UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
__________________
Commission File Number: 0-19822
_______
LITCHFIELD FINANCIAL CORPORATION
_______________________________________________________
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3023928
________________________________ ____________________________________
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
789 MAIN ROAD, STAMFORD, VT 05352
________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 694-1200
______________
________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
__ __
As of November 12, 1996, 5,444,399 shares of common stock of
Litchfield Financial Corporation were outstanding.
1
LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
FORM 10-Q
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
LITCHFIELD FINANCIAL CORPORATION
Consolidated Balance Sheets
(in 000's except share amounts)
September December
30, 1996 31, 1995
__________ _______
(unaudited)
ASSETS
Cash and cash equivalents $ 10,510 $ 18,508
Restricted cash and cash equivalents 18,042 16,345
Loans held for sale, net of allowance for loan
losses of $580 in 1996 and $1,100 in 1995 8,699 14,380
Loans held for investment, net of allowance for
loan losses of $938 in 1996 and $413 in 1995 63,889 33,613
Subordinated pass-through certificates held to
maturity, net of allowance for loan losses
of $1,500 in 1996 and $1,270 in 1995 17,648 13,468
Excess servicing asset 11,810 10,058
Deferred debt issuance costs 1,917 2,211
Other assets 4,743 4,808
-------- --------
Total assets $137,258 $113,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit $ 21,600 $ ---
Term note payable 7,866 9,836
Accounts payable and accrued liabilities 2,907 4,442
Dealer/developer reserves 9,951 9,644
Allowance for loans sold 1,300 932
Deferred income taxes 4,780 3,740
------ ------
48,404 28,594
------ ------
10% Notes due 2002 12,888 12,888
8 7/8 % Notes due 2003 15,930 16,113
10% Notes 2004 18,280 18,400
------ ------
47,098 47,401
====== ======
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000
shares, none issued and outstanding --- ---
Common stock, $.01 par value; authorized 8,000,000
shares, 5,493,389 shares issued and 5,444,399 shares
outstanding in 1996; 5,223,715 shares issued and
5,174,715 shares outstanding in 1995 55 52
Additional paid in capital 35,226 31,873
Retained earnings 7,069 6,065
Less 48,990 common shares held in treasury, at cost, (594) (594)
Total stockholders' equity 41,756 37,396
-------- --------
Total liabilities and stockholders' equity $137,258 $113,391
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Income
(in 000's except share and per share amounts)
Unaudited
Three Months Ended September 30,
________________________________
1996 1995
______ ______
Revenues:
Interest income $3,747 $2,814
Gain on sale of loans 2,811 2,149
Loan origination and fee income 315 227
Servicing income 263 274
----- -----
7,136 5,464
----- -----
Expenses:
Interest expense 1,843 1,639
Salaries and employee benefits 806 640
Other operating expenses 898 663
Provision for loan losses 420 195
----- -----
3,967 3,137
----- -----
Income before income taxes 3,169 2,327
Provision for income taxes 1,223 873
------ ------
Net income $1,946 $1,454
====== ======
Primary and fully-diluted net income per common share $ .34 $ .33
===== =====
Weighted average number of shares 5,720,924 4,412,366
See accompanying notes to unaudited consolidated financial statements.
4
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Income
(in 000's except share and per share amounts)
Unaudited
Nine Months Ended September 30,
_______________________________
1996 1995
________ ________
Revenues:
Interest income $10,260 $7,786
Gain on sale of loans 6,165 3,920
Loan origination and fee income 904 550
Servicing income 783 532
------ ------
18,112 12,788
------ ------
Expenses:
Interest expense 5,140 4,593
Salaries and employee benefits 2,372 1,616
Other operating expenses 2,219 1,580
Provision for loan losses 1,374 518
------ -----
11,105 8,307
------ -----
Income before income taxes 7,007 4,481
Provision for income taxes 2,699 1,682
------ ------
Net income $4,308 $2,799
====== ======
Primary and fully-diluted net income per common share $.75 $.64
==== ====
Weighted average number of shares 5,715,391 4,398,797
See accompanying notes to unaudited consolidated financial statements.
