sct10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the quarterly period ended September 30, 2009
|
or |
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 113 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the transition period from ___________________________ to
___________________________
|
Commission
File Number: 0-49784
Southern
Connecticut Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Connecticut
|
|
06-1609692
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
215
Church Street, New Haven, Connecticut
(Address
of principal executive offices)
|
|
06510
(Zip
Code)
|
(203)
782-1100
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
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.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
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 the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ](Do
not check if a smaller reporting company) |
Smaller
reporting company [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at November 12, 2009
|
Common
Stock, $.01 par value per share
|
|
2,689,902
shares
|
|
|
|
Table
of Contents
|
Part
I – Financial Information
|
|
|
Page
|
Item
1. Financial Statements
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2009 and December 31, 2008
(unaudited)
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months and nine months
ended September 30, 2009 and 2008 (unaudited)
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the nine months ended
September 30, 2009 and 2008 (unaudited)
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
2008 (unaudited)
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
|
|
|
|
Item
4T. Controls and Procedures
|
|
|
|
|
Part
II - Other Information
|
|
|
|
Item
1. Legal Proceedings
|
|
|
|
|
Item
1A. Risk Factors
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
|
|
|
Item
5. Other Information
|
|
|
|
|
Item
6. Exhibits
|
|
|
|
|
Signatures
|
|
Item 1. Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
September
30, 2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
2009
|
|
|
2008
|
|
Cash
and due from banks
|
|
$ |
1,998,915 |
|
|
$ |
5,267,439 |
|
Short-term
investments
|
|
|
24,760,599 |
|
|
|
8,637,450 |
|
Cash
and cash equivalents
|
|
|
26,759,514 |
|
|
|
13,904,889 |
|
|
|
|
|
|
|
|
|
|
Interest
bearing certificates of deposit
|
|
|
1,555,343 |
|
|
|
1,642,612 |
|
Available
for sale securities (at fair value)
|
|
|
2,273,376 |
|
|
|
5,130,005 |
|
Federal
Home Loan Bank stock
|
|
|
66,100 |
|
|
|
66,100 |
|
Loans
receivable
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
105,119,018 |
|
|
|
90,424,801 |
|
Allowance
for loan losses
|
|
|
(2,719,775 |
) |
|
|
(1,183,369 |
) |
Loans
receivable, net
|
|
|
102,399,243 |
|
|
|
89,241,432 |
|
Accrued
interest receivable
|
|
|
424,059 |
|
|
|
411,729 |
|
Premises
and equipment
|
|
|
2,549,105 |
|
|
|
2,754,153 |
|
Other
assets held for sale
|
|
|
368,730 |
|
|
|
374,920 |
|
Other
assets
|
|
|
1,471,164 |
|
|
|
1,390,722 |
|
Total
assets
|
|
$ |
137,866,634 |
|
|
$ |
114,916,562 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
2009 |
|
|
2008 |
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest
bearing deposits
|
|
$ |
29,537,914 |
|
|
$ |
28,214,381 |
|
Interest
bearing deposits
|
|
|
89,941,145 |
|
|
|
65,755,643 |
|
Total
deposits
|
|
|
119,479,059 |
|
|
|
93,970,024 |
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
|
236,905 |
|
|
|
214,391 |
|
Capital
lease obligations
|
|
|
1,176,739 |
|
|
|
1,180,938 |
|
Accrued
expenses and other liabilities
|
|
|
978,918 |
|
|
|
1,010,255 |
|
Total
liabilities
|
|
|
121,871,621 |
|
|
|
96,375,608 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
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 2,689,902; 2008
2,688,152
|
|
|
26,899 |
|
|
|
26,882 |
|
Additional
paid-in capital
|
|
|
22,547,221 |
|
|
|
22,521,164 |
|
Accumulated
deficit
|
|
|
(6,596,968 |
) |
|
|
(4,035,302 |
) |
Accumulated
other comprehensive income - net unrealized gain
|
|
|
|
|
|
|
|
|
on
available for sale securities
|
|
|
17,861 |
|
|
|
28,210 |
|
Total
shareholders' equity
|
|
|
15,995,013 |
|
|
|
18,540,954 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
137,866,634 |
|
|
$ |
114,916,562 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months and Nine Months Ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
1,541,428 |
|
|
$ |
1,496,517 |
|
|
$ |
4,420,938 |
|
|
$ |
4,769,642 |
|
Interest
on securities
|
|
|
17,985 |
|
|
|
59,801 |
|
|
|
106,543 |
|
|
|
136,089 |
|
Interest
on Federal funds sold and short-term and other investments
|
|
|
58,697 |
|
|
|
79,666 |
|
|
|
163,310 |
|
|
|
382,827 |
|
Total
interest income
|
|
|
1,618,110 |
|
|
|
1,635,984 |
|
|
|
4,690,791 |
|
|
|
5,288,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on deposits
|
|
|
547,572 |
|
|
|
459,639 |
|
|
|
1,529,943 |
|
|
|
1,577,076 |
|
Interest
expense on capital lease obligations
|
|
|
43,648 |
|
|
|
44,025 |
|
|
|
131,822 |
|
|
|
132,105 |
|
Interest
expense on repurchase agreements and other borrowings
|
|
|
1,128 |
|
|
|
2,632 |
|
|
|
5,269 |
|
|
|
6,780 |
|
Total
interest expense
|
|
|
592,348 |
|
|
|
506,296 |
|
|
|
1,667,034 |
|
|
|
1,715,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
1,025,762 |
|
|
|
1,129,688 |
|
|
|
3,023,757 |
|
|
|
3,572,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit)
provision for loan losses
|
|
|
(137,255 |
) |
|
|
39,661 |
|
|
|
1,943,461 |
|
|
|
(64,082 |
) |
Net
interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(credit)
provision for loan losses
|
|
|
1,163,017 |
|
|
|
1,090,027 |
|
|
|
1,080,296 |
|
|
|
3,636,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
|
|
113,054 |
|
|
|
136,851 |
|
|
|
386,933 |
|
|
|
402,960 |
|
Gain
from sale of branch
|
|
|
- |
|
|
|
50,669 |
|
|
|
- |
|
|
|
874,912 |
|
Other
noninterest income
|
|
|
26,096 |
|
|
|
5,970 |
|
|
|
71,605 |
|
|
|
175,728 |
|
Total
noninterest income
|
|
|
139,150 |
|
|
|
193,490 |
|
|
|
458,538 |
|
|
|
1,453,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
751,142 |
|
|
|
835,386 |
|
|
|
2,294,451 |
|
|
|
2,957,384 |
|
Occupancy
and equipment
|
|
|
160,000 |
|
|
|
171,573 |
|
|
|
501,691 |
|
|
|
528,520 |
|
Professional
services
|
|
|
122,333 |
|
|
|
5,927 |
|
|
|
394,741 |
|
|
|
254,686 |
|
Data
processing and other outside services
|
|
|
115,617 |
|
|
|
98,267 |
|
|
|
316,097 |
|
|
|
302,669 |
|
Advertising
and promotional expenses
|
|
|
700 |
|
|
|
18,488 |
|
|
|
12,523 |
|
|
|
50,346 |
|
FDIC
Insurance
|
|
|
51,923 |
|
|
|
16,115 |
|
|
|
194,431 |
|
|
|
59,478 |
|
Other
operating expenses
|
|
|
97,221 |
|
|
|
179,383 |
|
|
|
386,566 |
|
|
|
569,147 |
|
Total
noninterest expenses
|
|
|
1,298,936 |
|
|
|
1,325,139 |
|
|
|
4,100,500 |
|
|
|
4,722,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
3,231 |
|
|
$ |
(41,622 |
) |
|
$ |
(2,561,666 |
) |
|
$ |
368,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Income (Loss) per Share
|
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.13 |
|
Diluted
Income (Loss) per Share
|
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
of
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
Income
|
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
368,049 |
|
|
|
- |
|
|
|
368,049 |
|
Unrealized
holding loss on available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,833 |
) |
|
|
(3,833 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock compensation
|
|
|
