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: March 31, 2009
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File Number: 0-28815
FIRST LITCHFIELD FINANCIAL CORPORATION
--------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 06-1241321
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
13 North Street, Litchfield, CT 06759
------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 567-8752
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been sub(j)ect to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accele(r)ated 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 May 10, 2009.
1
FIRST LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 2009 and December 31, 2008
(unaudited) ............................................................. 3
Consolidated Statements of Income - Three months ended
March 31, 2009 and 2008 (unaudited) ..................................... 4
Consolidated Statements of Changes in Shareholders' Equity - Three months
ended March 31, 2009 and 2008 (unaudited) ............................... 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2009 and 2008 (unaudited) ..................................... 6
Notes to Consolidated Financial Statements (unaudited) .................. 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 20
Item 4T - Controls and Procedures ....................................... 30
Part II - Other Information
Item 1 - Legal Proceedings .............................................. 31
Item 2 - Unregistered Sales of Equity Securities and
Use of Proceeds [not applicable] ........................................ 31
Item 3 - Defaults Upon Senior Securities [not applicable] ............... 31
Item 4 - Submission of Matters to a Vote of Security Holders ............ 31
Item 5 - Other Information .............................................. 31
Item 6 - Exhibits ....................................................... 32
Signatures ...................................................................... 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
2009 2008
------------- -------------
ASSETS
Cash and due from banks $ 9,582,536 $ 9,238,320
Interest - bearing accounts due from banks 52,081 463
------------- -------------
CASH AND CASH EQUIVALENTS 9,634,617 9,238,783
------------- -------------
Securities:
Available for sale securities, at fair value 115,129,861 113,486,201
Held to maturity securities (fair value $16,402-2009 and $16,553-2008) 16,084 16,550
------------- -------------
TOTAL SECURITIES 115,145,945 113,502,751
------------- -------------
Federal Home Loan Bank stock, at cost 5,427,600 5,427,600
Federal Reserve Bank stock, at cost 225,850 225,850
Other restricted stock, at cost 100,000 100,000
Loans held for sale -- 1,013,216
Loan and lease receivables, net of allowance for loan and lease
losses of $3,593,824 -2009, $3,698,820-2008
NET LOANS AND LEASES 392,506,130 366,392,079
Premises and equipment, net 7,243,155 7,370,252
Foreclosed property 475,000 --
Deferred income taxes 5,248,056 5,082,957
Accrued interest receivable 2,198,905 2,262,918
Cash surrender value of life insurance 10,513,365 10,416,651
Due from broker for security sales -- 9,590,823
Other assets 1,566,064 1,633,727
------------- -------------
TOTAL ASSETS $ 550,284,687 $ 532,257,607
============= =============
LIABILITIES
Deposits:
Noninterest bearing $ 69,381,530 $ 69,548,261
Interest bearing 290,600,357 273,778,363
------------- -------------
TOTAL DEPOSITS 359,981,887 343,326,624
Federal Home Loan Bank advances 98,800,000 81,608,000
Repurchase agreements with financial institutions 22,500,000 26,450,000
Repurchase agreements with customers 19,094,439 18,222,571
Junior subordinated debt issued by unconsolidated trust 10,104,000 10,104,000
Collateralized borrowings 1,132,621 1,375,550
Capital lease obligation 1,060,912 1,065,563
Due to broker for security purchases -- 12,994,945
Accrued expenses and other liabilities 5,280,781 4,643,090
------------- -------------
TOTAL LIABILITIES 517,954,640 499,790,343
------------- -------------
EQUITY
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized, 10,000 shares outstanding -- --
as of 3/31/09 and 12/31/08
Common stock $.01 par value
Authorized - 5,000,000 shares
2009 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares
2008 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares 25,040 25,038
Additional paid-in capital 37,907,553 37,892,831
Accumulated deficit (3,177,514) (3,325,920)
Less: Treasury stock at cost- 149,747 as of 3/31/09 and12/31/08 (1,154,062) (1,154,062)
Accumulated other comprehensive loss, net of taxes (1,344,985) (1,024,498)
------------- -------------
TOTAL FIRST LITCHFIELD FINANCIAL CORPORATION
SHAREHOLDERS' EQUITY 32,256,032 32,413,389
------------- -------------
NONCONTROLLING INTERESTS 74,015 53,875
------------- -------------
TOTAL EQUITY 32,330,047 32,467,264
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 550,284,687 $ 532,257,607
============= =============
See Notes to Consolidated Financial Statements.
3
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2009 2008
----------- -----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases $ 5,389,717 $ 5,527,083
----------- -----------
Interest and dividends on securities:
Mortgage-backed securities 699,516 673,328
US Treasury and other securities 175,372 501,942
State and municipal securities 213,282 336,419
Corporate bonds and other securities 68,504 118,621
----------- -----------
Total interest on securities 1,156,674 1,630,310
----------- -----------
Other interest income 14,838 99,043
----------- -----------
TOTAL INTEREST AND DIVIDEND INCOME 6,561,229 7,256,436
----------- -----------
INTEREST EXPENSE
Interest on deposits:
Savings 111,497 189,676
Money market 280,172 456,767
Time certificates of deposit 885,931 1,452,676
----------- -----------
TOTAL INTEREST ON DEPOSITS 1,277,600 2,099,119
Interest on Federal Home Loan Bank advances 877,308 1,007,798
Interest on repurchase agreements 295,213 338,420
Interest on subordinated debt 101,624 189,948
Interest on collateralized borrowings 22,819 29,424
Interest on capital lease obligation 14,098 14,338
----------- -----------
TOTAL INTEREST EXPENSE 2,588,662 3,679,047
----------- -----------
NET INTEREST INCOME 3,972,567 3,577,389
PROVISION FOR LOAN AND LEASE LOSSES 270,000 75,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 3,702,567 3,502,389
----------- -----------
NONINTEREST INCOME
Banking service charges and fees 363,187 345,179
Trust 272,056 339,524
Gains on available for sale securities -- 11,942
Increase in cash surrender value of life insurance 96,715 97,743
Other 82,088 61,634
----------- -----------
TOTAL NONINTEREST INCOME 814,046 856,022
----------- -----------
NONINTEREST EXPENSE
Salaries 1,563,142 1,597,635
Employee benefits 477,760 441,749
Net occupancy 325,250 311,826
Equipment 147,396 159,614
Legal fees 115,863 62,952
Directors fees 46,750 50,100
Computer services 292,145 272,973
Supplies 37,149 45,504
Commissions, services and fees 131,085 116,242
Postage 36,870 40,203
Advertising 115,474 137,015
Other 733,995 563,230
----------- -----------
TOTAL NONINTEREST EXPENSE 4,022,879 3,799,043
----------- -----------
INCOME BEFORE INCOME TAXES 493,734 559,368
PROVISION FOR INCOME TAXES 69,914 60,845
----------- -----------
NET INCOME BEFORE NONCONTROLLING INTERESTS 423,820 498,523
NET INCOME ATTIBUTABLE TO
NONCONTROLLING INTERESTS (20,140) --
----------- -----------
NET INCOME 403,680 498,523
----------- -----------
DIVIDENDS AND ACCRETION ON PREFERRED SHARES 137,430 --
----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 266,250 $ 498,523
=========== ===========
INCOME PER SHARE
BASIC NET INCOME PER COMMON SHARE $ 0.11 $ 0.21
=========== ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.11 $ 0.21
=========== ===========
DIVIDENDS PER SHARE $ 0.05 $ 0.15
=========== ===========
See Notes to Consolidated Financial Statements.
