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 March 31, 2009 were $550,284,687, an increase of $18,027,080, or 3.39% from year-end 2008 total assets of $532,257,607.

Net loans and leases increased $26,114,051 or 7.3% over the year-end 2008 amount. Net loans and leases as of March 31, 2009 were $392,506,130, as compared to the year-end 2008 level of $366,392,079. Consistent with Management's strategy to migrate to a more profitable loan composition, commercial loan and lease growth was strong during the first quarter of 2009. Leases, net of unearned income, were $28,349,650 at March 31, 2009, which was an increase of $8,563,780 or 43.28% from the year-end 2008 balance of $19,785,870. The growth in the leasing portfolio is in relatively short-term equipment financing. Commercial mortgages totaled $76,397,014 at March 31, 2009, which was an increase of $8,942,089 or 13.26% from year-end 2008. Growth in commercial mortgages has been in fixed and variable rate products to commercial customers located in our traditional and contiguous markets. Construction mortgages totaled $41,524,670 as compared to the year-end balance of $38,153,503. Growth in this portfolio during the first quarter was in commercial construction loans. The residential mortgage loan portfolio totaled $195,574,353, which was an increase of $3,013,245 from year-end 2008. Much of this growth was in the home equity loans.

As of March 31, 2009, the securities portfolio totaled $115,145,945, as compared to the year-end 2008 balance of $113,502,751. During the first quarter of 2009, approximately $11 million in U.S. Government agency bonds were called. These bonds were replaced with mortgage-backed securities with characteristics of shorter duration and improved liquidity.

At year-end 2008, the due from broker for security sales totaled $9,590,823, as a result of a security traded before December 31, 2008 with proceeds not received until January 2009. There were no similar transactions at March 31, 2009.

Cash and cash equivalents totaled $9,634,617, as compared to the balance of $9,238,783 at year-end 2008. Cash and cash equivalents is comprised of vault cash, Federal funds sold, balances at correspondent banks and the Federal Reserve Bank.

As of March 31, 2009, the Company had a balance of $475,000 in foreclosed real estate. There was no similar amount at year-end 2008.

Total liabilities were $517,954,640 as of March 31, 2009, which was an increase of $18,164,297 from total liabilities of $499,790,343 as of year-end 2008. Total deposits increased by $16,655,263, or 4.85% from their year-end levels. Time certificates of deposit totaled $140,986,961 as of March 31, 2009, which was an

increase of 15.46%, or $18,876,100 from year-end 2008. The increase in time deposits is reflective of the customer's desire for yield and the shifting of money market deposits into short term certificates of deposit. Additionally, growth has also been in the Bank's CDARs deposits, which provides FDIC deposit insurance, beyond the $250,000 limit. Savings deposits totaled $65,303,876 at March 31, 2009 which was an increase of 11.47% from the year-end 2008 balance. Growth in savings deposits has been in traditional savings and municipal NOW accounts. Money market deposits decreased by $8,775,606, or 9.43%, as a result of customers seeking higher rates as well to lock in those rates via certificates of deposit.

As of March 31, 2009, repurchase agreements with customers totaled $19,094,439, which was an increase of 4.78% from the year-end 2008 balance. Because these accounts represent overnight investments by commercial and municipal cash management customers, fluctuations in the balances of these accounts are reflective of the temporary nature of these funds. During the first quarter of 2009, advances under Federal Home Loan Bank borrowings increased by $17,192,000, while repurchase agreements with financial institutions decreased by $3,950,000. The overall increase in wholesale borrowing is a result of the growth in the loan and lease portfolio during the first quarter. As mentioned previously, the growth in the loan and lease portfolio totaled $26.1 million and outpaced the $16.7 million in deposit growth.

RESULTS OF OPERATIONS- THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31, 2008

Summary

Net income available to common shareholders for the first quarter of 2009 totaled $266,250 versus net income of $498,523 for the first quarter of 2008. Basic and diluted net income per common share for the first quarter of 2009 were both $.11, compared to basic and diluted income per share of $.21 for the first quarter of 2008. The decrease in net income available to common shareholders is due primarily to increases in the provision for loans and lease losses and other noninterest expenses. Additionally contributing to the decrease is the dividend payable on preferred shares.

Net Interest Income

Net interest income is the largest component of the Company's operations. Net interest income is defined as the difference between interest and dividend income from earning assets, primarily loans and investment securities, and interest expense on deposits and borrowed money. Interest income is the product of the average balances outstanding on loans, securities and interest-bearing deposit accounts multiplied by their effective yields. Interest expense is similarly calculated as the result of the average balances of interest-bearing deposits and borrowed funds multiplied by the average rates paid on those funds. Other components of operating income are the provision for loan losses, noninterest income such as service charges and trust fees, noninterest expenses and income taxes.

Net interest income on a fully tax-equivalent basis is comprised of the following for the three months ended March 31,

                                              2009              2008
                                          -----------       -----------
      Interest and dividend income        $ 6,561,229       $ 7,256,436
      Tax-equivalent adjustments (1)          103,798           153,604
      Interest expense                     (2,588,662)       (3,679,047)
                                          -----------       -----------
      Net interest income                 $ 4,076,365       $ 3,730,993
                                          ===========       ===========

(1) Interest income is presented on a tax-equivalent basis which reflects a federal tax rate of 34% for all periods presented.

The following table presents on a tax-equivalent basis, the Company's average balance sheet amounts (computed on a daily basis), net interest income, interest rates, interest spread and net interest margin for the three months ended March 31, 2009 and 2008. Average loans outstanding include nonaccruing loans.