U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the quarterly period ended: March 31, 2000
[ ] 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 small business issuer 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)
Issuer's telephone number, including area code: (860) 567-8752
----------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,514,931 shares
of Common Stock, par value $.01 per share, were outstanding at April
25, 2000.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
Part I - Consolidated Financial Information
Item 1 - Financial Statements (unaudited)
<S> <C>
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 . . . . . . . . 2
Consolidated Statements of Income - Three months ended
March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . . . .. . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part II - Other Information
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . 14
3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . None
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . .None
5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,953,860 $ 12,800,196
-------------- -------------
CASH AND CASH EQUIVALENTS 4,953,860 12,800,196
-------------- -------------
Securities:
Available for sale securities:
US Treasuries and other securities (amortized cost $28,471,809-2000 27,598,010 23,663,850
and $24,491,689-1999)
Mortgage-backed securities (amortized cost $20,605,085-2000
and $19,279,026-1999) 20,337,201 19,036,632
Held to maturity securities:
Mortgage-backed securities (market value $3,847,977-2000
and $4,147,716-1999) 3,871,085 4,188,851
-------------- -------------
TOTAL SECURITIES 51,806,296 46,889,333
-------------- -------------
Federal Home Loan Bank stock, at cost 2,100,000 2,100,000
Federal Reserve Bank stock, at cost 81,850 81,850
Loans Receivable:
Real estate-residential mortgage 117,115,034 115,392,170
Real estate-commercial mortgage 20,099,407 19,821,940
Real estate-construction 7,743,317 7,090,241
Commercial 8,686,172 8,063,552
Installment 34,541,912 33,114,855
Other 170,263 123,370
-------------- -------------
TOTAL LOANS 188,356,105 183,606,128
Net deferred loan origination costs 1,284,491 1,217,288
Allowance for loan losses (961,211) (1,014,522)
-------------- --------------
NET LOANS 188,679,385 183,808,894
-------------- -------------
Deferred taxes 399,217 378,450
Bank premises and equipment, net 2,938,479 3,017,976
Accrued interest receivable 1,537,080 1,455,363
Other assets 5,347,719 5,441,728
-------------- -------------
TOTAL ASSETS $ 257,843,886 $ 255,973,790
============== =============
LIABILITIES
Deposits:
Noninterest bearing:
Demand $ 39,747,367 $ 33,990,059
Interest bearing:
Savings 34,168,272 36,556,699
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Money market 43,527,811 44,111,008
Time certificates of deposit in denominations of $100,000 or more 17,085,651 16,802,864
Other time certificates of deposit 68,663,220 65,772,152
-------------- -------------
TOTAL DEPOSITS 203,192,321 197,232,782
-------------- -------------
Federal Home Loan Bank advances 37,165,000 41,730,000
Collateralized borrowings 899,204 830,227
Accrued expenses and other liabilities 1,209,877 1,254,572
-------------- -------------
TOTAL LIABILITIES 242,466,402 241,047,581
-------------- -------------
Commitments & Contingencies -- --
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares
outstanding Common stock $.01 par value
Authorized - 5,000,000 shares
2000 - Issued - 1,597,348 shares, outstanding - 1,514,931 shares
1999 - Issued - 1,567,353 shares, outstanding - 1,484,934 shares 15,973 15,674
Capital surplus 11,150,626 10,933,465
Retained earnings 5,608,943 5,324,445
Less: Treasury stock at cost-82,419 shares (701,061) (701,061)
Accumulated other comprehensive income-net unrealized loss
on available for sale securities (net of taxes) (696,997) (646,314)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 15,377,484 14,926,209
--------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 257,843,886 $ 255,973,790
=============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, (Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------------- -------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 3,578,171 $ 2,892,063
Interest and dividends on securities:
Mortgage-backed 364,628 416,663
US Treasury and other 449,528 369,485
Deposits with banks 97 9
Other interest income -- 11,594
---------------- -------------
TOTAL INTEREST INCOME 4,392,424 3,689,814
---------------- -------------
INTEREST EXPENSE
Interest on deposits:
Savings 126,316 126,229
Money market 394,236 366,009
Time certificates of deposit in denominations of $100,000 or more 167,775 145,889