5
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
(in 000's)
Unaudited
Additional
Common Paid In Retained Treasury
Stock Capital Earnings Stock Total
______ _________ ________ ________ _____
Balance, December 31, 1995 $52 $31,873 $ 6,065 $(594) $37,396
Issuance of 10,560 shares
of common stock
(including reissuance
of 10 shares held in
treasury) --- 52 --- --- 52
5% Stock dividend 3 3,301 (3,304) --- ---
Net income --- --- 4,308 --- 4,308
--- ------- ------ ----- -------
Balance, September 30, 1996 $55 $35,226 $7,069 $(594) $41,756
=== ======= ====== ===== =======
See accompanying notes to unaudited consolidated financial statements.
6
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(in 000's)
Unaudited
Nine Months Ended September 30,
_______________________________
1996 1995
______ ______
Cash flows from operating activities:
Net income $4,308 $2,799
Adjustments to reconcile net income to net cash
used in operating activities:
Gain on sale of loans (6,165) (3,920)
Amortization and depreciation 462 357
Provision for loan losses 1,374 518
Deferred income taxes 1,040 592
Net changes in operating assets and liabilities:
Restricted cash and cash equivalents (1,697) (4,686)
Loans held for sale 5,681 (6,812)
Excess servicing asset 1,841 (800)
Dealer/developer reserves 307 2,976
Net change in other assets and liabilities (4,263) (969)
------ -------
Net cash provided by (used in) operating activities 2,888 (9,945)
------ -------
Cash flows from investing activities:
Purchase of investments held to maturity --- (5,595)
Redemption of investments held to maturity 101 9,196
Net originations and principal payments
on loans held for investment (30,276) (19,554)
Repayments of loans held for investments --- 11,364
Capital expenditures and other assets (90) (2,107)
-------- -------
Net cash used in investing activities (30,265) (6,696)
======== =======
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit 21,600 (5,823)
Retirement of long-term Notes (303) (875)
Proceeds from issuance of long-term Notes --- 18,400
Proceeds from term note --- 12,500
Payments on term note (1,970) (1,981)
Net proceeds from issuance of common stock 52 215
------ -------
Net cash provided by financing activities 19,379 22,436
------ -------
Net increase (decrease) in cash and
cash equivalents (7,998) 5,795
Cash and cash equivalents, beginning of period 18,508 5,534
------- -------
Cash and cash equivalents, end of period $10,510 $11,329
======= =======
Supplemental Schedule of Noncash Financing and
Investing Activities:
Exchange of mortgage loans for subordinated
pass-through certificates $3,540 $8,842
====== ======
Exchange of mortgage loans for investments held
to maturity $ --- $ 358
====== ======
Transfers from loans to real estate acquired
through foreclosure $ 498 $ 824
====== ======
Supplemental Cash Flow Information:
Interest paid $4,806 $4,315
====== ======
Income taxes paid $1,154 $1,090
====== ======
See accompanying notes to unaudited consolidated financial statements.
7
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited consolidated interim financial statements as of
September 30, 1996 and for the three and nine month periods ended September 30,
1996 and 1995 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 1996, are not necessarily indicative of
the results expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Litchfield Financial Corporation's annual report on Form
10-K for the year ended December 31, 1995.
In May, 1995, the Financial Accounting Standards Board issued Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights; an Amendment of
FASB Statement No. 65." The provisions of this standard are effective for fiscal
years beginning after December 15, 1995. Adoption of this standard as of January
1, 1996 did not have a significant impact on the Company.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." The Company intends to continue to account for its stock
compensation arrangements under the provisions of APB No. 25 "Accounting for
Stock Issued to Employees" with adoption of the new standard for the fiscal year
ending December 31, 1996.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." In general, the
provisions of this standard are effective for financial statements for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and shall be applied prospectively. Due to the recent
issuance of the standard, the Company has not fully evaluated the impact that
the adoption of the standard is expected to have on its financial statements.