|
|
|
|
|
|
|
|
40,670 |
|
|
|
- |
|
|
|
- |
|
|
|
40,670 |
|
Stock
option compensation
|
|
|
|
|
|
|
|
|
|
|
16,930 |
|
|
|
- |
|
|
|
- |
|
|
|
16,930 |
|
Stock
repurchase
|
|
|
(202,186 |
) |
|
|
(2,022 |
) |
|
|
(1,373,980 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,376,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
2,767,528 |
|
|
$ |
27,675 |
|
|
$ |
22,947,151 |
|
|
$ |
(3,801,002 |
) |
|
$ |
(43,527 |
) |
|
$ |
19,130,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
2,688,152 |
|
|
$ |
26,882 |
|
|
$ |
22,521,164 |
|
|
$ |
(4,035,302 |
) |
|
$ |
28,210 |
|
|
$ |
18,540,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,561,666 |
) |
|
|
- |
|
|
|
(2,561,666 |
) |
Unrealized
holding loss on available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
securities, net of income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,349 |
) |
|
|
(10,349 |
) |
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,572,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock compensation
|
|
|
1,750 |
|
|
|
17 |
|
|
|
40,902 |
|
|
|
- |
|
|
|
- |
|
|
|
40,919 |
|
Stock
option compensation
|
|
|
- |
|
|
|
- |
|
|
|
(14,845 |
) |
|
|
- |
|
|
|
- |
|
|
|
(14,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
2,689,902 |
|
|
$ |
26,899 |
|
|
$ |
22,547,221 |
|
|
$ |
(6,596,968 |
) |
|
$ |
17,861 |
|
|
$ |
15,995,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHERN CONNECTICUT BANCORP, INC. AND
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operations
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,561,666 |
) |
|
$ |
368,049 |
|
Adjustments
to reconcile net (loss) income to net cash used in
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
and accretion of premiums and discounts on investments,
net
|
|
|
13,839 |
|
|
|
3,924 |
|
Provision
(credit) for loan losses
|
|
|
1,943,461 |
|
|
|
(64,082 |
) |
Gain
on sale of branch
|
|
|
- |
|
|
|
(874,912 |
) |
Share
based compensation
|
|
|
26,074 |
|
|
|
57,600 |
|
Loans
originated for sale, net of principal payments received
|
|
|
- |
|
|
|
(58,513 |
) |
Depreciation
and amortization
|
|
|
218,374 |
|
|
|
215,664 |
|
Increase
in cash surrender of life insurance
|
|
|
(32,580 |
) |
|
|
(33,138 |
) |
Write-down
of other assets held for sale
|
|
|
6,190 |
|
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Decrease)
increase in deferred loan fees
|
|
|
(8,226 |
) |
|
|
31,854 |
|
(Increase)
decrease in accrued interest receivable
|
|
|
(12,330 |
) |
|
|
11,801 |
|
Increase
in other assets
|
|
|
(47,862 |
) |
|
|
(310,559 |
) |
(Decrease)
increase in accrued expenses and other liabilities
|
|
|
(42,733 |
) |
|
|
25,166 |
|
Net
cash used in operating activities
|
|
|
(497,459 |
) |
|
|
(627,146 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of interest bearing certificates of
deposit
|
|
|
87,269 |
|
|
|
- |
|
Purchases
of available for sale securities
|
|
|
(7,456,165 |
) |
|
|
(11,500,000 |
) |
Principal
repayments on available for sale securities
|
|
|
2 |
|
|
|
- |
|
Proceeds
from maturities / calls of available for sale securities
|
|
|
10,300,000 |
|
|
|
11,700,003 |
|
Net
payments on sale of branch
|
|
|
- |
|
|
|
(495,521 |
) |
Net
increase in loans receivable
|
|
|
(15,621,296 |
) |
|
|
(7,992,794 |
) |
Purchases
of premises and equipment
|
|
|
(13,326 |
) |
|
|
(101,481 |
) |
Proceeds
from the sale of OREO
|
|
|
528,250 |
|
|
|
- |
|
Acquisition
of mortgage broker
|
|
|
- |
|
|
|
(137,668 |
) |
Net
cash used in investing activities
|
|
|
(12,175,266 |
) |
|
|
(8,527,461 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in demand, savings and money market
deposits
|
|
|
4,846,137 |
|
|
|
(4,122,341 |
) |
Net
increase in certificates of deposit
|
|
|
20,662,898 |
|
|
|
1,499,485 |
|
Net
increase in repurchase agreements
|
|
|
22,514 |
|
|
|
220,487 |
|
Principal
repayments on capital lease obligations
|
|
|
(4,199 |
) |
|
|
(3,777 |
) |
Stock
repurchased
|
|
|
- |
|
|
|
(1,376,002 |
) |
Net
cash provided by (used in) financing activities
|
|
|
25,527,350 |
|
|
|
(3,782,148 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
12,854,625 |
|
|
|
(12,936,755 |
) |
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
13,904,889 |
|
|
|
33,346,944 |
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$ |
26,759,514 |
|
|
$ |
20,410,189 |
|
|
|
|
|
|
|
(Continued)
|
|
SOUTHERN
CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued
|
|
|
|
|
For
the Nine Months Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
Interest
|
|
$ |
1,617,294 |
|
|
$ |
1,745,913 |
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
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 gains (losses) on available for sale securities
arising
|
|
|
|
|
|
|
|
|
during
the period
|
|
$ |
1,047 |
|
|
$ |
(3,833 |
) |
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
(Unaudited)
Note
1. Nature of Operations
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’s target commercial customer has between $1.0 million 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.
Note
2. Basis of Financial Statement Presentation
The
consolidated interim financial statements include the accounts of the Company
and its subsidiaries. The consolidated interim financial statements and notes
thereto have been prepared in conformity with U.S. generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated in consolidation. Amounts in
prior period financial statements are reclassified whenever necessary to conform
to current period presentations. The results of operations for the three and
nine months ended September 30, 2009 are not necessarily indicative of the
results which may be expected for the year as a whole. The accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements of the Company and notes
thereto as of December 31, 2008, filed with the Securities and Exchange
Commission on Form 10-K on March 27, 2009.
In May
2009, the Financial Accounting Standards Board (FASB) issued a new standard
entitled Subsequent
Events. This statement provides guidance on principles and requirements
for subsequent events. The guidance sets forth: 1) the period after the balance
sheet date during which management of a reporting entity shall evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements; 2) the circumstances under which an entity shall recognize
events or transactions occurring after the
balance
sheet date in its financial statements; and 3) the disclosures that an entity
shall make about events or transactions that occurred after the balance sheet
date. Two types of subsequent events require consideration by management: (a)
recognized subsequent events; and (b) non-recognized subsequent events.
Recognized subsequent events consist of those events or transactions that
provide additional evidence with respect to conditions that existed at the date
of the balance sheet, including the estimates inherent in the process of
preparing financial statements. Non-recognized subsequent events consist
of those events that provide evidence with respect to conditions that
did not exist at the date of the balance sheet, but arose subsequent to that
date. This statement is effective for interim or annual financial periods after
June 15, 2009. The Company has evaluated the subsequent events through November
12, 2009. No material subsequent events have occurred since September 30, 2009
that required recognition or disclosure in these financial
statements.