Other time certificates of deposit 922,023 900,846
---------------- -------------
TOTAL INTEREST ON DEPOSITS 1,610,350 1,538,973
Interest on Federal Home Loan Bank advances 543,181 113,106
Interest on borrowed money -- 618
---------------- -------------
TOTAL INTEREST EXPENSE 2,153,531 1,652,697
---------------- -------------
NET INTEREST INCOME 2,238,893 2,037,117
PROVISION FOR LOAN LOSSES 45,000 30,000
---------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,193,893 2,007,117
---------------- -------------
NONINTEREST INCOME
Banking service charges and fees 141,665 115,291
Trust 210,000 178,500
Other 88,036 80,775
---------------- -------------
TOTAL NONINTEREST INCOME 439,701 374,566
---------------- -------------
NONINTEREST EXPENSE
Salaries 762,398 644,858
Employee benefits 231,848 169,909
Net occupancy 116,500 121,528
Equipment 114,510 97,206
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Legal fees 65,384 25,890
Directors fees 35,704 37,750
Computer services 199,246 192,041
Supplies 45,096 55,154
Commissions, services and fees 77,374 53,068
Postage 25,832 28,418
Advertising 38,225 47,042
Other 262,404 286,059
---------------- -------------
TOTAL NONINTEREST EXPENSES 1,974,521 1,758,923
---------------- -------------
INCOME BEFORE INCOME TAXES 659,073 622,760
PROVISION FOR INCOME TAXES 223,081 193,844
---------------- -------------
NET INCOME $ 435,992 $ 428,916
---------------- -------------
INCOME PER SHARE
BASIC NET INCOME PER SHARE $ 0.29 $ 0.29
================ =============
DILUTED NET INCOME PER SHARE $ 0.28 $ 0.28
================ =============
Dividends Per Share $ .10 $ .10
================ =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, (Unaudited)
<TABLE>
<CAPTION>
2000 1999
-----------------------------------
<S> <C> <C>
Net income $ 435,992 $ 428,916
Unrealized holding losses on securities:
Unrealized holding losses arising during the period, net of taxes (50,683) (94,336)
---------------- --------------
Comprehensive income $ 385,309 $ 334,580
================ =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31, (Unaudited) 2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 435,992 $ 428,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of premiums and discounts
on investment securities, net (15,399) 20,401
Provision for loan losses 45,000 30,000
Depreciation and amortization 92,350 93,376
Loans originated for sale -- (542,550)
Proceeds from sales of loans held for sale -- 922,150
Gain on disposals of bank premises and equipment -- (105)
Increase in accrued interest receivable (81,717) (63,145)
Decrease (increase) in other assets 140,382 (102,807)
(Increase) in deferred loan origination costs (67,203) (109,145)
(Decrease) increase in accrued expenses and other liabilities (47,695) 67,886
------------ ------------
Net cash provided by operating activities 501,710 744,977
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale mortgage-backed securities:
Proceeds from maturities and principal payments 837,480 2,514,241
Purchases (2,143,399) --
Available for sale US Treasury and other investment securities:
Purchases (3,978,549) (6,000,000)
Held to maturity mortgage-backed securities:
Proceeds from maturities and principal payments 311,455 820,549
Purchase of Federal Home Loan Bank Stock -- (54,000)
Net increase in loans (4,848,288) (5,598,086)
Purchase of bank premises and equipment (12,853) (210,046)
Proceeds form sale of bank premises and equipment -- 105
Increase in cash surrender value of life insurance (46,375) --
------------ ------------
Net cash used in investing activities (9,880,529) (8,527,237)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits 2,785,684 1,829,304
Net increase (decrease) in certificates of deposit 3,173,855 (5,378,151)
Net (decrease) increase in borrowings under Federal Home Loan
Bank advances (4,565,000) 7,700,000
Net increase in collateralized borrowings 68,977 200
Proceeds from exercise of stock options 217,460 118,206
Dividends paid on common stock (148,493) (141,206)
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net cash provided by financing activities 1,532,483 4,128,353
------------ ------------
Net decrease in cash and cash equivalents (7,846,336) (3,653,907)
CASH AND CASH EQUIVALENTS, at beginning of period 12,800,196 8,756,166
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 4,953,860 $ 5,102,259
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 2,120,437 $ 1,617,111
============ ============
Income taxes $ 46,952 $ 67,628
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
2. The accompanying unaudited consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles 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, 1999.
