UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the Quarterly period ended: June 30, 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 subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [_] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [_] Accelerated filer [_]Non-accelerated filer [_]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,356,875 shares of Common
Stock, par value $.01 per share, were outstanding at August 10, 2009.
1
FIRST LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2009 and December 31, 2008
(unaudited) ...........................................................3
Consolidated Statements of Income - Three and Six months ended
June 30, 2009 and 2008 (unaudited) ....................................4
Consolidated Statements of Changes in Shareholders' Equity - Six
months ended June 30, 2009 and 2008 (unaudited) .......................5
Consolidated Statements of Cash Flows - Six months ended
June 30, 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 ............................................31
Item 4 - Controls and Procedures .....................................46
Part II - Other Information
Item 1 - Legal Proceedings ...........................................46
Item 2 - Unregistered Sales of Equity Securities and
Use of Proceeds [not applicable] .....................................46
Item 3 - Defaults Upon Senior Securities [not applicable] ............46
Item 4 - Submission of Matters to a Vote of Security Holders .........46
Item 5 - Other Information ...........................................48
Item 6 - Exhibits ....................................................49
Signatures ...................................................................51
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31,
2009 2008
------------- -------------
ASSETS
Cash and due from banks $ 34,855,338 $ 9,238,320
Interest - bearing accounts due from banks 7,648,928 463
------------- -------------
CASH AND CASH EQUIVALENTS 42,504,266 9,238,783
------------- -------------
Securities:
Available for sale securities, at fair value 83,987,109 113,486,201
Held to maturity securities (fair value $16,103-2009 and $16,553-2008) 15,602 16,550
------------- -------------
TOTAL SECURITIES 84,002,711 113,502,751
------------- -------------
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 105,000 100,000
Loans held for sale 13,728,284 1,013,216
Loan and lease receivables, net of allowance for loan and lease
losses of $4,029,790 -2009, $3,698,820-2008
NET LOANS AND LEASES 378,792,440 366,392,079
Premises and equipment, net 7,171,167 7,370,252
Deferred income taxes 5,021,166 5,082,957
Accrued interest receivable 1,927,445 2,262,918
Cash surrender value of life insurance 10,610,856 10,416,651
Due from broker for security sales -- 9,590,823
Other assets 1,501,694 1,633,727
------------- -------------
TOTAL ASSETS $ 551,018,479 $ 532,257,607
============= =============
LIABILITIES
Deposits:
Noninterest bearing $ 72,638,038 $ 69,548,261
Interest bearing 304,512,562 273,778,363
------------- -------------
TOTAL DEPOSITS 377,150,600 343,326,624
Federal Home Loan Bank advances 80,000,000 81,608,000
Repurchase agreements with financial institutions 22,500,000 26,450,000
Repurchase agreements with customers 18,939,133 18,222,571
Junior subordinated debt issued by unconsolidated trust 10,104,000 10,104,000
Collateralized borrowings 1,118,720 1,375,550
Capital lease obligation 1,056,198 1,065,563
Due to broker for security purchases -- 12,994,945
Accrued expenses and other liabilities 7,340,897 4,643,090
------------- -------------
TOTAL LIABILITIES 518,209,548 499,790,343
------------- -------------
EQUITY
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized, 10,000 shares -- --
outstanding as of 6/30/09 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 25,042 25,038
Additional paid-in capital 37,922,451 37,892,831
Accumulated deficit (1,529,138) (3,325,920)
Less: Treasury stock at cost- 149,747 as of 6/30/09 and 12/31/08 (1,154,062) (1,154,062)
Accumulated other comprehensive loss, net of taxes (2,561,864) (1,024,498)
------------- -------------
TOTAL FIRST LITCHFIELD FINANCIAL CORPORATION
SHAREHOLDERS' EQUITY 32,702,429 32,413,389
------------- -------------
NONCONTROLLING INTERESTS 106,502 53,875
------------- -------------
TOTAL EQUITY 32,808,931 32,467,264
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 551,018,479 $ 532,257,607
============= =============
See Notes to Consolidated Financial Statements.
3
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
-------------- -------------- -------------- --------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases $ 5,499,776 $ 5,304,303 $ 10,889,493 $ 10,814,168
-------------- -------------- -------------- --------------
Interest and dividends on securities:
Mortgage-backed securities 688,193 982,061 1,387,709 1,655,389
US Treasury and other securities 99,174 426,684 274,546 928,626
State and municipal securities 212,905 289,966 426,187 626,385
Trust Preferred and other securities 34,041 101,155 102,545 219,776
-------------- -------------- -------------- --------------
Total interest on securities 1,034,313 1,799,866 2,190,987 3,430,176
-------------- -------------- -------------- --------------
Other interest income 5,627 68,343 20,465 167,386
-------------- -------------- -------------- --------------
TOTAL INTEREST AND DIVIDEND INCOME 6,539,716 7,172,512 13,100,945 14,411,730
-------------- -------------- -------------- --------------
INTEREST EXPENSE
Interest on deposits:
Savings 78,361 116,210 189,858 305,886
Money market 191,934 365,400 472,106 822,167
Time certificates of deposit 950,216 1,393,292 1,836,147 2,845,968
-------------- -------------- -------------- --------------
TOTAL INTEREST ON DEPOSITS 1,220,511 1,874,902 2,498,111 3,974,021
Interest on Federal Home Loan Bank advances 887,866 1,014,625 1,765,174 2,022,423
Interest on repurchase agreements 259,663 410,817 554,876 749,237
Interest on subordinated debt 136,379 125,813 238,003 315,761
Interest on collateralized borrowings 20,332 25,379 43,151 54,803
Interest on capital lease obligation 14,037 14,279 28,135 28,617
-------------- -------------- -------------- --------------
TOTAL INTEREST EXPENSE 2,538,788 3,465,815 5,127,450 7,144,862
-------------- -------------- -------------- --------------
NET INTEREST INCOME 4,000,928 3,706,697 7,973,495 7,266,868
PROVISION FOR LOAN AND LEASE LOSSES 517,589 137,000 787,589 212,000
-------------- -------------- -------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 3,483,339 3,569,697 7,185,906 7,054,868
-------------- -------------- -------------- --------------
NONINTEREST INCOME
Banking service charges and fees 389,301 380,741 752,488 725,920
Trust 275,483 333,569 547,539 673,093
Gains on available for sale securities 321,074 20,899 321,074 32,841
Increase in cash surrender value of life insurance 97,491 99,833 194,205 197,576
Gains on the sale of loans 17,379 6,231 60,440 10,302
Other 129,744 98,193 168,772 172,974
-------------- -------------- -------------- --------------
TOTAL NONINTEREST INCOME 1,230,472 939,466 2,044,518 1,812,706
-------------- -------------- -------------- --------------
NONINTEREST EXPENSE
Salaries 1,625,898 1,719,704 3,189,040 3,317,339
Employee benefits 432,187 450,090 909,947 891,839
Net occupancy 304,275 292,397 629,525 604,223
Equipment 149,122 154,770 296,518 314,384
Legal fees 125,930 54,668 241,793 117,620
Directors fees 47,225 50,200 93,975 100,300
Computer services 286,082 214,114 578,227 487,087
Supplies 36,525 44,925 73,674 90,429
Commissions, services and fees 121,467 127,796 252,552 244,038
Postage 38,140 33,417 75,010 73,620
Advertising 197,567 157,355 313,041 294,370
FDIC assessments 516,238 51,040 719,226 92,349
Other 559,513 473,243 1,090,520 995,164
-------------- -------------- -------------- --------------
TOTAL NONINTEREST EXPENSE 4,440,169 3,823,719 8,463,048 7,622,762
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 273,642 685,444 767,376 1,244,812
(BENEFIT) PROVISION FOR INCOME TAXES (5,357) 68,996 64,557 129,841
-------------- -------------- -------------- --------------
NET INCOME BEFORE NONCONTROLLING INTERESTS 278,999 616,448 702,819 1,114,971
NET INCOME ATTIBUTABLE TO
NONCONTROLLING INTERESTS (32,487) -- (52,627) --
-------------- -------------- -------------- --------------
NET INCOME $ 246,512 $ 616,448 $ 650,192 $ 1,114,971
DIVIDENDS AND ACCRETION ON PREFERRED SHARES 137,606 -- 275,036 --
-------------- -------------- -------------- --------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 108,906 $ 616,448 $ 375,156 $ 1,114,971
============== ============== ============== ==============
INCOME PER SHARE
BASIC NET INCOME PER COMMON SHARE $ 0.05 $ 0.26 $ 0.16 $ 0.47
============== ============== ============== ==============
DILUTED NET INCOME PER COMMON SHARE $ 0.05 $ 0.26 $ 0.16 $ 0.47
============== ============== ============== ==============
DIVIDENDS PER SHARE $ 0.05 $ 0.15 $ 0.10 $ 0.30
============== ============== ============== ==============
See Notes to Consolidated Financial Statements.
4
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Retained Accumulated
Non- Additional Earnings Other Total
controlling Preferred Common Paid-In (Accumulated Treasury Comprehensive Shareholders'
Interests Stock Stock Capital Deficit) Stock Loss Equity
--------- --------- ---------- ----------- ----------- ------------ ----------- ------------
Six months ended June 30, 2008
Balance, December 31, 2007 $ 50,000 $ -- $ 25,012 $27,858,841 $ 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 (loss):
Net income -- -- -- -- 1,114,971 -- 1,114,971
Other comprehensive loss, net
of taxes:
Net unrealized holding
loss on available
for sale securities -- -- -- -- -- -- (2,867,053) (2,867,053)
Net actuarial loss and
prior service cost
for pension benefits (316,372) (316,372)
------------
Other comprehensive loss (3,183,425)
------------
Total comprehensive loss (2,068,454)
Cash dividends declared: $0.30
per share -- -- -- -- (710,409) -- -- (710,409)
Purchase of treasury shares -- -- -- -- -- (186,052) -- (186,052)
Stock options exercised -
1,893 shares 19 20,463 20,482
Tax benefit on stock options
exercised 2,025 2,025
Restricted stock grants and
expense -- -- 2 3,822 -- -- -- 3,824
--------- --------- ---------- ----------- ----------- ------------ ----------- ------------
Balance, June 30, 2008 $ 50,000 $ -- $ 25,033 $27,885,151 $ 3,015,400 $ (1,113,016) $(4,450,812) $ 25,411,756
========= ========= ========== =========== =========== ============ =========== ============
Six months ended June 30, 2009
Balance, December 31, 2008 $ 53,875 $ -- $ 25,038 $37,892,831 $(3,325,920) $ (1,154,062) $(1,024,498) $ 32,467,264
Comprehensive income (loss):
Net income (loss) 52,627 -- -- -- 650,192 -- -- 702,819
Other comprehensive income
(loss), net of taxes:
Net unrealized holding
loss on available
for sale securities -- -- -- -- -- -- (23,127) (23,127)
Net unrealized holding
gain on cash flow
hedges 107,287 107,287
Net actuarial gain and
prior service cost
for pension benefits -- -- -- -- -- -- 35,787 35,787
------------
Other comprehensive income 119,947
------------
Total comprehensive income 822,766
Cumulative effect of adopting
FSP FAS 115-2 and FAS 124-2
(net of $853,767 tax
effect) -- -- -- -- 1,657,313 -- (1,657,313) --
Cash dividends declared: $0.10
per share -- -- -- (235,687) -- -- (235,687)
Restricted stock grants and
expense -- -- 4 4,584 -- -- -- 4,588
Preferred stock dividends (250,000) (250,000)
Accretion of discount on
preferred stock -- -- -- 25,036 (25,036) -- -- --
--------- --------- ---------- ----------- ----------- ------------ ----------- ------------
Balance, June 30, 2009 $ 106,502 $ -- $ 25,042 $37,922,451 $(1,529,138) $(1,154,062) $(2,561,864) $ 32,808,931
========= ========= ========== =========== =========== ============ =========== ============
See Notes to Consolidated Financial Statements.
