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: June 30, 2008
[ ] 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 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 [ ]
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: 2,359,388 shares of Common
Stock, par value $.01 per share, were outstanding at August 5, 2008.
1
FIRST LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2008 and December 31, 2007
(unaudited) ..........................................................3
Consolidated Statements of Income - Three and Six months ended
June 30, 2008 and 2007 (unaudited) ...................................4
Consolidated Statements of Changes in Shareholders' Equity -
Six months ended June 30, 2008 and 2007 (unaudited) ..................5
Consolidated Statements of Cash Flows - Six months ended
June 30, 2008 and 2007 (unaudited) ...................................6
Notes to Consolidated Financial Statements (unaudited) ...............7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................19
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
[not applicable] .....................................................32
Item 4T - Controls and Procedures ....................................32
Part II - Other Information
Item 1 - Legal Proceedings ...........................................33
Item 1A - Risk Factors [not applicable] ..............................33
Item 2 - Unregistered Sales of Equity Securities and Use
of Proceeds ..........................................................33
Item 3 - Defaults Upon Senior Securities .............................33
Item 4 - Submission of Matters to a Vote of Security Holders .........33
Item 5 - Other Information ...........................................35
Item 6 - Exhibits ....................................................36
Signatures ...................................................................37
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31,
2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 9,879,291 $ 10,876,445
Interest - bearing accounts due from banks 14,201,940 10,620,749
------------- -------------
CASH AND CASH EQUIVALENTS 24,081,231 21,497,194
------------- -------------
Securities:
Available for sale securities, at fair value 152,191,082 128,979,548
Held to maturity securities (fair value $31,846-2008 and $33,712-2007) 32,176 34,185
------------- -------------
TOTAL SECURITIES 152,223,258 129,013,733
------------- -------------
Federal Home Loan Bank stock, at cost 5,370,000 5,067,400
Federal Reserve Bank stock, at cost 225,850 225,850
Other restricted stock, at cost 100,000 95,000
Loan and lease receivables, net of allowance for loan and lease
losses of $2,233,578 -2008, $2,151,622 -2007
NET LOANS AND LEASES 337,241,903 327,475,371
Premises and equipment, net 7,495,227 7,758,761
Deferred income taxes 2,967,481 1,327,535
Accrued interest receivable 2,474,581 2,609,606
Cash surrender value of insurance 10,218,116 10,020,540
Other assets 2,232,045 2,562,639
------------- -------------
TOTAL ASSETS $ 544,629,692 $ 507,653,629
============= =============
LIABILITIES
Deposits:
Noninterest bearing $ 71,480,790 $ 70,564,267
Interest bearing 273,276,745 265,053,397
------------- -------------
TOTAL DEPOSITS 344,757,535 335,617,664
Federal Home Loan Bank advances 95,762,000 91,500,000
Repurchase agreements with financial institutions 49,550,000 21,550,000
Repurchase agreements with customers 12,617,814 14,142,773
Junior subordinated debt issued by unconsolidated trust 10,104,000 10,104,000
Collateralized borrowings 1,402,321 1,699,336
Capital lease obligation 1,074,684 1,083,567
Accrued expenses and other liabilities 3,949,582 3,593,677
------------- -------------
TOTAL LIABILITIES 519,217,936 479,291,017
------------- -------------
Minority interest 50,000 50,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized, no
shares outstanding Common stock $.01 par value
Authorized - 5,000,000 shares
2008 - Issued - 2,506,622 shares, outstanding - 2,360,283 shares
2007 - Issued - 2,501,229 shares, outstanding - 2,368,200 shares 25,033 25,012
Additional paid-in capital 27,885,151 27,858,841
Retained earnings 3,015,400 2,623,110
Less: Treasury stock at cost- 146,339 as of 6/30/08, 133,029 as of 12/31/07 (1,113,016) (926,964)
Accumulated other comprehensive loss, net of taxes (4,450,812) (1,267,387)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 25,361,756 28,312,612
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 544,629,692 $ 507,653,629
============= =============
See Notes to Consolidated Financial Statements.
3
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases $ 5,309,856 $ 5,221,275 $ 10,836,939 $ 10,165,123
------------ ------------ ------------ ------------
Interest and dividends on securities:
Mortgage-backed securities 982,061 653,247 1,655,389 1,334,231
US Treasury and other securities 426,684 540,976 928,626 1,098,749
State and municipal securities 289,966 338,416 626,385 676,810
Corporate bonds and other securities 101,155 185,131 219,776 370,326
------------ ------------ ------------ ------------
Total interest on securities 1,799,866 1,717,770 3,430,176 3,480,116
Other interest income 68,343 28,814 167,386 199,449
------------ ------------ ------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 7,178,065 6,967,859 14,434,501 13,844,688
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits:
Savings 116,210 150,791 305,886 330,080
Money market 365,400 551,250 822,167 1,049,833
Time certificates of deposit 1,393,292 1,580,212 2,845,968 3,295,943
------------ ------------ ------------ ------------
TOTAL INTEREST ON DEPOSITS 1,874,902 2,282,253 3,974,021 4,675,856
Interest on Federal Home Loan Bank advances 1,014,625 845,447 2,022,423 1,527,146
Interest on repurchase agreements 410,817 326,096 749,237 733,487
Interest on subordinated debt 125,813 198,275 315,761 395,896
Interest on collateralized borrowings 25,379 -- 54,803 --
Interest on capital lease obligation 14,279 14,510 28,617 29,075
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 3,465,815 3,666,581 7,144,862 7,361,460
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,712,250 3,301,278 7,289,639 6,483,228
PROVISION FOR LOAN AND LEASE LOSSES 137,000 -- 212,000 105,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 3,575,250 3,301,278 7,077,639 6,378,228
------------ ------------ ------------ ------------
NONINTEREST INCOME
Banking service charges and fees 380,741 335,434 725,920 646,666
Trust 333,569 340,647 673,093 670,236
Gains (losses) on available for sale securities 20,899 -- 32,841 (14,350)
Other 198,704 150,718 358,081 318,819
------------ ------------ ------------ ------------
TOTAL NONINTEREST INCOME 933,913 826,799 1,789,935 1,621,371
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries 1,719,704 1,530,909 3,317,339 3,134,724
Employee benefits 450,090 382,119 891,839 809,067
Net occupancy 292,397 261,855 604,223 536,913
Equipment 154,770 167,535 314,384 336,056
Legal fees 54,668 86,526 117,620 131,251
Directors fees 50,200 52,278 100,300 108,453
Computer services 214,114 196,213 487,087 457,371
Supplies 44,925 41,786 90,429 84,579
Commissions, services and fees 127,796 144,738 244,038 230,254
Postage 33,417 25,168 73,620 67,114
Advertising 157,355 105,902 294,370 169,916
Other 524,283 457,070 1,087,513 843,307
------------ ------------ ------------ ------------
TOTAL NONINTEREST EXPENSE 3,823,719 3,452,099 7,622,762 6,909,005
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 685,444 675,978 1,244,812 1,090,594
PROVISION FOR INCOME TAXES 68,996 94,212 129,841 105,934
------------ ------------ ------------ ------------
NET INCOME $ 616,448 $ 581,766 $ 1,114,971 $ 984,660
============ ============ ============ ============
INCOME PER SHARE
BASIC NET INCOME PER SHARE $ 0.26 $ 0.25 $ 0.47 $ 0.42
============ ============ ============ ============
DILUTED NET INCOME PER SHARE $ 0.26 $ 0.25 $ 0.47 $ 0.42
============ ============ ============ ============
DIVIDENDS PER SHARE $ 0.15 $ 0.15 $ 0.30 $ 0.30
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
4
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Shareholders'
Stock Capital Earnings Stock Loss Equity
------------ ------------ ------------ ------------ ------------ ------------
Six months ended June 30, 2007
Balance, December 31, 2006 $ 23,724 $ 25,840,623 $ 3,953,216 $ (794,756) $ (2,816,613) $ 26,206,194
Comprehensive income:
Net income -- -- 984,660 -- 984,660
Other comprehensive loss, net of taxes:
Net unrealized holding loss on available
for sale securities -- -- -- -- (797,184) (797,184)
------------
Other comprehensive loss (797,184)
------------
Total comprehensive income 187,476
Cash dividends declared: $0.30 per share -- -- (676,531) -- -- (676,531)
Stock options exercised - 4,983 shares 48 38,371 -- -- -- 38,419
Tax benefit on stock options exercised -- 19,168 -- -- -- 19,168
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2007 $ 23,772 $ 25,898,162 $ 4,261,345 $ (794,756) $ (3,613,797) $ 25,774,726