These financial statements reflect, in the opinion of Management, all
adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the Company's financial position and the results of
its operations and its cash flows for the periods presented. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations that may be expected for all of
2000.
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 in weighted average shares outstanding, unless the
effect is antidilutive. The Company is also required to provide a
reconciliation of the numerator and denominator used in the computation of
both basic and diluted income per share.
The following is information about the computation of net income per share
for the three month periods ended March 31, 2000 and 1999. The 1999
information has been restated to give retroactive effect to all stock
dividends and stock splits for the periods presented.
For the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Net Per Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic Net Income Per Share
Income available to common shareholders $435,992 1,498,155 $ .29
-------- --------- -------
Effect of Dilutive Securities
Options Outstanding -- 50,094
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions $435,992 1,538,249 $ .28
======== ========= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Three Months Ended March 31, 1999
Net Per Share
Income Shares Amount
------ ------ ------
Basic Net Income Per Share
Income available to common shareholders $428,916 1,480,794 $ .29
-------- --------- ------
Effect of Dilutive Securities
Options Outstanding -- 63,924
Diluted Net Income Per Share
Income available to common shareholders
plus assumed conversions $428,916 1,544,718 $ .28
======== ========== =======
</TABLE>
6
<PAGE>
4. Other comprehensive income, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000
--------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
<S> <C> <C> <C>
Unrealized holding losses arising during the period $(71,450) $ 20,767 $(50,683)
Less: reclassification adjustment for amounts recognized in net income -- -- --
-------- -------- --------
Unrealized holding loss on available for sale securities, net of taxes $(71,450) $ 20,767 $(50,683)
======== ======== ========
<CAPTION>
March 31, 1999
--------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
<S> <C> <C> <C>
Unrealized holding losses arising during the period $(158,168) $ 63,832 $ (94,336)
Less: reclassification adjustment for amounts recognized in net income -- -- --
--------- --------- ---------
Unrealized holding loss on available for sale securities, net of taxes $(158,168) $ 63,832 $ (94,336)
========= ========= =========
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
First Litchfield Financial Corp (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 (OCC.) The First National Bank of Litchfield is the
Company's only subsidiary and only source of income. The Bank has one
subsidiary, Lincoln Corporation, which is a Connecticut corporation. The purpose
of 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.
Both the Company and the Bank are headquartered in Litchfield, CT. 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 Bank Insurance Fund (BIF), which is
administered by the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank's lending activities include loans secured by residential and commercial
mortgages. Other loan products include consumer and business installment
lending, as well as other secured and nonsecured lending. The Bank has six
banking locations located in the towns of Torrington, Litchfield, Washington,
Marble Dale, Goshen and Roxbury, 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.
As of March 31, 2000 the Company has assets of $257,843,886, which was an
increase of $1.9 million or .7% from year-end 1999 assets of $255,973,790.
Although the overall increase of assets appears minimal, growth in both the loan
and securities portfolios was offset by a decrease in cash and cash equivalents.
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 financial statements.
FINANCIAL CONDITION
Total assets as of March 31, 2000 were $257,843,886, an increase of $1,870,096
or .7% from year-end 1999 assets of $255,973,790.
Growth in assets was experienced in both the loan and securities portfolios.
Total securities as of March 31, 2000 aggregated $51,806,296, which is an
increase of $4,916,963 or 10.5% from the year-end 1999 level. First quarter
purchases of US Government Treasury securities and agency bonds were made in an
effort to improve liquidity as well as to increase the yield on the portfolio.