5
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) June 30,
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 650,192 $ 1,114,971
Adjustments to reconcile net income to net cash provided by operating activities:
Net income attributable to non-controlling interest 52,627 --
Amortization (accretion) amortization of discounts and premiums
on investment securities, net 150,252 (78,435)
Provision for loan and lease losses 787,589 212,000
Depreciation and amortization 350,456 372,100
Gains on sale of available for sale securities (321,074) (32,841)
Loss on sale of foreclosed real estate 55,640 --
Losses on sales of repossessed assets 185,865 11,937
Loans originated for sale (9,008,409) (1,515,000)
Proceeds from sales of loans held for sale 9,359,065 1,525,302
Gains on sales of loans held for sale (60,440) (10,302)
(Gain) losses on disposals of bank premises and equipment (3,300) 2,188
Stock based compensation 4,588 3,824
Decrease in accrued interest receivable 335,473 135,025
(Increase) decrease in other assets (118,893) 296,593
Increase in cash surrender value of life insurance (194,205) (197,576)
Increase in deferred loan origination costs (60,013) (63,759)
Increase (decrease) in accrued expenses and other liabilities 159,130 (135,161)
------------ ------------
Net cash provided by operating activities 2,324,543 1,640,866
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Proceeds from maturities and principal payments 45,966,023 18,721,350
Purchases (50,785,340) (52,095,778)
Proceeds from sales 31,050,068 5,930,151
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 948 2,009
Purchase of restricted stock (5,000) (5,000)
Purchase of Federal Home Loan Bank stock -- (302,600)
Net increase in loans and leases (28,832,328) (10,046,774)
Purchase of bank premises and equipment (151,371) (110,754)
Proceeds from sale of bank premises and equipment 3,300 --
Proceeds from sale of foreclosed real estate 419,360 --
Proceeds from sales of repossessed assets 56,676 154,064
------------ ------------
Net cash provided by (used in) investing activities (2,277,664) (37,753,332)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 1,750,359 414,916
Net increase in certificates of deposit 32,073,617 8,724,955
Net (decrease) increase in Federal Home Loan Bank overnight borrowings (1,608,000) 4,262,000
Net (decrease) increase in repurchase agreements with financial institutions (3,950,000) 28,000,000
Net increase (decrease) in repurchase agreements with customers 716,562 (1,524,959)
Net decrease in collateralized borrowings (256,830) (297,015)
Principal repayments on capital lease obligation (9,365) (8,883)
Purchase of treasury shares -- (186,052)
Proceeds from the exercise of stock options -- 20,482
Tax benefit of stock options exercised -- 2,025
Dividends paid on common stock (497,740) (710,966)
------------ ------------
Net cash provided by financing activities 28,218,603 38,696,503
------------ ------------
Net decrease in cash and cash equivalents 28,265,482 2,584,037
CASH AND CASH EQUIVALENTS, at beginning of period 9,238,783 21,497,194
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 37,504,265 $ 24,081,231
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 5,127,218 $ 7,144,394
============ ============
Income taxes $ 1,000 $ 1,000
============ ============
Noncash investing and financing activities:
Accrued dividends declared $ 367,844 $ 354,672
============ ============
Transfer of loans to repossessed assets $ 90,423 $ 132,001
============ ============
Transfer of loans to foreclosed real estate $ 475,000 $ --
============ ============
Increase in leases and other liabilities for
equipment payable related to financed leases $ 2,767,508 $ --
============ ============
Increase in mortgage servicing assets, net of amortization $ 99,808 $ 16,723
============ ============
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 $ 54,223 $ 479,352
============ ============
Gross unrealized holding losses on available for sale securities $ 2,884,630 $ 690,223
============ ============
Transfer of loans to loans held for sale $ 13,005,284 $ --
============ ============
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.
Certain 2008 amounts have been reclassified to conform with the 2009
presentation. Such reclassifications had no effect on net income.
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 and six months ended June 30, 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 Standards ("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 gain on cash flow
hedges" as a component of accumulated other comprehensive income (loss)
("OCI") 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 three and six month periods ended June 30, 2009 this amount
totaled $108,906 and $375,156, respectively.
7
The following is information about the computation of net income per share
for the three and six month periods ended June 30, 2009 and 2008.
Three Months Ended
June 30, 2009
------------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ----------
Basic Net Income Per Share
Income available to common shareholders $ 108,906 2,356,875 $ 0.05
==========
Effect of Dilutive Securities
Options Outstanding -- --
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $ 108,906 2,356,875 $ 0.05
========== ========== ==========
Three Months Ended
June 30, 2008
------------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ----------
Basic Net Income Per Share
Income available to common shareholders $ 616,448 2,366,459 $ 0.26
==========
Effect of Dilutive Securities
Options Outstanding -- 668
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $ 616,448 2,367,127 $ 0.26
========== ========== ==========
Six Months Ended
June 30, 2009
------------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ----------
Basic Net Income Per Share
Income available to common shareholders $ 375,156 2,356,875 $ 0.16
==========
Effect of Dilutive Securities
Options Outstanding -- --
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $ 375,156 2,356,875 $ 0.16
========== ========== ==========
Six Months Ended
June 30, 2008
------------------------------------
Net Per Share
Income Shares Amount
---------- ---------- ----------
Basic Net Income Per Share
Income available to common shareholders $1,114,971 2,368,223 $ 0.47
==========
Effect of Dilutive Securities
Options Outstanding -- 804
Diluted Net Income Per Share
Income available to common shareholders
---------- ----------
plus assumed conversions $1,114,971 2,369,027 $ 0.47
========== ========== ==========
8
4. Other comprehensive income (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 gain, is as follows:
Three Months Ended
June 30, 2009
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
------------ ------------ ------------
Unrealized holding gain arising during the period $ 415,892 $ (141,403) $ 274,489
Less: reclassification adjustment for gain recognized in net income (321,074) 109,165 (211,909)
------------ ------------ ------------
Unrealized holding gain on available for sale securities, net of taxes 94,818 (32,238) 62,580
Net cash flow hedges, net of taxes 442,274 (150,375) 291,899
Net pension gain, net of taxes 130,233 (44,278) 85,955
------------ ------------ ------------
Total other comprehensive income, net of taxes $ 667,325 $ (226,891) $ 440,434
============ ============ ============
Three Months Ended
June 30, 2008
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
------------ ------------ ------------
Unrealized holding losses arising during the period $ (3,164,397) $ 1,075,895 $ (2,088,502)
Add: reclassification adjustment for gain recognized in net income (20,899) 7,106 (13,793)
------------ ------------ ------------
Unrealized holding losses on available for sale securities, net of taxes (3,185,296) 1,083,001 (2,102,295)
Net pension loss, net of taxes (120,596) 41,003 (79,593)
------------ ------------ ------------
Total other comprehensive loss, net of taxes $ (3,305,892) $ 1,124,003 $ (2,181,889)
============ ============ ============
Six Months Ended
June 30, 2009
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
------------ ------------ ------------
Unrealized holding gain arising during the period $ 286,033 $ (97,251) $ 188,782
Less: reclassification adjustment for gain recognized in net income (321,074) 109,165 (211,909)
------------ ------------ ------------
Unrealized holding losses on available for sale securities, net of taxes (35,041) 11,914 (23,127)
Net cash flow hedges, net of taxes 162,556 (55,269) 107,287
Net pension gain, net of taxes 54,223 (18,436) 35,787
------------ ------------ ------------
Total other comprehensive income, net of taxes $ 181,738 $ (61,791) $ 119,947
============ ============ ============
Six Months Ended
June 30, 2008
--------------------------------------------
Before-Tax Tax Net-of-Tax
Amount Effect Amount
------------ ------------ ------------
Unrealized holding losses arising during the period $ (4,311,178) $ 1,465,800 $ (2,845,378)
Add: reclassification adjustment for gain recognized in net income (32,841) 11,166 (21,675)
------------ ------------ ------------
Unrealized holding losses on available for sale securities, net of taxes (4,344,019) 1,476,966 (2,867,053)
Net pension loss, net of taxes (479,352) 162,980 (316,372)
------------ ------------ ------------
Total other comprehensive loss, net of taxes $ (4,823,371) $ 1,639,946 $ (3,183,425)
============ ============ ============
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
9
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 June 30:
2009 2008
-------- --------
Service cost $ -- $ --
Interest cost 42,700 46,306
Expected return on plan assets (43,104) (50,363)
Amortization of unrealized loss 19,523 14,812
-------- --------
Net periodic benefit cost $ 19,119 $ 10,755
======== ========
Components of net periodic benefit cost for the six months ended June 30:
2009 2008
--------- ---------
Service cost $ -- $ --
Interest cost 85,400 92,613
Expected return on plan assets (86,208) (100,727)
Amortization of unrealized loss 39,046 29,625
--------- ---------
Net periodic benefit cost $ 38,238 $ 21,511
========= =========
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 would suspend its dividend for the first quarter of 2009, and 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.
