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 MARCH 31, 1997
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 May 12, 1997, 5,536,651 shares of common stock of Litchfield Financial
Corporation were outstanding.
1
LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
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
LITCHFIELD FINANCIAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
LITCHFIELD FINANCIAL CORPORATION
Consolidated Balance Sheets
(in 000's except share amounts)
March 31, December 31,
1997 1996
___________ ____________
(unaudited)
ASSETS
Cash and cash equivalents $ 8,586 $ 5,557
Restricted cash 20,827 18,923
Loans held for sale, net of allowance for
loan losses of $827 in 1997 and $817 in 1996 12,895 12,260
Loans held for investment, net of allowance
for loan losses of $1,385 in 1997 and $1,200
in 1996 90,969 79,996
Retained interests in loan sales 28,285 28,912
Other assets 7,467 7,041
-------- --------
Total assets $169,029 $152,689
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit $ 47,529 $ 36,299
Term note payable 6,903 7,428
Accounts payable and accrued liabilities 6,982 3,811
Dealer/developer reserves 10,631 10,628
Deferred income taxes 5,472 5,080
-------- --------
77,517 63,246
-------- --------
10% Notes due 2002 12,785 12,785
8 7/8 % Notes due 2003 15,930 15,930
10% Notes 2004 18,280 18,280
------- -------
46,995 46,995
------- -------
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,
5,525,251 shares issued and
outstanding in 1997 and 5,444,399
shares issued and outstanding in 1996 55 54
Additional paid in capital 35,321 34,633
Net unrealized gain on retained
interests in loan sales 235 ---
Retained earnings 8,906 7,761
------- -------
Total stockholders' equity 44,517 42,448
-------- --------
Total liabilities and stockholders' equity $169,029 $152,689
======== ========
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 March 31,
____________________________
1997 1996
____ ____
Revenues:
Interest income $4,546 $3,292
Gain on sale of loans 1,504 880
Servicing and other fee income 357 478
------ ------
6,407 4,650
====== ======
Expenses:
Interest expense 2,394 1,529
Salaries and employee benefits 813 737
Other operating expenses 903 664
Provision for loan losses 435 425
------ ------
4,545 3,355
------ ------
Income before income taxes 1,862 1,295
Provision for income taxes 717 497
------ ------
Net income $1,145 $ 798
====== ======
Primary and fully-diluted net income per common share $ .20 $ .14
======= =======
Fully diluted weighted average number of shares 5,791,669 5,700,891
See accompanying notes to unaudited consolidated financial statements.
4
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
(in 000's)
Unaudited
Net Unrealized
Gain on
Additional Retained
Common Paid In Interests in Retained
Stock Capital Loan Sales Earnings Total
______ _________ ____________ ________ _______
Balance, December 31, 1996 $54 $34,633 $ --- $7,761 $42,448
Issuance of 80,852 shares
of common stock 1 688 --- --- 689
Net unrealized gain on
retained interests in
loan sales --- --- 235 --- 235
Net income --- --- --- 1,145 1,145
----- ------- ---- ------ -------
Balance, March 31, 1997 $55 $35,321 $235 $8,906 $44,517
===== ======= ==== ====== =======
See accompanying notes to unaudited consolidated financial statements.