Net loans totaled $188,679,385 as of March 31, 2000, an increase of $4,870,491
over the balance at December 31, 1999. Growth was experienced in all loan
categories, and the largest increase was in the residential mortgage portfolio,
which increased $1,722,864 from year-end 1999. Installment loans, particularly
indirect dealer financing of cars, recreational vehicles and boats, increased by
$1,427,057. Management considers the increased loan demand to be indicative of
8
<PAGE>
the strong local economy as well as competitively priced loan products and the
Bank's reputation for excellent customer service.
Cash and cash equivalents decreased by $7,846,336 or 61.3% during the first
quarter of 2000. This decrease was the result of lower requirements for cash and
liquid funds after providing excess liquidity as part of the Bank's preparations
during the fourth quarter of 1999 regarding the Year 2000 issue.
Total liabilities were $242,466,402 as of March 31, 2000, which were nearly
unchanged from the December 31, 1999 level of $241,047,581. However, during the
first quarter, the mix of the funding liabilities changed. Total deposits were
$203,192,321, which was a $5,959,539 or a 3.0% increase over December 31, 1999.
Demand deposits totaled $39,747,367, an increase of $5,757,308 from December 31,
1999. Management attributes the increase of demand deposits to the seasonal
fluctuations related to customer tax payments. Savings and Money Market deposits
decreased by a total of $2,971,624 or 3.6% over December 31, 1999. This decline
was offset by an increase of $2,891,068 in Other Time Certificates of Deposit.
The relatively higher rates paid on short term certificates of deposit appear to
be causing a migration of funds from the savings and money market deposits.
Federal Home Loan Bank advances decreased by $4,565,000 or 10.9% over the three
month period. Growth in deposits as well as the availability of funds not needed
for the Year 2000 issue combined to fund earning asset growth but also to reduce
Federal Home Bank advances.
RESULTS OF OPERATIONS
Summary
Net income for the Company for the first quarter of 2000 totaled $435,992. These
earnings are similar to earnings for the first quarter of 1999 which totaled
$428,916. Basic and fully diluted net income per share for the first quarter of
2000 were $.29 and $.28 per share respectively. These results were unchanged
from those earned for the first quarter of 1999.
Net interest income
Net interest income is comprised of the following for the three months ended
March 31,
2000 1999
--------- --------
Interest and dividend income $4,392,424 $3,689,814
Tax-equivalent adjustments 15,483 4,820
Interest expense 2,153,531 1,652,697
--------- ---------
Net interest income $2,254,376 $2,041,937
========== ==========
The following table presents the Company's average balance sheets (computed on a
daily basis), net interest income, and interest rates for the three months ended
March 31, 2000 and 1999. Average loans outstanding include nonaccruing loans.
Interest income is presented on a tax-equivalent basis which reflects a federal
tax rate of 34% for all periods presented.
9
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
Three months ended March 31, 2000 Three months ended March 31, 1999
------------------------------------------------------------------------------------------
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets:
Loans $185,654,000 $3,593,654 7.74% $154,399,000 $2,896,883 7.50%
Investment Securities 51,755,000 814,156 6.29% 52,236,000 786,148 6.02%
Other interest earning assets 30,000 97 1.29% 999,000 11,603 4.65%
------------ ---------- ------------ -----------
Total interest earning assets 237,439,000 4,407,907 7.43% 207,634,000 3,694,634 7.12%
Allowance for loan losses (999,000) (1,026,000)
Cash and due from banks 6,100,000 5,264,000
Bank premises and equipment 2,989,000 2,212,000
Net unrealized gain/loss on
securities (848,000) (117,000)
Other assets 7,182,000 2,779,000
----------- ------------
Total Average Assets $251,863,000 $216,746,000
============ ============
Liabilities and Shareholder's Equity
Interest Bearing Liabilities:
Savings deposits $35,636,000 $ 126,316 1.42% $34,972,000 $ 126,229 1.44%
Money Market deposits 45,409,000 394,236 3.47% 44,942,000 366,009 3.26%
Time deposits 84,684,000 1,089,798 5.15% 83,727,000 1,046,735 5.00%
Borrowed funds 36,242,000 543,181 6.00% 8,593,000 113,724 5.29%
----------- ---------- ------------ ---------
Total interest bearing liabilities 201,971,000 2,153,531 4.27% 172,234,000 1,652,697 3.84%
