decrease) in repurchase agreements with customers                               1,186,514           (873,356)
    Net decrease in collateralized borrowings                                                    (1,375,550)          (310,166)
    Principal repayments on capital lease obligation                                                (14,142)           (13,413)
    Purchase of treasury shares                                                                          --           (227,098)
    Proceeds from the exercise of stock options                                                          --             20,483
    Tax benefit of stock options exercised                                                               --              2,025
    Dividends paid on common stock                                                                 (615,618)        (1,065,082)
                                                                                               ------------       ------------
                 Net cash provided by financing activities                                       32,821,024          3,983,832
                                                                                               ------------       ------------
                 Net increase (decrease) in cash and cash equivalents                            34,004,803        (14,453,071)
    CASH AND CASH EQUIVALENTS, at beginning of period                                             9,238,783         21,497,194
                                                                                               ------------       ------------
    CASH AND CASH EQUIVALENTS, at end of period                                                $ 43,243,586       $  7,044,123
                                                                                               ============       ============
    SUPPLEMENTAL INFORMATION
                 Cash paid during the period for:
                 Interest on deposits and borrowings                                           $  7,612,852       $ 10,523,661
                                                                                               ============       ============
                 Income taxes                                                                  $      1,000       $      1,000
                                                                                               ============       ============
    Noncash investing and financing activities:
                 Accrued dividends declared                                                    $    375,000       $    353,603
                                                                                               ============       ============
                 Transfer of loans  to repossessed assets                                      $     90,423       $    181,400
                                                                                               ============       ============
                 Transfer of loans to OREO                                                     $  1,022,040       $         --
                                                                                               ============       ============
                 Increase in leases and other liabilities for
                 equipment payable related to financed leases                                  $    680,533       $  2,082,719
                                                                                               ============       ============
                 Increase in mortgage servicing assets                                         $    269,037       $     15,017
                                                                                               ============       ============
                 Increase in liabilities and decrease in retained earnings for
                 the adopting FASB staff position, "Accounting for Deferred
                 Compensation and Postretirement Benefit Aspects of Endorsement
                 Split-Dollar-Life Insurance Arrangements"                                     $         --       $     12,272
                                                                                               ============       ============
                 Change in other liabilities related to the unfunded pension liability         $    223,167       $    813,770
                                                                                               ============       ============
                 Change in gross unrealized holding losses on available for sale securities    $  1,715,613       $  3,226,105
                                                                                               ============       ============
                 Transfer of loans to loans held for sale                                      $ 13,005,284       $         --
                                                                                               ============       ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.    The  consolidated  balance sheet at December 31, 2008 of First  Litchfield
      Financial  Corporation  (the  "Company") has been derived from the audited
      financial  statements  at that  date,  but  does  not  include  all of the
      information  and  footnotes  required by accounting  principles  generally
      accepted  in  the  United   States  of  America  for  complete   financial
      statements.  Certain 2008 amounts have been  reclassified  to conform with
      the 2009 presentation. Such reclassifications had no effect on net income.

2.    The accompanying  unaudited  consolidated financial statements and related
      notes have been  prepared  pursuant  to the rules and  regulations  of the
      Securities and Exchange Commission.  Accordingly,  certain information and
      footnote disclosures normally included in financial statements prepared in
      accordance with  accounting  principles  generally  accepted in the United
      States  of  America  have  been   omitted   pursuant  to  such  rules  and
      regulations.  The  accompanying  financial  statements  and related  notes
      should be read in conjunction with the audited financial statements of the
      Company and notes thereto for the fiscal year ended December 31, 2008.

      These  financial  statements  reflect,  in the opinion of Management,  all
      adjustments,  consisting of only normal recurring  adjustments,  necessary
      for a fair  presentation  of the  Company's  financial  position  and  the
      results of its  operations  and its cash flows for the periods  presented.
      The results of  operations  for the three and nine months ended  September
      30, 2009 are not necessarily  indicative of the results of operations that
      may be expected for all of 2009.

      The Financial  Accounting  Standards Board's (FASB)  Accounting  Standards
      Codification (ASC) became effective on July 1, 2009. At that date, the ASC
      became FASB's officially recognized source of authoritative U.S. generally
      accepted  accounting  principles  (GAAP)  applicable  to  all  public  and
      non-public non-governmental entities,  superseding existing FASB, American
      Institute of Certified Public  Accountants  (AICPA),  Emerging Issues Task
      Force (EITF) and related  literature.  Rules and interpretive  releases of
      the SEC under the authority of federal securities laws are also sources of
      authoritative GAAP for SEC registrants. All other accounting literature is
      considered  non-authoritative.  The  switch  to the  ASC  affects  the way
      companies  refer  to U.S.  GAAP in  financial  statements  and  accounting
      policies.  Citing  particular  content in the ASC involves  specifying the
      unique numeric path to the content  through the Topic,  Subtopic,  Section
      and Paragraph structure.

      During the first  quarter of 2009,  the Company  entered into two interest
      rate swap agreements to hedge certain interest rate exposures. The Company
      does not use  derivatives for  speculative  purposes.  The Company applies
      "Accounting  for  Derivative   Instruments  and  Hedging  Activities,"  as
      amended,   which  establishes   accounting  and  reporting  standards  for
      derivative  instruments and hedging  activities.  This accounting guidance
      requires  the Company to recognize  all  derivatives  as either  assets or
      liabilities  in its  Consolidated  Balance  Sheets  and to  measure  those
      instruments at fair value.  The estimated fair value is based primarily on
      projected future swap rates.

      The Company  applies  cash flow hedge  accounting  to interest  rate swaps
      designated as hedges of the variability of future cash flows from floating
      rate  liabilities  due to the benchmark  interest  rate.  The Company uses
      regression  analysis to perform an ongoing  prospective and  retrospective
      assessment  of these hedging  relationships.  Changes in the fair value of
      these  interest  rate swaps are recorded to "net holding gain on cash flow
      hedges" as a component of accumulated  other  comprehensive  income (loss)
      ("OCI") in Shareholders' equity, to the extent they are effective. Amounts
      recorded  to  accumulated  other  comprehensive  income  (loss)  are  then
      reclassified  to interest  expense as interest on the hedged  borrowing is
      recognized.  Any ineffective  portion of the change in fair value of these
      instruments is recorded to interest expense.


                                       7
<PAGE>

3.    The  Company is  required  to present  basic  income per share and diluted
      income per share in its  consolidated  statements of income.  Basic income
      per share  amounts are  computed by  dividing  net income by the  weighted
      average  number of common  shares  outstanding.  Diluted  income per share
      assumes  exercise of all potential  common stock  equivalents  in weighted
      average  shares  outstanding,  unless  the  effect is  anti-dilutive.  The
      Company is also required to provide a reconciliation  of the numerator and
      denominator  used in the  computation of both basic and diluted income per
      share.  Income  attributable to common  shareholders  has been reduced and
      losses have been  increased  by  preferred  share  dividends  and discount
      accretion related to the Company`s  participation in TARP Capital Purchase
      program.  For the three and nine month  periods  ended  September 30, 2009
      this amount totaled $137,874 and $412,910, respectively.

      The following is information  about the  computation of net loss per share
      for the three and nine month  periods  ended  September 30, 2009 and 2008.
      The Company had no dilutive securities outstanding at September 30, 2009.

<TABLE>
<CAPTION>
                                                               Three Months Ended
                                                              September 30, 2009
                                                    --------------------------------------
                                                       Net                       Per Share
                                                      Loss           Shares         Amount
                                                    -----------     ---------    ---------
<S>                                                 <C>             <C>          <C>
    Basic Net Loss Per Share
        Loss attributable to common shareholders    $(2,252,777)    2,356,875    $  (0.96)
                                                                                 =========
    Effect of Dilutive Securities
        Options Outstanding                                  --           --
    Diluted Net Loss Per Share
        Loss attributable to common shareholders
                                                    ------------    ---------
        plus assumed conversions                    $(2,252,777)    2,356,875    $  (0.96)
                                                    ============    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                              September 30, 2008
                                                    --------------------------------------
                                                       Net                       Per Share
                                                      Loss           Shares        Amount
                                                    -----------     ---------    ---------
<S>                                                 <C>             <C>          <C>
    Basic Net Loss Per Share
        Loss attributable to common shareholders    $(5,425,890)    2,358,267    $  (2.30)
                                                                                 =========
    Effect of Dilutive Securities
        Options Outstanding                                  --            --
    Diluted Net Loss Per Share
        Loss attributable to common shareholders
                                                    ------------    ---------
        plus assumed conversions                    $(5,425,890)    2,358,267    $  (2.30)
                                                    ============    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                              September 30, 2009
                                                    --------------------------------------
                                                       Net                       Per Share
                                                      Loss           Shares       Amount
                                                    -----------     ---------    ---------
<S>                                                 <C>             <C>          <C>
    Basic Net Loss Per Share
        Loss attributable to common shareholders    $(1,877,621)    2,356,875    $  (0.80)
                                                                                 =========
    Effect of Dilutive Securities
        Options Outstanding                                  --            --
    Diluted Net Loss Per Share
        Loss attributable to common shareholders
                                                    ------------    ---------
        plus assumed conversions                    $(1,877,621)    2,356,875    $  (0.80)
                                                    ============    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                              September 30, 2008
                                                    --------------------------------------
                                                      Net                        Per Share
                                                      Loss           Shares       Amount
                                                    -----------     ---------    ---------
<S>                                                 <C>             <C>          <C>
Basic Net Loss Per Share
        Loss attributable to common shareholders    $(4,310,919)    2,364,904    $  (1.82)
                                                                                 =========
    Effect of Dilutive Securities
        Options Outstanding                                  --           536
    Diluted Net Loss Per Share
        Loss attributable to common shareholders
                                                    ------------    ---------
        plus assumed conversions                    $(4,310,919)    2,365,440    $  (1.82)
                                                    ============    =========    =========
</TABLE>


                                       8
<PAGE>

4.    Other  comprehensive  income  (loss),  which is comprised of the change in
      unrealized  gains and losses on available  for sale  securities,  net cash
      flow hedges, as well as net pension gain, is as follows:

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                         September 30, 2009
                                                                              ----------------------------------------
                                                                              Before-Tax          Tax       Net-of-Tax
                                                                                Amount          Effect        Amount
                                                                              -----------     ---------     ---------
<S>                                                                           <C>             <C>           <C>
    Unrealized holding gain arising during the period                         $ 1,204,164     $(409,416)    $ 794,748
    Less:  reclassification adjustment for loss recognized in net income            6,490        (2,207)        4,283
                                                                              -----------     ---------     ---------

    Unrealized holding gain on available for sale securities, net of taxes      1,210,654      (411,623)      799,031
    Net cash flow hedges, net of taxes                                           (204,165)       69,416      (134,749)
    Net pension gain, net of taxes                                                168,944       (57,440)      111,504
                                                                              -----------     ---------     ---------
    Total other comprehensive income, net of taxes                            $ 1,175,433     $(399,647)    $ 775,786
                                                                              ===========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                         September 30, 2008
                                                                              -----------------------------------------
                                                                              Before-Tax          Tax        Net-of-Tax
                                                                                Amount          Effect         Amount
                                                                              -----------     ---------     -----------
<S>                                                                           <C>             <C>           <C>
    Unrealized holding losses arising during the period                       $(5,602,610)    $ 194,688     $(5,407,922)
    Add:  reclassification adjustment for loss recognized in net income         6,720,523      (574,778)      6,145,745
                                                                              -----------     ---------     -----------

    Unrealized holding gains on available for sale securities, net of taxes     1,117,913      (380,090)        737,823
    Net pension loss, net of taxes                                               (334,418)      113,702        (220,716)
                                                                              -----------     ---------     -----------
    Total other comprehensive income, net of taxes                            $   783,495     $(266,388)    $   517,107
                                                                              ===========     =========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended
                                                                                         September 30, 2009
                                                                              ----------------------------------------
                                                                              Before-Tax          Tax       Net-of-Tax
                                                                                Amount          Effect       Amount
                                                                              -----------     ---------     ---------
<S>                                                                           <C>             <C>           <C>
    Unrealized holding gain arising during the period                         $ 1,490,197     $(506,667)    $ 983,530
    Less:  reclassification adjustment for gain recognized in net income         (314,584)      106,959      (207,625)
                                                                              -----------     ---------     ---------

    Unrealized holding gains on available for sale securities, net of taxes     1,175,613      (399,708)      775,905
    Net cash flow hedges, net of taxes                                            (41,609)       14,147       (27,462)
    Net pension gain, net of taxes                                                223,167       (75,876)      147,291
                                                                              -----------     ---------     ---------
    Total other comprehensive income, net of taxes                            $ 1,357,171     $(461,437)    $ 895,734
                                                                              ===========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended
                                                                                         September 30, 2008
                                                                              ----------------------------------------
                                                                              Before-Tax          Tax       Net-of-Tax
                                                                                Amount          Effect       Amount
                                                                              -----------     ---------     -----------
<S>                                                                           <C>             <C>           <C>
    Unrealized holding losses arising during the period                       $(9,913,788)    $ 1,660,488   $(8,253,300)
    Add:  reclassification adjustment for loss recognized in net income         6,687,682        (563,612)    6,124,070
                                                                              -----------     -----------   -----------

    Unrealized holding losses on available for sale securities, net of taxes   (3,226,106)      1,096,876    (2,129,230)
    Net pension loss, net of taxes                                               (813,770)        276,682      (537,088)
                                                                              -----------     -----------   -----------
    Total other comprehensive loss, net of taxes                              $(4,039,876)    $ 1,373,558   $(2,666,318)
                                                                              ===========     =========== =============
</TABLE>


                                       9
<PAGE>

5.    The Company's  subsidiary,  The First  National  Bank of  Litchfield  (the
      "Bank") has a  noncontributory  defined  benefit pension plan (the "Plan")
      that covers  substantially  all employees  who have  completed one year of
      service  and have  attained  age 21.  The  benefits  are based on years of
      service  and the  employee's  compensation  during  the last five years of
      employment.  During the first quarter of 2005, the Bank's pension plan was
      curtailed. Prior to the Plan's curtailment,  the Bank's funding policy was
      to contribute  amounts to the plan  sufficient to meet the minimum funding
      requirements set forth in ERISA, plus such additional  amounts as the Bank
      determined to be appropriate from time to time. The actuarial  information
      has been calculated using the projected unit credit method.

      Components  of net  periodic  benefit  cost  for the  three  months  ended
      September 30:

                                                  2009         2008
                                               --------     --------
            Service cost                       $     --     $     --
            Interest cost                        42,700       46,306
            Expected return on plan assets      (43,104)     (50,363)
            Amortization of unrealized loss      19,523       14,812
                                               --------     --------
            Net periodic benefit cost          $ 19,119     $ 10,755
                                               ========     ========


      Components  of net  periodic  benefit  cost  for  the  nine  months  ended
      September 30:

                                                   2009         2008
                                               ---------     ---------
            Service cost                       $      --     $      --
            Interest cost                        128,100       138,919
            Expected return on plan assets      (129,311)     (151,090)
            Amortization of unrealized loss       58,569        44,437
                                               ---------     ---------
            Net periodic benefit cost          $  57,358     $  32,266
                                               =========     =========

6.    The  Bank is a  member  of the  Federal  Home  Loan  Bank of  Boston  (the
      "FHLBB").  As a member of the FHLBB,  the Bank has access to a preapproved
      line of credit of up to 2% of its total  assets and the capacity to borrow
      up to 30% of its total assets.  In accordance  with an agreement  with the
      FHLBB, the Bank is required to maintain qualified  collateral,  as defined
      in the  FHLBB  Statement  of  Products  Policy,  free and  clear of liens,
      pledges and encumbrances  for the advances.  FHLBB stock and certain loans
      which aggregate  approximately 100% of the outstanding advance are used as
      collateral.  The  Company  views its  investment  in the FHLBB  stock as a
      long-term  investment.  Accordingly,  when evaluating for impairment,  the
      value is determined based on the ultimate recovery of the par value rather
      than recognizing temporary declines in value. The determination of whether
      a decline affects the ultimate recovery is influenced by criteria such as:
      1) the  significance of the decline in net assets of the FHLBB as compared
      to the capital stock amount and length of time a decline has persisted; 2)
      impact of  legislative  and  regulatory  changes on the FHLBB;  and 3) the
      liquidity position of the FHLBB. The FHLBB announced in February 2009 that
      it would  suspend its  dividend  for the first  quarter of 2009,  and will
      likely not pay any dividends for the remainder of 2009,  and will continue
      its moratorium on excess stock repurchases announced in December 2008. The
      FHLBB   noted   their   primary   concern   related   to  the   impact  of
      other-than-temporary impairment ("OTTI") charges recorded on private label
      mortgage-backed securities (MBS) as of December 31, 2008.

      While the FHLBB  announced that it remained  adequately  capitalized as of
      December 31, 2008 in its February  announcement,  the Company is unable to
      determine if the potential additional charges to earnings will change this
      regulatory  capital  classification.   On  October  29,  2009,  the  FHLBB
      communicated  to its members that the FHLBB  recorded a net loss of $105.4
      million for the third quarter of 2009. The primary challenge for the FHLBB
      continues to be losses due to the  other-than-temporary  impairment of its
      investments in  private-label  mortgage-backed  securities  resulting in a
      credit  loss  of


                                       10
<PAGE>

      $174.2 million during the quarter. The associated non-credit loss on these
      securities  this quarter was $1.6  million and resulted in an  accumulated
      other  comprehensive loss of $1.0 billion at September 30, 2009.  Retained
      earnings  were $136.3  million at  September  30,  2009,  down from $241.7
      million at June 30, 2009. In spite of these losses,  the FHLBB remained in
      compliance with all regulatory capital ratios as of September 30, 2009.

      The FHLBB  explained that the ongoing impact of the economy as well as the
      housing  and capital  markets is likely to continue to provide  challenges
      for the Bank.  The underlying  credit quality  especially as it relates to
      the  FHLBB's  investments  in  private-label  mortgage-backed  securities,
      remains   vulnerable.   Trends  in  determining   future  OTTI  are  still
      challenging and include:  rising  unemployment rates, some further decline
      in housing prices, higher default rates, lower voluntary prepayment rates,
      and deepened loss severities.

      FHLBB's management is focused on the long-term agenda: returning the FHLBB
      to  profitability,  preserving  the FHLBB's  capital  base,  and  building
      retained  earnings.  They have begun to implement  elements of a plan that
      will,  over time,  work to restore the FHLBB to a position  where they can
      once  again  repurchase  stock,  pay  members  a  dividend,  and  fund the
      Affordable  Housing  Program.  The  Company  does  not  believe  that  its
      investment  in the  FHLBB  is  impaired  as of this  date.  However,  this
      estimate could change in the near term as a result of any of the following
      events:  1) additional  significant  impairment losses are incurred on the
      MBS  causing a  significant  decline  in the  FHLBB's  regulatory  capital
      status; 2) the economic losses resulting from credit  deterioration on the
      MBS increases significantly;  and 3) capital preservation strategies being
      utilized by the FHLBB become ineffective.