============ ============ ============ ============ ============ ============
Six months ended June 30, 2008
Balance, December 31, 2007 $ 25,012 $ 27,858,841 $ 2,623,110 $ (926,964) $ (1,267,387) $ 28,312,612
Comprehensive loss:
Net income -- -- 1,114,971 -- 1,114,971
Other comprehensive loss, net of taxes:
Net unrealized holding loss on available
for sale securities -- -- -- -- (2,867,053) (2,867,053)
Net actuarial loss and prior service
cost for pension benefits -- -- -- -- (316,372) (316,372)
------------
Other comprehensive loss (3,183,425)
------------
Total comprehensive loss (2,068,454)
Cash dividends declared: $0.30 per share -- -- (710,409) -- (710,409)
Purchase of treasury shares -- -- -- (186,052) -- (186,052)
Stock options exercised - 1,893 shares 19 20,463 -- -- -- 20,482
Tax benefit on stock options exercised -- 2,025 -- -- -- 2,025
Restricted stock grants and expense 2 3,822 -- -- -- 3,824
Adoption of EITF 06-4 as of January 1, 2008 -- -- (12,272) -- -- (12,272)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2008 $ 25,033 $ 27,885,151 $ 3,015,400 $ (1,113,016) $ (4,450,812) $ 25,361,756
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
5
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,114,971 $ 984,660
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion) amortization of discounts and premiums
on investment securities, net (78,435) 96,598
Provision for loan losses 212,000 105,000
Depreciation and amortization 372,100 361,876
(Gains) losses on available for sale securities (32,841) 14,350
Loss on sale of repossessed assets 11,937 --
Loans originated for sale (1,515,000) (2,682,000)
Proceeds from sales of loans held for sale 1,525,302 2,432,858
Gains on sales of loans held for sale (10,302) (9,675)
Loss on disposals of bank premises and equipment 2,188 --
Stock based compensation 3,824 --
Decrease (increase) in accrued interest receivable 135,025 (63,637)
Decrease (increase) in other assets 296,593 (316,377)
Increase in cash surrender value of insurance (197,576) (187,916)
Increase in deferred loan origination costs (63,759) (14,959)
(Decrease) increase in accrued expenses and other liabilities (135,161) 1,143,642
------------ ------------
Net cash provided by operating activities 1,640,866 1,864,420
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from maturities and principal payments 18,721,350 5,463,118
Purchases (52,095,778) --
Proceeds from sales 5,930,151 4,985,650
Held to maturity mortgage-backed securities:
Proceeds from principal payments 2,009 3,821
Purchase of restricted stock (5,000) (15,000)
Redemption of restricted stock -- 10,500
Purchase of Federal Home Loan Bank stock (302,600) (180,700)
Net increase in loans and leases (10,046,774) (13,126,888)
Purchase of premises and equipment (110,754) (837,062)
Proceeds from sale of repossessed assets 154,064 --
------------ ------------
Net cash used in investing activities (37,753,332) (3,696,561)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 414,916 14,186,803
Net increase (decrease) in certificates of deposit 8,724,955 (14,326,875)
Proceeds from Federal Home Loan Bank advances -- 67,000,000
Repayments on Federal Home Loan Bank advances -- (60,000,000)
Net increase in Federal Home Loan Bank overnight borrowings 4,262,000 3,155,000
Net increase (decrease) in repurchase agreements with financial institutions 28,000,000 (18,650,000)
Net decrease in repurchase agreements with customers (1,524,959) (3,382,814)
Net decrease in collateralized borrowings (297,015) --
Principal payments on capital lease obligation (8,883) (8,425)
Purchase of treasury shares (186,052) --
Proceeds from the exercise of stock options 20,482 38,419
Tax benefit of stock options exercised 2,025 19,168
Dividends paid on common stock (710,966) (675,970)
------------ ------------
Net cash provided by (used in) financing activities 38,696,503 (12,644,694)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,584,037 (14,476,835)
CASH AND CASH EQUIVALENTS, at beginning of period 21,497,194 29,197,637
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 24,081,231 $ 14,720,802
============ ============
SUPPLEMENTAL INFORMATION Cash paid during the period for:
Interest on deposits and borrowings $ 7,144,394 $ 7,286,943
============ ============
Income taxes $ 1,000 $ 500
============ ============
Non cash investing and financing activities:
Accrued dividends declared $ 354,672 $ 337,912
============ ============
Transfer of loans to repossessed assets $ 132,001 $ 82,017
============ ============
Increase in liabilities and decrease in retained earnings for
adoption of EITF 06-4 $ 12,272 $ --
============ ============
Change in other liabilities related to the unfunded
pension liability $ 479,352 $ --
============ ============
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet at December 31, 2007 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.
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, 2007.
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 six months ended June 30, 2008 are not necessarily
indicative of the results of operations that may be expected for all of
2008.
3. The Company is required to present basic income per share and diluted income
per share in its 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 antidilutive. 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.
The following is information about the computation of net income per share
for the three and six month periods ended June 30, 2008 and 2007. The 2007
information has been restated to give retroactive effect to all stock
dividends.
Three Months Ended
June 30, 2008
---------------------------------
Net Per Share
Income Shares Amount
--------- --------- ---------
Basic Net Income Per Share
Income available to common shareholders $ 616,448 2,366,459 $ 0.26
=========
Effect of Dilutive Securities
Options Outstanding -- 668
Diluted Net Income Per Share
Income available to common shareholders
--------- ---------
plus assumed conversions $ 616,448 2,367,127 $ 0.26
========= ========= =========
Three Months Ended
June 30, 2007
---------------------------------
Net Per Share
Income Shares Amount
--------- --------- ---------
Basic Net Income Per Share
Income available to common shareholders $ 581,766 2,370,886 $ 0.25
=========
Effect of Dilutive Securities
Options Outstanding -- 4,188
Diluted Net Income Per Share
Income available to common shareholders
--------- ---------
plus assumed conversions $ 581,766 2,375,074 $ 0.25
========= ========= =========
7
Six Months Ended
June 30, 2008
---------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ---------
Basic Net Income Per Share
Income available to common shareholders $1,114,971 2,368,223 $ 0.47
=========
Effect of Dilutive Securities
Options Outstanding -- 804
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $1,114,971 2,369,027 $ 0.47
========== ========== =========
Six Months Ended
June 30, 2007
---------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ---------
Basic Net Income Per Share
Income available to common shareholders $ 984,660 2,369,786 $ 0.42
=========
Effect of Dilutive Securities
Options Outstanding -- 4,692
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $ 984,660 2,374,478 $ 0.42
========== ========== =========
4. Other comprehensive income, which is comprised of the change in unrealized
gains and losses on available for sale securities, as well as net pension
loss, is as follows:
Six Months Ended
June 30, 2008
-----------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $(4,311,178) $ 1,465,800 $(2,845,378)
Less: reclassification adjustment for amounts recognized in net income (32,841) 11,166 (21,675)
----------- ----------- -----------
Unrealized holding losses on available for sale securities, net of taxes (4,344,019) 1,476,966 (2,867,053)
Net pension loss, net of taxes (479,352) 162,980 (316,372)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $(4,823,371) $ 1,639,946 $(3,183,425)
=========== =========== ===========
Six Months Ended
June 30, 2007
-----------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $(1,222,204) $ 415,549 $ (806,655)
Add: reclassification adjustment for amounts recognized in net income 14,350 (4,879) 9,471
----------- ----------- -----------
Unrealized holding losses on available for sale securities, net of taxes $(1,207,854) $ 410,670 $ (797,184)
=========== =========== ===========
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. The Bank's funding policy was to contribute amounts to the Plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Bank may determine to be appropriate from time to time. The
actuarial information has been
8
calculated using the projected unit credit method. The increase in net
actuarial pension loss for the six months ended June 30, 2008 is due to
changes in market value of the Plan's investments since December 31, 2007.
During the first quarter of 2005, the Bank's pension plan was curtailed as
the Bank's Board of Directors approved the cessation of benefit accruals
under the Plan effective April 30, 2005.