5
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(in 000's)
Unaudited
Three Months Ended March 31,
____________________________
1997 1996
_________ ________
Cash flows from operating activities:
Net income $ 1,145 $ 798
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Gain on sale of loans (1,504) (880)
Amortization and depreciation 129 145
Amortization of retained interests in loan sales 1,014 654
Provision for loan losses 435 425
Deferred income taxes 392 49
Net changes in operating assets and liabilities:
Restricted cash (1,904) (1,534)
Loans held for sale (547) (6,185)
Retained interests in loan sales (132) (235)
Dealer/developer reserves 3 (137)
Net change in other assets and liabilities 2,110 (116)
----- -------
Net cash provided by (used in) operating activities 1,141 (7,016)
----- -------
Cash flows from investing activities:
Redemption of investments held to maturity 16 24
Net originations and principal payments on loans
held for investment (10,973) (9,008)
Collections on retained interests in loan sales 1,499 ---
Capital expenditures and other assets (48) (12)
-------- --------
Net cash used in investing activities (9,506) (8,996)
-------- --------
Cash flows from financing activities:
Net borrowings on lines of credit 11,230 2,400
Payments on term note (525) (447)
Net proceeds from issuance of common stock 689 28
-------- --------
Net cash provided by financing activities 11,394 1,981
-------- --------
Net increase (decrease) in cash and cash equivalents 3,029 (14,031)
Cash and cash equivalents, beginning of period 5,557 18,508
-------- ---------
Cash and cash equivalents, end of period $ 8,586 $ 4,477
======== =========
Supplemental Schedule of Noncash Financing
and Investing Activities:
Transfers from loans to real estate
acquired through foreclosure $ 447 $ 107
======= ========
Supplemental Cash Flow Information:
Interest paid $ 2,300 $ 1,522
======== ========
Income taxes paid $ 325 $ 443
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A. Basis of Presentation
The accompanying unaudited consolidated interim financial statements as of
March 31, 1997 and for the three month periods ended March 31, 1997 and 1996
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 month period ended March 31,
1997, are not necessarily indicative of the results expected for the year ended
December 31, 1997. 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, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. Under the new standard, primary earnings per share would have been
$.01 per share higher for each of the quarters ended March 31, 1997 and 1996.
The impact of Statement 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
B. Gain on Sale of Loans and Retained Interests in Loan Sales
The Company adopted the requirements of Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" for transfers of receivables. There was no
effect on net income in the first quarter as a result of adopting the standard.
The Company has reclassified as retained interests in loan sales certain
subordinated pass-through certificates, interest only strips and recourse
obligations in connection with adopting the standard.
Gains on sales of loans are based on the difference between the allocated
cost basis of the assets sold and the proceeds, which includes the fair value of
any assets or liabilities that are newly created as a result of the transaction.
The Company carries any retained interests in the transferred assets at an
allocated amount of the previous carrying amount. Newly created interests which
consist primarily of interest only strips and recourse obligations are initially
recorded at fair value. The previous carrying amount is allocated between the
assets sold and any retained interests based on their relative fair values at
the date of transfer. Retained interests in transferred assets consist primarily
of subordinate portions of the principal balance of transferred assets.
The Company estimates fair value using discounted cash flow analysis
(using a discount rate commensurate with the risks involved), because quoted
market prices are not available. The Company's analysis incorporates assumptions
that market participants would use in their estimates of future cash flows
7
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
including assumptions about interest, defaults and prepayment rates. The Company
considers retained interests in loan sales, such as subordinated pass-through
certificates and interest only strips, as available for sale because such
interests are subject to prepayment.
There is generally no servicing asset or liability because the Company
estimates that the benefits of servicing are just adequate to compensate it for
its servicing responsibilities.
Since its inception, the Company has sold $261,494,000 of loans at face
value ($249,451,000 through December 31, 1996). The principal amount remaining
on the loans sold was $131,162,000 at March 31, 1997 and $129,619,000 at
December 31, 1996. 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
$8,698,000 at March 31, 1997 ($8,780,000 at December 31, 1996). The Company
repurchased $335,000 and $115,000 of loans under the recourse provisions of loan
sales during the three months ended March 31, 1997 and 1996, respectively, and
$991,000 during the year ended December 31, 1996. 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. As of March 31, 1997, $19,616,000 of the
Company's cash was restricted as credit enhancements in connection with certain
securitization programs.
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 41 and 50 states, respectively. The Serviced
Portfolio consists of the principal of Land, VOI and Dealer/Other Loans serviced
by or on behalf of the Company. At March 31, 1997, 15.6% of the portfolio by
collateral location was located in Texas, and 14.1% and 14.0% of the portfolio
by borrower location was located in Texas and Florida, respectively. No other
state accounted for more than 10.0% of the total.