4
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Additional
Noncontrolling Preferred Common Paid-In
Interests Stock Stock Capital
-------------- -------------- -------------- --------------
Three months ended March 31, 2008
Balance, December 31, 2007 $ 50,000 $ -- $ 25,012 $ 27,858,841
Adoption of EITF 06-4 as of January 1, 2008 -- -- -- --
Comprehensive income:
Net income -- -- -- --
Other comprehensive income (loss), net of taxes:
Net unrealized holding loss on available
for sale securities -- -- -- --
Net actuarial loss and prior service
cost for pension benefits
Other comprehensive loss
Total comprehensive loss
Cash dividends declared: $0.15 per share -- -- -- --
Restricted stock grants and expense -- -- 1 1,529
-------------- -------------- -------------- --------------
Balance, March 31, 2008 $ 50,000 $ -- $ 25,013 $ 27,860,370
============== ============== ============== ==============
Three months ended March 31, 2009
Balance, December 31, 2008 $ 53,875 $ -- $ 25,038 $ 37,892,831
Comprehensive income (loss):
Net income 20,140 -- -- --
Other comprehensive loss, net of taxes:
Net unrealized holding loss on available
for sale securities -- -- -- --
Net unrealized holding loss on cash
flow hedges
Net actuarial loss and prior service
cost for pension benefits -- -- -- --
Other comprehensive loss
Total comprehensive income
Cash dividends declared: $0.05 per share -- -- -- --
Restricted stock grants and expense -- -- 2 2,292
Preferred stock dividends
Accretion of discount on preferred stock 12,430
-------------- -------------- -------------- --------------
Balance, March 31, 2009 $ 74,015 $ -- $ 25,040 $ 37,907,553
============== ============== ============== ==============
Retained Accumulated
Earnings Other Total
(Accumulated Treasury Comprehensive Shareholders'
Deficit) Stock Loss Equity
-------------- -------------- -------------- --------------
Three months ended March 31, 2008
Balance, December 31, 2007 $ 2,623,110 $ (926,964) $ (1,267,387) $ 28,362,612
Adoption of EITF 06-4 as of January 1, 2008 (12,272) -- -- (12,272)
Comprehensive income:
Net income 498,523 -- 498,523
Other comprehensive income (loss), net of taxes:
Net unrealized holding loss on available
for sale securities -- -- (764,757) (764,757)
Net actuarial loss and prior service
cost for pension benefits (236,780) (236,780)
--------------
Other comprehensive loss (1,001,537)
--------------
Total comprehensive loss (503,014)
Cash dividends declared: $0.15 per share (355,736) -- -- (355,736)
Restricted stock grants and expense -- -- -- 1,530
-------------- -------------- -------------- --------------
Balance, March 31, 2008 $ 2,753,625 $ (926,964) $ (2,268,924) $ 27,493,120
============== ============== ============== ==============
Three months ended March 31, 2009
Balance, December 31, 2008 $ (3,325,920) $ (1,154,062) $ (1,024,498) $ 32,467,264
Comprehensive income (loss):
Net income 403,680 -- 423,820
Other comprehensive loss, net of taxes:
Net unrealized holding loss on available
for sale securities -- -- (85,707) (85,707)
Net unrealized holding loss on cash
flow hedges (184,613) (184,613)
Net actuarial loss and prior service
cost for pension benefits -- -- (50,167) (50,167)
--------------
Other comprehensive loss (320,487)
--------------
Total comprehensive income 103,333
Cash dividends declared: $0.05 per share (117,844) -- (117,844)
Restricted stock grants and expense -- -- -- 2,294
Preferred stock dividends (125,000) (125,000)
Accretion of discount on preferred stock (12,430) --
-------------- -------------- -------------- --------------
Balance, March 31, 2009 $ (3,177,514) $ (1,154,062) $ (1,344,985) $ 32,330,047
============== ============== ============== ==============
5
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31,
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 403,680 $ 498,523
Adjustments to reconcile net income to net cash provided by operating activities:
Net income attributable to non-controlling interest 20,140 --
Amortization (accretion) amortization of discounts and premiums
on investment securities, net 52,251 (24,676)
Provision for loan and lease losses 270,000 75,000
Depreciation and amortization 178,556 188,905
Gains on sale of available for sale securities -- (11,942)
Losses on sale of repossessed assets 115,387 5,030
Loans originated for sale (3,677,254) (505,000)
Proceeds from sales of loans held for sale 4,739,544 509,071
Gains on sales of loans held for sale (49,074) (4,071)
Stock based compensation 2,294 1,530
Decrease (increase) in accrued interest receivable 64,013 (92,708)
(Increase) decrease in other assets (26,274) 30,079
Increase in cash surrender value of life insurance (96,714) (97,743)
Increase in deferred loan origination costs (45,966) (30,414)
(Decrease) increase in accrued expenses and other liabilities (561,195) 751,601
------------ ------------
Net cash provided by operating activities 1,389,388 1,293,185
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from maturities and principal payments 25,297,500 14,272,834
Purchases (41,118,213) (42,586,928)
Proceeds from sales 10,590,823 1,265,587
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 466 563
Purchase of restricted stock -- (293,300)
Net increase in loans and leases (25,898,621) (3,978,796)
Purchase of bank premises and equipment (51,459) (66,933)
Proceeds from sale of repossessed assets 44,295 75,633
------------ ------------
Net cash used in investing activities (31,135,209) (31,311,340)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings, money market and demand deposits (2,220,837) (2,559,969)
Net increase in certificates of deposit 18,876,100 8,514,016
Net increase in Federal Home Loan Bank overnight borrowings 17,192,000 --
Net (decrease) increase in repurchase agreements with financial institutions (3,950,000) 25,000,000
Net increase (decrease) in repurchase agreements with customers 871,868 (4,547,198)
Net decrease in collateralized borrowings (242,929) (284,106)
Principal repayments on capital lease obligation (4,651) (4,412)
Dividends paid on common stock (379,896) (355,230)
------------ ------------
Net cash provided by financing activities 30,141,655 25,763,101
------------ ------------
Net decrease in cash and cash equivalents 395,834 (4,255,054)
CASH AND CASH EQUIVALENTS, at beginning of period 9,238,783 21,497,194
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 9,634,617 $ 17,242,140
============ ============
SUPPLEMENTAL INFORMATION Cash paid during the period for:
Interest on deposits and borrowings $ 2,612,221 $ 3,527,280
============ ============
Income taxes $ 1,000 $ 1,000
============ ============
Noncash investing and financing activities:
Accrued dividends declared $ 242,844 $ 355,736
============ ============
Transfer of loans to repossessed assets $ 65,747 $ 61,516
============ ============
Transfer of loans to foreclosed assets $ 475,000 $ --
============ ============
Increase in leases and other liabilities for
equipment payable related to financed leases $ 980,211 $ --
============ ============
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 $ (76,010) $ (358,757)
============ ============
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet at December 31, 2008 of First Litchfield
Financial Corporation (the "Company") has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
2. The accompanying unaudited consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted pursuant to such rules and
regulations. The accompanying financial statements and related notes
should be read in conjunction with the audited financial statements of the
Company and notes thereto for the fiscal year ended December 31, 2008.
These financial statements reflect, in the opinion of Management, all
adjustments, consisting of only normal recurring adjustments, necessary
for a fair presentation of the Company's financial position and the
results of its operations and its cash flows for the periods presented.
The results of operations for the three months ended March 31, 2009 are
not necessarily indicative of the results of operations that may be
expected for all of 2009.
During the first quarter of 2009, the Company entered into two interest
rate swap agreements to hedge certain interest rate exposures. The Company
does not use derivatives for speculative purposes. The Company applies
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS 133") as
amended, which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 requires the
Company to recognize all derivatives as either assets or liabilities in
its Consolidated Balance Sheets and to measure those instruments at fair
value. The estimated fair value is based primarily on projected future
swap rates.
The Company applies cash flow hedge accounting to interest rate swaps
designated as hedges of the variability of future cash flows from floating
rate liabilities due to the benchmark interest rate. The Company uses
regression analysis to perform an ongoing prospective and retrospective
assessment of these hedging relationships. Changes in the fair value of
these interest rate swaps are recorded to "net holding loss on cash flow
hedges" as a component of accumulated other comprehensive income (loss) in
Shareholders' equity, to the extent they are effective. Amounts recorded
to accumulated other comprehensive income (loss) are then reclassified to
interest expense as interest on the hedged borrowing is recognized. Any
ineffective portion of the change in fair value of these instruments is
recorded to interest expense.
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. Income
available to common shareholders has been reduced by preferred share
dividends and discount accretion related to the Company`s participation in
TARP Capital Purchase program. For the period ended March 31, 2009 this
amount totaled $137,430.
7
The following is information about the computation of net income per share
for the three month periods ended March 31, 2009 and 2008.
Three Months Ended
March 31, 2009
-------------------------------------------
Net Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common shareholders $ 266,250 2,356,875 $ 0.11
===========
Effect of Dilutive Securities
Options Outstanding -- --
----------- -----------
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions $ 266,250 2,356,875 $ 0.11
=========== =========== ===========
Three Months Ended
March 31, 2008
-------------------------------------------
Net Per Share
Income Shares Amount
----------- ----------- -----------
Basic Net Income Per Share
Income available to common shareholders $ 498,523 2,369,989 $ 0.21
===========
Effect of Dilutive Securities
Options Outstanding -- 939
----------- -----------
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions $ 498,523 2,370,928 $ 0.21
=========== =========== ===========
4. Other comprehensive loss which is comprised of the change in unrealized
gains and losses on available for sale securities, net cash flow hedges,
as well as net pension loss, is as follows:
Three Months Ended
March 31, 2009
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $ (129,859) $ 44,152 $ (85,707)
Less: reclassification adjustment for amounts recognized in net income -- -- --
----------- ----------- -----------
Unrealized holding losses on available for sale securities, net of taxes (129,859) 44,152 (85,707)
Net cash flow hedges, net of taxes (279,717) 95,104 (184,613)
Net pension loss, net of taxes (76,010) 25,843 (50,167)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $ (485,586) $ 165,099 $ (320,487)
=========== =========== ===========
Three Months Ended
March 31, 2008
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
----------- ----------- -----------
Unrealized holding losses arising during the period $(1,146,781) $ 389,905 $ (756,876)
Add: reclassification adjustment for amounts recognized in net income (11,942) 4,061 (7,881)
----------- ----------- -----------
Unrealized holding losses on available for sale securities, net of taxes (1,158,723) 393,966 (764,757)
Net pension loss, net of taxes (358,757) 121,977 (236,780)
----------- ----------- -----------
Total other comprehensive loss, net of taxes $(1,517,480) $ 515,943 $(1,001,537)
=========== =========== ===========
8
5. The Company's subsidiary, The First National Bank of Litchfield (the
"Bank") has a noncontributory defined benefit pension plan (the "Plan")
that covers substantially all employees who have completed one year of
service and have attained age 21. The benefits are based on years of
service and the employee's compensation during the last five years of
employment. During the first quarter of 2005, the Bank's pension plan was
curtailed. Prior to the Plan's curtailment, the Bank's funding policy was
to contribute amounts to the plan sufficient to meet the minimum funding
requirements set forth in ERISA, plus such additional amounts as the Bank
determined to be appropriate from time to time. The actuarial information
has been calculated using the projected unit credit method.