However, our preliminary evaluation is that adoption of the standard is not
expected to have a significant impact on the Company.
On July 23, 1996, the Board of Directors declared a five percent stock
dividend on the Company's Common Stock payable August 9, 1996 to stockholders of
record on July 23, 1996. Accordingly, all per share amounts have been restated
to reflect the stock dividend.
B. Sale of Notes
Since its inception, the Company has sold $239,945,000 of loans at face
value ($194,515,000 through December 31, 1995). The principal amount remaining
8
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
on the loans sold was $125,793,000 at September 30, 1996 and $111,117,000 at
December 31, 1995. The Company guarantees, through replacement or repayment,
loans in default up to a specified percentage of loans sold. Dealer/developer
guaranteed loans are secured by repurchase or replacement guarantees in addition
to, in most instances, dealer/developer reserves.
The Company's undiscounted exposure to loss on loans sold in the event of
nonperformance by the consumer, default by the dealer/developer on its
guarantee, and the determination that the collateral is of no value was
$8,839,000 at September 30, 1996 ($10,259,000 at December 31, 1995). The Company
repurchased $264,000 and $110,000 of loans under the recourse provisions of loan
sales during the three months ended September 30, 1996 and 1995, respectively.
Loans repurchased during the nine months ended September 30, 1996 and 1995 were
$778,000 and $329,000, respectively, and $448,000 during the year ended December
31, 1995. In addition, when the Company sells loans through securitization
programs, the Company commits either to replace or repurchase any loans that do
not conform to the requirements thereof in the operative loan sale documents.
Also, in connection with certain securitization programs, $17,734,000 of cash
and cash equivalents are restricted as credit enhancements at September 30,
1996.
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 41 and 50 states, respectively. At September
30, 1996, 14.1% and 9.9% of the collateral by property balance were located in
Texas and California, respectively, and 13.4%, 10.2% and 9.9% of the borrowers
by collateral location were located in Texas, Florida and New York,
respectively.
C. Debt
At September 30, 1996, the Company had a secured warehouse line of credit
of $20,000,000 with an over line of $5,000,000 from the Bank of Boston. The
Company can elect to borrow all or part of the outstanding balance on the line
of credit and the over line at either the Bank's prime interest rate or the
Eurodollar rate plus 2%. Outstanding borrowings under the line of credit and the
over line at September 30, 1996 were $21,600,000. On October 2, 1996, the
warehouse line of credit was amended to include a $10,000,000 syndication with
Fleet Bank - NH. The borrowings on the over line were incorporated into the
amended facility and the over line expired. Bank of Boston is the agent bank for
the facility. The warehouse line of credit matures in April 1997, with renewal
at the lender's discretion. At December 31, 1995 the secured warehouse line of
credit was $15,000,000 at the Bank's prime interest rate plus 1%. There were no
outstanding borrowings at December 31, 1995. On July 23, 1996, the Company
entered into an additional secured line of credit of $5,000,000 with another
financial institution at that institution's prime rate of interest plus 1.25%.
This warehouse line of credit matures in July 1997. There were no outstanding
borrowings on this line of credit at September 30, 1996. The lines of credit are
secured by consumer receivables and other secured loans. On September 13, 1996,
the Company entered into a $15,000,000 revolving line of credit facility with
the Bank of Scotland. The facility is secured by certain subordinated
pass-through certificates and excess servicing assets and matures in September
1999. Interest is payable quarterly in arrears at the Bank's prime interest rate
plus 1%. There were no outstanding borrowings under this facility at September
30, 1996. The Company is not required to maintain compensating balances or
forward sales commitments under the terms of these lines of credit.