      Federal Home Loan Bank advances as of September 30, 2009 are as follows:

due        10/02/2009    $ 6,000,000  @       4.50%
due        11/30/2009      5,000,000  @       3.95%
due         6/24/2010      5,000,000  @       4.15%
due        11/02/2010     10,000,000  @       4.45%
due         5/29/2012      5,000,000  @       4.32%
due         5/02/2014      7,000,000  @       4.59% , callable 5/3/2010
due         8/20/2014      7,000,000  @       4.25% , callable 8/20/2010
due         5/05/2016     10,000,000  @       4.53% , callable 11/5/2009
due         3/23/2017     10,000,000  @       4.29% , callable 12/23/2009
due         7/20/2017     10,000,000  @       4.29% , callable 10/20/2009
due        11/20/2017      5,000,000  @       4.29% , callable 11/19/2012
                      --------------
                Total   $ 80,000,000
                      ==============

      As of  September  30,  2009,  the Bank  had  borrowings  under  repurchase
      agreements with financial  institutions totaling $22,500,000.  This amount
      includes borrowings:

due         3/12/2013   $ 12,500,000  @       3.19% , callable 3/12/2011
due         5/23/2013     10,000,000  @       3.64% , callable 5/23/2011
                      ---------------
                Total   $ 22,500,000
                      ===============


                                       11
<PAGE>

7.    A  reconciliation  of the  anticipated  income tax  expense  (computed  by
      applying the Federal statutory income tax rate of 34% to the income before
      taxes) to the  (benefit)  provision  for income  taxes as  reported in the
      statements of operations is as follows:

<TABLE>
<CAPTION>
                                                                 For the three months ended September 30,
                                                               --------------------------------------------
                                                                      2009                     2008
                                                               -------------------    ---------------------
<S>                                                            <C>           <C>      <C>             <C>
    Provision for income taxes at statutory Federal rate       $(966,795)    (34)%    $(1,982,430)    (34)%
    Increase (decrease) resulting from:
            Tax exempt income                                   (104,392)     (2)        (148,249)     (3)
            Nondeductible interest expense                         5,234      --           10,423      --
            Increase in valuation allowance                           --      --        1,710,200      30
            Unrecognized tax benefits                            292,014      10               --
            Other                                                  3,495      (1)           5,270      --
                                                               ---------     ---      -----------     ---
    Benefit for income taxes                                   $(770,444)    (27)%    $  (404,786)     (7)%
                                                               =========     ===      ===========     ===
</TABLE>


<TABLE>
<CAPTION>
                                                                 For the nine months ended September 30,
                                                               --------------------------------------------
                                                                       2009                     2008
                                                               -------------------    ---------------------
<S>                                                       <C>                <C>      <C>             <C>
    Provision for income taxes at statutory Federal rate       $(705,887)    (34)%    $(1,559,194)    (34)%
    Increase (decrease) resulting from:
            Tax exempt income                                   (320,252)    (16)        (477,969)    (11)
            Nondeductible interest expense                        17,742       1           36,207       1
            Increase in valuation allowance                           --      --        1,710,200      37
            Unrecognized tax benefits                            292,014      14
            Other                                                 10,496       1           15,811       1
                                                               ---------     ---      -----------     ---
    Benefit for income taxes                                   $(705,887)    (34)%    $  (274,945)     (6)%
                                                               =========     ===      ===========     ===
</TABLE>

As of September  30, 2009 and  December  31, 2008,  the Company had recorded net
deferred  income tax assets of  approximately  $5.3  million  and $5.1  million,
respectively.  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
September  30, 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 September 30, 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.

Federal tax returns for all years subsequent to 2006 remain open to examination.
For the Company's  principal state tax jurisdiction of Connecticut,  tax returns
for years subsequent to 2001 remain open to examination.  There were no interest
or penalties paid during the nine-month  period ended  September 30, 2009 or the
twelve-month  period ended  December 31, 2008. No accrued  interest or penalties
were  recorded  as of  September  30,  2009 or December  31,  2008.  The Company
believes that it has appropriate  support for the income tax positions taken and
to be taken on its tax returns,  and that its accruals for tax  liabilities  are
adequate for all open years based on an  assessment  of many  factors  including
past  experience  and  interpretations  of tax law  applied to the facts of each
matter.


                                       12
<PAGE>


8.    The amortized cost, gross unrealized  gains,  gross unrealized  losses and
      approximate  fair values of securities  which are  classified as available
      for sale and held to maturity at September  30, 2009 and December 31, 2008
      are as follows:


<TABLE>
<CAPTION>

AVAILABLE FOR SALE                                               September 30, 2009
                                              -----------------------------------------------------------
                                                               Gross            Gross
                                               Amortized     Unrealized       Unrealized          Fair
                                                 Cost          Gains            Losses           Value
                                              -----------    -----------     ------------     -----------
<S>                                           <C>            <C>             <C>              <C>
    Debt Securities:
         U.S. Treasury securities             $ 3,080,963    $    70,287     $         --     $ 3,151,250
         U.S. Government Agency securities     12,227,759         90,220          (41,179)     12,276,800
         State and Municipal Obligations       12,441,684        127,478         (155,868)     12,413,294
         Trust Preferred Securities (1)         2,994,101             --       (2,114,570)        879,531
                                              -----------    -----------     ------------     -----------
                                               30,744,507        287,985       (2,311,617)     28,720,875
                                              -----------    -----------     ------------     -----------
    Mortgage-Backed Securities:
         GNMA                                     461,783          7,785              (52)        469,516
         FNMA                                  29,490,613        618,691          (12,885)     30,096,419
         FHLMC                                 21,638,206        320,132          (20,918)     21,937,420
                                              -----------    -----------     ------------     -----------
                                               51,590,602        946,608          (33,855)     52,503,355
                                              -----------    -----------     ------------     -----------

    Marketable Equity Securities               17,069,511         14,939               --      17,084,450
                                              -----------    -----------     ------------     -----------

    Total available for sale securities       $99,404,620    $ 1,249,532     $ (2,345,472)    $98,308,680
                                              ===========    ===========     ============     ===========
</TABLE>

      (1)  Net  of  other-than-temporary  impairment  writedowns  recognized  in
      earnings, other than such noncredit-related  amounts reclassified on April
      1, 2009.

<TABLE>
<CAPTION>
                                                                   December 31, 2008
                                              -----------------------------------------------------------
                                                                Gross            Gross
                                               Amortized      Unrealized       Unrealized         Fair
                                                  Cost          Gains           Losses           Value
                                              ------------    ---------     ------------     ------------
<S>                                           <C>             <C>           <C>              <C>
    Debt Securities:
         U.S. Treasury securities             $  3,110,574    $ 107,876     $         --     $  3,218,450
         U.S. Government Agency securities      26,500,000       65,763           (3,386)      26,562,377
         State and Municipal Obligations        19,931,000       77,501         (376,069)      19,632,432
         Trust Preferred Securities (2)            493,615           --               --          493,615
                                              ------------    ---------     ------------     ------------
                                                50,035,189      251,140         (379,455)      49,906,874
                                              ------------    ---------     ------------     ------------
    Mortgage-Backed Securities:
         GNMA                                    9,495,917           12           (8,094)       9,487,835
         FNMA                                   35,675,421      467,875         (263,567)      35,879,729
         FHLMC                                  14,994,269      210,723           (9,228)      15,195,764
                                              ------------    ---------     ------------     ------------
                                                60,165,607      678,610         (280,889)      60,563,328
                                              ------------    ---------     ------------     ------------

    Marketable Equity Securities                 3,045,878           --          (29,879)       3,015,999
                                              ------------    ---------     ------------     ------------

    Total available for sale securities       $113,246,674    $ 929,750     $   (690,223)    $113,486,201
                                              ============    =========     ============     ============
</TABLE>

      (2)  Net  of  other-than-temporary  impairment  writedowns  recognized  in
      earnings.

<TABLE>
<CAPTION>

HELD TO MATURITY                                                  September 30, 2009
                                             ------------------------------------------------------------
                                                                 Gross         Gross
                                               Amortized       Unrealized    Unrealized           Fair
                                                  Cost           Gains         Losses            Value
                                              ------------    -----------   ------------     ------------
<S>                                           <C>             <C>           <C>               <C>
Mortgage-Backed Securities:
     GNMA                                     $     15,064    $       356   $         --     $     15,420
                                              ============    ===========   ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                  December 31, 2008
                                              -----------------------------------------------------------
                                                                  Gross         Gross
                                               Amortized       Unrealized    Unrealized          Fair
                                                 Cost            Gains         Losses           Value
                                              ------------    -----------   ------------     ------------
<S>                                           <C>             <C>           <C>              <C>
Mortgage-Backed Securities:
     GNMA                                     $     16,550    $         3   $         --     $     16,553
                                              ============    ===========   ============     ============
</TABLE>


                                       13
<PAGE>

The Company adopted the FASB staff position,  "Recognition  and  Presentation of
Other-Than-Temporary  Impairments,"  for the interim period ended June 30, 2009,
which was applied to existing and new debt  securities held by the Company as of
April 1,  2009.  For those  debt  securities  for  which  the fair  value of the
security is less than its amortized cost and the Company does not intend to sell
such  security  and it is more  likely  than not that it will not be required to
sell such security  prior to the recovery of its  amortized  cost basis less any
credit losses,  the accounting  principle  requires that the credit component of
the  other-than-temporary  impairment losses be recognized as a loss in earnings
while the noncredit  component is recognized in other comprehensive loss, net of
related  taxes.  As a result of the adoption of the  accounting  principle,  the
Company  reclassified  the  noncredit  component  of  the   other-than-temporary
impairment   loss   previously   recognized   in  earnings   during  2008.   The
reclassification  was reflected as a cumulative  effect adjustment of $1,657,313
($2,511,080  before  taxes)  that  increased  retained  earnings  and  increased
accumulated  other  comprehensive  loss.  The amortized cost basis of these debt
securities  for which  other-than-temporary  impairment  losses were  recognized
during 2008 were  adjusted  by the amount of the  cumulative  effect  adjustment
before taxes.

The following table presents the Bank's  securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at September 30, 2009:

<TABLE>
<CAPTION>
                                              Less than 12 Months          12 Months or More                    Total
                                           -------------------------    -------------------------    -------------------------
                                              Fair        Unrealized       Fair       Unrealized        Fair        Unrealized
                                              Value         Losses        Value         Losses          Value         Losses
                                           -------------------------    -------------------------    -------------------------
<S>                                        <C>            <C>           <C>           <C>            <C>            <C>
    Investment Securities
       U.S. Government Agency Securities   $ 4,993,650    $   41,179    $       --    $        --    $ 4,993,650    $   41,179
       State & Municipal obligations                --            --     4,258,191        155,868      4,258,191       155,868
       Trust Preferred Securities (1)          879,531     2,114,570            --             --        879,531     2,114,570
                                           -----------    ----------    ----------    -----------    -----------    ----------
                                             5,873,181     2,155,749     4,258,191        155,868     10,131,372     2,311,617
                                           -----------    ----------    ----------    -----------    -----------    ----------
    Mortgage-Backed Securities
       GNMA                                         --            --        46,057             52         46,057            52
       FNMA                                  1,407,460           268     1,777,533         12,617      3,184,993        12,885
       FHLMC                                 3,764,485        17,796        75,781          3,122      3,840,266        20,918
                                           -----------    ----------    ----------    -----------    -----------    ----------
                                             5,171,945        18,064     1,899,371         15,791      7,071,316        33,855
                                           -----------    ----------    ----------    -----------    -----------    ----------

                                           -----------    ----------    ----------    -----------    -----------    ----------
    Total                                  $11,045,126    $2,173,813    $6,157,562    $   171,659    $17,202,688    $2,345,472
                                           ===========    ==========    ==========    ===========    ===========    ==========
</TABLE>

(1) Net of  other-than-temporary  impairment  writedowns recognized in earnings,
other  than  such  noncredit-related  amounts  reclassified  on April 1, 2009 in
accordance   with   the   adoption   of   "Recognition   and   Presentation   of
Other-Than-Temporary Impairments."


The following table presents the Bank's  securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2008:

<TABLE>
<CAPTION>
                                               Less than 12 Months          12 Months or More                   Total
                                           -------------------------    -------------------------    -------------------------
                                              Fair        Unrealized        Fair       Unrealized         Fair       Unrealized
                                              Value         Losses         Value         Losses          Value         Losses
                                           -------------------------    -------------------------    -------------------------
<S>                                        <C>            <C>           <C>            <C>            <C>            <C>
    Investment Securities
       U.S. Government Agency securities   $ 7,996,614    $    3,386    $        --    $        --    $ 7,996,614    $  3,386
       State & Municipal obligations         8,804,717       303,267      2,574,433         72,802     11,379,150     376,069
                                           -----------    ----------    -----------    -----------    -----------    --------
                                            16,801,331       306,653      2,574,433         72,802     19,375,764     379,455
                                           -----------    ----------    -----------    -----------    -----------    --------
    Mortgage-Backed Securities
       GNMA                                         --            --        465,643          8,094        465,643       8,094
       FNMA                                 10,067,156       112,219      4,209,833        151,348     14,276,989     263,567
       FHLMC                                        --            --      1,351,769          9,228      1,351,769       9,228
                                           -----------    ----------    -----------    -----------    -----------    --------
                                            10,067,156       112,219      6,027,245        168,670     16,094,401     280,889
                                           -----------    ----------    -----------    -----------    -----------    --------

    Marketable Equity Securities                    --            --      1,970,122         29,879      1,970,122      29,879

                                           -----------    ----------    -----------    -----------    -----------    --------
    Total                                  $26,868,487    $  418,872    $10,571,800    $   271,351    $37,440,287    $690,223
                                           ===========    ==========    ===========    ===========    ===========    ========
</TABLE>


                                       14
<PAGE>
      At September 30, 2009,  seventeen  securities  had unrealized  losses.  At
      September 30, 2009, gross unrealized  holding losses on available for sale
      and held to maturity securities totaled $2,345,472. Of the securities with
      unrealized  losses,  there  were  nine  securities  that  have  been  in a
      continuous unrealized loss position for a period of twelve months or more.
      The unrealized  losses on these  securities  totaled $171,659 at September
      30, 2009. The following  summarizes by investment security type, the basis
      for the conclusion that the applicable  investment  securities  within the
      Company's  available for sale  portfolio  were not  other-than-temporarily
      impaired at September 30, 2009.

      Management  conducts  a  formal  review  of  investment  securities  on  a
      quarterly  basis  for  the  presence  of  other-than-temporary  impairment
      ("OTTI").  For the  second  quarter  of  2009,  the  Company  adopted  the
      provisions  of FASB  staff  position,  "Recognition  and  Presentation  of
      Other-Than-Temporary  Impairments."  Management  assesses  whether OTTI is
      present when the fair value of a debt  security is less than its amortized
      cost  basis at the  balance  sheet  date.  Under  these  circumstances  as
      required by the new staff  position,  OTTI is  considered to have occurred
      (1) if the Company intends to sell the security; (2) if it is "more likely
      than not" that the Company  will be required to sell the  security  before
      recovery of its amortized cost basis; or (3) the present value of expected
      cash flows is not  sufficient to recover the entire  amortized cost basis.
      The  "more  likely  than  not"  criteria  is a lower  threshold  than  the
      "probable" criteria used under previous guidance.

      The staff  position  requires  that  credit-related  OTTI is recognized in
      earnings  while  non-credit  related OTTI on securities not expected to be
      sold is  recognized  in OCI.  Non-credit  related  OTTI is caused by other
      factors,    including   illiquidity.    For   securities   classified   as
      held-to-maturity ("HTM"), the amount of OTTI recognized in OCI is accreted
      to the  credit-adjusted  expected cash flow amounts of the securities over
      future periods. Non-credit related OTTI recognized in earnings previous to
      April 1, 2009 is reclassified from retained earnings to accumulated OCI as
      a cumulative  effect  adjustment.  The Company adopted this staff position
      effective  April 1, 2009. The adoption of this staff position  resulted in
      the reclassification of $2,511,080, ($1,657,313, net of tax) of non-credit
      related OTTI to accumulated  OCI which had previously been recognized as a
      loss in earnings.

      Management's  OTTI  evaluation  process  also  follows the guidance of the
      standard entitled  "Accounting for Certain  Investments in Debt and Equity
      Securities,"  "Recognition  of Interest Income and Impairment on Purchased
      and Retained  Beneficial  Interests in Securitized  Financial Assets," and
      "Amendments to the Impairment and Interest Income  Measurement  Guidance."
      This  guidance  requires  the Company to take into  consideration  current
      market  conditions,  fair value in relationship to cost, extent and nature
      of change in fair value,  issuer rating changes and trends,  volatility of
      earnings,  current analysts'  evaluations,  and all available  information
      relevant to the  collectability  of debt  securities.  The Company is also
      required to consider  its ability and intent to hold  investments  until a
      recovery of fair value,  which may be  maturity,  and other  factors  when
      evaluating  the  existence  of  OTTI  in  its  securities  portfolio.  The
      accounting  principle  was issued on January 12, 2009 and is effective for
      reporting   periods  ending  after  December  15,  2008.  This  accounting
      principle  amends the previous  accounting  principle by  eliminating  the
      requirement  that a  holder's  best  estimate  of cash flows be based upon
      those that a market participant would use. Instead, the provision requires
      that OTTI be recognized as a realized loss through earnings when there has
      been an adverse change in the holder's expected cash flows such that it is
      "probable" that the full amount will not be received.

      In addition, the disclosure and related discussion of unrealized losses is
      presented   pursuant  to  the  EITF  topic   entitled,   "The  Meaning  of
      Other-Than-Temporary   Impairment   and   Its   Application   to   Certain
      Investments."  The staff position replaces certain  impairment  evaluation
      guidance of the EITF topic;  however, the disclosure  requirements of EITF
      topic remain in effect. This staff position addresses the determination of
      when an  investment  is  considered  impaired,  whether the  impairment is
      considered  to  be   other-than-temporary,   and  the  measurement  of  an
      impairment  loss. The staff position also  supersedes  EITF Topic entitled
      "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
      Security  Whose Cost Exceeds Fair Value," and clarifies that an impairment
      loss  should be  recognized  no


                                       15
<PAGE>

      later than when the impairment is deemed  other-than-temporary,  even if a
      decision to sell an impaired security has not been made.

      For the three and nine months ended  September  30, 2009,  the Company did
      not recognize any OTTI charges.

      For all security  types  discussed  below where no OTTI is  considered  to
      exist at September 30, 2009,  management applied the criteria of the staff
      position  to each  investment  individually.  That is,  for each  security
      evaluated,  management  concluded  that it does  not  intend  to sell  the
      security  and it is not  more  likely  than not  that  management  will be
      required to sell the security  before recovery of its amortized cost basis
      and as such OTTI was not recognized as a loss in earnings.

