UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly period ended: September 30, 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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,356,875 shares of Common
Stock, par value $.01 per share, were outstanding at November 10, 2008.
1
FIRST LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2008 and
December 31, 2007 (unaudited ........................................ 3
Consolidated Statements of Operations - Three and Nine months ended
September 30, 2008 and 2007 (unaudited .............................. 4
Consolidated Statements of Changes in Shareholders' Equity -
Nine months ended September 30, 2008 and 2007 (unaudited) ........... 5
Consolidated Statements of Cash Flows - Nine months
ended September 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 ................................. 21
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk [not applicable] ........................................ 35
Item 4 - Controls and Procedures .................................... 35
Part II - Other Information
Item 1 - Legal Proceedings .......................................... 36
Item 1A - Risk Factors [not applicable .............................. 36
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3 - Defaults Upon Senior Securities ............................ 36
Item 4 - Submission of Matters to a Vote of Security Holders ........ 36
Item 5 - Other Information .......................................... 36
Item 6 - Exhibits ................................................... 37
Signatures ................................................................ 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31,
2008 2007
------------- -------------
ASSETS
Cash and due from banks $ 7,044,119 $ 10,876,445
Interest - bearing accounts due from banks 4 10,620,749
------------- -------------
CASH AND CASH EQUIVALENTS 7,044,123 21,497,194
------------- -------------
Securities:
Available for sale securities, at fair value 104,918,031 128,979,548
Held to maturity securities (fair value $30,915-2008 and $33,712-2007) 31,233 34,185
------------- -------------
TOTAL SECURITIES 104,949,264 129,013,733
------------- -------------
Federal Home Loan Bank stock, at cost 5,427,600 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 $2,267,102 -2008, $2,151,622 -2007
NET LOANS AND LEASES 351,737,145 327,475,371
Premises and equipment, net 7,335,512 7,758,761
Deferred income taxes 2,701,093 1,327,535
Accrued interest receivable 2,300,474 2,609,606
Cash surrender value of insurance 10,319,819 10,020,540
Due from broker for security sales 11,643,821 --
Other assets 2,753,736 2,562,639
------------- -------------
TOTAL ASSETS $ 506,538,437 $ 507,653,629
============= =============
LIABILITIES
Deposits: --
Noninterest bearing $ 68,243,431 $ 70,564,267
Interest bearing 272,483,672 265,053,397
------------- -------------
TOTAL DEPOSITS 340,727,103 335,617,664
Federal Home Loan Bank advances 87,941,000 91,500,000
Repurchase agreements with financial institutions 26,450,000 21,550,000
Repurchase agreements with customers 13,269,417 14,142,773
Junior subordinated debt issued by unconsolidated trust 10,104,000 10,104,000
Collateralized borrowings 1,389,170 1,699,336
Capital lease obligation 1,070,154 1,083,567
Accrued expenses and other liabilities 5,476,419 3,593,677
------------- -------------
TOTAL LIABILITIES 486,427,263 479,291,017
------------- -------------
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 - 2,356,875 shares
2007 - Issued - 2,501,229 shares, outstanding - 2,368,200 shares 25,036 25,012
Additional paid-in capital 27,887,443 27,858,841
(Accumulated deficit) retained earnings (2,763,538) 2,623,110
Less: Treasury stock at cost- 149,747 as of 9/30/08, 133,029 as of 12/31/07 (1,154,062) (926,964)
Accumulated other comprehensive loss, net of taxes (3,933,705) (1,267,387)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 20,061,174 28,312,612
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 506,538,437 $ 507,653,629
============= =============
See Notes to Consolidated Financial Statements.
3
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
----------- ---------- ------------ -----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases $ 5,363,809 $5,341,401 $ 16,200,748 $15,539,697
----------- ---------- ------------ -----------
Interest and dividends on securities:
Mortgage-backed securities 991,860 629,956 2,647,249 1,964,187
US Treasury and other securities 397,073 531,737 1,325,699 1,630,486
State and municipal securities 279,144 339,347 905,529 1,016,157
Corporate bonds and other securities 65,299 102,842 285,075 473,168
----------- ---------- ------------ -----------
Total interest on securities 1,733,376 1,603,882 5,163,552 5,083,998
Other interest income 43,482 168,062 210,868 367,511
----------- ---------- ------------ -----------
TOTAL INTEREST AND DIVIDEND INCOME 7,140,667 7,113,345 21,575,168 20,991,206
----------- ---------- ------------ -----------
INTEREST EXPENSE
Interest on deposits:
Savings 173,193 237,267 479,079 567,347
Money market 363,373 627,841 1,185,540 1,677,674
Time certificates of deposit 1,130,642 1,529,945 3,976,610 4,825,888
----------- ---------- ------------ -----------
TOTAL INTEREST ON DEPOSITS 1,667,208 2,395,053 5,641,229 7,070,909
Interest on Federal Home Loan Bank advances 1,013,339 786,727 3,035,762 2,313,874
Interest on repurchase agreements 398,077 347,706 1,147,314 1,081,193
Interest on subordinated debt 137,523 200,582 453,284 596,478
Interest on collateralized borrowings 25,418 31,230 80,221 64,403
Interest on capital lease obligation 14,220 14,453 42,837 43,528
----------- ---------- ------------ -----------
TOTAL INTEREST EXPENSE 3,255,785 3,775,751 10,400,647 11,170,385
----------- ---------- ------------ -----------
NET INTEREST INCOME 3,884,882 3,337,594 11,174,521 9,820,821
PROVISION FOR LOAN AND LEASE LOSSES 155,000 -- 367,000 105,000
----------- ---------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 3,729,882 3,337,594 10,807,521 9,715,821
----------- ---------- ------------ -----------
NONINTEREST (LOSS) INCOME
Banking service charges and fees 417,803 337,469 1,143,723 984,135
Trust 319,049 350,071 992,142 1,020,307
(Losses) gains on available for sale securities (6,720,523) 33,982 (6,687,682) 19,632
Other 176,143 168,779 534,224 487,598
----------- ---------- ------------ -----------
TOTAL NONINTEREST (LOSS) INCOME (5,807,528) 890,301 (4,017,593) 2,511,672
----------- ---------- ------------ -----------
NONINTEREST EXPENSE
Salaries 1,650,937 1,511,962 4,968,276 4,646,686
Employee benefits 406,287 383,699 1,298,126 1,192,766
Net occupancy 293,833 306,956 898,056 843,869
Equipment 151,144 131,883 465,528 467,938
Legal fees 85,703 24,128 203,323 155,379
Directors fees 51,175 50,275 151,475 158,728
Computer services 259,291 211,226 746,378 668,597
Supplies 58,020 42,988 148,449 127,567
Commissions, services and fees 70,393 88,120 314,431 318,374
Postage 40,056 33,898 113,676 101,012
Advertising 170,839 98,540 465,209 268,456
Other 515,352 497,011 1,602,865 1,340,318
----------- ---------- ------------ -----------
TOTAL NONINTEREST EXPENSE 3,753,030 3,380,686 11,375,792 10,289,690
----------- ---------- ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES (5,830,676) 847,209 (4,585,864) 1,937,803
(BENEFIT) PROVISION FOR INCOME TAXES (404,786) 169,373 (274,945) 275,307
----------- ---------- ------------ -----------
NET (LOSS) INCOME $(5,425,890) $ 677,836 $ (4,310,919) $ 1,662,496
=========== ========== ============ ===========
(LOSS) INCOME PER SHARE
BASIC NET (LOSS) INCOME PER SHARE $ (2.30) $ 0.29 $ (1.82) $ 0.70
=========== ========== ============ ===========
DILUTED NET (LOSS) INCOME PER SHARE $ (2.30) $ 0.29 $ (1.82) $ 0.70
=========== ========== ============ ===========
DIVIDENDS PER SHARE $ 0.15 $ 0.15 $ 0.45 $ 0.45
=========== ========== ============ ===========
See Notes to Consolidated Financial Statements.
