Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
___________________
F
O R M 10 – K
[ X
]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Fiscal Year Ended December 31, 2009.
[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ____________________ to
____________________
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Commission
file number 1-32219
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SOUTHERN
CONNECTICUT BANCORP, INC.
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|
(Exact
name of registrant as specified in its
charter)
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Connecticut
(State
or other jurisdiction of incorporation or organization)
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06-1609692
(I.R.S.
Employer Identification Number)
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215
Church Street
New
Haven, Connecticut
(Address
of Principal Executive Offices)
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06510
(Zip
Code)
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Registrant's
telephone number, including area code
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(203)
782-1100
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Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, par value $.01 per share
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American
Stock Exchange
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes [
] No [x]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes [
] No [x]
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
preceding 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 Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
[ ] |
Accelerated
filer
|
[ ] |
Non-accelerated
filer
|
[ ] |
Smaller
reporting company
|
[x] |
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [
] No [x]
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates (assumes all directors, executive officers and 10% or greater
holders are affiliates) of the registrant, computed by reference to the price at
which the common equity was last sold as of June 30, 2009, the last business day
of the registrant’s most recently completed second fiscal quarter:
$13,323,402.
The
number of shares outstanding of each of the registrant’s classes of common
equity: Common Stock, par value $.01 per share, outstanding as of March 29,
2010: 2,695,902
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the registrant’s definitive Proxy Statement for its 2010 Annual Meeting
of Shareholders which is expected to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year
covered by this Form 10-K, are incorporated by reference into Part III of
this report on Form 10-K.
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Table of
Contents
Part
I
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Page
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Item
1.
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Business.
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Item
1A.
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Risk
Factors.
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Item
1B.
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Unresolved
Staff Comments.
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Item
2.
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Properties.
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Item
3.
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Legal
Proceedings.
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Item
4.
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Reserved.
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related
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Shareholder
Matters and Issuer Purchases of Equity Securities.
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Item
6.
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Selected
Financial Data.
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Item
7.
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Management’s
Discussion and Analysis of Financial
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Condition
and Results of Operations.
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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Item
8.
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Financial
Statements and Supplementary Data.
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Item
9.
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Changes
in and Disagreements with Accountants on
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Accounting
and Financial Disclosure.
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Item
9A(T).
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Controls
and Procedures.
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Item
9B.
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Other
Information.
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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Item
11.
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Executive
Compensation.
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Item
12.
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Stockholder Matters.
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3
Item
13.
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Certain
Relationships and Related Transactions, and
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Director
Independence.
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Item
14.
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Principal
Accountant Fees and Services.
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules.
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Signatures
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4
PART I
Item 1. Business.
Background
Southern
Connecticut Bancorp, Inc. (the “Company”) is a bank holding company
headquartered in New Haven, Connecticut that was incorporated on November 8,
2000. The Company’s strategic objective is to serve as a bank holding
company for a community-based commercial bank and a mortgage broker serving
primarily New Haven County (the “Greater New Haven Market”). The
Company owns 100% of the capital stock of The Bank of Southern Connecticut (the
“Bank”), a Connecticut-chartered bank with its headquarters in New Haven,
Connecticut, and 100% of the capital stock of SCB Capital Inc., operating under
the name “Evergreen Financial Services” (“Evergreen”), which is licensed by the
State of Connecticut Department of Banking to operate a mortage brokerage
business and also operates from the Company’s headquarters in New Haven,
Connecticut. The Company and its subsidiaries focus on meeting the financial
services needs of consumers and small to medium-sized businesses, professionals
and professional corporations, and their owners and employees in the Greater New
Haven Market.
The Bank
operates branches at four locations, including downtown New Haven, the
Amity/Westville section of New Haven, Branford and North Haven. The
Bank’s branches have a consistent, attractive appearance. Each
location has an open lobby, comfortable waiting area, offices for the branch
manager and a loan officer, and a conference room. The design of the
branches complements the business development strategy of the Bank, affording an
appropriate space to deliver personalized banking services in professional,
confidential surroundings.
The Bank
focuses on serving the banking needs of small to medium-sized businesses,
professionals and professional corporations, and their owners and employees in
the Greater New Haven Market. The Bank’s target commercial customer
has between $1.0 and $30.0 million in revenues, 15 to 150 employees, and
borrowing needs of up to $3.0 million. The primary focus on this
commercial market makes the Bank uniquely qualified to move deftly in responding
to the needs of its clients. The Bank has been successful in winning
business by offering a combination of competitive pricing for its services,
quick decision making processes and a high level of personalized, “high touch”
customer service.
On
February 22, 2010, the Company entered into an Agreement and Plan of Merger with
Naugatuck Valley Financial Corporation (“NVSL”) and Newco, a corporation to be
formed by NVSL to be the holding company for Naugatuck Valley Savings and Loan
(“NVSL Bank”), pursuant to which the Company will merge with and into NVSL, with
NVSL being the surviving corporation.
In
connection with the merger, Naugatuck Valley Mutual Holding Company (“NVSL
MHC”), which is presently the majority shareholder of NVSL, will reorganize and
convert from a mutual holding company form of organization to a stock holding
company form of organization. The stock holding company will be
Newco, which will (i) offer and sell shares of its common stock as prescribed in
a Plan of Conversion adopted concurrently with the execution of the Agreement
and Plan of Merger and (ii) exchange shares of its common stock for shares of
NVSL common stock held by persons other than NVSL MHC. Additionally,
in connection with the merger, the Bank will be merged with and into NVSL Bank.
See Note 18 to the Consolidated Financial Statements for additional information
relating to the merger.
5
The
Greater New Haven Market
The
Company serves the Greater New Haven Market, which is comprised of the
communities located in and around New Haven County in Southern Central
Connecticut. The Greater New Haven Market is located in the center
of, and is a critical component of, the commercial activity of the northeast
corridor in New England. The market focus resides in the busy transportation and
commercial area between New York City to the south, Hartford to the north,
Providence to the east, and Boston to the northeast. The diversified
economic base of this market region includes pharmaceutical, advanced
manufacturing, healthcare, defense, technology, service and energy
companies. The region is also one of New England’s most popular
tourist destinations, featuring popular shoreline and heritage
sites. In addition, the Company’s headquarters is located in downtown
New Haven, in the area of Yale University’s campus.
Bank
Growth and Operating Strategy
The Bank
seeks to differentiate itself by offering prompt, personal “high touch” service
and quality banking products. The Bank’s target customers are small
to medium-sized businesses, professionals and professional corporations, and
their owners and employees. The Bank emphasizes personal
relationships with customers, community involvement by employees and the board
of directors, and responsive lending decisions by an accessible and experienced
local management team.
The key
elements of the Bank’s business strategy include:
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·
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Provision of individualized
attention with local underwriting and credit decision-making
authority. As the only commercial bank based in and
wholly focused on the greater New Haven area, the Bank is better able to
provide the individualized customer service, combined with prompt local
underwriting and credit decision-making authority that management believes
small to medium-sized businesses
desire.
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·
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Employing qualified and
experienced banking professionals. The Company and the
Bank seek to continue to hire and retain highly experienced and qualified
local commercial lenders and other banking professionals with successful
track records and established relationships with small to medium-sized
businesses in targeted market areas. The experience and
expertise of these individuals serves to enhance the Bank’s image within
the communities it serves, thereby increasing the Bank’s
business.
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·
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Leveraging personal
relationships and community involvement. The directors,
officers and senior employees of the Company and the Bank have extensive
personal contacts, business relationships and involvement in communities
in which they live and work and which the Bank serves. By building on and
leveraging these relationships and community involvement, management
believes that the Bank has generated and will continue to generate
enthusiasm and interest from small to medium-sized businesses and
professionals in the targeted market
areas.
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6
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·
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Offering a suite of products
attractive to our core customer base. The Bank seeks to
offer competitive basic, popular products to its commercial and consumer
customer base. The Bank offers internet-banking services to its customers
through a partnership with Digital Insight, a subsidiary of
Intel. The Bank offers remote deposit capture, a system that
allows our customers to deposit checks from their places of business,
rather than having to make a trip to the Bank. The Bank offers
a full complement of banking services utilized by small business
customers.
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·
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Maintaining high credit
quality. The success of the Bank’s business plan depends
to a significant extent on the quality of the Bank’s assets, particularly
loans. The Bank has built a strong internal emphasis on credit
quality and has established stringent underwriting standards and loan
approval processes. The Bank actively manages past due and
non-performing loans in an effort to minimize credit loss and related
expenses and to ensure that the allowance for loan losses is
adequate.
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·
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Taking market share from
large, non-local competitors. The Greater New Haven
Market is dominated by large, non-locally owned financial institutions
with headquarters typically located outside of
Connecticut. Management believes that the Bank has attracted
and can continue to attract small to medium-sized businesses and
professionals that prefer local decision-making authority and interaction
with banking professionals who can provide prompt personalized and
knowledgeable service.
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·
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Optimizing net interest
margin. The Bank’s focus on commercial customers helps
to support a strong net interest margin. The high percentage of
assets concentrated in loans to commercial entities that typically provide
higher yield than consumer loans, particularly residential mortgages and
home equity related loans. The Bank maintains a high percentage
of commercial transaction accounts and money market deposit accounts to
fund its operations. These deposits typically have a lower
interest rate expense than certificates of deposits. The
combination of the higher yielding assets and lower expense deposits
produces a strong margin for the
Company.
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Lending,
Depository and Other Products
Lending
Products. The Bank offers a broad range of loans to businesses
and individuals in its service area, including commercial and business loans,
industrial loans, personal loans, commercial and home mortgage loans, home
equity loans and automobile loans. The Bank has received lending approval status
from the Small Business Administration (“SBA”) to enable it to make SBA loans in
communities located throughout the State of Connecticut. The Bank
holds certified lending status (“CLP”) from the SBA.
7
Loans are
made on a variable or fixed rate basis, with fixed rate loans typically limited
to three to five year terms. All loans are approved pursuant to
lending policies and procedures authorized by the Bank’s board of
directors. The Bank, at times, participates in multi-bank loans to
companies in its market area. Commercial loans and commercial real
estate loans may be written for maturities of up to twenty
years. Loans to purchase or refinance commercial real estate are
typically supported by personal guarantees of the principal owners and related
parties, and are collateralized by the subject real estate, which may in certain
cases be supplemented by additional collateral in the form of liquid
assets. Loans to local businesses are generally supported by the
personal guarantees of the principal owners and are carefully underwritten to
determine appropriate collateral and covenant requirements.
Depository
Products. The Bank has attracted a base of core deposits,
including interest bearing and non-interest bearing checking accounts, money
market accounts, savings accounts, sweep accounts, NOW accounts, repurchase
agreements, and a variety of certificates of deposits and IRA
accounts. To continue to attract deposits, the Bank employs an
aggressive marketing plan in its service area and features a broad product line
and rates and services competitive with those offered in the Greater New Haven
Market. The primary sources of deposits have been and are expected to
continue to be small to medium-sized businesses, professionals (lawyers,
doctors, accountants, etc.) and professional corporations, and their owners and
employees. The Bank obtains these deposits through personal
solicitation by its officers and directors, outside programs and advertisements
published and/or broadcasted in the local media. The Bank offers
internet-banking services to its customers, including commercial cash management
services and personal banking services. The Bank offers remote
deposit capture, which offers check deposit capabilities for customers from
their place of business. The Bank also offers drive-in teller
services, automated teller services, wire transfer, lock box and safe deposit
services.
Other
Services. The Bank provides a broad range of other services
and products, including cashier’s checks, money orders, travelers’ checks,
bank-by-mail, direct deposit and U.S. Savings Bonds. The Bank is
associated with a shared network of automated teller machines that its customers
are able to use throughout Connecticut and other regions. The Bank
does not expect to offer trust services directly in the near future, but may
offer trust services in the future independently or possibly through a joint
venture with a larger institution. To directly offer trust services,
the Bank would need the approval of the Connecticut Banking Commissioner and the
FDIC.
Mortgage
Brokerage Services
Evergreen
operates from the Company’s headquarters in New Haven, Connecticut and is
licensed by the State of Connecticut Department of Banking to operate a mortgage
brokerage business.
Evergreen
focuses on meeting the mortgage brokerage needs of residential and small to
medium-sized businesses, professionals and professional corporations, and their
owners and employees in the Southern Connecticut market.
Investment
Services
The
Company does not engage in investment services.
8
Investment
Securities
Investment
securities are held by the Company and the Bank with the objective of maximizing
the long-term rate of return for shareholders. Investments are
overseen by the Board of Directors and a committee of officers who take into
account returns, liquidity needs, and the overall asset/liability management of
the Company and the Bank. Permissible investments include debt
securities such as U.S. Government securities, government-sponsored agency
securities, municipal bonds, domestic certificates of deposit that are insured
by the FDIC, mortgage-backed securities and collateralized mortgage
obligations. The Bank’s current investment portfolio is limited to
U.S. Government agency obligations and agency issued collateralized mortgage
obligations, which have been classified as available for
sale. Accordingly, the principal risk associated with the Bank’s
current investing activities is market risk (variations in value resulting from
general changes in interest rates) rather than credit risk. The Bank
does not take credit risk for the purposes of increasing interest
income. Management continually reviews its portfolio and prevailing
market conditions, and under certain market conditions, the Company’s strategy
may be reviewed and revised by management and the board of
directors.
Asset
and Liability Management
Interest
rate risk measures the impact that changing interest rates have on current and
future earnings. The Company’s goal is to optimize long-term
profitability while minimizing exposure to interest rate
fluctuations. Interest rate risk exposure, including, among other
things, the Company’s exposure to changes in interest income and equity value
based on fluctuations in interest rates, is monitored by senior management and
reported to the Bank’s Asset Liability Committee (ALCO) and the board of
directors on a quarterly basis. The Bank employs the services of a
national service provider for monitoring, analyzing and managing interest rate
risk.
Regulatory
Compliance
The
Company operates in a heavily regulated industry and is subject to increasing
regulatory review and scrutiny from the Federal Reserve Board, the Connecticut
Banking Commissioner, and the FDIC. The Company and the Bank have
invested and continue to invest significant time and resources to ensure
compliance and conformity with applicable regulations (see “REGULATION AND
SUPERVISION” below). The Bank is committed to meeting its obligations
under the Bank Secrecy Act, the Gramm-Leach-Bliley Act and the USA PATRIOT Act,
as well as various other regulations. Management meets and reports to
the board of directors on a regular basis regarding new developments in
compliance and the Bank’s efforts to comply therewith.
Competition
There are
numerous banks and other financial institutions serving the Greater New Haven
Market posing significant competition to attract deposits and
loans. The Bank competes for loans and deposits with other commercial
banks, savings and loan associations, finance companies, money market funds,
insurance companies, credit unions and other financial institutions, a number of
which are much larger and have substantially greater resources. To
increase its business, the Bank will have to win existing customers away from
existing banks and financial institutions as well as successfully compete for
new customers from growth in the target markets.
9
New Haven
county is currently served by approximately 271 offices of 26 commercial and
savings banks. The majority of these banks are substantially larger
than the Bank expects to be in the near future, and are able to offer products
and services which may be impractical for the Bank to provide at this
time. There are numerous banks and other financial institutions
serving the communities surrounding New Haven, which also draw customers from
New Haven, posing significant competition for the Bank to attract deposits and
loans. The Bank also experiences competition from out-of-state
financial institutions with little or no traditional bank branches in New
Haven. Many of these banks and financial institutions are well
established and better capitalized than the Bank, allowing them to provide a
greater range of services.
Intense
market demands, economic pressures, and significant legislative and regulatory
actions have eroded traditional banking industry classifications and have
increased competition among banks and other financial
institutions. Market dynamics as well as legislative and regulatory
changes have resulted in a number of new competitors offering services
historically offered only by commercial banks. Increased customer
awareness of product and service differences among competitors has also
increased competition among banks.
Employees
As of
December 31, 2009, the Bank and Evergreen had 35 and 2 full-time equivalent
employees, respectively. Relationships with all employees are
believed to be excellent.
REGULATION
AND SUPERVISION
Banks and
bank holding companies are extensively regulated under both federal and state
law. The Company and the Bank have set forth below brief summaries of various
aspects of supervision and regulation to which they are subject. These summaries
do not purport to be complete and are qualified in their entirety by reference
to applicable laws, rules and regulations.
Laws
and Regulations to which The Company is Subject
General. As a bank
holding company registered in accordance with the Bank Holding Company Act of
1956 (the “BHC Act”), the Company is regulated by and subject to the supervision
of the Federal Reserve Board and is required to file with the Federal Reserve
Board an annual report and such other information as may be
required. The Federal Reserve Board has the authority to conduct
examinations of the Company as well. The Federal Reserve Board has
the authority to issue orders to bank holding companies to cease and desist from
unsound banking practices and violations of conditions imposed by, or violations
of agreements with, the Federal Reserve Board. The Federal Reserve
Board is also empowered to assess civil money penalties against companies or
individuals who violate the BHC Act or orders or regulations thereunder, to
order termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company.
10
The BHC Act—Acquisitions and
Permissible Activities. The BHC Act requires the prior
approval of the Federal Reserve Board for a bank holding company to acquire
substantially all the assets of a bank or acquire direct or indirect ownership
or control of more than 5% of any class of the voting shares of any bank, bank
holding company or savings association, or increase any such non-majority
ownership or control of any bank, bank holding company or savings association,
or merge or consolidate with any bank holding company. Federal law
generally authorizes bank holding companies to acquire banks located in any
state, subject to certain state-imposed age and deposit concentration limits,
and also generally authorizes interstate bank holding company and bank mergers
and to a lesser extent, interstate branching.
Unless a
bank holding company becomes a financial holding company under the
Gramm-Leach-Bliley Act of 1999 (“GLBA”) (as discussed below), the BHC Act
prohibits a bank holding company from acquiring a direct or indirect interest in
or control of more than 5% of any class of the voting shares of a company that
is not a bank or a bank holding company and from engaging directly or indirectly
in activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary banks, except that it may engage in and
may own shares of companies engaged in certain activities the Federal Reserve
Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The GLBA
permits a qualifying bank holding company to become a “financial holding
company” and thereby engage in a broader range of activities than is permissible
for a traditional bank holding company. In order to qualify for this
election, all of the depository institution subsidiaries of the bank holding
company must be well capitalized and well managed, as defined under Federal
Reserve Board regulations, and all such subsidiaries must have achieved a rating
of “satisfactory” or better with respect to meeting community credit
needs. Pursuant to the GLBA, financial holding companies are
permitted to engage in activities that are “financial in nature” or incidental
or complementary thereto, as determined by the Federal Reserve
Board. The GLBA identifies several activities as “financial in
nature,” including, among others, insurance underwriting and agency activities,
investment advisory services, merchant banking and underwriting, and dealing in
or making a market in securities. At this time, the Company has not
elected to become a financial holding company and has no immediate plans to do
so.
Capital
Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
submitted to it under the BHC Act. These capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to at
least 8% of total risk-adjusted assets and off-balance sheet items (the “Total
Risk-Based Capital Ratio”), with at least one-half of that amount consisting of
Tier I or core capital and the remaining amount consisting of Tier II or
supplementary capital. Tier I capital for bank holding companies
generally consists of the sum of common shareholders’ equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
goodwill and other non-qualifying intangible assets. Tier II capital
generally consists of: hybrid capital instruments; perpetual preferred stock,
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics.
11
In
addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum leverage capital ratio of
Tier I capital (defined by reference to the risk-based capital guidelines) to
total average assets (the “Leverage Ratio”) of 3.0%. Total average
assets for this purpose do not include goodwill and any other intangible assets
and investments that the Federal Reserve Board determines should be deducted
from Tier I capital. The Federal Reserve Board has announced that the
3.0% Leverage Ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses,
deficiencies, or those that are not experiencing or anticipating significant
growth. For all other bank holding companies, the minimum leverage
ratio is 4%, and bank holding companies with supervisory, financial, managerial
or operational weaknesses or organizations expecting significant growth are
expected to maintain capital ratios well above minimum levels.
The
Company is currently in compliance with the Total Risk-Based Capital Ratio, Tier
I Capital and the Leverage Ratio requirements. As of December 31,
2009, the Company had a Tier I Risk-Based Capital Ratio and a Total Risk-Based
Capital Ratio equal to 11.99% and 13.25%, respectively, and a Leverage Ratio
equal to 11.24%. U.S. bank regulatory authorities and international bank
supervisory organizations, principally the Basel Committee on Banking
Supervision, currently are considering changes to the risk-based capital
adequacy framework, including emphasis on credit, market and operational risk
components, which ultimately could affect the appropriate capital
guidelines.
Limitations on Acquisitions of Common
Stock. The federal Change in Bank Control Act prohibits a
person or group of persons from acquiring “control” of a depository institution
or a depository institution holding company unless the appropriate federal
banking agency has been given at least 60 days to review the proposal and public
notice has been provided. “Control” is generally defined under this
act as ownership of 25% or more of any class of voting stock. In
addition, under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% or more of a class of voting stock of a depository
institution or a depository institution holding company with a class of
securities registered under Section 12 of the Exchange Act would, under the
circumstances set forth in the presumption, constitute the acquisition of
control. Furthermore, any company, as that term is broadly defined in
the BHC Act, would be required to obtain the approval of the Federal Reserve
Board under BHC Act before acquiring 25% (5% in the case of an acquirer that is
a bank holding company) or more of any class of voting securities of a
depository institution or a depository institution holding company, or such
lesser percentage as the Federal Reserve Board deems to constitute a
“controlling influence.”
Bank Holding Company
Dividends. The Federal Reserve Board has authority to prohibit
bank holding companies from paying cash dividends if such payment is deemed to
be an unsafe or unsound practice. The Federal Reserve Board has
indicated generally that it may be an unsafe or unsound practice for bank
holding companies to pay dividends unless the bank holding company’s net income
over the preceding year is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s capital needs,
asset quality, and overall financial condition. The Company’s ability
to pay dividends is also subject to laws and regulations of the Connecticut
Department of Banking.