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 September 30, 2009 and December 31, 2008 are as
follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
September 30, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agency Obligations
|
|
$ |
2,138,783 |
|
|
$ |
28,097 |
|
|
$ |
- |
|
|
$ |
2,166,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agency Mortgage Backed Securities
|
|
|
105,336 |
|
|
|
1,160 |
|
|
|
- |
|
|
|
106,496 |
|
|
|
$ |
2,244,119 |
|
|
$ |
29,257 |
|
|
$ |
- |
|
|
$ |
2,273,376 |
|
|
|
|
|
|
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 |
|
The
amortized cost and fair value of available for sale debt securities at September
30, 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.
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
|
|
September 30,
2009 |
|
Cost
|
|
|
Value
|
|
Maturity:
|
|
|
|
|
|
|
Over
10 years
|
|
$ |
2,138,783 |
|
|
$ |
2,166,880 |
|
Mortgage-backed
securities
|
|
|
105,336 |
|
|
|
106,496 |
|
|
|
$ |
2,244,119 |
|
|
$ |
2,273,376 |
|
Note
4. Loans Receivable
A summary
of the Company's loan portfolio at September 30, 2009 and December 31, 2008 is
as follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Commercial
loans secured by real estate
|
|
$ |
57,354,683 |
|
|
$ |
45,462,172 |
|
Commercial
loans
|
|
|
42,802,203 |
|
|
|
37,625,274 |
|
Construction
and land loans
|
|
|
4,585,782 |
|
|
|
6,500,111 |
|
Consumer
home equity loans
|
|
|
- |
|
|
|
383,682 |
|
Consumer
installment loans
|
|
|
466,718 |
|
|
|
552,156 |
|
Total
loans
|
|
|
105,209,386 |
|
|
|
90,523,395 |
|
Net
deferred loan fees
|
|
|
(90,368 |
) |
|
|
(98,594 |
) |
Allowance
for loan losses
|
|
|
(2,719,775 |
) |
|
|
(1,183,369 |
) |
Loans
receivable, net
|
|
$ |
102,399,243 |
|
|
$ |
89,241,432 |
|
The
following represents the activity in the allowance for loan losses for the nine
months ended September 30, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$ |
1,183,369 |
|
|
$ |
1,256,965 |
|
Provision
(credit) for loan losses
|
|
|
1,943,461 |
|
|
|
(64,082 |
) |
Recoveries
of loans previously charged-off
|
|
|
10,423 |
|
|
|
36,756 |
|
Loans
charged-off
|
|
|
(417,478 |
) |
|
|
(180,413 |
) |
Balance
at end of period
|
|
$ |
2,719,775 |
|
|
$ |
1,049,226 |
|
At
September 30, 2009 and December 31, 2008, the unpaid principal balances of loans
placed on nonaccrual status were $5,336,890 and $881,948, respectively. There
were no loans considered “troubled debt restructurings” at September 30, 2009 or
December 31, 2008. Accruing loans contractually past due 90 days or more were
$269,426 and $384,443 at September 30, 2009 and December 31, 2008,
respectively.
The
following information relates to impaired loans as of September 30, 2009 and
December 31, 2008:
|
|
2009
|
|
|
2008
|
|
Impaired
loans for which there is a specific allowance
|
|
$ |
4,654,814 |
|
|
$ |
538,727 |
|
|
|
|
|
|
|
|
|
|
Impaired
loans for which there is no specific allowance
|
|
$ |
1,747,668 |
|
|
$ |
1,957,926 |
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses related to impaired loans
|
|
$ |
1,511,292 |
|
|
$ |
162,571 |
|
|
|
|
|
|
|
|
|
|
Average
recorded investment in impaired loans
|
|
$ |
5,520,089 |
|
|
$ |
1,978,934 |
|
Note
5. Deposits
At
September 30, 2009 and December 31, 2008, deposits consisted of the
following:
|
|
2009
|
|
|
2008
|
|
Noninterest
bearing
|
|
$ |
29,537,914 |
|
|
$ |
28,214,381 |
|
|
|
|
|
|
|
|
|
|
Interest
bearing:
|
|
|
|
|
|
|
|
|
Checking
|
|
|
6,620,696 |
|
|
|
5,685,490 |
|
Money
Market
|
|
|
28,555,614 |
|
|
|
26,578,024 |
|
Savings
|
|
|
2,102,186 |
|
|
|
1,492,378 |
|
Time
certificates, less than $100,000 (1)
|
|
|
31,408,218 |
|
|
|
18,066,157 |
|
Time
certificates, $100,000 or more (2)
|
|
|
21,254,431 |
|
|
|
13,933,594 |
|
Total
interest bearing
|
|
|
89,941,145 |
|
|
|
65,755,643 |
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
119,479,059 |
|
|
$ |
93,970,024 |
|
(1)
Included in time certificates of deposit, less than $100,000, at September
30, 2009 and December 31, 2008
|
were
brokered deposits totaling $12,673,249 and $5,731,302,
respectively.
|
|
|
|
|
(2)
Included in time certificates of deposit, $100,000 or more, at September
30, 2009 and December 31, 2008
|
were
brokered deposits totaling $3,223,676 and $2,740,969,
respectively.
|
Brokered
deposits at September 30, 2009 and December 31, 2008
represented:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Bank
customer time certificates of deposit
|
|
$ |
8,939,896 |
|
|
$ |
4,271,135 |
|
Bank
customer time certificates of deposit placed
|
|
|
|
|
|
|
|
|
through
CDARS to ensure FDIC coverage
|
|
|
1,309,611 |
|
|
|
2,201,901 |
|
Time
certificates of deposit purchased by the
|
|
|
|
|
|
|
|
|
Bank
through CDARS
|
|
|
5,647,418 |
|
|
|
1,999,235 |
|
Total
brokered deposits
|
|
$ |
15,896,925 |
|
|
$ |
8,472,271 |
|
Note
6. Available Borrowings
The Bank is a member of the Federal
Home Loan Bank of Boston (“FHLB”). At September 30, 2009, 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 September 30, 2009.
The Bank
is required to maintain an investment in capital stock of the FHLB 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 fair
value. For disclosure purposes, such stock is assumed to have a fair
value which is equal to cost based upon the redemption provisions of the
FHLB.
Note
7. Income (Loss) Per Share
The
Company is required to present basic income (loss) per share and diluted income
(loss) per share in its statements of operations. Basic per share amounts are
computed by dividing net income (loss) by the weighted average number of common
shares outstanding. Diluted per share amounts assume exercise of all potential
common stock equivalents in weighted average shares outstanding, unless the
effect is antidilutive. The Company is also required to provide a reconciliation
of the numerator and denominator used in the computation of both basic and
diluted income (loss) per share.