      The following  summarizes,  by investment security type, the basis for the
      conclusion that the applicable  investment securities within the Company's
      available for sale portfolio were not  other-than-temporarily  impaired at
      September 30, 2009:

      U.S. Government Agency Securities - The unrealized losses in the Company's
      investment in these  securities as of September 30, 2009 totaled  $41,179.
      This compares to unrealized  losses of $3,386 at December 31, 2008. As the
      unrealized  losses  in this  sector  of the  portfolio  relate  mostly  to
      interest  rates,  the Company does not consider  these  investments  to be
      other-than-temporarily impaired at September 30, 2009.

      State and Municipal  Obligations - The unrealized  losses on the Company's
      investment in state and municipal  obligations  decreased from $376,069 at
      December  31, 2008 to $155,868 at September  30, 2009.  There were no OTTI
      charges  for these  securities  during the third  quarter  of 2009.  These
      securities are primarily  insured AA and A rated general  obligation bonds
      with stable ratings.  The decrease in the unrealized loss at September 30,
      2009 is attributable  to sales in this sector of the portfolio  during the
      third quarter.  As of September 30, 2009,  all securities are  performing,
      the  Company  is  receiving  all  interest  and   principal   payments  as
      contractually  agreed,  and all these  securities  are rated as investment
      grade.   The  Company  does  not   consider   these   investments   to  be
      other-than-temporarily impaired at September 30, 2009.

      Trust  Preferred  Securities - As of September  30, 2009,  the  unrealized
      losses on the Company's  investment in trust preferred  securities totaled
      $2,114,570.  As of September  30, 2009,  this  portfolio  consisted of two
      pooled trust preferred  securities with a carrying value of $2,994,101 and
      a market value of $879,531.  These securities are in the form of mezzanine
      classes which are comprised of bank and insurance  collateral.  During the
      first quarter of 2009,  both  securities were downgraded to a rating of Ca
      indicating  a more severe  deterioration  in the  creditworthiness  of the
      underlying issuers of these securities.  As a result, the Company recorded
      OTTI  losses  effective  as of December  31,  2008.  Management  evaluated
      current  credit  ratings,  credit  support  and stress  testing for future
      defaults.  Management  also  reviewed  analytics  provided by the trustee,
      reports from  third-party  sources and internal  documents.  As previously
      indicated,  the Company adopted the provisions of the staff position,  and
      in connection therewith determined that  other-than-temporary  impairments
      at April 1, 2009  consisted  of  $1,881,573  related to credit  losses and
      $2,511,080  related to other factors.  There were no  other-than-temporary
      impairments for the three months ended September 30, 2009.

      The unrealized  losses on the Company's  trust  preferred  securities were
      caused by a lack of  liquidity  and  uncertainties  facing the banking and
      insurance  industries.  During 2009,  the Company was notified  that these
      securities will not be remitting interest payments and that going forward,
      the Company  would be  receiving  payments "in kind." As a result of this,
      the Company has  discontinued  interest  accruals on the securities and an
      impairment  loss has been  recorded on one  security as  discussed  above.
      Based on the  aforementioned  valuation  analysis  to  determine  expected
      credit losses prepared on both of these


                                       16
<PAGE>

      securities,  management  expects to fully recover  amortized  cost of each
      security.  However,  additional  interest  deferrals and/or defaults could
      result in future  other-than-temporary  impairment  charges.  Because  the
      Company does not intend to sell the  investments and it is not more likely
      than not that the Company will be required to sell the investments  before
      recovery of their amortized cost bases, which may be maturity, the Company
      does not consider the  non-credit  impairment of these  investments  to be
      recognized in earnings as  other-than-temporary  impairments  at September
      30, 2009.

      Mortgage-backed  securities  - The  unrealized  losses  on  the  Company's
      investment  in  mortgage-backed  securities  decreased  from  $280,889  at
      December  31, 2008 to $33,855 at September  30,  2009.  There were no OTTI
      charges for the nine months ended September 30, 2009. These securities are
      U.S.   Government  Agency  or  sponsored  agency  securities   secured  by
      residential  properties.  The contractual cash flows for these investments
      are performing as expected. Management believes the increase in fair value
      is  attributable  to investor's  perception of  improvement  in credit and
      liquidity in the marketplace. The Company expects to collect all principal
      and interest on these  securities.  Because the Company does not intend to
      sell these investments and it is not more likely than not that the Company
      will be required to sell these  investments  until a recovery of amortized
      cost,  which may be at  maturity,  the  Company  does not  consider  these
      investments to be other-than-temporarily impaired at September 30, 2009.

      Equity  securities  - There  were no  unrealized  losses on the  Company's
      investment  which was a decrease from the unrealized  losses of $29,879 as
      of December 31, 2008. As of September 30, 2009, this portfolio consists of
      a  marketable  investment  fund with a fair value of  $2,014,939,  a money
      market  fund with a fair value of  $15,069,509,  and  perpetual  preferred
      stock of government sponsored  enterprises which have been written down to
      a fair value of $2. Given that there is no  unrealized  loss  remaining in
      this segment of the  portfolio,  no  other-than-temporary  evaluation  was
      warranted at September 30, 2009.

The following  table  presents a roll-forward  of the balance of  credit-related
impairment  losses on debt  securities  held at  September  30, 2009 for which a
portion  of  the   other-than-temporary   impairment  was  recognized  in  other
comprehensive loss:

<TABLE>
<CAPTION>
For the Three Months ended September 30, 2009:
<S>                                                                              <C>
Balance at July 1, 2009                                                          $1,881,573
Credit component of other-than-temporary impairment not reclassified to other
 comprehensive loss in conjunction with the cumulative effect adjustment                 --
Additions for credit component for which other-than-temporary impairment was
 not previously recognized                                                               --
                                                                                 ----------
Balance at September 30, 2009                                                    $1,881,573
                                                                                 ==========
<CAPTION>

For the Nine Months ended September 30, 2009:
<S>                                                                              <C>
Balance at January 1, 2009                                                       $       --
Credit component of other-than-temporary impairment not reclassified to other
 comprehensive loss in conjunction with the cumulative effect adjustment          1,881,573
Additions for credit component for which other-than-temporary impairment was
 not previously recognized                                                               --
                                                                                 ----------
Balance at September 30, 2009                                                    $1,881,573
                                                                                 ==========
</TABLE>

      As of  September  30,  2009,  debt  securities  with  other-than-temporary
      impairment  losses  related  to credit  and were  recognized  in  earnings
      consisted of pooled trust  preferred  securities.  In accordance  with the
      staff position regarding  other-than-temporary  impairment issued in April
      2009,  the Company  estimated the portion of loss  attributable  to credit
      using a  discounted  cash flow  model.  Significant  inputs  for the Trust


                                       17
<PAGE>

      Preferred   Securities  included  estimated  cash  flows  and  prospective
      deferrals,  defaults  and  recoveries  based on the  underlying  seniority
      status and  subordination  structure  of the pooled trust  preferred  debt
      tranche at the time of  measurement.  The  valuations  of trust  preferred
      securities  were based upon fair value guidance issued in April 2009 using
      cash flow  analysis.  Contractual  cash flows and a market  rate of return
      were used to derive fair value for each of these securities.  Factors that
      affected the market rate of return included (1) any uncertainty  about the
      amount and timing of the cash flows, (2) the credit risk, (3) liquidity of
      the  instrument,  and (4) observable  yields from trading data and bid/ask
      indications.  Credit risk spreads and liquidity  premiums were analyzed to
      derive the appropriate discount rate.  Prospective  deferral,  default and
      recovery  estimates  affecting  projected  cash  flows  were  based  on an
      analysis of the underlying  financial condition of the individual issuers,
      with  consideration  of the issuer's  capital  adequacy,  credit  quality,
      lending  concentrations  and other factors.  Assumptions  for deferral and
      constant  default rates were 100% for  nonperforming  in 2011,  from 2% to
      4.85% for  nonperforming  during 2010, 3.5% for 2011 and 1% for performing
      after 2011.  The  assumptions  for  collateral  conditional  default rates
      ranged from 0% to 4% and severity of defaults  assumptions ranged from 68%
      to 95%.  Assumptions for internal rates of return were from 12% to 17% and
      prepayment assumptions were from 0% to 2%.

      All cash flow estimates were based on the  securities'  tranche  structure
      and contractual rate and maturity terms. The Company utilized the services
      of a third-party vendor to obtain information about the structure in order
      to determine how the underlying  collateral cash flows will be distributed
      to each  security  issued from the  structure.  The  present  value of the
      expected  cash flows was compared to the  Company's  holdings to determine
      the credit-related impairment loss.

      The amortized cost and fair value of debt securities at September 30, 2009
      and December 31, 2008, by contractual  maturity,  are shown below.  Actual
      maturities  of  mortgage-backed  securities  may differ  from  contractual
      maturities  because the mortgages  underlying the securities may be called
      or  prepaid  with  or  without  call  or  prepayment  penalties.   Because
      mortgage-backed securities are not due at a single maturity date, they are
      not included in the maturity categories in the following maturity summary.

<TABLE>
<CAPTION>
                                                                  September 30, 2009
                                                --------------------------------------------------------------
                                                Available-for-Sale Securities      Held-to-Maturity Securities
                                                -----------------------------      ---------------------------
                                                 Amortized           Fair            Amortized      Fair
                                                    Cost            Value               Cost        Value
                                                -----------      -----------          -------      -------
<S>                                             <C>              <C>                  <C>          <C>
    Due in one year or less                     $   999,178      $ 1,010,938          $    --      $    --
    Due after one year through five years         5,226,049        5,294,963               --           --
    Due after five years through ten years       10,584,778       10,642,659               --           --
    Due after ten years                          13,934,502       11,772,315               --           --
                                                -----------      -----------          -------      -------
                                                 30,744,507       28,720,875               --           --
    Mortgage-backed securities                   51,590,602       52,503,355           15,064       15,420
                                                -----------      -----------          -------      -------
       TOTAL DEBT SECURITIES                    $82,335,109      $81,224,230          $15,064      $15,420
                                                ===========      ===========          =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     December 31,2008
                                                ------------------------------------------------------------
                                                Available-for-Sale Securities    Held-to-Maturity Securities
                                                -----------------------------      -------------------------
                                                 Amortized           Fair          Amortized       Fair
                                                    Cost            Value             Cost        Value
                                                ------------      ------------      -------      -------
<S>                                             <C>               <C>               <C>          <C>
    Due in one year or less                     $         --      $         --      $    --      $    --
    Due after one year through five years         25,110,576        25,272,025           --           --
    Due after five years through ten years         6,403,590         6,443,810           --           --
    Due after ten years                           18,521,023        18,191,039           --           --
                                                ------------      ------------      -------      -------
                                                  50,035,189        49,906,874           --           --
    Mortgage-backed securities                    60,165,607        60,563,328       16,550       16,553
                                                ------------      ------------      -------      -------
       TOTAL DEBT SECURITIES                    $110,200,796      $110,470,202      $16,550      $16,553
                                                ============      ============      =======      =======
</TABLE>


                                       18
<PAGE>

9.    A summary of the Bank's loan and lease portfolio at September 30, 2009 and
      December 31, 2008 is as follows:

<TABLE>
<CAPTION>
                                                                                        2009                 2008
                                                                                   -------------       -------------
<S>                                                                                <C>                 <C>
    Real estate--residential mortgage                                              $ 172,572,153       $ 192,561,108
    Real estate--commercial mortgage                                                 100,564,068          67,454,925
    Real estate--construction                                                         27,262,941          38,153,503
    Commercial Loans                                                                  41,015,054          46,249,689
    Commercial Leases (net of unearned
      discount of $3,999,055-2009, $2,501,895-2008)                                   35,324,433          19,785,870
    Installment                                                                        4,882,886           5,113,400
    Other                                                                                372,074             128,574
                                                                                   -------------       -------------
                            TOTAL LOANS AND LEASES                                   381,993,609         369,447,069
    Net deferred loan origination costs                                                  636,779             562,242
    Premiums on purchased loans                                                           20,690              81,588
    Allowance for loan and lease losses                                               (6,084,194)         (3,698,820)
                                                                                   -------------       -------------
                              NET LOANS AND LEASES                                 $ 376,566,884       $ 366,392,079
                                                                                   =============       =============
</TABLE>

      Changes in the  allowance  for loan and lease  losses for the three months
      ended September 30, 2009 and 2008 are as shown below:

                                                     2009               2008
                                                  -----------       -----------
    Balance at June 30,                           $ 4,029,790       $ 2,233,578

    Provision for loan and lease losses             2,682,691           155,000
    Loans and leases charged off                     (767,429)         (123,192)
    Recoveries of loans and leases charged off        139,142             1,716
                                                  -----------       -----------

    Balance at the end of the period              $ 6,084,194       $ 2,267,102
                                                  ===========       ===========

      Changes in the  allowance  for loan and lease  losses for the nine  months
      ended September 30, 2009 and 2008 are as shown below:

                                                      2009              2008
                                                  -----------       -----------

    Balance at beginning of the year              $ 3,698,820       $ 2,151,622

    Provision for loan and lease losses             3,470,280           367,000
    Loans and leases charged off                   (1,416,376)         (275,457)
    Recoveries of loans and leases charged off        331,470            23,937
                                                  -----------       -----------

    Balance at the end of the period              $ 6,084,194       $ 2,267,102
                                                  ===========       ===========

      The  following  information  relates to impaired  loans and leases,  which
      include  all  nonaccrual  loans and leases and other loans and leases past
      due 90 days or more, and all restructured  loans and leases, as of and for
      the nine months ended September 30, 2009 and December 31, 2008.

<TABLE>
<CAPTION>
                                                                                         2009            2008
                                                                                      ----------      ---------
<S>                                                                                   <C>             <C>
    Loans and leases receivable for which there is a related allowance for loan
       and lease losses                                                               $4,140,031      $6,225,481
                                                                                      ==========      ==========

    Loans and leases receivable for which there is no related allowance for loan
       and lease losses                                                               $7,578,146      $2,657,655
                                                                                      ==========      ==========

    Allowance for loan and lease losses related to impaired loans and leases          $1,375,040      $  939,066
                                                                                      ==========      ==========
</TABLE>


                                       19
<PAGE>


10.   Other real estate owned  ("OREO")  represents the estimated net realizable
      value of real estate  received in satisfaction  of a  non-performing  loan
      through  foreclosure  proceedings during 2009. The Bank had no OREO during
      2008.  A summary of the other real estate  owned  operations  for the nine
      months ended  September 30, 2009 and 2008 included in other expenses is as
      follows:

<TABLE>
<CAPTION>
                                                                      2009         2008
                                                                    -------      ------
<S>                                                                 <C>          <C>
    Expense of holding other real estate owned                      $98,875      $   --
    Write-down of other real estate owned property                       --          --
                                                                    -------      ------
    Expense of holding other real estate owned operations, net      $98,875      $   --
                                                                    =======      ======
</TABLE>

11.   A summary of the Bank's  deposits at  September  30, 2009 and December 31,
      2008 is as follows:

<TABLE>
<CAPTION>
                                                                                 2009              2008
                                                                             ------------      ------------
<S>                                                                          <C>               <C>
    Noninterest bearing:
                Demand                                                       $ 70,023,494      $ 69,548,261
                                                                             ------------      ------------
    Interest bearing:
                Savings                                                        72,532,547        58,582,376
                Money market                                                   82,392,871        93,085,126
                Time certificates of deposit in
                  denominations of $100,000 or more                            76,917,868        41,003,855
                Other time certificates of deposit                             80,657,664        81,107,006
                                                                             ------------      ------------
                Total Interest bearing deposits                               312,500,950       273,778,363
                                                                             ------------      ------------
                                                         TOTAL DEPOSITS      $382,524,444      $343,326,624
                                                                             ============      ============
</TABLE>

      Included in deposits as of  September  30, 2009 and  December 31, 2008 are
      approximately  $29,510,000  and  $15,902,000,  respectively,  of  brokered
      deposits which have varying  maturities through December 2009 and December
      2010, respectively.

12.   During  2007,  the  Company  approved a  restricted  stock plan (the "2007
      Plan") for senior  management.  On February 15, 2008, the Company  granted
      3,500  restricted  stock awards to senior  management  from the 2007 Plan.
      These  awards  vest over a  five-year  period,  or  earlier  if the senior
      manager  ceases to be a senior  manager for reasons such as  retirement or
      change in control.  The holders of these awards  participate  fully in the
      rewards of stock ownership of the Company,  including  voting and dividend
      rights.  The senior managers are not required to pay any  consideration to
      the Company for the restricted stock awards. The Company measures the fair
      value of the awards  based on the  average of the high price and low price
      at which the Company's  common stock traded on the date of the grant.  For
      the three and nine months  ended  September  30,  2009,  $2,294 and $6,882
      respectively  was recognized as compensation  expense under the 2007 Plan.
      At September 30, 2009,  unrecognized  compensation cost of $30,591 related
      to these  awards is expected to vest over a weighted  average  period of 4
      years.

      A summary of unvested shares as of and for the nine months ended September
      30, 2009, is as follows:

                                                  Weighted Average
                                    Shares          Grant Date
                                 (in thousands)     Fair Value
                                 -------------     ------------
    Unvested at January 1, 2009         3,500        $ 13.11

                Granted                    --             --
                Vested                     --             --
                Forfeited                  --             --
                                        -----        -------

    Unvested at September 30, 2009      3,500        $ 13.11
                                        =====        =======


                                       20
<PAGE>

13.   The Company has two operating  segments for purposes of reporting business
      line results: Community Banking and Leasing. The Community Banking segment
      is defined as all the operating  results of the Company and the Bank.  The
      Leasing  segment  is defined as the  results of First  Litchfield  Leasing
      Corporation.  Because First Litchfield Leasing Corporation is a relatively
      new subsidiary,  methodologies  and  organizational  hierarchies are newly
      developed  and will be  subject  to  periodic  review  and  revision.  The
      following presents the operating results and total assets for the segments
      of the Company as of and for the three and nine months ended September 30,
      2009 and 2008, respectively. The Company uses an internal reporting system
      to generate  information by operating  segment.  Estimates and allocations
      are used for  noninterest  expenses and income  taxes.  The Company uses a
      matched  maturity  funding concept to allocate  interest  expense to First
      Litchfield  Leasing  Corporation.  The matched  maturity  funding  concept
      utilizes the origination date and the maturity date of the lease to assign
      an interest expense to each lease.