12
Bank Holding Company Support of
Subsidiary Banks. Under Federal Reserve Board policy, a bank
holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources to their
support. This support may be required at times when the bank holding
company may not have the resources to provide it. Similarly, under
the cross-guarantee provisions of the Federal Deposit Insurance Act (“FDIA”),
the FDIC can hold any FDIC-insured depository institution liable for any loss
suffered or anticipated by the FDIC in connection with (1) the “default” of a
commonly controlled FDIC-insured depository institution; or (2) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution “in danger of default.”
The Sarbanes-Oxley
Act. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)
implements a broad range of corporate governance and accounting measures for
public companies (including publicly-held bank holding companies such as the
Company) designed to promote honesty and transparency in corporate
America. Sarbanes-Oxley’s principal provisions, many of which have
been interpreted through regulations of the Securities and Exchange Commission,
provide for and include, among other things: (i) the creation of an independent
accounting oversight board; (ii) auditor independence provisions that restrict
non-audit services that accountants may provide to their audit clients; (iii)
additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer of a
public company certify financial statements; (iv) the forfeiture of bonuses or
other incentive-based compensation and profits from the sale of an issuer’s
securities by directors and senior officers in the twelve month period following
initial publication of any financial statements that later require restatement;
(v) an increase in the oversight of, and enhancement of certain requirements
relating to, audit committees of public companies and how they interact with the
company’s independent auditors; (vi) requirements that audit committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer; (vii) requirements that companies disclose
whether at least one member of the audit committee is a “financial expert” (as
such term is defined by the SEC); (viii) expanded disclosure requirements for
corporate insiders, including accelerated reporting of stock transactions by
insiders and a prohibition on insider trading during pension blackout periods;
(ix) a prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions on non-preferential terms and in
compliance with other bank regulatory requirements; (x) disclosure of a code of
ethics and filing a Form 8-K for a change or waiver of such code; and (xi) a
range of enhanced penalties for fraud and other violations. On
December 15, 2006, the Securities and Exchange Commission delayed the internal
control reporting requirements under Section 404 of the Sarbanes-Oxley Act for
non-accelerated filers to periods ending after December 15, 2007. On
January 31, 2008, the SEC proposed and on June 20, 2008 approved a further
one-year delay from fiscal years ending after December 15, 2008 to fiscal years
ending after December 15, 2009 for the auditors attestation report on internal
controls over financial reporting. On October 2, 2009, the SEC announced a
further six-month deferral from fiscal years ending on or after December 15,
2009 to fiscal years ending on or after June 15, 2010 for the auditors
attestation report on internal controls over financial reporting. The six-month
deferral was granted as a result of the issuance of the SEC’s cost-benefit study
conducted by its Office of Economic Analysis. The study was conducted to
determine whether additional guidance provided to company management and
auditors in 2007 was effective in reducing the costs of compliance. Because the
study was published less than three months before the December 15 deadline, the
Commission determined that a six-month deferral is appropriate and reasonable so
that small public companies and their auditors can better plan for the required
auditor attestation. In accordance with the requirements of Section
404(a), Management’s report on internal controls is included herein at Item
9A(T).
13
USA PATRIOT
ACT. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
“Patriot Act”), designed to deny terrorists and others the ability to obtain
access to the United States financial system, has significant implications for
depository institutions, broker-dealers and other businesses involved in the
transfer of money. The Patriot Act, as implemented by various federal
regulatory agencies, requires financial institutions, including the Company and
the Bank, to implement new policies and procedures or amend existing policies
and procedures with respect to, among other matters, anti-money laundering,
compliance, suspicious activity and currency transaction reporting, and due
diligence on customers. The Patriot Act and its underlying
regulations also permit information sharing for counter-terrorist purposes
between federal law enforcement agencies and financial institutions, as well as
among financial institutions, subject to certain conditions, and require the
Federal Reserve Board (and other federal banking agencies) to evaluate the
effectiveness of an applicant in combating money laundering activities when
considering applications filed under the BHC Act or the Bank Merger
Act.
Significant
Laws and Regulations to which the Bank is Subject
General. The Bank
is organized under the Banking Law of the State of Connecticut. Its operations
are subject to federal and state laws applicable to commercial banks and to
extensive regulation, supervision and examination by the Connecticut Banking
Commissioner, as well as by the FDIC, as its primary federal regulator and
insurer of deposits. While the Bank is not a member of the Federal
Reserve System, it is subject to certain regulations of the Federal Reserve
Board. In addition to banking laws, regulations and regulatory
agencies, the Bank is subject to various other laws, regulations and regulatory
agencies, all of which directly or indirectly affect the Bank’s
operations. The Connecticut Banking Commissioner and the FDIC examine
the affairs of the Bank for the purpose of determining its financial condition
and compliance with laws and regulations. The Connecticut Banking
Commissioner and the FDIC have the authority to limit the Bank’s payment of cash
dividends based on such factors as the maintenance of adequate capital, which
could reduce the amount of dividends otherwise payable.
The
Connecticut Banking Commissioner and the FDIC have significant discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the FDIC, Congress,
the Connecticut Banking Commissioner, or the Connecticut General Assembly, could
have a material adverse impact on the Bank.
Activities and Investments of Insured
State-Chartered Banks. Section 24 of the FDIA generally limits
the activities of principal and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. The
Company does not expect such provisions to have a material adverse effect on the
Company or the Bank.
Capital
Requirements. The FDIC has issued regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks,
such as the Bank. Under the regulations, a bank generally is deemed
to be (i) “well-capitalized” if it has a Total Risk-Based Capital Ratio of 10.0%
or more, a Tier I Risk-Based Capital Ratio of 6.0% or more, a Leverage Ratio of
5.0% or more and is not subject to any written capital order or directive; or
(ii) “adequately capitalized” if it has a Total Risk-Based Capital Ratio of 8.0%
or more, a Tier I Risk-Based Capital Ratio of 4.0% or more, and a Leverage Ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of “well-capitalized;” or (iii) “undercapitalized” if it has a Total
Risk-Based Capital Ratio that is less than 8.0%, a Tier I Risk-Based Capital
Ratio that is less than 4.0% or a Leverage Ratio that is less than 4.0% (3.0%
under certain circumstances); or (iv) “significantly undercapitalized” if it has
a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk-Based
Capital Ratio that is less than 3.0% or a Leverage Ratio that is less than 3.0%,
and (v) “critically undercapitalized” if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. If an institution becomes
undercapitalized, it would become subject to significant additional oversight
and regulation, as mandated by the FDIA.
14
The
following table illustrates the Company's and the Bank's regulatory
capital ratios at December 31:
|
|||||||
Company
|
Bank
|
||||||
Capital
|
Capital
|
||||||
Adequacy
|
Adequacy
|
||||||
2009
|
2008
|
Target
Ratio
|
2009
|
2008
|
Target
Ratio
|
||
Total
Capital to Risk Weighted Assets
|
13.25%
|
18.46%
|
8.00%
|
12.39%
|
17.09%
|
8.00%
|
|
Tier
1 Capital to Risk Weighted Assets
|
11.99%
|
17.13%
|
4.00%
|
11.13%
|
15.96%
|
4.00%
|
|
Tier
1 (Leverage) Capital Ratio to Average Assets
|
11.24%
|
15.64%
|
4.00%
|
10.44%
|
14.55%
|
4.00%
|
As of
December 31, 2009, the Bank and the Company were deemed to be well-capitalized
institutions.
Prompt Corrective Action and Other
Enforcement Mechanisms. Federal law requires each federal
banking agency to take prompt corrective action to resolve the problems of
insured depository institutions, including but not limited to those that fall
below one or more prescribed minimum capital ratios. An institution
that, based upon its capital levels, is classified as “well capitalized,”
“adequately capitalized” or “undercapitalized” may be treated as though it were
in the next lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an unsafe or unsound
condition or an unsafe or unsound practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions. The federal banking agencies, however, may not
treat an institution as “critically undercapitalized” unless its capital ratio
actually warrants such treatment.
In
addition to restrictions and sanctions imposed under the prompt corrective
action provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
15
Premiums for Deposit Insurance.
The FDIC has implemented a risk-based assessment system, under which an
institution’s deposit insurance premium assessment is based on the probability
that the deposit insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue needs of the
deposit insurance fund.
Under
this risk-based assessment system, banks are categorized into one of three
capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three categories based on supervisory evaluations
by its primary federal regulator. The three supervisory categories
are: financially sound with only a few minor weaknesses (Group A); demonstrates
weaknesses that could result in significant deterioration (Group B); and poses a
substantial probability of loss (Group C). The capital ratios used by
the FDIC to define well capitalized, adequately capitalized and undercapitalized
are the same in the FDIC’s prompt corrective action regulations.
FDIC
insurance of deposits may be terminated by the FDIC, after notice and hearing,
upon finding by the FDIC that the insured institution has engaged in unsafe or
unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
conditions imposed by, the FDIC.
Safety and Soundness
Standards. Federal law requires each federal banking agency to
prescribe for depository institutions under its jurisdiction standards relating
to, among other things: internal controls; information systems and audit
systems; loan documentation; credit underwriting; interest rate risk; asset
growth; compensation; fees and benefits; and such other operational and
managerial standards as the agency deems appropriate. The federal
banking agencies have promulgated regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the “Guidelines”) to implement
these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset quality; earnings and compensation; and fees and
benefits. If the appropriate federal banking agency determines that
an institution fails to meet any standards prescribed by the Guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard set by the FDIC.
The
federal banking agencies also have adopted regulations for real estate lending
prescribing uniform guidelines for real estate lending. The
regulations require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
16
Community Reinvestment Act.
Under the Community Reinvestment Act (“CRA”), as implemented by FDIC
regulations, the Bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA
does not prescribe specific lending requirements or programs for financial
institutions nor does it limit an institution’s discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in
connection with its examination of a depository institution, to assess the
institution’s record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The FDIC is required to provide a written evaluation and
make public disclosure of an institution’s CRA performance utilizing a
four-tiered descriptive rating system. Institutions are evaluated and
rated by the FDIC as “Outstanding,” “Satisfactory,” “Needs to Improve,” or
“Substantial Non Compliance.” Failure to receive at least a
“Satisfactory” rating may inhibit an institution from undertaking certain
activities, including acquisitions of other financial institutions, which
require regulatory approval based, in part, on CRA compliance considerations. In
its most recent CRA evaluation, dated December 31, 2008, the Bank was rated as
“Satisfactory.”
Transactions with
Affiliates. Sections 23A and 23B of the Federal Reserve Act
restrict transactions between a bank and an affiliated company, including a
parent bank holding company. The Bank is subject to certain
restrictions on loans to affiliated companies, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
their behalf. Among other things, these restrictions limit the amount
of such transactions, require collateral in prescribed amounts for extensions of
credit, prohibit the purchase of low quality assets and require that the terms
of such transactions be substantially equivalent to terms of similar
transactions with nonaffiliates. Generally, the Bank is limited in
its extensions of credit to any affiliate to 10% of the Bank’s capital and in
its extensions of credit to all affiliates to 20% of the Bank’s
capital.
Customer Information
Security. The FDIC and other bank regulatory agencies have
adopted guidelines (the “Security Guidelines”) for safeguarding confidential,
personal customer information. The Security Guidelines require each
financial institution, under the supervision and ongoing oversight of its board
of directors or an appropriate committee thereof, to create, implement and
maintain a comprehensive written information security program designed to ensure
the security and confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of such information,
and protect against unauthorized access to or use of such information, and
ensure the proper disposal of information that could result in substantial harm
or inconvenience to any customer.
Recent Legislative and Regulatory
Initiatives to Address Difficult Market and Economic
Conditions. Among the numerous initiatives the United States
government has taken in response to the financial crises affecting the banking
system and financial markets, was the enactment of the Emergency Economic
Stabilization Act of 2008 (“EESA”) on October 3, 2008. The EESA
included a provision for an increase in the amount of deposits insured by the
FDIC to $250,000 until December 2009 (which was subsequently extended to
December 31, 2013 by the Helping Families Save Their Homes Act of 2009) as a way
to instill confidence in the banking system. On October 14, 2008, the
FDIC announced a new program, the Temporary Liquidity Guarantee Program (“TLGP”)
that provides unlimited FDIC deposit insurance on funds in noninterest-bearing
transaction deposit accounts that are not otherwise covered by the existing FDIC
deposit insurance limit of $250,000. The TLGP also provides that the
FDIC will guarantee qualifying senior unsecured debt issued before June 2009 by
participating banks and certain qualifying holding
companies. Participating institutions are assessed a surcharge of 10
basis points on the additional insured deposits and an assessment of 50 to 100
basis points on qualifying senior unsecured debt issued under the debt guarantee
segment of the program. The Bank elected to participate in both
aspects of the TLGP and incurred the surcharge as a cost of such
participation.
17
Privacy. Financial
institutions are required to implement policies and procedures regarding their
information collection practices and the disclosure of nonpublic personal
information about consumers to nonaffiliated third parties. In
general, the statute requires explanations to consumers on policies and
procedures regarding the disclosure of such nonpublic personal information, and,
except as otherwise required by law, prohibits disclosing such information
except as provided in the financial institution’s policies and
procedures.
Item 1A. Risk
Factors.
Not
required.
Item 1B. Unresolved Staff
Comments.
None.
Item 2. Properties.
The table
below sets forth information about properties the Bank uses for its branch
offices. The Company also owns property located in Clinton,
Connecticut.
Office
|
|
Location
|
|
Square Feet
|
|
Status
|
Main
Office
|
|
215
Church Street, New Haven, Connecticut
|
|
11,306
|
|
Leased
|
Branford
Office
|
|
445
West Main Street, Branford, Connecticut
|
|
3,714
|
|
Leased
|
Amity
Office
|
|
1475
Whalley Avenue, New Haven, Connecticut
|
|
2,822
|
|
Owned
|
North
Haven Office
|
24
Washington Avenue, North Haven, Connecticut
|
2,430
|
Leased
|
|||
Property at 215 Church Street, New
Haven, Connecticut. The Bank leases a free-standing building
located at 215 Church Street, New Haven, Connecticut, in the central business
and financial district of New Haven. The headquarters of the Bank and
the Company, and Evergreen, are located within this building. The
building has a drive-up teller, an automated teller machine, two vaults and a
night deposit drop.
The lease
term ended in 2006, however, the Bank exercised its option to extend the lease
for an additional five years. The Bank has a right of first refusal
to purchase the building. The Bank’s annual rent, which is fixed in
the terms of the lease, including during the option periods, is currently
$137,933. The Bank is responsible for all costs to maintain the
interior of the building, other than structural repairs, and for all real estate
taxes.
18
When
practical, the Bank seeks to sublease space within the building that is not
needed for operations. The Bank of Southern Connecticut had no
tenants during 2009.
Property at 445 West Main Street,
Branford, Connecticut. The Bank of Southern Connecticut leases
space at 445 West Main Street, Branford, Connecticut, the site of the Branford
branch, which opened for business on October 7, 2002.
The
current term of the Branford branch lease expires in 2012. The Bank
of Southern Connecticut has an option to extend the lease for two additional
terms. The base rent payable for the current term is $40,631 until
September 30, 2012. The base rent for the option periods increases
and is fixed in the lease. The Bank is responsible for all costs to
maintain the building, other than structural repairs, and for all real estate
taxes.
Property at 1475 Whalley Avenue, New
Haven, Connecticut. The Bank owns a one-acre site with a
single story, stucco facility of approximately 2,822 square feet that is located
at 1475 Whalley Avenue, New Haven, Connecticut. The Bank operates its
Amity branch from this location.
Property at 24 Washington Avenue,
North Haven, Connecticut. On February 16, 2006, the Company
entered into a lease agreement to lease the facility at 24 Washington Avenue,
North Haven, Connecticut, the site of The Bank of North Haven, a division of The
Bank of Southern Connecticut. The facility was improved to
accommodate the new branch, and $295,000 was expended for improvements,
furnishings and equipment. The Bank of North Haven, a division of The
Bank of Southern Connecticut, opened for operations on July 10,
2006. The lease is for an initial term of five years, with three
successive five-year option periods. Base rent is $38,880 annually
until April 30, 2011. The base rent for the option periods increases
and is fixed in the lease. The Bank is responsible for the pro rata
share of operating expenses.
Property in Clinton,
Connecticut. In June 2005, the Company purchased a one-acre
improved site with two buildings in Clinton, Connecticut for the primary purpose
of establishing a branch office of the Bank. The net purchase price
of the property was $495,000. During 2007, the Bank determined that
it would not establish a branch at this location and subsequently retained a
commercial real estate broker to represent the Company in the sale of the
property, and the property is classified as held for sale at December 31,
2009.
In August
2009, the Company entered into an agreement to lease one of the two buildings
located in Clinton, Connecticut. The lease is for an initial term of
five years, with two successive five-year option periods. Base rent
is $24,000 annually until August 31, 2009. The base rent for the
option periods increases and is fixed in the lease. The tenant has a right of
first refusal in the purchase the property. The tenant is responsible for all
costs to maintain the building, other than structural repairs and real estate
taxes.
Item 3. Legal
Proceedings.
Periodically, there have been various
claims and lawsuits against the Company, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business. However, neither the Company nor any
subsidiary is a
party to any pending legal proceedings that management believes would have a
material adverse effect on the Company’s financial condition, results of
operations or cash flows.
19
PART II
Item 5. Market
for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities.
The
Company’s Common Stock is quoted on the NYSE Amex under the symbol
"SSE."
The following table sets forth the high
and low sales price per share of the Company’s Common Stock for the last two
years:
Quarter Ended
|
High
|
Low
|
||||||
March
31,2009
|
$ | 8.90 | $ | 4.93 | ||||
June
30, 2009
|
$ | 5.70 | $ | 4.55 | ||||
September
30, 2009
|
$ | 6.25 | $ | 4.13 | ||||
December
31, 2009
|
$ | 4.65 | $ | 2.04 | ||||
March
31,2008
|
$ | 7.50 | $ | 6.73 | ||||
June
30, 2008
|
$ | 7.45 | $ | 6.95 | ||||
September
30, 2008
|
$ | 7.05 | $ | 5.48 | ||||
December
31, 2008
|
$ | 6.25 | $ | 1.40 |
Holders
There were approximately 100 registered
shareholders of record of the Company’s Common Stock as of March 29,
2010.
Dividends
No cash
dividends have been declared to date by the Company. Management
expects that earnings, if any, will be retained and that no cash dividends will
be paid in the near future. The Company may, however, declare stock
dividends at the discretion of its Board of Directors. No stock
dividends were declared in 2009 and 2008.
The
Company’s only significant operating subsidiary during 2009 is the
Bank. The Company is dependent upon the ability of the Bank to
declare and pay dividends to the Company. The Bank’s ability to
declare cash dividends is dependent upon the Bank’s ability to earn profits and
to maintain acceptable capital ratios, as well as meet regulatory requirements
and remain compliant with banking law.
The
policy of the Connecticut Banking Commissioner is to prohibit payment of any
cash dividends prior to recapture of organization and pre-operating expenses
from operating profits. In addition, the Bank is prohibited by
Connecticut law from declaring a cash dividend on its Common Stock without prior
approval of the Connecticut Banking Commissioner except from its net profits for
that year and any retained net profits of the preceding two
years. “Net profits” is defined as the remainder of all earnings from
current operations. In some instances, the FDIC may impose further
restrictions on dividends. At December 31, 2009 and 2008, no cash
dividends may be declared by the Bank without regulatory approval.
20
The payment of cash dividends by the
Bank may also be affected by other factors, such as the requirement to maintain
capital in accordance with regulatory guidelines. If, in the opinion
of the Connecticut Banking Commissioner, the Bank were engaged in or was about
to engage in an unsafe or unsound practice, the Commissioner could require,
after notice and a hearing, the Bank to cease and desist from the
practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution’s capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvements Act of 1991, a depository
institution may not pay any cash dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. Moreover, the
federal banking agencies have issued policy statements that provide that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings.
Recent Sales of Unregistered
Securities
The
Company has not sold unregistered securities during the period covered by this
report on Form 10-K.
Item 6. Selected Financial
Data.
Not
required.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
The
following discussion is intended to assist you in understanding the financial
condition and results of operations of the Company and the Bank, and should be
read in conjunction with the consolidated financial statements and related notes
beginning on page F-3.
Overview
Southern
Connecticut Bancorp, Inc. is a bank holding company headquartered in New Haven,
Connecticut that was incorporated on November 8, 2000. The Company’s strategic
objective is to serve as a bank holding company for The Bank of Southern
Connecticut, a commercial bank serving New Haven, Connecticut and the
surrounding communities. The Bank of Southern Connecticut
commenced operations on October 1, 2001. The Company owns 100% of the capital
stock of The Bank of Southern Connecticut (the “Bank”), a Connecticut-chartered
bank with its headquarters in New Haven, Connecticut and 100% of the capital
stock of SCB Capital Inc., operating under the name “Evergreen Financial
Services” (Evergreen), a mortage broker with its headquarters in New Haven,
Connecticut.
21
The
Company’s net loss for fiscal year 2009 was $2,907,000 (or basic and diluted
loss per share of $1.08), compared to net income of $134,000 (or basic and
diluted income per share of $0.05) in fiscal year 2008
The
Company’s net loss for the year ended December 31, 2009 was largely attributable
to a provision for loan losses of $1,992,000 for 2009 compared to $226,000 in
2008. The significant increase in the provision for loan losses during the 2009
is related to a group of ten impaired loans that have been severely impacted by
prevailing economic conditions, discussed in more detail under Allowance for Loan
Losses.