9
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company also has a revolving line of credit as part of an asset backed
commercial paper facility with Holland Limited Securitization, Inc. ("HLS") a
multi-seller commercial paper issuer sponsored by Internationale Nederlanden
(U.S.) Capital Markets, Inc. ("ING"). In October 1996, the Company amended the
facility to increase the facility to $100 million, subject to certain terms and
conditions, reduce certain credit enhancement requirements and expand certain
loan eligibility criteria. The facility expires in June 1998.
In connection with the HLS facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994 ("LMSC"), to
purchase loans from the Company. LMSC either pledges the loans on a revolving
line of credit with HLS or sells the loans to HLS. HLS issues commercial paper
or other indebtedness to fund the purchase or pledge of loans from LMSC. HLS is
not affiliated with the Company or its affiliates. As of September 30, 1996, the
outstanding balance of loans sold under the facility was $69,133,000 and there
were no outstanding borrowings under the line of credit. Interest is payable on
the line of credit based on certain commercial paper rates.
During the first quarter of 1995, the Company entered into a 10.43%,
$12,500,000 debt placement with an insurance company. Principal is payable
monthly based on collection of the underlying collateral. The note is redeemable
only with the approval of the noteholder. The note is collateralized by certain
of the Company's investments in Class B subordinated pass-through certificates,
excess servicing assets, and cash. At September 30, 1996, the remaining
principal balance was $7,866,000 and the value of the underlying collateral was
approximately $14,014,000.
On March 15, 1995, the Company completed a public offering of $18,400,000
of 10% Notes due 2004. The Company repaid $120,000 of these notes pursuant to
the noteholders' annual redemption rights on April 1, 1996. On August 1, 1996
and June 1, 1996 the Company repaid $20,000 and $163,000, respectively of the
1993 Notes due 2003 pursuant to the noteholders' annual redemption rights.
10
FORM 10-Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Litchfield Financial Corporation (the "Company") is a specialty consumer
finance company which provides financing for the purchase of rural and vacation
properties ("Land Loans") and financing of vacation ownership interests ("VOI
Loans"), popularly known as timeshare interests. In addition, the Company makes
loans to rural land dealers and resort developers of vacation properties secured
by consumer receivables and other secured loans (collectively "Dealer/Other
Loans").
The principal sources of the Company's revenues are (i) interest income,
(ii) gain from the sale of loans, (iii) loan origination and fee income and (iv)
servicing income. Gains on sales of loans are based principally upon the present
value of the difference between the interest to be collected from the borrower
and the interest to be passed on to the purchaser of the loan during the
estimated average life of the loans, less a normal servicing fee (referred to as
"excess servicing asset"). In addition, the Company realizes gains from selling
loans which were purchased at a discount. The excess servicing asset is
amortized over the estimated term of the loans using the interest method. If
prepayment or default assumptions prove inaccurate, then in subsequent periods
the excess servicing asset may be adjusted for unfavorable changes. Because a
significant portion of the Company's revenues is comprised of gains realized
upon sales of loans, the timing of such sales has a significant effect on the
Company's results of operations.
Results of Operations
The following table sets forth the percentage relationship to revenues,
unless otherwise indicated, of certain items included in the Company's
statements of income.