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                                        September 30, 2009
                                                               --------------------------------------------------------------------
                                                                 Community                           Elimination       Consolidated
                                                                  Banking            Leasing           Entries            Total
                                                               -------------       ------------       ----------      -------------
<S>                                                            <C>                 <C>                <C>             <C>
    Net interest income                                        $   3,308,163       $    418,462       $       --      $   3,726,625
    Provision for credit losses                                    2,660,513             22,178               --          2,682,691
                                                               -------------       ------------       ----------      -------------

    Net interest income after provision for credit losses            647,650            396,284               --          1,043,934
    Noninterest income                                             1,215,035                 --               --          1,215,035
    Noninterest expense                                            5,019,960             82,524               --          5,102,484
                                                               -------------       ------------       ----------      -------------

    (Loss) income before income taxes                             (3,157,275)           313,760               --         (2,843,515)
    Income tax benefit (provision)                                   875,044           (104,600)              --            770,444
                                                               -------------       ------------       ----------      -------------

    Net (loss) income                                          $  (2,282,231)      $    209,160       $       --      $  (3,613,959)
                                                               =============       ============       ==========      =============

    Total assets as of September 30, 2009                      $ 513,221,094       $ 38,184,219       $  201,950      $ 551,203,363
                                                               =============       ============       ==========      =============
</TABLE>

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                                        September 30, 2008
                                                               --------------------------------------------------------------------

                                                                 Community                           Elimination       Consolidated
                                                                  Banking            Leasing           Entries            Total
                                                               ------------        ------------       ----------      -------------
<S>                                                            <C>                 <C>                <C>             <C>
    Net interest income                                        $   3,713,276       $    171,606       $       --      $   3,884,882
    Provision for credit losses                                      119,909             35,091               --            155,000
                                                               -------------       ------------       ----------      -------------

    Net interest income after provision for credit losses          3,593,367            136,515               --          3,729,882
    Noninterest (loss) income                                     (5,811,556)             4,028               --         (5,807,528)
    Noninterest expense                                            3,672,156             80,874               --          3,753,030
                                                               -------------       ------------       ----------      -------------

    (Loss) Income before income taxes                             (5,890,345)            59,669               --         (5,830,676)
    Income tax benefit (provision)                                   423,034            (18,248)              --            404,786
                                                               -------------       ------------       ----------      -------------

    Net (loss) income                                          $  (5,467,311)      $     41,421       $       --      $  (5,425,890)
                                                               =============       ============       ==========      =============

    Total assets as of September 30, 2008                      $ 484,358,599       $ 22,381,788       $  201,950      $ 506,538,437
                                                               =============       ============       ==========      =============
</TABLE>


                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                                                        Nine Months Ended
                                                                                        September 30, 2009
                                                               --------------------------------------------------------------------
                                                                 Community                            Elimination     Consolidated
                                                                  Banking            Leasing           Entries            Total
                                                               -------------       ------------       ----------      -------------
<S>                                                            <C>                 <C>                <C>             <C>
    Net interest income                                        $  10,626,062       $  1,074,058       $       --      $  11,700,120
    Provision for credit losses                                    3,357,959            112,321               --          3,470,280
                                                               -------------       ------------       ----------      -------------

    Net interest income after provision for credit losses          7,268,103            961,737               --          8,229,840
    Noninterest income                                             3,256,647              2,906               --          3,259,553
    Noninterest expense                                           13,307,487            258,045               --         13,565,532
                                                               -------------       ------------       ----------      -------------

    (Loss) Income before income taxes                             (2,782,737)           706,598               --         (2,076,139)
    Income tax benefit (provision)                                   940,188           (234,301)              --            705,887
                                                               -------------       ------------       ----------      -------------

    Net (loss) income                                          $  (1,842,549)      $    472,297       $       --      $  (1,370,252)
                                                               =============       ============       ==========      =============

    Total assets as of September 30, 2009                      $ 513,221,094       $ 38,184,219       $  201,950      $ 551,203,363
                                                               =============       ============       ==========      =============
</TABLE>

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended
                                                                                         September 30, 2008
                                                              ---------------------------------------------------------------------

                                                                 Community                            Elimination     Consolidated
                                                                   Banking           Leasing            Entries           Total
                                                               -------------       ------------       ----------      -------------
<S>                                                            <C>                 <C>                <C>          <C>
    Net interest income                                        $  10,708,773       $    465,748       $       --      $  11,174,521
    Provision for credit losses                                      280,226             86,774               --            367,000
                                                               -------------       ------------       ----------      -------------

    Net interest income after provision for credit losses         10,428,547            378,974               --                 --
    Noninterest (loss) income                                     (4,021,621)             4,028               --         (4,017,593)
    Noninterest expense                                           11,119,124            256,668               --         11,375,792
                                                               -------------       ------------       ----------      -------------

    (Loss) income before income taxes                             (4,712,198)           126,334               --        (15,393,385)
    Income tax benefit (provision)                                   313,270            (38,325)              --            274,945
                                                               -------------       ------------       ----------      -------------

    Net (loss) income                                          $  (4,398,928)      $     88,009       $       --      $  (4,310,919)
                                                               =============       ============       ==========      =============

    Total assets as of September 30, 2008                      $ 484,358,599       $ 22,381,788       $  201,950      $ 506,538,437
                                                               =============       ============       ==========      =============
</TABLE>

14.   The fair  value  of an  asset or  liability  is the  price  that  would be
      received  to sell that  asset or paid to  transfer  that  liability  in an
      orderly   transaction   occurring  in  the   principal   market  (or  most
      advantageous  market in the absence of a principal  market) for such asset
      or liability.  In estimating fair value,  the Company  utilizes  valuation
      techniques  that are  consistent  with the  market  approach,  the  income
      approach  and/or  the  cost  approach.   Such  valuation   techniques  are
      consistently   applied.   Inputs  to  valuation   techniques  include  the
      assumptions  that  market  participants  would use in  pricing an asset or
      liability.   The  standard  issued  by  the  FASB  entitled,  "Fair  Value
      Measurements" establishes a fair value hierarchy for valuation inputs that
      gives the  highest  priority  to  quoted  prices  in  active  markets  for
      identical  assets or liabilities  and the lowest  priority to unobservable
      inputs. The fair value hierarchy is as follows:


                                       22
<PAGE>

Level 1  Quoted prices in active  markets for identical  assets or  liabilities.
         Level 1 assets include debt and equity securities that are traded in an
         active exchange market, as well as U.S. Treasury  securities,  that are
         highly liquid and are actively traded in over-the-counter markets.

Level 2  Observable  inputs other than Level 1 prices such as quoted  prices for
         similar  assets or  liabilities;  quoted prices in markets that are not
         active;  or other inputs that are observable or can be  corroborated by
         observable market data for substantially the full term of the assets or
         liabilities.  Level 2 assets and  liabilities  include debt  securities
         with quoted prices that are traded less frequently than exchange-traded
         instruments whose value is determined using a pricing model with inputs
         that are observable in the market or can be derived principally from or
         corroborated  by  observable  market  data.  This  category   generally
         includes  other U.S.  Government  and agency  mortgage-backed  and debt
         securities,  state and  municipal  obligations,  and equity  securities
         quoted in markets that are not active.  Also included are interest rate
         swaps, certain collateral-dependent impaired loans, loans held for sale
         and foreclosed property.

Level 3  Unobservable  inputs that are supported by little or no market activity
         and  that  are   significant  to  the  fair  value  of  the  assets  or
         liabilities.   Level  3  assets  and  liabilities   include   financial
         instruments whose value is determined using pricing models,  discounted
         cash flow methodologies,  or similar techniques, as well as instruments
         for  which  the  determination  of  fair  value  requires   significant
         management  judgment or  estimation.  For example,  this category could
         include certain private equity investments,  trust preferred securities
         and certain collateral-dependent impaired loans.


      The following table details the financial  instruments that are carried at
      fair value and measured at fair value on a recurring basis as of September
      30, 2009 and December 31, 2008 and indicates  the fair value  hierarchy of
      the valuation techniques utilized by the Company to determine fair value:

<TABLE>
<CAPTION>
                                                Fair Value Measurements at September 30, 2009, Using

                                                                Quoted Prices in                        Significant
                                                 September       Active Markets    Significant Other    Unobservable
                                                 30, 2009       Identical Assets   Observable Inputs       Inputs
                                                   Total            (Level 1)         (Level 2)          (Level 3)
                                                 -----------      -------------       -----------        ---------
<S>                                              <C>              <C>                 <C>                <C>
    Assets:
              Available for sale securities      $98,308,680      $  20,235,700       $77,193,449        $879,531
                                                 ===========      =============       ===========        ========
    Liabilities:
              Interest rate swaps                $    41,609      $          --       $    41,609        $     --
                                                 ===========      =============       ===========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                Fair Value Measurements at December 31, 2008, Using

                                                                 Quoted Prices in                       Significant
                                                   December       Active Markets   Significant Other   Unobservable
                                                   31, 2008     Identical Assets   Observable Inputs       Inputs
                                                    Total            (Level 1)         (Level 2)          (Level 3)
                                                 ------------     -------------       ------------       ---------
<S>                                              <C>              <C>                 <C>                <C>
Assets:
          Available for sale securities          $113,486,201     $   5,188,571       $108,297,630       $     --
                                                 ============      =============      ============       ========
</TABLE>

As of September 30, 2009, U.S.  Treasury  securities and two equity  securities,
with carrying  values of  $20,235,700  are the only assets whose fair values are
measured on a recurring basis,  using Level 1 inputs (active market quotes).  At
December  31,  2008,  U.S.  Treasury  securities  and one equity  security  with
carrying  values of  $5,188,571,  are the only  assets  whose  fair  values  are
measured on a recurring basis using Level 1 inputs.

The fair values of U. S. Government and agency mortgaged  backed  securities and
debt securities,  State and Municipal obligations, and certain equity securities
are measured on a recurring  basis,  using Level 2 inputs of  observable  market
data on similar securities.  As of September 30, 2009 and December 31, 2008, the
carrying  values  of these  securities  totaled  $77,193,449  and  $108,297,630,
respectively.


                                       23
<PAGE>

The fair value of the  Bank's  interest  rate swap  derivative  instruments  are
determined  based on inputs that are readily  available in public markets or can
be derived from information available in publicly quoted markets. Therefore, the
Bank has  categorized  these  derivative  instruments as Level 2 within the fair
value hierarchy.

Securities measured at fair value in Level 3 include certain collateralized debt
obligations  that are  backed  by trust  preferred  securities  issued by banks,
thrifts  and  insurance  companies.  Management  determined  that an orderly and
active market for these securities and similar securities did not exist based on
a  significant  reduction  in trading  volume and widening  spreads  relative to
historical levels.

     The following table shows a reconciliation of the beginning and ending
     balances for Level 3 assets:

<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                             September 30, 2009
                                                                             ------------------
<S>                                                                              <C>
    Balance at beginning of period                                               $       --

    Increase in fair value of securities included in other comprehensive loss       385,916
    Transfers to (from) level 3 - Trust Preferred securities                        493,615
                                                                                 ----------

    Balance at end of period                                                     $  879,531
                                                                                 ==========
</TABLE>

     The following tables detail the assets and liabilities carried at fair
     value and measured at fair value on a nonrecurring basis as of September
     30, 2009 and December 31, 2008 and indicate the fair value hierarchy of the
     valuation techniques utilized by the Company to determine the fair value:

<TABLE>
<CAPTION>
                                                                         September 30, 2009
                                            ---------------------------------------------------------------------------
                                                                  Quoted Prices in       Significant        Significant
                                                Balance          Active Markets for      Observable         Unobservable
                                                 as of            Identical Assets          Inputs              Inputs
                                            September 30, 2009          (Level 1)          (Level 2)          (Level 3)
                                            ------------------     ----------------       ---------         ----------
<S>                                           <C>                     <C>                 <C>                <C>
    Financial assets held at fair value
      Foreclosed Property (1)                 $  547,040              $   --              $ 547,040          $       --
                                              ==========              ======              =========          ==========

      Impaired Loans (1)                      $8,885,054              $   --              $      --          $8,885,054
                                              ==========              ======              =========          ==========

     Loans held for sale                      $   95,000              $   --              $  95,000          $       --
                                              ==========              ======              =========          ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                            December 31, 2008
                                            -----------------------------------------------------------------------------
                                                                  Quoted Prices in       Significant         Significant
                                                  Balance        Active Markets for      Observable          Unobservable
                                                  as of           Identical Assets         Inputs              Inputs
                                              December 31, 2008    (Level 1)              (Level 2)           (Level 3)
                                            -------------------    ----------          -----------            ----------
<S>                                           <C>                    <C>                  <C>                 <C>
    Financial assets held at fair value
      Impaired Loans (1)                      $3,271,452             $   --               $  694,650          $2,576,802
                                              ==========             ======               ==========          ==========

      Loans held for sale                     $1,013,216             $   --               $1,013,216          $       --
                                              ==========             ======               ==========          ==========
 </TABLE>

(1) Represents  carrying value and related write-downs for which adjustments are
based on the appraised value.

      The Company has no other  assets or  liabilities  carried at fair value or
      measured at fair value on a non recurring basis.

      The Fair Value  Measurements  standard  requires  disclosure of fair value
      information about financial instruments,  whether or not recognized in the
      statement of financial condition,  for which it is


                                       24
<PAGE>

      practicable to estimate that value. The Fair Value  Measurements  standard
      excludes certain financial  instruments from its disclosure  requirements.
      Accordingly,  the aggregate fair value amounts  presented do not represent
      the underlying value of the Company.

      In April 2009, the FASB issued a staff position "Interim Disclosures about
      Fair  Value  of  Financial   Instruments."   This  staff  position  amends
      "Disclosures  about  Fair  Value of  Financial  Instruments,"  to  require
      disclosures  about fair value instruments for interim reporting periods of
      publicly traded companies as well as in financial  statements.  This staff
      position  also amends  "Interim  Financial  Reporting,"  to require  those
      disclosures  in  summarized  financial  information  at interim  reporting
      periods. Effective April 1, 2009, the Company adopted this staff position.

      Cash and Due From Banks,  Federal Funds Sold,  Interest Income Receivable,
      Accrued  Interest  Payable,   Collateralized  Borrowings,  and  Short-term
      Borrowings:  These assets and liabilities  are short-term,  and therefore,
      book  value  is a  reasonable  estimate  of fair  value.  These  financial
      instruments are not carried at fair value on a recurring basis.

      Federal  Home  Loan  Bank  Stock,  Federal  Reserve  Bank  Stock and Other
      Restricted Stock: Such stock is estimated to equal the carrying value, due
      to the historical  experience that these stocks are redeemed at par. These
      financial instruments are not carried at fair value on a recurring basis.

      Available  for Sale and Held to Maturity  Securities:  Where quoted prices
      are available in an active market,  securities are classified within Level
      1 of the valuation  hierarchy.  Level 1 securities  include U.S.  Treasury
      securities that are traded in an active exchange market.  If quoted prices
      are not available,  then fair values are estimated by using pricing models
      (i.e.,  matrix  pricing)  or quoted  prices  of  securities  with  similar
      characteristics  and  are  classified  within  Level  2 of  the  valuation
      hierarchy. Examples of such instruments include U.S. Government agency and
      sponsored agency bonds,  mortgage-backed  and debt  securities,  state and
      municipal  obligations,  and equity  securities  in  markets  that are not
      active, and certain  collateral  dependent loans.  Securities  measured at
      fair value in Level 3 include certain collateralized debt obligations that
      are backed by trust  preferred  securities  issued by banks,  thrifts  and
      insurance  companies.  Management  determined  that an orderly  and active
      market for these securities and similar  securities did not exist based on
      a significant reduction in trading volume and widening spreads relative to
      historical  levels.  Available  for sale  securities  are recorded at fair
      value on a  recurring  basis,  and held to  maturity  securities  are only
      disclosed at fair value.

      Loans:  For  variable  rate loans  which  reprice  frequently  and have no
      significant  change in  credit  risk,  carrying  values  are a  reasonable
      estimate  of fair  values,  adjusted  for credit  losses  inherent  in the
      portfolios. The fair value of fixed rate loans is estimated by discounting
      the future cash flows using the current  market rates as of the  reporting
      date,  estimated  using local market data, at which similar loans would be
      made to borrowers  with similar  credit ratings and for the same remaining
      maturities,  adjusted for credit losses inherent in the portfolios.  Loans
      are  generally not recorded at fair value on a recurring  basis.  However,
      from   time   to   time,    nonrecurring   fair   value   adjustments   to
      collateral-dependent  impaired  loans  are  recorded  to  reflect  partial
      write-downs  based on the  observable  market  price or current  appraised
      value of collateral.

      Loans held for sale: Loans held for sale are required to be carried at the
      lower of cost or fair value.  Market value is to represent fair value.  As
      of  September  30,  2009,  the Company had $95,000 of loans held for sale,
      which  represented  first  mortgages  committed  and subject to settlement
      shortly after the end of the period. Due to the short term nature of loans
      committed for sale, the carrying value approximates the market price.

      Interest rate swap derivatives: The fair value of the Bank's interest rate
      swap  derivative  instruments  are  determined  based on  inputs  that are
      readily  available in public  markets or can be derived  from


                                       25
<PAGE>

      information available in publicly quoted markets.  Therefore, the Bank has
      categorized these derivative  instruments as Level 2 within the fair value
      hierarchy.

      Deposits:  The fair value of demand  deposits,  savings  and money  market
      deposits is the amount  payable on demand at the reporting  date. The fair
      value of certificates of deposit is estimated using a discounted cash flow
      calculation  that applies  current market interest rates being offered for
      deposits  of similar  remaining  maturities  to a schedule  of  aggregated
      expected  maturities on such  deposits.  Deposits are not recorded at fair
      value on a recurring basis.

      Long-term  debt:  The fair value of long-term  debt is  estimated  using a
      discounted cash flow  calculation  that applies current interest rates for
      borrowings  of  similar  maturity  to a  schedule  of  maturities  of such
      advances.  Long-term  debt is not  recorded  at fair value on a  recurring
      basis.

      Off-balance-sheet  instruments:  Fair values for off-balance-sheet lending
      commitments  are based on fees  currently  charged to enter  into  similar
      agreements,  taking into account the remaining terms of the agreements and
      the  counterparties'  credit standings.  Off-balance sheet instruments are
      not recorded at fair value on a recurring basis.

      The recorded  book  balances and  estimated  fair values of the  Company's
      financial  instruments  at  September  30, 2009 and  December 31, 2008 are
      presented in the following  table.  The  estimated  fair value amounts for
      September  30, 2009 and December 31, 2008 have been measured as of the end
      of the  respective  periods  and have not been  revaluated  or updated for
      purposes of these  financial  statements  subsequent  to those  respective
      dates. As such, the estimated fair values of these  financial  instruments
      subsequent  to those  respective  reporting  dates may be  different  than
      amounts reported at period-end.

<TABLE>
<CAPTION>
                                         September 30, 2009            December 31, 2008
                                     ---------------------------  ----------------------------
                                         Book       Estimated         Book        Estimated
                                        Value      Fair Value         Value      Fair Value
                                     ---------------------------  ----------------------------
<S>                                <C>               <C>         <C>                <C>
Financial Assets:
Cash and equivalents               $   43,243,586    43,243,586  $    9,238,783     9,238,783
Available for sale securities          98,308,680    98,308,680     113,486,201   113,486,201
Held to maturity securities                15,064        15,420          16,550        16,553
Federal Home Loan Bank Stock            5,427,600     5,427,600       5,427,600     5,427,600
Federal Reserve Bank Stock                225,850       225,850         225,850       225,850
Other restricted stock                    105,000       105,000         100,000       100,000
Loans held for sale                        95,000        95,000       1,013,216     1,013,216
Loans and leases, net                 376,566,884   393,828,296     366,392,079   365,191,872
Accrued interest receivable             1,939,745     1,939,745       2,262,918     2,262,918
Interest rate swaps                        41,609        41,609               -             -

Financial Liabilities:
Savings deposits                       72,532,547    72,532,547      58,582,376    58,582,376
Money market and demand deposits      152,416,365   152,416,365     162,633,387   162,633,387
Time certificates of deposit          157,575,532   158,575,338     122,110,861   122,607,975
Federal Home Loan Bank advances        80,000,000    82,950,958      81,608,000    86,044,755
Repurchase agreements with
   financial institutions              22,500,000    23,308,788      26,450,000    26,316,528
Repurchase agreements with customers   19,409,085    19,409,085      18,222,571    18,222,571
Subordinated debt                      10,104,000    10,104,000      10,104,000    10,104,000
Accrued interest payable                  511,261       511,261         611,829       611,829
Collateralized borrowings                       -             -       1,375,550     1,375,550
</TABLE>

      Loan and lease  commitments,  rate lock  derivative  commitments and other
      commitments, on which the committed interest rate is less than the current
      market rate are insignificant at September 30, 2009 and December 31, 2008.