10
Federal Home Loan Bank advances as of June 30, 2009 are as follows:
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 8/5/2009
due 3/23/2017 10,000,000 @ 4.29% , callable 9/23/2009
due 7/20/2017 10,000,000 @ 4.29% , callable 7/20/2009
due 11/20/2017 5,000,000 @ 4.29% , callable 11/19/2012
-------------
Total $ 80,000,000
=============
As of June 30, 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 3/12/2013
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 June 30,
-------------------------------------------------
2009 2008
---------------------- ----------------------
Provision for income taxes at statutory Federal rate $ 93,038 34% $ 233,052 34%
Increase (decrease) resulting from:
Tax exempt income (107,910) (39) (180,877) (27)
Nondeductible interest expense 5,948 2 11,551 2
Other 3,567 1 5,270 1
--------- --------- --------- ---------
(Benefit) Provision for income taxes $ (5,357) (2)% $ 68,996 10%
========= ========= ========= =========
For the six months ended June 30,
-------------------------------------------------
2009 2008
---------------------- ----------------------
Provision for income taxes at statutory Federal rate $ 260,908 34% $ 423,236 34%
Increase (decrease) resulting from:
Tax exempt income (215,859) (28) (329,721) (26)
Nondeductible interest expense 12,508 1 25,784 2
Other 7,000 1 10,542 1
--------- --------- --------- ---------
Provision for income taxes $ 64,557 8% $ 129,841 11%
========= ========= ========= =========
11
8. The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of securities which are classified as available for
sale and held to maturity at June 30, 2009 and December 31, 2008 are as
follows:
AVAILABLE FOR SALE June 30, 2009
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Debt Securities:
U.S. Treasury Securities 3,090,833 66,316 -- $ 3,157,149
U.S. Government Agency securities 4,202,232 26,528 -- 4,228,760
State and Municipal Obligations 19,924,546 39,644 (825,706) 19,138,484
Trust Preferred Securities (1) 2,993,836 -- (2,028,156) 965,680
------------- ------------- ------------- -------------
30,211,447 132,488 (2,853,862) 27,490,073
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA 489,836 8,242 (138) 497,940
FNMA 29,657,179 284,355 (13,033) 29,928,501
FHLMC 23,875,049 152,951 (2,658) 24,025,342
------------- ------------- ------------- -------------
54,022,064 445,548 (15,829) 54,451,783
------------- ------------- ------------- -------------
Marketable Equity Securities 2,060,192 -- (14,939) 2,045,253
------------- ------------- ------------- -------------
Total available for sale securities $ 86,293,703 $ 578,036 $ (2,884,630) $ 83,987,109
============= ============= ============= =============
(1) Net of other-than-temporary impairment writedowns recognized in
earnings, other than such noncredit-related amounts reclassified on April
1, 2009 in accordance with the adoption of FSP FAS 115-2 and FAS 124-2.
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 (2) 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
============= ============= ============= =============
(2) Net of other-than-temporary impairment writedowns recognized in
earnings.
HELD TO MATURITY June 30, 2009
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 15,602 $ 501 $ -- $ 16,103
============= ============= ============= =============
December 31, 2008
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Mortgage-Backed Securities:
GNMA $ 16,550 $ 3 $ -- $ 16,553
============= ============= ============= =============
12
The Company adopted the provisions of FASB Staff Position ("FSP") FAS 115-2 and
FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments,"
("FSP 115-2 and 124-2") for the interim period ended June 30, 2009, which was
applied to existing and new debt securities held by the Company as of April 1,
2009. For those debt securities for which the fair value of the security is less
than its amortized cost and the Company does not intend to sell such security
and it is more likely than not that it will not be required to sell such
security prior to the recovery of its amortized cost basis less any credit
losses, FSP FAS 115-2 and FAS 124-2 requires that the credit component of the
other-than-temporary impairment losses be recognized as a loss in earnings while
the noncredit component is recognized in other comprehensive loss, net of
related taxes. As a result of the adoption of FSP FAS 115-2 and FAS 124-2, the
Company reclassified the noncredit component of the other-than-temporary
impairment loss previously recognized in earnings during 2008. The
reclassification was reflected as a cumulative effect adjustment of $1,657,313
($2,511,080 before taxes) that increased retained earnings and increased
accumulated other comprehensive loss. The amortized cost basis of these debt
securities for which other-than-temporary impairment losses were recognized
during 2008 were adjusted by the amount of the cumulative effect adjustment
before taxes.
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at June 30, 2009:
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------------- ------------------------- -------------------------
Investment Securities
State & Municipal obligations 4,751,386 70,469 8,183,190 755,237 12,934,576 825,706
Trust Preferred Securities (1) -- -- 965,680 2,028,156 965,680 2,028,156
----------- ----------- ----------- ----------- ----------- -----------
4,751,386 70,469 9,148,870 2,783,393 13,900,256 2,853,862
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities
GNMA -- -- 87,940 138 87,940 138
FNMA 24,122 86 3,728,105 12,947 3,752,227 13,033
FHLMC 3,579,313 1,549 126,705 1,109 3,706,018 2,658
----------- ----------- ----------- ----------- ----------- -----------
3,603,435 1,635 3,942,750 14,194 7,546,185 15,829
----------- ----------- ----------- ----------- ----------- -----------
Marketable Equity Securities -- -- 1,985,061 14,939 1,985,061 14,939
----------- ----------- ----------- ----------- ----------- -----------
Total $ 8,354,821 $ 72,104 $15,076,681 $ 2,812,526 $23,431,502 $ 2,884,630
=========== =========== =========== =========== =========== ===========
(1) Net of other-than-temporary impairment writedowns recognized in earnings,
other than such noncredit-related amounts reclassified on April 1, 2009 in
accordance with the adoption of FSP FAS 115-2 and FAS 124-2.
The following table presents the Bank's securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2008:
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------------- ------------------------- -------------------------
Investment Securities
U.S. Government Agency securities $ 7,996,614 $ 3,386 $ -- $ -- $ 7,996,614 $ 3,386
State & Municipal obligations 8,804,717 303,267 2,574,433 72,802 11,379,150 376,069
----------- ----------- ----------- ----------- ----------- -----------
16,801,331 306,653 2,574,433 72,802 19,375,764 379,455
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-Backed Securities
GNMA -- -- 465,643 8,094 465,643 8,094
FNMA 10,067,156 112,219 4,209,833 151,348 14,276,989 263,567
FHLMC -- -- 1,351,769 9,228 1,351,769 9,228
----------- ----------- ----------- ----------- ----------- -----------
10,067,156 112,219 6,027,245 168,670 16,094,401 280,889
----------- ----------- ----------- ----------- ----------- -----------
Marketable Equity Securities -- -- 1,970,122 29,879 1,970,122 29,879
----------- ----------- ----------- ----------- ----------- -----------
Total $26,868,487 $ 418,872 $10,571,800 $ 271,351 $37,440,287 $ 690,223
=========== =========== =========== =========== =========== ===========
13
At June 30, 2009, twenty-eight securities have unrealized losses. At June
30, 2009, gross unrealized holding losses on available for sale and held to
maturity securities totaled $2,884,630. Of the securities with unrealized
losses, there were nineteen 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 $2,812,526 at June 30, 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
June 30, 2009.
Management conducts a formal review of investment securities on a quarterly
basis for the presence of other-than-temporary impairment ("OTTI"). For the
second quarter of 2009, the Company adopted FSP SFAS 115-2 and SFAS 124-2,
issued by the FASB on April 9, 2009. Management assesses whether OTTI is
present when the fair value of a debt security is less than its amortized
cost basis at the balance sheet date. Under these circumstances as required
by the new FSP, OTTI is considered to have occurred (1) if the Company
intends to sell the security; (2) if it is "more likely than not" that the
Company will be required to sell the security before recovery of its
amortized cost basis; or (3) the present value of expected cash flows is
not sufficient to recover the entire amortized cost basis. The "more likely
than not" criteria is a lower threshold than the "probable" criteria used
under previous guidance.
The FSP requires that credit-related OTTI is recognized in earnings while
non-credit related OTTI on securities not expected to be sold is recognized
in OCI. Non-credit related OTTI is caused by other factors, including
illiquidity. For securities classified as held-to-maturity ("HTM"), the
amount of OTTI recognized in OCI is accreted to the credit-adjusted
expected cash flow amounts of the securities over future periods.
Non-credit related OTTI recognized in earnings previous to April 1, 2009 is
reclassified from retained earnings to accumulated OCI as a cumulative
effect adjustment. The Company adopted this FSP effective April 1, 2009.
The adoption of this FSP resulted in the reclassification of $2,511,080,
($1,657,313, net of tax) of non-credit related OTTI to OCI which had
previously been recognized as a loss in earnings.
Management's OTTI evaluation process also follows the guidance of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets", and FSP No. EITF 99-20-1, "Amendments to the
Impairment and Interest Income Measurement Guidance of EITF Issue No.
99-20" ("FSP EITF 99-20-1"). This guidance requires the Company to take
into consideration current market conditions, fair value in relationship to
cost, extent and nature of change in fair value, issuer rating changes and
trends, volatility of earnings, current analysts' evaluations, and all
available information relevant to the collectability of debt securities.
The Company is also required to consider its ability and intent to hold
investments until a recovery of fair value, which may be maturity, and
other factors when evaluating the existence of OTTI in its securities
portfolio. FSP EITF 99-20-1 was issued on January 12, 2009 and is effective
for reporting periods ending after December 15, 2008. This FSP amends EITF
99-20 by eliminating the requirement that a holder's best estimate of cash
flows be based upon those that a market participant would use. Instead, the
FSP requires that OTTI be recognized as a realized loss through earnings
when there has been an adverse change in the holder's expected cash flows
such that it is "probable" that the full amount will not be received. This
requirement is consistent with the impairment model in SFAS 115.
In addition, the disclosure and related discussion of unrealized losses is
presented pursuant to FSP FAS 115-1 and FAS 124-1, and EITF Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1"). FSP FAS 115-1 and FAS 124-1 replaces
certain impairment evaluation guidance of EITF 03-1; however, the
disclosure requirements of EITF 03-1 remain in effect. This FSP addresses
the determination of when an investment is considered impaired, whether the
impairment is considered to be other-than-temporary, and the measurement of
an impairment loss. The FSP also supersedes EITF Topic No. D-44,
14
"Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value", and clarifies that an impairment
loss should be recognized no later than when the impairment is deemed
other-than-temporary, even if a decision to sell an impaired security has
not been made.
For the three and six months ended June 30, 2009, the Company did not
recognize any OTTI charges.
For all security types discussed below where no OTTI is considered to exist
at June 30, 2009, management applied the criteria of FSP FAS 115-2 and FAS
124-1 to each investment individually. That is, for each security
evaluated, management concluded that it does not intend to sell the
security and it is not more likely than not that management will be
required to sell the security before recovery of its amortized cost basis
and as such OTTI was not recognized as a loss in earnings.
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
June 30, 2009:
U.S. Government Agency Securities - There were no unrealized losses in the
Company's investment in these securities as of June 30, 2009. This compares
to unrealized losses of $3,386 at December 31, 2008.
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 $825,706 at June 30, 2009. There were no OTTI charges
for these securities during the second quarter of 2009. These securities
are primarily insured AA and A rated general obligation bonds with stable
ratings The increase in the unrealized loss at June 30, 2009 is
attributable to concerns about municipal 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 June 30,
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 June 30, 2009.
Trust Preferred Securities - As of June 30, 2009 the unrealized losses on
the Company's investment in trust preferred securities totaled $2,028,156.
As of June 30, 2009, this portfolio consisted of two pooled trust preferred
securities with a carrying value of $2,993,836 and a market value of
$965,680. These securities are in the form of mezzanine classes which are
comprised of bank and insurance collateral. 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. Management evaluated current credit ratings,
credit support and stress testing for future defaults. Management also
reviewed analytics provided by the trustee, reports from third-party
sources and internal documents. As previously indicated, the Company
adopted the provisions of FSP FAS 115-2 and FAS 124-2, and in connection
therewith determined that other-than-temporary impairments at April 1, 2009
consisted of $1,881,573 related to credit losses and $2,511,080 related to
other factors. There were no other-than-temporary impairments for the three
months ended June 30, 2009.