Three months ended Nine months ended
___________________ _________________
September 30, September 30,
___________________ _________________
1996 1995 1996 1995
____ ____ ____ ____
Revenues:
Interest income 52.5% 51.5% 56.7% 60.9%
Gain on sale of loans 39.4 39.3 34.0 30.6
Loan origination and fee income 4.4 4.2 5.0 4.3
Servicing income 3.7 5.0 4.3 4.2
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses:
Interest expense 25.8 30.0 28.4 35.9
Salaries and employee benefits 11.3 11.7 13.1 12.6
Other operating expenses 12.6 12.1 12.2 12.4
Provision for loan losses 5.9 3.6 7.6 4.1
---- ---- ---- ----
55.6 57.4 61.3 65.0
---- ---- ---- ----
Income before income taxes 44.4 42.6 38.7 35.0
Provision for income taxes 17.1 16.0 14.9 13.1
---- ---- ---- ----
Net income 27.3% 26.6% 23.8% 21.9%
==== ==== ==== ====
11
FORM 10-Q
Revenues increased 30.6% and 41.6% to $7,136,000 and $18,112,000 for the
three and nine months ended September 30, 1996, from $5,464,000 and $12,788,000
for the same periods in 1995. Net income for the three and nine months ended
September 30, 1996 increased 33.8% and 53.9% to $1,946,000 and $4,308,000
compared to $1,454,000 and $2,799,000 for the same periods in 1995. Net income
as a percentage of revenues increased to 27.3% and 23.8% for the three and nine
months ended September 30, 1996 compared to 26.6% and 21.9% for the three and
nine months ended September 30, 1995.
Interest income increased 33.2% and 31.8% to $3,747,000 and $10,260,000 for
the three and nine months ended September 30, 1996 from $2,814,000 and
$7,786,000 for the same periods in 1995, primarily as the result of the increase
in loans held for investment and subordinated pass-through certificates.
Interest on loans and subordinated pass-through certificates, cash and
investments, and excess servicing revenue comprised 80.3%, 6.3%, and 13.4% of
interest income for the three months ended September 30, 1996, compared with
82.5% 9.3%, and 8.2% in the same period in the prior year. Interest on loans and
subordinated pass-through certificates, cash and investments, and excess
servicing revenue comprised 82.7%, 7.9%, and 9.4% of interest income for the
nine months ended September 30, 1996, compared with 80.7%, 10.4%, and 8.9% in
the same period in the prior year. Interest earned on loans and subordinated
pass through certificates increased 29.7% and excess servicing revenue increased
115.9%, while interest earned on cash and investments decreased 9.9%, for the
three months ended September 30, 1996 compared to the same period in the prior
year. Interest earned on loans and subordinated pass-through certificates
increased 34.9% and excess servicing revenue increased 40.1%, while interest
earned on cash and investments remained constant for the nine months ended
September 30, 1996 compared to the same period in the prior year. The average
rate earned on loans owned and subordinated pass-through certificates decreased
to 12.7% for the three and the nine month periods ended September 30, 1996 from
13.4% and 13.1% for the three and nine month periods ended September 30, 1995.
Gain on the sale of loans increased 30.8% and 57.3% to $2,811,000 and
$6,165,000 for the three and nine months ended September 30, 1996 from
$2,149,000 and $3,920,000 for the same periods in 1995. The volume of loans sold
increased 42.7% to $21,582,000 for the three months ended September 30, 1996
from $15,128,000 for the same period in 1995. The volume of loans sold decreased
17.4% to $45,430,000 for the nine months ended September 30, 1996 from
$54,967,000 for the same period in 1995. The primary reason for the
disproportionate increase in the gain on sale of loans despite the decrease in
the loan sales was that the Company did not recognize any gain on the sale of
$27,155,000 of VOI Loans purchased from GEFCO in the second quarter of 1995.
This was consistent with the purchase method of accounting.
Loan origination and fee income increased 38.8% and 64.4% to $315,000 and
$904,000 for the three and nine months ended September 30, 1996 from $227,000
and $550,000 for the same periods in 1995. This increase in fee income primarily
reflected an increase in Dealer/Other Loan originations during 1996.
Loans serviced for others increased 17.8% to $125,793,000 as of September
30, 1996 from $106,819,000 at September 30, 1995. Servicing income increased
47.2% to $783,000 for the nine months ended September 30, 1996, from $532,000
for the same period in 1995 because of the higher average Serviced Portfolio
during the 1996 period, primarily as the result of the acquisition of the GEFCO
portfolio in April 1995. Servicing income decreased 4.0%, to $263,000 for the
12
FORM 10-Q
three months ended September 30,1996 from $274,000 for the same period in 1995,
due to the decrease in the average servicing fee per loan. In connection with
the Company's continued growth, the Company decided to subcontract its servicing
rights in order to avoid incurring additional fixed overhead costs associated
with such servicing. Accordingly, the Company subcontracted, to an unaffiliated
third party, the servicing of VOI Loans in 1995 and the remaining loans in April
1996.