The
following is information about the computation of income (loss) per share for
the three and nine months ended September 30, 2009 and 2008:
Three
Months Ended September 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Net
|
|
|
Average
|
|
|
Amount
|
|
|
Net
|
|
|
Average
|
|
|
Amount
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
Basic
Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) available to common shareholders
|
|
$ |
3,231 |
|
|
|
2,689,902 |
|
|
$ |
0.00 |
|
|
$ |
(41,622 |
) |
|
|
2,917,934 |
|
|
$ |
(0.01 |
) |
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants/Stock
Options outstanding/Restricted Stock
|
|
|
- |
|
|
|
2,016 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) available to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
plus assumed conversions
|
|
$ |
3,231 |
|
|
|
2,691,918 |
|
|
$ |
0.00 |
|
|
$ |
(41,622 |
) |
|
|
2,917,934 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
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
|
|
$ |
(2,561,666 |
) |
|
|
2,689,400 |
|
|
$ |
(0.95 |
) |
|
$ |
368,049 |
|
|
|
2,893,087 |
|
|
$ |
0.13 |
|
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants/Stock
Options outstanding/Restricted Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,506 |
|
|
|
- |
|
Diluted
(Loss) Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income available to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
plus assumed conversions
|
|
$ |
(2,561,666 |
) |
|
|
2,689,400 |
|
|
$ |
(0.95 |
) |
|
$ |
368,049 |
|
|
|
2,909,593 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30, 2009 and the three months ended
September 30, 2008, no common stock equivalents have been
included
|
|
in
the computation of net loss per share because the inclusion of such
equivalents is anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
8. Other Comprehensive Income (Loss)
Under Statement of Financial Standards
entitled, “Reporting Comprehensive Income,” certain transactions and other
economic events that bypass the Company’s income statement must be displayed as
other comprehensive income. The Company’s other comprehensive income, which is
comprised solely of the change in unrealized gains (losses) on available for
sale securities, is as follows:
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
Before-Tax
|
|
|
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Taxes
|
|
|
Amount
|
|
Unrealized
holding gains arising during
|
|
|
|
|
|
|
|
|
|
period
|
|
$ |
1,047 |
|
|
$ |
(11,396 |
) |
|
$ |
(10,349 |
) |
Reclassification
adjustment for amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
recognized
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrealized
holding gains on available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
securities,
net of taxes
|
|
$ |
1,047 |
|
|
$ |
(11,396 |
) |
|
$ |
(10,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Before-Tax
|
|
|
|
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Taxes
|
|
|
Amount
|
|
Unrealized
holding losses arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
period
|
|
$ |
(3,833 |
) |
|
$ |
- |
|
|
$ |
(3,833 |
) |
Reclassification
adjustment for amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
recognized
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrealized
holding losses on available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
securities,
net of taxes
|
|
$ |
(3,833 |
) |
|
$ |
- |
|
|
$ |
(3,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
9. 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.
The
contractual amounts of commitments to extend credit represent 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. 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.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Commitments
to extend credit
|
|
|
|
|
|
|
Future
loan commitments
|
|
$ |
5,477,523 |
|
|
$ |
16,398,484 |
|
Unused
lines of credit
|
|
|
26,503,216 |
|
|
|
23,157,442 |
|
Financial
standby letters of credit
|
|
|
3,358,597 |
|
|
|
3,570,308 |
|
Undisbursed
construction loans
|
|
|
437,000 |
|
|
|
237,000 |
|
|
|
$ |
35,776,336 |
|
|
$ |
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
upon management’s credit evaluation of the counterparty. 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. The liability related to guarantees
recorded at September 30, 2009 and December 31, 2008 was not
significant.
Note 10. Fair
Value
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued a
standard entitled Fair Value
Measurements. The Company adopted the provisions of this
standard for the quarter ended March 31, 2008 except for the provisions relating
to nonfinancial assets and liabilities, which were subject to deferral, which
the Company adopted effective January 1, 2009. This standard defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurement. This standard also
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets. In determining fair value, the Company
uses various methods including market, income and cost
approaches. Based on these approaches, the Company often utilizes
certain assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk or the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable inputs. The Company
utilizes valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on the observability
of the inputs used in the valuation techniques the Company is required to
provide the following information according to the fair value hierarchy
described 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.
|
A
description of the valuation methodologies used for assets and liabilities
recorded at fair value, and for estimating fair value for 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 and sponsored agency bonds and mortgage-backed
securities. Level 3 securities are securities for which significant
unobservable inputs are utilized.
Loans
held for sale
The fair
value is based on prevailing market prices. The Company records these
assets 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 loan portfolio. 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, nonrecurring fair value adjustments to collateral-dependent
impaired loans are recorded to reflect partial write-downs based on the
observable market price or current appraised value of collateral.
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.
The
following table details the financial instruments carried at fair value and
measured at fair value on a recurring basis as of September 30, 2009 and
December 31, 2008 and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine the fair value:
|
|
Balance
as
of
September
30, 2009
|
|
|
Quoted
Prices in Active Markets
for Identical
Assets (Level
1)
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$ |
2,273,376 |
|
|
$ |
- |
|
|
$ |
2,273,376 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2009 and
December 31, 2008 and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine the fair value:
|
|
|
|
|
Quoted
Prices in Active Markets
for Identical
Assets (Level
1)
|
|
|
|
|
|
|
|
Impaired
loans (1)
|
|
$ |
4,757,393 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,757,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
The
following table details the nonfinancial assets carried at fair value and
measured at fair value on a nonrecurring basis as of September 30, 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
|
|
|
|
September
30, 2009
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Other
assets held for sale
|
|
$ |
368,730 |
|
|
$ |
- |
|
|
$ |
368,730 |
|
|
$ |
- |
|
As of
September 30, 2009 and December 31, 2008, the recorded book balances and fair
values of the Company’s financial instruments were as follows:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Recorded
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
Book
|
|
|
|
|
|
Book
|
|
|
|
|
|
|
Balance
|
|
|
Fair
Value
|
|
|
Balance
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
1,998,915 |
|
|
$ |
1,998,915 |
|
|
$ |
5,267,439 |
|
|
$ |
5,267,439 |
|
Short-term
investments
|
|
|
24,760,599 |
|
|
|
24,760,599 |
|
|
|
8,637,450 |
|
|
|
8,637,450 |
|
Interest
bearing certificates of deposit
|
|
|
1,555,343 |
|
|
|
1,555,343 |
|
|
|
1,642,612 |
|
|
|
1,642,612 |
|
Available
for sale securities
|
|
|
2,273,376 |
|
|
|
2,273,376 |
|
|
|
5,130,005 |
|
|
|
5,130,005 |
|
Federal
Home Loan Bank stock
|
|
|
66,100 |
|
|
|
66,100 |
|
|
|
66,100 |
|
|
|
66,100 |
|
Loans
receivable, net
|
|
|
102,399,243 |
|
|
|
103,550,000 |
|
|
|
89,241,432 |
|
|
|
91,679,000 |
|
Accrued
interest receivable
|
|
|
424,059 |
|
|
|
424,059 |
|
|
|
411,729 |
|
|
|
411,729 |
|
Servicing
rights
|
|
|
18,485 |
|
|
|
30,862 |
|
|
|
26,302 |
|
|
|
32,077 |
|
Interest
only strips
|
|
|
23,838 |
|
|
|
36,758 |
|
|
|
34,643 |
|
|
|
37,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
29,537,914 |
|
|
|
29,537,914 |
|
|
|
28,214,381 |
|
|
|
28,214,381 |
|
Interest
bearing checking accounts
|
|
|
6,620,696 |
|
|
|
6,620,696 |
|
|
|
5,685,490 |
|
|
|
5,685,490 |
|
Money
market deposits
|
|
|
28,555,614 |
|
|
|
28,555,614 |
|
|
|
26,578,024 |
|
|
|
26,578,024 |
|
Savings
deposits
|
|
|
2,102,186 |
|
|
|
2,102,186 |
|
|
|
1,492,378 |
|
|
|
1,492,378 |
|
Time
certificates of deposits
|
|
|
52,662,649 |
|
|
|
53,731,000 |
|
|
|
31,999,751 |
|
|
|
32,371,000 |
|
Repurchase
agreements
|
|
|
236,905 |
|
|
|
236,905 |
|
|
|
214,391 |
|
|
|
214,391 |
|
Accrued
interest payable
|
|
|
225,636 |
|
|
|
225,636 |
|
|
|
152,052 |
|
|
|
152,052 |
|
Note
11. 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 three months and nine months ended September 30, 2009 and September 30,
2008, respectively. The Company uses an internal reporting system to generate
information by operating segment. Estimates and allocations are used for
noninterest expenses.