Demand deposits 33,630,000 29,688,000
Other liabilities 1,084,000 309,000
Shareholders' Equity 15,178,000 14,515,000
----------- -----------
Total liabilities and equity $251,863,000 $216,746,000
============ ============
Net interest income $2,254,376 $2,041,937
========== ============
Net interest spread 3.16% 3.28%
Net interest margin 3.80% 3.93%
RATE/VOLUME ANALYSIS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3/31/00 Compared to 3/31/99
Increase (Decrease) Due to
-------------------------------------------------------------------------
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest earned on:
Loans $602,480 $94,291 $696,771
Investment securities (7,294) 35,302 28,008
Other interest income (6,598) (4,908) (11,506)
-------- ------- -------
Total interest earning assets 588,588 124,685 713,273
Interest paid on:
Deposits 19,818 51,559 71,377
Borrowed money 412,477 16,980 429,457
-------- ------- --------
Total interest bearing liabilities 432,295 68,539 500,834
Increase in net interest income $156,293 $56,146 $212,439
======== ======= ========
</TABLE>
Of the $212,439 increase in the net interest income, an increase of $56,146
resulted from increases in interest rates earned or paid during 2000 and an
increase of $156,293 is attributed to increases in the volume of average
interest earning assets and interest bearing liabilities.
10
<PAGE>
Net interest income is the single largest source of the Company's net income.
Net interest income is defined as the difference between interest and dividend
income from earning assets, primarily loans and investment securities, and
interest expense on deposits and borrowed money. Interest income is the product
of the average balances outstanding on loans, securities and interest-bearing
deposit accounts multiplied by their effective yields. Interest expense is
similarly calculated as the result of the average balances of interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
Other components of operating income are the provision for loan losses,
noninterest income such as service charges and trust fees, noninterest expenses
and income taxes.
Tax-equivalent net interest income for the first quarter of 2000 increased
$212,439 or 10.4% from 1999 first quarter results. The increase in net interest
income is due primarily to the higher levels of earning assets over the
comparable quarter in 1999. Average earning assets for the first quarter of 2000
totaled $237,439,000, an increase of $29,805,000 from average earning assets of
$207,634,000 for the quarter ended March 31, 1999. The effect of the increased
level of earning assets offset the negative effect of the lower net interest
margin (net interest income divided by average earning assets) during the first
quarter of 2000. The net interest margin was 3.80% for the first quarter of
2000, down 13 basis points from the 3.93% earned during the comparable quarter
in 1999. The yield on earning assets increased by 31 basis points due to a
higher interest rate environment. Conversely, costs to fund earning assets
increased 43 basis points due also to the effect of the higher interest rate
environment as well as to intense rate competition for deposits.
Provision for Loan Losses
The provision for loan losses for the first quarter of the year totaled $45,000,
an increase of $15,000 from the first quarter of 1999. Management increased the
loan loss provision primarily in response to the sustained growth experienced in
the loan portfolio. The provision for loan losses is determined quarterly and
assessed along with the adequacy of the loan loss reserve.
During the first quarter of 2000 the Company recorded net charge-offs of $98,311
compared to first quarter 1999 net charge-offs of $672. First quarter 2000
charge-offs included writedowns and losses related primarily to the growth in
the consumer loan portfolio.
Noninterest Income
Noninterest income for the first quarter of 2000 totaled $439,701, an increase
of $65,135 or 17% from first quarter 1999 noninterest income of $374,566. This
increase is attributed to increased income from trust fees which increased
$31,500 from the first quarter of 1999. This increase is due to higher levels of
trust assets as well as the imposition of fee increases effective in 2000. Also
contributing to the increase in noninterest income is the increase in fees from
service charges on deposit accounts. Growth in this area resulted from both ATM
fees and higher levels of MasterMoney debit card usage.