Interest expense increased 12.4% and 11.9% to $1,843,000 and $5,140,000
during the three and nine months ended September 30 , 1996 from $1,639,000 and
$4,593,000 for the same periods in 1995. During the three and nine months ended
September 30, 1996, borrowings averaged $72,379,000 and $66,972,000
respectively, at an average rate of 9.3% and 9.2%, respectively, compared to
$59,697,000 and $54,628,000 at average rates of 9.8% and 9.7% during the same
periods in 1995. Average borrowings increased proportionately more than interest
expense because of the Company's ability to secure financing at more favorable
interest rates in 1996. Interest expense includes the amortization of deferred
debt issuance costs.
Salaries and employee benefits increased 25.9% to $806,000 for the three
months ended September 30, 1996 from $640,000 for the same period in 1995,
Salaries and employee benefits increased 46.8%, to $2,372,000 for the nine
months ended September 30, 1996 from $1,616,000 for the same period in 1995,
because of an increase in certain incentive based compensation due to higher
originations and an increase in the average number of employees during the 1996
period. The total full time equivalent employees increased to 56 in September
1996 from 55 in September 1995. The average number of employees working during
the 1996 periods increased due to hiring additional staff to support the growth
in the Serviced Portfolio. Personnel costs as a percentage of revenues decreased
slightly to 11.3% for the three months ended September 30, 1996 from 11.7% for
the same period in 1995. Personnel costs as a percentage of revenues increased
slightly to 13.1% for nine months ended September 30, 1996 from 12.6% for the
same period in 1995.
Other operating expenses increased 35.4% and 40.4% to $898,000 and
$2,219,000 for the three and nine months ended September 30, 1996 from $663,000
and $1,580,000 for the same periods in 1995, primarily due to the growth in the
Serviced Portfolio. Other operating expenses increased to 12.6% as a percentage
of revenue for the three months ended September 30, 1996 compared to 12.1% for
the same period in 1995. Other operating expenses as a percentage of revenue
remained relatively constant at 12.2% for the nine months ended September 30,
1996 compared to 12.4% for the same period in 1995.
During the three and nine months ended September 30, 1996, the Company
increased its provision for loan losses 115.4% and 165.2%, to $420,000 and
$1,374,000 from $195,000 and $518,000 for the same periods in 1995, primarily as
the result of the overall increase in the Serviced Portfolio as well as the
proportionate increase in the percentage of non-guaranteed loans in the Serviced
Portfolio. Historically, the loan loss rate for non-guaranteed loans has been
higher than the rate for guaranteed loans.
Liquidity and Capital Resources
The Company's business requires continued access to short and long-term
sources of debt financing and equity capital. The Company's cash requirements
13
FORM 10-Q
arise from loan originations and purchases, repayment of debt upon maturity,
payments of operating and interest expenses and loan repurchases. The Company's
primary sources of liquidity are sales into secondary markets of the loans it
originates and purchases, short-term borrowings under warehouse lines secured by
pledges of its loans (in most cases until such loans are sold and the lenders
can be repaid), long-term debt and equity offerings, and cash flows from
operations.
In connection with the Company's practice of selling the loans which it
originates and purchases, the Company in some cases commits to repurchase from
investors any such loans that become 90 days or more past due. This obligation
is subject to various terms and conditions, including, in some instances, a
limitation on the amount of loans that may be required to be repurchased. Based
on the Company's repurchase obligations contained in certain of its loan sale
contracts, there were approximately $8,839,000 of loans at September 30, 1996
which the Company could be required to repurchase in the future should such
loans become 90 days or more past due. The Company repurchased $264,000 and
$778,000 of such loans under the recourse provisions of loan sales during the
three and nine months ended September 30, 1996. Also, in connection with certain
securitization programs, $17,734,000 of cash and cash equivalents are restricted
as credit enhancements at September 30, 1996.