The unrealized losses on the Company's trust preferred securities were
caused by a lack of liquidity and uncertainties facing the banking and
insurance industries. During the second quarter the Company was notified
that one of the securities will not be remitting interest payments and that
the going forward, would be receiving payments, "in kind." As a result of
this, the Company has discontinued interest accruals on this security and
an impairment loss has been recorded on this security as discussed above.
Based on the aforementioned valuation analysis to determine expected credit
losses prepared on both of these securities, management expects to fully
recover amortized cost of each security. However, additional interest
deferrals and /or defaults could result in future other than temporary
impairment charges. Because the Company does not intend to sell the
15
investments and it is not more likely than not that the Company will be
required to sell the investments before recovery of their amortized cost
bases, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired at June 30, 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 $15,829 at June 30, 2009. There were no OTTI charges
for the six months ended June 30, 2009. These securities are U.S.
Government Agency or sponsored agency securities secured by residential
properties. The contractual cash flows for these investments are performing
as expected. Management believes the increase in fair value is attributable
to investor's perception of improvement in credit and liquidity in the
marketplace. The Company expects to collect all principal and interest on
these securities. Because the Company does not intend to sell these
investments and it is not more likely than not that the Company will be
required to sell 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 June 30, 2009.
Equity securities - The unrealized losses on the Company's investment in
four marketable equity securities totaled $14,939, which was a decrease
from the unrealized losses of $29,879 as of December 31, 2008. As of June
30, 2009, this portfolio consists of a marketable investment fund with a
fair value of $1,985,061, a money market fund with a fair value of $60,190,
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
June 30, 2009.
The following table presents a roll-forward of the balance of credit-related
impairment losses on debt securities held at June 30, 2009 for which a portion
of the other-than-temporary impairment was recognized in other comprehensive
loss:
Balance at April 1, 2009 $ --
Credit component of other-than-temporary impairment not reclassified to other
comprehensive loss in conjunction with the cumulative effect adjustment 1,881,573
Additions for credit component for which other-than-temporary impairment was
not previously recognized --
----------
Balance at June 30, 2009 $1,881,573
==========
As of June 30, 2009, debt securities with other-than-temporary impairment losses
related to credit and were recognized in earnings consisted of pooled trust
preferred securities. In accordance with FSP FAS 115-2 and FAS 124-2, the
Company estimated the portion of loss attributable to credit using a discounted
cash flow model. Significant inputs for the Trust Preferred Securities included
estimated cash flows and prospective deferrals, defaults and recoveries based on
the underlying seniority status and subordination structure of the pooled trust
preferred debt tranche at the time of measurement. The valuations of trust
preferred securities were based upon FAS 157-4 using cash flow analysis.
Contractual cash flows and a market rate of return were used to derive fair
value for each of these securities. Factors that affected the market rate of
return included (1) any uncertainty about the amount and timing of the cash
flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable
yields from trading data and bid/ask indications. Credit risk spreads and
liquidity premiums were analyzed to derive the appropriate discount rate.
Prospective deferral, default and recovery estimates affecting projected cash
flows were based on an analysis of the underlying financial condition of the
individual issuers, with consideration of the issuers's capital adequacy, credit
quality, lending concentrations and other factors. Assumptions for deferral and
constant default rates were 100% for nonperforming in 2011, from 2% to 4.85% for
16
nonperforming during 2010, 3.5% for 2011 and 1% for performing after 2011. The
assumptions for collateral conditional default rates ranged from 0% to 4% and
severity of defaults assumptions ranged from 80% to 95%. Assumptions for
internal rates of return were L+70, 10%, 12%, 15% 17% and 20% and prepayment
assumptions were from 0% to 2%.
All cash flow estimates were based on the securities' tranche structure and
contractual rate and maturity terms. The Company utilized the services of a
third-party vendor to obtain information about the structure in order to
determine how the underlying collateral cash flows will be distributed to each
security issued from the structure. The present value of the expected cash flows
were compared to the Company's holdings to determine the credit-related
impairment loss.
The amortized cost and fair value of debt securities at June 30, 2009 and
December 31, 2008, by contractual maturity, are shown below. Actual maturities
of mortgage-backed securities may differ from contractual maturities because the
mortgages underlying the securities may be called or prepaid with or without
call or prepayment penalties. Because mortgage-backed securities are not due at
a single maturity date, they are not included in the maturity categories in the
following maturity summary.
June 30, 2009
----------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ 998,825 $ 1,013,711 $ -- $ --
Due after one year through five years 2,237,008 2,288,622 -- --
Due after five years through ten years 6,653,702 6,702,453 -- --
Due after ten years 20,321,912 17,485,287 -- --
------------ ------------ ------------ ------------
30,211,447 27,490,073 -- --
Mortgage-backed securities 54,022,064 54,451,783 15,602 16,103
------------ ------------ ------------ ------------
TOTAL DEBT SECURITIES $ 84,233,511 $ 81,941,856 $ 15,602 $ 16,103
============ ============ ============ ============
December 31, 2008
----------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ -- $ -- $ -- $ --
Due after one year through five years 25,110,576 25,272,025 -- --
Due after five years through ten years 6,403,590 6,443,810 -- --
Due after ten years 18,521,023 18,191,039 -- --
------------ ------------ ------------ ------------
50,035,189 49,906,874 -- --
Mortgage-backed securities 60,165,607 60,563,328 16,550 16,553
------------ ------------ ------------ ------------
TOTAL DEBT SECURITIES $110,200,796 $110,470,202 $ 16,550 $ 16,553
============ ============ ============ ============
17
9. A summary of the Bank's loan and lease portfolio at June 30, 2009 and
December 31, 2008 is as follows:
2009 2008
------------- -------------
Real estate--residential mortgage $ 175,853,528 $ 192,561,108
Real estate--commercial mortgage 77,756,069 67,454,925
Real estate--construction 40,286,979 38,153,503
Commercial Loans 50,662,915 46,249,689
Commercial Leases (net of unearned
discount of $3,999,055-2009, $2,501,895-2008) 32,300,923 19,785,870
Installment 5,218,229 5,113,400
Other 66,850 128,574
------------- -------------
TOTAL LOANS AND LEASES 382,145,493 369,447,069
Net deferred loan origination costs 622,255 562,242
Premiums on purchased loans 54,482 81,588
Allowance for loan and lease losses (4,029,790) (3,698,820)
------------- -------------
NET LOANS AND LEASES $ 378,792,440 $ 366,392,079
============= =============
Changes in the allowance for loan and lease losses for the three months
ended June 30, 2009 and 2008 are as shown below:
2009 2008
----------- -----------
Balance at March 31, $ 3,593,824 $ 2,195,493
Provision for loan and lease losses 517,589 137,000
Loans and leases charged off (228,822) (116,005)
Recoveries of loans and leases charged off 147,199 17,090
----------- -----------
Balance at the end of the period $ 4,029,790 $ 2,233,578
=========== ===========
Changes in the allowance for loan and lease losses for the six months ended
June 30, 2009 and 2008 are as shown below:
2009 2008
----------- -----------
Balance at beginning of the year $ 3,698,820 $ 2,151,622
Provision for loan and lease losses 787,589 212,000
Loans and leases charged off (648,947) (152,265)
Recoveries of loans and leases charged off 192,328 22,221
----------- -----------
Balance at the end of the period $ 4,029,790 $ 2,233,578
=========== ===========
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
six months ended June 30, 2009 and December 31, 2008.
2009 2008
---------- ----------
Loans and leases receivable for which there is a related allowance for loan
and lease losses $2,601,363 $6,225,481
========== ==========
Loans and leases receivable for which there is no related allowance for loan
and lease losses $7,459,970 $2,657,655
========== ==========
Allowance for loan and lease losses related to impaired loans and leases $1,035,823 $ 939,066
========== ==========
18
10. A summary of the Bank's deposits at June 30, 2009 and December 31, 2008 is
as follows:
2009 2008
------------ ------------
Noninterest bearing:
Demand $ 72,638,038 $ 69,548,261
------------ ------------
Interest bearing:
Savings 63,894,720 58,582,376
Money market 86,433,364 93,085,126
Time certificates of deposit in
denominations of $100,000 or more 73,933,818 41,003,855
Other time certificates of deposit 80,250,660 81,107,006
------------ ------------
Total Interest bearing deposits 304,512,562 273,778,363
------------ ------------
TOTAL DEPOSITS $377,150,600 $343,326,624
============ ============
Included in deposits as of June 30, 2009 and December 31, 2008 are
approximately $27,241,000 and $15,902,000, respectively, of brokered
deposits which have varying maturities through December 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 and
six months ended June 30, 2009, $2,294 and $4,588 respectively was
recognized as compensation expense under the 2007 Plan. At June 30, 2009,
unrecognized compensation cost of $32,885 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 six months ended June 30,
2009, is as follows:
Weighted Average
Shares Grant Date
(in thousands) Fair Value
---------------------------
Unvested at January 1, 2009 3,500 $ 13.11
Granted -- --
Vested -- --
Forfeited -- --
------------ ------------
Unvested at June 30, 2009 3,500 $ 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 and six months ended June 30, 2009
and 2008, respectively. The Company uses an internal reporting system to
generate information by operating segment. Estimates and allocations are
used for noninterest expenses and income taxes. The Company uses a matched
maturity funding concept to allocate interest expense to First Litchfield
Leasing Corporation. The matched maturity funding concept utilizes the
origination date and the maturity date of the lease to assign an interest
expense to each lease.