Components of net periodic benefit cost for the three months ended June 30:
2008 2007
-------- --------
Service cost $ -- $ --
Interest cost 46,306 46,042
Expected return on plan assets (50,363) (50,062)
Amortization of unrealized loss 14,812 16,952
-------- --------
Net periodic benefit cost $ 10,755 $ 12,932
======== ========
Components of net periodic benefit cost for the six months ended June 30:
2008 2007
--------- ---------
Service cost $ -- $ --
Interest cost 92,613 92,084
Expected return on plan assets (100,727) (100,124)
Amortization of unrealized loss 29,625 33,904
--------- ---------
Net periodic benefit cost $ 21,511 $ 25,864
========= =========
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. Federal Home Loan Bank advances as of June 30, 2008 are as
follows:
line of credit $ 4,262,000 @ 2.85%
due 7/18/2008 4,500,000 @ 3.27%
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 9/04/2012 5,000,000 @ 4.38%
due 11/02/2012 2,000,000 @ 4.70%
due 5/02/2014 7,000,000 @ 4.59% , callable 5/3/2010
due 8/20/2014 7,000,000 @ 4.25% , callable 8/20/2009
due 5/05/2016 10,000,000 @ 4.53% , callable 8/5/2008
due 3/23/2017 10,000,000 @ 4.29% , callable 3/23/2009
due 7/20/2017 10,000,000 @ 4.29% , callable 7/22/2008
due 11/20/2017 5,000,000 @ 4.29% , callable 11/19/2012
------------
Total $ 95,762,000
============
9
As of June 30, 2008, the Bank had borrowings under repurchase agreements
with financial institutions totaling $49,550,000. This amount includes
borrowings:
due 9/12/2008 $ 4,600,000 @ 2.96%
due 9/12/2008 4,700,000 @ 2.96%
due 9/12/2008 1,700,000 @ 2.96%
due 9/12/2008 1,500,000 @ 2.96%
due 7/28/2008 5,000,000 @ 3.25%
due 7/31/2008 5,000,000 @ 3.27%
due 2/25/2009 4,550,000 @ 3.20%
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 $ 49,550,000
============
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 provision for income taxes as reported in the statements of
income is as follows:
For the three months ended June 30,
------------------------------------------------
2008 2007
---------------------- ----------------------
Provision for income taxes at statutory Federal rate $ 233,052 34 % $ 229,833 34 %
Increase (decrease) resulting from:
Tax exempt income (180,877) (27) (145,860) (21)
Nondeductible interest expense 11,551 2 14,982 2
Other 5,270 1 (4,743) (1)
--------- --------- --------- ---------
Provision for income taxes $ 68,996 10 % $ 94,212 14 %
========= ========= ========= =========
For the six months ended June 30,
------------------------------------------------
2008 2007
---------------------- ----------------------
Provision for income taxes at statutory Federal rate $ 423,236 34 % $ 370,802 34 %
Increase (decrease) resulting from:
Tax exempt income (329,721) (26) (295,209) (27)
Nondeductible interest expense 25,784 2 29,814 3
Other 10,542 1 527 --
--------- --------- --------- ---------
Provision for income taxes $ 129,841 11 % $ 105,934 10 %
========= ========= ========= =========
10
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 June 30, 2008 and December 31, 2007 are as
follows:
AVAILABLE FOR SALE June 30, 2008
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt Securities:
U.S. Treasury securities $ 4,002,137 $ 58,167 $ (4,679) $ 4,055,625
U.S. Government Agency securities 23,000,000 -- (396,959) 22,603,041
State and Municipal Obligations 26,883,578 142,223 (472,516) 26,553,285
Corporate and Other Bonds 4,895,747 -- (2,397,607) 2,498,140
------------ ------------ ------------ ------------
58,781,462 200,390 (3,271,761) 55,710,091
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA 586,897 -- (12,794) 574,103
FNMA 68,218,694 86,750 (1,759,124) 66,546,320
FHLMC 15,933,153 27,236 (440,727) 15,519,662
------------ ------------ ------------ ------------
84,738,744 113,986 (2,212,645) 82,640,085
------------ ------------ ------------ ------------
Money Market mutual fund 6,150,796 -- -- 6,150,796
Marketable Equity Securities 8,030,000 -- (339,890) 7,690,110
------------ ------------ ------------ ------------
Total available for sale securities $157,701,002 $ 314,376 $ (5,824,296) $152,191,082
============ ============ ============ ============
December 31, 2007
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt Securities:
U.S. Treasury securities $ 4,007,040 $ 62,179 $ -- $ 4,069,219
U.S. Government Agency securities 30,992,780 8,895 (106,435) 30,895,240
State and Municipal Obligations 31,190,175 364,035 (49,871) 31,504,339
Corporate and Other Bonds 4,898,731 -- (445,731) 4,453,000
------------ ------------ ------------ ------------
71,088,726 435,109 (602,037) 70,921,798
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA 674,447 -- (16,521) 657,926
FNMA 40,041,144 221,704 (996,597) 39,266,251
FHLMC 12,311,134 61,541 (295,091) 12,077,584
------------ ------------ ------------ ------------
53,026,725 283,245 (1,308,209) 52,001,761
------------ ------------ ------------ ------------
Marketable Equity Securities 6,030,000 54,000 (28,011) 6,055,989
------------ ------------ ------------ ------------
Total available for sale securities $130,145,451 $ 772,354 $ (1,938,257) $128,979,548
============ ============ ============ ============
HELD TO MATURITY June 30, 2008
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA $ 32,176 $ -- $ (330) $ 31,846
============ ============ ============ ============
December 31, 2007
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Mortgage-Backed Securities:
GNMA $ 34,185 $ -- $ (473) $ 33,712
============ ============ ============ ============
11
At June 30, 2008, gross unrealized holding losses on available for sale and
held to maturity securities totaled $5,824,626. Of the securities with
unrealized losses, there were thirty-eight 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 $1,413,182 at June 30,
2008. Management does not believe that the unrealized losses on securities
other than Corporate and other bonds are other than temporary as they
relate primarily to debt and mortgage-backed securities issued by U.S.
Government and U.S. Government sponsored agencies, and are due to changes
in the interest rate environment. Unrealized holding losses in Corporate
and other bonds are due to both changes in interest rates as well as lack
of liquidity currently in the financial markets. Management believes these
unrealized losses to be temporary until such time as those markets have
stabilized. The Company has both the intent and the ability to hold these
securities until maturity or until the fair value fully recovers. In
addition, Management considers the issuers of the securities to be
financially sound and that the Company will receive all contractual
principal and interest related to these investments. As a result, it is
anticipated that these unrealized losses will not have a negative impact on
future earnings or a permanent effect on capital. However, Management
periodically evaluates investment alternatives to properly manage the
overall balance sheet. The timing of sales and reinvestments is based on
various factors, including Management's evaluation of interest rate risks
and liquidity needs.
9. A summary of the Bank's loan and lease portfolio at June 30, 2008 and
December 31, 2007 is as follows:
2008 2007
------------- -------------
Real estate-residential mortgage $ 189,527,722 $ 189,556,668
Real estate-commercial mortgage 56,635,839 55,752,240
Real estate-construction 31,201,759 34,808,984
Commercial Loans 39,980,838 33,641,679
Commercial Leases (net of unearned discount of $2,112,616) 15,652,993 8,634,199
Installment 5,698,322 6,519,812
Other 149,542 99,357
------------- -------------
TOTAL LOANS AND LEASES 338,847,015 329,012,939
Net deferred loan origination costs 509,430 445,671
Premiums on purchased loans 119,036 168,383
Allowance for loan and lease losses (2,233,578) (2,151,622)
------------- -------------
NET LOANS AND LEASES $ 337,241,903 $ 327,475,371
============= =============
10. A summary of the Bank's deposits at June 30, 2008 and December 31, 2007 is
as follows:
2008 2007
------------ ------------
Noninterest bearing:
Demand $ 71,480,790 $ 70,564,267
------------ ------------
Interest bearing:
Savings 53,987,512 56,344,878
Money market 80,594,465 78,738,706
Time certificates of deposit in
denominations of $100,000 or more 55,487,971 52,345,036
Other time certificates of deposit 83,206,797 77,624,777
------------ ------------
Total Interest bearing deposits 273,276,745 265,053,397
------------ ------------
TOTAL DEPOSITS $344,757,535 $335,617,664
============ ============
12
Included in deposits as of June 30, 2008 and December 31, 2007 are
approximately $14,649,000 and $6,538,000, respectively, of brokered
deposits which have varying maturities through December 2008.