Components of net periodic benefit cost for the three months ended March
31:
2009 2008
---------- ----------
Service cost $ -- $ --
Interest cost 46,818 46,306
Expected return on plan assets (43,104) (50,363)
Amortization of unrealized loss 23,935 14,812
---------- ----------
Net periodic benefit cost $ 27,649 $ 10,755
========== ==========
6. The Bank is a member of the Federal Home Loan Bank of Boston (the
"FHLBB"). As a member of the FHLBB, the Bank has access to a preapproved
line of credit of up to 2% of its total assets and the capacity to borrow
up to 30% of its total assets. In accordance with an agreement with the
FHLBB, the Bank is required to maintain qualified collateral, as defined
in the FHLBB Statement of Products Policy, free and clear of liens,
pledges and encumbrances for the advances. FHLBB stock and certain loans
which aggregate approximately 100% of the outstanding advance are used as
collateral. The Company views its investment in the FHLBB stock as a
long-term investment. Accordingly, when evaluating for impairment, the
value is determined based on the ultimate recovery of the par value rather
than recognizing temporary declines in value. The determination of whether
a decline affects the ultimate recovery is influenced by criteria such as:
1) the significance of the decline in net assets of the FHLBB as compared
to the capital stock amount and length of time a decline has persisted; 2)
impact of legislative and regulatory changes on the FHLBB; and 3) the
liquidity position of the FHLBB. The FHLBB announced in February 2009 that
it will suspend its dividend for the first quarter of 2009, will likely
not pay any dividends for the remainder of 2009, and will continue its
moratorium on excess stock repurchases announced in December 2008. The
FHLBB noted their primary concern related to the impact of other than
temporary impairment ("OTTI") charges recorded on private label
mortgage-backed securities (MBS) as of December 31, 2008.
While the FHLBB announced that it remained adequately capitalized as of
December 31, 2008 in its February announcement, the Company is unable to
determine if the potential additional charges to earnings will change this
regulatory capital classification. The Company does not believe that its
investment in the FHLBB is impaired as of this date. However, this
estimate could change in the near term as a result of any of the following
events: 1) additional significant impairment losses are incurred on the
MBS causing a significant decline in the FHLBB's regulatory capital
status; 2) the economic losses resulting from credit deterioration on the
MBS increases significantly; and 3) capital preservation strategies being
utilized by the FHLBB become ineffective.
9
Federal Home Loan Bank advances as of March 31, 2009 are as follows:
overnight $ 18,800,000 @ 0.3125%
due 10/02/2009 6,000,000 @ 4.50%
due 11/30/2009 5,000,000 @ 3.95%
due 6/24/2010 5,000,000 @ 4.15%
due 11/02/2010 10,000,000 @ 4.45%
due 5/29/2012 5,000,000 @ 4.32%
due 5/02/2014 7,000,000 @ 4.59% , callable 5/3/2010
due 8/20/2014 7,000,000 @ 4.25% , callable 8/20/2009
due 5/05/2016 10,000,000 @ 4.53% , callable 5/5/2009
due 3/23/2017 10,000,000 @ 4.29% , callable 6/23/2009
due 7/20/2017 10,000,000 @ 4.29% , callable 4/22/2009
due 11/20/2017 5,000,000 @ 4.29% , callable 11/19/2012
------------
Total $ 98,800,000
============
As of March 31, 2009, the Bank had borrowings under repurchase agreements
with financial institutions totaling $22,500,000. This amount includes
borrowings:
due 3/12/2013 12,500,000 @ 3.19% , callable 3/12/2011
due 5/23/2013 10,000,000 @ 3.64% , callable 5/23/2011
------------
Total $ 22,500,000
============
7. A reconciliation of the anticipated income tax expense (computed by
applying the Federal statutory income tax rate of 34% to the income before
taxes) to the provision for income taxes as reported in the statements of
income is as follows:
For the three months ended March 31,
---------------------------------------------------
2009 2008
---------------------- ----------------------
Provision for income taxes at statutory Federal rate $ 167,870 34% $ 190,185 34%
Increase (decrease) resulting from:
Tax exempt income (107,950) (22) (148,844) (27)
Nondeductible interest expense 6,560 1 14,233 3
Other 3,434 1 5,271 1
---------- ------ ---------- ------
Provision for income taxes $ 69,914 14% $ 60,845 11%
========== ====== ========== ======
10
8. The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of securities which are classified as available
for sale and held to maturity at March 31, 2009 and December 31, 2008 are
as follows:
AVAILABLE FOR SALE March 31, 2009
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Debt Securities:
U.S. Treasury securities $ 3,100,704 $ 90,274 $ -- $ 3,190,978
U.S. Government Agency securities 15,000,000 28,720 (12,280) 15,016,440
State and Municipal Obligations 19,927,961 47,006 (983,740) 18,991,227
Trust Preferred Securities 486,493 105,968 -- 592,461
------------- ------------- ------------- -------------
38,515,158 271,968 (996,020) 37,791,106
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA 9,458,200 176,100 (1,021) 9,633,279
FNMA 34,027,854 568,570 (81,523) 34,514,901
FHLMC 30,958,875 301,713 (90,782) 31,169,806
------------- ------------- ------------- -------------
74,444,929 1,046,383 (173,326) 75,317,986
------------- ------------- ------------- -------------
Marketable Equity Securities 2,060,106 -- (39,337) 2,020,769
------------- ------------- ------------- -------------
Total available for sale securities $ 115,020,193 $ 1,318,351 $ (1,208,683) $ 115,129,861
============= ============= ============= =============
December 31, 2008
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Debt Securities:
U.S. Treasury securities $ 3,110,574 $ 107,876 $ -- $ 3,218,450
U.S. Government Agency securities 26,500,000 65,763 (3,386) 26,562,377
State and Municipal Obligations 19,931,000 77,501 (376,069) 19,632,432
Trust Preferred Securities 493,615 -- -- 493,615
------------- ------------- ------------- -------------
50,035,189 251,140 (379,455) 49,906,874
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA 9,495,917 12 (8,094) 9,487,835
FNMA 35,675,421 467,875 (263,567) 35,879,729
FHLMC 14,994,269 210,723 (9,228) 15,195,764
------------- ------------- ------------- -------------
60,165,607 678,610 (280,889) 60,563,328
------------- ------------- ------------- -------------
Marketable Equity Securities 3,045,878 -- (29,879) 3,015,999
------------- ------------- ------------- -------------
Total available for sale securities $ 113,246,674 $ 929,750 $ (690,223) $ 113,486,201
============= ============= ============= =============
HELD TO MATURITY March 31, 2009
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 16,084 $ 318 $ -- $ 16,402
============= ============= ============= =============
December 31, 2008
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 16,550 $ 3 $ -- $ 16,553
============= ============= ============= =============
11
At March 31, 2009, thirty-seven securities have unrealized losses. At
March 31, 2009, gross unrealized holding losses on available for sale and
held to maturity securities totaled $1,208,683. Of the securities with
unrealized losses, there were sixteen 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 $818,176 at March 31,
2009. The following summarizes by investment security type, the basis for
the conclusion that the applicable investment securities within the
Company's available for sale portfolio were not other-than-temporarily
impaired at March 31, 2009.
Trust Preferred Securities - As of March 31, 2009 there were no unrealized
losses on the Company's investment in corporate bonds and notes. As of
March 31, 2009, this portfolio consisted of two pooled trust preferred
securities with a carrying value of $486,493 and a market value of
$592,461. During the first quarter of 2009, both securities were
downgraded to a rating of Ca indicating a more severe deterioration in the
creditworthiness of the underlying issuers of these securities. As a
result, the Company recorded OTTI losses effective as of December 31, 2008
and wrote them down to their current carrying values.
Equity securities - The unrealized losses on the Company's investment in
four marketable equity securities totaled $39,337, which was an increase
from the unrealized losses of $29,879 as of December 31, 2008. As of March
31, 2009, this portfolio consists of a marketable investment fund with a
fair value of $1,960,663, a money market fund with a fair value of
$60,104, and perpetual preferred stock of government sponsored enterprises
which have been written down to a fair value of $2. Given the small
unrealized loss remaining in this segment of the portfolio, and the
Company's ability and intent to hold the investments for a reasonable
period of time sufficient for a forecasted recovery of amortized cost, the
Company does not consider these investments to be other-than-temporarily
impaired at March 31, 2009.