C. Allowance for loan losses
The total allowance for loan losses consists of the following:
March 31, December 31,
1997 1996
___________ ___________
Allowance for losses on loans
held for sale $ 827,000 $ 817,000
Allowance for losses on loans
held for investment 1,385,000 1,200,000
Recourse obligation on retained
interests in loan sales 2,414,000 2,511,000
---------- ----------
$4,626,000 $4,528,000
========== ==========
8
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
D. Debt
At March 31, 1997, the Company had a secured line of credit of $30,000,000
from BankBoston, as lead agent, and Fleet Bank. The Company can elect to borrow
all or part of the outstanding balance on the line of credit at either the
Banks' prime interest rate or the Eurodollar rate plus 2%. Outstanding
borrowings under the line of credit were $30,000,000 and $26,200,000 at March
31, 1997 and December 31, 1996, respectively. At December 31, 1996 the
outstanding borrowings were $26,200,000. This line of credit is secured by
consumer receivables and other secured loans. The line of credit matured in
April 1997 and the Company was granted a thirty day extension. The Company is
currently negotiating a renewal and an amendment to the existing line of credit
which is expected to close in May 1997. The amendment is to increase the amount
of the line of credit and to extend the maturity of the line beyond one year.
However, no assurance can be given that such renewal or amendment will be
closed.
In January 1997, an additional secured line of credit was increased to
$8,000,000 with another financial institution at that institution's prime rate
of interest plus 1.25%. This line of credit matures in January 1998. There were
no outstanding borrowings on this line of credit at March 31, 1997 and December
31, 1996. This line of credit is secured by consumer receivables and other
secured loans.
In January 1997, the secured line of credit with the Bank of Scotland was
increased to $20,000,000. Interest is payable quarterly in arrears at the Bank's
prime interest rate plus 1%. The outstanding borrowings under this facility at
March 31, 1997 and December 31, 1996 were $13,400,000 and $8,300,000,
respectively. This facility is secured by certain retained interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999. The outstanding balance at March 31, 1997 was paid in full in April 1997.
On March 5, 1997, the Company entered into a $25,000,000 secured line of
credit with Green Tree Financial Servicing Corporation. The outstanding
borrowings at March 31, 1997 were $3,214,000. The facility is secured by loans
to developers of VOI resorts for the acquisition and development of VOI resorts
("Facility A") and the related financing of consumer purchases of VOIs
("Facility B"). Interest is payable monthly in arrears at the thirty day LIBOR
rate plus 3.75% for Facility A and at the thirty day LIBOR rate plus 2% for
Facility B. Although the maximum amount that can be borrowed on each facility is
$15,000,000, the aggregate outstanding borrowings cannot exceed $25,000,000.
This facility expires in March 2000.
On March 21, 1997, the Company entered into a $3,000,000 secured line of
credit with an additional financial institution. Interest is payable monthly in
arrears at the Bank's base rate plus 1%. This line of credit is secured by
consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at March 31, 1997.
The Company is not required to maintain compensating balances or forward
sales commitments under the terms of these lines of credit.
The Company also has a revolving line of credit and sale facility as part
of an asset backed commercial paper facility with Holland Limited
9
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 HLS facility to increase the facility to $100,000,000,
subject to certain terms and conditions, reduce certain credit enhancement
requirements and expand certain loan eligibility criteria. The outstanding
aggregate balance of the loans pledged and sold under the HLS facility at any
time cannot exceed $100,000,000. The HLS 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 March 31, 1997, the
outstanding balance of eligible loans sold under the facility was $65,939,000.
Outstanding borrowings under the line of credit at March 31, 1997 and December
31, 1996 were $915,000 and $1,799,000, respectively. Interest is payable on the
line of credit at an interest rate based on certain commercial paper rates.