4
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Retained Accumulated
Additional Earnings Other Total
Common Paid-In (Accumulated) Treasury Comprehensive Shareholders'
Stock Capital Deficit) Stock Loss Equity
----------- ----------- ----------- ----------- ------------- -------------
Nine months ended September 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 -- -- 1,662,496 -- 1,662,496
Other comprehensive income, net of taxes:
Net unrealized holding gain on
available for sale securities -- -- -- -- 439,268 439,268
Other comprehensive income 439,268
Total comprehensive income 2,101,764
Cash dividends declared: $0.45 per share -- -- (1,016,334) -- -- (1,016,334)
Stock options exercised - 5,346 shares 54 44,053 -- -- -- 44,107
Tax benefit on stock options exercised -- 20,498 -- -- -- 20,498
----------- ----------- ----------- ----------- ----------- ------------
Balance, September 30, 2007 $ 23,778 $25,905,174 $ 4,599,378 $ (794,756) $(2,377,345) $ 27,356,229
=========== =========== =========== =========== =========== ============
Nine months ended September 30, 2008
Balance, December 31, 2007 $ 25,012 $27,858,841 $ 2,623,110 $ (926,964) $(1,267,387) $ 28,312,612
Adoption of EITF 06-4 as of January 1, 2008 -- -- (12,272) -- -- (12,272)
Comprehensive loss:
Net loss -- -- (4,310,919) -- (4,310,919)
Other comprehensive loss, net of taxes:
Net unrealized holding loss on
available for sale securities -- -- -- -- (2,129,230) (2,129,230)
Net actuarial loss and prior service
cost for pension benefits -- -- -- -- (537,088) (537,088)
Other comprehensive loss (2,666,318)
Total comprehensive loss (6,977,237)
Cash dividends declared: $0.45 per share -- -- (1,063,457) -- (1,063,457)
Purchase of treasury shares -- -- -- (227,098) -- (227,098)
Stock options exercised - 1,893 shares 19 20,464 -- -- -- 20,483
Tax benefit on stock options exercised -- 2,025 -- -- -- 2,025
Restricted stock grants and expense 5 6,113 -- -- -- 6,118
Balance, September 30, 2008 $ 25,036 $27,887,443 $(2,763,538) $(1,154,062) $(3,933,705) $ 20,061,174
=========== =========== =========== =========== =========== ============
See Notes to Consolidated Financial Statements.
5
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (4,310,919) $ 1,662,496
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
(Accretion) amortization of discounts and premiums
on investment securities, net (124,184) 135,456
Provision for loan losses 367,000 105,000
Depreciation and amortization 550,204 557,804
Loss on impairment write-down of available for sale
securities 6,946,098 --
Losses (gains) on sale of available for sale securities (258,416) (19,632)
Loss on sale of repossessed assets 26,275 --
Loans originated for sale (2,124,000) (4,911,000)
Proceeds from sales of loans held for sale 2,143,887 5,818,499
Gains on sales of loans held for sale (19,887) (25,316)
Loss on disposals of bank premises and equipment 2,188 888
Stock based compensation 6,118 --
Decrease (increase) in accrued interest receivable 309,132 (188,507)
Increase in other assets (250,504) (179,294)
Increase in cash surrender value of insurance (299,279) (285,666)
Increase in deferred loan origination costs (90,048) (29,781)
Decrease in accrued expenses and other liabilities (1,024,395) (45,370)
------------ ------------
Net cash provided by operating activities 1,849,270 2,595,577
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from maturities and principal payments 29,370,830 7,800,193
Purchases (58,903,339) (1,000,000)
Proceeds from sales 43,804,423 16,295,820
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 2,952 4,985
Increase in due from broker for security sales (11,643,821) --
Purchase of restricted stock (5,000) (15,000)
Purchase of Federal Home Loan Bank stock (360,200) (180,700)
Redemption of Federal Home Loan Bank stock -- 10,500
Net increase in loans and leases (22,637,407) (19,725,198)
Purchase of bank premises and equipment (129,143) (858,989)
Proceeds from sale of repossessed assets 214,532 --
------------ ------------
Net cash (used in) provided by investing activities (20,286,173) 2,331,611
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 11,907,339 13,255,898
Net decrease in certificates of deposit (6,797,900) (20,191,388)
Proceeds from Federal Home Loan Bank advances -- 90,000,000
Repayments on Federal Home Loan Bank advances (4,500,000) (86,500,000)
Net decrease in Federal Home Loan Bank overnight borrowings 941,000 (464,000)
Net increase (decrease) in repurchase agreements with financial institutions 4,900,000 (18,650,000)
Net decrease in repurchase agreements with customers (873,356) (2,783,240)
Net decrease in collateralized borrowings (310,166) --
Principal repayments on capital lease obligation (13,413) (12,722)
Purchase of treasury shares (227,098) --
Proceeds from the exercise of stock options 20,483 44,107
Tax benefit of stock options exercised 2,025 20,498
Dividends paid on common stock (1,065,082) (1,014,632)
------------ ------------
Net cash provided by (used in) financing activities 3,983,832 (26,295,479)
------------ ------------
Net decrease in cash and cash equivalents (14,453,071) (21,368,291)
CASH AND CASH EQUIVALENTS, at beginning of period 21,497,194 29,197,637
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 7,044,123 $ 7,829,346
============ ============
SUPPLEMENTAL INFORMATION Cash paid during the period for:
Interest on deposits and borrowings $ 10,523,661 $ 11,201,056
============ ============
Income taxes $ 1,000 $ 500
============ ============
Non cash investing and financing activities:
Accrued dividends declared $ 353,603 $ 338,902
============ ============
Transfer of loans to repossessed assets $ 181,400 $ 82,017
============ ============
Increase in leases and other liabilities for
============ ============
equipment payable related to financed leases $ 2,082,719 $ --
============ ============
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 $ 813,770 $ --
============ ============
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 nine months ended September 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 nine month periods ended September 30, 2008 and 2007.
The 2007 information has been restated to give retroactive effect to all
stock dividends.
Three Months Ended
September 30, 2008
----------------------------------------------
Net Per Share
Loss Shares Amount
----------- --------- -----------
Basic Net Loss Per Share
Loss available to common shareholders $(5,425,890) 2,358,267 $ (2.30)
===========
Effect of Dilutive Securities
Options Outstanding -- --
Diluted Net Loss Per Share
Loss available to common shareholders
plus assumed conversions ----------- -----------
$(5,425,890) 2,358,267 $ (2.30)
=========== =========== ===========
Three Months Ended
September 30, 2007
----------------------------------------------
Net Per Share
Loss Shares Amount
----------- --------- -----------
Basic Net Income Per Share
Income available to common shareholders $ 677,836 2,371,972 $ 0.29
===========
Effect of Dilutive Securities
Options Outstanding -- 2,643
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions ----------- -----------
$ 677,836 2,374,615 $ 0.29
=========== =========== ===========
7
Nine Months Ended
September 30, 2008
-------------------------------------------------
Net Per Share
Loss Shares Amount
------------ ------------ ------------
Basic Net Loss Per Share
Loss available to common shareholders $ (4,310,919) 2,364,904 $ (1.82)
============
Effect of Dilutive Securities
Options Outstanding -- 536
Diluted Net Loss Per Share
Loss available to common shareholders
plus assumed conversions ------------ ------------
$ (4,310,919) 2,365,440 $ (1.82)
============ ============ ============
Nine Months Ended
September 30, 2007
-------------------------------------------------
Net Per Share
Loss Shares Amount
------------ ------------ ------------
Basic Net Income Per Share
Income available to common shareholders $ 1,662,496 2,370,515 $ 0.70
============
Effect of Dilutive Securities
Options Outstanding -- 4,009
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions ------------ ------------
$ 1,662,496 2,374,524 $ 0.70
============ ============ ============
For the three months and nine months ended September 30, 2008, common
stock equivalents existing at September 30, 2008 have been excluded from
the computation of the net loss per share because the inclusion of such
equivalents is anti-dilutive.