Mortgage-backed securities - The unrealized losses on the Company's
investment in mortgage-backed securities decreased from $280,889 at
December 31, 2008 to $173,326 at March 31, 2009. There were no OTTI
charges for the three months ended March 31, 2009. These securities are
U.S. Government Agency or sponsored agency securities and the contractual
cash flows for these investments are performing as expected. Management
believes the decline in fair value is attributable to investor's
perception of credit and the lack of liquidity in the marketplace. The
Company expects to collect all principal and interest on these securities
and has the ability and intent to hold these investments until a recovery
of amortized cost, which may be at maturity. The Company does not consider
these investments to be other-than-temporarily impaired at March 31, 2009.
State and Municipal Obligations - The unrealized losses on the Company's
investment in state and municipal obligations increased from $376,069 at
December 31, 2008 to $983,740 at March 31, 2009. There were no OTTI
charges for these securities during the first quarter of 2009. The
increase in the unrealized loss at March 31, 2009 is attributable to
concerns about the economy, credit, lack of bank participation in this
market and downgrades of the monoline insurers as well as some perceived
lack of credibility of the credit rating agencies. As of March 31, 2009,
all securities are performing, the Company is receiving all interest and
principal payments as contractually agreed, and all these securities are
rated as investment grade. The Company does not consider these investments
to be other-than-temporarily impaired at March 31, 2009.
U.S. Government Agency Securities - The unrealized losses on the Company's
investment in these securities increased from $3,386 at December 31, 2008
to $12,280 at March 31, 2009. Given the small unrealized loss remaining in
this segment of the portfolio, and the Company's ability and intent to
hold the investments for a reasonable period of time sufficient for a
recovery of amortized cost, the Company does not consider these
investments to be other-than-temporarily impaired at March 31, 2009.
12
9. A summary of the Bank's loan and lease portfolio at March 31, 2009 and
December 31, 2008 is as follows:
2009 2008
------------- -------------
Real estate--residential mortgage $ 195,574,353 $ 192,561,108
Real estate--commercial mortgage 76,397,014 67,454,925
Real estate--construction 41,524,670 38,153,503
Commercial Loans 47,023,206 46,249,689
Commercial Leases (net of unearned
discount of $3,225,580-2009, $2,501,895-2008) 28,349,650 19,785,870
Installment 4,867,299 5,113,400
Other 1,689,679 128,574
------------- -------------
TOTAL LOANS AND LEASES 395,425,871 369,447,069
Net deferred loan origination costs 608,208 562,242
Premiums on purchased loans 65,875 81,588
Allowance for loan and lease losses (3,593,824) (3,698,820)
------------- -------------
NET LOANS AND LEASES $ 392,506,130 $ 366,392,079
============= =============
The following information relates to impaired loans and leases, which
include all nonaccrual loans and leases and other loans and leases past
due 90 days or more, and all restructured loans and leases, as of and for
the three months ended March 31, 2009 and December 31, 2008.
March 31, December 31,
2009 2008
-------------- --------------
Loans and leases receivable for which there is a related allowance for loan
and lease losses $ 3,373,637 $ 6,225,481
============== ==============
Loans and leases receivable for which there is no related allowance for loan
and lease losses $ 4,604,784 $ 2,657,655
============== ==============
Allowance for loan and lease losses related to impaired loans and leases $ 647,724 $ 939,066
============== ==============
10. A summary of the Bank's deposits at March 31, 2009 and December 31, 2008
is as follows:
2009 2008
------------ ------------
Noninterest bearing:
Demand $ 69,381,530 $ 69,548,261
------------ ------------
Interest bearing:
Savings 65,303,876 58,582,376
Money market 84,309,520 93,085,126
Time certificates of deposit in
denominations of $100,000 or more 63,537,494 41,003,855
Other time certificates of deposit 77,449,467 81,107,006
------------ ------------
Total Interest bearing deposits 290,600,357 273,778,363
------------ ------------
TOTAL DEPOSITS $359,981,887 $343,326,624
============ ============
13
Included in deposits as of March 31, 2009 and December 31, 2008 are
approximately $26,834,285 and $15,902,000, respectively, of brokered
deposits which have varying maturities through March 2010 and December
2009, respectively.
11. During 2007, the Company approved a restricted stock plan (the "2007
Plan") for senior management. On February 15, 2008, the Company granted
3,500 restricted stock awards to senior management from the 2007 Plan.
These awards vest over a five-year period, or earlier if the senior
manager ceases to be a senior manager for 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 measures the fair
value of the awards based on the average of the high price and low price
at which the Company's common stock traded on the date of the grant. For
the three months ended March 31, 2009, $2,294 was recognized as
compensation expense under the 2007 Plan. At March 31, 2009, unrecognized
compensation cost of $35,179 related to these awards is expected to vest
over a weighted average period of 4 years.
A summary of unvested shares as of and for the three months ended March
31, 2009, is as follows:
Weighted Average
Shares Grant Date
(in thousands) Fair Value
-------------- ----------------
Unvested at January 1, 2009 3,493 $ 13.11
Granted -- --
Vested (2) --
Forfeited -- --
----------- -----------
Unvested at March 31, 2009 3,491 $ 13.11
=========== ===========
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 Company and the Bank. The
Leasing segment is defined as the results of First Litchfield Leasing
Corporation. Because First Litchfield Leasing Corporation is a relatively
new subsidiary, methodologies and organizational hierarchies are newly
developed and will be subject to periodic review and revision. The
following presents the operating results and total assets for the segments
of the Company as of and for the three months ended March 31, 2009 and
2008. 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.
14
Three Months Ended
March 31, 2009
-----------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,699,571 $ 272,996 $ -- $ 3,972,567
Provision for credit losses 233,574 36,426 -- 270,000
------------- ------------- ------------- -------------
Net interest income after provision 3,465,997 236,570 -- 3,702,567
Noninterest income 814,046 -- -- 814,046
Noninterest expense 3,935,944 86,935 -- 4,022,879
------------- ------------- ------------- -------------
Income before income taxes 344,099 149,635 -- 493,734
Income tax provision 20,981 48,933 -- 69,914
------------- ------------- ------------- -------------
Net income $ 323,118 $ 100,702 $ -- $ 423,820
============= ============= ============= =============
Total assets as of March 31, 2009 $ 561,220,666 $ 31,369,892 $ (42,305,871) $ 550,284,687
============= ============= ============= =============
Three Months Ended
March 31, 2008
-----------------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,444,275 $ 133,114 $ -- $ 3,577,389
Provision for credit losses 42,987 32,013 -- 75,000
------------- ------------- ------------- -------------
Net interest income after provision 3,401,288 101,101 -- 3,502,389
Noninterest income 856,022 -- -- 856,022
Noninterest expense 3,706,383 92,660 -- 3,799,043
------------- ------------- ------------- -------------
Income before income taxes 550,927 8,441 -- 559,368
Income tax provision 58,640 2,205 -- 60,845
------------- ------------- ------------- -------------
Net income $ 492,287 $ 6,236 $ -- $ 498,523
============= ============= ============= =============
Total assets as of March 31, 2008 $ 556,409,543 $ 14,865,306 $ (37,249,245) $ 534,025,604
============= ============= ============= =============
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).
Effective January 1, 2009, the Company adopted Financial Accounting
Standards Board Staff Position ("FSP") No. 157-2, "Effective Date of FASB
Statement No. 157," for non-financial assets and non-financial
liabilities.
SFAS 157 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value:
15
Level 1 Quoted prices in active markets for identical assets or
liabilities. Level 1 assets include debt and equity securities
that are traded in an active exchange market, as well as U.S.
Treasury securities, that are highly liquid and are actively
traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are
observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 2 assets and liabilities include debt securities with
quoted prices that are traded less frequently than
exchange-traded instruments whose value is determined using a
pricing model with inputs that are observable in the market or
can be derived principally from or corroborated by observable
market data. This category generally includes other U.S.
Government and agency mortgage-backed and debt securities,
state and municipal obligations, corporate and other bonds,
and equity securities quoted in markets that are not active.
Also included are interest rate swaps, certain
collateral-dependent impaired loans and foreclosed property.
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination
of fair value requires significant management judgment or
estimation. For example, this category could include certain
private equity investments, and certain collateral-dependent
impaired loans.
The following table details the financial instruments that are carried at
fair value and measured at fair value on a recurring basis as of March 31, 2009
and December 31, 2008 and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine fair value:
Fair Value Measurements at March 31, 2009, Using
Quoted Prices in Significant
March Active Markets for Significant Other Unobservable
31, 2009 Identical Assets Observable Inputs Inputs
Total (Level 1) (Level 2) (Level 3)
------------- ------------------- ----------------- -------------
Assets:
Available for sale securities $ 115,129,861 $ 5,151,643 $ 109,978,218 $ --
============= ============= ============= =============
Liabilities:
Interest rate swaps $ 279,717 $ -- $ 279,717 $ --
============= ============= ============= =============
Fair Value Measurements at December 31, 2008, Using
Quoted Prices in Significant
December Active Markets for Significant Other Unobservable
31, 2008 Identical Assets Observable Inputs Inputs
Total (Level 1) (Level 2) (Level 3)
------------- ------------------- ----------------- -------------
Assets:
Available for sale securities $ 113,486,201 $ 5,188,571 $ 108,297,630 $ --
============= ============= ============= =============
Liabilities:
Interest rate swaps $ -- $ -- $ -- $ --
============= ============= ============= =============
As of March 31, 2009 and December 31, 2008, U.S. Treasury securities and
one equity security, with carrying values of $5,151,643 and $5,188,571,
respectively, are the only assets whose fair values are measured on a
recurring basis using Level 1 inputs (active market quotes).