In
addition to the impact of the provision for loan losses, the operating results
for the year ended December 31, 2009 compared to 2008 were influenced by the
following factors:
|
·
|
Net
interest income decreased due primarily to lower yields on interest
earning assets, offset partially by lower costs on interest bearing
liabilities and changes in asset and liability
volumes;
|
|
·
|
Noninterest
income decreased because noninterest income in 2008 included the gain on
the sale of the New London branch; a decrease in loan fees attributable to
a prepayment penalty received in 2008; and due to a decrease in service
charges and fees, resulting from changes in the business practices of
customers of the Bank; and
|
|
·
|
Noninterest
expenses decreased due to lower salaries and benefits resulting from
reductions in staff, both from the sale of the New London branch and other
reductions, and the elimination of certain employee benefits and bonuses
in 2009. In addition, salaries and benefits expense for 2008 included
expenses related to separation payments made to the former Chief Executive
Officer and President of the Bank, and there were no such expenses in
2009; expense reductions attributable to lower negotiated rates on certain
insurance and telecommunications service contracts; decreases in
advertising and promotional campaigns; and expense savings related to
printing the Company’s 2009 shareholders’ letter and proxy statement.
These decreases were partially offset by the impairment write-down of
goodwill relating to Evergreen; an increase in professional service fees;
and by higher FDIC insurance premiums due to an increase in assessment
rates and deposit balances subject to assessment, as well as a special
one-time assessment paid during
2009.
|
The
Company offers a wide range of services to businesses, professionals, and
individuals. The Company focuses on serving the banking needs of
small to medium-sized businesses in its geographic areas. The Company
makes commercial loans, industrial loans, real estate loans, construction loans
and consumer loans, accepts demand, savings, and time deposits and provides a
broad range of other services to its customers, either directly or through third
parties. The Company derives revenues principally from interest
earned on loans and fees from other banking-related services. The operations of
the Company are influenced significantly by general economic conditions and by
policies of financial institution regulatory agencies, primarily the Connecticut
Banking Commissioner and the FDIC. The Company’s cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financings may be offered.
22
On
February 22, 2010, the Company entered into an Agreement and Plan of Merger with
Naugatuck Valley Financial Corporation (“NVSL”) and Newco, a corporation to be
formed by NVSL to be the holding company for Naugatuck Valley Savings and Loan
(“NVSL Bank”), pursuant to which the Company will merge with and into NVSL, with
NVSL being the surviving corporation. See Note 18 to the Consolidated Financial
Statements for additional information regarding the transaction.
Selected
Operating and Balance Sheet Data –
Years
Ended December 31, 2009 and December 31, 2008
Operating Data
|
2008
|
2008
|
||||||
Interest
income
|
$ | 6,425,869 | $ | 7,000,100 | ||||
Interest
expense
|
2,172,387 | 2,240,045 | ||||||
Net
interest income
|
4,253,482 | 4,760,055 | ||||||
Provision
for loan losses
|
1,992,113 | 226,019 | ||||||
Noninterest
income
|
628,944 | 1,666,625 | ||||||
Noninterest
expenses
|
5,797,738 | 6,066,912 | ||||||
Net
(loss) income
|
(2,907,425 | ) | 133,749 | |||||
Basic
and diluted (loss) income per share
|
(1.08 | ) | 0.05 | |||||
Balance sheet data
|
||||||||
Cash
and due from banks
|
$ | 2,541,557 | $ | 5,267,439 | ||||
Short-term
investments
|
15,383,081 | 8,637,450 | ||||||
Interest
bearing certificates of deposit
|
347,331 | 1,642,612 | ||||||
Investment
securities
|
2,219,751 | 5,130,005 | ||||||
Loans,
net
|
109,865,195 | 89,241,432 | ||||||
Total
assets
|
135,610,178 | 114,916,562 | ||||||
Total
deposits
|
117,555,542 | 93,970,024 | ||||||
Repurchase
agreements
|
294,332 | 214,391 | ||||||
Total
shareholders' equity
|
15,632,536 | 18,540,954 | ||||||
Book
value per share
|
5.80 | 6.90 |
Segment
Reporting
The
Company has three reporting segments for purposes of reporting business line
results: Community Banking, Mortgage Brokerage and the Holding Company. The
Community Banking segment is defined as all operating results of the Bank. The
Mortgage Brokerage segment is defined as the results of Evergreen and the
Holding Company segment is defined as the results of Southern Connecticut
Bancorp on an unconsolidated or standalone basis. The Company uses an internal
reporting system to generate information by operating segment. Estimates and
allocations are used for noninterest expenses.
23
Assets
The Company’s total assets were $135.6
million as of December 31, 2009, an increase of $20.7 million over December 31,
2008 total assets of $114.9 million. $20.6 million of the increase in total
assets during 2009 is attributable to an increase in loans receivable from
December 31, 2008. Earning assets comprise $130.6 million of the total assets,
and consist of short-term investments, interest-bearing certificates of deposit,
securities and loans, which collectively increased $24.7 million from
2008. The Company has maintained liquidity by maintaining balances in
overnight Federal Funds sold and in short-term investments, primarily money
market mutual funds, to provide funding for higher yielding loans as they are
approved. As of December 31, 2009 and 2008 short-term investments
balances were $15.4 million and $8.6 million, respectively. During
the latter part of 2008, due to historically low returns available on federal
funds sold, the Company focused on money market funds as a short-term investment
strategy. Investment securities classified as available for sale were $2.2
million and $5.1 million as of December 31, 2009 and 2008,
respectively. The gross loan portfolio was $112.6 million and $90.4
million as of December 31, 2009 and 2008 respectively, an increase of $22.2
million. The allowance for loan losses increased $1.6 million to $2.8 million at
December 31, 2009 compared to $1.2 million at the end of 2008.
Investments
The amortized cost of the Company’s
investments decreased $2.9 million during 2009, representing the difference
between securities that matured ($7.1 million) and were called ($5.0 million)
and purchases of new securities ($9.2 million).
The
following table presents the maturity distribution of the amortized cost of
investment securities at December 31, 2009, and the weighted average yield of
such securities. The weighted average yields were calculated based on
the amortized cost and effective yields to maturity of each
security.
Over
|
Over
|
|||||||||||||||||||||||||||
One
Year
|
Five
Years
|
Weighted
|
||||||||||||||||||||||||||
One
Year
|
Through
|
Through
|
Over
|
No
|
Average
|
|||||||||||||||||||||||
Available for sale
|
or
Less
|
Five
Years
|
Ten
Years
|
Ten
Years
|
Maturity
|
Total
|
Yield
|
|||||||||||||||||||||
U.
S. Government sponsored
|
||||||||||||||||||||||||||||
agency
obligations
|
$ | - | $ | - | $ | 2,126,216 | $ | - | $ | - | $ | 2,126,216 | 3.07 | % | ||||||||||||||
Mortgage-backed
securities
|
- | - | - | - | 105,331 | 105,331 | 4.49 | % | ||||||||||||||||||||
Total
|
$ | - | $ | - | $ | 2,126,216 | $ | - | $ | 105,331 | $ | 2,231,547 | ||||||||||||||||
Weighted
Average Yield
|
0.00 | % | 0.00 | % | 3.07 | % | 0.00 | % | 4.49 | % | 3.13 | % | ||||||||||||||||
The
following table presents a summary of investments for any issuer that exceeds
10% of shareholders’ equity at December 31, 2009:
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Federal
National Mortgage Association
|
$ | 2,126,216 | $ | 2,113,733 |
Please
see also, “Notes to Consolidated Financial Statements.”
24
Loans
The Bank’s net loan portfolio was
$109.9 million at December 31, 2009 versus $89.2 million at December 31, 2008,
an increase of $20.7 million. The Company attributes the 2009 loan
growth to the success of the Bank’s loan business development program in
generating loan demand to small to medium-sized
businesses. Management believes that the loan growth will continue as
the Bank’s branch system deposit base grows and additional lending capacity is
developed. The Bank’s loans have been made to borrowers primarily in
the New Haven market area. There are no other significant loan
concentrations in the loan portfolio.
The
following table presents the maturities of loans in the Company’s portfolio at
December 31, 2009 by type of loan, and the sensitivities of loans to changes in
interest rates:
Due
after
|
||||||||||||||||||||
Due
in
|
one
year
|
|||||||||||||||||||
one
year
|
through
|
Due
after
|
||||||||||||||||||
or
less
|
five
years
|
five
years
|
Total
|
%
of Total
|
||||||||||||||||
Commercial
loans secured
|
||||||||||||||||||||
by
real estate
|
$ | 14,812,625 | $ | 42,490,005 | $ | 6,534,082 | $ | 63,836,712 | 56.60 | % | ||||||||||
Commercial
loans
|
30,742,366 | 11,365,251 | 1,785,574 | 43,893,191 | 38.92 | % | ||||||||||||||
Construction
loans
|
3,732,354 | 575,551 | 300,000 | 4,607,905 | 4.08 | % | ||||||||||||||
Consumer
installment loans
|
254,899 | 152,858 | 40,786 | 448,543 | 0.40 | % | ||||||||||||||
Total
|
$ | 49,542,244 | $ | 54,583,665 | $ | 8,660,442 | $ | 112,786,351 | 100.00 | % | ||||||||||
Fixed
rate loans
|
$ | 15,010,814 | $ | 11,488,564 | $ | 4,707,011 | $ | 31,206,389 | ||||||||||||
Variable
rate loans
|
34,531,430 | 43,095,101 | 3,953,431 | 81,579,962 | ||||||||||||||||
Total
|
$ | 49,542,244 | $ | 54,583,665 | $ | 8,660,442 | $ | 112,786,351 | ||||||||||||
Please
see also, “Notes to Consolidated Financial Statements.”
Critical
Accounting Policy
In the ordinary course of business, the
Company has made a number of estimates and assumptions relating to reporting the
results of operations and financial condition in preparing its financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ significantly
from those estimates under different assumptions and conditions. The
Company believes the following discussion addresses the Company’s only critical
accounting policy, which is the policy that is most important to the portrayal
of the Company’s financial condition and results, and requires management’s most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain. The Company has reviewed this critical accounting policy
and estimates with its audit committee. Refer to the discussion below
under “Allowance for Loan Losses” and Note 1 to the consolidated financial
statements for a detailed description of our estimation process and methodology
related to the allowance for loan losses.
25
Allowance
for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The
allowance consists of allocated and general components. The allocated
component relates to loans that are considered impaired. For such
impaired loans, an allowance is established when the discounted cash flows (or
observable market price or collateral value if the loan is collateral dependent)
of the impaired loan is lower than the carrying value of that
loan. The general component covers all other loans, segregated
generally by loan type, and is based on historical loss experience with
adjustments for qualitative factors which are made after an assessment of
internal or external influences on credit quality that are not fully reflected
in the historical loss data.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and real estate
loans by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Impaired
loans also include loans modified in troubled debt restructurings where
concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal,
forbearance or other actions intended to maximize collection.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual consumer installment loans for impairment disclosures, unless such
loans are the subject of a restructuring agreement due to financial difficulties
of the borrower.
26
Based upon this evaluation, management
believes the allowance for loan losses of $2,768,000 or 2.46% of gross loans
outstanding at December 31, 2009 is adequate, under prevailing economic
conditions, to absorb losses on existing loans. At December 31, 2008,
the allowance for loan losses was $1,183,000 or 1.31% of gross loans
outstanding. The increase in the allowance is attributable to a
$1,327,000 increase in the specific component of the allowance and a $258,000
increase in the general component of the allowance. The increase in the specific
component is due to an increase in specific reserves totaling $1,420,000 for ten
loans (five construction and land loans, four commercial real estate loans and
one commercial loan secured by residential real estate) identified as impaired
during the year ended December 31, 2009. This was partially offset by a decrease
in specific reserves totaling $5,000,for loans that were impaired, at both
December 31, 2009 and December 31, 2008; and by $88,000 for loans charged off
during the year that were classified as impaired at December 31, 2008. The
increase in the general component of the reserve is primarily due to an increase
in the reserve factors and increased loan volume, partially offset by the
reclassification of thirteen loans to impaired loans.
The accrual of interest on loans is
discontinued at the time the loan is 90 days past due unless the loan is
well-secured and in process of collection. Consumer installment loans
are typically charged off no later than 180 days past due. Past due
status is based on contractual terms of the loan. In all cases, loans
are placed on nonaccrual status or charged-off at an earlier date if collection
of principal or interest is considered doubtful. All interest accrued but not
collected for loans that are placed on nonaccrual status or charged off is
reversed against interest income. The interest on these loans is
accounted for on the cash-basis method until qualifying for return to accrual
status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Management considers all non-accrual
loans and troubled-debt restructured loans to be impaired. In most
cases, loan payments that are past due less than 90 days and the related loans
are not considered to be impaired.
Allowance
for Loan Losses and Non-Accrual, Past Due and Restructured Loans
2009
|
2008
|
|||||||
Balance
at beginning of year
|
$ | 1,183,369 | $ | 1,256,965 | ||||
Provision
for loan losses
|
1,992,113 | 226,019 | ||||||
Recoveries
of loans previously charged-off:
|
||||||||
Commercial
|
10,000 | 37,109 | ||||||
Consumer
|
563 | - | ||||||
Total
recoveries
|
10,563 | 37,109 | ||||||
Loans
charged-off:
|
||||||||
Commercial
loans secured by real estate
|
(413,839 | ) | (90,215 | ) | ||||
Commercial
|
(2,300 | ) | - | |||||
Consumer
|
(1,339 | ) | (246,509 | ) | ||||
Total
charge-offs
|
(417,478 | ) | (336,724 | ) | ||||
Balance
at end of year
|
$ | 2,768,567 | $ | 1,183,369 | ||||
Net
charge-offs to average loans
|
(0.42 | %) | (0.36 | %) | ||||
27
Allocation
of the Allowance for Loan Losses at December 31. 2009 and
2008:
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Percent
of
|
Percent
of
|
|||||||||||||||
Loans
in Each
|
Loans
in Each
|
|||||||||||||||
Category
to
|
Category
to
|
|||||||||||||||
Balance
|
Total
Loans
|
Balance
|
Total
Loans
|
|||||||||||||
Commercial
loans secured by real estate
|
$ | 1,530,085 | 56.60 | % | $ | 528,754 | 50.22 | % | ||||||||
Commercial
loans
|
1,140,924 | 38.92 | % | 530,088 | 41.57 | % | ||||||||||
Construction
and land loans
|
90,274 | 4.08 | % | 114,340 | 7.18 | % | ||||||||||
Consumer
home equity loans
|
- | 0.00 | % | 6,890 | 0.42 | % | ||||||||||
Consumer
installment loans
|
7,284 | 0.40 | % | 3,297 | 0.61 | % | ||||||||||
$ | 2,768,567 | 100.00 | % | $ | 1,183,369 | 100.00 | % | |||||||||
Non-Accrual,
Past Due and Restructured Loans
The following represents non-accrual
and past due loans at December 31, 2009 and December 31, 2008:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Non-accrual
loans
|
$ | 5,363,061 | $ | 881,948 | ||||
Accruing
loans contractually past due 90 days or more
|
||||||||
Loans
past due 90 days or more and still accruing
|
$ | 483,897 | $ | 195,822 | ||||
Matured
loans pending renewal and still accruing
|
- | 188,620 | ||||||
Total
|
$ | 483,897 | $ | 384,442 | ||||
In 2009
and 2008, there were no loans considered “troubled debt
restructurings.”
Potential
Problem Loans
At December 31, 2009, the Bank had
loans totaling $1.0 million, which were not disclosed in the table above, and
were not on non-accrual status, but were deemed to be impaired. The loans were
current with respect to principal and interest. Management of the Company has
reviewed the collateral for the loans and considers the current specific
reserves, if any, on the loans to be adequate to cover potential losses related
to the relationships.
Deposits
Total deposits were $117.6 million at
December 31, 2009, an increase of $23.6 million (25.1%) in comparison to total
deposits at December 31, 2008 of $94.0 million. The overall growth in
deposit balances occurred primarily during the first six months of 2009 to fund
anticipated increased loan volume. Non-interest bearing deposits were $29.8
million at December 31, 2009, an increase of $1.6 million (5.7%) from $28.2
million at December 31, 2008. The balance of interest bearing checking accounts
can fluctuate as much as 5% to 10% on a daily basis. Total interest
bearing checking, money market and savings deposits increased $3.6 million, or
10.8%, to $37.4 million at December 31, 2009 from $33.8 million at December 31,
2008. Time deposits increased to $50.3 million at December 31, 2009
from $32.0 million at December 31, 2008, an $18.3 million (57.2%)
increase. Included in time deposits at December 31, 2009 is $14.0
million in brokered deposits, which includes the Company’s placement of $3.4
million in customer deposits and purchase of $3.5 million in brokered
certificates of deposit through the CDARS program. The CDARS program offers the
Bank both reciprocal and one way swap programs which allow customers to enjoy
additional FDIC insurance for deposits that might not otherwise be eligible for
FDIC insurance and gives the Bank additional access to funding. As of
December 31, 2009, core deposits represented 57.2% of total deposits compared to
66.0% at December 31, 2008. The decrease in core deposits as a percentage of
total deposits is due to seasonal fluctuations in deposit levels as well as the
effect of reduced economic activity in general, on the Bank’s customer’s
businesses.
28
The Bank maintains relationships with
several deposit brokers and could continue to utilize the services of one or
more of such brokers if management determines that issuing brokered certificates
of deposit would be in the best interest of the Bank and the
Company.
The Greater New Haven Market is highly
competitive. The Bank faces competition from a large number of banks
(ranging from small community banks to large international banks), credit
unions, and other providers of financial services. The level of rates
offered by the Bank reflects the high level of competition in our
market.
As
of December 31, 2009 the Bank's maturities of time deposits
were:
|
||||||||||||
$100,000 |
Less
than
|
|||||||||||
or
greater
|
$100,000 |
Totals
|
||||||||||
(
Thousands of dollars)
|
||||||||||||
Three
months or less
|
$ | 4,196 | $ | 2,260 | $ | 6,456 | ||||||
Over
three months to six months
|
2,873 | 5,505 | 8,378 | |||||||||
Over
six months to one year
|
9,217 | 9,495 | 18,712 | |||||||||
Over
one year to two years
|
2,930 | 4,513 | 7,443 | |||||||||
Over
two years to three years
|
2,843 | 4,842 | 7,685 | |||||||||
Over
three years
|
454 | 1,171 | 1,625 | |||||||||
$ | 22,513 | $ | 27,786 | $ | 50,299 | |||||||
Other
The increase in Other Assets of
$457,000 is due mainly to the prepayment in December 2009 of FDIC insurance
premiums totaling $678,000, partially offset by the write-down in 2009 of
$238,000 in Goodwill recorded by the Company related to the Evergreen asset
purchase in 2008.
29
Average
Balances, Yields, and Rates
The
following table presents average balance sheets (daily averages), interest
income, interest expense, and the corresponding annualized rates on earning
assets and rates paid on interest bearing liabilities for the years ended
December 31, 2009 and 2008.
Distribution
of Assets, Liabilities and Shareholders' Equity;
|
||||||||||||||||||||||||||||
Interest
Rates and Interest Differential
|
||||||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||||||
(Decreases)
|
||||||||||||||||||||||||||||
Interest
|
Interest
|
Increases
|
||||||||||||||||||||||||||
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
in
interest
|
||||||||||||||||||||||
(Dollars
in thousands)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Income/Expense
|
|||||||||||||||||||||
Interest
earning assets
|
||||||||||||||||||||||||||||
Loans
(1)(2)
|
$ | 97,773 | $ | 6,102 | 6.24 | % | $ | 84,106 | $ | 6,334 | 7.53 | % | $ | (232 | ) | |||||||||||||
Short-term and
other investments
|
22,023 | 203 | 0.92 | % | 10,120 | 266 | 2.63 | % | (63 | ) | ||||||||||||||||||
Investments
|
3,353 | 121 | 3.61 | % | 5,051 | 196 | 3.88 | % | (75 | ) | ||||||||||||||||||
Federal
funds sold
|
- | - | - | 7,497 | 204 | 2.72 | % | (204 | ) | |||||||||||||||||||
Total
interest earning assets
|
123,149 | 6,426 | 5.22 | % | 106,774 | 7,000 | 6.56 | % | (574 | ) | ||||||||||||||||||
Cash
and due from banks
|
4,362 | 4,387 | ||||||||||||||||||||||||||
Premises
and equipment, net
|
2,625 | 2,974 | ||||||||||||||||||||||||||
Allowance
for loan losses
|
(2,522 | ) | (1,213 | ) | ||||||||||||||||||||||||
Other
|
2,319 | 1,995 | ||||||||||||||||||||||||||
Total
assets
|
$ | 129,933 | $ | 114,917 | ||||||||||||||||||||||||
Interest
bearing liabilities
|
||||||||||||||||||||||||||||
Time
certificates
|
$ | 47,288 | 1,457 | 3.08 | % | $ | 29,904 | 1,251 | 4.18 | % | 206 | |||||||||||||||||
Savings
deposits
|
1,907 | 20 | 1.05 | % | 1,557 | 21 | 1.35 | % | (1 | ) | ||||||||||||||||||
Money
market / checking deposits
|
34,318 | 514 | 1.50 | % | 35,661 | 783 | 2.20 | % | (269 | ) | ||||||||||||||||||
Capital
lease obligations
|
1,178 | 176 | 14.94 | % | 1,184 | 176 | 14.86 | % | - | |||||||||||||||||||
Repurchase
agreements
|
764 | 6 | 0.79 | % | 567 | 9 | 1.59 | % | (3 | ) | ||||||||||||||||||
Total
interest bearing liabilities
|
85,455 | 2,173 | 2.54 | % | 68,873 | 2,240 | 3.25 | % | (67 | ) | ||||||||||||||||||
Non-interest
bearing deposits
|
26,792 | 25,170 | ||||||||||||||||||||||||||
Accrued
expenses and other liabilities
|
1,058 | 1,281 | ||||||||||||||||||||||||||
Shareholder's
equity
|
16,628 | 19,593 | ||||||||||||||||||||||||||
Total
liabilities and equity
|
$ | 129,933 | $ | 114,917 | ||||||||||||||||||||||||
Net
interest income
|
$ | 4,253 | $ | 4,760 | $ | (507 | ) | |||||||||||||||||||||
Interest
spread
|
2.68 | % | 3.31 | % | ||||||||||||||||||||||||
Interest
margin
|
3.45 | % | 4.46 | % | - | |||||||||||||||||||||||
(1)
Average balance includes nonaccruing loans.
|
||||||||||||||||||||||||||||
(2)
Interest income includes loan fees, which are not
material.
|
30
Rate
Volume Variance Analysis
The
following table summarizes the variance in interest income and expense for 2009
and 2008 resulting from changes in assets and liabilities and fluctuations in
interest rates earned and paid. The changes in interest income and expense
attributable to both rate and volume have been allocated to both rate and volume
on a pro rata basis.