4. Other comprehensive (loss) 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:
Three Months Ended
September 30, 2008
---------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- --------- -----------
Unrealized holding gains arising during the period $(5,602,610) $ 194,688 $(5,407,922)
Less: reclassification adjustment for amounts recognized in net loss 6,720,523 (574,778) 6,145,745
----------- --------- -----------
Unrealized holding losses on available for sale securities, net of taxes 1,117,913 (380,090) 737,823
Net pension loss, net of taxes (334,418) 113,702 (220,716)
----------- --------- -----------
Total other comprehensive income of taxes $ 783,495 $(266,388) $ 517,107
=========== ========= ===========
Three Months Ended
September 30, 2007
---------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- --------- -----------
Unrealized holding losses arising during the period $ 1,907,394 $(648,514) $ 1,258,880
Add: reclassification adjustment for amounts recognized in net income (33,982) 11,554 (22,428)
----------- --------- -----------
Unrealized holding gains on available for sale securities, net of taxes $ 1,873,412 $(636,960) $ 1,236,452
=========== ========= ===========
8
Nine Months Ended
September 30, 2008
-----------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $(9,913,788) $ 1,660,488 $(8,253,300)
Less: reclassification adjustment for amounts recognized in net loss 6,687,682 (563,612) 6,124,070
----------- ----------- -----------
Unrealized holding losses on available for sale securities, net of taxes (3,226,106) 1,096,876 (2,129,230)
Net pension loss, net of taxes (813,770) 276,682 (537,088)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $(4,039,876) $ 1,373,558 $(2,666,318)
=========== =========== ===========
Nine Months Ended
September 30, 2007
-----------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding gains arising during the period $ 685,190 $ (232,965) $ 452,225
Add: reclassification adjustment for amounts recognized in net income (19,632) 6,675 (12,957)
----------- ----------- -----------
Unrealized holding gains on available for sale securities, net of taxes $ 665,558 $ (226,290) $ 439,268
=========== =========== ===========
9
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 calculated using the projected unit credit
method. The increase in net actuarial pension loss for the nine months
ended September 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
September 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 nine months ended
September 30:
2008 2007
--------- ---------
Service cost $ -- $ --
Interest cost 138,919 138,126
Expected return on plan assets (151,090) (150,186)
Amortization of unrealized loss 44,437 50,856
--------- ---------
Net periodic benefit cost $ 32,266 $ 38,796
========= =========
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 September 30, 2008 are
as follows:
line of credit $ 941,000 @ 2.51%
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 11/5/2008
due 3/23/2017 10,000,000 @ 4.29% , callable 3/23/2009
due 7/20/2017 10,000,000 @ 4.29% , callable 10/22/2008
due 11/20/2017 5,000,000 @ 4.29% , callable 11/19/2012
------------
Total $ 87,941,000
============
10
As of September 30, 2008, the Bank had borrowings under repurchase
agreements with financial institutions totaling $26,450,000. This amount
includes borrowings:
due 2/25/2009 3,950,000 @ 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 $ 26,450,000
============
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 (benefit) provision for income taxes as reported in the
statements of income is as follows:
For the three months ended September 30,
---------------------------------------------------------
2008 2007
-------------------------- ------------------------
(Benefit) provision for income taxes at statutory Federal rate $(1,982,430) (34)% $ 288,051 34%
Increase (decrease) resulting from:
Tax exempt income (148,249) (3) (149,518) (18)
Nondeductible interest expense 10,423 -- 15,555 2
Increase in valuation allowance 1,710,200 30 -- --
Other 5,270 -- 15,285 2
----------- ------- ----------- ------
Benefit provision for income taxes $ (404,786) (7)% $ 169,373 20%
=========== ======= =========== ======
For the nine months ended September 30,
---------------------------------------------------------
2008 2007
-------------------------- ------------------------
(Benefit) provision for income taxes at statutory Federal rate $(1,559,194) (34)% $ 658,853 34%
Increase (decrease) resulting from:
Tax exempt income (477,969) (11) (444,728) (23)
Nondeductible interest expense 36,207 1 45,370 2
Increase in valuation allowance 1,710,200 37 -- --
Other 15,811 1 15,812 1
----------- ------- ----------- ------
Benefit provision for income taxes $ (274,945) (6)% $ 275,307 14%
=========== ======= =========== ======
During the three and nine months ended September 30, 2008, the Company incurred
a $5,030,000 loss from the other-than-temporary impairment of Fannie Mae and
Freddie Mac preferred stock and auction rate preferred securities holding such
stock. As of September 30, 2008, these losses were considered capital losses for
Federal income tax purposes, which are only deductible if such losses are offset
against capital gains. Because the Company did not have any such capital gains
in the tax carryback period, and because there were no tax strategies available
to generate future capital gains to utilize such losses, a deferred tax
valuation allowance of $1,710,200 was recorded, which represents the amount of
deferred tax benefit related to the impairment losses.
Subsequent to September 30, 2008, the passage of the Federal Emergency Economic
Stabilization Act changed the Federal tax laws to allow the deductions of losses
related to Fannie Mae and Freddie Mac preferred stock and auction rate
securities holding such stock to be treated as ordinary losses for Federal
Income tax purposes. Therefore, the Company expects to reverse the valuation
allowance and recognize the $1,710,200 deferred tax benefit of these impairment
losses in the fourth quarter of 2008.
11
8. The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of securities which are classified as available for sale
and held to maturity at September 30, 2008 and December 31, 2007 are as follows:
AVAILABLE FOR SALE September 30, 2008
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
Debt Securities:
U.S. Treasury securities $ 4,120,554 $ 13,899 $ -- $ 4,134,453
U.S. Government Agency securities 21,500,000 80,698 (39,693) 21,541,005
State and Municipal Obligations 19,933,926 4,273 (2,009,044) 17,929,155
Corporate and Other Bonds 2,975,085 -- (926,521) 2,048,564
------------ ----------- ------------ ------------
48,529,565 98,870 (2,975,258) 45,653,177
------------ ----------- ------------ ------------
Mortgage-Backed Securities:
GNMA 551,242 -- (11,881) 539,361
FNMA 46,672,962 5,254 (1,210,147) 45,468,069
FHLMC 10,529,932 2,698 (247,389) 10,285,241
------------ ----------- ------------ ------------
57,754,136 7,952 (1,469,417) 56,292,671
------------ ----------- ------------ ------------
Money Market mutual fund 26,336 -- -- 26,336
Marketable Equity Securities 3,000,002 -- (54,155) 2,945,847
------------ ----------- ------------ ------------
Total available for sale securities $109,310,039 $ 106,822 $ (4,498,830) $104,918,031
============ =========== ============ ============
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 September 30, 2008
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
Mortgage-Backed Securities:
GNMA $ 31,233 $ -- $ (318) $ 30,915
============ =========== ============ ============
December 31, 2007
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
Mortgage-Backed Securities:
GNMA $ 34,185 $ -- $ (473) $ 33,712
============ =========== ============ ============
12
During both the three and nine months ended September 30, 2008, the
Company recorded losses for the other-than-temporary impairment of certain
investments in Fannie Mae and Freddie Mac preferred/auction rate
securities holding such stock, and trust preferred debt securities
aggregating $6,946,098.