16
The fair values of U. S. Government and agency mortgaged backed securities
and debt securities, State and Municipal obligations, trust preferred
securities, and certain equity securities are measured on a recurring
basis, using Level 2 inputs of observable market data on similar
securities. As of March 31, 2009 and December 31, 2008, the carrying
values of these securities totaled $109,978,218 and $108,297,630,
respectively.
Interest rate swaps are reported at fair value utilizing Level 2 inputs
obtained from third parties to value interest rate swaps. Fair values are
compared to other independent third party values for reasonableness.
The following tables detail the assets and liabilities carried at fair
value and measured at fair value on a nonrecurring basis as of March 31,
2009 and December 31, 2008 and indicate the fair value hierarchy of the
valuation techniques utilized by the Company to determine the fair value:
March 31, 2009
-----------------------------------------------------------------------------
Quoted Prices in Significant Significant
Balance Active Markets for Observable Unobservable
as of Identical Assets Inputs Inputs
March 31, 2009 (Level 1) (Level 2) (Level 3)
-------------- ------------------ -------------- --------------
Financial assets held at fair value
Foreclosed Property (1) $ 475,000 $ -- $ 475,000 $ --
============== ============== ============== ==============
Impaired Loans (1) $ 5,473,572 $ -- $ -- $ 5,473,572
============== ============== ============== ==============
(1) Represents carrying value and related write-downs for which
adjustments are based on the appraised value.
December 31, 2008
-----------------------------------------------------------------------------
Quoted Prices in Significant Significant
Balance Active Markets for Observable Unobservable
as of Identical Assets Inputs Inputs
December 31, 2008 (Level 1) (Level 2) (Level 3)
----------------- ------------------ -------------- --------------
Financial assets held at fair value
Foreclosed Property (1) $ -- $ -- $ -- $ --
============== ============== ============== ==============
Impaired Loans (1) $ 3,271,452 $ -- $ 694,650 $ 2,576,802
============== ============== ============== ==============
(1) Represents carrying value and related write-downs for which
adjustments are based on the appraised value.
The Company has no other assets or liabilities carried at fair value or
measured at fair value on a nonrecurring basis.
14. Interest Rate Swaps and Derivative Instruments
The Company manages its interest rate risk by using derivative instruments
in the form of interest rate swaps designed to reduce interest rate risk
by effectively converting a portion of floating rate debt into fixed rate
debt. This action reduces the Company's risk of incurring higher interest
costs in periods of rising interest rates. On February 2, 2009, the
Company entered into two interest rate swap agreements through March of
2014 and 2019, respectively; however, the settlements under the swaps
commenced March 30, 2009. Payments under the swap agreements will continue
on the 30th of each quarter end. The Company is accounting for the
interest rate swap agreements as effective cash flow hedges (see Notes 4
and 13). The notional principal amounts of these swaps were $6,800,000 and
$3,000,000 and the variable interest rate amounts on related debt were
swapped for effective fixed rates of 5.79% and 4.86%, respectively. These
swaps are designated as cash flow hedges and qualify for hedge accounting
treatment under SFAS No 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No 133').
In accordance with SFAS No 133, the Company's derivative instruments are
recorded as assets or liabilities at fair value. Changes in fair value
derivatives that have been designated as cash flow hedges
17
are included in "Unrealized losses on cash flow hedges" as a component of
other comprehensive income to the extent of the effectiveness of such
hedging instruments. Any ineffective portion of the change in fair value
of the designated hedging instruments would be included in the
Consolidated Statements of Income in interest (income) expense. No hedge
ineffectiveness on cash flow hedges was recognized during the three months
ended March 31, 2009, and Management does not anticipate to recognize any
throughout the terms of the swaps. Gains and losses are reclassified from
accumulated other comprehensive income to the Consolidated Statements of
Income in the period the hedged transaction affects earnings.
Amounts reported in accumulated other comprehensive income related to
derivatives will be reclassified to interest expense as interest payments
are made on the Company's variable-rate debt. Amounts in other
comprehensive income will be reclassified into interest expense over the
term of the swap agreements to achieve the fixed rate on the debt.
Over the next twelve months, the Company estimates that an addition
$166,767 will be reclassified as an increase to interest expense.
The gross carrying values of the interest rate contracts as of March 31,
2009 were $279,717 and were recorded in other liabilities on the
Consolidated Balance Sheets. For the three months ended March 31, 2009,
the amount of loss recognized on the effective portion of these interest
rate contracts in accumulated other comprehensive income on the condensed
Consolidated Balance Sheets was $184,613. For the quarter ended March 31,
2009, there were no losses on the effective portion of these interest rate
contracts reclassified from accumulated other comprehensive loss on the
balance sheet into interest expense on the Consolidated Statement of
Income. These interest rate swap agreements contain no credit-risk-related
contingency features. Associated with these swaps, as of March 31, 2009,
the Company was required to post collateral with a fair value totaling
$300,000 to cover the estimated peak exposure of these swaps. No
additional collateral is or will be required to be posted.
15. Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted the provisions of SFAS No.
157, "Fair Value Measurements," for financial assets and financial
liabilities. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. Effective January 1,
2009, Company adopted Financial Accounting Standards Board Staff Position
("FSP") No. 157-2, "Effective Date of FASB Statement No. 157," for
non-financial assets and non-financial liabilities.
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 was 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 is to
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 is to 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. Earlier adoption is prohibited. The
18
Company adopted SFAS 160 beginning on January 1, 2009 and with the
adoption, presented $74,015 as equity in the Company's consolidated
financial statements and modified the presentation of the Company's
financial statements as of March 31, 2009 and December 31, 2008 and the
periods ended March 31, 2009 and 2008.
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 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those years. All prior-period EPS data presented shall be
adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this FSP. Early application is not permitted. The Company
adopted the FSP for the quarter ended March 31, 2009; the adoption of this
FSP did not have a significant effect on the Company's financial
statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities -- an amendment of FASB Statement No.
133" ("SFAS No. 161"). SFAS No. 161 requires enhanced disclosures about
how and why an entity uses derivative instruments, how derivative
instruments and related items are accounted for under SFAS No. 133 and how
derivative instruments and related hedged items affect an entity's
financial position, financial performance and cash flows. The Company
adopted this standard January 1, 2009. SFAS No. 161 enhanced disclosures
as required under SFAS No. 161 and are included in the Company's financial
statements for March 31, 2009.
In January 2009, the FASB issued FASB Staff Position ("FSP") No. EITF
99-20-1, "Amendments to the Impairment Guidance of EITF Issue No. 99-20,"
("FSP No. EITF 99-20-1"), which amends the impairment guidance in Emerging
Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transferor in Securitized
Financial Assets," ("EITF No. 99-20"). The FSP revises EITF 99-20's
impairment guidance for beneficial interests to make it consistent with
the requirements of FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("SFAS No. 115") for
determining whether an impairment of other debt and equity securities has
occurred. The impairment model in SFAS No. 115 enables greater judgment to
be exercised in determining whether an OTTI loss needs to be recorded. The
impairment model previously provided for in EITF 99-20 limited
management's use of judgment in applying the impairment model. FSP EITF
No. 99-20-1 was effective as of January 1, 2009. The adoption of FSP No.
EITF No. 99-20-1 did not have a material impact on the Company's
consolidated financial statements.
In April 2009, the FASB issued Staff Position No. FAS 157-4, "Determining
Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly," ("FSP 157-4"). This FSP addresses concerns that FASB
Statement No. 157, Fair Value Measurements, emphasized the use of an
observable market transaction even when that transaction may not have been
orderly or the market for that transaction may not have been active. FSP
157-4 provides additional guidance on: (a) determining when the volume and
level of activity for the asset or liability has significantly decreased;
(b) identifying circumstances in which a transaction is not orderly; and
(c) understanding the fair value measurement implications of both (a) and
(b). The effective date of disclosures for this new standard is for
interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009, only if
this FSP is adopted at the same time as FSP No. FAS 115-2 and FAS 124-2
and FSP No. FAS 107-1 and
19
APB 28-1. The Company is evaluating the impact of this new standard and
will adopt this new standard for the three months ended June 30, 2009.
In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP
115-2 and 124-2"). This FSP amends the OTTI guidance for debt securities
to make the guidance more operational and to improve the presentation and
disclosure of OTTI in the financial statements. The most significant
change the FSP brings is a revision to the amount of other-than-temporary
loss of a debt security recorded in earnings. The effective date of
disclosures for this new standard is for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009, only if this FSP is adopted at the
same time as FSP No. FAS 157-4 and FSP No. FAS 107-1 and APB 28-1. The
Company is evaluating the impact of this new standard and will adopt this
new standard for the three months ended June 30, 2009.