11. During 2007 the Company approved a restricted stock plan (the "2007 Plan")
for senior management. As of December 31, 2007, no restricted stock awards
had been granted. On February 15, 2008, the Company granted 3,500
restricted stock awards to senior management from the 2007 Plan. These
awards vest ratably over a five-year period, or earlier if the senior
manager ceases to be a senior manager for any reason other than cause, for
example, retirement. 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 measured 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.
Compensation expense related to these awards for the three and six months
ended June 30, 2008 was $1,530 and $3,824 respectively.
A summary of restricted shares under the 2007 Plan as of June 30, 2008, and
changes during the six months then ended, (shares in thousands) is
presented below:
Weighted Average
Grant Date
Shares Fair Value
---------- ----------
Nonvested at January 1, 2008 -- $ --
Granted 3,500 13.11
Vested -- --
Forfeited -- --
---------- ----------
Nonvested at June 30, 2008 3,500 $ 13.11
========== ==========
13
12. 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 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 months and six months ended June 30, 2008 and 2007,
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.
Three Months Ended
June 30, 2008
----------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
---------------- ---------------- ---------------- ----------------
Net interest income $ 3,551,222 $ 161,028 $ -- $ 3,712,250
Provision for credit losses 117,330 19,670 -- 137,000
---------------- ---------------- ---------------- ----------------
Net interest income after provision 3,433,892 141,358 -- 3,575,250
Noninterest income 933,913 -- -- 933,913
Noninterest expense 3,740,585 83,134 -- 3,823,719
---------------- ---------------- ---------------- ----------------
Income before income taxes 627,220 58,224 -- 685,444
Income tax provision 51,124 17,872 -- 68,996
---------------- ---------------- ---------------- ----------------
Net income $ 576,096 $ 40,352 $ -- $ 616,448
================ ================ ================ ================
Total assets as of June 30, 2008 $ 527,445,033 $ 17,386,586 $ (201,927) $ 544,629,692
================ ================ ================ ================
Three Months Ended
June 30, 2007
----------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
---------------- ---------------- ---------------- ----------------
Net interest income $ 3,258,305 $ 42,973 $ -- $ 3,301,278
Provision for credit losses (22,183) 22,183 -- --
---------------- ---------------- ---------------- ----------------
Net interest income after provision 3,280,488 20,790 -- 3,301,278
Noninterest income 826,799 -- -- 826,799
Noninterest expense 3,365,541 86,558 -- 3,452,099
---------------- ---------------- ---------------- ----------------
Income before income taxes 741,746 (65,768) -- 675,978
Income tax provision 117,002 (22,790) -- 94,212
---------------- ---------------- ---------------- ----------------
Net income $ 624,744 $ (42,978) $ -- $ 581,766
================ ================ ================ ================
Total assets as of June 30, 2007 $ 483,363,604 $ 7,526,542 $ (971,364) $ 489,918,782
================ ================ ================ ================
14
Six Months Ended
June 30, 2008
---------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
---------------- ---------------- ---------------- ----------------
Net interest income $ 6,995,497 $ 294,142 $ -- $ 7,289,639
Provision for credit losses 160,317 51,683 -- 212,000
---------------- ---------------- ---------------- ----------------
Net interest income after provision 6,835,180 242,459 -- 7,077,639
Noninterest income 1,789,935 -- -- 1,789,935
Noninterest expense 7,446,968 175,794 -- 7,622,762
---------------- ---------------- ---------------- ----------------
Income before income taxes 1,178,147 66,665 -- 1,244,812
Income tax provision 109,764 20,077 -- 129,841
---------------- ---------------- ---------------- ----------------
Net income $ 1,068,383 $ 46,588 $ -- $ 1,114,971
================ ================ ================ ================
Total assets as of June 30, 2008 $ 527,445,033 $ 17,386,586 $ (201,927) $ 544,629,692
================ ================ ================ ================
Six Months Ended
June 30, 2007
---------------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
---------------- ---------------- ---------------- ----------------
Net interest income $ 6,404,739 $ 78,489 $ -- $ 6,483,228
Provision for credit losses 54,471 50,529 -- 105,000
---------------- ---------------- ---------------- ----------------
Net interest income after provision 6,350,268 27,960 -- 6,378,228
Noninterest income 1,621,371 -- -- 1,621,371
Noninterest expense 6,741,461 167,544 -- 6,909,005
---------------- ---------------- ---------------- ----------------
Income before income taxes 1,230,178 (139,584) -- 1,090,594
Income tax provision 153,821 (47,887) -- 105,934
---------------- ---------------- ---------------- ----------------
Net income $ 1,076,357 $ (91,697) $ -- $ 984,660
================ ================ ================ ================
Total assets as of June 30, 2007 $ 483,363,604 $ 7,526,542 $ (971,364) $ 489,918,782
================ ================ ================ ================
13. Effective January 1, 2008, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS
157") which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires
disclosures about the fair value of assets and liabilities recognized in
the balance sheet in periods subsequent to initial recognition, whether the
measurements are made on a recurring basis (for example, available-for-sale
investment securities) or on a nonrecurring basis (for example, impaired
loans).
SFAS 157 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
15
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, corporate and other bonds, and equity
securities quoted in markets that are not active. Also included are
certain collateral-dependant impaired loans.
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, and
certain collateral-dependant impaired loans.
Fair Value Measurements at June 30, 2008, Using
Quoted Prices in Significant
June Active Markets for Significant Other Unobservable
30, 2008 Identical Assets Observable Inputs Inputs
Total (Level 1) (Level 2) (Level 3)
------------------ ------------------ ------------------ ------------------
Assets:
Available for sale securities $ 152,191,082 $ 4,055,625 $ 148,135,457 $ --
================== ================== ================== ==================
U.S. Treasury securities, with a carrying value of $4,055,625 at June 30,
2008, are the only assets whose fair values are measured on a recurring
basis using Level 1 inputs (active market quotes).
The fair values of U. S. Government and agency mortgaged backed securities
and debt securities, State and Municipal obligations, other corporate
bonds, and certain equity securities are measured on a recurring basis,
using Level 2 inputs of observable market data on similar securities. The
carrying value of these securities totaled $148,135,457 as of June 30,
2008.
For the second quarter of 2008 there has been no change in the
categorization of securities measured within levels 1 through 3.
Loans which are deemed to be impaired are primarily valued at the lower of
the current value, present value of future cash flows or, the fair values
of the underlying collateral of the impaired loan. Such fair values are
obtained using independent appraisals, which the Company considers to be
level 2 inputs. If such appraisal amounts are subsequently adjusted by
management, such fair values may then be considered to be Level 3 inputs.
Collateral dependant impaired loans were insignificant at June 30, 2008.
The Company has no liabilities carried at fair value or measured at fair
value on a nonrecurring basis.
Also in February 2008, the FASB issued FSP FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value
16
Measurements for Purposes of Lease Classification or Measurement under
Statement 13," which clarified that Statement 157 does not apply to
Statement 13, "Accounting for Leases," and other pronouncements that
address fair value measurements for purposes of lease classification or
measurement. The scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be
measured at fair value under Statement 141, "Business Combinations,"
regardless of whether those assets and liabilities are related to leases.
On February 12, 2008, the FASB issued Staff Position 157-2 which defers the
effective date of Statement 157 for certain nonfinancial assets and
liabilities to fiscal years beginning after November 15, 2008. All other
provisions of Statement 157 are effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.
The Company adopted the provisions of Statement 157 for the quarter ended
March 31, 2008 except for those nonfinancial assets and liabilities subject
to deferral as a result of Staff Position 157-2. There was no impact on the
consolidated financial statements of the Company as a result of the
adoption of Statement 157.
14. In September 2006, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement
Benefits Associated with Endorsement Split-Dollar Life Insurance
Arrangements" ("EITF 06-4"), and in March 2007, the FASB ratified EITF
Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements" ("EITF 06-10"). EITF 06-4 requires deferred
compensation or postretirement benefit aspects of an endorsement-type
split-dollar life insurance arrangement to be recognized as a liability by
the employer and states the obligation is not effectively settled by the
purchase of a life insurance policy. The liability for future benefits
should be recognized based on the substantive agreement with the employee,
which may be either to provide a future death benefit or to pay for the
future cost of the life insurance. EITF 06-10 provides recognition guidance
for postretirement benefit liabilities related to collateral assignment
split-dollar life insurance arrangements, as well as recognition and
measurement of the associated asset on the basis of the terms of the
collateral assignment split-dollar life insurance arrangement. EITF 06-4
and EITF 06-10 are effective for fiscal years beginning after December 15,
2007. The adoption of EITF 06-4 or EITF 06-10 resulted in a decrease to
retained earnings of $12,272.
15. Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No, 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No, 115 (Statement 159) which permits an entity to choose to
measure certain financial instruments and certain other items at fair
value, on an instrument-by-instrument basis. Once an entity has elected to
record eligible items at fair value, the decision is irrevocable and the
entity should report unrealized gains and losses on items for which the
fair value option has been elected in earnings. Statement 159 is effective
for fiscal years beginning after November 15, 2007. At the effective date,
an entity may elect the fair value option for eligible items that exist at
that date with the effect of the first measurement to fair value reported
as a cumulative-effect adjustment to the opening balance of retained
earnings. There was no impact on the consolidated financial statements of
the Company as a result of the adoption of Statement 159 during the first
quarter of 2008 since the Company has not elected the fair value option for
any eligible items, as defined in Statement 159.
In September 2006, the FASB issued SFAS No.158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires an
employer to recognize the over-funded or under-funded
17
status of a defined benefit postretirement plan as an asset or a liability
in its balance sheet and to recognize changes in that funded status in the
year in which the changes occur through accumulated other comprehensive
income. The Company adopted the recognition provisions of this standard
effective December 31, 2006. SFAS 158 also requires an employer to measure
the funded status of a plan as of the employer's year-end reporting date.
The Company's non-contributory pension plan was frozen in May of 2005. The
measurement date provisions of SFAS 158 are effective for the Company for
the year ending December 31, 2008. Management does not expect the adoption
of the measurement date provisions of SFAS 158 to have a material impact on
the Company's financial position or results of operations.
In December 2007, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141(R), "Business Combinations," ("SFAS 141(R)") which
replaces SFAS 141. SFAS 141(R) establishes principles and requirements for
how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures goodwill
acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by the Company taking
place on or after January 1, 2009. Early adoption is prohibited.
Accordingly, a calendar year-end company is required to record and disclose
business combinations following existing accounting guidance until January
1, 2009. The Company will assess the impact of SFAS 141(R) if and when a
future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS
160"). SFAS 160 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 exists. In some cases minority interest is reported as a liability
and in others it is reported in the mezzanine section between liabilities
and equity. Specifically, SFAS 160 requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financials statements and separate from the parent's equity. The amount of
net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160
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 will be measured using the
fair value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interests. SFAS 160 is
effective for the Company on January 1, 2009. Earlier adoption is
prohibited. The Company is currently evaluating the impact, if any, the
adoption of SFAS 160 will have on its financial position, results of
operations and cash flows.
18
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 Corporation 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 nonsecured 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.
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.
FINANCIAL CONDITION
Total assets as of June 30, 2008 were $544,629,692, an increase of $36,976,063,
or 7.28% from year-end 2007 total assets of $507,653,629.
Net loans and leases increased $9,766,532 over the year-end 2007 amount. Net
loans and leases as of June 30, 2008 were $337,241,903, as compared to the
year-end 2007 level of $327,475,371.
19
Consistent with Management's strategy to migrate to a more profitable loan
composition, commercial loan and lease growth was strong during the second
quarter of 2008. Leases, net of unearned income, were $15,652,993 at June 30,
2008, which was an increase of $7,018,794 from the year-end 2007 balance of
$8,634,199. Commercial loans totaled $39,980,838, which is an increase of
$6,339,159, from year-end 2007. Growth in commercial loans has been in both
lines of credit and in term financing and continues to be a result of the sales
development and commercial calling initiatives for traditional and contiguous
markets. The residential mortgage loan portfolio totaled $189,527,722, which was
a decrease of $28,946 from year-end 2007. This decrease is the result of the
weakened economic and real estate market conditions.
As of June 30, 2008, the securities portfolio totaled $152,223,258, which is a
17.99% increase from the year-end 2007 balance. This increase is the result of a
leverage strategy executed during the first quarter of 2008, whereby $25,000,000
of fixed rate mortgage backed securities were purchased and funded by borrowings
from repurchase agreements. This transaction was effected to take advantage of
the steepening yield curve with the result of improving the Company's
profitability with minimal credit or interest rate risk. As of June 30, 2008,
the unrealized loss on available for sale securities totaled $5,509,920, which
is an increase of $4,344,017, from the year end net unrealized loss of
$1,165,903. The increase in the unrealized loss is reflective of the volatility
and lack of liquidity in the markets and changes in the interest rate
environment. Management believes the issuers of these securities to be
financially sound and the unrealized losses are temporary until such time as the
corporate and bond markets have stabilized
Cash and cash equivalents totaled $24,081,231, which is an increase of
$2,584,037, or 12.02% from year-end 2007. During 2008, funds temporarily
invested in interest bearing correspondent bank balances at year-end were
reinvested in overnight institutional funds to take advantage of better yields.
As of June 30, 2008 and December 31, 2007, there were no investments in Federal
Funds Sold.
Total liabilities were $519,217,936 as of June 30, 2008, which was an increase
of $39,926,919 from total liabilities of $479,291,017 as of year-end 2007. Total
deposits increased by $9,139,871, or 2.72% from their year-end levels. Money
market deposits increased by $1,855,759, or 2.36% as a result of higher balances
held for the Bank's trust customers. Time certificates of deposit totaled
$138,694,768 as of June 30, 2008, which was an increase of 6.71%, or $8,724,955
from year-end 2007. The growth in time deposits is reflective of the customer's
desire for optimization of investment yield in the low interest rate
environment.
As of June 30, 2008, repurchase agreements with customers totaled $12,617,814,
which was a decrease of $1,524,959 from the year-end 2007 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. During the second quarter of
2008, advances under Federal Home Loan Bank borrowings increased by $4,262,000,
while repurchase agreements with financial institutions increased by $28,000,000
as a result of the first quarter leverage strategy discussed above.
RESULTS OF OPERATIONS- THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2007
Summary
Net income for the Company for the second quarter of 2008 totaled $616,448.
These earnings are $34,682 or 6.0% above earnings for the second quarter of
2007, which totaled $581,766. Basic and diluted income per share for the second
quarter of 2008 were both $.26, compared to basic and diluted
20
income per share of $.25 for the second quarter of 2007. The increase in net
income is due primarily to the increase in interest income and fees on loans and
leases as well as increased noninterest income. For the second quarter of 2008,
the return on average equity for the Company totaled 9.00% compared to 8.88% for
the second quarter of 2007.
Net Interest Income
Net interest income is the single largest source of the Company's net income.
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.
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 June 30, 2008 and 2007.
2008 2007
----------- -----------
Interest and dividend income $ 7,178,065 $ 6,967,859
Tax-equivalent adjustments (1) 205,124 152,495
Interest expense (3,465,815) (3,666,581)
----------- -----------
Net interest income $ 3,917,374 $ 3,453,773
=========== ===========
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
21
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 June
30, 2008 and 2007. Average loans outstanding include nonaccruing loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Three months ended June 30, 2008 Three months ended June 30, 2007
------------------------------------------- -------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Assets
Interest Earning Assets:
Loans and leases $338,109,000 $ 5,313,355 6.29% $307,243,000 $ 5,222,038 6.80%
Investment securities 162,975,000 2,042,869 5.01% 146,742,000 1,869,502 5.10%
Other interest earning assets 5,098,000 26,965 2.12% 2,744,000 28,814 4.20%
------------ ------------ ------------ ------------
Total interest earning assets 506,182,000 7,383,189 5.83% 456,729,000 7,120,354 6.24%
------------ ------------ ------------ ------------ ------------ ------------
Allowance for loan and
lease losses (2,157,000) (2,137,000)
Cash and due from banks 11,508,000 10,820,000
Premises and equipment 7,592,000 7,816,000
Net unrealized losses on
securities (2,791,000) (2,783,000)
Other assets 16,734,000 16,914,000
------------ ------------
Total Average Assets $537,068,000 $487,359,000
============ ============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 54,314,000 116,210 0.86% $ 50,493,000 150,791 1.19%
Money Market deposits 80,431,000 365,400 1.82% 74,980,000 551,250 2.94%
Time deposits 139,872,000 1,393,292 3.98% 136,211,000 1,580,212 4.64%
Borrowed funds 162,373,000 1,590,913 3.92% 124,306,000 1,384,328 4.45%
------------ ------------ ------------ ------------
Total interest bearing liabilities 436,990,000 3,465,815 3.17% 385,990,000 3,666,581 3.80%
------------ ------------ ------------ ------------
Demand deposits 67,354,000 70,063,000
Other liabilities 5,312,000 5,109,000
Shareholders' Equity 27,412,000 26,197,000
------------ ------------
Total liabilities and equity $537,068,000 $487,359,000
============ ============
Net interest income $ 3,917,374 $ 3,453,773
============ ============
Net interest spread 2.66% 2.44%
============ ============
Net interest margin 3.10% 3.02%
============ ============
22
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the three months ended June 30, 2008 when compared to the three
months ended June 30, 2007 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.