At September 30, 2008, gross unrealized holding losses on available for
sale and held to maturity securities totaled $4,499,148. Of the securities
with unrealized losses, there were twenty-nine securities that have been
in a continuous unrealized loss position for a period of twelve months or
more. The unrealized losses on these securities totaled $1,166,870 at
September 30, 2008. Management does not believe that the unrealized losses
on U.S. Government Agency debt securities, and mortgage-backed securities
are other than temporary as the losses are due primarily to changes in the
interest rate environment. The unrealized holding losses on state and
municipal obligations is mostly a result of the market's reaction to
insurer downgrades and is not reflective of the issuer's underlying credit
strength. Management considers the issuers to be financially sound and the
Company is receiving and expects to continue to receive timely interest
and principal payments. Unrealized holding losses on 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 that the
lack of liquidity in these securities is due to the turmoil in the
financial industry. Investors are reluctant to acquire these securities
amidst weak forecasts for this sector of the economy. 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. In addition, Management periodically evaluates the
credit worthiness of all issuers and future changes to those issuers may
warrant a change in circumstances that would cause an impairment charge.
9. A summary of the Bank's loan and lease portfolio at September 30, 2008 and
December 31, 2007 is as follows:
2008 2007
------------- -------------
Real estate--residential mortgage $ 190,518,998 $ 189,556,668
Real estate--commercial mortgage 59,192,882 55,752,240
Real estate--construction 35,963,046 34,808,984
Commercial Loans 43,636,144 33,641,679
Commercial Leases (net of unearned discount of $1,810,313 ) 18,586,319 8,634,199
Installment 5,380,896 6,519,812
Other 92,449 99,357
------------- -------------
TOTAL LOANS AND LEASES 353,370,734 329,012,939
Net deferred loan origination costs 535,719 445,671
Premiums on purchased loans 97,794 168,383
Allowance for loan and lease losses (2,267,102) (2,151,622)
------------- -------------
NET LOANS AND LEASES $ 351,737,145 $ 327,475,371
============= =============
13
10. A summary of the Bank's deposits at September 30, 2008 and December 31,
2007 is as follows:
2008 2007
------------ ------------
Noninterest bearing:
Demand $ 68,243,431 $ 70,564,267
------------ ------------
Interest bearing:
Savings 61,714,216 56,344,878
Money market 87,597,543 78,738,706
Time certificates of deposit in
denominations of $100,000 or more 43,392,850 52,345,036
Other time certificates of deposit
79,779,063 77,624,777
------------ ------------
Total Interest bearing deposits 272,483,672 265,053,397
------------ ------------
TOTAL DEPOSITS $340,727,103 $335,617,664
============ ============
Included in deposits as of September 30, 2008 and December 31, 2007 are
approximately $9,801,436 and $6,538,000, respectively, of brokered
deposits which have varying maturities through September 2009 and December
2008, respectively.
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 nine months
ended September 30, 2008 was $2,294 and $6,118 respectively.
A summary of restricted shares under the 2007 Plan as of September 30,
2008, and changes during the nine 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 September 30, 2008 3,500 $ 13.11
=========== ===========
14
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 nine months ended September 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
September 30, 2008
---------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,713,276 $ 171,606 $ -- $ 3,884,882
Provision for credit losses 119,909 35,091 -- 155,000
------------- ------------- ------------- -------------
Net interest income after provision 3,593,367 136,515 -- 3,729,882
Noninterest (loss) income (5,811,556) 4,028 -- (5,807,528)
Noninterest expense 3,672,156 80,874 -- 3,753,030
------------- ------------- ------------- -------------
(Loss) income before income taxes (5,890,345) 59,669 -- (5,830,676)
Income tax (benefit) provision (423,034) 18,248 -- (404,786)
------------- ------------- ------------- -------------
Net (loss) income $ (5,467,311) $ 41,421 $ -- $ (5,425,890)
============= ============= ============= =============
Total assets as of September 30, 2008 $ 484,358,599 $ 22,179,838 $ -- $ 506,538,437
============= ============= ============= =============
Three Months Ended
September 30, 2007
---------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,259,081 $ 78,512 $ -- $ 3,337,593
Provision for credit losses (18,203) 18,203 -- --
------------- ------------- ------------- -------------
Net interest income after provision 3,277,284 60,309 -- 3,337,593
Noninterest income 890,301 -- -- 890,301
Noninterest expense 3,306,043 74,642 -- 3,380,685
------------- ------------- ------------- -------------
Income (loss) before income taxes 861,542 (14,333) -- 847,209
Income tax provision (benefit) 211,090 (41,717) -- 169,373
------------- ------------- ------------- -------------
Net income $ 650,452 $ 27,384 $ -- $ 677,836
============= ============= ============= =============
Total assets as of September 30, 2007 $ 467,492,051 $ 9,501,221 $ -- $ 476,993,272
============= ============= ============= =============
15
Nine Months Ended
September 30, 2008
---------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 10,708,773 $ 465,748 $ -- $ 11,174,521
Provision for credit losses 280,226 86,774 -- 367,000
------------- ------------- ------------- -------------
Net interest income after provision 10,428,547 378,974 -- 10,807,521
Noninterest (loss) income (4,021,621) 4,028 -- (4,017,593)
Noninterest expense 11,119,124 256,668 -- 11,375,792
------------- ------------- ------------- -------------
(Loss) income before income taxes (4,712,198) 126,334 -- (4,585,864)
Income tax (benefit) provision (313,270) 38,325 -- (274,945)
------------- ------------- ------------- -------------
Net (loss) income $ (4,398,928) $ 88,009 $ -- $ (4,310,919)
============= ============= ============= =============
Total assets as of September 30, 2008 $ 484,358,599 $ 22,179,838 $ -- $ 506,538,437
============= ============= ============= =============
Nine Months Ended
September 30, 2007
---------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 9,663,820 $ 157,001 $ -- $ 9,820,821
Provision for credit losses 36,268 68,732 -- 105,000
------------- ------------- ------------- -------------
Net interest income after provision 9,627,552 88,269 -- 9,715,821
Noninterest income 2,511,672 -- -- 2,511,672
Noninterest expense 10,047,504 242,186 -- 10,289,690
------------- ------------- ------------- -------------
Income (loss) before income taxes 2,091,720 (153,917) -- 1,937,803
Income tax (benefit) provision 364,911 (89,604) -- 275,307
------------- ------------- ------------- -------------
Net income (loss) $ 1,726,809 $ (64,313) $ -- $ 1,662,496
============= ============= ============= =============
Total assets as of September 30, 2007 $ 467,492,051 $ 9,501,221 $ -- $ 476,993,272
============= ============= ============= =============
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:
16
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 September 30, 2008, Using
Quoted Prices in Significant
September 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 $ 104,918,031 $ 4,134,453 $ 100,783,578 $ --
============== ============== ============== ===============
U.S. Treasury securities, with a carrying value of $4,134,453 at September
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 $100,783,578 as of September
30, 2008.
For the third quarter of 2008 there has been no change in the
categorization of securities measured within levels 1 through 3.
17
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 September 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 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.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active ("FSP
157-3"), which was effective upon issuance including prior periods for
which financial statements have not been issued.
FSP 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in
accordance with SFAS 157 and clarifies the application of SFAS 157, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The Company adopted this
FSP for its September 30, 2008 financial statements. The impact of
adoption on the Company's financial statements was not material.
18
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 overfunded or underfunded 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)
19
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.
In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. This FSP addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the
earnings allocation in computing earnings per share (EPS) under the
two-class method described in paragraphs 60 and 61 of FASB Statement No.