In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1,
"Interim Disclosures about Fair Value of Financial Instruments," ("FSP
107-1" and "APB 28-1"). This FSP amends FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments," to require
disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, "Interim
Financial Reporting," to require those disclosures in summarized financial
information at interim reporting periods. The effective date of
disclosures for this new standard is for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009, only if this FSP is adopted at the
same time as FSP No. FAS 115-2 and FAS 124-2 and FSP No. FAS 157-4. The
Company is evaluating the impact of this new standard and will adopt this
new standard for the three months ended June 30, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
First Litchfield Financial Corporation (the "Company"), a Delaware corporation
formed in 1988, is the one-bank holding company for The First National Bank of
Litchfield (the "Bank"), a national bank supervised and examined by the Office
of the Comptroller of the Currency (the "OCC"). The Bank is the Company's
primary subsidiary and only source of income. The Bank has three subsidiaries,
The Lincoln Corporation and Litchfield Mortgage Service Corporation, which are
Connecticut corporations, and First Litchfield Leasing Corporation ("First
Litchfield Leasing"), which is a Delaware corporation. The purpose of The
Lincoln Corporation is to hold property such as real estate, personal property,
securities, or other assets, acquired by the Bank through foreclosure or
otherwise to compromise a doubtful claim or collect a debt previously
contracted. The purpose of Litchfield Mortgage Service Corporation is to operate
as a passive investment company in accordance with Connecticut law. The purpose
of First Litchfield Leasing is to provide equipment financing and leasing
products to complement the Bank's array of commercial products.
Both the Company and the Bank are headquartered in Litchfield, Connecticut. The
Bank is a full-service commercial bank serving both individuals and businesses
generally within Litchfield County Connecticut. Deposits are insured up to
specific limits of the Federal Deposit Insurance Act by the Deposit Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation. The
Bank's lending activities include loans secured by residential and commercial
mortgages. Other loan products include consumer and business installment
lending, as well as other secured and unsecured lending. The Bank has nine
banking locations located in the towns of Canton, Torrington, Litchfield,
Washington, Marble Dale, Goshen, Roxbury and New Milford, Connecticut. In 1975,
the Bank was granted Trust powers by the OCC. The Bank's Trust Department
provides trust and fiduciary services to individuals, nonprofit organizations
and commercial
20
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 March 31, 2009 were $550,284,687, an increase of $18,027,080,
or 3.39% from year-end 2008 total assets of $532,257,607.
Net loans and leases increased $26,114,051 or 7.3% over the year-end 2008
amount. Net loans and leases as of March 31, 2009 were $392,506,130, as compared
to the year-end 2008 level of $366,392,079. Consistent with Management's
strategy to migrate to a more profitable loan composition, commercial loan and
lease growth was strong during the first quarter of 2009. Leases, net of
unearned income, were $28,349,650 at March 31, 2009, which was an increase of
$8,563,780 or 43.28% from the year-end 2008 balance of $19,785,870. The growth
in the leasing portfolio is in relatively short-term equipment financing.
Commercial mortgages totaled $76,397,014 at March 31, 2009, which was an
increase of $8,942,089 or 13.26% from year-end 2008. Growth in commercial
mortgages has been in fixed and variable rate products to commercial customers
located in our traditional and contiguous markets. Construction mortgages
totaled $41,524,670 as compared to the year-end balance of $38,153,503. Growth
in this portfolio during the first quarter was in commercial construction loans.
The residential mortgage loan portfolio totaled $195,574,353, which was an
increase of $3,013,245 from year-end 2008. Much of this growth was in the home
equity loans.
As of March 31, 2009, the securities portfolio totaled $115,145,945, as compared
to the year-end 2008 balance of $113,502,751. During the first quarter of 2009,
approximately $11 million in U.S. Government agency bonds were called. These
bonds were replaced with mortgage-backed securities with characteristics of
shorter duration and improved liquidity.
At year-end 2008, the due from broker for security sales totaled $9,590,823, as
a result of a security traded before December 31, 2008 with proceeds not
received until January 2009. There were no similar transactions at March 31,
2009.
Cash and cash equivalents totaled $9,634,617, as compared to the balance of
$9,238,783 at year-end 2008. Cash and cash equivalents is comprised of vault
cash, Federal funds sold, balances at correspondent banks and the Federal
Reserve Bank.
As of March 31, 2009, the Company had a balance of $475,000 in foreclosed real
estate. There was no similar amount at year-end 2008.
Total liabilities were $517,954,640 as of March 31, 2009, which was an increase
of $18,164,297 from total liabilities of $499,790,343 as of year-end 2008. Total
deposits increased by $16,655,263, or 4.85% from their year-end levels. Time
certificates of deposit totaled $140,986,961 as of March 31, 2009, which was an
21
increase of 15.46%, or $18,876,100 from year-end 2008. The increase in time
deposits is reflective of the customer's desire for yield and the shifting of
money market deposits into short term certificates of deposit. Additionally,
growth has also been in the Bank's CDARs deposits, which provides FDIC deposit
insurance, beyond the $250,000 limit. Savings deposits totaled $65,303,876 at
March 31, 2009 which was an increase of 11.47% from the year-end 2008 balance.
Growth in savings deposits has been in traditional savings and municipal NOW
accounts. Money market deposits decreased by $8,775,606, or 9.43%, as a result
of customers seeking higher rates as well to lock in those rates via
certificates of deposit.
As of March 31, 2009, repurchase agreements with customers totaled $19,094,439,
which was an increase of 4.78% from the year-end 2008 balance. Because these
accounts represent overnight investments by commercial and municipal cash
management customers, fluctuations in the balances of these accounts are
reflective of the temporary nature of these funds. During the first quarter of
2009, advances under Federal Home Loan Bank borrowings increased by $17,192,000,
while repurchase agreements with financial institutions decreased by $3,950,000.
The overall increase in wholesale borrowing is a result of the growth in the
loan and lease portfolio during the first quarter. As mentioned previously, the
growth in the loan and lease portfolio totaled $26.1 million and outpaced the
$16.7 million in deposit growth.
RESULTS OF OPERATIONS- THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2008
Summary
Net income available to common shareholders for the first quarter of 2009
totaled $266,250 versus net income of $498,523 for the first quarter of 2008.
Basic and diluted net income per common share for the first quarter of 2009 were
both $.11, compared to basic and diluted income per share of $.21 for the first
quarter of 2008. The decrease in net income available to common shareholders is
due primarily to increases in the provision for loans and lease losses and other
noninterest expenses. Additionally contributing to the decrease is the dividend
payable on preferred shares.
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 March 31,
2009 2008
----------- -----------
Interest and dividend income $ 6,561,229 $ 7,256,436
Tax-equivalent adjustments (1) 103,798 153,604
Interest expense (2,588,662) (3,679,047)
----------- -----------
Net interest income $ 4,076,365 $ 3,730,993
=========== ===========
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
22
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 March
31, 2009 and 2008. Average loans outstanding include nonaccruing loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Three months ended March 31, 2009 Three months ended March 31, 2008
----------------------------------------- ------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
Assets
Interest Earning Assets:
Loans and leases $ 379,642,000 $ 5,393,138 5.68% $ 334,537,000 $ 5,528,611 6.61%
Investment securities 117,522,000 1,257,051 4.28% 145,219,000 1,834,637 5.05%
Other interest earning assets 4,486,000 14,838 1.32% 6,302,000 46,792 2.97%
------------- ------------- ------------- -------------
Total interest earning assets 501,650,000 6,665,027 5.31% 486,058,000 7,410,040 6.10%
------------- ------------- ----- ------------- ------------- -----
Allowance for loan and
lease losses (3,723,000) (2,173,000)
Cash and due from banks 13,566,000 11,346,000
Premises and equipment 7,333,000 7,726,000
Net unrealized losses on
securities (255,000) (673,000)
Other assets 20,387,000 15,978,000
------------- -------------
Total Average Assets $ 538,958,000 $ 518,262,000
============= =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 63,882,000 111,497 0.70% $ 58,398,000 189,676 1.30%
Money Market deposits 88,926,000 280,172 1.26% 82,963,000 456,767 2.20%
Time deposits 133,130,000 885,931 2.66% 134,172,000 1,452,676 4.33%
Borrowed funds 143,879,000 1,311,062 3.64% 144,321,000 1,579,928 4.38%
------------- ------------- ------------- -------------
Total interest bearing liabilities 429,817,000 2,588,662 2.41% 419,854,000 3,679,047 3.51%
------------- ----- ------------- -----
Demand deposits 68,383,000 64,714,000
Other liabilities 8,087,000 4,834,000
Shareholders' Equity 32,671,000 28,860,000
------------- -------------
Total liabilities and equity $ 538,958,000 $ 518,262,000
============= =============
Net interest income $ 4,076,365 $ 3,730,993
============= =============
Net interest spread 2.90% 2.59%
===== =====
Net interest margin 3.25% 3.07%
===== =====
23
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the three months ended March 31, 2009 when compared to the three
months ended March 31, 2008 in net interest income arising from changes in
interest rates and from asset and liability volume mix. The change in interest
attributable to both rate and volume has been allocated to the changes in the
rate and the volume on a pro rata basis.