2009
vs 2008
|
||||||||||||
Due
to Change in Average
|
(Decrease)
|
|||||||||||
(Dollars in thousands)
|
Volume
|
Rate
|
Increase
|
|||||||||
Interest
earning assets
|
||||||||||||
Loans
|
$ | 943 | $ | (1,175 | ) | $ | (232 | ) | ||||
Short-term
and other investments
|
182 | (245 | ) | (63 | ) | |||||||
Investments
|
(62 | ) | (13 | ) | (75 | ) | ||||||
Federal
funds sold
|
(204 | ) | - | (204 | ) | |||||||
Total
interest earning assets
|
859 | (1,433 | ) | (574 | ) | |||||||
Interest
bearing liabilities
|
||||||||||||
Time
certificates
|
595 | (389 | ) | 206 | ||||||||
Savings
deposits
|
4 | (5 | ) | (1 | ) | |||||||
Money
market / checking deposits
|
(29 | ) | (240 | ) | (269 | ) | ||||||
Capital
lease obligations
|
(1 | ) | 1 | - | ||||||||
Repurchase
agreements
|
2 | (5 | ) | (3 | ) | |||||||
Total
interest bearing liabilities
|
571 | (638 | ) | (67 | ) | |||||||
Net
interest income
|
$ | 288 | $ | (795 | ) | $ | (507 | ) |
The
decrease in net interest income during 2009 reflects the decrease in the yields
on earning assets from 6.56% in 2008 to 5.22% in 2009, partially offset by an
increase in total average interest earning asset balances from 2008, as the
average interest earning assets in 2009 of $123.1 million were 15% higher than
2008. The decline in interest income attributable to average interest earning
assets was partially offset by the combined effects of a decrease in rates on
interest bearing liabilities from 3.25% in 2008 to 2.54% in 2009 and a $16.6
million increase in average interest bearing liabilities from $68.9 million in
2008 to $85.5 million in 2009. Overall, the change in interest income
attributed to volume increases was $288,000 offset by a decrease of $795,000 due
to the decrease in interest rates. Interest income from interest earning assets
in 2009 compared to 2008 declined $1.4 million due to rates and increased
$859,000 due to volume. Variances in the 2009 cost of interest
bearing liabilities in comparison to 2008 were due to decreased rate
considerations of $638,000 offset by increased volume considerations of
$571,000.
The Company intends for the Bank to
continue to emphasize lending to small to medium-sized businesses in its market
area as its strategy to increase assets under management and to improve
earnings. The Bank will seek opportunities through marketing to
increase its deposit base, with a primary objective of attracting core
non-interest checking and related money market deposit accounts, in order to
support its earning assets and also by considering additional branch locations
and new product and service offerings.
31
The following are measurements of the
Company’s results of operations in relation to assets and equity, and average
equity to average assets for the years ended December 31, 2009 and
2008:
2009
|
2008
|
|||||||
(Loss)
income on average assets
|
(2.24 | %) | 0.12 | % | ||||
(Loss)
income on average equity
|
(17.50 | %) | 0.68 | % | ||||
Average
equity to average assets
|
12.79 | % | 17.05 | % | ||||
Results
of Operations
The
Company’s net loss for fiscal year 2009 was $2,907,000 (or basic and diluted
loss per share of $1.08), compared to net income of $134,000 (or basic and
diluted income per share of $0.05) in fiscal year 2008.
The
Company’s net loss for the year ended December 31, 2009 was largely attributable
to a provision for loan losses of $1,992,000 for 2009 compared to $226,000 for
2008. The significant increase in the provision for loan losses during 2009 is
related to a group of ten impaired loans that have been severely impacted by
prevailing economic conditions, discussed in more detail under Allowance for Loan
Losses.
In
addition to the impact of the provision for loan losses, the operating results
for the year ended December 31, 2009 compared to 2008 were influenced by the
following factors:
|
·
|
Net
interest income decreased due primarily to lower yields on interest
earning assets, offset partially by lower costs on interest bearing
liabilities and changes in asset and liability
volumes;
|
|
·
|
Noninterest
income decreased because noninterest income in 2008 included the gain on
the sale of the New London branch; a decrease in loan fees attributable to
a prepayment penalty received in 2008; and due to a decrease in service
charges and fees, resulting from changes in the business practices of
customers of the Bank; and
|
|
·
|
Noninterest
expenses decreased due to lower salaries and benefits resulting from
reductions in staff, both from the sale of the New London branch and other
reductions, and the elimination of certain employee benefits and bonuses
in 2009. In addition, salaries and benefits expense for 2008 included
expenses related to separation payments made to the former Chief Executive
Officer and President of the Bank, and there were no such expenses in
2009; expense reductions attributable to lower negotiated rates on certain
insurance and telecommunications service contracts; decreases in
advertising and promotional campaigns; and expense savings related to
printing the Company’s 2009 shareholders’ letter and proxy statement.
These decreases were partially offset by the impairment write-down of
goodwill relating to Evergreen; an increase in professional service fees;
and by higher FDIC insurance premiums due to an increase in assessment
rates and deposit balances subject to assessment, as well as a special
one-time assessment paid during
2009.
|
32
Net
Interest Income
The
principal source of revenue for the Bank is net interest income. The
Bank’s net interest income is dependent primarily upon the difference or spread
between the average yield earned on loans receivable and securities and the
average rate paid on deposits and borrowings, as well as the relative amounts of
such assets and liabilities. The Bank, like other banking
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
For the
year ended December 31, 2009, net interest income was $4,253,000 versus
$4,760,000 for the same period in 2008. The $507,000 (or 10.6%) decrease was the
result of a $574,000 decrease in interest income and a $67,000 decrease in
interest expense. This net decrease was primarily the result of
decreases in rates, partially offset by increases in volume, on both interest
earning assets and interest bearing liabilities.
The
Company’s average total interest earning assets were $123.1 million during the
year ended December 31, 2009 compared to $106.8 million for the same period in
2008, an increase of $16.3 million (or 15.3%). The increase in average interest
earning assets of $16.3 million was comprised of increases in average balances
of loans of $13.7 million and short-term and other investments of $11.9 million,
partially offset by decreases in average balances of federal funds sold of $7.5
million and investments of $1.6 million.
The yield on average interest earning
assets for the year ended December 31, 2009 was 5.22% compared to 6.56% for
2008, a decrease of 134 basis points. The decrease in the yield on
average earning assets reflects the impact of reductions in the FOMC rates,
particularly in the prime lending rate, LIBOR and the Bank’s base lending rate;
as well as an increase in non-performing assets and an increasingly competitive
market to attract new loans.
The
combined effects of the 134 basis point decrease in yield on average interest
earning assets and the $16.3 million increase in average balances of interest
earning assets resulted in the $574,000 decrease in interest income between the
year ended December 31, 2009 and the year ended December 31, 2008.
The
average balance of the Company’s interest bearing liabilities was $85.5 million
during the year ended December 31, 2009 compared to $68.9 million for 2008, an
increase of $16.6 million (or 24.1%). The cost of average interest bearing
liabilities decreased 71 basis points to 2.54% during the year ended December
31, 2009 compared to 3.25% for the same period in 2008, which was primarily due
to a general decrease in market interest rates.
The
combined effects of the 71 basis point decrease in yield on average interest
bearing liabilities and the $16.6 million increase in average balances of
interest bearing liabilities resulted in the $67,000 decrease in interest
expense between the year ended December 31, 2009 and the year ended December 31,
2008.
Provision
for Loan Losses
The Bank’s provision for loan losses
was $1,992,000 for the year ended December 31, 2009, as compared to $226,000 for
the year ended December 31, 2008. The significant increase in the provision for
loan losses during the year ended December 31, 2009 was primarily related to
specific reserves established for a group of ten impaired loans that have been
severely impacted by prevailing economic conditions, discussed in more detail
under Allowance for Loan
Losses.
33
Noninterest
Income
Total
noninterest income was $629,000 for the year ended December 31, 2009 compared to
$1,667,000 for the same period in 2008. Noninterest income in 2008 included an
$875,000 gain on the sale of the Bank’s New London branch. Service charges and
fees decreased $70,000 due to changes in business practices of customers of the
Bank during the year ended December 31, 2009. Other non-interest income
decreased to $122,000 in 2009 from $215,000 in 2008, due to decreases in loan
prepayment fees ($74,000), insurance commissions ($9,000), letter of credit fees
($10,000), and other fees ($29,000), partially offset by increases in other loan
and SBA servicing related fees ($29,000).
Noninterest
Expenses
Total
noninterest expenses were $5,798,000 for the year ended December 31, 2009
compared to $6,067,000 for 2008, a decrease of $269,000 or 4.4%.
Salaries
and benefits expense for the year ended December 31, 2009 was $3,089,000 versus
$3,688,000 for the same period in 2008. Salaries and benefits expense decreased
$599,000, or 16.2%, primarily because of expense savings related to reductions
in staff, both from the sale of the New London branch and other reductions, and
the elimination of certain employee benefits and bonuses in 2009, as well as the
reduction relating to separation payments made to the former Chief Executive
Officer and President of the Bank in 2008, with no such expenses incurred in
2009.
FDIC
insurance expense increased by $167,000 from $79,000 to $246,000 primarily due
to increased assessment rates and deposit balances subject to assessment, as
well as a one time special assessment of five basis points based upon deposit
balances on June 30, 2009. The Temporary Liquidity Guarantee Program
announcement by the FDIC on October 17, 2008 provided banks with the option to
fully insure non-interest bearing transaction deposit accounts. The Bank elected
to participate in the program, resulting in a 10 basis point annual rate
surcharge applied to balances in such accounts over $250,000, beginning in
2009.
Professional
services for the year ended December 31, 2009 increased by $152,000 from
$358,000 to $510,000, primarily due to an increase in legal fees related to the
merger announced on February 22, 2010 (see Note 18 to the Consolidated Financial
Statements) and accounting fees, partially offset by a reduction in other
professional fees.
Other
operating expenses increased by $61,000 to $846,000 for the year ended December
31, 2009, compared to the same period in 2008. The increase is primarily due to
the $238,000 impairment write-down of goodwill relating to Evergreen, partially
offset by expense reductions attributable to lower negotiated rates on certain
insurance and telecommunications service contracts, and expense savings related
to printing the Company’s 2009 shareholders’ letter and proxy statement. The
goodwill impairment recognized was due to the recurring operating losses
incurred by Evergreen since its acquisition, and the uncertainty that such
results were not likely to improve in the near future.
34
Off-Balance-Sheet
Arrangements
See Note
13 to the accompanying Consolidated Financial Statements for required disclosure
regarding off-balance-sheet arrangements.
Liquidity
The Company’s liquidity position as of
December 31, 2009 and 2008 consisted of liquid assets totaling $20.4
million and $20.7 million, respectively. This represents 15.1% and
18.0% of total assets at December 31, 2009 and 2008,
respectively. The liquidity ratio is defined as the percentage of
liquid assets to total assets. The following categories of assets as
described in the accompanying balance sheet are considered liquid assets: Cash
and due from banks, federal funds sold, short-term investments, interest-bearing
certificates of deposit and securities available for sale. Liquidity
is a measure of the Company’s ability to generate adequate cash to meet
financial obligations. The principal cash requirements of a financial
institution are to cover downward fluctuations in deposits and increases in its
loan portfolio.
Management believes the Company’s
short-term assets provide sufficient liquidity to cover potential fluctuations
in deposit accounts and loan demand and to meet other anticipated operating cash
and investment requirements.
Capital
The
following table illustrates the Company's and the Bank's regulatory
capital ratios at December 31:
|
|||||||
Company
|
Bank
|
||||||
Capital
|
Capital
|
||||||
Adequacy
|
Adequacy
|
||||||
2009
|
2008
|
Target
Ratio
|
2009
|
2008
|
Target
Ratio
|
||
Total
Capital to Risk Weighted Assets
|
13.25%
|
18.46%
|
8.00%
|
12.39%
|
17.09%
|
8.00%
|
|
Tier
1 Capital to Risk Weighted Assets
|
11.99%
|
17.13%
|
4.00%
|
11.13%
|
15.96%
|
4.00%
|
|
Tier
1 (Leverage) Capital Ratio to Average Assets
|
11.24%
|
15.64%
|
4.00%
|
10.44%
|
14.55%
|
4.00%
|
Capital
adequacy is one of the most important factors used to determine the safety and
soundness of individual banks and the banking system. Based on the
above ratios, the Bank is considered to be “well capitalized” under applicable
regulations. To be considered “well capitalized” an institution must
generally have a leverage capital ratio of at least 5%, a Tier 1 risk-based
capital ratio of at least 6% and a total risk-based capital ratio of at least
10%.
Market
Risk
Market
risk is defined as the sensitivity of income to fluctuations in interest rates,
foreign exchange rates, equity prices, commodity prices and other market-driven
rates or prices. Based upon the nature of the Company’s business,
market risk is primarily limited to interest rate risk, which is defined as the
impact of changing interest rates on current and future earnings.
35
The Company’s goal is to maximize
long-term profitability, while minimizing its exposure to interest rate
fluctuations. The first priority is to structure and price the
Company’s assets and liabilities to maintain an acceptable interest rate spread,
while reducing the net effect of changes in interest rates. In order
to reach an acceptable interest rate spread, the Company must generate loans and
seek acceptable long-term investments to replace the lower yielding balances in
Federal Funds sold and short-term investments. The focus also must be
on maintaining a proper balance between the timing and volume of assets and
liabilities re-pricing within the balance sheet. One method of
achieving this balance is to originate variable loans for the portfolio to
offset the short-term re-pricing of the liabilities. In fact, a
number of the interest bearing deposit products have no contractual
maturity. Customers may withdraw funds from their accounts at any
time and deposits balances may therefore run off unexpectedly due to changing
market conditions.
The
exposure to interest rate risk is monitored by Senior Management of the Bank and
reported quarterly to the Asset and Liability Management Committee and the Board
of Directors. Management reviews the interrelationships within the
balance sheet to maximize net interest income within acceptable levels of
risk.
Impact
of Inflation and Changing Prices
The Company’s consolidated financial
statements have been prepared in terms of historical dollars, without
considering changes in relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on
a financial institution’s performance than the effect of general levels of
inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and
services. Notwithstanding this fact, inflation can directly affect
the value of loan collateral, in particular, real estate. Inflation,
or disinflation, could significantly affect the Company’s earnings in future
periods.
Factors
Affecting Future Results
Some of the statements under
“Management’s Discussion and Analysis or Plan of Operations,” “Business” and
elsewhere in this Annual Report on Form 10-K may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. Statements which include the words “expect,”
“intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a
future or forward-looking nature identify forward-looking statements for
purposes of the federal securities laws or otherwise. All
forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors
that could cause actual results to differ materially from those indicated in
these statements or that could adversely affect the holders of our common
stock. These
factors include, but are not limited to, (1) changes in prevailing interest
rates which would affect the interest earned on the Company’s interest earning
assets and the interest paid on its interest bearing liabilities, (2) the timing
of re-pricing of the Company’s interest earning assets and interest bearing
liabilities, (3) the effect of changes in governmental monetary policy, (4) the
effect of changes in regulations applicable to the Company and the conduct of
its business, (5) changes in competition among financial service companies,
including possible further encroachment of non-banks on services traditionally
provided by banks and the impact of recently enacted federal legislation, (6)
the ability of competitors which are larger than the Company to provide products
and services which it is impractical for the Company to provide, (7) the
volatility of quarterly earnings, due in part to the variation in the number,
dollar volume and profit realized from SBA guaranteed loan participation sales
in different quarters, (8) the effect of a loss of any executive officer, key
personnel, or directors, (9) the effect of the Company’s opening of branches and
the receipt of regulatory approval to complete such actions, (10) concentration
of the Company’s business in southern and southeastern Connecticut, (11) the
concentration of the Company’s loan portfolio in commercial loans to
small-to-medium sized businesses, which may be impacted more severely than
larger businesses during periods of economic weakness, (12) lack of seasoning in
the Company’s loan portfolio, which may increase the risk of future credit
defaults, and (13) the effect of any decision by the Company to engage in any
business not historically permitted to it. Other such factors may be
described in other filings made by the Company with the SEC.
36
Although
the Company believes that it has the resources needed for success, future
revenues and interest spreads and yields cannot be reliably
predicted. These trends may cause the Company to adjust its
operations in the future. Because of the foregoing and other factors,
recent trends should not be considered reliable indicators of future financial
results or stock prices.
Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
Not
required.
Item
8. Financial
Statements and Supplementary Data.
The
consolidated balance sheets of the Company as of December 31, 2009 and 2008, and
the related consolidated statements of operations, shareholders’ equity and cash
flows for the years then ended, together with the report thereon of McGladrey
& Pullen, LLP dated March 29, 2010 are included as part of this Form 10-K
following page 46 hereof.
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure.
Not
applicable.
Item 9A(T). Controls and
Procedures.
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Based
upon an evaluation of the effectiveness of the Company’s disclosure controls and
procedures performed by the Company’s management, with participation of the
Company’s President and Chief Operating Officer, Chief Financial
Officer, and Chief Accounting Officer as of the end of the period covered by
this report, the Company’s President and Chief Operating Officer, Chief
Financial Officer, and Chief Accounting Officer concluded that the Company’s
disclosure controls and procedures have been effective in ensuring that material
information relating to the Company, including its consolidated subsidiary, is
made known to the certifying officers by others within the Company and the Bank
during the period covered by this report.
37
As used
herein, “disclosure controls and procedures” means controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
|
(b)
|
Management’s
Annual Report on Internal Control Over Financial
Reporting
|
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and
with the participation of the President and Chief Operating Officer, the Chief
Financial Officer and the Chief Accounting Officer, we conducted an evaluation
of the effectiveness of our control over financial reporting based on the
framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our
evaluation under the framework, management has concluded that our internal
control over financial reporting was effective as of December 31,
2009.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
|
(c)
|
Changes
in Internal Control over Financial
Reporting
|
There
have not been any changes in the Company’s internal controls over financial
reporting during the Company’s last fiscal quarter ended December 31, 2009 that
have materially affected or are reasonably likely to materially affect the
Company’s internal control over financial reporting.
Item 9B. Other
Information.
None.
38
PART III
Item 10. Directors, Executive
Officers and Corporate Governance.
The
information required by this Item 10 is incorporated into this Form 10-K by
reference from the sections captioned “Proposal 1 – Election of Directors”,
“Corporate Governance”, “Section 16(a) Beneficial Ownership Reporting
Compliance”, and “Code of Ethics” in the Company's definitive proxy statement
for its 2010 Annual Meeting of Shareholders (the "Definitive Proxy
Statement").
Item 11. Executive
Compensation.
The
information required by this Item 11 is incorporated into this Form 10-K by
reference from the sections captioned “Executive Compensation” and “Director
Compensation” in the Definitive Proxy Statement.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
Equity
Compensation Plan Information
The following schedule provides
information with respect to the compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance as of December 31, 2009:
Plan
Category
|
Number
of securities to
|
Weighted-average
|
Number
of securities
|
|||
be
issued upon exercise
|
exercise
price of
|
remaining
available for
|
||||
of
outstanding options,
|
outstanding
options,
|
future
issuance under
|
||||
warrants
and rights
|
warrants
and rights
|
equity
compensation
|
||||
(a)
|
(b)
|
plans
(excluding
|
||||
securities
reflected in
|
||||||
column
(a)
|
||||||
Equity
Compensation Plans
|
202,201
|
$7.79
|
257,971
|
|||
approved
by security holders
|
||||||
Equity
Compensation Plan
|
77,184
|
$10.39
|
0
|
|||
not
approved by security
|
||||||
holders
(1)
|
||||||
Total
|
279,385
|
$8.51
|
257,971
|
(1) The
Company adopted a 2001 Warrant Plan and 2001 Supplemental Warrant Plan
(collectively, the “Warrant Plans”) on April 11, 2001 and October 16, 2001,
respectively. The Warrant Plans were not approved by security
holders. Under the Warrant Plans, each director of the Company, other
than Mr. Joseph V. Ciaburri (who served as the Chairman of the board of
directors of the Company at the time), and each director of the Bank who is not
a director of the Company, as of the initial public offering of the Company in
July 2001, received a warrant to purchase one share of the Company common stock
for each four shares purchased in the offering by such director or members of
such director’s immediate family. Under the 2001 Supplemental Warrant
Plan, certain organizers of the Company who are not directors, officers or
employees of the Company or the Bank but who made contributions to the Company’s
enterprise received a warrant to purchase one share of the Company common stock
for each five shares purchased in the offering by such person or member of such
person’s immediate family. The warrants have a term of ten years. The
exercise price of the warrants is $10.39, the price at which the Company’s
common stock was sold in the initial public offering, as adjusted for subsequent
stock dividends. As of December 31, 2009, the warrants are fully
exercisable.
39
Additional
information required by this Item 12 is incorporated into this Form 10-K by
reference from the section captioned “Security Ownership of Certain Beneficial
Owners and Management” in the Definitive Proxy Statement.
Item 13. Certain Relationships and
Related Transactions, and Director Independence.
The
information required by this Item 13 is incorporated into this Form 10-K by
reference from the sections captioned “Corporate Governance”, “Compensation
Committee Interlocks and Insider Participation” and “Certain Relationships and
Related Transactions” in the Definitive Proxy Statement.
Item 14. Principal Accountant Fees
and Services.