On March 21, 1997, the Company closed an additional revolving line of
credit and sale facility of $25,000,000 with BankBoston's commercial paper
conduit, EagleFunding Capital Corporation ("EFCC"). The EFCC facility, which
expires in March 2000, is subject to certain terms and conditions, credit
enhancement requirements and loan eligibility criteria. The outstanding
aggregate balance of the loans pledged and sold under the EFCC facility at any
time cannot exceed $25,000,000.
In connection with the EFCC facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1995 ("LCC"), to purchase loans from
the Company. LCC either pledges the loans on a revolving line of credit with or
sells the loans to EFCC. EFCC issues commercial paper or other indebtedness to
fund the purchase or pledge of loans from LCC. EFCC is not affiliated with the
Company or its affiliates. As of March 31, 1997 the outstanding balance of the
eligible loans previously sold under the facility was $10,700,000. There were no
amounts borrowed under the line of credit as of March 31, 1997. Interest is
payable on the line of credit at an interest rate based on certain commercial
paper rates.
During the first quarter of 1995, the Company issued a 10.43% promissory
note with an initial balance of $12,500,000 to 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 retained interests in loan sales and cash. The
balance outstanding on the note was $6,903,000 and $7,428,000 at March 31, 1997
and December 31, 1996, respectively. As of March 31, 1997 the approximate value
of the underlying collateral was $12,776,000.
In April 1997, the Company issued unsecured notes with an initial
principal balance of $20,000,000 to Teachers Insurance and Annuity Association
("TIAA"). Interest is payable at 9.3% semiannually in arrears. The notes
requires principal reductions of $7,500,000, $6,000,000, $6,000,000 and $500,000
in March 2001, 2002, 2003 and 2004, respectively. The proceeds were used to
repay the outstanding balance on the line of credit with the Bank of Scotland
and a portion of the outstanding balance on the line of credit with BankBoston.
10
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Litchfield Financial Corporation (the "Company") is a specialty 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 secured by consumer
receivables and other secured loans (collectively "Dealer/Other Loans").
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gain from the sale of loans and (iii) servicing and other fee
income. Gains on sales of loans are based on the difference between the
allocated cost basis of the assets sold and the proceeds, which includes the
fair value of any assets or liabilities that are newly created as a result of
the transaction. 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 March 31,
----------------------------
1997 1996
---- ----
Revenues:
Interest and fees on loans 70.9% 70.8%
Gain on sale of loans 23.5 18.9
Servicing and other income 5.6 10.3
----- -----
100.0 100.0
----- -----
Expenses:
Interest expense 37.3 32.9
Salaries and employee benefits 12.7 15.9
Other operating expenses 14.1 14.3
Provision for loan losses 6.8 9.1
----- -----
70.9 72.2
----- -----
Income before income taxes 29.1 27.8
Provision for income taxes 11.2 10.6
------ ------
Net income 17.9% 17.2%
====== ======
Revenues increased 37.8% to $6,407,000 for the three months ended March
31, 1997, from $4,650,000 for the same period in 1996. Net income for the three
months ended March 31, 1997 increased 43.5% to $1,145,000 compared to $798,000
for the same period in 1996. Net income as a percentage of revenues increased to
17.9% for the three months ended March 31, 1997 compared to 17.2% for the three
11
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
months ended March 31, 1996. Loan originations grew 36.9% to $36,063,000 for the
three months ended March 31, 1997 from $26,350,000 for the same period in 1996.
The Serviced Portfolio increased 39.7% to $256,192,000 at March 31, 1997 from
$183,448,000 at March 31, 1996.
Interest and fees on loans increased 38.1% to $4,546,000 for the three
months ended March 31, 1997 from $3,292,000 in 1996, primarily as the result of
the increase in loans held for investment and retained interests in loan sales.