128, Earnings per Share. This FSP shall be effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period EPS data presented
shall be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this FSP. Early application is not permitted. The Company
does not expect this FSP to have a significant effect on the Company's
financial statements.
16. Reclassifications
Certain 2007 amounts have been reclassified to conform with the 2008
presentation, and such reclassifications had no effect on net income.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
First Litchfield Financial Corporation (the "Company"), a Delaware corporation
formed in 1988, is the one-bank holding company for The First National Bank of
Litchfield (the "Bank"), a national bank supervised and examined by the Office
of the Comptroller of the Currency (the "OCC"). The Bank is the Company's
primary subsidiary and only source of income. The Bank has three subsidiaries,
The Lincoln Corporation and Litchfield Mortgage Service Corporation, which are
Connecticut corporations, and First Litchfield Leasing Corporation ("First
Litchfield Leasing"), which is a Delaware corporation. The purpose of The
Lincoln Corporation is to hold property such as real estate, personal property,
securities, or other assets, acquired by the Bank through foreclosure or
otherwise to compromise a doubtful claim or collect a debt previously
contracted. The purpose of Litchfield Mortgage Service Corporation is to operate
as a passive investment company in accordance with Connecticut law. The purpose
of First Litchfield Leasing is to provide equipment financing and leasing
products to complement the Bank's array of commercial products.
Both the Company and the Bank are headquartered in Litchfield, Connecticut. The
Bank is a full-service commercial bank serving both individuals and businesses
generally within Litchfield County Connecticut. Deposits are insured up to
specific limits of the Federal Deposit Insurance Act by the Deposit Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation. The
Bank's lending activities include loans secured by residential and commercial
mortgages. Other loan products include consumer and business installment
lending, as well as other secured and 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 September 30, 2008 were $506,538,437, and substantially
unchanged from total assets of $507,653,629 at December 31, 2007.
Net loans and leases increased $24,261,774 over the year-end 2007 amount. Net
loans and leases as of September 30, 2008 were $351,737,145, as compared to the
year-end 2007 level of $327,475,371.
21
Consistent with Management's strategy to migrate to a more profitable loan
composition, commercial loan and lease growth was strong during the third
quarter of 2008. Leases, net of unearned income, were $18,586,319 at September
30, 2008, which was an increase of $9,952,120 from the year-end 2007 balance of
$8,634,199. Commercial loans totaled $43,636,144, which is an increase of
$9,994,465, 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 $190,518,998, which
substantially unchanged from year-end 2007.
As of September 30, 2008, the securities portfolio totaled $104,949,264, which
is a 18.65% decrease from the year-end 2007 balance. During the first quarter of
2008 the Company had executed a leverage strategy whereby $25,000,000 of fixed
rate mortgage backed securities were purchased and funded by borrowings from
repurchase agreements. During the third quarter of 2008 the Company sold
approximately $35,000,000 in investment securities. These sales were executed to
increase liquidity as well as to decrease the total assets of the Bank in order
to ensure capital adequacy as of September 30, 2008. Additionally, the Company
wrote down for other than temporary impairment ("OTTI") $5,030,000 of the Bank's
investments in Fannie Mae and Freddie Mac preferred stock/auction rate
securities holding such stock holdings during the third quarter. During the
third quarter the Company also recorded an OTTI loss of $1,916,100 on the Bank's
investment in a pooled trust preferred security.
The due from broker for security sales totaled $11,643,821, as a result of
securities traded on September 30, 2008 and proceeds not received until October
2008.
Cash and cash equivalents totaled $7,044,123, which is a decrease of
$14,453,071, or 67.23% from year-end 2007. During 2008, funds temporarily
invested in interest bearing correspondent bank balances at year-end were used
to pay down wholesale borrowings as well as to fund loan growth.
Total liabilities were $486,427,263 as of September 30, 2008, which was an
increase of $7,136,246 from total liabilities of $479,291,017 as of year-end
2007. Total deposits increased by $5,109,439, or 1.52% from their year-end
levels. Money market deposits increased by $8,858,837, or 11.25% as a result of
higher balances held for the Bank's trust customers as well as increased money
market balances due to a third quarter rate promotion. Time certificates of
deposit totaled $123,171,913 as of September 30, 2008, which was a decrease of
5.23%, or $6,797,900 from year-end 2007. The decrease in time deposits is
reflective of the customer's desire for liquidity and the shifting of the
reinvestment of maturing certificate of deposits into the money market deposits.
As of September 30, 2008, repurchase agreements with customers totaled
$13,269,417, which was a decrease of $873,356 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 third
quarter of 2008, advances under Federal Home Loan Bank borrowings decreased by
$3,559,000, while repurchase agreements with financial institutions increased by
$4,900,000 as a result of the first quarter leverage strategy discussed above.
Shareholders' equity totaled $20,061,174 as of September 30, 2008 as compared
with $28,312,612 as of December 31, 2007. The decrease in shareholders' equity
of $8,251,438 is due primarily to the OTTI losses taken on available for sale
securities in the third quarter of 2008. These losses net of taxes totaled
$6,294,626. Additionally, the change in the Company's unrealized losses on
available for sale securities during 2008 reduced equity by $2,129,230.
22
RESULTS OF OPERATIONS- THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2007
Summary
Net loss for the Company for the third quarter of 2008 totaled $5,425,890 versus
net income of $677,836 for the third quarter of 2007. Basic and diluted loss per
share for the third quarter of 2008 were both $2.30, compared to basic and
diluted income per share of $.29 for the third quarter of 2007.
The decrease in net income is due primarily to the OTTI losses on available for
sale securities resulting from the OTTI losses on Freddie Mac and Fannie Mae
securities recorded during the third quarter, when the United States Government
placed Fannie Mae and Freddie Mac into conservatorship. As a result, the Company
had to take a $5,030,000 write down of Freddie Mac and Fannie Mae preferred
stock during the quarter ended September 30, 2008. No tax benefit was recognized
as a result of these charges for the quarter ended September 30, 2008, because
applicable law at the time required financial institutions to treat the loss as
a capital loss. On October 3, 2008, the Emergency Economic Stabilization Act of
2008 was enacted, which includes a provision that permits financial institutions
to recognize losses relating to the Freddie Mac and Fannie Mae preferred stock
as an ordinary loss, thereby allowing a tax benefit for both tax and financial
reporting purposes. Therefore, a tax benefit of approximately $1,710,200 was not
recognized in the quarter ended September 30, 2008, and will be recognized in
the quarter ending December 31, 2008. This tax benefit, had it been recognized
in the same quarter as the losses were taken, would have added approximately
$.73 to the Company's book value and reduced the third quarter loss by $.73 per
share. (See Footnote 7 of the Consolidated Financial Statements.)
Additionally during the third quarter the Company recorded an OTTI loss on a
pooled trust preferred security as a result of this security being downgraded
below investment grade. This loss, net of taxes, totaled $1,264,626.
Net Interest Income
Net interest income is the largest component of the Company's operations. Net
interest income is defined as the difference between interest and dividend
income from earning assets, primarily loans and investment securities, and
interest expense on deposits and borrowed money. Interest income is the product
of the average balances outstanding on loans, securities and interest-bearing
deposit accounts multiplied by their effective yields. Interest expense is
similarly calculated as the result of the average balances of interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
Other components of operating income are the provision for loan losses,
noninterest income such as service charges and trust fees, noninterest expenses
and income taxes.