The Company funds its loan purchases in part with borrowings under various
bank warehouse lines of credit. Warehouse lines are paid down when the Company
receives the proceeds from the sale of the loans or when cash is otherwise
available. At September 30, 1996, the Company had a secured warehouse line of
credit of $20,000,000 with an over line of $5,000,000 from the Bank of Boston.
The Company can elect to borrow all or part of the outstanding balance on the
line of credit and the over line at either the Bank's prime interest rate or the
Eurodollar rate plus 2%. Outstanding borrowings under the line of credit and the
over line at September 30, 1996 were $21,600,000. On October 2, 1996, the
warehouse line of credit was amended to include a $10,000,000 syndication with
Fleet Bank - NH. The borrowings on the over line were incorporated into the
amended facility and the over line expired. Bank of Boston is the agent bank for
the facility. The warehouse line of credit matures in April 1997, with renewal
at the lender's discretion. At December 31, 1995 the secured warehouse line of
credit was $15,000,000 at the Bank's prime interest rate plus 1%. There were no
outstanding borrowings at December 31, 1995. On July 23, 1996, the Company
entered into an additional secured line of credit of $5,000,000 with another
financial institution at that institution's prime rate of interest plus 1.25%.
This warehouse line of credit matures in July 1997. There were no outstanding
borrowings on this line of credit at September 30, 1996. The lines of credit are
secured by consumer receivables and other secured loans. On September 13, 1996,
the Company entered into a $15,000,000 revolving line of credit facility with
the Bank of Scotland. The facility is secured by certain subordinated
pass-through certificates and excess servicing assets and matures in September
1999. Interest is payable quarterly in arrears at the Bank's prime interest rate
plus 1%. There were no outstanding borrowings under this facility at September
30, 1996. The Company is not required to maintain compensating balances or
forward sales commitments under the terms of these lines of credit. As of
September 30, 1996 and December 31, 1995, the Company had no unsecured lines of
credit.
The Company also has a revolving line of credit as part of an asset backed
commercial paper facility with Holland Limited Securitization, Inc. ("HLS") a
multi-seller commercial paper issuer sponsored by Internationale Nederlanden
(U.S.) Capital Markets, Inc. ("ING"). In October 1996, the Company amended the
facility to increase the facility to $100 million, subject to certain terms and
conditions, reduce certain credit enhancement requirements and expand certain
loan eligibility criteria. The facility expires in June 1998.
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FORM 10-Q
In connection with the HLS facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994 ("LMSC"), to
purchase loans from the Company. LMSC either pledges the loans on a revolving
line of credit with HLS or sells the loans to HLS. HLS issues commercial paper
or other indebtedness to fund the purchase or pledge of loans from LMSC. HLS is
not affiliated with the Company or its affiliates. As of September 30, 1996, the
outstanding balance of loans sold under the facility was $69,133,000 and there
were no outstanding borrowings under the line of credit. Interest is payable on
the line of credit based on certain commercial paper rates.
During the first quarter of 1995, the Company entered into a 10.43%,
$12,500,000 debt placement with an insurance company. Principal is payable
monthly based on collection of the underlying collateral. The note is redeemable
only with the approval of the noteholder. The note is collateralized by certain
of the Company's investments in Class B subordinated pass-through certificates,
excess servicing assets, and cash. At September 30, 1996, the balance
outstanding on the note was $7,866,000 and the value of the underlying
collateral was approximately $14,014,000.