Interest and fees on loans, retained interests in loan sales, and cash and
investments comprised 74.4%, 19.6%, and 6.0%, respectively, of interest and fees
on loans for the three months ended March 31, 1997, compared with 67.2%, 22.9%,
and 9.9%, respectively, for the same period in the prior year. Interest earned
on loans and retained interests in loan sales increased 52.9% and 18.2%,
respectively, for the first three months of 1997 compared to the first three
months of 1996. Interest earned on cash and investments decreased 16.4% for the
three months ended March 31, 1997 compared to the same period in 1996. The
average rate earned on loans owned and retained interests in loan sales
decreased to 12.4% for the three months ended March 31, 1997 from 13.3% for the
three months ended March 31, 1996, primarily due to the effect of the growth in
Dealer/Other Loans as a percentage of the Serviced Portfolio. Dealer/Other Loan
yields are usually less than Land Loan or VOI Loan yields, but Dealer/Other
Loans servicing costs and loan losses are generally less as well.
Gain on the sale of loans increased 70.9% to $1,504,000 for the three
months ended March 31, 1997 from $880,000 in the same period in 1996. The volume
of loans sold increased 127.3% to $12,043,000 for the three months ended March
31, 1997 from $5,299,000 during the corresponding period in 1996. Gain on sale
of loans increased less than the volume of loans sold primarily due to the lower
amount of discount relating to loans sold and, to a lesser extent, the lower
spread between the coupon rate of the loans sold and the pass-through rate.
Loans serviced for others increased 26.2% to $131,162,000 as of March 31,
1997 from $103,952,000 at March 31, 1996. Servicing and other fee income
decreased 25.3% to $357,000 for the three months ended March 31, 1997, from
$478,000 compared to the same period in 1996. Servicing and other fee income
decreased despite the increase in loans serviced for others due to a 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 Land and Dealer/Other Loans in April 1996.
Interest expense increased 56.6% to $2,394,000 during the three months
ended March 31 , 1997 from $1,529,000 for the same period in 1996. The increase
in interest expense primarily reflects an increase in average borrowings which
was only partially offset by a decrease in average rates. During the three
months ended March 31, 1997, borrowings averaged $98,952,000 at an average rate
of 8.9% as compared to $57,602,000 and 9.8%, respectively, for the three months
ended March 31,1996. Interest expense includes the amortization of deferred debt
issuance costs.
Salaries and employee benefits increased 10.3% to $813,000 for the three
months ended March 31, 1997 from $737,000 for the same period in 1996 because of
an increases in the number of employees in 1997 and, to a lesser extent, an
increase in salaries. The number of full time equivalents increased to 61 at
March 31, 1997 compared to 53 at March 31, 1996. Personnel costs as a percentage
of revenues decreased to 12.7% for the three months ended March 31, 1997
compared to 15.9% for the same period in 1996 primarily as a result of
subcontracting of servicing to a third party.
12
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other operating expenses increased 36.0% to $903,000 for the three months
ended March 31, 1997 from $664,000 for the same period in 1996 primarily as the
result of subcontracting of servicing to a third party. As a percentage of
revenues, other operating expenses decreased slightly to 14.1% for the first
three months in 1997 compared to 14.3% for the first three months in 1996.
During the three months ended March 31, 1997, the Company increased its
provision for loan losses 2.4% to $435,000 from $425,000 for the same period in
1996. The provision for loan losses increased less than the increase in loans
owned and retained interests in loan sales because of the growth in Dealer/Other
Loans as a percentage of the serviced portfolio. Dealer/Other Loans have
experienced significantly lower delinquency and default rates than Land Loans
and VOI 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 principal cash
requirements arise from loan originations, repayment of debt on maturity,
payments of operating and interest expenses and loan repurchases. The Company's
primary sources of liquidity are loan sales, short-term borrowings under secured
lines of credit, long-term debt and equity offerings and cash flows from
operations.
In connection with certain loan sales, the Company 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. There were approximately $8,698,000 of loans at March 31, 1997
which the Company could be required to repurchase in the future should such
loans become 90 days or more past due. The Company repurchased $335,000 and
$155,000 of such loans under the recourse provisions of loan sales during the
three months ended March 31, 1997 and 1996, respectively. As of March 31, 1997,
$19,616,000 of the Company's cash was restricted as credit enhancements in
connections with certain securitization programs.