McGladrey
& Pullen, LLP and RSM McGladrey, Inc. provide audit, audit-related and tax
advisory and tax return preparation services for the Company and The Bank of
Southern Connecticut. The following table summarizes the fees
provided in 2009 and 2008, respectively:
2009
|
2008
|
|||||||
Audit
fees
|
$ | 128,580 | $ | 139,609 | ||||
Audit
Related Fees
|
None
|
None
|
||||||
Tax
fees
|
11,900 | 10,900 | ||||||
All
Other fees
|
1,700 | 2,733 |
Audit
fees consist of fees for professional services rendered for the audit of the
consolidated financial statements, review of consolidated financial statements
included in quarterly reports on Form 10-Q and annual reports on Form 10-K, and
services connected with statutory and regulatory filings or
engagements. Audit-related fees are principally for consultations on
various accounting and reporting matters. Tax service fees consist of
fees for tax return preparation for the Company. All other fees consist of
consultations related to Sarbanes-Oxley Act Section 404
implementation.
40
The audit
committee of the Company’s Board of Directors has established policies and
procedures for the engagement of the independent registered public accounting
firm to provide non-audit services, including a requirement for approval in
advance of all non-audit services to be provided by the independent
auditor. To ensure that this does not restrict access to the
independent registered public accounting firm by management on matters where the
advice and consultation of the independent registered public accounting firm is
sought by management and such advice or consultation, in the opinion of
management, cannot practically be delayed pending pre-approval by the audit
committee, the committee authorizes management to use their judgment and retain
the independent auditor for such matters and consider such services to be
pre-approved provided the estimated cost of such services does not exceed 5% of
the annual fees paid to the independent registered public accounting firm and
such services are formally approved by the audit committee at its next
meeting.
41
PART IV
Item 15. Exhibits, Financial
Statement Schedules.
(a)
Financial Statements and Schedules:
The
following Financial Statements and Supplementary Data are filed as part of this
annual report:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Operations
Consolidated
Statements of Shareholders’ Equity
Consolidated
Statements of Cash Flows
Notes to
Consolidated Financial Statements
All
financial statement schedules are omitted because they are either inapplicable
or not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(b)
Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit No.
|
Description
|
2.1
|
Agreement
and Plan of Merger, dated as of February 22, 2010, by and among Naugatuck
Valley Financial Corporation, Newco (as defined therein) and the
Registrant (incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed on February 23,
2010)
|
3(i)
|
Amended
and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form
10-QSB filed on August 14, 2002)
|
3(ii)
|
By-Laws
of the Registrant (incorporated by reference to Exhibit 3(ii) to the
Registrant’s Current Report on Form 8-K filed on March 6,
2007)
|
10.1
|
Lease,
dated as of August 17, 2000, between 215 Church Street, LLC and the
Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s
Registration Statement on Form SB-2 filed on April 30,
2001)
|
10.2
|
Letter
agreement dated January 3, 2001 amending the Lease between 215 Church
Street, LLC and the Registrant (incorporated by reference to Exhibit 10.2
to the Registrant’s Registration Statement on Form SB-2 filed on April 30,
2001)
|
10.3
|
First
Amendment to Lease dated March 30, 2001 between 215 Church Street, LLC and
the Registrant (incorporated by reference to Exhibit 10.3 to the
Registrant’s Registration Statement on Form SB-2 filed on April 30,
2001)
|
10.4
|
Second
Amendment to Lease dated March 31, 2001 between 215 Church Street, LLC and
the Registrant (incorporated by reference to Exhibit 10.4 to the
Registrant’s Registration Statement Form SB-2 filed on April 30,
2001)
|
42
10.5
|
Assignment
of Lease dated April 11, 2001 between the Registrant and The Bank of
Southern Connecticut (incorporated by reference to Exhibit 10.5 to the
Registrant’s Registration Statement on Form SB-2 filed on April 30,
2001)
|
10.6
|
Lease
dated August 2, 2002 between 469 West Main Street LLC and The Bank of
Southern Connecticut (incorporated by reference to Exhibit 10.17 to the
Registrant’s Annual Report on Form 10-KSB filed on March 30,
2004)
|
10.7
|
Registrant’s
2001 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the
Registrant’s Registration Statement on Form SB-2 filed on April 30, 2001)
#
|
10.8
|
Registrant’s
2001 Warrant Plan (incorporated by reference to Exhibit 10.9 to the
Registrant’s Registration Statement on Form SB-2 filed on April 30, 2001)
#
|
10.9
|
Registrant’s 2001
Supplemental Warrant Plan (incorporated by reference to Exhibit
10.12 to the Registrant’s Annual Report on Form 10-KSB filed on March 29,
2002) #
|
10.10
|
Registrant’s
2002 Stock Option Plan (incorporated by reference to Appendix B to the
Registrant’s Definitive Proxy Statement filed on April 18, 2002)
#
|
10.11
|
Form
of Stock Option Agreement for Non-qualified Stock Option granted under the
Registrant’s 2002 Stock Option Plan (incorporated by reference to Exhibit
10.18 to the Registrant’s Quarterly Report on Form 10-QSB filed on
November 15, 2004) #
|
10.12
|
Form
of Stock Option Agreement for Incentive Stock Option granted under the
Registrant’s 2002 Stock Option Plan (incorporated by reference to Exhibit
10.19 to the Registrant’s Quarterly Report on Form 10-QSB filed on
November 15, 2004) #
|
10.13
|
Consulting
agreement dated March 1, 2007, by and among the Registrant and The Bank of
Southern Connecticut and Joseph V. Ciaburri (incorporated by reference to
Exhibit 10.23 to the Registrant’s Annual Report on Form 10-KSB filed on
March 28, 2007) #
|
10.14
|
Employment
Agreement dated February 8, 2008, effective January 1, 2008, by and among
the Registrant and The Bank of Southern Connecticut and John Howard
Howland (incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on February 14,
2008)
|
10.15
|
Employment
Agreement dated May 5, 2008, effective May 5, 2008, by and among the
Registrant and The Bank of Southern Connecticut and Stephen V. Ciancarelli
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on May 9,
2008)
|
10.16
|
Employment
Agreement, effective January 1, 2010, by and among the Registrant and The
Bank of Southern Connecticut and John H. Howland (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on December 30, 2009) #
|
10.17
|
Employment
Agreement, effective January 1, 2010, by and among the Registrant and The
Bank of Southern Connecticut and Stephen V. Ciancarelli (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on December 30, 2009) #
|
10.18
|
2005
Stock Option and Award Plan (incorporated by reference to Exhibit 99.1 to
the Registrant’s Form S-8 filed on January 13, 2006)
#
|
43
10.19
|
Form
of Common Stock Award Agreement for Restricted Stock Awards granted under
the 2005 Stock Option and Award Plan (incorporated by reference to Exhibit
99.2 to the Registrant’s Form S-8 filed on January 13, 2006)
#
|
14.
|
Code
of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s
Annual Report on Form 10-KSB filed on March 30,
2004)
|
31.1
|
|
32.2
|
|
#
Management contract or compensatory plan or
arrangement
|
44
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUTHERN
CONNECTICUT BANCORP, INC.
|
|
(Registrant)
|
|
By:
|
/s/ JOHN HOWARD HOWLAND
|
Name:
John Howard Howland
|
|
Title:
President and Chief Operating Officer
|
|
Date: March 29,
2010
|
In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
/s/ John Howard Howland
|
March 29, 2010
|
|
John
H. Howland
|
Date
|
|
President
and Chief Operating Officer
|
||
/s/ Stephen V. Ciancarelli
|
March 29, 2010
|
|
Stephen
V. Ciancarelli
|
Date
|
|
Senior
Vice President and Chief Financial Officer
|
||
/s/ Elmer F. Laydon
|
March 29, 2010
|
|
Elmer
F. Laydon
|
Date
|
|
Chairman
and Director
|
||
/s/ Alphonse F. Spadaro,
Jr.
|
March 29, 2010
|
|
Alphonse
F. Spadaro, Jr.
|
Date
|
|
Vice
Chairman and Director
|
||
/s/ Carl R. Borrelli
|
March 29, 2010
|
|
Carl
R. Borrelli
|
Date
|
|
Director
|
||
/s/ James S. Brownstein,
Esq.
|
March 29, 2010
|
|
James
S. Brownstein, Esq.
|
Date
|
|
Director
|
||
/s/ Alfred J. Ranieri, Jr.
|
March 29, 2010
|
|
Alfred
J. Ranieri, Jr.
|
Date
|
|
Director
|
45
/s/ Joshua H. Sandman,
Ph.D.
|
March 29, 2010
|
|
Joshua
H. Sandman, Ph.D.
|
Date
|
|
Director
|
||
/s/ Anthony M. Avellani
|
March 29, 2010
|
|
Anthony
M. Avellani
|
Date
|
|
Vice
President, Chief Accounting Officer
|
46
FINANCIAL
STATEMENTS
December
31, 2009 and 2008
CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Consolidated
Balance Sheets
|
|
Consolidated
Statements of Operations
|
|
Consolidated
Statements of Shareholders’ Equity
|
|
Consolidated
Statements of Cash Flows
|
|
Notes
to Consolidated Financial Statements
|
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Southern
Connecticut Bancorp, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Southern Connecticut
Bancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, shareholders’ equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Southern Connecticut
Bancorp, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
We were
not engaged to examine management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009,
included in the accompanying “Management’s Annual Report on Internal Control
Over Financial Reporting” and accordingly, we do not express an opinion
thereon.
/s/
McGladrey & Pullen, LLP
New
Haven, Connecticut
March 29,
2010
F-2
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
December
31, 2009 and December 31, 2008
|
||||||||
ASSETS
|
2009
|
2008
|
||||||
Cash
and due from banks (Note 2)
|
$ | 2,541,557 | $ | 5,267,439 | ||||
Short-term
investments
|
15,383,081 | 8,637,450 | ||||||
Cash
and cash equivalents
|
17,924,638 | 13,904,889 | ||||||
Interest
bearing certificates of deposit
|
347,331 | 1,642,612 | ||||||
Available
for sale securities (at fair value) (Note 3)
|
2,219,751 | 5,130,005 | ||||||
Federal
Home Loan Bank stock (Note 7)
|
66,100 | 66,100 | ||||||
Loans
receivable (Note 4)
|
||||||||
Loans
receivable
|
112,633,762 | 90,424,801 | ||||||
Allowance
for loan losses
|
(2,768,567 | ) | (1,183,369 | ) | ||||
Loans
receivable, net
|
109,865,195 | 89,241,432 | ||||||
Accrued
interest receivable
|
480,497 | 411,729 | ||||||
Premises
and equipment (Note 5)
|
2,485,797 | 2,754,153 | ||||||
Other
assets held for sale (Note 17)
|
372,758 | 374,920 | ||||||
Other
assets
|
1,848,111 | 1,390,722 | ||||||
Total
assets
|
$ | 135,610,178 | $ | 114,916,562 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Liabilities
|
2009 | 2008 | ||||||
Deposits
(Note 6)
|
||||||||
Noninterest
bearing deposits
|
$ | 29,834,836 | $ | 28,214,381 | ||||
Interest
bearing deposits
|
87,720,706 | 65,755,643 | ||||||
Total
deposits
|
117,555,542 | 93,970,024 | ||||||
Repurchase
agreements
|
294,332 | 214,391 | ||||||
Capital
lease obligations (Note 8)
|
1,175,263 | 1,180,938 | ||||||
Accrued
expenses and other liabilities
|
952,505 | 1,010,255 | ||||||
Total
liabilities
|
119,977,642 | 96,375,608 | ||||||
Commitments
and Contingencies (Notes 7, 8, and 13)
|
||||||||
Shareholders' Equity
(Notes 10 and 14)
|
||||||||
Preferred
stock, no par value; shares authorized: 500,000;
|
||||||||
none
issued
|
- | - | ||||||
Common
stock, par value $.01; shares authorized: 5,000,000;
|
||||||||
shares
issued and outstanding: 2009 2,695,902; 2008
2,688,152
|
26,959 | 26,882 | ||||||
Additional
paid-in capital
|
22,560,100 | 22,521,164 | ||||||
Accumulated
deficit
|
(6,942,727 | ) | (4,035,302 | ) | ||||
Accumulated
other comprehensive (loss) income - net unrealized (loss)
gain
|
||||||||
on
available for sale securities
|
(11,796 | ) | 28,210 | |||||
Total
shareholders' equity
|
15,632,536 | 18,540,954 | ||||||
Total
liabilities and shareholders' equity
|
$ | 135,610,178 | $ | 114,916,562 | ||||
See
Notes to Consolidated Financial Statements
|
F-3
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
For
the Years Ended December 31, 2009 and 2008
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Interest
Income:
|
||||||||
Interest
and fees on loans
|
$ | 6,102,192 | $ | 6,333,993 | ||||
Interest
on securities
|
120,944 | 195,748 | ||||||
Interest
on Federal funds sold and short-term and other investments
|
202,733 | 470,359 | ||||||
Total
interest income
|
6,425,869 | 7,000,100 | ||||||
Interest
Expense:
|
||||||||
Interest
expense on deposits (Note 6)
|
1,990,314 | 2,055,427 | ||||||
Interest
expense on capital lease obligations
|
175,641 | 176,110 | ||||||
Interest
expense on repurchase agreements and other borrowings
|
6,432 | 8,508 | ||||||
Total
interest expense
|
2,172,387 | 2,240,045 | ||||||
Net
interest income
|
4,253,482 | 4,760,055 | ||||||
Provision
for loan losses (Note 4)
|
1,992,113 | 226,019 | ||||||
Net
interest income after provision for loan losses
|
2,261,369 | 4,534,036 | ||||||
Noninterest
Income:
|
||||||||
Service
charges and fees
|
506,944 | 576,801 | ||||||
Gain
from sale of branch (Note 17)
|
- | 874,912 | ||||||
Other
noninterest income
|
122,000 | 214,912 | ||||||
Total
noninterest income
|
628,944 | 1,666,625 | ||||||
Noninterest
Expenses:
|
||||||||
Salaries
and benefits
|
3,089,483 | 3,688,383 | ||||||
Occupancy
and equipment
|
677,803 | 684,817 | ||||||
Professional
services
|
510,431 | 358,122 | ||||||
Data
processing and other outside services
|
412,684 | 397,464 | ||||||
Advertising
and promotional expenses
|
14,321 | 73,641 | ||||||
FDIC
Insurance
|
246,533 | 79,068 | ||||||
Other
operating expenses
|
846,483 | 785,417 | ||||||
Total
noninterest expenses
|
5,797,738 | 6,066,912 | ||||||
Net
(loss) income
|
$ | (2,907,425 | ) | $ | 133,749 | |||
Basic
and diluted (loss) income per share
|
$ | (1.08 | ) | $ | 0.05 | |||
See
Notes to Consolidated Financial Statements
|
F-4
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
||||||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
For
the Years Ended December 31, 2009 and 2008
|
||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||
Number
|
Additional
|
Other
|
||||||||||||||||||||||
of
Common
|
Common
|
Paid-In
|
Accumulated
|
Comprehensive
|
||||||||||||||||||||
Shares
|
Stock
|
Capital
|
Deficit
|
Income
(Loss)
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2007
|
2,969,714 | $ | 29,697 | $ | 24,263,531 | $ | (4,169,051 | ) | $ | (39,694 | ) | $ | 20,084,483 | |||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | - | - | 133,749 | - | 133,749 | ||||||||||||||||||
Unrealized
holding gain on available for
|
||||||||||||||||||||||||
sale
securities
|
- | - | - | - | 67,904 | 67,904 | ||||||||||||||||||
Total
comprehensive income
|
201,653 | |||||||||||||||||||||||
Restricted
stock compensation (Note 10)
|
6,750 | 68 | 54,943 | - | - | 55,011 | ||||||||||||||||||
Stock
option compensation (Note 10)
|
20,119 | - | - | 20,119 | ||||||||||||||||||||
Stock
repurchase (Note 10)
|
(288,312 | ) | (2,883 | ) | (1,817,429 | ) | - | - | (1,820,312 | ) | ||||||||||||||
Balance,
December 31, 2008
|
2,688,152 | 26,882 | 22,521,164 | (4,035,302 | ) | 28,210 | 18,540,954 | |||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
- | - | - | (2,907,425 | ) | - | (2,907,425 | ) | ||||||||||||||||
Unrealized
holding loss on available for
|
||||||||||||||||||||||||
sale
securities
|
- | - | - | - | (40,006 | ) | (40,006 | ) | ||||||||||||||||
Total
comprehensive loss
|
(2,947,431 | ) | ||||||||||||||||||||||
Restricted
stock compensation (Note 10)
|
7,750 | 77 | 53,781 | - | - | 53,858 | ||||||||||||||||||
Stock
option compensation (Note 10)
|
- | - | (14,845 | ) | - | - | (14,845 | ) | ||||||||||||||||
Balance,
December 31, 2009
|
2,695,902 | $ | 26,959 | $ | 22,560,100 | $ | (6,942,727 | ) | $ | (11,796 | ) | $ | 15,632,536 | |||||||||||
See
Notes to Consolidated Financial Statements
|
F-5
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
For
the Years Ended December 31, 2009 and 2008
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows From Operations
|
||||||||
Net
(loss) income
|
$ | (2,907,425 | ) | $ | 133,749 | |||
Adjustments
to reconcile net (loss) income to net cash used in
|
||||||||
operating
activities:
|
||||||||
Amortization
and accretion of premiums and discounts on investments,
net
|
26,369 | 3,575 | ||||||
Provision
for loan losses
|
1,992,113 | 226,019 | ||||||
Gain
on sale of branch
|
- | (874,912 | ) | |||||
Share
based compensation
|
39,013 | 75,130 | ||||||
Loans
originated for sale, net of principal payments received
|
- | (58,513 | ) | |||||
Depreciation
and amortization
|
290,191 | 300,165 | ||||||
Increase
in cash surrender of life insurance
|
(40,684 | ) | (46,444 | ) | ||||
Write-down
of other assets held for sale
|
2,162 | 40,000 | ||||||
Changes
in assets and liabilities:
|
||||||||
Increase
in deferred loan fees
|
53,995 | 25,299 | ||||||
(Increase)
decrease in accrued interest receivable
|
(68,768 | ) | 121,961 | |||||
Increase
in other assets
|
(416,705 | ) | (96,364 | ) | ||||
Decrease
in accrued expenses and other liabilities
|
(57,750 | ) | (432,443 | ) | ||||
Net
cash used in operating activities
|
(1,087,489 | ) | (582,778 | ) | ||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of interest bearing certificates of deposit
|
- | (1,642,612 | ) | |||||
Proceeds
from maturities of interest bearing certificates of
deposit
|
1,295,281 | - | ||||||
Purchases
of available for sale securities
|
(9,206,124 | ) | (11,500,000 | ) | ||||
Principal
repayments on available for sale securities
|
3 | 3 | ||||||
Proceeds
from maturities / calls of available for sale securities
|
12,050,000 | 11,700,000 | ||||||
Net
payments on sale of branch
|
- | (495,521 | ) | |||||
Net
increase in loans receivable
|
(23,198,121 | ) | (10,333,247 | ) | ||||
Purchases
of premises and equipment
|
(21,835 | ) | (113,971 | ) | ||||
Proceeds
from the sale of other real estate owned
|
528,250 | - | ||||||
Acquisiton
of mortgage broker
|
- | (130,094 | ) | |||||
Net
cash used in investing activities
|
(18,552,546 | ) | (12,515,442 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Net
increase (decrease) in demand, savings and money market
deposits
|
5,286,573 | (4,732,082 | ) | |||||
Net
increase in certificates of deposit
|
18,298,945 | 543,614 | ||||||
Net
increase (decrease) in repurchase agreements
|
79,941 | (329,950 | ) | |||||
Principal
repayments on capital lease obligations
|
(5,675 | ) | (5,105 | ) | ||||
Stock
repurchased
|
- | (1,820,312 | ) | |||||
Net
cash provided by (used in) financing activities
|
23,659,784 | (6,343,835 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
4,019,749 | (19,442,055 | ) | |||||
Cash
and cash equivalents
|
||||||||
Beginning
|
13,904,889 | 33,346,944 | ||||||
Ending
|
$ | 17,924,638 | $ | 13,904,889 | ||||
(Continued)
|
||||||||
F-6
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued
|
||||||||
For
the Years Ended December 31, 2009 and 2008
|
||||||||
2009
|
2008
|
|||||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 2,123,546 | $ | 2,247,054 | ||||
Income
taxes
|
$ | 750 | $ | 750 | ||||
Supplemental
Disclosures of Non-Cash Investing and Financing
Activities:
|
||||||||
Assets
and Liabilities transferred in sale of branch:
|
||||||||
Premises
and equipment
|
$ | - | $ | 644,723 | ||||
Loans
receivable
|
$ | - | $ | 7,248,744 | ||||
Deposits
|
$ | - | $ | 9,263,900 | ||||
Transfer
of loans held for sale to loans receivable
|
$ | - | $ | 413,119 | ||||
Transfer
of loans receivable to Other Real Estate Owned
|
$ | 528,250 | $ | - | ||||
Unrealized
holding (losses) gains on available for sale securities
arising
|
||||||||
during
the period
|
$ | (40,006 | ) | $ | 67,904 | |||
See
Notes to Consolidated Financial Statements
|
||||||||
F-7
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Note
1.
|
Nature
of Operations and Summary of Significant Accounting
Policies
|
Southern
Connecticut Bancorp, Inc. (the “Company”) is a bank holding company
headquartered in New Haven, Connecticut that was incorporated on November 8,
2000. The Company’s strategic objective is to serve as a bank holding
company for a community-based commercial bank and a mortgage broker serving
primarily New Haven County (the “Greater New Haven Market”). The
Company owns 100% of the capital stock of The Bank of Southern Connecticut (the
“Bank”), a Connecticut-chartered bank with its headquarters in New Haven,
Connecticut, and 100% of the capital stock of SCB Capital Inc., operating under
the name “Evergreen Financial Services” (“Evergreen”), which is licensed by the
State of Connecticut Department of Banking to operate a mortage brokerage
business and also operates from the Company’s headquarters in New Haven,
Connecticut. The Company and its subsidiaries focus on meeting the financial
services needs of consumers and small to medium-sized businesses, professionals
and professional corporations, and their owners and employees in the Greater New
Haven Market.