                                       26
<PAGE>

15. Interest Rate Swaps and Derivative Instruments

      The Company manages its interest rate risk by using derivative instruments
      in the form of interest rate swaps  designed to reduce  interest rate risk
      by effectively  converting a portion of floating rate debt into fixed rate
      debt. This action reduces the Company's risk of incurring  higher interest
      costs in  periods of rising  interest  rates.  On  February  2, 2009,  the
      Company  entered into two interest rate swap  agreements  through March of
      2014 and 2019,  respectively;  however,  the  settlements  under the swaps
      commenced March 30, 2009. Payments under the swap agreements will continue
      on the  30th of each  quarter  end.  The  Company  is  accounting  for the
      interest rate swap agreements as effective cash flow hedges.  The notional
      principal  amounts of these swaps were  $6,800,000  and $3,000,000 and the
      variable  interest rate amounts on related debt were swapped for effective
      fixed rates of 5.79% and 4.86%,  respectively.  These swaps are designated
      as cash flow  hedges and qualify for hedge  accounting  treatment  under a
      standard  entitled,  "Accounting  for Derivative  Instruments  and Hedging
      Activities."

      In accordance with this standard, the Company's derivative instruments are
      recorded as assets or  liabilities  at fair  value.  Changes in fair value
      derivatives  that have been designated as cash flow hedges are included in
      "Unrealized  gains  (losses) on cash flow  hedges" as a component of other
      comprehensive  income to the extent of the  effectiveness  of such hedging
      instruments.  Any  ineffective  portion of the change in fair value of the
      designated  hedging  instruments  would be  included  in the  Consolidated
      Statements of Income in interest (income)  expense.  No such adjustment to
      income to reflect hedge ineffectiveness on cash flow hedges was recognized
      during the nine months ended  September 30, 2009, and Management  does not
      anticipate the recognition of any such adjustment to income throughout the
      terms of the swaps.  Gains and losses are  reclassified  from  accumulated
      other comprehensive income to the Consolidated Statements of Income in the
      period the hedged transaction affects earnings.

      Amounts  reported in  accumulated  other  comprehensive  income related to
      derivatives will be reclassified to interest expense as interest  payments
      are  made  on  the  Company's   variable-rate   debt.   Amounts  in  other
      comprehensive  income will be reclassified  into interest expense over the
      term of the swap agreements to achieve the fixed rate on the debt.

      Over the next twelve  months,  the Company  estimates  that an  additional
      $221,175 will be reclassified as an increase to interest expense.

      The gross  carrying  values of the interest rate contracts as of September
      30,  2009 were  $41,609  and were  recorded  in other  liabilities  on the
      Consolidated  Balance  Sheets  (see Notes 4 and 13).  For the nine  months
      ended September 30, 2009, the amount of income recognized on the effective
      portion  of  these   interest   rate   contracts  in   accumulated   other
      comprehensive  income on the  condensed  Consolidated  Balance  Sheets was
      ($27,462).  For the quarter ended September 30, 2009, there were no losses
      on the effective  portion of these  interest rate  contracts  reclassified
      from  accumulated  other  comprehensive  loss into interest expense of the
      Consolidated  Statement of Financial  Condition.  These interest rate swap
      agreements contain no credit-risk-related contingency features. Associated
      with these swaps,  as of September  30, 2009,  the Company was required to
      post collateral with a fair value totaling $300,000 to cover the estimated
      peak  exposure of these  swaps.  No  additional  collateral  is or will be
      required to be posted.

16. Recent Accounting Pronouncements

      As discussed in Note 1 - Significant Accounting Policies, on July 1, 2009,
      the Accounting Standards  Codification became FASB's officially recognized
      source of authoritative  U.S.  generally  accepted  accounting  principles
      applicable  to  all  public  and  non-public   non-governmental  entities,
      superceding  existing FASB, AICPA, EITF and related literature.  Rules and
      interpretive releases of the SEC under the


                                       27
<PAGE>

      authority of federal  securities  laws are also  sources of  authoritative
      GAAP for SEC registrants.  All other  accounting  literature is considered
      non-authoritative.  The switch to the ASC affects the way companies  refer
      to U.S.  GAAP in financial  statements  and  accounting  policies.  Citing
      particular content in the ASC involves  specifying the unique numeric path
      to  the  content  through  the  Topic,  Subtopic,  Section  and  Paragraph
      structure.

      Noncontrolling   Interests  in  Consolidated  Financial  Statements  -  In
      December  2007,  the FASB  issued an  amendment  to  previous  guidance on
      noncontrolling  interest.  This amendment  establishes  new accounting and
      reporting  standards for the  noncontrolling  interest in a subsidiary and
      for the  deconsolidation of a subsidiary.  Before this statement,  limited
      guidance  existed  for  reporting   noncontrolling   interests   (minority
      interest).  As a result,  diversity  in  practice  existed.  In some cases
      minority  interest  was  reported  as a  liability  and in  others  it was
      reported  in  the  mezzanine  section  between   liabilities  and  equity.
      Specifically,  this amendment requires the recognition of a noncontrolling
      interest  (minority  interest)  as equity in the  consolidated  financials
      statement and separate from the parent's equity.  The amount of net income
      attributable  to the  noncontrolling  interest is included in consolidated
      net income on the face of the income statement.  This amendment  clarifies
      that changes in a parent's  ownership interest in a subsidiary that do not
      result in  deconsolidation  are equity  transactions if the parent retains
      its controlling financial interest.  In addition,  this statement requires
      that a parent  recognize  gain or loss in net income when a subsidiary  is
      deconsolidated.  Such gain or loss is to be measured  using the fair value
      of the noncontrolling  equity investment on the deconsolidation  date. The
      amendment also includes  expanded  disclosure  requirements  regarding the
      interests of the parent and its noncontrolling interests. Earlier adoption
      was prohibited. The Company adopted this amendment beginning on January 1,
      2009 and with the adoption,  presented  $74,015 as equity in the Company's
      consolidated  financial  statements and modified the  presentation  of the
      Company's financial  statements as of March 31, 2009 and December 31, 2008
      and going forward.

      Share-Based  Payment  Transaction  - In June  2008,  the FASB  issued  new
      guidance  on  "Determining  Whether  Instruments  Granted  in  Share-Based
      Payment  Transactions  Are  Participating  Securities."  This new guidance
      addresses whether instruments granted in share-based payment  transactions
      are participating  securities prior to vesting and, therefore,  need to be
      included in the earnings  allocation in computing earnings per share (EPS)
      under the  two-class  method.  This  guidance is effective  for  financial
      statements  issued for fiscal years beginning after December 15, 2008, and
      interim periods within those years.  All  prior-period  EPS data presented
      shall be adjusted retrospectively (including interim financial statements,
      summaries of earnings,  and selected  financial  data) to conform with the
      provisions of this staff  position.  Early  application was not permitted.
      The Company  adopted the staff  position  for the quarter  ended March 31,
      2009.  The  adoption  of this staff  position  did not have a  significant
      effect on the Company's financial statements.

      Derivatives  and Hedging - In March 2008,  the FASB issued a new  standard
      entitled, "Disclosures about Derivative Instruments and Hedging Activities
      - an amendment of FASB  Statement  133." The  standard  requires  expanded
      disclosure to provide greater transparency about (i) how and why an entity
      uses derivative  instruments,  (ii) how derivative instruments and related
      hedge  items  are  accounted  for  under  this  standard,  and  (iii)  how
      derivative  instruments  and  related  hedged  items  affect  an  entity's
      financial  position,  results of operations and cash flows.  To meet those
      objectives, the standard requires qualitative disclosures about objectives
      and strategies for using derivatives,  quantitative disclosures about fair
      value  amounts  of  gains  and  losses  on  derivative   instruments   and
      disclosures about credit  risk-related  contingent  features in derivative
      agreements.  The standard became effective for the Company January 1, 2009
      and  enhanced   disclosures  are  included  in  the  Company's   financial
      statements for September 30, 2009.

      Impairment  Guidance  - In  January  2009,  the FASB  issued a FASB  Staff
      Position entitled "Amendments to the Impairment Guidance of EITF Issue No.
      99-20,"  which  amends  the   impairment


                                       28
<PAGE>

      guidance in the EITF Issue, "Recognition of Interest Income and Impairment
      on Purchased  Beneficial  Interests and Beneficial Interests that Continue
      to be Held by a  Transferor  in  Securitized  Financial  Assets."  The FSP
      revises the EITF issue's impairment  guidance for beneficial  interests to
      make  it  consistent  with  the  requirements  of the  standard  entitled,
      "Accounting for Certain  Investments in Debt and Equity  Securities,"  for
      determining  whether an impairment of other debt and equity securities has
      occurred. The impairment model in the standard enables greater judgment to
      be exercised in determining whether an OTTI loss needs to be recorded. The
      impairment  model  previously  provided  for in  the  EITF  issue  limited
      management's  use of judgment in applying the impairment  model. The staff
      position was  effective  as of January 1, 2009.  The adoption of the staff
      position  did not have a  material  impact on the  Company's  consolidated
      financial statements.

      Determining Fair Value When the Volume and Level of Activity for the Asset
      or Liability Have  Significantly  Decreased and  Identifying  Transactions
      That Are Not  Orderly - In April  2009 FASB  issued  this  guidance  which
      addresses concerns that Fair Value  Measurements  emphasized the use of an
      observable market transaction even when that transaction may not have been
      orderly or the market for that transaction may not have been active.  This
      provides additional guidance on: (a) determining when the volume and level
      of activity for the asset or liability has  significantly  decreased;  (b)
      identifying  circumstances in which a transaction is not orderly;  and (c)
      understanding the fair value measurement implications of both (a) and (b).
      The effective date of disclosures for this new standard is for interim and
      annual  reporting  periods ending after June 15, 2009. The Company adopted
      this  guidance  on April 1,  2009.  The  adoption  did not have a material
      impact on the Company's consolidated financial statements. See Notes 8 and
      13 for disclosure.

      Other-Than-Temporary  Impairments - In April 2009, the FASB issued a staff
      position entitled,  "Recognition and Presentation of  Other-Than-Temporary
      Impairments."  The  staff  position  (i)  changes  existing  guidance  for
      determining  whether  an  impairment  is   other-than-temporary   to  debt
      securities  and (ii) replaces the existing  requirement  that the entity's
      management  assert it has both the intent and  ability to hold an impaired
      security until recovery with a requirement that management  assert: (a) it
      does not have the intent to sell the  security;  and (b) it is more likely
      than not it will not have to sell the security before recovery of its cost
      basis.   Under  the  staff  position,   declines  in  the  fair  value  of
      held-to-maturity and  available-for-sale  securities below their cost that
      are  deemed  to be  other-than-temporary  are  reflected  in  earnings  as
      realized  losses to the extent the impairment is related to credit losses.
      The amount of the  impairment  related to other  factors is  recognized in
      other  comprehensive  income.  The staff position became effective for the
      Company  in  the  quarter  ended  June  30,  2009,  and  resulted  in  the
      reclassification  of  $2,511,080  ($1,657,313,  net of tax) of  non-credit
      related OTTI to OCI which had previously  been  recognized in earnings and
      is disclosed in Note 8 - Investment Securities.

      Fair Value Measurements and Disclosures - In April 2009, the FASB issued a
      staff position entitled, "Determining Fair Value when the Volume and Level
      of Activity for the Asset or Liability  has  Significantly  Decreased  and
      Identifying Transactions that are not Orderly." The staff position affirms
      that the  objective  of fair  value  when the  market  for an asset is not
      active is the price that would be received to sell the asset in an orderly
      transaction, and clarifies and includes additional factors for determining
      whether  there has been a significant  decrease in market  activity for an
      asset when the market for that  asset is not  active.  The staff  position
      requires an entity to base its conclusion  about whether a transaction was
      not orderly on the weight of the evidence and expands  certain  disclosure
      requirements.  The staff position became  effective for the Company in the
      quarter ended June 30, 2009. See Note 13 for disclosure.

      Interim  Disclosure - Fair Value  Measurements  - In April 2009,  the FASB
      issued a new staff  position  entitled,  "Interim  Disclosures  about Fair
      Value of Financial  Instruments."  The staff position  requires a publicly
      traded  company  to  include  disclosures  about  the  fair  value  of its
      financial  instruments


                                       29
<PAGE>

      whenever it issues summarized financial  information for interim reporting
      periods.  In  addition,  entities  must  disclose,  in the  body or in the
      accompanying  notes of its summarized  financial  information  for interim
      reporting  periods and in its financial  statements  for annual  reporting
      periods,  the fair  value of all  financial  instruments  for  which it is
      practicable to estimate that value,  whether  recognized or not recognized
      in  the  statement  of  financial  position.  The  staff  position  became
      effective  for the Company in the  quarter  ended June 30,  2009,  and its
      adoption  did not have a  significant  effect on the  Company's  financial
      position,  results of operations,  or cash flows. The Company has included
      the disclosures required by the staff position in Note 13.

      Subsequent Events - In May 2009, the FASB issued a new standard  entitled,
      "Subsequent  Events."  This  standard  establishes  general  standards  of
      accounting for and disclosure of events that occur after the balance sheet
      date but before financial statements are issued or available to be issued.
      This  standard  defines (i) the period after the balance sheet date during
      which  a  reporting   entity's   management   should  evaluate  events  or
      transactions that may occur for potential recognition or disclosure in the
      financial statements,  (ii) the circumstances under which an entity should
      recognize events or transactions occurring after the balance sheet date in
      its financial statements,  and (iii) the disclosures an entity should make
      about events or  transactions  that occurred after the balance sheet date.
      The new standard became effective for the Company's  financial  statements
      for  periods  ending  after June 15,  2009 and did not have a  significant
      impact on the Company's financial statements.

      Transfers  and  Servicing  - In June  2009,  the FASB  issued a  statement
      entitled,  "Accounting for Transfers of Financial Assets - an amendment of
      FASB Statement No. 140." This standard amends prior accounting guidance to
      enhance   reporting  about  transfers  of  financial   assets,   including
      securitizations, and where companies have continuing exposure to the risks
      related to transferred  financial assets. The new standard  eliminates the
      concept  of  a  "qualifying   special-purpose   entity"  and  changes  the
      requirements  for  derecognizing   financial  assets.  The  standard  also
      requires  additional  disclosures  about all continuing  involvements with
      transferred  financial assets including information about gains and losses
      resulting from transfers during the period. The standard will be effective
      January 1, 2010 and is not  expected to have a  significant  impact on the
      Company's financial statements.

17.   Reclassification

      Certain  2008  amounts  have been  reclassified  to conform  with the 2009
      presentation. Such reclassifications had no effect on net income.

18.   Subsequent  Events

      The Company has  evaluated  events or  transactions  that  occurred  after
      September  30,  2009 and through the time the  financial  statements  were
      filed on November 13, 2009 for potential  recognition or disclosure in the
      interim financial statements.

      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.  No fractional shares
      will be issued.  Consummation  of the Merger is subject to approval by the
      shareholders  of the Company,  as well as customary  regulatory  approvals
      including  the Office of the  Comptroller  of the  Currency,  the State of
      Connecticut  Department  of  Banking  and the  Federal  Deposit  Insurance
      Corporation. The Merger is expected to close in the first quarter of 2010,
      although there can be no assurance that this will occur.


                                       30
<PAGE>

      On  November  9,  2009,  the Bank  entered  into a Formal  Agreement  (the
      "Agreement")  with The  Office of the  Comptroller  of the  Currency  (the
      "OCC").  The Agreement is a remedial  supervisory  action with  provisions
      intended  to  improve  the  Bank's  condition  and  operations.  While not
      punitive,  the Agreement  provides a framework for  addressing  identified
      problems,  documenting remedial efforts and preventing the reoccurrence of
      similar  problems so that the Bank's  condition will improve and no longer
      be considered to be troubled.  Management and the Board are of the opinion
      that compliance with the Agreement is in the best interest of the Bank but
      will require sustained effort and management resources.

      To coordinate its compliance efforts pursuant to the Agreement,  the Board
      of the Bank will appoint a Compliance  Committee  consisting  primarily of
      independent Directors. The Compliance Committee will meet at least monthly
      to monitor  and report the Bank's  progress  to the Board.  The Board will
      review the Bank's  liquidity  plans,  capital plans,  strategic  plans and
      management  and staffing plans and provide copies of such plans to the OCC
      along with copies of the  reports of the  Compliance  Committee  and other
      relevant  information.  The Board will  assess the  adequacy of the Bank's
      management  and staffing needs to assure that the Bank is well managed and
      well  staffed.  The Bank will also notify the OCC  regarding  any proposed
      changes in the Board,  executive  management  or staff or changes in their
      duties or responsibilities.

      Pursuant to the  Agreement,  the Bank will not utilize  brokered  deposits
      without  appropriate FDIC and OCC authorization.  In this regard, the only
      deposits  currently  utilized by the Bank which could be  characterized as
      "brokered  deposits" are deposits obtained through the CDARS program.  The
      Agreement  with the OCC does not preclude the Bank from  participating  in
      the CDARS program and the Bank has requested  authorization  from the FDIC
      to continue to participate in such program. The Bank has approximately $11
      million in CDARS deposits, most of which will mature in January 2010.

      The  Agreement  further  requires  the Bank to  enhance  its  credit  risk
      management  program  within the  Bank's  loan and lease  functions  and to
      develop  and adhere to policies  designed to enhance  risk rating and risk
      monitoring. In addition, the Bank has agreed to take appropriate action to
      improve  and  maintain  asset  quality.  The  Bank  will  prepare  written
      evaluations of and programs for collecting any loans greater than $750,000
      that are subject to  criticism,  regularly  review  such  loans,  and only
      extend  additional  credit  on  such  loans  if the  Bank  determines  and
      documents  that it is consistent  with the Bank's plan to collect the loan
      or strengthen  the assets  underlying the loan and the action is necessary
      to protect the Bank's  interests.  In addition,  the Bank will enhance and
      document  the  programs it uses to  evaluate,  maintain  and  document the
      adequacy  of the  Allowance  for Loan and  Lease  Losses,  which  enhanced
      programs  were  utilized in the  evaluation  of the Allowance for Loan and
      Lease  Losses for the third  quarter of 2009,  and  provide a copy of such
      program and documentation to the OCC.