The Company funds its loan purchases in part with borrowings under various
bank lines of credit. Lines are paid down when the Company receives the proceeds
from the sale of the loans or when cash is otherwise available. At March 31,
1997, the Company had a secured line of credit of $30,000,000 from BankBoston,
as lead agent, and Fleet Bank. The Company can elect to borrow all or part of
the outstanding balance on the line of credit at either the Banks' prime
interest rate or the Eurodollar rate plus 2%. Outstanding borrowings under the
line of credit were $30,000,000 and $26,200,000 at March 31, 1997 and December
31, 1996, respectively. At December 31, 1996 the outstanding borrowings were
$26,200,000. This line of credit is secured by consumer receivables and other
secured loans. The line of credit matured in April 1997 and the Company was
granted a thirty day extension. The Company is currently negotiating a renewal
and an amendment to the existing line of credit which is expected to close in
May 1997. The amendment is to increase the amount of the line of credit and to
extend the maturity of the line beyond one year. However, no assurance can be
given that such renewal or amendment will be closed.
In January 1997, an additional secured line of credit was increased to
$8,000,000 with another financial institution at that institution's prime rate
13
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of interest plus 1.25%. This line of credit matures in January 1998. There were
no outstanding borrowings on this line of credit at March 31, 1997 and December
31, 1996. This line of credit is secured by consumer receivables and other
secured loans.
In January 1997, the secured line of credit with the Bank of Scotland was
increased to $20,000,000. Interest is payable quarterly in arrears at the Bank's
prime interest rate plus 1%. The outstanding borrowings under this facility at
March 31, 1997 and December 31, 1996 were $13,400,000 and $8,300,000,
respectively. This facility is secured by certain retained interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999. The outstanding balance at March 31, 1997 was paid in full in April 1997.
On March 5, 1997, the Company entered into a $25,000,000 secured line of
credit with Green Tree Financial Servicing Corporation. The outstanding
borrowings at March 31, 1997 were $3,214,000. The facility is secured by loans
to developers of VOI resorts for the acquisition and development of VOI resorts
("Facility A") and the related financing of consumer purchases of VOIs
("Facility B"). Interest is payable monthly in arrears at the thirty day LIBOR
rate plus 3.75% for Facility A and at the thirty day LIBOR rate plus 2% for
Facility B. Although the maximum amount that can be borrowed on each facility is
$15,000,000, the aggregate outstanding borrowings cannot exceed $25,000,000.
This facility expires in March 2000.
On March 21, 1997, the Company entered into a $3,000,000 secured line of
credit with an additional financial institution. Interest is payable monthly in
arrears at the Bank's base rate plus 1%. This line of credit is secured by
consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at March 31, 1997.
The Company is not required to maintain compensating balances or forward
sales commitments under the terms of these lines of credit.
The Company also has a revolving line of credit and sale facility 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 HLS facility to increase the facility to $100,000,000,
subject to certain terms and conditions, reduce certain credit enhancement
requirements and expand certain loan eligibility criteria. The outstanding
aggregate balance of the loans pledged and sold under the HLS facility at any
time cannot exceed $100,000,000. The HLS 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 March 31, 1997, the
outstanding balance of eligible loans sold under the facility was $65,939,000.
Outstanding borrowings under the line of credit at March 31, 1997 and December
31, 1996 were $915,000 and $1,799,000, respectively. Interest is payable on the
line of credit at an interest rate based on certain commercial paper rates.
On March 21, 1997, the Company closed an additional revolving line of
credit and sale facility of $25,000,000 with BankBoston's commercial paper
conduit, EagleFunding Capital Corporation ("EFCC"). The EFCC facility, which
expires in March 2000, is subject to certain terms and conditions, credit
14
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
enhancement requirements and loan eligibility criteria. The outstanding
aggregate balance of the loans pledged and sold under the EFCC facility at any
time cannot exceed $25,000,000.