11
<PAGE>
Noninterest Expense
First quarter 2000 noninterest expense totaled $1,974,521, an increase of 12.2%
or $215,598 from the first quarter of 1999. Salary and benefits costs increased
due to additions to staff, primarily in the Loan Department. Growth in benefits
costs are also due to increases in group insurance premiums relating to new
staff.
Legal fees for the first quarter totaled $65,384, which have increased $39,494
from the first quarter of 1999. Corporate activity related to the Company's
registration and filings with the Securities and Exchange Commission and
increased legal services provided within the trust function have caused this
increase. Also contributing to the increase in noninterest expense was the
increase in commissions and consulting expenses. Cost incurred for profitability
studies, compliance issues and loan review analyses during the first quarter of
2000 have caused this increase.
Income Taxes
The first quarter 2000 provision for income taxes totaled $223,081, an increase
of $29,237 from the same period in 1999. There are two factors contributing to
this increase: a higher level of taxable income in 2000, and the lower than
normal 1999 taxes resulting from an investment tax credit related to the
renovation of the building housing the Bank's executive offices. This tax credit
reduced income tax expense for 1999.
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 and the sale of mortgage loans in the secondary
market are available to fund short term cash needs.
As of March 31, 2000 the Company had $24,858,781 in loan commitments and credit
lines outstanding. Since some commitments are expected to expire without being
drawn upon, the total commitment amount therefore does not necessarily represent
all future cash requirements. The funding of these commitments are anticipated
to be through deposits, loan and security amortizations and maturities.
Management is confident that the Company has sufficient liquidity to meet its
present and foreseeable needs.
CAPITAL
At March 31, 2000, total shareholders' equity was $15,377,484 compared to
$14,926,209 at December 31, 1999. From a regulatory perspective, the capital
ratios of the Company and the Bank place each entity in the "well-capitalized"
categories under applicable regulations. The various capital ratios of the
Company and the Bank are as follows as of March 31, 2000.
12
<PAGE>
Minimum
Regulatory
Capital Levels The Company The Bank
-------------- ----------- --------
TIER 1:
Leverage capital ratio 4% 6.34% 6.31%
Risk-based capital ratio 4% 9.88% 9.84%
Total risk-based capital ratio 8% 10.47% 10.43%
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended March 31, 2000
and 1999 are as shown below:
For the three months ended March 31, 2000 1999
---------------- ----------
Balance at beginning of the year $1,014,522 $1,013,949
Provision for loan losses 45,000 30,000
Loans charged off (108,559) (1,469)
Recoveries of loans previously charged off 10,248 797
---------------- ---------
Balance at end of period $ 961,211 $1,043,277
================ ==========
The following table summarizes the Bank's OREO, past due and nonaccrual loans,
and nonperforming assets as of March 31, 2000 and December 31, 1999.
March 31, 2000 December 31, 1999
-------------- -----------------
Nonaccrual loans $ 1,134,032 $ 1,394,305
Other real estate owned -- --
------------- ---------------
Total nonperforming assets $ 1,134,032 $ 1,394,305
============= ===============
Loans past due in excess of 90 days and
accruing interest $ -- $ 33,441
============= ===============
Potential Problem Loans
As of March 31, 2000, there were no potential problem loans not disclosed above
which cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms.
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
<PAGE>
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and Bank, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general and
on the markets in which the Company and the Bank do business, and (b)
expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attractions of new deposit and loan
customers and the introduction of new products and services. Such
forward-looking statements are based on assumptions rather than historical or
current facts and, therefore, are inherently uncertain and subject to risk. For
those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
13
<PAGE>
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. The Company and Bank do not
undertake any obligation to update or revise any forward-looking statements
subsequent to the date on which they are made.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company or the Bank are involved in any pending material
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the Company's financial condition or
results of operations.
The First National Bank of Litchfield, the Company's subsidiary, was
sued in the Superior Court in Litchfield, Connecticut in a civil action No. CV
98-0077737-S1 served on August 31, 1998 in a matter captioned Russell B. Rhea v.
The First National Bank of Litchfield. The matter was concluded in February,
2000 when the parties agreed to settle the lawsuit for $10,000 without any
admission of wrong doing or liability on the part of the Bank or its agents or
employees.