Net interest income on a fully tax-equivalent basis is comprised of the
following for the three months ended September 30,
2008 2007
----------- -----------
Interest and dividend income $ 7,140,667 $ 7,113,345
Tax-equivalent adjustments (1) 156,436 152,617
Interest expense (3,255,785) (3,775,752)
----------- -----------
Net interest income $ 4,041,318 $ 3,490,210
=========== ===========
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
23
The following table presents on a tax-equivalent basis, the Company's average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates, interest spread and net interest margin for the three months ended
September 30, 2008 and 2007. Average loans outstanding include nonaccruing
loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Three months ended September 30, 2008 Three months ended September 30, 2007
------------------------------------- -------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Assets
Interest Earning Assets:
Loans and leases $ 348,266,000 $5,367,408 6.16% $ 312,731,000 $5,342,576 6.83%
Investment securities 155,762,000 1,886,213 4.84% 135,343,000 1,755,324 5.19%
Other interest earning assets 9,603,000 43,482 1.81% 15,006,000 168,062 4.48%
------------- ---------- ------------- ----------
Total interest earning assets 513,631,000 7,297,103 5.68% 463,080,000 7,265,962 6.28%
------------- ---------- ----- ------------- ---------- -----
Allowance for loan and
lease losses (2,222,000) (2,125,000)
Cash and due from banks 11,310,000 11,650,000
Premises and equipment 7,440,000 7,867,000
Net unrealized losses on
securities (6,955,000) (3,721,000)
Other assets 18,117,000 17,878,000
------------- -------------
Total Average Assets $ 541,321,000 $ 494,629,000
============= =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 64,474,000 173,193 1.07% $ 60,801,000 237,267 1.56%
Money Market deposits 80,602,000 363,373 1.80% 79,767,000 627,841 3.15%
Time deposits 131,370,000 1,130,642 3.44% 133,759,000 1,529,945 4.58%
Borrowed funds 163,604,000 1,588,577 3.88% 120,523,000 1,380,699 4.58%
------------- ---------- ------------- ----------
Total interest bearing liabilities 440,050,000 3,255,785 2.96% 394,850,000 3,775,752 3.82%
---------- ----- ---------- -----
Demand deposits 72,097,000 68,565,000
Other liabilities 4,446,000 4,844,000
Shareholders' Equity 24,728,000 26,370,000
------------- -------------
Total liabilities and equity $ 541,321,000 $ 494,629,000
============= =============
Net interest income $4,041,318 $3,490,210
========== ==========
Net interest spread 2.72% 2.45%
===== =====
Net interest margin 2.99% 2.82%
===== =====
24
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the three months ended September 30, 2008 when compared to the three
months ended September 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.
09/30/08 Compared to 09/30/07
Increase (Decrease) Due to
--------------------------
Volume Rate Total
--------- --------- ---------
Interest earned on:
Loans and leases $ 575,148 $(550,316) $ 24,832
Investment securities 252,626 (121,737) 130,889
Other interest earning assets (46,932) (77,648) (124,580)
--------- --------- ---------
Total interest earning assets 780,842 (749,701) 31,141
--------- --------- ---------
Interest paid on:
Deposits 18,361 (746,206) (727,845)
Borrowed money 440,797 (232,919) 207,878
--------- --------- ---------
Total interest bearing liabilities 459,158 (979,125) (519,967)
--------- --------- ---------
Increase in net interest income $ 321,684 $ 229,424 $ 551,108
========= ========= =========
Tax-equivalent net interest income for the third quarter of 2008 totaled
$4,041,318, an increase of $551,108, or 15.79% from the third 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 $321,684. 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 $229,424 in additional net interest income.
Average earning assets for the third quarter of 2008 totaled $513,631,000, which
was $50,551,000 or 10.92% higher than average earning assets for the third
quarter of 2007 which totaled $463,080,000. This increase in loans and
investments, net of increased volume of interest bearing liabilities,
contributed to an additional $368,616 in net interest income. Average loans and
leases increased by $35,535,000, or 11.36%, while average investments increased
by $20,419,000 or 15.09%. 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 17 basis points from 2.82% in
the third quarter of 2007 to 2.99% for the third quarter of 2008. Funding costs
decreased by 86 basis points while the tax equivalent yield on earning assets
decreased by 57 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.
25
Provision for Loan and Lease Losses
The provision for loan and lease losses for the third quarter of 2008 totaled
$155,000, which is an increase of $155,000 from the third quarter of 2007 which
had no provision. The provision for loan and lease losses is determined
quarterly based on the calculation of the allowance for loan and lease losses.
(See discussion of the Allowance for Loan and Lease Losses.)
During the third quarter of 2008, the Company recorded net charge-offs of
$121,476 compared to third quarter 2007 net charge-offs of $6,313. The change in
the level of charge-offs from 2007 to 2008 is due to one commercial loan
charge-off in 2008 and higher levels of charge-off activity from the consumer
automobile loan portfolio, which the Bank purchased in 2006. The change in the
level of charge-offs from 2007 to 2008 is considered by Management to be
reflective of a weakening consumer credit environment.
Noninterest (Loss) Income
Noninterest loss for the third quarter of 2008 totaled $5,807,528, versus third
quarter 2007 income of $890,301. The decrease in noninterest income is the
direct result of the $6,946,098 OTTI write down of the Bank's investments in
Fannie Mae and Freddie Mac preferred stock/auction rate securities holding such
stock holdings, as well as a pooled trust preferred security, during the third
quarter.
During September of 2008, the United States Government placed two government
sponsored entities, Fannie Mae and Freddie Mac into conservatorship. This action
caused the Bank's unrealized market losses in Fannie Mae and Freddie Mac
preferred stock and auction rate security holding such stock to be considered as
OTTI and resulted in the Bank's complete write down of the $5,030,000
investments. Additionally the Bank recorded an OTTI loss of $1,916,100 on its
holding of a pooled trust preferred security as a result of this instrument's
credit rating being downgraded to less than investment grade. Also during the
third quarter of 2008, $35,000,000 in sales of available for sale securities
were sold for the purpose of shortening the duration of the portfolio as well as
to deleverage the balance sheet to ensure capital adequacy at September 30,
2008. These sales resulted in net gains of $215,300.
Trust income totaled $319,049, which represented 8.2% of noninterest income
decreased $31,022 or 8.9% from $350,071 at September 30, 2007. The weakened
economic and market conditions continue to put pressure on wealth management
income. Income from banking service charges and fees increased by $80,334, or
23.80%, from the third 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 $176,143, which was an increase of
$7,364, or 4.36% from the third quarter of 2007. This increase is a result of
the increase in the cash surrender value of bank owned life insurance.
Noninterest Expense
Third quarter 2008 noninterest expense totaled $3,753,030, increasing 11.01%, or
$372,344 from the third quarter 2007 expense of $3,380,686. Increases in
noninterest expenses are reflected in staffing, 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. Advertising expense totaled $170,839, which was an increase of
$72,299, or 73.37% increase from the third 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.
26
Other noninterest expenses totaled $515,352 which is an increase of $18,341, or
3.69% from the third 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 Company recorded a tax benefit of $404,786 for the third quarter of 2008.
This benefit compares to the third quarter of 2007 provision of $169,373. The
third quarter expected tax benefit did not relate proportionately to the pretax
loss due to the Company's inability to consider its loss on the Fannie Mae and
Freddie Mac OTTI write-down as ordinary income as of September 30, 2008. With
the October 2008 passage of the Emergency Economic Stabilization Act, banks with
Fannie Mae or Freddie Mac preferred shares and auction rate securities holding
such shares can treat their losses as ordinary losses for tax purposes. Pursuant
to this change, the Company will recognize the tax benefit of approximately
$1,710,000 in the fourth quarter of 2008.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2007
Summary
Net loss for the Company for the nine months ended September 30, 2008 totaled
$4,310,919 versus earnings of $1,662,496 for the nine months ended September 30,
2007. Basic and diluted loss per share for the nine months ended September 30,
2008 were both $1.82, compared to basic and diluted income per share of $.70 for
the nine months ended September 30, 2007. The 2008 net loss is due primarily to
the OTTI loss on available for sale securities in the third quarter of 2008.