      The Agreement precludes the Bank from growing at a rate greater than 5% on
      an annual basis. In addition to updating its capital plan with appropriate
      contingencies,  the Agreement  would preclude the payment of any dividends
      inconsistent  with the capital plan or applicable law and without  written
      non-objection  by the OCC. The Merger  Agreement with Union  precludes the
      payment of dividends to the  shareholders  of the  Company's  common stock
      pending consummation of the merger.

      The Bank  understands that the Agreement with the OCC will remain in place
      so long as the Bank remains  subject to OCC supervision or until such time
      as the Agreement is terminated by the OCC,  which will generally not occur
      until the issues which were the basis of the Agreement have been corrected
      and  verified  through  an  examination  and  until  there is no basis for
      supervisory concern.  Failure to comply with the Agreement could result in
      more serious  supervisory  action by the OCC with respect to the Bank, its
      officers or directors.


                                       31
<PAGE>

      In addition to the Agreement, the Bank has been notified that the OCC will
      require the Bank to achieve and maintain the following  capital  ratios by
      no later than March 31, 2010:

      o Total  risk-based  capital  at least  equal to twelve  percent  (12%) of
      risk-weighted  assets (as compared  with 10.80%  maintained by the Bank at
      September 30, 2009 and 10% generally required of well-capitalized banks);

      o Tier 1 capital  at least  equal to ten  percent  (10%) of risk  weighted
      assets (as compared  with 9.54%  maintained  by the Bank at September  30,
      2009, and 6% generally required of well-capitalized banks); and

      o Tier 1 capital at least equal to eight  percent  (8%) of adjusted  total
      assets (as compared  with 6.59%  maintained  by the Bank at September  30,
      2009 and 5% generally required of well-capitalized banks).

      The Bank expects to consummate its Merger with and into Union prior to the
      date by which it would be required to achieve and  maintain  such  capital
      ratios.  However,  there  can be no  assurance  that  the  Merger  will be
      consummated  within such  timeframe.  Accordingly,  the Bank will  develop
      contingency plans to address compliance with such capital  requirements in
      the event that the Merger is not consummated by March 31, 2010.

      There are no other subsequent  events requiring  recognition or disclosure
      in the financial statements.


                                       32
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

First Litchfield Financial  Corporation (the "Company"),  a Delaware corporation
formed in 1988, is the one-bank  holding  company for The First National Bank of
Litchfield  (the "Bank"),  a national bank supervised and examined by the Office
of the  Comptroller  of the  Currency  (the  "OCC").  The Bank is the  Company's
primary subsidiary and only source of income.  The Bank has three  subsidiaries,
The Lincoln Corporation and Litchfield Mortgage Service  Corporation,  which are
Connecticut  corporations,  and First  Litchfield  Leasing  Corporation  ("First
Litchfield  Leasing"),  which is a  Delaware  corporation.  The  purpose  of The
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. The purpose
of First  Litchfield  Leasing  is to provide  equipment  financing  and  leasing
products to complement the Bank's array of commercial products.

Both the Company and the Bank are headquartered in Litchfield,  Connecticut. The
Bank is a full-service  commercial bank serving both  individuals and businesses
generally  within  Litchfield  County  Connecticut.  Deposits  are insured up to
specific  limits of the Federal Deposit  Insurance Act by the Deposit  Insurance
Fund, which is administered by the Federal Deposit  Insurance  Corporation.  The
Bank's lending  activities  include loans secured by residential  and commercial
mortgages.  Other  loan  products  include  consumer  and  business  installment
lending,  as well as other  secured  and  unsecured  lending.  The Bank has nine
banking  locations  located  in the  towns of  Canton,  Torrington,  Litchfield,
Washington,  Marble Dale, Goshen, Roxbury and New Milford, Connecticut. In 1975,
the Bank was  granted  Trust  powers by the OCC.  The  Bank's  Trust  Department
provides trust and fiduciary  services to individuals,  nonprofit  organizations
and  commercial  customers.  Additionally,  the Bank  offers  nondeposit  retail
investment  products such as mutual funds,  annuities and insurance  through its
relationship with Infinex Investments, Inc.

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").  The Company owns 100% of Trust II's common stock.  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.

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. No fractional shares will be issued.  Consummation of the Merger is
subject to approval by the  shareholders  of the  Company,  as well as customary
regulatory  approvals including the OCC, the State of Connecticut  Department of
Banking and the Federal Deposit Insurance Corporation. The Merger is expected to
close in the first quarter of 2010, although there can be no assurance that this
will occur.

The following  discussion and analysis of the Company's  consolidated  financial
condition  and  results of  operations  should be read in  conjunction  with the
consolidated  financial  statements  and  notes  to the  consolidated  financial
statements.


                                       33
<PAGE>

FINANCIAL CONDITION

Total  assets  as of  September  30,  2009 were  $551,203,363,  an  increase  of
$18,945,756, or 3.56% from year-end 2008 total assets of $532,257,607.

Net loans and  leases  increased  $10,174,805  or 2.78% over the  year-end  2008
amount.  Net loans and leases as of  September  30, 2009 were  $376,566,884,  as
compared  to  the  year-end  2008  level  of   $366,392,079.   Consistent   with
management's  strategy  to  migrate  to  a  more  profitable  loan  composition,
commercial  loan and lease growth was strong  during the third  quarter of 2009.
Leases,  net of unearned  income,  were $35,324,433 at September 30, 2009, which
was an  increase of  $15,538,563  or 78.53% from the  year-end  2008  balance of
$19,785,870.  The growth in the leasing  portfolio is in  relatively  short-term
equipment financing.  Commercial mortgages totaled $100,564,068 at September 30,
2009, which was an increase of $33,109,143 or 49.08% from year-end 2008.  Growth
in  commercial  mortgages  has been in  fixed  and  variable  rate  products  to
commercial   customers  located  in  our  traditional  and  contiguous  markets.
Construction  mortgages totaled  $27,262,941 as compared to the year-end balance
of  $38,153,503.  The decline in this  portfolio was due to the soft  commercial
construction   market.   The   residential   mortgage  loan  portfolio   totaled
$172,572,153,  which was a decrease  of  $19,988,955  from  year-end  2008.  The
majority of this decrease was  attributable to the sale of residential  mortgage
loans in the secondary market which settled in the third quarter.  This sale was
transacted for the purpose of strengthening the Company's balance sheet in terms
of interest rate risk and liquidity.

As of September 30, 2009,  the  securities  portfolio  totaled  $98,323,744,  as
compared to the  year-end  2008  balance of  $113,502,751.  The  decrease in the
investment  portfolio  is due to  calls  in  agency  bonds  as well as  sales of
mortgage-backed securities.  During the first nine months of 2009, approximately
$26  million in U.S.  Government  agency  bonds were  called.  These  bonds were
replaced  with  mortgage-backed   securities  with  characteristics  of  shorter
duration  and  improved  liquidity.  In the second  quarter,  the  Company  sold
approximately  $20 million in twenty and thirty year fixed rate  mortgage-backed
securities.  Similar to the aforementioned  sale of residential  mortgages,  the
sale was also for the purpose of  strengthening  the  balance  sheet in terms of
interest rate risk and liquidity.

At year-end 2008, the due from broker for security sales totaled $9,590,823,  as
a result of a  security  traded  before  December  31,  2008 with  proceeds  not
received until January 2009. There were no similar transactions at September 30,
2009.

Cash and cash  equivalents  totaled  $43,243,586,  as compared to the balance of
$9,238,783 at year-end  2008.  Cash and cash  equivalents  is comprised of vault
cash,  Federal  funds  sold,  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.

Total  liabilities  were  $519,814,447  as of September  30, 2009,  which was an
increase of $20,024,104  from total  liabilities of  $499,790,343 as of year-end
2008.  Total deposits  increased by  $39,197,820,  or 11.42% from their year-end
levels.  Time  certificates of deposit totaled  $157,575,532 as of September 30,
2009,  which was an increase of 29.04%,  or $35,464,671  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.  Savings
deposits  totaled  $72,532,547  at  September  30, 2009 which was an increase of
23.81% from the year-end  2008 balance.  Growth in savings  deposits has been in
traditional  savings,  health  savings and municipal NOW accounts.  Money market
deposits  decreased by $10,692,255,  or 11.49%, as a result of customers seeking
higher rates and locking in those rates via certificates of deposit.


                                       34
<PAGE>

As  of  September  30,  2009,   repurchase  agreements  with  customers  totaled
$19,409,085,  which was an increase  of 6.51% from the  year-end  2008  balance.
Because  these  accounts  represent  overnight  investments  by  commercial  and
municipal  cash  management  customers,  fluctuations  in the  balances of these
accounts are reflective of the temporary  nature of these funds. As of September
30, 2009,  advances  under  Federal  Home Loan Bank  borrowings  and  repurchase
agreements  with financial  institutions  decreased  $1,608,000 and  $3,950,000,
respectively.  Increases in the loan portfolio were funded by deposit growth and
by the liquidity from investment sales,  which enabled  management to reduce the
overall level of wholesale borrowings.


                                       35
<PAGE>

RESULTS OF OPERATIONS-  THREE MONTHS ENDED  SEPTEMBER 30, 2009 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2008

Summary

Net loss available to common  shareholders for the third quarter of 2009 totaled
$2,252,777  versus net loss of $5,425,890  for the third quarter of 2008.  Basic
and  diluted net loss per common  share for the third  quarter of 2009 were both
$.96 compared to basic and diluted loss per share of $2.30 for the third quarter
of 2008.  The  decrease  in net loss  available  to common  shareholders  is due
primarily to the loss on available  for sale  securities in the third quarter of
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. Also in the 2009 quarter,  dividends payable and accretion
on preferred shares was incurred, which preferred shares were not outstanding in
the 2008 period.

Net Interest Income

Net interest income is the largest  component of the Company's  operations.  Net
interest  income is defined as the  difference  between  interest  and  dividend
income from earning  assets,  primarily  loans and  investment  securities,  and
interest expense on deposits and borrowed money.  Interest income is the product
of the average balances outstanding on loans,  securities,  and interest-bearing
deposit  accounts  multiplied by their  effective  yields.  Interest  expense is
similarly  calculated as the result of the average balances of  interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
The net interest  spread  represents the difference  between the average rate on
interest-earning  assets and the average cost of  interest-bearing  liabilities.
The net interest margin  represents net interest income before the provision for
loan and  lease  losses  divided  by  average  interest  earning  assets.  Other
components of operating  income are the  provision for loan losses,  noninterest
income such as service charges and trust fees,  noninterest  expenses and income
taxes.

Net  interest  income  on a  fully  tax-equivalent  basis  is  comprised  of the
following  for the three  months  ended  September  30,

                                                2009               2008
                                           -------------      -------------
Interest and dividend income               $  6,111,459       $  7,140,667
Tax-equivalent adjustments (1)                   99,125            156,436
Interest expense                             (2,384,834)        (3,255,785)
                                           -------------      -------------
Net interest income                        $  3,825,750       $  4,041,318
                                           =============      =============

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


                                       36
<PAGE>

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 three  months ended
September  30, 2009 and 2008.  Average  loans  outstanding  include  nonaccruing
loans.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                     Three months ended September 30, 2009      Three months ended September 30, 2008
                                   -----------------------------------------   ----------------------------------------
                                                       Interest                                   Interest
                                         Average       Earned/      Yield/          Average        Earned/     Yield/
                                         Balance         Paid        Rate           Balance         Paid        Rate
                                         -------         ----        ----           -------         ----        ----
<S>                                   <C>             <C>             <C>        <C>             <C>             <C>
Assets
Interest Earning Assets:
Loans and leases                      $ 386,163,000   $5,331,700      5.52%      $ 348,266,000   $ 5,367,408     6.16%
Investment securities                   101,142,000      851,665      3.37%        155,762,000     1,886,213     4.84%
Other interest earning assets            26,859,000       27,219      0.41%          9,603,000        43,482     1.81%
                                      -------------   ----------                 --------------  -----------

Total interest earning assets           514,164,000    6,210,584      4.83%        513,631,000     7,297,103     5.68%
                                                      ----------   --------                      -----------   -------

Allowance for loan and
  lease losses                           (4,029,000)                                (2,222,000)
Cash and due from banks                  29,693,000                                 11,310,000
Premises and equipment                    7,161,000                                  7,440,000
Net unrealized gains (losses)
 on  securities                             599,000                                 (6,955,000)
Foreclosed real estate                      104,000                                          -
Other assets                             17,078,000                                 18,117,000
                                      -------------                              --------------

Total Average Assets                  $ 564,770,000                              $ 541,321,000
                                      =============                              ==============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                      $  73,797,000       65,163      0.35%      $  64,474,000       173,193     1.07%
Money Market deposits                    85,544,000      131,823      0.62%         80,602,000       363,373     1.80%
Time deposits                           156,343,000      937,871      2.40%        131,370,000     1,130,642     3.44%
Borrowed funds                          135,405,000    1,249,977      3.69%        163,604,000     1,588,577     3.88%
                                      -------------   ----------                 --------------  -----------

Total interest bearing liabilities      451,089,000    2,384,834      2.11%        440,050,000     3,255,785     2.96%
                                                      ----------   --------                      -----------   -------

Demand deposits                          73,260,000                                 72,097,000
Other liabilities                         6,873,000                                  4,446,000
Shareholders' Equity                     33,548,000                                 24,728,000
                                      -------------                              --------------

Total liabilities and equity          $ 564,770,000                              $ 541,321,000
                                      =============                              ==============

Net interest income                                   $3,825,750                                 $ 4,041,318
                                                      ==========                                 ===========
Net interest spread                                                   2.72%                                      2.72%
                                                                   ========                                    =======
Net interest margin                                                   2.98%                                      2.99%
                                                                   ========                                    =======
</TABLE>


                                       37
<PAGE>

RATE/VOLUME ANALYSIS

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the three months ended September 30, 2009 when compared to the three
months ended  September 30, 2008 in net interest  income arising from changes in
interest  rates and asset and  liability  volume  mix.  The  change in  interest
attributable  to both rate and volume has been  allocated  to the changes in the
rate and the volume on a pro rata basis.

<TABLE>
<CAPTION>

                                                            09/30/09 Compared to 09/30/08
                                                              Increase (Decrease) Due to
                                                              --------------------------
                                                      Volume            Rate            Total
                                                     ---------       -----------      -----------
<S>                                                  <C>             <C>              <C>
    Interest earned on:
    Loans and leases                                 $ 552,982       $  (588,690)     $   (35,708)
    Investment securities                             (553,601)         (480,947)      (1,034,548)
    Other interest earning assets                       35,782           (52,045)         (16,263)
                                                     ---------       -----------      -----------
    Total interest earning assets                       35,163        (1,121,682)      (1,086,519)
                                                     ---------       -----------      -----------

    Interest paid on:
    Deposits                                           211,785          (744,136)        (532,351)
    Borrowed money                                    (263,316)          (75,284)        (338,600)
                                                     ---------       -----------      -----------
    Total interest-bearing liabilities                 (51,531)         (819,420)        (870,951)
                                                     ---------       -----------      -----------

    Increase, (decrease) in net interest income      $  86,694       $  (302,262)     $  (215,568)
                                                     =========       ===========      ===========
</TABLE>

Tax-equivalent  net  interest  income  for the  third  quarter  of 2009  totaled
$3,825,750, a decrease of $215,568, or 5.33% from the third quarter of 2008. The
decreased  interest margin caused the decline in net interest income,  while the
slight  increase in earning  asset  volume  offset the  decrease.  The effect of
increased volume of earning assets over  interest-bearing  liabilities increased
net interest income by $86,694. However, for the quarter, the interest earned on
earning  assets  decreased  more than  funding  costs and resulted in a $302,262
decline in net interest income.

Average earning assets for the third quarter of 2009 totaled $514,164,000, which
was $533,000 or .10% higher than average earning assets for the third quarter of
2008 which totaled $513,631,000. This increase in earning assets, contributed to
an additional $35,163 in interest income.  Average loans and leases increased by
$37,897,000,  or 10.88%,  while average  investments and other interest  earning
assets decreased by $37,364,000 or 22.59%. The increase in loans and leases came
from organic growth in commercial leasing and mortgage lending.  The decrease in
the  securities  portfolio  is the result of the  strategy  to change the mix of
earning  assets from  investments  to loans.  The mix of earning  assets for the
third quarter of 2009 was 75% loans to 25%  investments and other earning assets
versus  the third  quarter  2008 mix of 68% loans to 32%  investments  and other
earning assets.

The tax equivalent net interest margin decreased 1 basis point from 2.99% in the
third quarter of 2008 to 2.98% for the third quarter of 2009. Both funding costs
and the tax equivalent yield on earning assets decreased by 85 basis points when
compared to the third quarter of 2008;  however,  for the third quarter of 2009,
the ratio of  earning  assets to total  assets was 91%  compared  to 95% for the
third  quarter of 2008.  This  lower  level of  earning  assets to total  assets
contributed  to the slight  decline in net interest  margin.  The  continued low
interest rate  environment has allowed  management to decrease its deposit rates
over the last year.  Although  yields on  earning  assets  have been  subject to
similar declines, the aforementioned  strategy to shift to a more profitable mix
of earning assets has offset some of this decline.  However,  continued downward
repricing  of  interest-earning  assets,  which are priced off of longer  market
indices, as well as declines in yield due to non-performing assets have resulted
in the drop in net interest  income.  Retail  deposits are the primary source of
the Company's  funding;  therefore,  competition for these deposits  remains the
biggest threat to the net interest margin.


                                       38
<PAGE>

Provision for Loan and Lease Losses

The  provision  for loan and lease losses for the third  quarter of 2009 totaled
$2,682,691,  which is an increase of $2,527,691  from the third quarter of 2008.
The  provision for loan and lease losses is  determined  quarterly  based on the
calculation of the allowance for loan and lease losses.  (See  discussion of the
Allowance for Loan and Lease Losses.)

During the third  quarter of 2009,  the  Company  recorded  net  charge-offs  of
$628,287 compared to third quarter 2008 net charge-offs of $121,476.  The change
in the level of charge-offs from 2008 to 2009 is due to commercial  mortgage and
commercial loan  charge-offs  and higher levels of charge-off  activity from the
consumer automobile loan portfolio.  The change in the level of charge-offs from
2008 to 2009 is considered  by  management  to be reflective of the  challenging
economic environment.

Noninterest Income (Loss)

Noninterest  income for the third  quarter of 2009  totaled  $1,215,035,  versus
third quarter 2008  noninterest  loss of  $5,807,528.  The change in noninterest
income is primarily attributable to the OTTI losses totaling $6,946,100 recorded
in the third quarter of 2008.

Trust income  totaled  $345,357,  compared to third quarter 2008 trust income of
$319,049. The increase from third quarter 2008 levels is due to increased assets
under management.

During the third  quarter of 2009 the Company  originated  and sold  residential
mortgages in the secondary  market which  resulted in gains on sales of loans of
$349,294  compared to similar sales transacted  during the third quarter of 2008
which resulted in gains of $17,085. These sales were transacted with the purpose
of reducing interest rate risk and improving the Company's liquidity position.