19
Three Months Ended
June 30, 2009
---------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,618,328 $ 382,600 $ -- $ 4,000,928
Provision for credit losses 463,872 53,717 -- 517,589
------------- ------------- ------------- -------------
Net interest income after provision 3,154,456 328,883 -- 3,483,339
Noninterest income 1,227,566 2,906 -- 1,230,472
Noninterest expense 4,351,583 88,586 -- 4,440,169
------------- ------------- ------------- -------------
Income before income taxes 30,439 243,203 -- 273,642
Income tax provision (86,125) 80,768 -- (5,357)
------------- ------------- ------------- -------------
Net income $ 116,564 $ 162,435 $ -- $ 278,999
============= ============= ============= =============
Total assets as of June 30, 2009 $ 516,202,885 $ 35,017,544 $ (201,950) $ 551,018,479
============= ============= ============= =============
Three Months Ended
June 30, 2008
---------------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------- ------------- ------------- -------------
Net interest income $ 3,545,669 $ 161,028 $ -- $ 3,706,697
Provision for credit losses 117,330 19,670 -- 137,000
------------- ------------- ------------- -------------
Net interest income after provision 3,428,339 141,358 -- 3,569,697
Noninterest income 939,466 -- -- 939,466
Noninterest expense 3,740,585 83,134 -- 3,823,719
------------- ------------- ------------- -------------
Income before income taxes 627,220 58,224 -- 685,444
Income tax provision 51,124 17,872 -- 68,996
------------- ------------- ------------- -------------
Net income $ 576,096 $ 40,352 $ -- $ 616,448
============= ============= ============= =============
Total assets as of June 30, 2008 $ 527,445,033 $ 17,386,586 $ (201,927) $ 544,629,692
============= ============= ============= =============
20
Six Months Ended
June 30, 2009
-----------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------ ------------ ------------ ------------
Net interest income $ 7,317,899 $ 655,596 $ -- $ 7,973,495
Provision for credit losses 697,446 90,143 -- 787,589
------------ ------------ ------------ ------------
Net interest income after provision 6,620,453 565,453 -- 7,185,906
Noninterest income 2,041,612 2,906 -- 2,044,518
Noninterest expense 8,287,527 175,521 -- 8,463,048
------------ ------------ ------------ ------------
Income before income taxes 374,538 392,838 -- 767,376
Income tax (benefit) provision (65,144) 129,701 -- 64,557
------------ ------------ ------------ ------------
Net income $ 439,682 $ 263,137 $ -- $ 702,819
============ ============ ============ ============
Total assets as of June 30, 2009 $516,202,885 $ 35,017,544 $ (201,950) $551,018,479
============ ============ ============ ============
Six Months Ended
June 30, 2008
-----------------------------------------------------------
Community Elimination Consolidated
Banking Leasing Entries Total
------------ ------------ ------------ ------------
Net interest income $ 6,972,726 $ 294,142 $ -- $ 7,266,868
Provision for credit losses 160,317 51,683 -- 212,000
------------ ------------ ------------ ------------
Net interest income after provision 6,812,409 242,459 -- 7,054,868
Noninterest income 1,812,706 -- -- 1,812,706
Noninterest expense 7,446,968 175,794 -- 7,622,762
------------ ------------ ------------ ------------
Income before income taxes 1,178,147 66,665 -- 1,244,812
Income tax provision 109,764 20,077 -- 129,841
------------ ------------ ------------ ------------
Net income $ 1,068,383 $ 46,588 $ -- $ 1,114,971
============ ============ ============ ============
Total assets as of June 30, 2008 $527,445,033 $ 17,386,586 $ (201,927) $544,629,692
============ ============ ============ ============
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).
In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB
Statement No. 157 ("FSP 157-2"), which permits a one-year deferral for the
implementation of SFAS No. 157 with regard to nonfinancial assets and
liabilities that are not recognized or disclosed at fair value in the
financial statements on a recurring basis. Effective January 1, 2009,
Company adopted FSP 157-2, "Effective Date of FASB Statement No. 157," for
non-financial assets and non-financial liabilities.
Effective April 1, 2009, the Company adopted FSP No. 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."
21
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:
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,
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, trust preferred securities
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 June 30,
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 June 30, 2009, Using
Quoted Prices in Significant
June Active Markets for Significant Other Unobservable
30, 2009 Identical Assets Observable Inputs Inputs
Total (Level 1) (Level 2) (Level 3)
--------------- --------------- --------------- ---------------
Assets:
Available for sale securities $ 83,987,109 $ 5,142,210 $ 77,879,219 $ 965,680
=============== =============== =============== ===============
Interest rate swaps $ 162,556 $ -- $ 162,556 $ --
=============== =============== =============== ===============
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 $ --
=============== =============== =============== ===============
22
As of June 30, 2009 and December 31, 2008, U.S. Treasury securities and one
equity security, with carrying values of $5,142,210 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).
The fair values of U. S. Government and agency mortgaged backed securities
and debt securities, State and Municipal obligations, and certain equity
securities are measured on a recurring basis, using Level 2 inputs of
observable market data on similar securities. As of June 30, 2009 and
December 31, 2008, the carrying values of these securities totaled
$77,879,219 and $108,297,630, respectively.
The fair value of the Bank's interest rate swap derivative instruments are
determined based on inputs that are readily available in public markets or
can be derived from information available in publicly quoted markets.
Therefore, the Bank has categorized these derivative instruments as Level 2
within the fair value hierarchy.
Securities measured at fair value in Level 3 include certain collateralized
debt obligations that are backed by trust preferred securities issued by
banks, thrifts and insurance companies. Management determined that an
orderly and active market for these securities and similar securities did
not exist based on a significant reduction in trading volume and widening
spreads relative to historical levels.
The following table shows a reconciliation of the beginning and ending
balances for Level 3 assets:
Six Months
Ended June 30, 2009
-------------------
Balance at beginning of period $ --
Increase in fair value of securities included in other comprehensive loss 472,065
Transfers to/from level 3 493,615
---------------
Balance at end of period $ 965,680
===============
The following tables detail the assets and liabilities carried at fair
value and measured at fair value on a nonrecurring basis as of June 30,
2009 and December 31, 2008 and indicate the fair value hierarchy of the
valuation techniques utilized by the Company to determine the fair value:
June 30, 2009
------------------------------------------------------------------------------------
Quoted Prices in Significant Significant
Balance Active Markets for Observable Unobservable
as of Identical Assets Inputs Inputs
June 30, 2009 (Level 1) (Level 2) (Level 3)
------------------- ------------------- ------------------- --------------------
Financial assets held at fair value
Impaired Loans (1) $ 8,857,514 $ -- $ 441,065 $ 8,416,449
=================== =================== =================== ====================
(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
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.
23
The Company has no other assets or liabilities carried at fair value or
measured at fair value on a non recurring basis.
SFAS No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. SFAS No. 107
excludes certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company.
In April 2009, the FASB issued Staff Position No. FAS 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 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. Effective April 1, 2009, the Bank adopted FSP No. 107-1 and APB
28-1. See the following table for disclosure of the information required by
this FSP.
The estimated fair value amounts for June 30, 2009 and December 31, 2008
have been measured as of the end of the respective periods and have not
been reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates
may be different than amounts reported at period-end.
Cash and Due From Banks, Federal Funds Sold, Interest Income Receivable,
Accrued Interest Payable, Collateralized Borrowings, and Short-term
Borrowings: These assets and liabilities are short-term, and therefore,
book value is a reasonable estimate of fair value. These financial
instruments are not carried at fair value on a recurring basis.
Federal Home Loan Bank Stock, Federal Reserve Bank Stock and Other
Restricted Stock: Such stock is estimated to equal the carrying value, due
to the historical experience that these stocks are redeemed at par. These
financial instruments are not carried at fair value on a recurring basis.
Available for Sale and Held to Maturity Securities: Where quoted prices are
available in an active market, securities are classified within Level 1 of
the valuation hierarchy. Level 1 securities include U.S. Treasury
securities that are traded in an active exchange market. If quoted prices
are not available, then fair values are estimated by using pricing models
(i.e., matrix pricing) or quoted prices of securities with similar
characteristics and are classified within Level 2 of the valuation
hierarchy. Examples of such instruments include U.S. Government agency and
sponsored agency bonds, mortgage-backed and debt securities, state and
municipal obligations, and equity securities in markets that are not
active, and certain collateral dependent loans. Securities measured at fair
value in Level 3 include certain collateralized debt obligations that are
backed by trust preferred securities issued by banks, thrifts and insurance
companies. Management determined that an orderly and active market for
these securities and similar securities did not exist based on a
significant reduction in trading volume and widening spreads relative to
historical levels. Available for sale securities are recorded at fair value
on a recurring basis, and held to maturity securities are only disclosed at
fair value.
Loans: For variable rate loans which reprice frequently and have no
significant change in credit risk, carrying values are a reasonable
estimate of fair values, adjusted for credit losses inherent in the
portfolios. The fair value of fixed rate loans is estimated by discounting
the future cash flows using the year end rates, estimated using local
market data, at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities, adjusted for credit
losses inherent in the portfolios. Loans are generally not recorded at fair
value on a recurring basis. However, from time to time, nonrecurring fair
24
value adjustments to collateral-dependent impaired loans are recorded to
reflect partial write-downs based on the observable market price or current
appraised value of collateral.
Loans held for sale: Loans held for sale are required to be carried at the
lower of cost or fair value. Under SFAS 157, market value is to represent
fair value. As of June 30, 2009, the Company had $13,728,284 of loans held
for sale, which represented first mortgages committed and subject to
settlement shortly after the end of the period. Due to the short term
nature of loans committed for sale, the carrying value approximates the
market price.
Interest rate swap derivatives: The fair value of the Bank's interest rate
swap derivative instruments are determined based on inputs that are readily
available in public markets or can be derived from information available in
publicly quoted markets. Therefore, the Bank has categorized these
derivative instruments as Level 2 within the fair value hierarchy described
in Note 13.
Deposits: The fair value of demand deposits, savings and money market
deposits is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is estimated using a discounted cash flow
calculation that applies interest rates currently being offered for
deposits of similar remaining maturities to a schedule of aggregated
expected maturities on such deposits. Deposits are not recorded at fair
value on a recurring basis.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow calculation that applies current interest rates for
borrowings of similar maturity to a schedule of maturities of such
advances. Long-term debt is not recorded at fair value on a recurring
basis.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. Off-balance sheet instruments are not
recorded at fair value on a recurring basis.
25
The recorded book balances and estimated fair values of the Company's
financial instruments at June 30, 2009 and December 31, 2008 are as
follows:
June 30, 2009 December 31, 2008
--------------------------- ---------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
--------------------------- ---------------------------
Financial Assets:
Cash and due from banks $ 42,504,266 42,504,266 $ 9,238,783 9,238,783
Available for sale securities 83,987,109 83,987,109 113,486,201 113,486,201
Held to maturity securities 15,602 16,103 16,550 16,553
Federal Home Loan Bank Stock 5,427,600 5,427,600 5,427,600 5,427,600
Federal Reserve Bank Stock 225,850 225,850 225,850 225,850
Other restricted stock 105,000 105,000 100,000 100,000
Loans held for sale 13,728,284 13,728,284 1,013,216 1,013,216
Loans and leases, net 378,792,440 406,502,141 366,392,079 365,191,872
Accrued interest receivable 1,927,445 1,927,445 2,262,918 2,262,918
Interest rate swaps 162,556 162,556 -- --
Financial Liabilities:
Savings deposits 63,894,720 63,894,720 58,582,376 58,582,376
Money market and demand deposits 159,071,402 159,071,402 162,633,387 162,633,387
Time certificates of deposit 154,184,478 155,339,429 122,110,861 122,607,975
Federal Home Loan Bank advances 80,000,000 82,910,379 81,608,000 86,044,755
Repurchase agreements with
financial institutions 22,500,000 22,761,323 26,450,000 26,316,528
Repurchase agreements with customers 18,939,133 18,939,133 18,222,571 18,222,571
Subordinated debt 10,104,000 10,104,000 10,104,000 10,104,000
Accrued interest payable 612,061 612,061 611,829 611,829
Collateralized borrowings 1,118,720 1,118,720 1,375,550 1,375,550
Loan and lease commitments, rate lock derivative commitments and other
commitments, on which the committed interest rate is less than the current
market rate are insignificant at June 30, 2009 and December 31, 2008.