06/30/08 Compared to 06/30/07
Increase (Decrease) Due to
--------------------------
Volume Rate Total
--------- --------- ---------
Interest earned on:
Loans and leases $ 502,016 $(410,699) $ 91,317
Investment securities 209,717 (36,350) 173,367
Other interest earning assets 32,490 (34,339) (1,849)
--------- --------- ---------
Total interest earning assets 744,223 (481,388) 262,835
--------- --------- ---------
Interest paid on: --
Deposits 108,253 (515,604) (407,351)
Borrowed money 387,339 (180,754) 206,585
--------- --------- ---------
Total interest bearing liabilities 495,592 (696,358) (200,766)
--------- --------- ---------
Increase in net interest income $ 248,631 $ 214,970 $ 463,601
========= ========= =========
Tax-equivalent net interest income for the second quarter of 2008 totaled
$3,917,374, an increase of $463,601, or 13.4% from the second quarter of 2007.
Both the increase in the volume of earning assets as well as increased interest
margin contributed to the improvement in net interest income. The effect of
increased volume of earning assets over interest bearing liabilities increased
net interest income by $248,631. Also, the Company was able to decrease its cost
of deposit interest to a greater degree than the interest earned on earning
assets which resulted in $214,970 in additional net interest income.
Average earning assets for the second quarter of 2008 totaled $506,182,000,
which was $49,453,000 or 10.8% greater than average earning assets for the
second quarter of 2007 which totaled $456,729,000. This increase in earning
assets, both in loans and investments, net of increased volume of interest
bearing liabilities, contributed to an additional $248,631 in net interest
income. Average loans and leases increased by $31 million, or 10.0%, while
average investments increased by $16 million or 11.1%. The increase in earning
assets came from organic growth in commercial leasing and lending as well as
increases in the securities portfolio strategically designed to take advantage
of the steepened yield curve.
The tax equivalent net interest margin improved 8 basis points from 3.02% in the
second quarter of 2007 to 3.10% for the second quarter of 2008. The tax
equivalent Funding costs decreased by 63 basis points while the yield on earning
assets decreased by 41 basis points. The significant drop in interest rates by
the Federal Open Market Committee of the Federal Reserve (the "FOMC") during the
first quarter allowed management to similarly adjust its deposit rates. Although
yields on earning assets are subject to similar declines, the structural
repricing intervals for many earning assets will not occur until later this
year. Also, many interest earning assets are priced off of longer market
indices, which were not as dramatically impacted by the FOMC decreases. Retail
deposits is the primary source of the Company's funding and therefore
competition for these deposits remains the biggest threat to the net interest
margin.
23
Provision for Loan and Lease Losses
The provision for loan and lease losses for the second quarter of 2008 totaled
$137,000, which is an increase of $137,000 from the provision for the second
quarter of 2007. The provision for loan and lease losses is determined quarterly
and assessed along with the adequacy of the loan and lease loss reserve. (See
discussion of the Allowance for Loan and Lease Losses.)
During the second quarter of 2008, the Company recorded net charge-offs of
$98,914 compared to second quarter 2007 net charge-offs of $38,413. The change
in the level of charge-offs from 2007 to 2008 is not considered by Management to
be indicative of any trend. The increase in charge-offs for the second quarter
of 2008 was related to one commercial loan. The remaining charge-off activity
for the second quarter of 2008 and the 2007 activity is primarily attributable
to consumer automobile loans which the Bank purchased in 2006 as well as other
consumer loans.
Noninterest Income
Noninterest income for the second quarter of 2008 totaled $933,913, increasing
$107,114, or 12.96% from the second quarter 2007 income of $826,799. Trust
income totaled $333,569, which represented 36% of noninterest income, decreased
slightly from second quarter 2007 levels. Income from banking service charges
and fees increased by $45,307, or 13.51%, from the second quarter of 2007. This
increase is due primarily to higher levels of deposit service charges, cash
management, and master money interchange fees. Other noninterest income totaled
$198,704, which was an increase of $47,986, or 31.84% from the second quarter of
2007. This increase is mostly related to revenue from loan fees as well as to
increases in the cash surrender value of bank owned life insurance.
During the second quarter of 2008, sales of available for sale municipal
securities were sold for the purpose of shortening the duration of the portfolio
as well as to ensure acceptable market bond ratings. These sales resulted in an
aggregate gain of $20,899.
Noninterest Expense
Second quarter 2008 noninterest expense totaled $3,823,719, increasing 10.77%,
or $371,620 from the second quarter 2007 expense of $3,452,099. Increases in
noninterest expenses are reflected in staffing, occupancy, advertising, exam,
audit and consulting fees. Increased salary and benefits expenses were due to
additional compliance personnel and an increased emphasis on commercial and
small business development. Occupancy costs reflect increases due to a larger
branch network and its related maintenance costs. Advertising expense totaled
$157,355, which was an increase of $51,453, or 48.59% increase from the second
quarter of 2007. This increase is due primarily to the Bank's image campaign
which was launched during the fourth quarter of 2007 as well as product and
publicity promotions. Costs for exam and audit fees increased due to costs for
regulatory reporting, compliance and internal audit.
Other noninterest expenses totaled $524,283 which is an increase of $67,213, or
14.71% from the second quarter of 2007. The majority of the increase is a result
of higher 2008 costs for exam and audit fees as they relate to regulatory
reporting compliance and internal audit initiatives.
Income Taxes
The second quarter 2008 provision for income taxes totaled $68,996, which is a
decrease of $25,216 or 26.77% from the second quarter of 2007. The decrease in
income tax expense in the second quarter of 2008 is due to a greater percentage
of tax-exempt income. Pretax income totaled $685,444 in the
24
second quarter of 2008 which was 1.4% higher than that for the second quarter of
2007. Additionally, the Company's effective tax rate of 10% for the second
quarter of 2008 was lower than the effective tax rate of 14% for the second
quarter of 2007. The decrease in the effective tax rate is due to a
proportionately higher level of non-taxable income from both state and municipal
investments as well as that from bank owned life insurance.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2007
Summary
Net income for the Company for the six months ended June 30, 2008 totaled
$1,114,971. These earnings are $130,311 or 13.23% above 2007 earnings, which
totaled $984,660. Basic and diluted income per share for the six months ended
June 30, 2008 were both $.47, compared to basic and diluted income per share of
$.42 for the six months ended June 30, 2007. The increase in net income is due
primarily to the increase in interest on mortgage-backed securities and interest
income and fees on loans and leases as well as increased noninterest income. For
the first six months of 2008, the return on average equity for the Company
totaled 7.93% compared to 7.36% for the first six months of 2007.
Net Interest Income
Net interest income is the single largest source of the Company's net income.
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.