Three Months
Ended September 30, 2009
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
Net
interest income
|
|
$ |
997,486 |
|
|
$ |
25,844 |
|
|
$ |
2,432 |
|
|
$ |
- |
|
|
$ |
1,025,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
for loan losses
|
|
|
(137,255 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(137,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after credit for loan losses
|
|
|
1,134,741 |
|
|
|
25,844 |
|
|
|
2,432 |
|
|
|
- |
|
|
|
1,163,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
139,150 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
139,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
1,215,987 |
|
|
|
65,999 |
|
|
|
16,950 |
|
|
|
- |
|
|
|
1,298,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
57,904 |
|
|
|
(40,155 |
) |
|
|
(14,518 |
) |
|
|
- |
|
|
|
3,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
- |
|
|
|
238,440 |
|
|
|
- |
|
|
|
- |
|
|
|
238,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets as of September 30, 2009
|
|
|
136,404,711 |
|
|
|
350,950 |
|
|
|
16,002,114 |
|
|
|
(14,891,141 |
) |
|
|
137,866,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30, 2008
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
Net
interest income
|
|
$ |
1,119,825 |
|
|
$ |
- |
|
|
$ |
9,863 |
|
|
$ |
- |
|
|
$ |
1,129,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
39,661 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
39,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
1,080,164 |
|
|
|
- |
|
|
|
9,863 |
|
|
|
- |
|
|
|
1,090,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
193,045 |
|
|
|
- |
|
|
|
445 |
|
|
|
- |
|
|
|
193,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
1,289,628 |
|
|
|
45,922 |
|
|
|
(10,411 |
) |
|
|
- |
|
|
|
1,325,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(16,419 |
) |
|
|
(45,922 |
) |
|
|
20,719 |
|
|
|
- |
|
|
|
(41,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
- |
|
|
|
238,440 |
|
|
|
- |
|
|
|
- |
|
|
|
238,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets as of September 30, 2008
|
|
|
115,996,608 |
|
|
|
266,996 |
|
|
|
19,143,624 |
|
|
|
(17,550,155 |
) |
|
|
117,857,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
Net
interest income
|
|
$ |
2,964,446 |
|
|
$ |
51,701 |
|
|
$ |
7,610 |
|
|
$ |
- |
|
|
$ |
3,023,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,943,461 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,943,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
1,020,985 |
|
|
|
51,701 |
|
|
|
7,610 |
|
|
|
- |
|
|
|
1,080,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
458,538 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
458,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
3,811,112 |
|
|
|
176,264 |
|
|
|
113,124 |
|
|
|
- |
|
|
|
4,100,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,331,589 |
) |
|
|
(124,563 |
) |
|
|
(105,514 |
) |
|
|
- |
|
|
|
(2,561,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
- |
|
|
|
238,440 |
|
|
|
- |
|
|
|
- |
|
|
|
238,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets as of September 30, 2009
|
|
|
136,404,711 |
|
|
|
350,950 |
|
|
|
16,002,114 |
|
|
|
(14,891,141 |
) |
|
|
137,866,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
Net
interest income
|
|
$ |
3,523,220 |
|
|
$ |
- |
|
|
$ |
49,377 |
|
|
$ |
- |
|
|
$ |
3,572,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
for loan losses
|
|
|
(64,082 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(64,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after credit for loan losses
|
|
|
3,587,302 |
|
|
|
- |
|
|
|
49,377 |
|
|
|
- |
|
|
|
3,636,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
1,450,626 |
|
|
|
- |
|
|
|
2,974 |
|
|
|
- |
|
|
|
1,453,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
4,561,141 |
|
|
|
47,740 |
|
|
|
113,349 |
|
|
|
- |
|
|
|
4,722,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
476,787 |
|
|
|
(47,740 |
) |
|
|
(60,998 |
) |
|
|
- |
|
|
|
368,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
- |
|
|
|
238,440 |
|
|
|
- |
|
|
|
- |
|
|
|
238,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets as of September 30, 2008
|
|
|
115,996,608 |
|
|
|
266,996 |
|
|
|
19,143,624 |
|
|
|
(17,550,155 |
) |
|
|
117,857,073 |
|
Note
12. Commitments and Contingencies
In
September 2009, the Company and the Bank entered into a settlement agreement
relating to a lawsuit that had been filed by a former officer for age
discrimination and breach of contract in connection with the officer’s layoff as
part of a reduction in staff announced by the Bank in July 2008. The settlement
agreement had no significant impact on the Company’s financial
statements.
Note
13. Recent Accounting Pronouncements
In September 2006, the
Financial Accounting Standards Board (FASB) issued a standard
entitled Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This standard also establishes fair value hierarachy about the assumptions used
to measure fair value and clarifies the assumptions about risk and the effect of
a restriction on the sale or use of an asset. On February 12, 2008, the FASB
issued a staff position which deferred the effective date for certain
nonfinancial assets and liabilities to fiscal years beginning after November 15,
2008. The Company adopted the standard for the quarter ended March 31, 2008,
except for the provisions relating to nonfinancial assets and liabilities, which
were subject to deferral, which the Company adopted effective January 1, 2009.
See Note 10 for additional information regarding fair value.
In April
2009, the FASB issued a new staff position entitled “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” This
staff position provided additional guidance on: (a) determining when the volume
and
level of
activity for the asset or liability has significantly decreased; (b) identifying
circumstances in which a transaction is not orderly; and (c) understanding the
fair value measurement implications of both (a) and (b). The effective date of
this new staff position is for interim and annual reporting periods ending after
June 15, 2009. The Company adopted the provisions of this staff position during
the quarter ended June 30, 2009. The adoption of this staff position did not
have an impact on the Company’s results of operations or financial
position.
In April
2009, the FASB issued a new staff position entitled “Recognition and
Presentation of Other-ThanTemporary Impairments.” This staff position amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change the staff position brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. The effective
date of this new staff position is for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the provisions of this staff
position during the quarter ended June 30, 2009. The adoption of this staff
positon did not have an impact on the Company’s results of operations or
financial position.
In April
2009, the FASB issued a new staff position entitled “Interim Disclosures about
Fair Value of Financial Instruments.” This staff position requires disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies in addition to annual financial statements. This staff
position also requires those disclosures in summarized financial information at
interim reporting periods. The effective date of disclosures for this new staff
position is for interim and annual reporting periods ending after June 15, 2009.
The Company adopted the provisions of the staff position for the quarter ended
June 30, 2009. See Note 10 for additional information regarding fair
value.
In June
2009, the FASB issued a new standard entitled Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140. The objective
of this standard is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial
assets. Additionally, on and after the effective date, the concept of
a qualifying special-purpose entity is no longer relevant for accounting
purposes. Therefore, formerly qualifying special-purpose entities (as
defined under previous accounting standards) should be evaluated for
consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. If the evaluation
on the effective date results in consolidation, the reporting entity should
apply the transition guidance provided in the pronouncement that requires
consolidation. This standard must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. This standard must be applied to transfers occurring on or
after the effective date. The adoption of this standard is not expected to
have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued a new standard entitled The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, to allow the FASB Codification to
be the single source of authoritative U.S. accounting and reporting standards,
other than guidance issued by the Securities and Exchange
Commission. The Company adopted this standard during the quarter
ended September 30, 2009. The adoption of this standard did not have
an impact on the Company’s consolidated financial statements.
Item 2. Management's Discussion and Analysis of
Financial Condition And Results of Operations
The
following discussion and analysis is intended to assist you in understanding the
financial condition and results of operations of the Company. This
discussion should be read in conjunction with the accompanying unaudited
financial statements as of and for the three months and nine months ended
September 30, 2009 and
2008,
along with the audited financial statements as of and for the year ended
December 31, 2008, included in the Company’s Form 10-K filed with the Securities
and Exchange Commission on March 27, 2009.