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. 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 are included in
"Unrealized gains (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 such adjustment to
income to reflect hedge ineffectiveness on cash flow hedges was recognized
during the six months ended June 30, 2009, and Management does not
26
anticipate the recognition of any such adjustment to income 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 additional
$194,491 will be reclassified as an increase to interest expense.
The gross carrying values of the interest rate contracts as of June 30,
2009 were $162,556 and were recorded in other assets on the Consolidated
Balance Sheets (see Notes 4 and 13). For the six months ended June 30,
2009, the amount of income recognized on the effective portion of these
interest rate contracts in accumulated other comprehensive income on the
condensed Consolidated Balance Sheets was $107,287. For the quarter ended
June 30, 2009, there were no losses on the effective portion of these
interest rate contracts reclassified from accumulated other comprehensive
loss into interest expense of the Consolidated Statement of Financial
Condition. These interest rate swap agreements contain no
credit-risk-related contingency features. Associated with these swaps, as
of June 30, 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
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 existed. In some cases minority interest was 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 statement and separate from the parent's equity. The amount of
net income attributable to the noncontrolling interest is 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
was prohibited. The 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 going forward.
In June 2008, the FASB issued FASB Staff Position 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
27
selected financial data) to conform with the provisions of this FSP. Early
application was 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, are included in the Company's financial statements for June 30,
2009.
In January 2009, the FASB issued FASB Staff Position 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 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 APB 28-1. The Company adopted FSP 157-4 on April 1, 2009. The
adoption of FSP 157-4 did not have a material impact on the Company's
consolidated financial statements. See Notes 8 and 13 for disclosure.
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 adopted the provisions of
FSP SFAS 115-2 and SFAS 124-2 on April 1, 2009. Adoption of FSP SFAS 115-2
and SFAS 124-2 resulted in the reclassification of $2,511,080 ($1,657,313,
net of tax)
28
of non-credit related OTTI to OCI which had previously been recognized in
earnings and is disclosed in Note 8 - Investment Securities.
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 adopted this new
standard as of April 1, 2009. See Note 13 for disclosure.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No.
165"), which sets forth the circumstances under which an entity should
recognize events occurring after the balance sheet date and the disclosures
that should be made. Also, this statement requires disclosure of the date
through which the entity has evaluated subsequent events (for public
companies, and other companies that expect to widely distribute their
financial statements, this date is the date of financial statement
issuance, and for nonpublic companies, the date the financial statements
are available to be issued). The effective date is for interim and annual
periods ending after June 15, 2009. The Company adopted SFAS No. 165 during
the second quarter of 2009, and the adoption did not have a material effect
on its consolidated financial statements.
In June 2009, the FASB issued FASB Statement No. 166, "Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No. 140,"
(FASB 166) The objective of this Statement is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. Additionally, on and
after the effective date, the concept of a qualifying special-purpose
entity is no longer relevant for accounting purposes. Therefore, formerly
qualifying special-purpose entities (as defined under previous accounting
standards) should be evaluated for consolidation by reporting entities on
and after the effective date in accordance with the applicable
consolidation guidance. If evaluation on the effective date results in
consolidation, the reporting entity should apply the transition guidance
provided in the pronouncement that requires consolidation. This Statement
must be applied as of the beginning of each reporting entity's first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. This
Statement must be applied to transfers occurring on or after the effective
date. The adoption of this standard is not expected to have a material
impact on the Company's consolidated financial statements.
In June 2009, the FASB issued FASB Statement No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles--a replacement of FASB Statement No. 162," (FASB 168) to allow
the FASB Codification to be the single source of authoritative U.S.
accounting and reporting standards, other than the guidance issued by the
Securities and Exchange Commission. The effective date of this standard is
for interim and annual reporting periods ending after September 15, 2009.
The adoption of this standard will not have a material impact on the
Company's consolidated financial statements.
29
16. Subsequent Events
The Company has evaluated events or transactions that occurred after June
30, 2009 and through the time the financial statements were issued on
August 19, 2009 for potential recognition or disclosure in the interim
financial statements. There are no subsequent events requiring recognition
or disclosure in the financial statements.
30
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 customers. Additionally, the Bank offers nondeposit retail
investment products such as mutual funds, annuities and insurance through its
relationship with Infinex Investments, Inc.
On June 26, 2003, the Company formed First Litchfield Statutory Trust I for the
purpose of issuing trust preferred securities and investing the proceeds in
subordinated debentures issued by the Company, and on June 26, 2003, the first
series of trust preferred securities were issued. During the second quarter of
2006, the Company formed a second statutory trust, First Litchfield Statutory
Trust II ("Trust II"). The Company owns 100% of Trust II's common stock. Trust
II exists for the sole purpose of issuing trust securities and investing the
proceeds in subordinated debentures issued by the Company. In June 2006, Trust
II issued its first series of trust preferred securities.
The following discussion and analysis of the Company's consolidated financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements.
FINANCIAL CONDITION
Total assets as of June 30, 2009 were $551,018,479, an increase of $18,760,872,
or 3.52% from year-end 2008 total assets of $532,257,607.
Net loans and leases increased $12,400,361 or 3.38% over the year-end 2008
amount. Net loans and leases as of June 30, 2009 were $378,792,440, 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 second quarter of 2009. Leases, net of
unearned income, were $32,300,923 at June 30, 2009, which was an increase of
$12,515,053 or 63.25% from the year-end 2008 balance of $19,785,870. The growth
in the leasing portfolio is in relatively short-term equipment financing.
31
Commercial mortgages totaled $77,756,069 at June 30, 2009, which was an increase
of $10,301,144 or 15.27% 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 $40,286,979
as compared to the year-end balance of $38,153,503. Growth in this portfolio
during the second quarter was in commercial construction loans. The residential
mortgage loan portfolio totaled $175,853,528, which was a decrease of
$16,707,580 from year-end 2008. The majority of this decrease was attributable
to the sale of residential mortgage loans in the secondary market which will
settle in the third quarter. This sale was transacted for the purpose of
strengthening the Company's balance sheet in terms of interest rate risk and
liquidity.
As of June 30, 2009, the securities portfolio totaled $84,002,711, as compared
to the year-end 2008 balance of $113,502,751. The decrease in the investment
portfolio is due to calls in agency bonds as well as sales of mortgage backed
securities. During the first six months of 2009, approximately $26 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. In the second quarter the Company sold approximately $20 million in
twenty and thirty year fixed rate mortgage backed securities. Similar to the
aforementioned sale of residential mortgages, the sale was also for the purpose
of strengthening the balance sheet in terms of interest rate risk and 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 June 30,
2009.
Cash and cash equivalents totaled $42,504,266, 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. The increase in cash and cash equivalents is due to the funds from
the investment sales and calls held in correspondent banks.
Total liabilities were $518,209,548 as of June 30, 2009, which was an increase
of $18,419,205 from total liabilities of $499,790,343 as of year-end 2008. Total
deposits increased by $33,823,976, or 9.85% from their year-end levels. Time
certificates of deposit totaled $154,184,478 as of June 30, 2009, which was an
increase of 26.27%, or $32,073,617 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 provide FDIC deposit
insurance, beyond the $250,000 limit. Savings deposits totaled $63,894,720 at
June 30, 2009 which was an increase of 9.07% from the year-end 2008 balance.
Growth in savings deposits has been in traditional savings, health savings and
municipal NOW accounts. Money market deposits decreased by $6,651,762, or 7.15%,
as a result of customers seeking higher rates as well to lock in those rates via
certificates of deposit.
As of June 30, 2009, repurchase agreements with customers totaled $18,939,133,
which was an increase of 3.94% 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. As of June 30, 2009, advances
under Federal Home Loan Bank borrowings and repurchase agreements with financial
institutions decreased by $1,608,000 and $3,950,000, respectively. Increases in
the loan portfolio were funded by deposit growth and by the liquidity from
investment sales, which enabled Management to reduce the overall level of
wholesale borrowings.
32
RESULTS OF OPERATIONS- THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2008
Summary
Net income available to common shareholders for the second quarter of 2009
totaled $108,906 versus net income of $616,448 for the second quarter of 2008.
Basic and diluted net income per common share for the second quarter of 2009
were both $.05, compared to basic and diluted income per share of $.26 for the
second 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 and accretion 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.
The net interest spread represents the difference between the average rate on
interest earning assets and the average cost of interest bearing liabilities.
The net interest margin represents net interest income before the provision for
loan and lease losses divided by average interest earning assets. Other
components of operating income are the provision for loan losses, noninterest
income such as service charges and trust fees, noninterest expenses and income
taxes.
Net interest income on a fully tax-equivalent basis is comprised of the
following for the three months ended June 30,
2009 2008
----------- -----------
Interest and dividend income $ 6,539,716 $ 7,172,512
Tax-equivalent adjustments (1) 104,265 205,124
Interest expense (2,538,788) (3,465,815)
----------- -----------
Net interest income $ 4,105,193 $ 3,911,821
=========== ===========
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
33
The following table presents on a tax-equivalent basis, the Company's average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates, interest spread and net interest margin for the three months ended June
30, 2009 and 2008. Average loans outstanding include nonaccruing loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Three months ended June 30, 2009 Three months ended June 30, 2008
------------------------------------------- -------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ ------------ ------------ ------------ ------------ ------------
Assets
Interest Earning Assets:
Loans and leases $398,438,000 $ 5,503,089 5.52% $338,109,000 $ 5,307,802 6.28%
Investment securities 117,863,000 1,135,265 3.85% 162,975,000 2,042,869 5.01%
Other interest earning assets 7,640,000 5,627 0.29% 5,098,000 26,965 2.12%
------------ ------------ ------------ ------------
Total interest earning assets 523,941,000 6,643,981 5.07% 506,182,000 7,377,636 5.83%
------------ ------------ ------------ ------------ ------------ ------------
Allowance for loan and
lease losses (3,603,000) (2,157,000)
Cash and due from banks 8,722,000 11,508,000
Premises and equipment 7,223,000 7,592,000
Net unrealized gains on
securities (2,248,000) (2,791,000)
Foreclosed real estate 460,000 --
Other assets 19,091,000 16,734,000
------------ ------------
Total Average Assets $553,586,000 $537,068,000
============ ============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 61,884,000 78,361 0.51% $ 54,314,000 116,210 0.86%
Money Market deposits 85,642,000 191,934 0.90% 80,431,000 365,400 1.82%
Time deposits 147,264,000 950,216 2.58% 139,872,000 1,393,292 3.98%
Borrowed funds 146,551,000 1,318,277 3.60% 162,373,000 1,590,913 3.92%
------------ ------------ ------------ ------------
Total interest bearing liabilities 441,341,000 2,538,788 2.30% 436,990,000 3,465,815 3.17%
------------ ------------ ------------ ------------ ------------ ------------
Demand deposits 71,795,000 67,354,000
Other liabilities 7,279,000 5,312,000
Shareholders' Equity 33,171,000 27,412,000
------------ ------------
Total liabilities and equity $553,586,000 $537,068,000
============ ============
Net interest income $ 4,105,193 $ 3,911,821
============ ============
Net interest spread 2.77% 2.66%
============ ============
Net interest margin 3.13% 3.09%
============ ============
34
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the three months ended June 30, 2009 when compared to the three
months ended June 30, 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.