Other noninterest  income totaled $14,767,  which was a decrease of $42,589,  or
74.26% from the third quarter of 2008. The decrease was due to expenses incurred
in holding other real estate owned during the third  quarter of 2009,  there was
no other real estate owned during the third quarter of 2008.

Noninterest Expense

Third quarter 2009 noninterest expense totaled $5,102,484, increasing 35.96%, or
$1,349,454  from the third quarter 2008 expense of  $3,753,030.  The majority of
the  increase  is the result of other  noninterest  expense  and FDIC  insurance
assessments. During the third quarter of 2009 the Company recorded an accrual of
$768,583 related to the dishonor of fraudulent  items;  there were no comparable
items in 2008.  Increases in  noninterest  expenses are also reflected in legal,
computer  services,  and  consulting  fees and  expenses for the  management  of
foreclosed properties, loan review, and employment agency fees.

Other noninterest expenses totaled $786,524 which is an increase of $362,567, or
85.52%  from the third  quarter  of 2008.  Higher  2009 costs for exam and audit
fees,  software,  and telephone  expenses  contributed  to the increase in other
noninterest expense.

Income Taxes

The third quarter 2009 income tax benefit totaled $770,444, which is an increase
of $365,658 or 107.76% from the third  quarter of 2008 benefit of $404,786.  The
effective  tax rate for the third  quarter of 2009 was 27% as compared to 7% for
the third  quarter of 2008.  In the third  quarter of 2009,  the  quarterly  tax
benefit was limited to the Company's pretax  year-to-date  loss at the statutory
rate. The third quarter 2008 tax benefit did not relate  proportionately  to the
pretax loss due to the  Company's  inability  to consider its loss on the Fannie
Mae and Freddie Mac OTTI write-down as ordinary income as of September 30, 2008.
With


                                       39
<PAGE>

the October 2008 passage of the Emergency Economic Stabilization Act, banks with
Fannie Mae or Freddie Mac preferred  shares and auction rate securities  holding
such shares were able treat their  losses as ordinary  losses for tax  purposes.
Pursuant to this change, the Company recognized the tax benefit of approximately
$1,710,000 in the fourth quarter of 2008.

As of September  30, 2009 and  December  31, 2008,  the Company had recorded net
deferred  income tax assets of  approximately  $5.3  million  and $5.1  million,
respectively.  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
September  30, 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
replace  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 September 30, 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. If, 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.


                                       40
<PAGE>

RESULTS OF  OPERATIONS-  NINE MONTHS ENDED  SEPTEMBER  30, 2009 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2008

Summary

Net loss available to common  shareholders  for the nine months ended  September
30,  2009  totaled  $1,877,621  versus the net loss of  $4,310,919  for the nine
months ended September 30, 2008. Basic and diluted net loss per common share for
the nine months ended September 30, 2009 were both $0.80,  compared to basic and
diluted loss per share of $1.82,  for the nine months ended  September 30, 2008.
The decrease in net loss  available to common  shareholders  is due primarily to
the loss on available  for sale  securities in the nine months of 2008 which was
significantly  less in the 2009  period,  partially  offset by  increases in the
provision  for loan and lease losses and loss due to dishonored  items.  Also in
the 2009  period,  dividends  payable  and  accretion  on  preferred  shares was
accrued, which preferred shares were not outstanding in 2008.

Net Interest Income

Net interest income is the largest  component of the Company's  operations.  Net
interest  income is defined as the  difference  between  interest  and  dividend
income from earning  assets,  primarily  loans and  investment  securities,  and
interest expense on deposits and borrowed money.  Interest income is the product
of the average balances  outstanding on loans,  securities and  interest-bearing
deposit  accounts  multiplied by their  effective  yields.  Interest  expense is
similarly  calculated as the result of the average balances of  interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
The net interest  spread  represents the difference  between the average rate on
interest  earning assets and the average cost of  interest-bearing  liabilities.
The net interest margin  represents net interest income before the provision for
loan and  lease  losses  divided  by  average  interest  earning  assets.  Other
components of operating  income are the  provision for loan losses,  noninterest
income such as service charges and trust fees,  noninterest expenses, and income
taxes.

Net interest income on a fully tax-equivalent basis is comprised of the
following for the nine months ended September 30,

                                                2009                  2008
                                          ---------------      ---------------
Interest and dividend income              $   19,212,404       $   21,575,168
Tax-equivalent adjustments (1)                   307,188              515,164
Interest expense                              (7,512,284)         (10,400,647)
                                          ---------------      ---------------
Net interest income                       $   12,007,308       $   11,689,685
                                          ===============      ===============

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


                                       41
<PAGE>

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 nine  months  ended
September  30, 2009 and 2008.  Average  loans  outstanding  include  nonaccruing
loans.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                      Nine months ended September 30, 2009    Nine months ended September 30, 2008
                                     --------------------------------------   ------------------------------------
                                                      Interest                                 Interest
                                         Average       Earned/     Yield/         Average       Earned/     Yield/
                                         Balance        Paid        Rate          Balance        Paid       Rate
                                         -------        ----        ----          -------        ----       ----
<S>                                  <C>           <C>               <C>      <C>           <C>             <C>
Assets
Interest Earning Assets:
Loans and leases                     $ 388,081,000  $ 16,227,927     5.58%    $ 341,230,000  $ 16,209,373   6.33%
Investment securities                  112,176,000     3,243,981     3.86%      150,686,000     5,670,091   5.02%
Other interest earning assets           12,995,000        47,684     0.49%       10,967,000       210,868   2.56%
                                       -----------   -----------                -----------   -----------

Total interest earning assets          513,252,000    19,519,592     5.07%      502,883,000    22,090,332   5.86%
                                                     -----------   -------                    -----------   -----

Allowance for loan and
  lease losses                          (3,785,000)                              (2,184,000)
Cash and due from banks                 17,327,000                               11,388,000
Premises and equipment                   7,239,000                                7,586,000
Net unrealized loss on
  securities                              (635,000)                              (3,473,000)
Foreclosed real estate                     188,000                                       --
Other assets                            18,852,000                               16,943,000
                                       -----------                              -----------

Total Average Assets                 $ 552,438,000                            $ 533,143,000
                                       ===========                              ===========

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                     $  66,521,000       255,021     0.51%    $  59,062,000       479,079   1.08%
Money Market deposits                   86,704,000       603,929     0.93%       81,332,000     1,185,540   1.94%
Time deposits                          145,579,000     2,774,018     2.54%      135,138,000     3,976,610   3.92%
Borrowed funds                         141,945,000     3,879,316     3.64%      157,692,000     4,759,418   4.02%
                                       -----------   -----------                -----------   -----------

Total interest bearing liabilities     440,749,000     7,512,284     2.27%      433,224,000    10,400,647   3.20%
                                                     -----------   -------                    -----------   -----

Demand deposits                         71,146,000                               68,055,000
Other liabilities                        7,413,000                                4,864,000
Shareholders' Equity                    33,130,000                               27,000,000
                                       -----------                              -----------

Total liabilities and equity         $ 552,438,000                            $ 533,143,000
                                       ===========                              ===========

Net interest income                                 $ 12,007,308                             $ 11,689,685
                                                     ===========                              ===========
Net interest spread                                                  2.80%                                  2.66%
                                                                   =======                                  =====
Net interest margin                                                  3.12%                                  2.92%
                                                                   =======                                  =====
</TABLE>


                                       42
<PAGE>


Rate/Volume Analysis

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the nine months ended  September  30, 2009 when compared to the nine
months ended  September 30, 2008 in net interest  income arising from changes in
interest  rates and from asset and liability  volume mix. The change in interest
attributable  to both rate and volume has been  allocated  to the changes in the
rate and the volume on a pro rata basis.

<TABLE>
<CAPTION>
                                            09/30/09 Compared to 09/30/08
                                              Increase (Decrease) Due to
                                              ---------------------------

                                      Volume            Rate             Total
                                    -----------      -----------      ------------
<S>                                 <C>              <C>              <C>
Interest earned on:
Loans and leases                    $ 2,083,220      $(2,064,666)     $     18,554
Investment securities                (1,273,069)      (1,153,041)       (2,426,110)
Other interest earning assets            33,124         (196,308)         (163,184)
                                    -----------      -----------      ------------
Total interest earning assets           843,275       (3,414,015)       (2,570,740)
                                    -----------      -----------      ------------

Interest paid on:
Deposits                                443,154       (2,451,415)       (2,008,261)
Borrowed money                         (452,197)        (427,905)         (880,102)
                                    -----------      -----------      ------------
Total interest bearing liabilities       (9,043)      (2,879,320)       (2,888,363)
                                    -----------      -----------      ------------

Increase in net interest income     $   852,318      $  (534,695)     $    317,623
                                    ===========      ===========      ============
</TABLE>

Tax-equivalent  net interest income for the nine months ended September 30, 2009
totaled  $12,007,308,  an  increase of  $317,623,  or 2.72% from the nine months
ended  September  30, 2008.  The impact of the increase in the volume of earning
assets primarily  contributed to the increase in net interest income. The effect
of  increased  volume of  earning  assets  over the  effect of the  increase  in
interest-bearing   liabilities   increased  net  interest  income  by  $852,318.
Additionally,  the Company was not able to decrease its cost of deposit interest
to a greater  degree than the  decrease in  interest  earned on earning  assets,
which resulted in a $534,695 decrease in net interest income.

Average  earning  assets for the nine months  ended  September  30, 2009 totaled
$513,252,000,  which was $10,369,000 or 2.06% higher than average earning assets
for the nine months ended September 30, 2008 which totaled $502,883,000. The net
increase in earning  assets,  net of the  increased  volume of interest  bearing
liabilities,  contributed  to an  additional  $852,318 in net  interest  income.
Average  loans and leases  increased by  $46,851,000,  or 13.73%,  while average
investments decreased by $38,510,000 or 25.56%. The increase in loans and leases
came from  organic  growth in  commercial  leasing  and  mortgage  lending.  The
decrease in the securities portfolio is the result of the strategy to change the
mix of earning assets from  investments to loans.  The mix of earning assets for
the nine months ended September 30, 2009 was 76% loans to 24% investments versus
the nine months ended September 30, 2008 mix of 68% loans to 32% investments.

The tax equivalent net interest  margin  improved 20 basis points from 2.92% for
the nine months  ended  September  30,  2008 to 3.12% for the nine months  ended
September  30, 2009.  The  improvement  in the next  interest  margin is because
funding  costs  decreased by 93 basis points while the tax  equivalent  yield on
earning  assets  decreased by only 79 basis  points.  The continued low interest
rate  environment  has allowed  management  to continue to decrease  its deposit
rates over the last year. Although yields on earning assets have been subject to
similar declines, the aforementioned  strategy to shift to a more profitable mix
of  earning  assets  has  offset  some  of  this  decline.  Additionally,   many
interest-earning  assets are priced off of longer market indices,  which are not
as dramatically  impacted by decreases in short term rates.  Retail deposits are
the primary source of the Company's  funding;  therefore,  competition for these
deposits remains the biggest threat to the net interest margin.


                                       43
<PAGE>

Provision for Loan and Lease Losses

The provision for loan and lease losses for the nine months ended  September 30,
2009 totaled $3,470,280, which is an increase of $3,103,280 from the nine months
ended  September 30, 2008. The provision for loan and lease losses is determined
quarterly  based on the  calculation of the allowance for loan and lease losses.
The increased  provision is reflective of a higher level of net  charge-offs and
management's  assessment of inherent losses in the portfolio due to the economic
environment. (See discussion of the Allowance for Loan and Lease Losses.)

During the nine months  ended  September  30,  2009,  the Company  recorded  net
charge-offs  of  $1,084,906  compared  to nine  month  2008 net  charge-offs  of
$251,520.  The  change in the level of  charge-offs  from 2008 to 2009 is due to
residential and commercial mortgage  charge-offs and higher levels of charge-off
activity from the consumer automobile loan, and commercial loan portfolios.  The
change in the level of charge-offs from 2008 to 2009 is considered by management
to be reflective of a weak economic environment.

Noninterest Income (Loss)

Noninterest  income  for the  nine  months  ended  September  30,  2009  totaled
$3,259,553,  versus the loss of $4,017,593  for the nine months ended  September
30, 2008. The 2008  noninterest  income  reflected  OTTI charges  related to the
$6,946,100  third quarter OTTI write down of the Bank's  investments  in Freddie
Mac and Fannie Mae preferred  stock/auction  rate securities  holding such stock
and one pooled trust preferred security.

Trust income totaled  $892,896,  compared to the nine months ended September 30,
2008 trust income of $992,142.  The decline from nine months ended September 30,
2008 levels is due to market declines of assets under management.

During the first nine months of 2009, the Company sold residential  mortgages in
the secondary market which resulted in gains on sales of loans totaling $509,552
compared to sales transacted during the first nine months of 2008 which resulted
in gains  totaling  $34,904.  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 $83,721,  as compared to $200,041 from the nine
months ended  September 30, 2008. The decrease is primarily  related to the loss
on other real estate owned.

During the first nine months of 2009,  the Company sold $37 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  $314,584.  Similar sales were transacted  during
the first nine months of 2008 and resulted in gains totaling $215,416.

Noninterest Expense

For the nine  months  ended  September  30,  2009  noninterest  expense  totaled
$13,565,532,  increasing  $2,189,740,  or  19.25%  from  the nine  months  ended
September 30, 2008 expense of $11,375,792. Increases in noninterest expenses are
reflected in regulatory  assessments,  legal,  computer  services and consulting
expenses.  The  largest of these  increases  was  regulatory  assessments  which
totaled  $930,055 for the first nine months of 2009.  This expense has increased
$746,311  over the 2008 costs due to increase  premiums  and the second  quarter
2009 special  assessment.  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.  The increase in  consulting  and related  expenses was primarily
related to loan review,  workout and the


                                       44
<PAGE>

management  of  foreclosed   properties,   investment  banking,   and  temporary
employment.  The impact of these  increases  was  mitigated by cost  containment
efforts for salaries,  equipment and supplies,  director fees,  and  advertising
expense.

Other noninterest  expenses totaled $1,877,044 which is an increase of $457,923,
or 32.27% from the nine months ended  September 30, 2008.  This increase was due
primarily to 2009 costs for exam and audit fees which totaled $361,372 above the
nine month September 30, 2008 costs. Other increases in this category were OREO,
software,  and  telephone  expense.  Offsetting  these  increases  were  reduced
expenses for insurance, contributions, directors fees, seminars, and travel.

Income Taxes

The income tax benefit for the nine months  ending  September  30, 2009  totaled
$705,887,  which is an increase of $430,942 or 156.74%  from the nine month 2008
benefit of $274,945.  The effective tax rates were 34% and 6%,  respectively for
the nine months ended  September 30, 2009 and 2008. The tax benefit for the nine
months ended  September  30,  2009,  was limited to the  Company's  year-to-date
pretax loss at the  statutory  rate of 34%.  The tax benefit for the nine months
ended  September  30,  2008 did not relate  proportionately  to the pretax  loss
because of the loss  related  to a $5 million  OTTI write down on Fannie Mae and
Freddie Mac preferred shares.  This loss was not considered ordinary income, and
therefore  no tax  benefit  related  to the  loss  could be  recognized  through
September  30,  2008.  With the passage of the Economic  Stabilization  Act, the
Company recognized the tax benefit of the OTTI loss during the fourth quarter of
2008.

As of September  30, 2009 and  December  31, 2008,  the Company had recorded net
deferred  income tax assets of  approximately  $5.3  million  and $5.1  million,
respectively.  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
September  30, 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
replace  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 September 30, 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. If, 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.


                                       45
<PAGE>

LIQUIDITY

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

The Bank is a member of the Federal Home Loan Bank system, which provides credit
to its  member  banks.  This  enhances  the  liquidity  position  of the Bank by
providing a source of  available  overnight  as well as  short-term  borrowings.
Additionally,   federal  funds,   borrowings   through  the  use  of  repurchase
agreements, and the sale of mortgage loans in the secondary market are available
to  fund  short-term  cash  needs.  (See  Note 6 to the  Consolidated  Financial
Statements for  information on Federal Home Loan Bank  borrowings and repurchase
agreements.)

As of September 30, 2009, the Company had  $116,246,290 in loan  commitments and
credit  lines  outstanding.  Because  some  commitments  are  expected to expire
without  being  drawn upon,  the total  commitment  amount does not  necessarily
represent  all future cash  requirements.  The funding of these  commitments  is
anticipated to be met through  deposits,  loan and security  amortizations,  and
maturities.  Management  believes  liquidity is adequate to meet its present and
foreseeable needs.

CAPITAL

Shareholders'  equity  totaled  $31,388,916 as of September 30, 2009 as compared
with $32,467,264 as of December 31, 2008. The decrease in  shareholders'  equity
is primarily  related to the 2009 net loss,  the Company's  other  comprehensive
income charges  related to the  recognition of the unfunded  pension  liability,
cash flow hedges, unrealized holding losses on available for sale securities and
common and  preferred  dividends.  From a  regulatory  perspective,  the capital
ratios of the Company  and the Bank place each entity in the  "well-capitalized"
categories under applicable regulations. During the third and fourth quarters of
2008,  the Company  increased its  investment in the Bank's equity by a total of
$4,000,000.  During the first and second quarters of 2009, the Company increased
its investment in the Bank's equity by an additional  $5,500,000.  These actions
were executed to insure the Bank maintained  capital at levels  considered to be
well-capitalized by the federal banking agency capital adequacy guidelines.

The  various  capital  ratios of the  Company  and the Bank are as follows as of
September 30, 2009:

<TABLE>
<CAPTION>
                                      Well-Capitalized
                                      Capital Levels      The Company          The Bank
                                      --------------      -----------          --------
<S>                                       <C>               <C>                <C>
TIER 1:
Leverage capital ratio                     5.00%              6.96%              6.59%

Risk-based capital ratio                   6.00%             10.09%              9.54%

Total risk-based capital ratio            10.00%             11.34%             10.80%
</TABLE>

Included in the  Company's  capital used to determine  these ratios at September
30, 2009 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 September  30, 2009 and
December  31, 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,


                                       46
<PAGE>

2009),  to meet the new  limitations.  Management  does not believe  these final
rules will have a significant  impact on the Company.  On December 12, 2008, the
Company  participated in the United States Department of the Treasury's Troubled
Assets Relief Program  ("TARP")  Capital  Purchase  Program ("CPP" also known as
TARP capital),  and issued $10,000,000 of cumulative  perpetual  preferred stock
with a common  stock  warrant  attached  to the U. S.  Treasury.  The  Company's
purpose in  participating in the TARP CPP was to insure that the Company and the
Bank  maintained  their  well-capitalized  status given the  uncertain  economic
environment.

On December  12, 2008,  under the TARP CPP,  the Company  sold 10,000  shares of
senior preferred stock to the U.S.  Treasury,  having a liquidation amount equal
to  $1,000  per  share,  or  $10,000,000.  Although  the  Company  is  currently
well-capitalized under regulatory guidelines, the Board of Directors believed it
was advisable to take advantage of the TARP CPP to raise  additional  capital to
ensure that during these  uncertain  times,  the Company is  well-positioned  to
support 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.