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 six months ended June 30,
2008 2007
------------ ------------
Interest and dividend income $ 14,434,501 $ 13,844,688
Tax-equivalent adjustments (1) 358,728 305,310
Interest expense (7,144,862) (7,361,460)
------------ ------------
Net interest income $ 7,648,367 $ 6,788,538
============ ============
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
25
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 June
30, 2008 and 2007. Average loans outstanding include nonaccruing loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Six months ended June 30, 2008 Six months ended June 30, 2007
------------------------------------------- -------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Assets
Interest Earning Assets:
Loans and leases $336,323,000 $ 10,841,965 6.45% $303,118,000 $ 10,166,621 6.71%
Investment securities 154,097,000 3,877,507 5.03% 150,424,000 3,783,928 5.03%
Other interest earning assets 5,700,000 73,757 2.59% 7,641,000 199,449 5.22%
------------ ------------ ------------ ------------
Total interest earning assets 496,120,000 14,793,229 5.96% 461,183,000 14,149,998 6.14%
------------ ------------ ------------ ------------ ------------ ------------
Allowance for loan and
lease losses (2,165,000) (2,134,000)
Cash and due from banks 11,427,000 14,371,000
Premises and equipment 7,659,000 7,549,000
Net unrealized losses on
securities (1,732,000) (2,833,000)
Other assets 16,356,000 17,086,000
------------ ------------
Total Average Assets $527,665,000 $495,222,000
============ ============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 56,356,000 305,886 1.09% $ 52,587,000 330,080 1.26%
Money Market deposits 81,697,000 822,167 2.01% 74,073,000 1,049,833 2.83%
Time deposits 137,022,000 2,845,968 4.15% 142,765,000 3,295,943 4.62%
Borrowed funds 153,347,000 3,170,841 4.14% 125,736,000 2,685,604 4.27%
------------ ------------ ------------ ------------
Total interest bearing liabilities 428,422,000 7,144,862 3.34% 395,161,000 7,361,460 3.73%
------------ ------------ ------------ ------------
Demand deposits 66,034,000 68,709,000
Other liabilities 5,073,000 4,586,000
Shareholders' Equity 28,136,000 26,766,000
------------ ------------
Total liabilities and equity $527,665,000 $495,222,000
============ ============
Net interest income $ 7,648,367 $ 6,788,538
============ ============
Net interest spread 2.62% 2.41%
============ ============
Net interest margin 3.08% 2.94%
============ ============
26
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the six months ended June 30, 2008 when compared to the six months
ended June 30, 2007 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.
06/30/08 Compared to 06/30/07
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans and leases $ 1,081,754 $ (406,410) $ 675,344
Investment securities 92,422 1,157 93,579
Other interest earning assets (42,107) (83,585) (125,692)
----------- ----------- -----------
Total interest earning assets 1,132,069 (488,838) 643,231
----------- ----------- -----------
Interest paid on:
Deposits 96,228 (798,063) (701,835)
Borrowed money 573,315 (88,078) 485,237
----------- ----------- -----------
Total interest bearing liabilities 669,543 (886,141) (216,598)
----------- ----------- -----------
Increase in net interest income $ 462,526 $ 397,303 $ 859,829
=========== =========== ===========
Tax-equivalent net interest income for the first six months of 2008 totaled
$7,648,367, an increase of $859,829, or 12.7% from the first six months of 2007.
Both the increase in the volume of earning assets as well as increased interest
margin contributed to the improvement in net interest income. The effect of
increased volume of earning assets over interest bearing liabilities increased
net interest income by $462,526. Also, the Company was able to decrease its cost
of deposit interest to a greater degree than the interest earned on earning
assets which resulted in $397,303 in additional net interest income.
Average earning assets for the first six months of 2008 totaled $496,120,000,
which was $34,937,000, or 7.6% greater than average earning assets for the first
six months of 2007, which totaled $461,183,000. This increase in earning assets
was mostly in the loan and lease portfolio which on average totaled
$336,323,000, an increase of $33,205,000 or 11%. The increase in loan volume
contributed $1,081,754 in additional interest income. For the first six months
of 2008, loans were 67.8% of earning assets compared to 65.7% for the same time
in 2007. This higher percentage of loans and leases to average earning assets
contributed to a more profitable mix of earning assets.
The 2008 year to date net interest margin increased by 14 basis points from the
same period in 2007. Funding costs decreased by 39 basis points while the yield
on earning assets decreased by 18 basis points. The significant drop in interest
rates by the Federal Open Market Committee of the Federal Reserve (the "FOMC")
during the first quarter allowed management to similarly adjust its deposit
rates. Although yields on earning assets are subject to similar declines, the
structural repricing intervals for many earning assets will not occur until
later this year. Also, many interest earning assets are priced off of longer
market indices, which were not as dramatically impacted by the FOMC decreases.
Retail deposits is the primary source of the Company's funding and therefore
competition for these deposits remains the biggest threat to the net interest
margin.
Provision for Loan and Lease Losses
The provision for loan and lease losses for the six months ended June 30, 2008
totaled $212,000, which is an increase of $107,000 from the provision for the
six months ended June 30, 2007. The provision
27
for loan and lease losses is determined quarterly and assessed along with the
adequacy of the loan and lease loss reserve. (See discussion of the Allowance
for Loan and Lease Losses.)
During the first six months of 2008, the Company recorded net charge-offs of
$130,044 compared to 2007 net charge-offs for the same period totaling $88,080.
The change in the level of charge-offs from 2007 to 2008 is due to one
commercial loan charge-off in 2008. For both years however, the charge-off
activity is primarily attributable to consumer automobile loans, which the Bank
purchased in 2006 as well as other consumer loans.
Noninterest Income
Year to date noninterest income as of June 30, 2008 totaled $1,789,935,
increasing $168,564, or 10.4% from the first six months of 2007 income of
$1,621,371. Trust income totaled $673,093, which represented 37.6% of
noninterest income and increased $2,857, or 0.43% from the first six months of
2007. Income from banking service charges and fees increased by $79,254, or
12.26%, from the first half of 2007. This increase is due primarily to higher
levels of deposit service charges, cash management, and master money interchange
fees. Other noninterest income totaled $358,081, which was an increase of
$39,262, or 12.31% from the first six months of 2007.
During the first half of 2008, available for sale municipal securities were sold
for the purpose of shortening the duration of the portfolio as well as to
ernsure acceptable market bond ratings. These sales resulted in an aggregate
gain of $32,841. During the first six months of 2007, the Bank recorded losses
on the sales of available for sale securities of $14,350. These sales were made
for the purpose of reducing interest rate risk and positioning earning assets
for future profitability.
Noninterest Expense
Six-month noninterest expense as of June 30, 2008 totaled $7,622,762, increasing
10.33%, or $713,757 from the same period in 2007. Advertising expense totaled
$294,370, which was an increase of $124,454, or 73.24% increase from the six
months ended June 30, 2007. This increase is due primarily to the Bank's image
campaign which was launched during the fourth quarter of 2007 as well as product
and publicity promotions. Occupancy costs reflect increases due to a larger
branch network and its related maintenance costs. Commissions, services and fees
expense totaled $244,038 compared to 2007 costs of $230,254. The increase from
the prior year relates primarily to strategic services related to the wealth
management and retail areas.
Other noninterest expenses totaled $1,087,513 which is an increase of $244,206,
or 28.96% from the first six months of 2007. The majority of the increase is a
result of higher 2008 costs for exam and audit fees as they relate to regulatory
reporting compliance and internal audit initiatives. Also contributing to the
increase were costs for placement fees for key personnel during the first
quarter of 2008.
Income Taxes
The provision for income taxes for the first six months of 2008 totaled
$129,841, which is an increase of $23,907, or 22.57% from the same period in
2007. The increase in income tax expense in the first six months of 2008 is due
to a higher level of taxable income. Pretax income totaled $1,244,812 in the
first half of 2008 which was 14.14% higher than that for the first half of 2007.
Additionally, the Company's effective tax rate of 11% for 2008 was higher than
the effective tax rate of 10% for 2007. The increase in the effective tax rate
is due to a proportionately lower level of non-taxable income from both state
and municipal investments as well as that from bank owned life insurance.
28
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 June 30, 2008, the Company had $135,089,450 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
At June 30, 2008, total shareholders' equity was $25,361,756 compared to
$28,312,612 at December 31, 2007. From a regulatory perspective, the capital
ratios of the Company and the Bank place each entity in the "well-capitalized"
categories under applicable regulations. In September 2007, the Company approved
a stock repurchase program to acquire in the next twelve months up to an
aggregate of 30,000 shares of the Company's outstanding Common Stock. Shares
repurchased by the Company during the first six months of 2008 totaled 13,310.
(See Part II, Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.)