06/30/09 Compared to 06/30/08
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans and leases $ 879,059 $ (683,772) $ 195,287
Investment securities (494,173) (413,431) (907,604)
Other interest earning assets 9,199 (30,537) (21,338)
----------- ----------- -----------
Total interest earning assets 394,085 (1,127,740) (733,655)
----------- ----------- -----------
Interest paid on:
Deposits 129,202 (783,593) (654,391)
Borrowed money (148,123) (124,513) (272,636)
----------- ----------- -----------
Total interest bearing liabilities (18,921) (908,106) (927,027)
----------- ----------- -----------
Increase in net interest income $ 413,006 $ (219,634) $ 193,372
=========== =========== ===========
Tax-equivalent net interest income for the second quarter of 2009 totaled
$4,105,193, an increase of $193,372, or 4.94% from the second 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 $413,006. Also, the interest earned on earning assets
decreased more than funding costs which resulted in a $219,634 decline in net
interest income.
Average earning assets for the second quarter of 2009 totaled $523,941,000,
which was $17,759,000 or 3.51% higher than average earning assets for the second
quarter of 2008 which totaled $506,182,000. This increase in earning assets,
contributed to an additional $394,085 in interest income. Average loans and
leases increased by $60,329,000, or 17.84%, while average investments decreased
by $45,112,000 or 27.68%. 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 second
quarter of 2009 was 76% loans to 22% investments versus the second quarter 2008
mix of 67% loans to 32% investments.
The tax equivalent net interest margin improved 4 basis points from 3.09% in the
second quarter of 2008 to 3.13% for the second quarter of 2009. Funding costs
decreased by 87 basis points while the tax equivalent yield on earning assets
decreased by 76 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.
35
Provision for Loan and Lease Losses
The provision for loan and lease losses for the second quarter of 2009 totaled
$517,589, which is an increase of $380,589 from the second 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 second quarter of 2009, the Company recorded net charge-offs of
$81,623 compared to second quarter 2008 net charge-offs of $98,915. In both
periods the charge-off activity was primarily from the consumer automobile loan
portfolio, which the Bank purchased in 2006.
Noninterest Income
Noninterest income for the second quarter of 2009 totaled $1,230,472, versus
second quarter 2008 noninterest income of $939,466. The increase in noninterest
income is primarily attributable to gains from the sale of available for sale
securities.
Trust income totaled $275,483, compared to second quarter 2008 trust income of
$333,569. The decline from second quarter 2008 levels is due to market declines
of assets under management. Income from banking service charges and fees
increased by $8,560, or 2.25%, from the second quarter of 2008. This increase is
due primarily to higher levels of deposit service charges, wire transfer, and
master money interchange fees.
During the second quarter of 2009 the Company originated and sold residential
mortgages in the secondary market which resulted in gains on sales of loans
totaling $17,379 compared to similar sales transacted during the second quarter
of 2008 which resulted in gains totaling $6,231.
Other noninterest income totaled $129,744, which was an increase of $31,551, or
32.13% from the second quarter of 2008. The increase was due to mortgage
servicing income recorded during the second quarter.
During the second quarter the Company sold approximately $20 million of
available for sale securities. These securities were sold with the purpose of
reducing interest rate risk and increasing liquidity. The sales resulted in
gains totaling $321,074. Gains on securities for the second quarter of 2008
totaled $20,899.
Noninterest Expense
Second quarter 2009 noninterest expense totaled $4,440,169, increasing 16.12%,
or $616,450 from the second quarter 2008 expense of $3,823,719. The majority of
the increase is the result of FDIC insurance premium increases as well as the
special assessment by the FDIC of approximately $260,000. This assessment was
expensed entirely in the second quarter. Increases in noninterest expenses are
also reflected in legal, computer services, advertising, consulting fees and
expenses for the management of foreclosed properties. The impact of these
increases was mitigated by cost containment efforts for salaries and employee
benefits.
Other noninterest expenses totaled $559,513 which is an increase of $86,270, or
18.23% from the second quarter of 2008. The majority of the increase is a result
of higher 2009 costs for exam and audit fees, software and telephone expenses.
Income Taxes
The second quarter 2009 income tax benefit totaled $ 5,357, which is a decrease
of $74,353 or 107.76% from the second quarter of 2008 provision of $68,996. The
effective tax rate for the second quarter of 2009 was (2)% as compared to 10%
36
for the second quarter of 2008. The lower tax rate is due to an increased
proportion of tax-exempt to taxable income in 2009.
RESULTS OF OPERATIONS- SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2008
Summary
Net income available to common shareholders for the six months ended June 30,
2009 totaled $375,156 versus $1,114,971 for the six months ended June 30, 2008.
Basic and diluted net income per common share for the six months ended June 30,
2009 were both $.16, compared to basic and diluted income per share of $.47 for
the six months ended June 30, 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 and accretion 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.
The net interest spread represents the difference between the average rate on
interest earning assets and the average cost of interest bearing liabilities.
The net interest margin represents net interest income before the provision for
loan and lease losses divided by average interest earning assets. Other
components of operating income are the provision for loan losses, noninterest
income such as service charges and trust fees, noninterest expenses and income
taxes.
Net interest income on a fully tax-equivalent basis is comprised of the
following for the six months ended June 30,
2009 2008
------------ ------------
Interest and dividend income $ 13,100,945 $ 14,411,730
Tax-equivalent adjustments (1) 208,063 358,728
Interest expense (5,127,450) (7,144,862)
------------ ------------
Net interest income $ 8,181,558 $ 7,625,596
============ ============
(1) Interest income is presented on a tax-equivalent basis which reflects a
federal tax rate of 34% for all periods presented.
37
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 six months ended June 30,
2009 and 2008. Average loans outstanding include nonaccruing loans.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Six months ended June 30, 2009 Six months ended June 30, 2008
------------------------------------------- --------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ ------------ ------------ ------------ ------------ ------------
Assets
Interest Earning Assets:
Loans and leases $389,040,000 $ 10,896,227 5.60% $336,323,000 $ 10,819,194 6.45%
Investment securities 117,693,000 2,392,316 4.07% 154,097,000 3,877,507 5.03%
Other interest earning assets 6,063,000 20,465 0.68% 5,700,000 73,757 2.59%
------------ ------------ ------------ ------------
Total interest earning assets 512,796,000 13,309,008 5.19% 496,120,000 14,770,458 5.96%
------------ ------------ ------------ ------------ ------------ ------------
Allowance for loan and
lease losses (3,663,000) (2,165,000)
Cash and due from banks 11,144,000 11,427,000
Premises and equipment 7,278,000 7,659,000
Net unrealized loss on
securities (1,252,000) (1,732,000)
Foreclosed real estate 230,000
Other assets 19,739,000 16,356,000
------------ ------------
Total Average Assets $546,272,000 $527,665,000
============ ============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits $ 62,883,000 189,858 0.60% $ 56,356,000 305,886 1.09%
Money Market deposits 87,284,000 472,106 1.08% 81,697,000 822,167 2.01%
Time deposits 140,197,000 1,836,147 2.62% 137,022,000 2,845,968 4.15%
Borrowed funds 145,215,000 2,629,339 3.62% 153,347,000 3,170,841 4.14%
------------ ------------ ------------ ------------
Total interest bearing liabilities 435,579,000 5,127,450 2.35% 428,422,000 7,144,862 3.34%
------------ ------------ ------------ ------------ ------------ ------------
Demand deposits 70,089,000 66,034,000
Other liabilities 7,683,000 5,073,000
Shareholders' Equity 32,921,000 28,136,000
------------ ------------
Total liabilities and equity $546,272,000 $527,665,000
============ ============
Net interest income $ 8,181,558 $ 7,625,596
============ ============
Net interest spread 2.84% 2.62%
============ ============
Net interest margin 3.19% 3.07%
============ ============
38
RATE/VOLUME ANALYSIS
The following table, which is presented on a tax-equivalent basis, reflects the
changes for the six months ended June 30, 2009 when compared to the six months
ended June 30, 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.
06/30/09 Compared to 06/30/08
Increase (Decrease) Due to
--------------------------
Volume Rate Total
----------- ----------- -----------
Interest earned on:
Loans and leases $ 1,575,674 $(1,498,641) $ 77,033
Investment securities (818,949) (666,242) (1,485,191)
Other interest earning assets 4,421 (57,713) (53,292)
----------- ----------- -----------
Total interest earning assets 761,146 (2,222,596) (1,461,450)
----------- ----------- -----------
Interest paid on:
Deposits 210,087 (1,685,997) (1,475,910)
Borrowed money (161,899) (379,603) (541,502)
----------- ----------- -----------
Total interest bearing liabilities 48,188 (2,065,600) (2,017,412)
----------- ----------- -----------
Increase in net interest income $ 712,958 $ (156,996) $ 555,962
=========== =========== ===========
Tax-equivalent net interest income for the six months ended June 30, 2009
totaled $8,181,558, an increase of $555,962, or 7.29% from the six months ended
June 30, 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 $712,958. Offsetting that, the
Company was not able to decrease its cost of deposit interest to a greater
degree than the interest earned on earning assets which resulted in a $156,996
decline in net interest income.
Average earning assets for the six months ended June 30, 2009 totaled
$512,796,000, which was $16,676,000 or 3.36% higher than average earning assets
for the six months ended June 30, 2008 which totaled $496,120,000. This increase
in earning assets, both in loans and investments, net of increased volume of
interest bearing liabilities, contributed to an additional $712,958 in net
interest income. Average loans and leases increased by $52,717,000, or 15.67%,
while average investments decreased by $36,404,000 or 23.62%. 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 six months ended June 30, 2009 was 76% loans to 23%
investments versus the six months ended June 30, 2008 mix of 68% loans to 31%
investments.
The tax equivalent net interest margin improved 12 basis points from 3.07% in
the six months ended June 30, 2008 to 3.19% for the six months ended June 30,
2009. Funding costs decreased by 99 basis points while the tax equivalent yield
on earning assets decreased by 77 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.
39
Provision for Loan and Lease Losses
The provision for loan and lease losses for the six months ended June 30, 2009
totaled $787,589, which is an increase of $575,589 from the six months ended
June 30, 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 six months ended June 30, 2009, the Company recorded net charge-offs
of $456,619 compared to six month 2008 net charge-offs of $130,044. The change
in the level of charge-offs from 2008 to 2009 is due to a residential loan
charge-off 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 six months ended June 30, 2009 totaled $2,044,518,
versus six months ended June 30, 2008 noninterest income of $1,812,706. The
increase in noninterest income is primarily attributable to gains from the sales
of available for sale securities and residential mortgages.