On March 15, 1995, the Company completed a public offering of $18,400,000
of 10% Notes due 2004 ("1995 Notes"). The 1995 Notes allow for a maximum annual
redemption of $920,000 and contain certain restrictions regarding the payment of
dividends and require the maintenance of certain financial ratios. On April 1,
1996 the noteholders redeemed, and the Company paid $120,000 of the 1995 Notes.
On October 31, 1995, the Company completed a public offering of 1,250,000 shares
of common stock at a price of $15 per share. The net proceeds to the Company
were approximately $17,325,000 after deducting expenses related to the offering.
Previously, the Company significantly increased its capital base through a
$9,500,000 initial public offering in February, 1992 and public debt offerings
of $15,065,000 in November 1992 ("1992 Notes") and $17,570,000 in May 1993
("1993 Notes"). The 1992 Notes and the 1993 Notes bear interest at 10% and 8
7/8%, respectively, and are due 2002 and 2003, respectively. The 1992 Notes and
the 1993 Notes are unsecured obligations of the Company and each such issuance
allows for a maximum annual redemption by noteholders of 5% of the original
principal amount thereof. On August 1, 1996 and June 1, 1996 the Company repaid
$20,000 and $163,000, respectively of the 1993 Notes due 2003 pursuant to the
noteholders' annual redemption rights.
The Company manages its exposure to changes in interest rates by attempting
to match its proportion of fixed versus variable rate assets, liabilities and
loan sale facilities. The Company has mitigated its interest rate exposure due
to interest rate declines by instituting interest rate floors on its adjustable
rate loans.
Historically, the Company has not required major capital expenditures to
support its operations.
Credit Quality and Allowances for Loan Losses
The Company maintains allowances for loan losses at levels which, in the
opinion of management, provide adequately for current and possible future losses
on loans, loans sold and subordinated pass-through certificates. Past-due loans
(loans 30 days or more past due which are not covered by dealer/developer
reserves and guarantees) as a percentage of the Serviced Portfolio were 1.43% as
of September 30, 1996. Management evaluates the adequacy of the allowances on a
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FORM 10-Q
quarterly basis by examining current delinquencies, the characteristics of the
accounts, the value of the underlying collateral, and general economic
conditions and trends. Management also evaluates the extent to which
dealer/developer reserves and guarantees can be expected to absorb loan losses.
A provision for loan losses is recorded in an amount deemed sufficient by
management to maintain the allowances at adequate levels. Total allowances for
loan losses and loans sold increased to $4,318,000 at September 30, 1996
compared to $3,715,000 at December 31, 1995. The allowance ratio (the allowances
for loan losses divided by the amount of the Serviced Portfolio) at September
30, 1996 decreased slightly to 1.96% from 2.10% at December 31, 1995.
As part of the Company's financing of Land Loans and VOI Loans,
arrangements are entered into with dealers and resort developers, whereby
reserves are established to protect the Company from potential losses associated
with such loans. As part of the Company's agreement with the dealers and resort
developers, a portion of the amount payable to each dealer and resort developer
for a Land Loan or a VOI Loan is retained by the Company and is available to the
Company to absorb loan losses for those loans. The Company negotiates the amount
of the reserves with the dealers and developers based upon various criteria, two
of which are the financial strength of the dealer or developer and credit risk
associated with the loans being purchased. Dealer/developer reserves amounted to
$9,951,000 and $9,644,000 at September 30, 1996 and December 31, 1995,
respectively.
Inflation
Inflation has not had a significant effect on the Company's
operating results to date.
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FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
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
Item 6. (a) Exhibits
The following exhibits are filed herewith:
11.1 -- Statement re: computation of earnings per share
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
None
17
FORM 10-Q
SIGNATURES
Pursuant to the requirements 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.
LITCHFIELD FINANCIAL CORPORATION
DATE: November 12, 1996 /s/ Richard A. Stratton
RICHARD A. STRATTON
Chief Executive Officer,
President and Director
DATE: November 12, 1996 /s/ Ronald E. Rabidou
RONALD E. RABIDOU
Chief Financial Officer
18