03/31/09 Compared to 03/31/08
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans and leases $ 694,143 $ (829,616) $ (135,473)
Investment securities (379,656) (197,930) (577,586)
Other interest earning assets (10,928) (21,026) (31,954)
----------- ----------- -----------
Total interest earning assets 303,559 (1,048,572) (745,013)
----------- ----------- -----------
Interest paid on:
Deposits 76,526 (898,045) (821,519)
Borrowed money (4,853) (264,013) (268,866)
----------- ----------- -----------
Total interest bearing liabilities 71,673 (1,162,058) (1,090,385)
----------- ----------- -----------
Increase in net interest income $ 231,886 $ 113,486 $ 345,372
=========== =========== ===========
Tax-equivalent net interest income for the first quarter of 2009 totaled
$4,076,365, an increase of $345,372, or 9.13% from the first quarter of 2008.
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 $231,886. 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 $113,486 in additional net interest income.
Average earning assets for the first quarter of 2009 totaled $501,650,000, which
was $15,592,000 or 3.21% higher than average earning assets for the first
quarter of 2008 which totaled $486,058,000. This increase in earning assets,
contributed to an additional $303,559 in net interest income. Average loans and
leases increased by $45,105,000, or 13.48%, while average investments decreased
by $27,697,000 or 19.07%. The increase in loans and leases came from organic
growth in commercial leasing and mortgage lending. The decrease in the
securities portfolio is the result of the strategy to change the mix of earning
assets from investments to loans. The mix of earning assets for the first
quarter of 2009 was 76% loans to 23% investments versus the first quarter 2008
mix of 69% loans to 30% investments.
The tax equivalent net interest margin improved 18 basis points from 3.07% in
the first quarter of 2008 to 3.25% for the first quarter of 2009. Funding costs
decreased by 110 basis points while the tax equivalent yield on earning assets
decreased by 79 basis points. The continued low interest rate environment has
allowed management to decrease its deposit rates over the last year. Although
yields on earning assets have been subject to similar declines, the
aforementioned strategy to shift to a more profitable mix of earning assets has
offset some of this decline. Additionally, many interest earning assets are
priced off of longer market indices, which are not as dramatically impacted by
decreases in short term rates. Retail deposits are the primary source of the
Company's funding; therefore, competition for these deposits remains the biggest
threat to the net interest margin.
24
Provision for Loan and Lease Losses
The provision for loan and lease losses for the first quarter of 2009 totaled
$270,000, which is an increase of $195,000 from the first quarter of 2008. The
provision for loan and lease losses is determined quarterly based on the
calculation of the allowance for loan and lease losses. (See discussion of the
Allowance for Loan and Lease Losses.)
During the first quarter of 2009, the Company recorded net charge-offs of
$374,996 compared to first quarter 2008 net charge-offs of $31,129. The change
in the level of charge-offs from 2008 to 2009 is due to residential loan
charge-offs in 2009 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 2008 to 2009 is considered by Management to be
reflective of a weakening consumer credit environment.
Noninterest Income
Noninterest income for the first quarter of 2009 totaled $814,046, versus first
quarter 2008 income of $856,022. The decrease in noninterest income is primarily
attributable to lower levels of fee income from the Bank's Trust and Wealth
Management activities.
Trust income totaled $272,056, compared to first quarter 2008 income of
$339,524. The decline from first quarter 2008 levels is due to market declines
of assets under management. Income from banking service charges and fees
increased by $18,008, or 5.22%, from the first quarter of 2008. This increase is
due primarily to higher levels of deposit service charges, wire transfer, and
master money interchange fees. Other noninterest income totaled $82,088, which
was an increase of $20,454, or 33.19% from the first quarter of 2008. This
increase is a result of income from the sale of residential mortgage loans in
the secondary market.
Noninterest Expense
First quarter 2009 noninterest expense totaled $4,022,879, increasing 5.89%, or
$223,836 from the first quarter 2008 expense of $3,799,043. Increases in
noninterest expenses are reflected in benefits, legal, computer services,
consulting fees and expenses for the management of foreclosed properties. The
impact of these increases was mitigated by cost containment efforts for
advertising, salaries, insurance, travel and memberships.
Other noninterest expenses totaled $733,995 which is an increase of $170,765, or
30.32% from the first quarter of 2008. The majority of the increase is a result
of higher 2009 costs for FDIC insurance, exam and audit fees which totaled
$213,601 above first quarter 2008 costs. In addition to the already increased
premiums for FDIC insurance, the Company is aware of the proposed increases to
the FDIC insurance expense via a one-time special assessment later this year.
This assessment could significantly increase other noninterest expense for the
year.
Income Taxes
The first quarter 2009 provision for income taxes totaled $69,914, which is an
increase of $9,069 or 14.91% from the first quarter of 2008 provision of
$60,845. The effective tax rate for the first quarter of 2009 was 14% as
compared to 11% for the first quarter of 2008. The higher tax rate is due to
decreased proportion of tax-exempt to taxable income in 2009.
25
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 March 31, 2009, the Company had $124,907,713 in loan commitments and
credit lines outstanding. Because some commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent all future cash requirements. The funding of these commitments is
anticipated to be met through deposits, loan and security amortizations and
maturities. Management believes liquidity is adequate to meet its present and
foreseeable needs.
CAPITAL
Shareholders' equity totaled $32,330,047 as of March 31, 2009 as compared with
$32,467,264 as of December 31, 2008. The decrease in shareholders' equity is due
to the Company's unrealized loss on available for sale securities, and other
comprehensive income charges related to the recognition of the unfunded pension
liability and cash flow hedges, as well as common and preferred dividends,
offset by net income. From a regulatory perspective, the capital ratios of the
Company and the Bank place each entity in the "well-capitalized" categories
under applicable regulations. During the third and fourth quarters of 2008 the
Company increased its investment in the Bank's equity by a total of $4,000,000.
During the first quarter of 2009, the Company increased its investment in the
Bank's equity by an additional $4,000,000. These actions were executed to insure
the Bank maintained capital at levels considered to be well-capitalized by the
federal banking agency capital adequacy guidelines.
The various capital ratios of the Company and the Bank are as follows as of
March 31, 2009:
Well-Capitalized
Capital Levels The Company The Bank
-------------- ----------- --------
TIER 1:
Leverage capital ratio 5.00% 7.44% 6.65%
Risk-based capital ratio 6.00% 10.36% 9.26%
Total risk-based capital ratio 10.00% 11.29% 10.20%
Included in the Company's capital used to determine these ratios at March 31,
2009 is $9.8 million related to the Company's investment in First Litchfield
Statutory Trust I and First Litchfield Statutory Trust II, which is recorded as
subordinated debt in the Company's balance sheets at March 31, 2009 and December
31, 2008, respectively. Trust preferred securities are currently considered
regulatory capital for purposes of determining the Company's Tier I capital
ratios. On March 1, 2005, the Board of Governors of the Federal Reserve System,
which is the Company's banking regulator, approved final rules that allow for
26
the continued inclusion of outstanding and prospective issuances of trust
preferred securities in regulatory capital subject to new, stricter limitations.
The Company has until March 31, 2011, (previously March 31, 2009), to meet the
new limitations. Management does not believe these final rules will have a
significant impact on the Company. On December 12, 2008 the Company participated
in the United States Department of the Treasury's Troubled Assets Relief Program
("TARP") Capital Purchase Program ("CPP".) CPP (also known as TARP capital), and
issued $10,000,000 of cumulative perpetual preferred stock with a common stock
warrant attached to the U. S. Treasury. The Company's purpose in participating
in the TARP CPP was to insure that the Company and the Bank maintained its
well-capitalized status given the uncertain economic environment.
On December 12, 2008, under the TARP CPP, the Company sold 10,000 shares of
senior preferred stock to the U.S. Treasury, having a liquidation amount equal
to $1,000 per share, or $10,000,000. Although the Company is currently
well-capitalized under regulatory guidelines, the Board of Directors believed it
was advisable to take advantage of the TARP CPP to raise additional capital to
ensure that during these uncertain times, the Company is well-positioned to
support the Company's existing operations as well as anticipated future growth.
Additional information concerning the TARP CPP is included in the Company's 2008
Form 10-K/A Amendment Number One, as filed with the Securities Exchange
Commission on April 23, 2009.
The Company expects that it (and the banking industry as a whole) may be
required by market forces and/or regulation to operate with higher capital
ratios than in the recent past. In addition, as the cumulative dividend rate on
the senior preferred stock issued in the TARP CPP increases from 5% to 9% in
2013, the Company will incur increased capital costs if the senior preferred
stock is not redeemed at or prior to that time. Therefore, in addition to
maintaining higher levels of capital, the Company's capital structure may be
subject to greater variation over the next few years than has been true
historically.
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Bank has made a number of estimates and
assumptions relating to the reported results of operations and financial
condition in preparing its financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ significantly from those estimates under different assumptions and
conditions.
The Bank utilizes a loan and lease review and rating process which classifies
loans and leases according to the Bank's uniform classification system in order
to identify potential problem loans and leases at an early stage, alleviate
weaknesses in the Bank's lending policies, oversee the individual loan and lease
rating system and ensure compliance with the Bank's underwriting, documentation,
compliance and administrative policies. Loans and leases included in this
process are considered by management as being in need of special attention
because of some deficiency related to the credit or documentation, but which are
still considered collectable and performing. Such attention is intended to act
as a preventative measure and thereby avoid more serious problems in the future.