The various capital ratios of the Company and the Bank are as follows as of June
30, 2008:
Minimum Regulatory
Capital Levels The Company The Bank
-------------- ----------- --------
TIER 1:
Leverage capital ratio 4% 7.34% 6.78%
Risk-based capital ratio 4% 11.25% 10.40%
Total risk-based capital ratio 8% 11.89% 11.04%
ALLOWANCE FOR LOAN AND LEASE LOSSES AND CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Bank has made a number of estimates and
assumptions relating to the reporting 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 Company believes the following discussion addresses the Bank's
only critical accounting policy, which is the policy that is most important to
the portrayal of the Bank's financial results and requires
29
management's most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
The Bank makes provisions for loan and lease losses on a quarterly basis as
determined by a continuing assessment of the adequacy of the allowance for loan
and lease losses. The Bank performs an ongoing review of loans and leases in
accordance with an individual loan and lease rating system to determine the
required allowance for loan and lease losses at any given date. The review of
loans and leases is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective and is based on an evaluation of the known and inherent risk
characteristics and size of the loan and lease portfolios, the assessment of
current economic and real estate market conditions, estimates of the current
value of underlying collateral, past loan and lease loss experience, review of
regulatory authority examination reports and evaluations of impaired loans and
leases, and other relevant factors. Loans and leases, including those considered
impaired, 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.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans and leases that are classified as doubtful,
substandard or special mention. For such loans and leases that are also
classified as impaired, 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-classified 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.
There were no material changes in loan or lease concentration or loan or lease
quality that had a significant effect on the allowance for loan and lease losses
calculation at June 30, 2008. In addition, there were no material changes in the
estimation methods and assumptions used in the Company's allowance for loan and
lease losses calculation, and there were no material reallocations of the
allowance among different parts of the loan or lease portfolio.
At June 30, 2008, the allowance for loan and lease losses was equivalent to 60%
of total non-performing assets as compared with 72% of total non-performing
assets at December 31, 2007. As of June 30, 2008, non-performing assets and
loans and leases were $3,752,118 and represented 1.11% of total loans and
leases. As of December 31, 2007, non-performing assets and loans and leases
totaled $2,962,185 and represented 0.90% of total loans and leases. The ratio of
the allowance for such loan and lease losses to total loans and leases at June
30, 2008 and December 31, 2007 was 0.66%. Changes in the allowance for loan and
lease losses for the six month periods ended June 30, 2008 and 2007 are as shown
below:
30
For the six months ended June 30, 2008 2007
----------- -----------
Balance at beginning of the year $ 2,151,622 $ 2,106,100
Provision for loan and lease losses 212,000 105,000
Loans and leases charged off (152,265) (94,713)
Recoveries of loans and leases previously charged-off 22,221 6,633
----------- -----------
Balance as of June 30, $ 2,233,578 $ 2,123,020
=========== ===========
The following table summarizes the Bank's Other Real Estate Owned ("OREO"), past
due and non-accrual loans and leases, and total nonperforming assets as of June
30, 2008 and December 31, 2007.
June 30, 2008 December 31, 2007
--------------- -----------------
Nonaccrual loans and leases $ 3,751,066 $ 2,959,074
Other real estate owned -- --
--------------- -----------------
Total nonperforming assets $ 3,751,066 $ 2,959,074
=============== =================
Loans and leases past due in excess of 90 days and
accruing interest $ 1,052 $ 3,111
=============== =================
POTENTIAL PROBLEM LOANS
As of June 30, 2008, 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.
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 June 30, 2008, there have been no significant changes in the Company's
off-balance sheet arrangements from December 31, 2007.
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.
31
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 operation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are 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 that 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 second quarter of 2008 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank (or any of their properties) are the subject of
any material pending legal proceedings other than routine litigation that is
incidental to their business.
ITEM 1A. RISK FACTORS.
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In September 2007 the Company approved a stock repurchase program to acquire up
to an aggregate of 30,000 shares of the Company's outstanding Common Stock.
Shares purchased pursuant to the repurchase program in the second quarter of
2008, are shown below.
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total number of Maximum number (or
shares (or units) approximate dollar
purchased as value) of shares (or
Total number of Average price part of publicly units) that may yet be
shares (or units) paid per share announced plans purchased under the
Period purchased (or unit) or programs plans or programs
- ---------------- ------------------- ------------------- ------------------- --------------------
April 1-30, 2008 1,600 $ 14.31 1,600 28,400 shares
------------------- ------------------- ------------------- --------------------
May 1-31, 2008 8,200 14.05 8,200 20,200 shares
------------------- ------------------- ------------------- --------------------
June 1-30, 2008 3,510 13.54 3,510 16,690 shares
------------------- ------------------- ------------------- --------------------
Total 13,310 $ 13.98 13,310 16,690 shares
=================== =================== =================== ====================
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of First Litchfield Financial Corporation
(the "Company") was held on Wednesday, May 21, 2008.
33
1. Election of Directors.
---------------------
The vote for re-electing each of the five (5) Directors listed below to
serve for a term of three (3) years is as follows:
Withholding
For Authority
--------------- ---------------
Patrick J. Boland Number of Shares: 1,953,773 24,680
--------------- ---------------
Percentage of Shares Voted: 98.75% 1.25%
--------------- ---------------
Percentage of Shares Entitled to Vote: 82.38% 1.04%
--------------- ---------------
Withholding
For Authority
--------------- ---------------
John A. Brighenti Number of Shares: 1,953,773 24,680
--------------- ---------------
Percentage of Shares Voted: 98.75% 1.25%
--------------- ---------------
Percentage of Shares Entitled to Vote: 82.38% 1.04%
--------------- ---------------
Withholding
For Authority
--------------- ---------------
Kathleen A. Kelley Number of Shares: 1,974,318 4,135
--------------- ---------------
Percentage of Shares Voted: 99.79% 0.21%
--------------- ---------------
Percentage of Shares Entitled to Vote: 83.24% 0.17%
--------------- ---------------
Withholding
For Authority
--------------- ---------------
Richard E. Pugh Number of Shares: 1,950,824 27,629
--------------- ---------------
Percentage of Shares Voted: 98.60% 1.40%
--------------- ---------------
Percentage of Shares Entitled to Vote: 82.25% 1.16%
--------------- ---------------
Withholding
For Authority
--------------- ---------------
H. Ray Underwood Number of Shares: 1,953,542 24,911
--------------- ---------------
Percentage of Shares Voted: 98.74% 1.26%
--------------- ---------------
Percentage of Shares Entitled to Vote: 82.37% 1.05%
--------------- ---------------
Continuing as Directors with terms to expire at the 2009 Annual Meeting of
Shareholders are: Joseph J. Greco, Perley H. Grimes, Jr., Gregory S.
Oneglia and Charles E. Orr. Continuing as Directors with terms to expire at
the 2010 Annual Meeting of Shareholders are: George M. Madsen, Alan B.
Magary, William J. Sweetman and Patricia D. Werner.
On June 11, 2008, Kathleen A. Kelley resigned as a Director of the Company
and of the Bank for personal reasons. Information regarding the resignation
is set forth in the Company's Current Report on Form 8-K , as filed with
the Securities and Exchange Commission of June 16, 2008.
34
2. Appointment of Auditors.
-----------------------
Votes cast "FOR," "AGAINST" and "ABSTAIN" on the proposal to ratify the
appointment of McGladrey & Pullen, LLP to act as independent auditors of
the current fiscal year were as follows:
BROKER
"FOR APPROVAL" "AGAINST APPROVAL" "ABSTAIN" NON-VOTES
1,929,117 44,422 4,914
- -------------------------- -------------------------------- ---------------------- ------------------
Number Number Number
81.34% 1.87% 0.21%
- -------------------------- -------------------------------- ----------------------
(Percent of shares entitled to vote)
97.51% 2.25% 0.25%
- -------------------------- -------------------------------- ----------------------
(Percent of shares actually voted at the meeting)
ITEM 5. OTHER INFORMATION.
None
35
ITEM 6. EXHIBITS
EXHIBIT INDEX
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation of First Litchfield Financial
Corporation, as amended. Exhibit is incorporated by reference to
Exhibit 3.1 set forth in the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission on
January 7, 2000.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
Exhibit is incorporated by reference to Exhibit 3.2 set forth in the
Company's Registration Statement on Form 10-SB as filed with the
Securities and Exchange Commission on January 7, 2000.
4. Specimen Common Stock Certificate. Exhibit is incorporated by
reference to Exhibit 4. set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
21. List of Subsidiaries of First Litchfield Financial Corporation.
Exhibit is incorporated by reference to Exhibit 21 set forth in the
Company's 10-K for the year ended December 31, 2006 as filed with
the Securities and Exchange Commission on April 2, 2007.
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.
36
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: August 6, 2008 FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Joseph J. Greco
----------------------------
Joseph J. Greco, President and
Chief Executive Officer
Dated: August 6, 2008 By: /s/ Carroll A. Pereira
---------------------------
Carroll A. Pereira
Principal Financial and
Accounting Officer
37