Net Interest Income
Net interest income is the largest component of the Company's operations. Net
interest income is defined as the difference between interest and dividend
income from earning assets, primarily loans and investment securities, and
interest expense on deposits and borrowed money. Interest income is the product
of the average balances outstanding on loans, securities and interest-bearing
deposit accounts multiplied by their effective yields. Interest expense is
similarly calculated as the result of the average balances of interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
Other components of operating income are the provision for loan losses,
noninterest income such as service charges and trust fees, noninterest expenses
and income taxes.
Net interest income on a fully tax-equivalent basis is comprised of the
following for the nine months ended September 30,
2008 2007
------------ ------------
Interest and dividend income $ 21,575,168 $ 20,991,206
Tax-equivalent adjustments (1) 515,164 457,927
Interest expense (10,400,647) (11,170,385)
------------ ------------
Net interest income $ 11,689,685 $ 10,278,748
============ ============
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
27
The following table presents on a tax-equivalent basis, the Company's average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates, interest spread and net interest margin for the nine months ended
September 30, 2008 and 2007. Average loans outstanding include nonaccruing
loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Nine months ended September 30, 2008 Nine months ended September 30, 2007
------------------------------------------ -----------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Assets
Interest Earning Assets:
Loans and leases $ 341,230,000 $ 16,209,373 6.33% $ 307,283,000 $ 15,542,370 6.74%
Investment securities 150,686,000 5,670,091 5.02% 145,397,000 5,539,252 5.08%
Other interest earning assets 10,967,000 210,868 2.56% 10,096,000 367,511 4.85%
------------- ------------- ------------- -------------
Total interest earning assets 502,883,000 22,090,332 5.86% 462,776,000 21,449,133 6.18%
------------- ------------- ------ ------------- ------------- ------
Allowance for loan and
lease losses (2,184,000) (2,131,000)
Cash and due from banks 11,388,000 13,464,000
Premises and equipment 7,586,000 7,655,000
Net unrealized losses on
securities (3,473,000) (3,129,000)
Other assets 16,943,000 17,350,000
------------- -------------
Total Average Assets $ 533,143,000 $ 495,985,000
============= =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 59,062,000 479,079 1.08% $ 55,325,000 567,347 1.37%
Money Market deposits 81,332,000 1,185,540 1.94% 75,971,000 1,677,674 2.94%
Time deposits 135,138,000 3,976,610 3.92% 139,763,000 4,825,888 4.60%
Borrowed funds 157,692,000 4,759,418 4.02% 124,959,000 4,099,476 4.37%
------------- ------------- ------------- -------------
Total interest bearing liabilities 433,224,000 10,400,647 3.20% 396,018,000 11,170,385 3.76%
------------- ------ ------------- ------
Demand deposits 68,055,000 68,661,000
Other liabilities 4,864,000 4,672,000
Shareholders' Equity 27,000,000 26,634,000
------------- -------------
Total liabilities and equity $ 533,143,000 $ 495,985,000
============= =============
Net interest income $ 11,689,685 $ 10,278,748
============= =============
Net interest spread 2.66% 2.42%
====== =======
Net interest margin 2.92% 2.76%
====== =======
28
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the nine months ended September 30, 2008 when compared to the nine
months ended September 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.
09/30/08 Compared to 09/30/07
Increase (Decrease) Due to
--------------------------
Volume Rate Total
---------- ----------- -----------
Interest earned on:
Loans and leases $1,649,674 $ (982,671) $ 667,003
Investment securities 199,644 (68,805) 130,839
Other interest earning assets 29,393 (186,036) (156,643)
---------- ----------- -----------
Total interest earning assets 1,878,711 (1,237,512) 641,199
---------- ----------- -----------
Interest paid on:
Deposits 114,895 (1,544,575) (1,429,680)
Borrowed money 1,008,041 (348,099) 659,942
---------- ----------- -----------
Total interest bearing liabilities 1,122,936 (1,892,674) (769,738)
---------- ----------- -----------
Increase in net interest income $ 755,775 $ 655,162 $ 1,410,937
========== =========== ===========
Tax-equivalent net interest income for the first nine months of 2008 totaled
$11,689,685, an increase of $1,410,937, or 13.7% from the first nine 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 $755,775. 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 $655,162 in additional net interest
income.
Average earning assets for the first nine months of 2008 totaled $502,883,000,
which was $40,107,000, or 8.7% higher than average earning assets for the first
nine months of 2007, which totaled $462,776,000. This increase in earning assets
was predominately in the loan and lease portfolio which on average totaled
$341,230,000, an increase of $33,947,000 or 11.1%. The increase in loan volume
contributed $1,649,674 in additional interest income. For the first nine months
of 2008, loans were 67.8% of earning assets compared to 66.3% 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. Growth in average
earning assets was funded, primarily by borrowings, the interest expense which
offset some of the increased interest income.
The 2008 year to date net interest margin increased by 16 basis points from the
same period in 2007. Funding costs decreased by 56 basis points while the yield
on earning assets decreased by 32 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. Since that time Management has been able to maintain its deposit balances
while keeping the costs of deposits down. Although yields on earning assets have
experienced similar declines, the structural repricing intervals for many
earning assets are occurring later. Additionally, 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 can adversely affect the
net interest margin.
29
Provision for Loan and Lease Losses
The provision for loan and lease losses for the nine months ended September 30,
2008 totaled $367,000, which is an increase of $262,000 from the provision for
the nine months ended September 30, 2007. The provision for loan and lease
losses is determined quarterly based on the calculation of the allowance for
loan and lease losses. (See discussion of the Allowance for Loan and Lease
Losses.)
During the first nine months of 2008, the Company recorded net charge-offs of
$251,520 compared to 2007 net charge-offs for the same period totaling $94,393.
The change in the level of charge-offs from 2007 to 2008 is due to one
commercial loan charge-off in 2008 and higher levels of charge-off activity from
the consumer automobile loan portfolio which the Bank purchased in 2006.
Charge-off activity for the first nine months of 2007 is also attributable to
consumer automobile loans as well as other consumer loans. While the amounts
represent a small volume by industry standards, it is greater than the Bank has
previously experienced in recent years and may be indicative of adverse trends
in the economy and real estate markets.
Noninterest (Loss) Income
Year to date noninterest loss for the nine months ended September 30, 2008
totaled $4,017,593, versus income of $2,511,672 for the nine months ended
September 30, 2007. The decrease in the year to date noninterest income is the
direct result of the $6,946,098 third quarter OTTI write down of the Bank's
investments in Freddie Mac and Fannie Mae preferred stock/auction rate
securities holding such stock and a pooled trust preferred security.
For the first nine months of 2008, losses on securities totaled $6,687,682. The
cause of this loss was the third quarter 2008 recognition of the OTTI losses of
$6,946,098 described above. Offsetting some of this loss was $215,300 of net
gains resulting from the sales of $35,000,000 of available for sale municipal
securities sold for the purpose of shortening the duration of the portfolio as
well as to ensure capital adequacy as of September 30, 2008. The Company
recorded gains on the sales of available for sale securities of $19,632 during
the first nine months of 2007. These sales were made for the purpose of reducing
interest rate risk and positioning earning assets for future profitability.
Trust income totaled $992,142, which represented 47.21% of noninterest income
and decreased $28,165, or 2.76% from the first nine months of 2007. This
decrease is the result of the weakened economic and market conditions. Income
from banking service charges and fees increased by $159,588, or 16.22%, from the
first nine months 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 $534,224, which was an increase of $46,626, or
9.56% from the first nine months of 2007.