ALLOWANCE FOR LOAN AND LEASE LOSSES:
The allowance for loan and lease losses consists of specific, general and
unallocated components. The specific component relates to loans and leases that
are classified as impaired. For impaired loans and leases an allowance is
established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan or lease is lower than the carrying value of
that loan or lease. The general component covers non-impaired loans and leases
and is based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
27
management's estimate or probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions.
The Bank makes provisions for loan and lease losses on a quarterly basis as
determined by a continuing assessment of the adequacy of the allowance for loan
and lease losses. The Bank performs an ongoing review of loans and leases in
accordance with an individual loan and lease rating system to determine the
required allowance for loan and lease losses at any given date. The review of
loans and leases is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective and is based on an evaluation of the known and inherent risk
characteristics and size of the loan and lease portfolios, the assessment of
current economic and real estate market conditions, estimates of the current
value of underlying collateral, past loan and lease loss experience, review of
regulatory authority examination reports and evaluations of impaired loans and
leases, and other relevant factors. Loans and leases, including impaired loans
and leases, are charged against the allowance for loan and lease losses when
management believes that the uncollectibility of principal is confirmed. Any
subsequent recoveries are credited to the allowance for loan and lease losses
when received. In connection with the determination of the allowance for loan
and lease losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties, when considered necessary.
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 March 31, 2009. 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 March 31, 2009, the allowance for loan and lease losses was equivalent to 52%
of total non-performing assets as compared with 66% of total non-performing
assets at December 31, 2008. As of March 31, 2009, non-performing assets, loans
and leases were $6,944,607 and represented 1.77% of total loans, leases and
OREO. As of December 31, 2008, non-performing assets and loans and leases
totaled $5,639,735 and represented 1.52% of total loans, leases and OREO. The
ratio of the allowance for such loan and lease losses to total loans and leases
at March 31, 2009 and December 31, 2008 was 0.91% and 1.00% respectively. The
ratio of the allowance for loan and lease losses to non-performing assets
declined over the first quarter of 2009 due mainly to the increase in
non-performing assets, however, the increase in those non-performing assets were
comprised of collateral-based loans which did not require a specific allocation
of the allowance for loan and lease losses and therefore did not result in an
increase to the allowance. Changes in the allowance for loan and lease losses
for the three month periods ended March 31, 2009 and 2008 are as shown below:
For the three months ended March 31, 2009 2008
----------- -----------
Balance at beginning of the year $ 3,698,820 $ 2,151,622
Provision for loan and lease losses 270,000 75,000
Loans and leases charged off (420,125) (36,260)
Recoveries of loans and leases previously charged-off 45,129 5,131
----------- -----------
Balance as of March 31, $ 3,593,824 $ 2,195,493
=========== ===========
The following table summarizes the Bank's Other Real Estate Owned ("OREO"), past
due in excess of 90 days and non-accrual loans and leases, and total
nonperforming assets as of March 31, 2009 and December 31, 2008.
28
March 30, 2009 December 31, 2008
-------------- -----------------
Nonaccrual loans and leases $ 6,469,607 $ 5,639,735
Other real estate owned 475,000 --
------------ ------------
Total nonperforming assets $ 6,944,607 $ 5,639,735
============ ============
Loans and leases past due in excess of 90 days and
accruing interest $ -- $ 19,603
============ ============
POTENTIAL PROBLEM LOANS
As of March 31, 2009, there were five loans totaling $1.5 million which are not
disclosed above which cause Management to have concern as to the ability of the
borrowers to comply with the present loan repayment terms. The Bank's carrying
value of these loans totaled $1.5 million at March 31, 2009. These loans are
still accruing interest but are classified as impaired. Although these loans are
currently performing, Management views them as having potential and well-defined
weaknesses that could jeopardize the liquidation of the debt.
OTHER THAN TEMPORARY IMPAIRMENT ("OTTI"): The Company's investment securities
portfolio is comprised of available-for-sale and held-to-maturity investments.
The available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains or losses, net of taxes, reported as accumulated other
comprehensive income or loss in shareholders' equity. The held-to-maturity
portfolio is carried at amortized cost. Management determines the classification
of a security at the time of its purchase.
The Company conducts a periodic review of our investment securities portfolio to
determine if the value of any security has declined below its cost or amortized
cost, and whether such decline is other-than-temporary. If such decline is
deemed other-than-temporary, the security is written down to a new cost basis
and the resulting loss is reported within non-interest income in the
consolidated statement of income.
Significant judgment is involved in determining when a decline in fair value is
other-than-temporary. The factors considered by Management include, but are not
limited to:
o The Company's intent and ability to retain the investment for a
period of time sufficient to allow for the anticipated recovery in
market value, which may be until maturity;
o Percentage and length of time by which an issue is below book value;
o Financial condition and near-term prospects of the issuer including
their ability to meet contractual obligations in a timely manner;
o Credit ratings of the security;
o Whether the decline in fair value appears to be issuer specific or,
alternatively, a reflection of general market or industry
conditions;
o Whether the decline is due to interest rates and spreads or credit
risk; and
o The value of underlying collateral.
Adverse changes in the factors used by management to determine if a security is
OTTI could lead to additional impairment charges. Conditions affecting a
security that the Company determined to be temporary could become other than
temporary and warrant an impairment charge. Additionally, a security that had no
apparent risk could be affected by a sudden or acute market condition
29
and necessitate an impairment charge. During the third and fourth quarters of
2008, the Company recorded OTTI losses totaling $9,422,650 related to the
Company's investments in Freddie Mac and Fannie Mae preferred stock/auction rate
securities holding such stock, and two pooled trust preferred securities. There
have been no OTTI losses during 2009.
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 March 31, 2009, there have been no significant changes in the Company's
off-balance sheet arrangements from December 31, 2008.
FORWARD-LOOKING STATEMENTS
This Quarterly Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and Bank, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general and
on the markets in which the Company and the Bank do business, and (b)
expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attractions of new deposit and loan
customers and the introduction of new products and services. Such
forward-looking statements are based on assumptions rather than historical or
current facts and, therefore, are inherently uncertain and subject to risk. For
those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business conditions in the banking industry generally and
in the specific markets in which the Bank operates; (b) changes in the
legislative and regulatory environment that negatively impact the Company and
Bank through increased operating expenses; (c) increased competition from other
financial and nonfinancial institutions; (d) the impact of technological
advances; and (e) other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. Such developments could
have an adverse impact on the Company and the Bank's financial position and
results of operation.
ITEM 4T. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in the Company's Exchange Act report is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
30
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit of possible
controls and procedures.
As of the end of the period covered by this report, the Company's management,
under the supervision and with the participation of the Company's Chief
Executive Officer and the Company's Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded the Company's disclosure
controls and procedures were effective.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's first quarter of 2009 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank (or any of their properties) is the subject of
any material pending legal proceedings other than routine litigation that is
incidental to its business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not
applicable
Item 3. Defaults Upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
31
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.
3.1.1 Certificate of Designations for the Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, filed December 9, 2008.
Exhibit is incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K as filed with the Securities
and Exchange Commission on December 18, 2008.
3.2 Bylaws of First Litchfield Financial Corporation, as amended.
Exhibit is incorporated by reference to Exhibit 3.2 set forth in
the Company's Registration Statement on Form 10-SB as filed with
the Securities and Exchange Commission on January 7, 2000.
4. Specimen Common Stock Certificate. Exhibit is incorporated by
reference to Exhibit 4. set forth in the Company's Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on January 7, 2000.
4.1 Amended and Restated Declaration of Trust of First Litchfield
Statutory Trust I. Exhibit is incorporated by reference to Exhibit
10.52 set forth in the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2003 as filed with the Securities
and Exchange Commission on August 13, 2003.
4.2 Indenture for the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2033. Exhibit is incorporated
by reference to Exhibit 10.53 set forth in the Company's Quarterly
report on Form 10-QSB for the quarter ended June 30, 2003 as filed
with the Securities and Exchange Commission on August 13, 2003.
4.3 Indenture dated June 16, 2006, between First Litchfield Financial
Corporation, as issuer, and Wilmington Trust Company, as indenture
trustee. Exhibit is incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form 8-K/A as filed with
the Securities and Exchange Commission on June 30, 2006.
4.4 Guarantee Agreement dated as of June 16, 2006, between First
Litchfield Financial Corporation, and Wilmington Trust Company.
Exhibit is incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form 8-K/A as filed with the
Securities and Exchange Commission on June 30, 2006.
4.5 Form of Junior Subordinated Note. Exhibit is incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement
on Form 8-K/A as filed with the Securities and Exchange Commission
on June 30, 2006.
4.6 Warrant to purchase Common Stock dated December 12, 2008. Exhibit
is incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K as filed with the Securities and
Exchange Commission on December 18, 2008.
32
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, 2008 as filed
with the Securities and Exchange Commission on April 15, 2009.
23. Consent of McGladrey & Pullen, LLP.
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.
33
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: May 14, 2009 FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Joseph J. Greco
-------------------
Joseph J. Greco, President and
Chief Executive Officer
Dated: May 14, 2009 By: /s/ Carroll A. Pereira
----------------------
Carroll A. Pereira
Principal Financial and
Accounting Officer
34