CERTAIN SUPERVISORY MATTERS

On November 9, 2009, the Bank entered into a Formal Agreement (the  "Agreement")
with the OCC. The  Agreement is a remedial  supervisory  action with  provisions
intended to improve the Bank's condition and operations. While not punitive, the
Agreement provides a framework for addressing  identified problems,  documenting
remedial efforts and preventing the reoccurrence of similar problems so that the
Bank's  condition  will improve and no longer to be  considered  to be troubled.
Management and the Board are of the opinion that  compliance  with the Agreement
is in the  best  interest  of the Bank but will  require  sustained  effort  and
management resources.

To coordinate its compliance efforts pursuant to the Agreement, the Board of the
Bank will appoint a Compliance  Committee  consisting  primarily of  independent
Directors.  The  Compliance  Committee will meet at least monthly to monitor and
report  the Bank's  progress  to the  Board.  The Board  will  review the Bank's
liquidity  plans,  capital  plans,  strategic  plans and management and staffing
plans and  provide  copies of such  plans to the OCC  along  with  copies of the
reports of the Compliance  Committee and other relevant  information.  The Board
will assess the adequacy of the Bank's  management  and staffing needs to assure
that the Bank is well  managed and well  staffed.  The Bank will also notify the
OCC regarding any proposed changes in the Board,  executive  management or staff
or changes in their duties or responsibilities.

Pursuant to the Agreement,  the Bank will not utilize brokered  deposits without
appropriate  FDIC and OCC  authorization.  In this  regard,  the  only  deposits
currently  utilized  by the Bank  which  could  be  characterized  as  "brokered
deposits" are deposits  obtained  through the CDARS program.  The Agreement with
the OCC does not preclude the Bank from  participating  in the CDARS program and
the Bank has requested authorization from the FDIC to continue to participate in
such program. The Bank has approximately $11 million in CDARS deposits,  most of
which will mature in January 2010.

The Agreement  further  requires the Bank to enhance its credit risk  management
program within the Bank's loan and lease  functions and to develop and adhere to
policies designed to enhance risk rating and risk monitoring.  In addition,  the
Bank has  agreed  to take  appropriate  action to  improve  and  maintain  asset


                                       47
<PAGE>

quality.  The  Bank  will  prepare  written  evaluations  of  and  programs  for
collecting  any loans  greater  than  $750,000  that are  subject to  criticism,
regularly review such loans, and only extend  additional credit on such loans if
the Bank  determines and documents that it is consistent with the Bank's plan to
collect the loan or strengthen the assets  underlying the loan and the action is
necessary to protect the Bank's  interests.  In addition,  the Bank will enhance
and  document  the  programs it uses to  evaluate,  maintain  and  document  the
adequacy of the  Allowance for Loan and Lease Losses,  which  enhanced  programs
were  utilized in the  evaluation of the Allowance for Loan and Lease Losses for
the third quarter of 2009, and provide a copy of such program and  documentation
to the OCC.

The  Agreement  precludes  the Bank from growing at a rate greater than 5% on an
annual  basis.  In  addition  to  updating  its  capital  plan with  appropriate
contingencies,  the  Agreement  would  preclude  the  payment  of any  dividends
inconsistent  with  the  capital  plan or  applicable  law and  without  written
non-objection  by the OCC. The Merger Agreement with Union precludes the payment
of  dividends  to  the  shareholders  of  the  Company's  common  stock  pending
consummation of the merger.

The Bank  understands  that the  Agreement  with the OCC will remain in place so
long as the Bank remains  subject to OCC  supervision  or until such time as the
Agreement is  terminated  by the OCC,  which will  generally not occur until the
issues which were the basis of the  Agreement  have been  corrected and verified
through an  examination  and until  there is no basis for  supervisory  concern.
Failure to comply with the  Agreement  could result in more serious  supervisory
action by the OCC with respect to the Bank, its officers or directors.

In  addition  to the  Agreement,  the Bank has been  notified  that the OCC will
require the Bank to achieve and  maintain  the  following  capital  ratios by no
later than March 31, 2010:

      o     Total  risk-based  capital at least equal to twelve percent (12%) of
            risk-weighted assets (as compared with 10.80% maintained by the Bank
            at September 30, 2009 and 10% generally required of well-capitalized
            banks);

      o     Tier 1 capital at least equal to ten percent  (10%) of risk weighted
            assets (as compared  with 9.54%  maintained by the Bank at September
            30, 2009, and 6% generally required of well-capitalized banks); and

      o     Tier 1 capital  at least  equal to eight  percent  (8%) of  adjusted
            total  assets  (as  compared  with 6.59%  maintained  by the Bank at
            September  30, 2009 and 5%  generally  required of  well-capitalized
            banks).

The Bank expects to consummate  its Merger with and into Union prior to the date
by which it would be required  to achieve  and  maintain  such  capital  ratios.
However,  there can be no assurance that the Merger will be  consummated  within
such timeframe.  Accordingly, the Bank will develop contingency plans to address
compliance  with such capital  requirements  in the event that the Merger is not
consummated by March 31, 2010.

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


                                       48
<PAGE>

stage,  alleviate  weaknesses  in  the  Bank's  lending  policies,  oversee  the
individual loan and lease rating system,  and ensure  compliance with the Bank's
underwriting,  documentation, compliance, and administrative policies. Loans and
leases included in this process are considered by management as being in need of
special  attention  because  of  some  deficiency   related  to  the  credit  or
documentation,  but  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.

Investment  securities  which are held for  indefinite  periods  of time,  which
management intends to use as part of its asset/liability  strategy, or which may
be sold in response to changes in interest  rates,  changes in prepayment  risk,
increases in capital  requirements,  or other similar factors, are classified as
available  for sale and are  carried at fair  value.  Net  unrealized  gains and
losses for such  securities,  net of tax,  are  required to be  recognized  as a
separate  component of shareholders'  equity and excluded from  determination of
net income.  Gains or losses on  disposition  are based on the net  proceeds and
cost of the securities sold, adjusted for amortization of premiums and accretion
of discounts, using the specific identification method.

The Company uses the asset and liability  method of accounting for income taxes.
Determination  of the  deferred  and  current  provision  requires  analysis  by
management  of certain  transactions  and the related tax laws and  regulations.
Management exercises significant judgment in evaluating the amount and timing of
recognition of the resulting tax  liabilities  and assets.  Those  judgments and
estimates  are  re-evaluated  on a continual  basis as  regulatory  and business
factors  change.  The Company  periodically  reviews the carrying  amount of its
deferred tax assets to determine if the  establishment of a valuation  allowance
is necessary.  If, based on the available evidence in future periods, it is more
likely than not that all or a portion of the Company's  deferred tax assets will
not  be  realized,   a  deferred  tax   valuation   allowance  is   established.
Consideration  is given to all  positive and  negative  evidence  related to the
realization of the deferred tax assets.  In evaluating  the available  evidence,
management  considers historical  financial  performance,  expectation of future
earnings,  the ability to  carryback  losses to recoup  taxes  previously  paid,
length of statutory carryforward periods, experience with operating loss and tax
credit  carryforwards not expiring unused, tax planning strategies and timing of
reversals  of  temporary  differences.   Significant  judgment  is  required  in
assessing  future  earnings  trends and the  timing of  reversals  of  temporary
differences.  The  Company's  evaluation is based on current tax laws as well as
management's   expectations  of  future   performance  based  on  its  strategic
initiatives.  Changes in existing  tax laws and future  results that differ from
expectations  may  result  in  significant  changes  in the  deferred  tax asset
valuation allowance.

ALLOWANCE FOR LOAN AND LEASE LOSSES:

The  allowance  for loan and lease  losses  consists of specific,  general,  and
unallocated components.  The specific component relates to loans and leases that
are  classified  as  impaired.  For  impaired  loans and leases an  allowance is
established  when the discounted  cash flows (or collateral  value or observable
market price) of the impaired loan or lease is lower than the carrying  value of
that loan or lease. The general component covers  non-impaired  loans and leases
and is based on historical loss experience adjusted for qualitative  factors. An
unallocated  component is  maintained to cover  uncertainties  that could affect
management's  estimate or probable  losses.  The  unallocated  component  of the
allowance  reflects  the  margin  of  imprecision  inherent  in  the  underlying
assumptions.

The Bank makes  provisions  for loan and lease  losses on a  quarterly  basis as
determined by a continuing  assessment of the adequacy of the allowance for loan
and lease  losses.  The Bank  performs an ongoing  review of loans and leases in
accordance  with an  individual  loan and lease rating  system to determine  the
required  allowance  for loan and lease losses at any given date.  The review of
loans and  leases  is  performed  to  estimate  potential  exposure  to  losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective  and is  based  on an  evaluation  of the  known  and  inherent  risk
characteristics  and size of the loan and lease  portfolios,  the  assessment of
current  economic and real estate  market  conditions,  estimates of the current
value of underlying collateral,  past loan and lease loss experience,  review of
regulatory  authority  examination reports and evaluations of impaired loans and
leases,


                                       49
<PAGE>

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
September 30, 2009.  In addition,  there were no material  reallocations  of the
allowance among different parts of the loan or lease portfolio.

As a result of this assessment, as of September 30, 2009, non-performing assets,
loans and leases were $12,225,363 and represented  3.20% of total loans,  leases
and OREO.  As of December 31, 2008,  non-performing  assets and loans and leases
totaled  $5,639,735 and represented  1.53% of total loans,  leases and OREO. The
ratio of the  allowance for such loan and lease losses to total loans and leases
at September 30, 2009 and December 31, 2008 was 1.59% and 1.00% respectively. At
September 30, 2009,  the  allowance for loan and lease losses was  equivalent to
50% of total non-performing  assets as compared with 66% of total non-performing
assets at  December  31,  2008.  The ratio of the  allowance  for loan and lease
losses to non-performing assets decreased over the first nine months of 2009 due
to the  increase  in  non-performing  assets  and loans and leases  despite  the
increase to the allowance resulting from commercial loan growth and the increase
to the general  allocations.  Although the Company did experience an increase in
non-performing  assets during the first nine months of the year, the increase in
those  non-performing  assets was comprised of collateral-based  loans which did
not require a specific  allocation  of the  allowance  for loan and lease losses
and,  therefore,  did not result in  additional  specific  allocations  with the
allowance.  Changes in the allowance for loan and lease losses for the three and
nine month periods ended September 30, 2009 and 2008 are as shown below:

   For the three months ended September 30,           2009              2008
                                                  -----------       -----------

    Balance as of June 30,                        $ 4,029,790       $ 2,233,578

    Provision for loan and lease losses             2,682,691           155,000
    Loans and leases charged off                     (767,429)         (123,192)
    Recoveries of loans and leases charged off        139,142             1,716
                                                  -----------       -----------

    Balance as of September 30,                   $ 6,084,194       $ 2,267,102
                                                  ===========       ===========


    For the nine months ended September 30,           2009              2008
                                                  -----------       -----------

    Balance at beginning of the year              $ 3,698,820       $ 2,151,622

    Provision for loan and lease losses             3,470,280           367,000
    Loans and leases charged off                   (1,416,376)         (275,457)
    Recoveries of loans and leases charged off        331,470            23,937
                                                  -----------       -----------

    Balance as of September 30,                   $ 6,084,194       $ 2,267,102
                                                  ===========       ===========


                                       50
<PAGE>

The following table summarizes the Bank's Other Real Estate Owned ("OREO"), past
due in excess of 90 days and still accruing  interest and non-accrual  loans and
leases, and total nonperforming assets as of September 30, 2009 and December 31,
2008.

<TABLE>
<CAPTION>
                                                        September 30, 2009  December 31, 2008
                                                        ------------------  ------------------
<S>                                                        <C>                  <C>
    Nonaccrual loans and leases                            $ 11,678,323         $ 5,639,735

    Other real estate owned                                     547,040                  --
                                                           ------------         -----------

    Total nonperforming assets                             $ 12,225,363         $ 5,639,735
                                                           ============         ===========

    Loans and leases past due in excess of 90 days and
      accruing interest                                    $     39,854         $    19,603
                                                           ============         ===========
</TABLE>

POTENTIAL PROBLEM LOANS

As of September  30, 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.

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

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

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

      o     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;

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

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

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

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

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

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

      o     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


                                       51
<PAGE>

      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 staff position issued in April
      2009 relating to OTTI during the second quarter of 2009.  Adoption of this
      staff position resulted in the reclassification of $2,511,080 ($1,657,313,
      net of tax) of  non-credit  related  accumulated  OTTI  to OCI  which  had
      previously  been recognized as a loss in earnings and is disclosed in Note
      8 - Investment Securities.

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to financial  instruments with off-balance  sheet risk in
the normal course of business to meet the financing  needs of its customers such
as letters of credit.  In the opinion of  management,  these  off-balance  sheet
arrangements are not likely to have a material effect on the Company's financial
condition, results of operation, or liquidity.

At September 30, 2009,  there have been no significant  changes in the Company's
off-balance sheet arrangements from those at December 31, 2008.

FORWARD-LOOKING STATEMENTS

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

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


                                       52
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that
information  required to be  disclosed in the  Company's  Exchange Act report is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's  rules and forms,  and that such  information  is  accumulated  and
communicated to the Company's management,  including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required  disclosure.  In designing and evaluating  the disclosure  controls and
procedures,  management  recognized that any controls and procedures,  no matter
how well  designed  and  operated,  can provide  only  reasonable  assurance  of
achieving  the  desired  control  objectives,  and  management  necessarily  was
required  to apply its  judgment  in  evaluating  the  cost-benefit  of possible
controls and procedures.

As of the end of the period  covered by this report,  the Company's  management,
under  the  supervision  and  with  the  participation  of the  Company's  Chief
Executive  Officer and the Company's  Chief  Financial  Officer,  carried out an
evaluation  of the  effectiveness  of the design and  operation of the Company's
disclosure controls and procedures.  Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded the Company's disclosure
controls and procedures were effective.

There were no changes in the Company's internal control over financial reporting
that occurred  during the Company's  third quarter of 2009 that have  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.


PART II.  OTHER INFORMATION

Item 1. 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 1A.  Risk Factors.  Not applicable

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.  None

Item 3.  Defaults Upon Senior Securities.   None

Item 4.  Submission of Matters to a Vote of Security Holders.  None

Item 5.  Other Information.   None


                                       53
<PAGE>

Item 6. Exhibits


                                  EXHIBIT INDEX

Exhibit
   No.    Exhibit
-------
2.1       Agreement and Plan of Merger dated as of October 25, 2009 by and among
          Union Savings Bank,  First  Litchfield  Financial  Corporation and The
          First  National  Bank  of  Litchfield.   Exhibit  is  incorporated  by
          reference to Exhibit 2.1 to the Company's  Current  Report on Form 8-K
          as filed with the  Securities  and Exchange  Commission on October 28,
          2009.

3.1       Certificate   of   Incorporation   of   First   Litchfield   Financial
          Corporation,  as amended.  Exhibit is  incorporated  by  reference  to
          Exhibit 3.1 set forth in the Company's  Registration Statement on Form
          10-SB as filed with the Securities and Exchange  Commission on January
          7, 2000.

3.1.1     Certificate of Designations  for the Fixed Rate  Cumulative  Perpetual
          Preferred  Stock,  Series  A,  filed  December  9,  2008.  Exhibit  is
          incorporated  by  reference  to Exhibit 3.1 to the  Company's  Current
          Report  on  Form  8-K  as  filed  with  the  Securities  and  Exchange
          Commission on December 18, 2008.

3.2       Bylaws of First Litchfield Financial Corporation,  as amended. Exhibit
          is incorporated by reference to Exhibit 3.2 set forth in the Company's
          Registration  Statement on Form 10-SB as filed with the Securities and
          Exchange Commission on January 7, 2000.

4.        Specimen  Common  Stock   Certificate.   Exhibit  is  incorporated  by
          reference  to  Exhibit  4.  set  forth in the  Company's  Registration
          Statement  on Form 10-SB as filed  with the  Securities  and  Exchange
          Commission on January 7, 2000.

4.1       Amended  and  Restated   Declaration  of  Trust  of  First  Litchfield
          Statutory  Trust I.  Exhibit is  incorporated  by reference to Exhibit
          10.52 set forth in the Company's  Quarterly  Report on Form 10-QSB for
          the  quarter  ended  June 30,  2003 as filed with the  Securities  and
          Exchange Commission on August 13, 2003.

4.2       Indenture  for  the  Company's   Floating  Rate  Junior   Subordinated
          Deferrable  Interest  Debentures due 2033.  Exhibit is incorporated by
          reference to Exhibit 10.53 set forth in the Company's Quarterly report
          on Form 10-QSB for the  quarter  ended June 30, 2003 as filed with the
          Securities and Exchange Commission on August 13, 2003.

4.3       Indenture  dated June 16, 2006,  between  First  Litchfield  Financial
          Corporation,  as issuer,  and Wilmington  Trust Company,  as indenture
          trustee.  Exhibit is  incorporated  by reference to Exhibit 4.1 to the
          Company's  Registration  Statement  on Form  8-K/A as  filed  with the
          Securities and Exchange Commission on June 30, 2006.

4.4       Guarantee   Agreement  dated  as  of  June  16,  2006,  between  First
          Litchfield Financial Corporation and Wilmington Trust Company. Exhibit
          is   incorporated  by  reference  to  Exhibit  4.2  to  the  Company's
          Registration  Statement on Form 8-K/A as filed with the Securities and
          Exchange Commission on June 30, 2006.


                                       54
<PAGE>

4.5       Form of Junior Subordinated Note. Exhibit is incorporated by reference
          to Exhibit 4.3 to the Company's  Registration  Statement on Form 8-K/A
          as filed with the Securities and Exchange Commission on June 30, 2006.

4.6       Warrant to purchase  Common Stock dated December 12, 2008.  Exhibit is
          incorporated  by  reference  to Exhibit 4.1 to the  Company's  Current
          Report  on  Form  8-K  as  filed  with  the  Securities  and  Exchange
          Commission on December 18, 2008.

31.1      Rule  13a-14(a)/15-14(a)  Certification of the Chief Executive Officer
          of the Company.

31.2      Rule  13a-14(a)/15-14(a)  Certification of the Chief Financial Officer
          of the Company.

32.0      Certification  of the Chief Executive  Officer and the Chief Financial
          Officer of the  Company,  pursuant  to 18 U.S.C.  ss.1350,  as adopted
          pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


                                       55
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



Dated: November 13, 2009                          FIRST LITCHFIELD
                                                  FINANCIAL CORPORATION


                                                  By:  /s/ Joseph J. Greco
                                                       -------------------
                                                       Joseph J. Greco,
                                                       President and Chief
                                                       Executive Officer


Dated: November 13, 2009                          By: /s/Carroll A. Pereira
                                                         ------------------
                                                        Carroll A. Pereira
                                                        Principal Financial and
                                                        Accounting Officer


                                       56