The Bank
operates branches at four locations, including downtown New Haven, the
Amity/Westville section of New Haven, Branford and North Haven. The
Bank’s branches have a consistent, attractive appearance. Each
location has an open lobby, comfortable waiting area, offices for the branch
manager and a loan officer, and a conference room. The design of the
branches complements the business development strategy of the Bank, affording an
appropriate space to deliver personalized banking services in professional,
confidential surroundings.
The Bank
focuses on serving the banking needs of small to medium-sized businesses,
professionals and professional corporations, and their owners and employees in
the Greater New Haven Market. The Bank’s target commercial customer
has between $1.0 and $30.0 million in revenues, 15 to 150 employees, and
borrowing needs of up to $3.0 million. The primary focus on this
commercial market makes the Bank uniquely qualified to move deftly in responding
to the needs of its clients. The Bank has been successful in winning
business by offering a combination of competitive pricing for its services,
quick decision making processes and a high level of personalized, “high touch”
customer service.
Principles of consolidation
and basis of financial statement presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, and have been prepared in accordance with accounting
principles generally accepted in the United States of America and general
practices within the banking industry. All significant intercompany
balances and transactions have been eliminated. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities as of the date of the balance
sheet and the reported amounts of income and expenses for the reporting
period. Actual results could differ from those
estimates.
On July
1, 2009, the Accounting Standards Codification (“ASC”) became the Financial
Accounting Standard Board’s (“FASB’s”) single source of authoritative U.S.
accounting and reporting standards applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and related
literature. The adoption of this ASC topic changed the applicable
citations and naming conventions used when referencing generally accepted
accounting principles.
F-8
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Significant group
concentrations of credit risk
Most of
the Company’s activities are with customers located within New Haven County,
Connecticut. Note 3 discusses the types of securities in which the
Company invests and Note 4 discusses the types of lending in which the Company
engages. The Company does not have any significant concentrations in
any one industry or customer.
The
following is a summary of the Company's significant accounting
policies.
Cash and cash equivalents
and statement of cash flows
Cash and
due from banks, Federal funds sold, and short-term investments are recognized as
cash equivalents in the statements of cash flows. Federal funds sold
generally mature in one day. For purposes of reporting cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. Cash flows from loans, deposits, and short-term
borrowings are reported net. The Company maintains amounts due from
banks and Federal funds sold which, at times, may exceed Federally insured
limits. The Company has not experienced any losses from such
concentrations.
Interest-bearing
certificates of deposit
Interest-bearing
certificates of deposit are carried at cost. At December 31, 2009 the balance in
interest-bearing cerificates of deposit was $347,000, which consisted of fixed
rate certificates of deposit which mature in March 2010 ($248,000) and June 2013
($99,000).
Investments in debt and
marketable equity securities
Management
determines the appropriate classification of securities at the date individual
investment securities are acquired, and the appropriateness of such
classification is reassessed at each balance sheet date.
Debt
securities that management has the positive intent and ability to hold to
maturity, if any, are classified as “held to maturity” and recorded at amortized
cost. “Trading” securities, if any, are carried at fair value with
unrealized gains and losses recognized in earnings. Securities not
classified as held to maturity or trading, including equity securities with
readily determinable fair values, are classified as “available for sale” and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income, net of taxes. Purchase premiums and
discounts are recognized in interest income using the interest method over the
terms of the securities.
F-9
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment. This
recent accounting guidance amends the recognition guidance for
other-than-temporary impairments of debt securities and expands the financial
statement disclosures for other-than-temporary impairment losses on debt and
equity securities. The recent guidance replaced the “intent and
ability” indication in prior guidance by specifying that (a) if the Company does
not have the intent to sell a debt security prior to recovery and (b) it is more
likely than not that it will not have to sell the debt security prior to
recovery, the security would not be considered other-than-temporarily impaired
unless there is a credit loss. When the Company does not intend to
sell the security, and it is more-likely-than-not the Company will not have to
sell the security before recovery of its cost basis, it will recognize the
credit component of an other-than-temporary impairment of a debt security in
earnings and the remaining portion in other comprehensive income. For
held-to-maturity debt securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion of a
previous other-than-temporary impairment is amortized prospectively over the
remaining life of the security on the basis of the timing of future estimated
cash flows of the security.
The
credit loss component recognized in earnings is identified as the amount of
principal cash flows not expected to be received over the remaining term of the
security as projected based on cash flow projections discounted at the
applicable original yield of the security. The adoption of the
other-than-temporary impairment accounting guidance had no impact on the
Company’s consolidated financial statements.
Prior to
the adoption of the recent accounting guidance on April 1, 2009, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that were deemed to be other than temporary were reflected in earnings as
realized losses. In estimating other-than-temporary impairment
losses, management considered (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Gains and
losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
The sale
of a held-to-maturity security within three months of its maturity date or after
collection of at least 85% of the principal outstanding at the time the security
was acquired is considered a maturity for purposes of classification and
disclosure.
Loans held for
sale
Loans
held for sale, if any, are primarily the guaranteed portions of SBA loans the
Company has the intent to sell in the foreseeable future, and are carried at the
lower of aggregate cost or market value. Gains and losses on sales of
loans are determined by the difference between the sales proceeds and the
carrying value of the loans.
F-10
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Transfers of financial
assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company – put
presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and no condition both constrains the transferee
from taking advantage of that right and provides more than a trivial benefit for
the transferor, and (3) the transferor does not maintain effective control over
the transferred assets through either (a) an agreement that both entitles and
obligates the transferor to repurchase or redeem the assets before maturity or
(b) the ability to unilaterally cause the holder to return specific assets,
other than through a cleanup call.
In June
2009, the FASB issued guidance which modifies certain guidance relating to
transfers and servicing of financial assets. This guidance eliminates
the concept of qualifying special purpose entities, provides guidance as to when
a portion of a transferred financial asset can be evaluated for sale accounting,
provides additional guidance with regard to accounting for transfers of
financial assets and requires additional disclosures. This guidance
is effective for the Company as of January 1, 2010, with adoption applied
prospectively for transfers that occur on and after the effective
date. The adoption of this guidance is not expected to have a
material impact on the Company’s consolidated financial statements.
Servicing
Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. Generally, purchased
servicing rights are capitalized at the cost to acquire the
rights. For sales of loans, a portion of the original cost of the
loan is allocated to the servicing right, and if the pass-through rate to the
investor is less than the note rate, to an interest-only strip, based on
relative fair value. Fair value is based on a valuation model that
calculates the present value of estimated future net servicing and interest
income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing and interest income,
such as the cost to service, the discount rate, the custodial earnings rate, an
inflation rate, ancillary income, prepayment speeds and default rates and
losses. Capitalized servicing assets are reported in other assets and
are amortized into non-interest income in proportion to, and over the period of,
the estimated future net servicing income of the underlying financial
assets. Interest only strips are also reported in other assets and
are amortized into other noninterest income under the same method as servicing
assets.
Servicing
assets and interest-only strips are evaluated for impairment based upon the fair
value of the assets as compared to amortized cost. Impairment is
determined by stratifying the assets into tranches based on predominant risk
characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance for an
individual tranche, to the extent that fair value is less than the capitalized
amount for the tranche. If the Company later determines that all or a
portion of the impairment no longer exists for a particular tranche, a reduction
of the allowance may be recorded as an increase to income.
F-11
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Servicing
fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal, or a fixed
amount per loan, and are recorded as income when earned. The
amortization of mortgage servicing rights is netted against loan servicing fee
income, and the amortization of interest-only strips is netted against other
noninterest income.
Loans
receivable
Loans
that the Company has the intent and ability to hold for the foreseeable future
or until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for unearned income, the allowance for loan losses,
and any unamortized deferred fees or costs.
Interest
income is accrued based on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
amortized as a level yield adjustment over the respective term of the
loan.
The
accrual of interest on loans is discontinued at the time the loan is 90 days
past due unless the loan is well-secured and in process of
collection. Consumer installment loans are typically charged off no
later than 180 days past due. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on nonaccrual
status or charged-off at an earlier date if collection of principal or interest
is considered doubtful. All interest accrued but not collected for loans that
are placed on nonaccrual status or charged off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis method until qualifying for return to accrual
status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for loan
losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The
allowance consists of allocated and general components. The allocated
component relates to loans that are considered impaired. For such
impaired loans, an allowance is established when the discounted cash flows (or
collateral value or observable market price if the loan is collateral dependent)
of the impaired loan is lower than the carrying value of that
loan. The general component covers all other loans, segregated
generally by loan type, and is based on historical loss experience with
adjustments for qualitative factors which are made after an assessment of
internal or external influences on credit quality that are not fully reflected
in the historical loss data.
F-12
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and real estate
loans by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Impaired
loans also include loans modified in troubled debt restructurings where
concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal,
forbearance or other actions intended to maximize collection.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual consumer installment loans for impairment disclosures, unless such
loans are the subject of a restructuring agreement due to financial difficulties
of the borrower.
Other real estate
owned
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower
of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
operations. Costs relating to the development and improvement of the
property are capitalized, subject to the limit of fair value of the collateral.
Gains or losses are included in operations upon disposal.
Premises and
equipment
Premises
and equipment are stated at cost for purchased assets, and, for assets under
capital lease, at the lower of fair value or the net present value of the
minimum lease payments required over the term of the lease, net of accumulated
depreciation and amortization. Leasehold improvements are capitalized
and amortized over the shorter of the terms of the related leases or the
estimated economic lives of the improvements. Depreciation is charged
to operations using the straight-line method over the estimated useful lives of
the related assets which range from 3 to 20 years. Gains and losses
on dispositions are recognized upon realization. Maintenance and
repairs are expensed as incurred and improvements are capitalized.
F-13
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Goodwill
During
2008, in connection with a business combination, the Company recorded goodwill.
Goodwill represents the cost of acquired assets in excess of value ascribed to
net tangible assets. Goodwill is not amortized, but is evaluated for impairment
annually. Goodwill recorded on the business combination of $238,440, which had
been included in other assets, was written off during 2009 based upon
management’s annual impairment evaluation performed in December 2009. The write
down of goodwill is included in other operating expenses at December 31,
2009.
Impairment of long-lived
assets
Long-lived
assets, including premises and equipment, which are held and used by the
Company, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If impairment is indicated by that review, the asset is
written down to its estimated fair value through a charge to noninterest
expense.
Repurchase
agreements
Repurchase
agreements, which are classified as secured borrowings, generally mature within
one to three days from the transaction date, and are reflected at the amount of
cash received in connection with the transaction. The Company may be
required to provide additional collateral based on the fair value of the
underlying securities.
Income
taxes
The
Company files consolidated federal and state income tax returns. The
Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
When tax
returns are filed, it is highly certain that some positions taken
will be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. The evaluation of a tax
position taken is considered by itself and not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit more
than fifty percent likely of being realized upon settlement with the applicable
taxing authority. The Company recognizes a liability for any tax position deemed
less likely than not to be sustained under examination by the relevant taxing
authorities. The Company’s open tax years that remain subject to examination by
the relevant taxing authorities are 2006, 2007 and 2008.
F-14
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Interest
and penalties related to income taxes, if any, are recorded within the provision
for income taxes.
Share-based
compensation
The
Company accounts for share-based compensation transactions at fair value and
recognizes the related expense in the consolidated statement of
operations.
Related party
transactions
Directors
and officers of the Company and the Bank and their affiliates have been
customers of and have had transactions with the Bank, and it is expected that
such persons will continue to have such transactions in the
future. Management believes that all deposit accounts, loans,
services and commitments comprising such transactions were made in the ordinary
course of business, and on substantially the same terms, including interest
rates, as those prevailing at the time for comparable transactions with other
customers who are not directors or officers. In the opinion of
management, the transactions with related parties did not involve more than
normal risks of collectibility or favored treatment or terms, or present other
unfavorable features. Note 15 contains details regarding related
party transactions.
Comprehensive
income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the shareholders’ equity
section of the balance sheets, such items, along with net income or loss, are
components of comprehensive income.
Segment
Reporting
The
Company has three reporting segments for purposes of reporting business line
results, Community Banking, Mortgage Brokerage and the Holding Company. The
Community Banking segment is defined as all operating results of the Bank. The
Mortgage Brokerage segment is defined as the results of Evergreen and the
Holding Company segment is defined as the results of Southern Connecticut
Bancorp. on an unconsolidated or standalone basis. The Company uses
an internal reporting system to generate information by operating segment.
Estimates and allocations are used for noninterest expenses.
F-15
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Fair
value
The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date. Fair value is best determined based upon quoted market
prices. However, in certain instances, there are no quoted market
prices for certain assets or liabilities. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the asset or
liability.
Fair
value measurements focus on exit prices in an orderly transaction (that is, not
a forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. If there has been a
significant decrease in the volume and level of activity for the asset or
liability, a change in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances, determining the
price at which willing market participants would transact at the measurement
date under current market conditions depends on the facts and circumstances and
requires the use of significant judgment.
The
Company’s fair value measurements are classified into a fair value hierarchy
based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. The
three categories within the hierarchy are as follows:
Level
1
|
Quoted
prices in active markets for identical assets and
liabilities.
|
|
Level
2
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities in active markets, quoted prices in markets that are not
active; and model-based valuation techniques for which all significant
inputs are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to determining 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.
|
Prior to
2009, the fair value guidance only pertained to financial assets and
liabilities. In January 2009, the provisions of the fair value
accounting guidance became effective for nonfinancial assets and
liabilities. The Company adopted these provisions in
2009.
F-16
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
In April
2009, the FASB issued guidance which addressed concerns that 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. This guidance relates to the
following: (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 Company adopted this new
guidance in 2009, and the adoption had no impact on the Company’s consolidated
financial statements.
In
February 2010, the FASB issued guidance which amends the existing guidance
related to Fair Value Measurements and Disclosures. The amendments
will require the following new fair value disclosures:
|
·
|
Separate
disclosure of the significant transfers in and out of Level 1 and Level 2
fair value measurements, and a description of the reasons for the
transfers.
|
|
·
|
In
the rollforward of activity for Level 3 fair value measurements
(significant unobservable inputs), purchases, sales, issuances, and
settlements should be presented separately (on a gross basis rather than
as one net number).
|
In
addition, the amendments clarify existing disclosure requirements, as
follows:
|
·
|
Fair
value measurements and disclosures should be presented for each class of
assets and liabilities within a line item in the statement of financial
position.
|
|
·
|
Reporting
entities should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or Level
3.
|
The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures included in the rollforward of activity for Level 3 fair value
measurements, for which the effective date is for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal
years.
See Note
16 for additional information regarding fair value.
Subsequent
events
In May
2009, the FASB issued guidance relating to accounting for, and disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. This guidance defines (i) the
period after the balance sheet date during which a reporting entity’s management
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet
date. The guidance became effective for the Company during the year
ended December 31, 2009.
F-17
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Reclassifications
Certain
2008 amounts have been reclassified to conform with the 2009 presentation. Such
reclassifications had no effect on 2008 net income.
|
Note
2.
|
Restrictions
on Cash and Cash Equivalents
|
The
Company is required to maintain reserves against its transaction
accounts and non-personal time deposits. At December 31, 2009 and
2008, the Company was required to have cash and liquid assets of approximately
$536,000 and $428,000, respectively, to meet these requirements. In
addition, at both December 31, 2009 and 2008, the Company was required to
maintain $125,000 in the Federal Reserve Bank for clearing
purposes.
|
Note
3.
|
Available
for Sale Securities
|
The
amortized cost, gross unrealized gains, gross unrealized losses and approximate
fair values of available for sale securities at December 31, 2009 and 2008 are
as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
December 31, 2009
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
U.S.
Government Agency Obligations
|
$ | 2,126,216 | $ | - | $ | (12,483 | ) | $ | 2,113,733 | |||||||
U.S.
Government Agency Mortgage Backed Securities
|
105,331 | 687 | - | 106,018 | ||||||||||||
$ | 2,231,547 | $ | 687 | $ | (12,483 | ) | $ | 2,219,751 | ||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
December 31, 2008
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
U.S.
Government Agency Obligations
|
$ | 4,996,409 | $ | 28,552 | $ | - | $ | 5,024,961 | ||||||||
U.S.
Government Agency Mortgage Backed Securities
|
105,386 | - | (342 | ) | 105,044 | |||||||||||
$ | 5,101,795 | $ | 28,552 | $ | (342 | ) | $ | 5,130,005 | ||||||||
F-18
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
following table presents the Company’s available for sale securities’ gross
unrealized losses and fair value, aggregated by the length of time the
individual securities have been in a continuous loss position, at December 31,
2009 and 2008:
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
2009
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
U.S.
Government
|
||||||||||||||||||||||||
Agency
obligations
|
$ | 2,113,733 | $ | 12,483 | $ | - | $ | - | $ | 2,113,733 | $ | 12,483 | ||||||||||||
Totals
|
$ | 2,113,733 | $ | 12,483 | $ | - | $ | - | $ | 2,113,733 | $ | 12,483 | ||||||||||||
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
2008
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
U.S.
Government
|
||||||||||||||||||||||||
mortgage-backed
securities
|
$ | - | $ | - | $ | 105,044 | $ | 342 | $ | 105,044 | $ | 342 | ||||||||||||
Totals
|
$ | - | $ | - | $ | 105,044 | $ | 342 | $ | 105,044 | $ | 342 |
At both
December 31, 2009 and 2008, the Company had 2 available for sale securities in
an unrealized loss position.
Management
believes that none of the unrealized losses on available for sale securities are
other than temporary because all of the unrealized losses in the Company’s
investment portfolio are due to market interest rate changes on debt securities
issued by U.S. Government agencies. Management considers the issuers of the
securities to be financially sound and the Company expects to receive all
contractual principal and interest related to these investments. Because the
Company does not intend to sell the 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 basis, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at December 31,
2009.
The
amortized cost and fair value of available for sale debt securities at December
31, 2009 by contractual maturity are presented below. Actual
maturities of mortgage-backed securities may differ from contractual maturities
because the mortgages underlying the securities may be called or repaid without
any penalties.
F-19
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Because
mortgage-backed securities are not due at a single maturity date, they are not
included in the maturity categories in the following summary:
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Maturity:
|
||||||||
Over
10 years
|
$ | 2,126,216 | $ | 2,113,733 | ||||
Mortgage-backed
securities
|
105,331 | 106,018 | ||||||
$ | 2,231,547 | $ | 2,219,751 |
At
December 31, 2009 and 2008, available for sale securities with a carrying value
of $2,219,751 and $3,117,504, respectively, were pledged as collateral under
repurchase agreements with Bank customers and to secure public
deposits.
There
were no sales of available for sale securities in 2009 and 2008.
Note
4.
|
Loans
Receivable and Allowance for Loan
Losses
|
A
summary of the Company's loan portfolio at December 31, 2009 and December
31, 2008 is as follows:
|
||||||||
2009
|
2008
|
|||||||
Commercial
loans secured by real estate
|
$ | 63,836,712 | $ | 45,462,172 | ||||
Commercial
loans
|
43,893,191 | 37,625,274 | ||||||
Construction
and land loans
|
4,607,905 | 6,500,111 | ||||||
Consumer
home equity loans
|
- | 383,682 | ||||||
Consumer
installment loans
|
448,543 | 552,156 | ||||||
Total
loans
|
112,786,351 | 90,523,395 | ||||||
Net
deferred loan fees
|
(152,589 | ) | (98,594 | ) | ||||
Allowance
for loan losses
|
(2,768,567 | ) | (1,183,369 | ) | ||||
Loans
receivable, net
|
$ | 109,865,195 | $ | 89,241,432 |
The
Company services certain loans that it has sold without recourse to third
parties. The aggregate of loans serviced for others approximated
$9,448,000 and $4,574,000 as of December 31, 2009 and 2008,
respectively.
The
balance of capitalized servicing rights, included in other assets at December
31, 2009 and 2008, was $17,248 and $26,302, respectively. No
impairment charges related to servicing rights were recognized during the years
ended December 31, 2009 and 2008.
F-20
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
changes in the allowance for loan losses for the years ended December 31, 2009
and 2008 are as follows:
2009
|
2008
|
|||||||
Balance
at beginning of year
|
$ | 1,183,369 | $ | 1,256,965 | ||||
Provision
for loan losses
|
1,992,113 | 226,019 | ||||||
Recoveries
of loans previously charged-off:
|
||||||||
Commercial
|
10,000 | 37,109 | ||||||
Consumer
|
563 | - | ||||||
Total
recoveries
|
10,563 | 37,109 | ||||||
Loans
charged-off:
|
||||||||
Commercial
loans secured by real estate
|
(413,839 | ) | (90,215 | ) | ||||
Commercial
|
(2,300 | ) | - | |||||
Consumer
|
(1,339 | ) | (246,509 | ) | ||||
Total
charge-offs
|
(417,478 | ) | (336,724 | ) | ||||
Balance
at end of year
|
$ | 2,768,567 | $ | 1,183,369 |
At
December 31, 2009 and 2008, the unpaid principal balances of loans placed on
nonaccrual status were $5,363,061 and $881,948, respectively. In 2009 and 2008,
there were no loans considered “troubled debt restructurings”. Accruing loans
contractually past due 90 days or more were $483,897 and $384,442 at December
31, 2009 and 2008, respectively.
The
following information relates to impaired loans as of and for the years ended
December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Impaired
loans for which there is a specific allowance
|
$ | 4,634,634 | $ | 538,727 | ||||
Impaired
loans for which there is no specific allowance
|
$ | 2,469,484 | $ | 1,957,926 | ||||
Allowance
for loan losses related to impaired loans
|
$ | 1,489,255 | $ | 162,571 | ||||
Average
recorded investment in impaired loans
|
$ | 5,775,813 | $ | 1,978,934 |
Interest
income collected and recognized on impaired loans was $149,040 and $143,278 in
2009 and 2008, respectively. If nonaccrual loans had been current
throughout their terms, additional interest income of approximately $410,907 and
$111,212 would have been recognized in 2009 and 2008,
respectively. The Company has no commitments to lend additional funds
to borrowers whose loans are impaired.