Trust income totaled $547,539, compared to the six months ended June 30, 2008
trust income of $673,093. The decline from six months ended June 30, 2008 levels
is due to market declines of assets under management. Income from banking
service charges and fees increased by $26,568, or 3.66%, from the six months
ended June 30, 2008. This increase is due primarily to higher levels of deposit
service charges, wire transfer, and master money interchange fees.
During the first six months of 2009 the Company originated and sold residential
mortgages in the secondary market which resulted in gains on sales of loans
totaling $60,440 compared to similar sales transacted during the first six
months of 2008 which resulted in gains totaling $10,302.
Other noninterest income totaled $168,772, as compared to $172,974 from the six
months ended June 30, 2008.
During the second quarter of 2009 the Company sold over $20 million of available
for sale securities. The purpose of this sale was to decrease interest rate risk
and improve liquidity in the balance sheet. The gains from these sales comprised
most of the $321,074 gain shown in the 2009 year to date results.
Noninterest Expense
The six months ended June 30, 2009 noninterest expense totaled $8,463,048,
increasing $840,286, or 11.02% from the six months ended June 30, 2008 expense
of $7,622,762. Increases in noninterest expenses are reflected in regulatory
assessments, legal, computer services, advertising and expenses for the
management of foreclosed properties. The largest of these increases was
regulatory assessments which totaled $719,226 for the first six months of 2009.
This expense has increased $626,877 over the 2008 costs due to increase premiums
and the special assessment for the second quarter. The impact of these increases
was mitigated by cost containment efforts for salaries, equipment and supplies.
Other noninterest expenses totaled $1,090,520 which is an increase of $95,356,
or 9.58% from the six months ended June 30, 2008. The majority of the increase
is a result of higher 2009 costs for exam and audit fees which totaled $94,290
above six months ended June 30, 2008 costs. Other increases in this category
were software and telephone expense. Offsetting these increases were reduced
expenses for insurance, contributions, directors fees, seminars and travel.
40
Income Taxes
The six months ended June 30, 2009 provision for income taxes totaled $64,557,
which is a decrease of $65,284 or 50.28% from the six months ended June 30, 2008
provision of $129,841. The effective tax rate for the six months ended June 30,
2009 was 8% as compared to 11% for the six months ended June 30, 2008. The lower
tax rate is due to decreased taxable income in 2009.
LIQUIDITY
Management's objective is to ensure continuous ability to meet cash needs as
they arise. Such needs may occur from time to time as a result of fluctuations
in loan demand and the level of total deposits. Accordingly, the Bank has a
liquidity policy that provides flexibility to meet cash needs. The liquidity
objective is achieved through the maintenance of readily marketable investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products.
The Bank is a member of the Federal Home Loan Bank system, which provides credit
to its member banks. This enhances the liquidity position of the Bank by
providing a source of available overnight as well as short-term borrowings.
Additionally, federal funds, borrowings through the use of repurchase
agreements, and the sale of mortgage loans in the secondary market are available
to fund short-term cash needs. (See Note 6 to the Consolidated Financial
Statements for information on Federal Home Loan Bank borrowings and repurchase
agreements.)
As of June 30, 2009, the Company had $151,482,011 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 $32,808,931 as of June 30, 2009 as compared with
$32,467,264 as of December 31, 2008. The increase in shareholders' equity is due
to 2009 net income as well as to the Company's other comprehensive income
charges related to the recognition of the unfunded pension liability and cash
flow hedges, offset by unrealized holding losses on available for sale
securities and common and preferred dividends. 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 and second quarters of 2009,
the Company increased its investment in the Bank's equity by an additional
$5,500,000. 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.
41
The various capital ratios of the Company and the Bank are as follows as of June
30, 2009:
Well-Capitalized
Capital Levels The Company The Bank
-------------- ----------- --------
TIER 1:
Leverage capital ratio 5.00% 7.57% 7.27%
Risk-based capital ratio 6.00% 10.73% 10.30%
Total risk-based capital ratio 10.00% 11.77% 11.34%
Included in the Company's capital used to determine these ratios at June 30,
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 June 30, 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
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
42
still considered collectible 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
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 June 30, 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 June 30, 2009, the allowance for loan and lease losses was equivalent to 46%
of total non-performing assets as compared with 66% of total non-performing
assets at December 31, 2008. As of June 30, 2009, non-performing assets, loans
and leases were $8,733,972 and represented 2.29% of total loans, leases and
OREO. As of December 31, 2008, non-performing assets and loans and leases
totaled $5,639,735 and represented 1.53% of total loans, leases and OREO. The
ratio of the allowance for such loan and lease losses to total loans and leases
at June 30, 2009 and December 31, 2008 was 1.05% and 1.00% respectively. The
ratio of the allowance for loan and lease losses to non-performing assets
increased over the first six months of 2009 due to increases to the allowance
resulting from commercial loan growth and increases to general allocations.
Although the Company did experience an increase in non-performing assets during
the first six months of the year, 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 additional allowance. Changes in the allowance for loan and lease
losses for the three and six month periods ended June 30, 2009 and 2008 are as
shown below:
43
For the three months ended June 30, 2009 2008
----------- -----------
Balance as of March 31, $ 3,593,824 $ 2,195,493
Provision for loan and lease losses 517,589 137,000
Loans and leases charged off (228,822) (116,005)
Recoveries of loans and leases charged off 147,199 17,090
----------- -----------
Balance as of June 30, $ 4,029,790 $ 2,233,578
=========== ===========
For the six months ended June 30, 2009 2008
----------- -----------
Balance at beginning of the year $ 3,698,820 $ 2,151,622
Provision for loan and lease losses 787,589 212,000
Loans and leases charged off (648,947) (152,265)
Recoveries of loans and leases charged off 192,328 22,221
----------- -----------
Balance as of June 30, $ 4,029,790 $ 2,233,578
=========== ===========
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 June 30, 2009 and December 31, 2008.
June 30, 2009 December 31, 2008
----------------- -----------------
Nonaccrual loans and leases $ 8,733,972 $ 5,639,735
Other real estate owned -- --
----------------- -----------------
Total nonperforming assets $ 8,733,972 $ 5,639,735
================= =================
Loans and leases past due in excess of 90
days and accruing interest $ -- $ 19,603
================= =================
POTENTIAL PROBLEM LOANS
As of June 30, 2009, there were four loans totaling $1.3 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 $1.3 million at June 30, 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: 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.
44
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 Whether the Company intends to sell the security and whether it is
more likely than not that the Company will be required to sell the
security before the recovery of its amortized cost basis, which may be
maturity;
o The length of time and the extent to which the fair value has been
less than the amortized cost basis;
o Adverse conditions specifically related to the security, an industry
or a geographic area;
o The historical and implied volatility of the fair value of the
security;
o The payment structure of the debt security and the likelihood of the
issuer being able to make payment that increase in the future;
o Failure of the issuer of the security to make scheduled interest or
principal payments;
o Any changes to the rating of the security by a rating agency;
o Recoveries or additional declines in fair value subsequent to the
balance sheet date.
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 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. The Company adopted the provisions of FSP SFAS 115-2 and SFAS 124-2
during the second quarter of 2009. Adoption of FSP SFAS 115-2 and SFAS
124-2 resulted in the reclassification of $2,511,080 ($1,657,313, net of
tax) of non-credit related OTTI to OCI which had previously been recognized
as a loss in earnings and is disclosed in Note 8 - Investment Securities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers such
as letters of credit. In the opinion of management, these off-balance sheet
arrangements are not likely to have a material effect on the Company's financial
condition, results of operation, or liquidity.
At June 30, 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
45
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 operations.
ITEM 4. 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
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 second 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.
46
The Annual Meeting of Shareholders of the Company was held on Wednesday, May 20,
2009. The results of such meeting are as follows:
1. Election of Directors
---------------------
The vote for re-electing each of the three Directors listed below to serve
for a term of three years was as follows:
Withholding
For Authority
--------------- -----------------
Joseph J. Greco Number of Shares: 1,722,357 84,234
--------------- -----------------
Percentage of Shares Voted: 94.04% 4.60%
--------------- -----------------
Percentage of Shares Entitled to Vote: 73.08% 3.57%
--------------- -----------------
Withholding
For Authority
--------------- -----------------
Perley H. Grimes, Jr. Number of Shares: 1,718,073 88,518
--------------- -----------------
Percentage of Shares Voted: 93.81% 4.83%
--------------- -----------------
Percentage of Shares Entitled to Vote: 72.90% 3.76%
--------------- -----------------
Withholding
For Authority
--------------- -----------------
Gregory S. Oneglia Number of Shares: 1,723,811 82,780
--------------- -----------------
Percentage of Shares Voted: 94.12% 4.52%
--------------- -----------------
Percentage of Shares Entitled to Vote: 73.14% 3.51%
--------------- -----------------
Continuing as Directors with terms to expire at the 2010 Annual Meeting of
Shareholders are: George M. Madsen, Alan B. Magary, William J. Sweetman,
and Patricia D. Werner. Continuing as Directors with terms to expire at the
2011 Annual Meeting of Shareholders are: Patrick J. Boland, John A.
Brighenti, Richard E. Pugh, and H. Ray Underwood, Jr.
2. Appointment of Auditors
-----------------------
Votes cast "For," "Against," and "Abstain" on the proposal to ratify the
appointment of McGladrey & Pullen, LLP to act as independent auditors of
the current fiscal year were as follows:
"FOR "AGAINST
APPROVAL" APPROVAL" "ABSTAIN"
---------------- --------------- ------------
1,789,887 14,383 27,223
---------------- --------------- ------------
Number Number Number
75.94% 0.61% 1.16%
---------------- --------------- ------------
(Percent of shares entitled to vote)
97.73% 0.79% 1.49%
---------------- --------------- ------------
(Percent of shares actually voted at the meeting)
47
3. Approval of Compensation of Named Executive Officers
----------------------------------------------------
Votes cast "For," "Against," and "Abstain" on the proposal to approve the
resolution regarding the compensation of the named executive officers in
the Summary Compensation Table of the Company's Proxy Statement for the
2009 Annual Meeting of Shareholders, as described in the Executive
Compensation Tables and the related disclosure contained in the Proxy
Statement were as follows:
"FOR "AGAINST
APPROVAL" APPROVAL" "ABSTAIN"
---------------- --------------- ------------
1,558,186 165,628 107,679
---------------- --------------- ------------
Number Number Number
66.11% 7.03% 4.57%
---------------- --------------- ------------
(Percent of shares entitled to vote)
85.08% 9.04% 5.88%
---------------- --------------- ------------
(Percent of shares actually voted at the meeting)
Item 5. Other Information. None
48
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.
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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.
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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 19, 2009 FIRST LITCHFIELD FINANCIAL
CORPORATION
By: /s/ Joseph J. Greco
--------------------
Joseph J. Greco, President and
Chief Executive Officer
Dated: August 19, 2009 By: /s/ Carroll A. Pereira
-----------------------
Carroll A. Pereira
Principal Financial and
Accounting Officer
51