In connection with the EFCC facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1995 ("LCC"), to purchase loans from
the Company. LCC either pledges the loans on a revolving line of credit with or
sells the loans to EFCC. EFCC issues commercial paper or other indebtedness to
fund the purchase or pledge of loans from LCC. EFCC is not affiliated with the
Company or its affiliates. As of March 31, 1997 the outstanding balance of the
eligible loans previously sold under the facility was $10,700,000. There were no
amounts borrowed under the line of credit as of March 31, 1997. Interest is
payable on the line of credit at an interest rate based on certain commercial
paper rates.
During the first quarter of 1995, the Company issued a 10.43% promissory
note with an initial balance of $12,500,000 to 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 retained interests in loan sales and cash. The
balance outstanding on the note was $6,903,000 and $7,428,000 at March 31, 1997
and December 31, 1996, respectively. As of March 31, 1997 the approximate value
of the underlying collateral was $12,776,000.
In April 1997, the Company issued unsecured notes with an initial
principal balance of $20,000,000 to Teachers Insurance and Annuity Association
("TIAA"). Interest is payable at 9.3% semiannually in arrears. The notes
requires principal reductions of $7,500,000, $6,000,000, $6,000,000 and $500,000
in March 2001, 2002, 2003 and 2004, respectively. The proceeds were used to
repay the outstanding balance on the line of credit with the Bank of Scotland
and a portion of the outstanding balance on the line of credit with BankBoston.
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 further mitigated its
interest rate exposure due to interest rate declines by instituting interest
rate floors on certain of 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 and recourse obligations
on retained interests in loan sales at levels which, in the opinion of
management, provide adequately for current and possible future losses on such
assets. 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 1.31% as of March 31, 1997 compared with 1.34% at December 31,
1996 and 1.75% at March 31, 1996. Management evaluates the adequacy of the
allowances on a 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
15
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
by management to maintain the allowances at adequate levels. Total allowances
for loan losses and recourse obligations on retained interests in loan sales
increased to $4,626,000 at March 31, 1997 compared to $4,528,000 at December 31,
1996. The allowance ratio (the allowances for loan losses divided by the amount
of the Serviced Portfolio) at March 31, 1997 decreased slightly to 1.81% from
1.87% at December 31, 1996.
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
$10,631,000 and $10,628,000 at March 31, 1997 and December 31, 1996,
respectively. The Company generally returns any excess reserves to the
dealer/developer on a quarterly basis as the related loans are repaid by
borrowers.
Inflation
Inflation has not had a significant effect on the Company's operating
results to date.
16
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
At the Company's Annual Meeting of Stockholders held on April 25, 1997,
Richard A. Stratton and James Westra each were elected to serve as
directors of the Company for a term expiring at the 2000 Annual Meeting
by a vote of 4,751,082 and 4,751,072 shares voting for their election
and 6,180 and 6,190 shares abstaining, respectively. In addition, the
stockholders approved by a vote of 4,731,709 shares for, 11,163 shares
against, and 14,390 shares abstaining, Ernst & Young LLP as the
Company's independent public accountants for 1997.
The Company solicited proxies for the Annual Meeting pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the Company's nominees for director, and
all nominees were elected.
Item 5. Other Information
None
Item 6. (a) Exhibits
The following exhibits are filed herewith:
10.152- Master revolving credit promissory note dated as of March 21,
1997 between Litchfield Financial Corporation and Republic Bank
in the principal amount of $3,000,000.
10.153- Wholesale warehouse loan and mortgage security agreement dated
as of March 21, 1997 between Litchfield Financial Corporation
and Republic Bank in the
principal amount of $3,000,000.
11.1 - Statement re: computation of earnings per share
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
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: May 12, 1997 /s/ Richard A.Stratton
----------------------
RICHARD A. STRATTON
Chief Executive Officer,
President and Director
DATE: May 12, 1997 /s/ Ronald E.Rabidou
--------------------
RONALD E. RABIDOU
Chief Financial Officer
18