The suit alleged that the Chief Financial Officer ("CFO") of American
Boot Company, of which Plaintiff was the Chief Executive Officer, forged the
signature of Russell B. Rhea to the signature card account, which allegedly
violated a Bank policy that there must be a witness for each of the two
individuals signing the account card. The Plaintiff alleged the following: The
CFO of American Boot Company deposited a personal check drawn on an account at
another financial institution, in the CFO's name, which account it was later
learned had previously been closed. The Bank then allowed the CFO of American
Boot Company to withdraw the funds prior to the check being paid, thereby
creating an overdraft in the American Boot Company account. Thereafter,
unbeknownst to the Plaintiff, the CFO of American Boot Company forged Mr. Rhea's
name to a wire transfer order in the amount of $91,000, which allowed that sum
to be returned to the other financial institution which had credited First
National Bank of Litchfield with the amount of the bad check because it had
failed to give a timely notice of dishonor as required by Federal Reserve
Regulations. That Plaintiff claims that the wire caused a loss to the American
Boot Company. Plaintiff claims that as a result of the Bank's alleged negligence
and failure to follow its policies, his investment in American Boot Company was
lost.
In suing The First National Bank of Litchfield, Plaintiff alleged that
The First National Bank of Litchfield failed to follow its policy and that The
First National Bank of Litchfield owed a duty to Plaintiff Rhea, to investigate
the transactions of the CFO of American Boot Company and protect Plaintiff Rhea
from the alleged fraudulent actions of the CFO of American Boot Company through
<PAGE>
American Boot Company's accounts at The First National Bank of Litchfield. The
plaintiff claimed damages, including but not limited to, the loss in value of
his investment in American Boot Company; interest; costs and attorney fees and
such other relief as the court deemed equitable.
Item 2. Changes in Securities and Use of Proceeds
In February 2000, the Company issued 29,997 shares of common stock to
the Company's President and Chief Executive Officer, Jerome J. Whalen in
exchange for an aggregate consideration of $162,283.77 ($5.41/share). The shares
were issued to Mr. Whalen pursuant to his exercise of options in connection with
the 1990 Stock Option Plan for the Company's President and Chief Executive
Officer, as amended.
The transaction was exempt from registration under the Securities Act
of 1933, as amended, pursuant to Section 4(2), as it was a transaction by an
issuer not involving any public offering.
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information
On May 3, 2000, the Company filed a Registration Statement on Form
S-8/S-3 with the SEC (Registration No. 333-36194). The Registration Statement
contains two parts. The first part contains a prospectus pursuant to Form S-3
(in accordance with Section C of the General Instructions to Form S-8) which
covers reoffers and resales by affiliates and non-affiliates of the Company of
shares of common stock of the Company which have been previously issued or will
be issued by the Registrant pursuant to the 1990 Stock Option Plan for the
Company's President and Chief Executive Officer, as amended and the 1994 Stock
Option Plan for Officers and Outside Directors. The second part contains
Information Required in the Registration Statement pursuant to Part II of Form
S-8.
The aggregate amount of securities registered under the Registration
Statement is 145,305 shares of common stock: 43,287 shares have previously been
issued by the Company pursuant to two of the Company's stock option plans (the
"1990 Stock Option Plan for the Company's President and Chief Executive Officer,
as amended" and the "1994 Stock Option Plan for Officers and Outside Directors")
and 102,018 shares which may be issued by the Company pursuant to the
Registrant's 1994 Stock Option Plan for Officers and Outside Directors.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - Exhibit 27. Financial Data Schedule
b. The Company did not file any reports on Form 8-K during the first
quarter ended March 31, 2000
14
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2000 FIRST LITCHFIELD FINANCIAL CORPORATION
By: /s/ Jerome J. Whalen
--------------------------------
Jerome J. Whalen, President and
Chief Executive Officer
Dated: May 15, 2000 By: /s/ Carroll A. Pereira
---------------------------------
Carroll A. Pereira,
Chief Financial Officer
15
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