Summary
As of
September 30, 2009, the Company had $137.9 million of total assets, $105.1
million of gross loans receivable, and $119.5 million of total
deposits. Total equity capital at September 30, 2009 was $16.0
million, and the Company’s Tier I Leverage Capital Ratio was
11.46%.
The
Company reported net income for the quarter ended September 30, 2009 of $3,000
(or basic and diluted earnings per share of $0.00), compared to a net loss of
$42,000 (or basic and diluted loss per share of $0.01), for the third quarter of
2008.
The
Company’s operating results for the third quarter of 2009 compared to the same
period of 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 for the third quarter of 2008
included recognition of a portion of the gain on the sale of the New
London branch; and because of a decrease in service charges and fees
resulting from changes in the business practices of customers of the Bank;
these decreases were partially offset by an increase in servicing income
on SBA loans; and
|
|
·
|
Noninterest
expenses decreased due to lower salaries and benefits resulting from
reductions in staff and elimination of certain employee benefits and
bonuses in 2009; expense reductions attributable to lower loan related
collection expenses; and expense savings related to lower negotiated rates
on certain insurance and telecommunications service contracts. These
decreases were partially offset by higher FDIC insurance premiums due to
an increase in assessment rates and deposit balances subject to
assessment, as well as increased professional service
expenses.
|
The
Company had a net loss of $2,562,000 (or basic and diluted loss per share of
$0.95) for the nine months ended September 30, 2009, compared to net income of
$368,000 (or basic and diluted income per share of $0.13) for the nine months
ended September 30, 2008.
The
Company’s net loss for the nine months ended September 30, 2009 was largely
attributable to a provision for loan losses of $1,943,000 for the nine months
ended September 30, 2009 compared to a credit balance of $(64,000) for the same
period in 2008. The significant increase in the provision for loan losses during
the first nine months of 2009 is related to a group of eleven 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 first nine months of 2009 compared to the same period of 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 for the first nine months of
2008 included the gain on the sale of the New London branch that was
primarily recorded in February 2008; and because of 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, because of
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; 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.
These decreases were partially offset by 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 accrued during the second
quarter.
|
Critical
Accounting Policy
In the ordinary course of business, the
Company makes a number of estimates and assumptions relating to reporting
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 estimate with its audit committee. Refer to the discussion below
under “Allowance for Loan Losses” and Note 1 to the audited financial statements
as of and for the year ended December 31, 2008, included in the Company’s Form
10-K filed with the Securities and Exchange Commission on March 27,
2009.
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. Loans 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 collectibility 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 general and
specific components. The specific component relates to allowances established
for individual impaired loans. The general component relates to pools
of loans segregated by loan type, and is based on historical loss experience
adjusted by certain qualitative factors as determined by management and the
board of directors. The allowance for loan losses does not contain an
unallocated component.
Based upon this evaluation, management
believes the allowance for loan losses of $2,719,775 or 2.59% of gross loans
receivable at September 30, 2009 is adequate, under prevailing economic
conditions, to absorb losses on existing loans. At December 31, 2008,
the allowance for loan losses was $1,183,369 or 1.31% of gross loans
receivable.
The increase in the allowance is
attributable to a $1,348,721 increase in the specific component of the allowance
and an $187,685 increase in the general component of the allowance. The increase
in the specific component is due to an increase in specific reserves totaling
$1,602,408 for nine loans identified as impaired during the nine months ended
September 30, 2009 and $153,368 for loans that were impaired at both September
30, 2009 and December 31, 2008, partially offset by $407,055 for loans charged
off (net of recoveries) during the period. 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 eleven loans
to impaired loans.
The
accrual of interest income on loans is discontinued whenever reasonable doubt
exists as to collectability and generally is discontinued when loans are past
due 90 days as to either principal or interest, or are otherwise considered
impaired. When the accrual of interest income is discontinued, all
previously accrued and uncollected interest is reversed against interest
income. The accrual of interest on loans past due 90 days or more may
be continued if the loan is well secured, it is believed all principal and
accrued interest income due on the loan will be realized, and the loan is in the
process of collection. A non-accrual loan is restored to an accrual
status when it is no longer delinquent and collectability of interest and
principal is no longer in doubt.
Management considers all non-accrual
loans, other loans past due 90 days or more based on contractual terms, and
restructured loans to be impaired. Loans for which payments are past
due, but not more than 90 days past due, are not considered to be impaired
unless management determines that full collection of principal and interest is
doubtful.
Recent
Accounting Changes
In September 2006, the Financial
Accounting Standards Board (FASB) issued a standard entitled Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This standard also
establishes fair value hierarachy about the assumptions used to measure fair
value and clarifies the assumptions about risk and the effect of a restriction
on the sale or use of an asset. On February 12, 2008, the FASB issued a staff
position which deferred the effective date for certain nonfinancial assets and
liabilities to fiscal years beginning after November 15, 2008. The Company
adopted the standard for the quarter ended March 31, 2008, except for the
provisions relating to nonfinancial assets and liabilities, which were subject
to deferral, which the Company adopted effective January 1, 2009. See Note 10
for additional information regarding fair value.
In April
2009, the FASB issued a new staff position entitled “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” This
staff position provided additional guidance on: (a) determining when the volume
and level of activity for the asset or liability has significantly decreased;
(b) identifying circumstances in which a transaction is not orderly; and (c)
understanding the fair value measurement implications of both (a) and (b). The
effective date of this new staff position is for interim and annual reporting
periods ending after June 15, 2009. The Company adopted the provisions of this
staff position during the quarter ended June 30, 2009. The adoption of this
staff position did not have an impact on the Company’s results of operations or
financial position.
In April
2009, the FASB issued a new staff position entitled “Recognition and
Presentation of Other-Than Temporary Impairments.” This staff position amends
the other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change the staff position brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. The effective
date of this new staff position is for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the provisions of this staff
position during the quarter ended June 30, 2009. The adoption of this staff
positon did not have an impact on the Company’s results of operations or
financial position.
In April
2009, the FASB issued a new staff position entitled “Interim Disclosures about
Fair Value of Financial Instruments.” This staff position requires disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies in addition to annual financial statements. This staff
position also requires those disclosures in summarized financial information at
interim reporting periods. The effective date of disclosures for this new staff
position is for interim and annual reporting periods ending after June 15, 2009.
The Company adopted the provisions of the staff position for the quarter ended
June 30, 2009. See Note 10 for additional information regarding fair
value.
In June
2009, the FASB issued a new standard entitled Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140. The objective
of this standard is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial
assets. Additionally, on and after the effective date, the concept of
a qualifying special-purpose entity is no longer relevant for accounting
purposes. Therefore, formerly qualifying special-purpose entities (as
defined under previous accounting standards) should be evaluated for
consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. If the evaluation
on the effective date results in consolidation, the reporting entity should
apply the transition guidance provided in the pronouncement that requires
consolidation. This standard must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. This standard must be applied to transfers occurring on or
after the effective date. The adoption of this standard is not expected to
have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued a new standard entitled The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, to allow the FASB Codification to
be the single source of authoritative U.S. accounting and reporting standards,
other than guidance issued by the Securities and Exchange
Commission. The Company adopted this standard during the quarter
ended September 30, 2009. The adoption of this standard did not have
an impact on the Company’s consolidated financial statements.
Comparison
of Financial Condition as of September 30, 2009 versus December 31,
2008
General
The
Company’s total assets were $137.9 million at September 30, 2009, an increase of
$23 million from December 31, 2008. The increase in total assets was
due primarily to growth in the Company’s short-term investments and growth in
the Bank’s loan portfolio, which were funded from deposit growth. Short-term
investments increased to $24.8 million from $8.6 million, and net loans
receivable increased to $102.4 million from $89.2 million, as of September 30,
2009 and December 31, 2008, respectively. Total deposits increased to
$119.5 million as of September 30, 2009 from $94.0 million as of December 31,
2008.