F-21
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
Company’s lending activities were conducted principally in New Haven County of
Connecticut. The Company grants commercial and residential real
estate loans, commercial business loans and a variety of consumer
loans. In addition, the Company may grant loans for the construction
of residential homes, residential developments and land development
projects. All residential and commercial mortgage loans are
collateralized by first or second mortgages on real estate. The
ability and willingness of borrowers to satisfy their loan obligations is
dependent in large part upon the status of the regional economy and regional
real estate market. Accordingly, the ultimate collectibility of a
substantial portion of the loan portfolio and the recovery of a substantial
portion of any resulting real estate acquired is susceptible to changes in
market conditions.
The
Company has established credit policies applicable to each type of lending
activity in which it engages, evaluates the creditworthiness of each customer on
an individual basis and, when deemed appropriate, obtains
collateral. Collateral varies by each borrower and loan
type. The market value of collateral is monitored on an ongoing basis
and additional collateral is obtained when warranted. Important types
of collateral include business assets, real estate, automobiles, marketable
securities and time deposits. While collateral provides assurance as
a secondary source of repayment, the Company ordinarily requires the primary
source of repayment to be based on the borrower’s ability to generate continuing
cash flows.
Note
5. Premises and Equipment
At
December 31, 2009 and 2008, premises and equipment consisted of the
following:
2009
|
2008
|
|||||||
Land
|
$ | 255,766 | $ | 255,766 | ||||
Premises
under capital lease
|
1,192,036 | 1,192,036 | ||||||
Buildings
and improvements
|
681,142 | 678,492 | ||||||
Leasehold
improvements
|
1,027,390 | 1,027,390 | ||||||
Furniture
and fixtures
|
527,969 | 527,969 | ||||||
Equipment
|
932,371 | 913,186 | ||||||
Software
|
91,134 | 91,134 | ||||||
4,707,808 | 4,685,973 | |||||||
Less
accumulated depreciation and amortization
|
(2,222,011 | ) | (1,931,820 | ) | ||||
$ | 2,485,797 | $ | 2,754,153 |
For the
years ended December 31, 2009 and 2008, depreciation and amortization expense
related to premises and equipment totaled $290,191 and $300,165,
respectively.
Premises
under capital lease of $1,192,036, and related accumulated amortization of
$463,301 and $403,699, as of December 31, 2009 and 2008, respectively, are
included in premises and equipment.
F-22
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Note
6. Deposits
At
December 31, 2009 and 2008, deposits consisted of the
following:
|
||||||||
2009
|
2008
|
|||||||
Noninterest
bearing
|
$ | 29,834,836 | $ | 28,214,381 | ||||
Interest
bearing:
|
||||||||
Checking
|
8,604,111 | 5,685,490 | ||||||
Money
Market
|
26,434,495 | 26,578,024 | ||||||
Savings
|
2,383,404 | 1,492,378 | ||||||
Time
certificates, less than $100,000 (1)
|
27,785,391 | 18,066,157 | ||||||
Time
certificates, $100,000 or more (2)
|
22,513,305 | 13,933,594 | ||||||
Total
interest bearing
|
87,720,706 | 65,755,643 | ||||||
Total
deposits
|
$ | 117,555,542 | $ | 93,970,024 | ||||
(1)
Included in time certificates of deposit, less than $100,000, at December
31, 2009 and December 31, 2008 were
brokered deposits totaling $9,015,482 and $5,731,302,
respectively.
|
||||||||
|
||||||||
(2)
Included in time certificates of deposit, $100,000 or more, at December
31, 2009 and December 31, 2008 were
brokered deposits totaling $4,991,718 and $2,740,969,
respectively.
|
||||||||
|
Brokered
deposits at December 31, 2009 and December 31, 2008
represented:
|
||||||||
2009
|
2008
|
|||||||
Bank
customer time certificates of deposit placed
|
||||||||
through
CDARS to ensure FDIC coverage
|
$ | 3,369,729 | $ | 2,201,901 | ||||
Time
certificates of deposit purchased by the
|
||||||||
Bank
through CDARS
|
3,544,135 | 1,999,235 | ||||||
Other brokered time certificates of deposit | 7,093,336 | 4,271,135 | ||||||
Total
brokered deposits
|
$ | 14,007,200 | $ | 8,472,271 |
Contractual
maturities of time certificates of deposit as of December 31, 2009 are
summarized below:
|
||||
Due
within:
|
||||
1
year
|
$ | 33,545,270 | ||
1-2
years
|
7,442,979 | |||
2-3
years
|
7,685,096 | |||
3-4
years
|
17,101 | |||
4-5
years
|
1,608,250 | |||
$ | 50,298,696 | |||
Interest
expense on certificates of deposit in denominations of $100,000 or more
was $579,967 and
|
||||
$499,111
for the years ended December 31, 2009 and 2008,
respectively.
|
F-23
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Note
7. Commitments and Contingencies
Federal Home Loan Bank
borrowings and stock
The Bank
is a member of the Federal Home Loan Bank of Boston (“FHLB”). At
December 31, 2009 and 2008, the Bank had the ability to borrow from the FHLB
based on a certain percentage of the value of the Bank’s qualified collateral,
as defined in the FHLB Statement of Products Policy, at the time of the
borrowing. In accordance with an agreement with the FHLB, the
qualified collateral must be free and clear of liens, pledges and
encumbrances. There were no borrowings outstanding with the FHLB at
December 31, 2009 and 2008.
The Bank
is required to maintain an investment in capital stock of the FHLB, as
collateral, in an amount equal to a percentage of its outstanding mortgage loans
and contracts secured by residential properties, including mortgage-backed
securities. No ready market exists for FHLB stock and it has no
quoted market value. For disclosure purposes, such stock is assumed
to have a market value which is equal to cost since the Bank can redeem the
stock with FHLB at cost.
Employment
agreements
On
December 28, 2009, the Company entered into an employment agreement with its
President and Chief Operating Officer effective January 1, 2010. Under the
agreement, he will serve as the President and Chief Operating Officer of the
Company through December 31, 2010, unless the Company terminates the
agreement earlier under the terms of the agreement. The President and
Chief Operating Officer will receive a base salary over the term of the
agreement and is eligible for salary increases and other merit bonuses at the
discretion of the Company’s board of directors.
The
President and Chief Operating Officer is provided with health and life
insurance, is reimbursed for certain business expenses, and is eligible to
participate in the profit sharing or 401(k) plan of the Company (or its
subsidiary).
If the
President and Chief Operating Officer’s employment is terminated as a result
of a business combination (as defined), the President and Chief Operating
Officer will, subject to certain conditions, be entitled to receive a lump sum
payment in an amount equal to two times the total of the President and Chief
Operating Officer’s then current base annual salary plus the amount of any bonus
for the prior calendar year in the event that the employee is not offered a
position with the remaining entity at the President and Chief Operating
Officer’s then current base annual salary. The President and Chief
Operating Officer is also entitled to a continuation of benefits under the
President and Chief Operating Officer Agreement for the balance of the unexpired
term of his employment, which will be paid at his option as a lump sum payment
or ratably over the balance of the unexpired term.
On
December 28, 2009, the Company entered into an employment agreement with its
Senior Vice President and Chief Financial Officer effective January 1,
2010. Under the agreement, he will serve as the Senior Vice President and
Chief Financial Officer of the Company through December 31, 2010, unless the
Company terminates the agreement earlier under the terms of the
agreement. The Senior Vice President and Chief Financial Officer will
receive a base salary that increases over the term of the agreement and is
eligible for salary increases and other merit bonuses at the discretion of the
Company’s board of directors.
F-24
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
Senior Vice President and Chief Financial Officer is provided with health and
life insurance, is reimbursed for certain business expenses, and is eligible to
participate in the profit sharing or 401(k) plan of the Company (or its
subsidiary).
If the
Senior Vice President and Chief Financial Officer employment is terminated as a
result of a business combination (as defined), the Senior Vice President
and Chief Financial Officer will, subject to certain conditions, be entitled to
receive a lump sum payment in an amount equal to two times the total of the
Senior Vice President and Chief Financial Officer’s then current base annual
salary plus the amount of any bonus for the prior calendar year in the event
that the employee is not offered a position with the remaining entity at his
then current base annual salary. The Senior Vice President and Chief
Financial Officer is also entitled to a continuation of benefits under the terms
of his agreement for the balance of the unexpired term of his employment, which
will be paid at his option as a lump sum payment or ratably over the balance of
the unexpired term.
Litigation
At
December 31, 2009, neither the Company nor any subsidiary was involved in
any pending legal proceedings believed by management to be material to the
Company’s financial condition or results of operations. Periodically, there have
been various claims and lawsuits against the Company, such as claims to enforce
liens, condemnation proceedings on properties in which we hold security
interest, claims involving the making and servicing of real property loans and
other issues incident to our business. However, neither the Company nor any
subsidiary is a party to any pending legal proceedings that management believes
would have a material adverse effect on the Company’s financial condition,
results of operations or cash flows.
Note
8. Lease and Subleases
The
Company leases the Bank’s main and Branford branch offices under twenty-year
capital leases that have terms, including renewal periods, through 2021 and
2022, respectively. Under the terms of the leases, the Bank will pay
all executory costs including property taxes, utilities and
insurance. In 2006, the Company entered into an operating lease for
its North Haven branch. The Company also leases the driveway to its
main office and certain equipment under non-cancelable operating
leases.
F-25
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
At
December 31, 2009, future minimum lease payments to be made under
these
|
||||||||
leases
by year and in the aggregate, are as follows:
|
||||||||
Capital
|
Operating
|
|||||||
Year
|
Leases
|
Leases
|
||||||
2010
|
$ | 187,609 | $ | 50,382 | ||||
2011
|
206,741 | 53,214 | ||||||
2012
|
214,357 | 54,635 | ||||||
2013
|
219,204 | 47,408 | ||||||
2014
|
219,204 | 46,751 | ||||||
2015
and thereafter
|
1,592,765 | 553,984 | ||||||
2,639,880 | $ | 806,374 | ||||||
Less
amount representng interest
|
(1,464,617 | ) | ||||||
Present
value of future minimum lease payments
- capital lease obligation
|
$ | 1,175,263 | ||||||
Total
rent expense charged to operations under the operating leases approximated
$73,500 and $82,700 for the years ended December 31, 2009 and 2008,
respectively. Rental income under subleases, and a lease of space in
premises owned, approximated $4,000 and $9,900 for the years ended December 31,
2009 and 2008, respectively. There were no subleases in effect at December 31,
2009.
Note
9. Income Taxes
A
reconciliation of the anticipated income tax (benefit) expense (computed by
applying the statutory Federal income tax rate of 34% to the (loss) income
before income taxes) to the amount reported in the statement of operations for
the years ended December 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
(Benefit)
expense for income taxes at statutory Federal rate
|
$ | (988,525 | ) | $ | 45,475 | |||
State
taxes, net of Federal benefit
|
(143,423 | ) | 7,115 | |||||
Increase
(decrease) in valuation allowance
|
1,147,731 | (36,419 | ) | |||||
Other
|
(15,783 | ) | (16,171 | ) | ||||
$ | - | $ | - |
F-26
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
At
December 31, 2009 and 2008, the components of gross deferred tax assets
and liabilities are as follows:
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 1,078,357 | $ | 460,922 | ||||
Net
operating loss carryforwards
|
1,173,117 | 763,460 | ||||||
Unrealized
loss on available for sale securities
|
4,595 | - | ||||||
Other
|
607,135 | 455,350 | ||||||
Gross
deferred tax assets
|
2,863,204 | 1,679,732 | ||||||
Less
valuation allowance
|
(2,762,810 | ) | (1,599,496 | ) | ||||
Deferred
tax assets - net of valuation allowance
|
100,394 | 80,236 | ||||||
Deferred
tax liabilities:
|
||||||||
Tax
bad debt reserve
|
100,394 | 63,319 | ||||||
Unrealized
gain on available for sale securities
|
- | 10,987 | ||||||
Depreciation
|
- | 5,930 | ||||||
Gross
deferred tax liabilities
|
100,394 | 80,236 | ||||||
Net
deferred taxes
|
$ | - | $ | - | ||||
As
of December 31, 2009, the Company had tax net operating loss carryforwards
of approximately $3,015,000
and $2,103,000 available to reduce future Federal and state taxable
income, respectively, which
expire in 2021 through 2029.
|
The net
changes in the valuation allowance for 2009 and 2008 were a decrease of
$1,163,314 in 2009, and an increase of $62,868 in 2008. The changes
in the valuation allowance have been allocated between operations and equity to
adjust the deferred tax asset to an amount considered by management more likely
than not to be realized. The portion of the change in the valuation
allowance allocated to equity is to eliminate the tax benefit related to the
unrealized holding losses on available for sale securities.
During
2007, the Company had a tax deduction for compensation related to the shares
issued to the former Chairman that exceeded the book compensation recorded for
such shares and predecessor stock options. The tax benefit for this
excess tax deduction is typically recorded as an increase to shareholders’
equity. However, because the Company is in a net operating loss
position for tax purposes and has a full valuation allowance recorded for its
net deferred tax asset, the Company did not record the tax benefit of this
deduction in 2007, and will not record such benefit until the Company’s net
operating losses are fully utilized. At both December 31, 2009 and
2008, approximately $140,000 of net operating losses resulting from this
deduction, and related tax benefit of approximately $55,000, have been excluded
from the calculation of deferred tax assets.
F-27
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Note
10. Shareholders’ Equity
Stock
repurchases
In
November of 2007, the Company’s Board of Directors approved the adoption of a
Stock Repurchase Program of up to 147,186 shares of its common stock
representing 5% of its outstanding common stock. The Company
completed this stock repurchase program in July 2008.
On July
15, 2008, the Company’s Board of Directors approved the adoption of an
additional Stock Repurchase Program of up to 141,126 shares representing 5% of
the outstanding shares of the Company’s common stock. The Company
completed this stock repurchase program in December 2008.
For the
year ended December 31, 2008, the Company repurchased 288,312 of its shares for
an aggregate purchase price of $1,820,312.
(Loss) Income per
share
The
Company is required to present basic (loss) income per share and diluted (loss)
income per share in its statements of operations. Basic and diluted
(loss) income per share are computed by dividing net (loss) income by the
weighted average number of common shares outstanding. Diluted per
share amounts assume exercise of all potential common stock instruments unless
the effect is to reduce the loss or increase the income per share.
For
the Year Ended December 31,
|
2009
|
2008
|
||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||
Net
|
Average
|
Amount
|
Net
|
Average
|
Amount
|
|||||||||||||||||||
Loss
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
|||||||||||||||||||
Basic
(Loss) Income Per Share
|
||||||||||||||||||||||||
(Loss)
Income available to common shareholders
|
$ | (2,907,425 | ) | 2,689,291 | $ | (1.08 | ) | $ | 133,749 | 2,849,332 | $ | 0.05 | ||||||||||||
Effect
of Dilutive Securities
|
||||||||||||||||||||||||
Warrants/Stock
Options outstanding/Restricted Stock
|
- | - | - | - | 8,636 | - | ||||||||||||||||||
Diluted
(Loss) Income Per Share
|
||||||||||||||||||||||||
(Loss)
Income available to common
|
||||||||||||||||||||||||
shareholders
plus assumed conversions
|
$ | (2,907,425 | ) | 2,689,291 | $ | (1.08 | ) | $ | 133,749 | 2,857,968 | $ | 0.05 | ||||||||||||
For
the year ended December 31, 2009, no common stock equivalents have been
included in the computation of
net loss per share because the inclusion of such equivalents is
anti-dilutive.
|
Share-based
plans
The
Company has adopted three share-based plans, the 2001 Stock Option Plan (the
“2001 Plan”), the 2002 Stock Option Plan (the “2002 Plan”), and the 2005 Stock
Option and Award Plan (the “2005 Plan”), under which an aggregate of 460,012
shares of the Company’s common stock are reserved for issuance of the Company’s
common stock, or upon the exercise of incentive options, nonqualified options
and restricted stock granted under the share-based plans.
F-28
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Under all
three plans, the exercise price for each share covered by an option may not be
less than the fair market value of a share of the Company’s common stock on the
date of grant. For incentive options granted to a person who owns
more than 10% of the combined voting power of the Company or any subsidiary
(“ten percent shareholder”), the exercise price cannot be less than 110% of the
fair market value on the date of grant.
Options
under all three plans have a term of ten years unless otherwise determined at
the time of grant, except that incentive options granted to any ten percent
shareholder will have a term of five years unless a shorter term is
fixed. Under the 2001 and 2002 plans, unless otherwise fixed at the
time of grant, 40% of the options become exercisable one year from the date of
grant, and 30% of the options become exercisable at each of the second and third
anniversaries from the date of grant. Under the 2005 plan, the
vesting terms of the awards is determined at the date of
grant. Dividends are not paid on unexercised options.
Also,
under the 2005 Plan, awards in the form of the Company’s common stock may be
granted. The vesting terms of the awards are determined at the time
of the grant.
Upon
adoption of the 2002 Option Plan in May 2002, the Company determined that no
additional options will be granted under the 2001 Option Plan.
A summary
of the status of the stock options at December 31, 2009 and changes during the
year then ended, is as follows:
2009
|
||||||||||||||||
Weighted-
|
||||||||||||||||
Weighted-
|
Average
|
|||||||||||||||
Number
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
Shares
|
Price
|
Term
|
Value
|
|||||||||||||
Outstanding
at beginning of year
|
202,763 | $ | 7.79 | 5.6 | ||||||||||||
Granted
|
- | - | ||||||||||||||
Exercised
|
- | - | ||||||||||||||
Exchanged
|
- | - | ||||||||||||||
Forfeited
|
(562 | ) | 7.11 | |||||||||||||
Outstanding
at end of year
|
202,201 | 7.79 | 4.6 | $ | - | |||||||||||
Vested
at end of year
|
202,201 | $ | 7.79 | 4.5 | $ | - | ||||||||||
Exercisable
at end of year
|
202,201 | $ | 7.79 | 4.5 | $ | - | ||||||||||
F-29
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
A summary
of the status of the Company’s nonvested restricted stock at December 31, 2009
and changes during the year then ended, is as follows:
2009
|
||||||||
Weighted-
|
||||||||
Number
|
Average
|
|||||||
of
|
Grant-Date
|
|||||||
Shares
|
Fair
Value
|
|||||||
Nonvested
restricted stock at beginning
|
||||||||
of
the year
|
9,750 | $ | 7.35 | |||||
Granted
|
- | - | ||||||
Vested
and Issued
|
(7,750 | ) | 7.38 | |||||
Forfeited
|
- | - | ||||||
Nonvested
restricted stock at end of the year
|
2,000 | 7.05 |
As of
December 31, 2009, there was no unrecognized compensation cost relating to the
option plans and $9,400 of total unrecognized compensation related to restricted
stock. That cost is expected to be recognized over a weighted-average period of
1.3 years. During the year ended December 31, 2009, a credit of $14,845 for
options and expense of $53,858 for restricted stock, was recognized as net
compensation cost. The credit for options resulted from the adjustment to
compensation from the consideration of actual versus expected forfeitures in the
final year of vesting. During the year ended December 31, 2008 $20,119 for
options and $55,011 for restricted stock was recognized as compensation cost. No
tax benefit related to the compensation cost was recognized due to the
uncertainty of realizing the tax benefit in the future.
Stock
warrants
The
Company adopted the 2001 Warrant Plan and the 2001 Supplemental Warrant Plan
(the “Warrant Plans”), under which an aggregate of 77,184 shares of the
Company’s common stock are reserved for issuance upon the exercise of warrants
granted to non-employee directors of the Company and the Bank, and certain other
individuals involved in the organization of the Bank.
Warrants
under the Warrant Plans have a term of ten years. Forty percent of
the warrants became exercisable one year from the date of grant, and 30% of the
warrants became exercisable at each of the second and third anniversaries from
the date of grant.
F-30
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
A summary
of the status of the warrants at December 31, 2009 and changes during the year
then ended, is as follows:
2009
|
||||||||||||||||
Weighted-
|
||||||||||||||||
Weighted-
|
Average
|
|||||||||||||||
Number
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
Shares
|
Price
|
Term
|
Value
|
|||||||||||||
Outstanding
at beginning of year
|
77,184 | $ | 10.39 | |||||||||||||
Granted
|
- | |||||||||||||||
Exercised
|
- | |||||||||||||||
Terminated
|
- | |||||||||||||||
Outstanding
at end of year
|
77,184 | $ | 10.39 | 1.7 | $ | - | ||||||||||
Exercisable
and vested at end of year
|
77,184 | $ | 10.39 | 1.7 | $ | - |
Note
11. 401(k) Profit Sharing Plan
The
Bank’s employees are eligible to participate in The Bank of Southern Connecticut
401(k) Profit Sharing Plan (the “Plan”) under Section 401(k) of the Internal
Revenue Code. The Plan covers substantially all employees of the
Bank. Under the terms of the Plan, participants can contribute a
discretionary percentage of compensation, with total annual contributions
subject to Federal limitations. The Bank may make discretionary
contributions to the Plan. Participants are immediately vested in
their contributions and become fully vested in employer contributions after
three years of service. There were $30,000 in discretionary
contributions made by the Bank during 2008, and no contributions made in 2009.
The $30,000 in discretionary contributions made by the Bank in 2008 had been
accrued for in 2007. The Company has not accrued a discretionary contribution
for 2009.
Note
12. Segment Reporting
The
Company has three reporting segments for purposes of reporting business line
results, Community Banking, Mortgage Brokerage and the Holding Company. The
Community Banking segment is defined as all operating results of the Bank. The
Mortgage Brokerage segment is defined as the results of Evergreen and the
Holding Company segment is defined as the results of Southern Connecticut
Bancorp on an unconsolidated or standalone basis. The following represents the
operating results and total assets for the segments of the Company as of and for
the years ended December 31, 2009 and 2008. The Company uses an
internal reporting system to generate information by operating segment.