Noninterest Expense
Nine-month noninterest expense as of September 30, 2008 totaled $11,375,792,
increasing 10.56%, or $1,086,102 from the same period in 2007. Increases in
noninterest expenses are reflected in staffing, occupancy, and advertising
expenses. Salaries and benefits expense increased $426,950 or 7.31% from the
same period in 2007. Increased salary and benefits expenses were due to
additional compliance personnel and an increased emphasis on commercial and
small business development. Occupancy costs totaled $898,056, which was an
increase of $54,187 or 6.42%, which reflects increases due to a larger branch
network and its related maintenance costs. Advertising expense totaled
30
$465,209, which was an increase of $196,753, or 73.29% increase from the nine
months ended September 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.
Other noninterest expenses totaled $1,602,865 which is an increase of $262,547,
or 19.59% from the first nine 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 Company recorded an income tax benefit for the first nine months of 2008
which totaled $274,945. This compares to the provision of $275,307 for the first
nine months of 2007. The 2008 tax benefit is a result of the pretax loss
recorded for the first nine months of 2008. However because the loss related to
a $5 million OTTI write down on Fannie Mae and Freddie Mac preferred shares is
not considered ordinary income, no tax benefit related to the loss can be
recognized through September 30, 2008. With the passage of the Economic
Stabilization Act, the Company will recognize the tax benefit of the OTTI loss
during the fourth quarter of 2008. (See Footnote 7 of the Consolidated Financial
Statements.)
LIQUIDITY
Management's objective is to ensure continuous ability to meet cash needs as
they arise. Such needs may occur from time to time as a result of fluctuations
in loan demand and the level of total deposits. Accordingly, the Bank has a
liquidity policy that provides flexibility to meet cash needs. The liquidity
objective is achieved through the maintenance of readily marketable investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products.
The Bank is a member of the Federal Home Loan Bank system, which provides credit
to its member banks. This enhances the liquidity position of the Bank by
providing a source of available overnight as well as short-term borrowings.
Additionally, federal funds, borrowings through the use of repurchase agreements
and the sale of mortgage loans in the secondary market are available to fund
short term cash needs. (See Note 6 to the Consolidated Financial Statements for
information on Federal Home Loan Bank borrowings and repurchase agreements.)
As of September 30, 2008, the Company had $132,400,947 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.
CAPITAL
Shareholders' equity totaled $20,061,174 as of September 30, 2008 as compared
with $28,312,612 as of December 31, 2007. The decrease in shareholders' equity
of $8,251,438 is due to the other than temporary impairment loss taken on
available for sale securities during the third quarter of 2008. The loss, net of
taxes totaled $6,294,626. Additionally, the 2008 other comprehensive loss both
from the unrealized holding losses from available for sale securities and
pension losses reduced equity by $2,666,318. From a regulatory perspective, the
capital ratios of the Company and the Bank place each entity in the
"well-capitalized" categories under applicable regulations. On September 20,
2007, the Company approved a stock repurchase program to acquire in the next
twelve months up to an aggregate
31
of 30,000 shares of the Company's outstanding Common Stock. Shares repurchased
by the Company during the first nine months of 2008 totaled 16,718. The
repurchase program expired during September 2008 and was not renewed. The
calculation of all capital ratios as of September 30, 3008 include the tax
benefit of the OTTI loss related to the Company's investments in Fannie Mae and
Freddie Mac preferred stock/auction rate securities holding such stock. While
the tax benefit of this loss was not recognized for financial reporting
purposes, Federal bank regulators issued an interagency statement formally
allowing financial institutions to treat any losses this year of Fannie Mae and
Freddie Mac preferred stock/auction rate securities holding such stock as
ordinary losses, rather than capital losses, for federal income tax purposes,
and thereby includable in regulatory capital calculations. During the third
quarter of 2008 the Company increased its investment in the Bank's equity by
$1,500,000. This action was executed to insure the Bank maintained capital at
levels considered to be well capitalized by bank regulation.
The various capital ratios of the Company and the Bank are as follows as of
September 30, 2008:
Minimum
Regulatory Capital Well Capitalized Actual
Ratios Capital Levels Ratios
------------------ -------------- ------
The Company
Leverage capital ratio 4.00% N/A 6.31%
Risk-based capital ratio 4.00% N/A 9.57%
Total risk-based capital ratio 8.00% N/A 10.21%
The Bank
Leverage capital ratio 4.00% 5.00% 6.27%
Risk-based capital ratio 4.00% 6.00% 9.48%
Total risk-based capital ratio 8.00% 10.00% 10.11%
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 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
32
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 concentrations or loan or lease
quality that had a significant effect on the allowance for loan and lease losses
calculation at September 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 September 30, 2008, the allowance for loan and lease losses was equivalent to
48% of total non-performing assets as compared with 72% of total non-performing
assets at December 31, 2007. As of September 30, 2008, non-performing assets and
loans and leases were $4,727,403 and represented 1.34% 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
September 30, 2008 and December 31, 2007 was 0.64%. Changes in the allowance for
loan and lease losses for the nine month periods ended September 30, 2008 and
2007 are as shown below:
For the nine months ended September 30, 2008 2007
----------- -----------
Balance at beginning of the year $ 2,151,622 $ 2,106,100
Provision for loan and lease losses 367,000 105,000
Loans and leases charged off (275,457) (107,087)
Recoveries of loans and leases previously charged-off 23,937 12,694
----------- -----------
Balance as of September 30, $ 2,267,102 $ 2,116,707
=========== ===========
The increase in the allowance was based upon growth in the loan portfolio,
uncertain economic conditions, concerns over further potential reduction in real
estate values and the impact of the prolonged recession or economic downturn
would have on the Bank's commercial and small business loan and lease portfolio.
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
September 30, 2008 and December 31, 2007.
33
September 30, 2008 December 31, 2007
------------------ -----------------
Nonaccrual loans and leases $ 4,719,588 $ 2,959,074
Other real estate owned -- --
--------------- -------------
Total nonperforming assets $ 4,719,588 $ 2,959,074
=============== =============
Loans and leases past due in excess of 90 days and
accruing interest $ 7,815 $ 3,111
=============== =============
POTENTIAL PROBLEM LOANS
As of September 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 September 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.
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.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[Not required for smaller reporting company.]
ITEM 4 . 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 third quarter of 2008 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
35
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.
On September 20, 2007 the Company approved a stock repurchase program to acquire
in the twelve months following such date, up to an aggregate of 30,000 shares of
the Company's outstanding Common Stock. The repurchase program expired on
September 20, 2008 and was not renewed. Shares purchased pursuant to the
repurchase program in the third quarter of 2008, are shown below.
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total number of
shares (or Maximum number
units) (or approximate dollar
Total number purchased as value) of shares
of shares Average price part of publicly (or units) that may yet
(or units) paid per share announced plans be purchased under the
Period purchased (or unit) or programs plans or programs
- ------------------------- --------------- ---------------- ------------------- -----------------------
July 1-31, 2008 1,095 12.23 1,095 7,333 shares
--------------- ---------------- ------------------- -----------------------
August 1-31, 2008 2,313 11.96 2,313 5,019 shares
--------------- ---------------- ------------------- -----------------------
September 1-30, 2008 -- -- -- 0 shares
--------------- ---------------- ------------------- -----------------------
Total 3,408 $ 12.04 3,408 0 shares
--------------- ---------------- ------------------- -----------------------
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
36
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.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 14, 2008 FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Joseph J. Greco
Joseph J. Greco, President and
Chief Executive Officer
Dated: November 14, 2008 By: /s/ Carroll A. Pereira
---------------------------
Carroll A. Pereira
Principal Financial and
Accounting Officer
38