Short-term
investments
Short-term
investments, consisting of money market investments, were $24.8 million at
September 30, 2009, compared to a balance of $8.6 million as of December 31,
2008. The $16.2 million increase in short-term investments from December 31,
2008 is primarily attributable to deposit growth. The Bank currently
has a large number of loans pending closing and anticipates utilizing a
significant portion of this $16.2 million growth if these loans are
closed.
Investments
Available for sale securities,
consisting of U.S. government agency obligations and agency issued
mortgage-backed securities, were $2.3 million at September 30, 2009, compared to
a balance of $5.1 million as of December 31, 2008. The Company uses its
available for sale securities portfolio to meet pledge requirements for public
deposits and repurchase agreements. The $2.8 million decrease in available for
sale securities is in response to lower pledge requirements at September 30,
2009. The Company classifies its securities as “available for sale” to provide
greater flexibility to respond to changes in interest rates as well as future
liquidity needs.
Loans
Interest income on loans is the most
important component of our net interest income. The loan portfolio is the
largest component of earning assets, and it therefore generates the largest
portion of revenues. The
Company’s
net loan portfolio was $102.4 million at September 30, 2009 versus $89.2 million
at December 31, 2008, an increase of $13.2 million. The increase in
the loan portfolio for the nine months ended September 30, 2009 was due to a
$14.7 million increase in outstanding loans partially offset by a $1.5 million
increase in the allowance for loan losses, explained in more detail under Allowance for Loan Losses
below. Management believes that loan growth will continue
during the fourth quarter of 2009. The Bank’s loans are made to borrowers
primarily in the New Haven market area. The Company’s loan to total asset ratio
is 74.2% and 77.7% and its loan to total deposit ratio is 85.7% and 95.0% at
September 30, 2009 and December 31, 2008, respectively. The Bank currently has a
large number of loans pending closing and if these loans are closed, the ratios
of loans receivable to total assets and total deposits are expected to
increase.
Allowance
for Loan Losses and Non-Accrual, Past Due and Restructured Loans
Allowance
for Loan Losses
The
following represents the activity in the allowance for loan losses for the nine
months ended September 30, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$ |
1,183,369 |
|
|
$ |
1,256,965 |
|
Provision
(credit) for loan losses
|
|
|
1,943,461 |
|
|
|
(64,082 |
) |
Recoveries
of loans previously charged-off
|
|
|
10,423 |
|
|
|
36,756 |
|
Loans
charged-off
|
|
|
(417,478 |
) |
|
|
(180,413 |
) |
Balance
at end of period
|
|
$ |
2,719,775 |
|
|
$ |
1,049,226 |
|
Non-Accrual, Past
Due and Restructured Loans
The
following represents non-accrual, past due and restricted loans at September 30,
2009 and December 31, 2008:
|
|
September
30,
|
|
December
31,
|
|
|
2009
|
|
2008
|
Non-accrual
loans
|
|
$ 5,336,890
|
|
$ 881,948
|
|
|
|
|
|
Accruing
loans contractually past due 90 days or more
|
|
|
|
|
Loans
past due 90 days or more and still accruing
|
|
$ 46,351
|
|
$ 195,822
|
Matured
loans pending renewal and still accruing
|
|
223,075
|
|
188,620
|
Total
|
|
$ 269,426
|
|
$ 384,442
|
Potential
Problem Loans
At September 30, 2009, the
Bank had loans totaling $1.1 million, which were not included in the
non-accrual loans above, but were deemed 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 $119.5 million at
September 30, 2009, an increase of $25.5 million (27.1%) in comparison to total
deposits at December 31, 2008 of $94.0 million. Non-interest bearing
deposits were $29.5 million at September 30, 2009, an increase of $1.3 million
(4.7%) 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 $3.5 million, or 10.4%, to $37.3 million at September 30,
2009 from $33.8 million at December 31, 2008. Time deposits increased
to $52.7 million at September 30, 2009 from $32.0 million at December 31, 2008,
a $20.7 million (64.7%) increase. Included in time deposits at
September 30, 2009 is $15.9 million in brokered deposits, which includes the
Company’s placement of $1.3 million in customer deposits and purchase of $5.6
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 September 30, 2009, core
deposits represented 55.9% of total deposits compared to 66% 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.
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.
Other
Repurchase agreement balances totaled
$236,905 at September 30, 2009 as compared to $214,391 at December 31,
2008. The increase was due to normal customer activity.
Results of Operations:
Comparison of Results
for the three and nine months ended September 30, 2009 and
2008
General
The
Company had net income for the quarter ended September 30, 2009 of $3,000 (or
basic and diluted earnings per share of $0.00), compared to a net loss of
$42,000 (or basic and diluted loss per share of $0.01) for the third quarter of
2008.
The
Company’s operating results for the third quarter of 2009 compared to the same
period of 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 for the third quarter of 2008
included recognition of a portion of the gain on the sale of the New
London branch; and because of a decrease in service charges and fees
resulting from changes in the business practices of customers of the Bank;
these decreases were partially offset by an increase in servicing income
on SBA loans; and
|
|
·
|
Noninterest
expenses decreased due to lower salaries and benefits resulting from
reductions in staff and elimination of certain employee benefits and
bonuses in 2009; expense reductions attributable to lower loan related
collection expenses; and expense savings related to lower negotiated rates
on certain insurance and telecommunications service contracts. These
decreases were partially offset by higher FDIC insurance premiums due to
an increase in assessment rates and deposit balances subject to
assessment, as well as increased professional service
expenses.
|
The
Company had a net loss of $2,562,000 (or basic and diluted loss per share of
$0.95) for the nine months ended September 30, 2009, compared to net income of
$368,000 (or basic and diluted income per share of $0.13) for the nine months
ended September 30, 2008.
The
Company’s net loss for the nine months ended September 30, 2009 was largely
attributable to a provision for loan losses of $1,943,000 for the nine months
ended September 30, 2009 compared to a credit balance of $(64,000) for the same
period in 2008. The significant increase in the provision for loan losses during
the first
nine months of 2009 is related to a group of eleven 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 first nine months of 2009 compared to the same period of 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 for the first nine months of
2008 included the gain on the sale of the New London branch that was
primarily recorded in February 2008; and because of 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, because of
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; 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. These decreases were partially
offset by 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
accrued during the second quarter.
|
Net
Interest Income
The
principal source of revenue for the Company and the Bank is net interest
income. The Company’s net interest income is dependent primarily upon
the difference or spread between the average yield earned on loans receivable
and investment securities and the average rate paid on deposits and borrowings,
as well as the relative average balances of such assets and
liabilities. The Company, 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.
The
Federal Open Market Committee (“FOMC”) short-term interest rates were 3.25% and
5.00% as of September 30, 2009 and 2008, respectively. Decreases in short-term
rates tend to compress the Company’s net interest spread and net interest
margin. During periods of declining interest rates, the interest expense related
to sources of funds is not reduced commensurate with the reduction in interest
earned on interest earning assets (which are most typically tied to the prime
lending rate or other market indices). This situation inherently
compresses the spread during periods of declining interest rates.
The
Company’s interest earning assets averaged $131.0 million during the three
months ended September 30, 2009 compared to $101.7 million for the same period
in 2008, an increase of $29.3 million (or 28.8%). The net increase of $29.3
million in the average interest earning assets was comprised of increases in
average balances of loans of $17.1 million and short-term and other investments
of $20.1 million, which were partially offset by decreases in average balances
of federal funds sold of $5.8 million and investments of $2.1
million.
The yield on average interest earning
assets for the three months ended September 30, 2009 was 4.90% compared to 6.40%
during the third quarter of 2008, a decrease of 150 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 150 basis
point decrease in yield on average interest earning assets and the $29.3 million
increase in average interest earning assets resulted in the $17,874 decrease in
interest income between the quarter ended September 30, 2009 and the quarter
ended September 30, 2008.