Estimates and allocations are used for noninterest expenses.
F-31
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Information
about the reporting segments and reconciliation of such information to the
consolidated financial statements follows:
Year
Ended December 31, 2009
|
||||||||||||||||||||
Community
|
Mortgage
|
Holding
|
Elimination
|
Consolidated
|
||||||||||||||||
Banking
|
Brokerage
|
Company
|
Entries
|
Total
|
||||||||||||||||
Net
interest income
|
$ | 4,174,743 | $ | 69,217 | $ | 9,522 | $ | - | $ | 4,253,482 | ||||||||||
Provision
for loan losses
|
1,992,113 | - | - | - | 1,992,113 | |||||||||||||||
Net
interest income after provision for loan losses
|
2,182,630 | 69,217 | 9,522 | - | 2,261,369 | |||||||||||||||
Noninterest
income
|
624,944 | - | 4,000 | - | 628,944 | |||||||||||||||
Noninterest
expense
|
5,178,002 | 481,243 | 138,493 | - | 5,797,738 | |||||||||||||||
Net
loss
|
(2,370,428 | ) | (412,026 | ) | (124,971 | ) | - | (2,907,425 | ) | |||||||||||
Total
assets as of December 31, 2009
|
134,437,050 | 106,216 | 15,653,237 | (14,586,325 | ) | 135,610,178 | ||||||||||||||
Year
Ended December 31, 2008
|
||||||||||||||||||||
Community
|
Mortgage
|
Holding
|
Elimination
|
Consolidated
|
||||||||||||||||
Banking
|
Brokerage
|
Company
|
Entries
|
Total
|
||||||||||||||||
Net
interest income
|
$ | 4,700,684 | $ | 3,000 | $ | 56,371 | $ | - | $ | 4,760,055 | ||||||||||
Provision
for loan losses
|
226,019 | - | - | - | 226,019 | |||||||||||||||
Net
interest income after credit for loan losses
|
4,474,665 | 3,000 | 56,371 | - | 4,534,036 | |||||||||||||||
Noninterest
income
|
1,663,651 | - | 2,974 | - | 1,666,625 | |||||||||||||||
Noninterest
expense
|
5,777,307 | 100,935 | 188,670 | - | 6,066,912 | |||||||||||||||
Net
income (loss)
|
361,009 | (97,935 | ) | (129,325 | ) | - | 133,749 | |||||||||||||
Goodwill
|
- | 238,440 | - | - | 238,440 | |||||||||||||||
Total
assets as of December 31, 2008
|
113,161,319 | 336,959 | 18,555,881 | (17,137,597 | ) | 114,916,562 | ||||||||||||||
Note
13. Financial Instruments with Off-Balance-Sheet
Risk
In the
normal course of business, the Company is a party to financial instruments with
off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the financial
statements. The contractual amounts of these instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
F-32
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
contractual amounts of commitments to extend credit represents the amounts of
potential accounting loss should the contract be fully drawn upon,
the customer default, and the value of any existing collateral become
worthless. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments and evaluates each customer’s creditworthiness on a case-by-case
basis. Management
believes that the Company controls the credit risk of these financial
instruments through credit approvals, credit limits, monitoring procedures and
the receipt of collateral as deemed necessary.
Financial
instruments whose contract amounts represent credit risk are as follows at
December 31, 2009 and December 31, 2008:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Commitments
to extend credit
|
||||||||
Future
loan commitments
|
$ | 5,054,000 | $ | 16,398,484 | ||||
Unused
lines of credit
|
28,178,604 | 23,157,442 | ||||||
Financial
standby letters of credit
|
3,358,597 | 3,570,308 | ||||||
Undisbursed
construction loans
|
437,000 | 237,000 | ||||||
$ | 37,028,201 | $ | 43,363,234 |
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
to extend credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the borrower. Since these
commitments could expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management’s credit evaluation of the counter
party. Collateral held varies, but may include residential and
commercial property, deposits and securities.
Standby
letters of credit are written commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Guarantees that are not
derivative contracts have been recorded on the Company’s consolidated balance
sheet at their fair value at inception. The liability related to
guarantees recorded at December 31, 2009 and 2008 was not
significant.
Note
14. Regulatory Matters
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company’s and the Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
F-33
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2009,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of
December 31, 2009, the most recent notification from the Federal Deposit
Insurance Corporation and the State of Connecticut Department of Banking
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since then, that management believes have changed the Bank’s
category.
Evergreen
offers mortgage brokerage services and is licensed by the State of Connecticut
Department of Banking to operate a mortgage brokerage business. Minimum net
worth requirements for mortgage brokers at December 31, 2009 were
$50,000.
F-34
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
Company's actual capital amounts and ratios at December 31, 2009 and
December 31, 2008 were
|
|||||||
(dollars
in thousands):
|
|||||||
To
Be Well
|
|||||||
Capitalized
Under
|
|||||||
For
Capital
|
Prompt
Corrective
|
||||||
December 31, 2009
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
Total
Capital to Risk-Weighted Assets
|
$
17,290
|
13.25%
|
$ 10,436
|
8.00%
|
N/A
|
N/A
|
|
Tier
1 Capital to Risk-Weighted Assets
|
15,645
|
11.99%
|
5,218
|
4.00%
|
N/A
|
N/A
|
|
Tier
1 (Leverage) Capital to Average Assets
|
15,645
|
11.24%
|
5,569
|
4.00%
|
N/A
|
N/A
|
|
To
Be Well
|
|||||||
Capitalized
Under
|
|||||||
For
Capital
|
Prompt
Corrective
|
||||||
December 31, 2008
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
Total
Capital to Risk-Weighted Assets
|
$
19,696
|
18.46%
|
$ 8,537
|
8.00%
|
N/A
|
N/A
|
|
Tier
1 Capital to Risk-Weighted Assets
|
18,275
|
17.13%
|
4,268
|
4.00%
|
N/A
|
N/A
|
|
Tier
1 (Leverage) Capital to Average Assets
|
18,275
|
15.64%
|
4,673
|
4.00%
|
N/A
|
N/A
|
|
The
Bank's actual capital amounts and ratios at December 31, 2009 and December
31, 2008 were
|
|||||||
(dollars
in thousands):
|
|||||||
To
Be Well
|
|||||||
Capitalized
Under
|
|||||||
For
Capital
|
Prompt
Corrective
|
||||||
December 31, 2009
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
Total
Capital to Risk-Weighted Assets
|
|
$
16,014
|
12.39%
|
$ 10,340
|
8.00%
|
$12,924
|
10.00%
|
Tier
1 Capital to Risk-Weighted Assets
|
14,384
|
11.13%
|
5,170
|
4.00%
|
7,755
|
6.00%
|
|
Tier
1 (Leverage) Capital to Average Assets
|
14,384
|
10.44%
|
5,512
|
4.00%
|
6,889
|
5.00%
|
|
To
Be Well
|
|||||||
Capitalized
Under
|
|||||||
For
Capital
|
Prompt
Corrective
|
||||||
December 31, 2008
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
Total
Capital to Risk-Weighted Assets
|
$
17,938
|
17.09%
|
$ 8,396
|
8.00%
|
$10,495
|
10.00%
|
|
Tier
1 Capital to Risk-Weighted Assets
|
16,755
|
15.96%
|
4,198
|
4.00%
|
6,297
|
6.00%
|
|
Tier
1 (Leverage) Capital to Average Assets
|
16,755
|
14.55%
|
4,607
|
4.00%
|
5,759
|
5.00%
|
F-35
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Restrictions on dividends,
loans or advances
The
Company’s ability to pay cash dividends is dependent on the Bank’s ability to
pay dividends to the Company. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the form
of cash dividends, loans or advances. Regulatory approval is required
to pay cash dividends in excess of the Bank’s net earnings retained in the
current year plus retained net earnings for the preceding two
years. The Bank is also prohibited from paying dividends that would
reduce its capital ratios below minimum regulatory requirements, and the Federal
Reserve Board may impose further dividend restrictions on the
Company. On October 23, 2008, the Bank declared a dividend of
$403,000 payable to the Company.
Under
Federal Reserve regulation, the Bank is also limited to the amount it may loan
to the Company, unless such loans are collateralized by specified
obligations. Loans or advances to the Company by the Bank are limited
to 10% of the Bank’s capital stock and surplus on a secured basis. During the
years ended December 31, 2009 and 2008, no loans or advances were made to the
Company by the Bank.
Note
15. Related Party Transactions
In the
normal course of business, the Company may grant loans to executive officers,
directors and members of their immediate families, as defined, and to entities
in which these individuals have more than a 10% equity
ownership. Such loans are transacted at terms including interest
rates, similar to those available to unrelated customers.
Changes
in loans outstanding to such related parties during 2009 and 2008 are as
follows:
|
||||||||
2009
|
2008
|
|||||||
Balance,
at beginning of year
|
$ | 798,574 | $ | 670,057 | ||||
Additional
loans
|
869,972 | 1,461,828 | ||||||
Repayments
|
(662,083 | ) | (1,129,369 | ) | ||||
Other
|
- | (203,942 | ) | |||||
Balance,end
of year
|
$ | 1,006,463 | $ | 798,574 | ||||
Other
related party loan transactions represent loans to related parties who
either became related parties, or
ceased being related parties, during the year.
|
||||||||
Related
party deposits aggregated approximately $4,206,600 and $4,336,900 as of
December 31, 2009 and
2008, respectively.
|
||||||||
|
F-36
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Included
in professional services for the year ended December 31, 2009 and 2008 was
approximately $102,000 and $102,000, respectively, in consulting fees paid to
the former Chairman, as well as $109,200 and $130,700, respectively, in legal
fees incurred for services provided by law firms, principals of which were
directors of the Company. During 2009 and 2008, the
Company paid approximately $1,200 and $5,900, respectively, for capital
expenditures and maintenance to certain companies, principals of which are
directors of the Company.
Rental
income and expense reimbursements of approximately $7,800 were received in 2008
from a tenant, the principal of which is related to the Company’s Chairman. No
such reimbursements were received during 2009.
Note
16. Fair Value and Interest Rate Risk
As
described in Note 1, the Company uses fair value measurements to record fair
value adjustments to certain assets and liabilities and to determine fair value
disclosures. A description of the valuation methodologies used for
assets and liabilities recorded at fair value, and for estimating fair value for
financial and non-financial instruments not recorded at fair value, is set forth
below.
Cash
and due from banks, Federal funds sold, short-term investments, interest bearing
certificates of deposit, accrued interest receivable, Federal Home
Loan Bank stock, accrued interest payable and repurchase agreements
The
carrying amount is a reasonable estimate of fair value. The Company does not
record these assets at fair value on a recurring basis.
Available
for sale securities
These
financial instruments are recorded at fair value in the financial statements on
a recurring basis. Where quoted prices are available in an active market,
securities are classified within Level 1 of the valuation
hierarchy. 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 government
agency bonds and mortgage-backed securities. Level 3 securities are
securities for which significant unobservable inputs are utilized.
Available-for-sale-securities are recorded at fair value on a recurring
basis.
Loans
receivable
For
variable rate loans that 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 estimated
year end market rates 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. The Company does not record
loans at fair value on a recurring basis. However, from time to time,
a loan is considered impaired and an allowance for credit losses is established.
The specific reserves for collateral dependent impaired loans are based on the
fair value of collateral less estimated costs to sell. The fair value of
collateral is determined based on appraisals. In some cases, adjustments are
made to the appraised values due to various factors including age of the
appraisal, age of comparables included in the appraisal, and known changes in
the market and in the collateral. When significant adjustments are based on
unobservable inputs, the resulting fair value measurement is categorized as a
level 3 measurement.
F-37
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Servicing
assets
The fair
value is based on market prices for comparable servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the
present value of estimated future net servicing income. The Company
does not record these assets at fair value on a recurring basis.
Other
assets held for sale and other real estate owned
Other
assets held for sale represents real estate that is not intended for use in
operations and real estate acquired through foreclosure, and are recorded at
fair value on a nonrecurring basis. Fair value is based upon independent market
prices, appraised values of the collateral or management’s estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company classifies the
asset as Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company
classifies the asset as Level 3.
Interest
only strips
The fair
value is based on a valuation model that calculates the present value of
estimated future cash flows. The Company does not record these assets
at fair value on a recurring basis.
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, estimated using local market data, to a schedule of
aggregated expected maturities on such deposits. The Company does not
record deposits at fair value on a recurring basis.
Off-balance-sheet
instruments
Fair
values for the Company’s off-balance-sheet instruments (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
standing. The Company does not record its off-balance-sheet instruments at fair
value on a recurring basis.
F-38
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
following table details the financial asset amounts that are carried at fair
value and measured at fair value on a recurring basis as of December 31, 2009
and 2008, and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine the fair value:
Quoted
Prices in
|
Significant
|
Significant
|
||||||||||||||
Balance
|
Active
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
as
of
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Available
for sale securities
|
$ | 2,219,751 | $ | - | $ | 2,219,751 | $ | - | ||||||||
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)
|
|||||||||||||
Available
for sale securities
|
$ | 5,130,005 | $ | - | $ | 5,130,005 | $ | - |
The
following table details the financial instruments carried at fair value and
measured at fair value on a nonrecurring basis as of December 31, 2009 and 2008,
and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine the fair value:
Quoted
Prices in
|
Significant
|
Significant
|
||||||||||||||
Balance
|
Active
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
as
of
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Financial
assets held at fair value
|
||||||||||||||||
Impaired
loans (1)
|
$ | 3,097,995 | $ | - | $ | - | $ | 3,097,995 | ||||||||
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)
|
|||||||||||||
Impaired
loans (1)
|
$ | 2,248,920 | $ | - | $ | - | $ | 2,248,920 | ||||||||
(1)
Represents carrying value and related write-downs for which adjustments
are based on appraised value. Management
makes adjustments to the appraised values as necessary to consider
declines in real estate values
since the time of the appraisal. Such adjustments are based on
management's knowledge of the local real estate
markets.
|
||||||||||||||||
|
F-39
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
following table details the nonfinancial assets carried at fair value and
measured at fair value on a nonrecurring basis as of December 31, 2009 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine the fair value:
Quoted
Prices in
|
Significant
|
Significant
|
||||||||||||||
Balance
|
Active
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
as
of
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Other
assets held for sale
|
$ | 372,758 | $ | - | $ | 372,758 | $ | - |
The
Company discloses 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. Certain financial instruments are
exluded from disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Company.
The
estimated fair value amounts for 2009 and 2008 have been measured as of their
respective year-ends 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 each
year-end.
The
information presented should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only required for a
limited portion of the Company’s assets and liabilities. Due to the
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful.
F-40
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
The
following is a summary of the recorded book balances and estimated fair values
of the Company’s financial instruments at December 31, 2009 and 2008, in
thousands:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Recorded
|
Recorded
|
|||||||||||||||
Book
|
Book
|
|||||||||||||||
Balance
|
Fair
Value
|
Balance
|
Fair
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 2,541,557 | $ | 2,541,557 | $ | 5,267,439 | $ | 5,267,439 | ||||||||
Short-term
investments
|
15,383,081 | 15,383,081 | 8,637,450 | 8,637,450 | ||||||||||||
Interest
bearing certificates of deposit
|
347,331 | 347,331 | 1,642,612 | 1,642,612 | ||||||||||||
Available
for sale securities
|
2,219,751 | 2,219,751 | 5,130,005 | 5,130,005 | ||||||||||||
Federal
Home Loan Bank stock
|
66,100 | 66,100 | 66,100 | 66,100 | ||||||||||||
Loans
receivable, net
|
109,865,195 | 111,191,000 | 89,241,432 | 91,679,000 | ||||||||||||
Accrued
interest receivable
|
480,497 | 480,497 | 411,729 | 411,729 | ||||||||||||
Servicing
rights
|
17,248 | 32,261 | 26,302 | 32,077 | ||||||||||||
Interest
only strips
|
22,176 | 26,709 | 34,643 | 37,887 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Noninterest-bearing
deposits
|
29,834,836 | 29,834,836 | 28,214,381 | 28,214,381 | ||||||||||||
Interest
bearing checking accounts
|
8,604,111 | 8,604,111 | 5,685,490 | 5,685,490 | ||||||||||||
Money
market deposits
|
26,434,495 | 26,434,495 | 26,578,024 | 26,578,024 | ||||||||||||
Savings
deposits
|
2,383,404 | 2,383,404 | 1,492,378 | 1,492,378 | ||||||||||||
Time
certificates of deposits
|
50,298,696 | 51,377,000 | 31,999,751 | 32,371,000 | ||||||||||||
Repurchase
agreements
|
294,332 | 294,332 | 214,391 | 214,391 | ||||||||||||
Accrued
interest payable
|
201,789 | 201,789 | 152,052 | 152,052 |
Unrecognized financial
instruments
Loan
commitments on which the committed interest rate is less than the current market
rate are insignificant at December 31, 2009 and 2008.
The
Company assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, fair
values of the Company’s financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate
risk. However, borrowers with fixed rate obligations are less likely
to prepay in a rising rate environment and more likely to prepay in a falling
rate environment. Conversely, members who are receiving fixed rates
are more likely to withdraw funds before maturity in a rising rate environment
and less likely to do so in a falling rate environment. Management
monitors rates and maturities of assets and liabilities and attempts to minimize
interest rate risk by adjusting terms of new loans and shares and by investing
in securities with terms that mitigate the Company’s overall interest rate
risk
F-41
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Note
17. Assets and Liabilities Held for Sale
Branch
Disposal
During
2007, the Company entered into an agreement for the sale of the majority of the
assets and liabilities of its branch located in New London, Connecticut to
another bank, and the sale was completed as of the close of business February
29, 2008. The Company realized a gain of $874,912 in 2008 from the
disposition of these assets and liabilities.
Property Held for
Sale
In June
2005, the Company purchased a one acre improved site with two buildings in
Clinton, Connecticut for the primary purpose of establishing a branch office of
the Bank. During 2007, the Bank determined that it would not
establish a branch at this location and subsequently retained a commercial real
estate broker to represent the Company with respect to the sale of the property,
and the property is classified as other assets held for sale as of December 31,
2009 and 2008.
In August
2009, The Company entered into an agreement to lease one of the two buildings
located in Clinton, Connecticut. The lease is for an initial term of
five years, with two successive five-year option periods. Base rent
is $24,000 annually until August 31, 2014. The base rent for the
option periods increases and is fixed in the lease. The tenant has a right of
first refusal to purchase the property. The tenant is responsible for all costs
to maintain the building, other than structural repairs and real estate taxes.
The Company received $4,000 in rent on this property in 2009.
Note
18. Subsequent Events
On
February 22, 2010, the Company entered into an Agreement and Plan of Merger with
Naugatuck Valley Financial Corporation (“NVSL”) and Newco, a corporation to be
formed by NVSL to be the holding company for Naugatuck Valley Savings and Loan
(“NVSL Bank”), pursuant to which the Company will merge with and into NVSL, with
NVSL being the surviving corporation.
In
connection with the merger, Naugatuck Valley Mutual Holding Company (“NVSL
MHC”), which is presently the majority shareholder of NVSL, will reorganize and
convert from a mutual holding company form of organization to a stock holding
company form of organization. The stock holding company will be
Newco, which will (i) offer and sell shares of its common stock as prescribed in
a Plan of Conversion adopted concurrently with the execution of the Agreement
and Plan of Merger and (ii) exchange shares of its common stock for shares of
NVSL common stock held by persons other than NVSL MHC. Additionally,
in connection with the merger, the Bank will be merged with and into NVSL
Bank.
F-42
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2009 and 2008
Subject
to the terms and conditions of the Agreement and Plan of Merger, each
outstanding share of common stock of the Company will be converted into the
right to receive, at the election of the holder of such share of common stock of
the Company, (i) cash consideration of $7.25, (ii) stock consideration equal to
the number of shares of Newco common stock in an exchange ratio equal to the
result obtained by dividing $7.25 by the initial offering price of Newco common
stock in the conversion stock offering, or (iii) a combination of the cash
consideration and the stock consideration, subject to customary proration and
allocation procedures, if necessary, to assure that 50% of the outstanding
shares of common stock of the Company are exchanged for Newco common stock and
50% of the outstanding shares of common stock of the Company are exchanged for
cash.
The
Agreement and Plan of Merger contains representations, warranties and covenants
of the Company and NVSL. Among other customary covenants, the Company
has agreed that it will conduct its business in the ordinary course and
consistent with prudent banking practices during the period between the
execution of the Agreement and Plan of Merger and the consummation of the merger
and will refrain from taking certain actions during such period unless it
obtains the prior written consent of NVSL. The Board of Directors of
the Company has agreed, subject to certain conditions, to submit the merger for
approval by the shareholders of the Company and to recommend the approval of the
merger. All of the Company’s directors have entered into voting
agreements whereby they have agreed to vote their shares of common stock of the
Company owned on the record date for the shareholder meeting to approve the
merger. The Company has agreed not to solicit, initiate or encourage
or, subject to certain exceptions, participate in any discussions or
negotiations with or furnish any information to, any person, entity or group
(other than NVSL) concerning the Company or the Bank entering into an
alternative business combination.
Newco and
NVSL Bank will select and invite, in their sole discretion and subject to their
corporate governance policies and procedures, one director of the Company to
serve on the Board of Directors of Newco and NVSL. NVSL Bank will
also establish an advisory board for the Company’s market area and invite each
director of the Company other than the director selected and invited to join the
Boards of Directors of Newco and NVSL Bank to serve on such advisory
board. NVSL Bank will maintain the advisory board for a minimum
period of one year following the consummation of the merger.
The
merger is expected to be completed during the third quarter of 2010 and is
subject to the completion of the conversion, approval of the shareholders of the
Company and NVSL, the receipt of regulatory approvals and other customary
closing conditions. The Agreement and Plan of Merger further provides
that, upon termination of the Agreement and Plan of Merger under specified
circumstances, the Company may be required to pay NVSL a termination fee of up
to $900,000 and in other specified circumstances, NVSL may be required to pay
the Bank a termination fee of up to $900,000.
F-43