The
Company’s interest bearing liabilities averaged $93.2 million during the three
months ended September 30, 2009 compared to $65.3 million for the same period in
2008, an increase of $27.9 million (or 42.7%). The cost of average interest
bearing liabilities decreased 56 basis points to 2.52% during the three months
ended September 30, 2009 compared to 3.08% for the same period in 2008. The
decrease was primarily due to a general decrease in market interest
rates.
The
combined effects of the $27.9 million increase in average interest bearing
liabilities and the 56 basis point decrease in the cost of average interest
bearing liabilities resulted in the $86,052 increase in interest expense between
the quarter ended September 30, 2009 and the quarter ended September 30,
2008.
Due to
decreases in the average yields on earning assets and increases in the cost of
average interest bearing liabilities, the interest spread decreased to 2.38%
during the third quarter of 2009, a decrease of 94 basis points from the
interest spread realized in the third quarter of 2008. The net
interest margin decreased to 3.11% for the three months ended September 30, 2009
from 4.42% for the comparable period in 2008, a decrease of 131 basis points
that largely reflects the decreasing short-term yields on interest earning
assets during the third quarter of 2009.
For the
nine months ended September 30, 2009, net interest income was $3,023,757 versus
$3,572,597 for the same period in 2008. The $548,840 (or 15.4%) decrease was the
result of a $597,767 decrease in interest income and a $48,927 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 interest earning assets averaged $119.9 million during the nine months
ended September 30, 2009 compared to $106.0 million for the same period in 2008,
an increase of $13.9 million (or 13.0%). The net increase in the average
interest earning assets of $13.8 million was comprised of increases in average
balances of loans of $11.8 million and short-term and other investments of $13.4
million, partially offset by decreases in average balances of federal funds sold
of $10.0 million and investments of $1.4 million.
The yield on average interest earning
assets for the nine months ended September 30, 2009 was 5.23% compared to 6.66%
during the same period in 2008, a decrease of 143 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 143 basis point decrease in yield on average interest
earning assets and the $13.8 million increase in average interest earning assets
resulted in the $597,767 decrease in interest income between the nine months
ended September 30, 2009 and the nine months ended September 30,
2008.
The
Company’s interest bearing liabilities averaged $83.3 million during the nine
months ended September 30, 2009 compared to $68.5 million for the same period in
2008, an increase of $14.8 million (or 21.6%). The cost of average interest
bearing liabilities decreased 67 basis points to 2.68% during the nine months
ended September 30, 2009 compared to 3.35% for the same period in 2008, which
was primarily due to a general decrease in market interest rates.
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
three months ended September 30, 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)
|
|
$ |
99,523 |
|
|
$ |
1,541 |
|
|
|
6.14 |
% |
|
$ |
82,457 |
|
|
$ |
1,496 |
|
|
|
7.22 |
% |
|
$ |
45 |
|
Short-term and
other investments
|
|
|
28,420 |
|
|
|
59 |
|
|
|
0.82 |
% |
|
|
8,371 |
|
|
|
48 |
|
|
|
2.28 |
% |
|
|
11 |
|
Investments
|
|
|
3,086 |
|
|
|
18 |
|
|
|
2.31 |
% |
|
|
5,141 |
|
|
|
60 |
|
|
|
4.64 |
% |
|
|
(42 |
) |
Federal
funds sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,780 |
|
|
|
32 |
|
|
|
2.20 |
% |
|
|
(32 |
) |
Total
interest earning assets
|
|
|
131,029 |
|
|
|
1,618 |
|
|
|
4.90 |
% |
|
|
101,749 |
|
|
|
1,636 |
|
|
|
6.40 |
% |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
4,530 |
|
|
|
|
|
|
|
|
|
|
|
4,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
2,589 |
|
|
|
|
|
|
|
|
|
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(2,841 |
) |
|
|
|
|
|
|
|
|
|
|
(1,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,309 |
|
|
|
|
|
|
|
|
|
|
|
2,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
137,616 |
|
|
|
|
|
|
|
|
|
|
$ |
109,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
certificates
|
|
$ |
53,653 |
|
|
|
418 |
|
|
|
3.09 |
% |
|
$ |
29,047 |
|
|
|
293 |
|
|
|
4.01 |
% |
|
|
125 |
|
Savings
deposits
|
|
|
2,146 |
|
|
|
5 |
|
|
|
0.92 |
% |
|
|
1,339 |
|
|
|
4 |
|
|
|
1.19 |
% |
|
|
1 |
|
Money
market / checking deposits
|
|
|
35,292 |
|
|
|
124 |
|
|
|
1.39 |
% |
|
|
33,005 |
|
|
|
162 |
|
|
|
1.95 |
% |
|
|
(38 |
) |
Capital
lease obligations
|
|
|
1,178 |
|
|
|
44 |
|
|
|
14.82 |
% |
|
|
1,183 |
|
|
|
44 |
|
|
|
14.80 |
% |
|
|
- |
|
Repurchase
agreements
|
|
|
895 |
|
|
|
1 |
|
|
|
0.44 |
% |
|
|
698 |
|
|
|
3 |
|
|
|
1.71 |
% |
|
|
(2 |
) |
Total
interest bearing liabilities
|
|
|
93,164 |
|
|
|
592 |
|
|
|
2.52 |
% |
|
|
65,272 |
|
|
|
506 |
|
|
|
3.08 |
% |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
27,401 |
|
|
|
|
|
|
|
|
|
|
|
24,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
1,115 |
|
|
|
|
|
|
|
|
|
|
|
1,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder's
equity
|
|
|
15,936 |
|
|
|
|
|
|
|
|
|
|
|
19,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
137,616 |
|
|
|
|
|
|
|
|
|
|
$ |
109,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
1,026 |
|
|
|
|
|
|
|
|
|
|
$ |
1,130 |
|
|
|
|
|
|
$ |
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
2.38 |
% |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
Interest
margin
|
|
|
|
|
|
|
|
|
|
|
3.11 |
% |
|
|
|
|
|
|
|
|
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes nonaccruing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities and Fluctuations in Interest Rates
The following table summarizes the
variance in interest income and interest expense for the nine months ended
September 30, 2009 and 2008 resulting from changes in assets and liabilities and
fluctuations in interest rates earned and paid. The changes in
interest attributable to both rate and volume have been allocated to both rate
and volume on a pro rata basis.
|
|
Three
Months Ended
|
|
|
|
September
30, 2009 vs 2008
|
|
|
|
Due
to Change in Average
|
|
|
(Decrease)
|
|
(Dollars in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Increase
|
|
Interest
earning assets
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
287 |
|
|
$ |
(242 |
) |
|
$ |
45 |
|
Short-term
and other investments
|
|
|
57 |
|
|
|
(46 |
) |
|
|
11 |
|
Investments
|
|
|
(19 |
) |
|
|
(23 |
) |
|
|
(42 |
) |
Federal
funds sold
|
|
|
(32 |
) |
|
|
- |
|
|
|
(32 |
) |
Total
interest earning assets
|
|
|
293 |
|
|
|
(311 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
certificates
|
|
|
205 |
|
|
|
(80 |
) |
|
|
125 |
|
Savings
deposits
|
|
|
2 |
|
|
|
(1 |
) |
|
|
1 |
|
Money
market / checking deposits
|
|
|
10 |
|
|
|
(48 |
) |
|
|
(38 |
) |
Repurchase
agreements
|
|
|
1 |
|
|
|
(3 |
) |
|
|
(2 |
) |
Total
interest bearing liabilities
|
|
|
218 |
|
|
|
(132 |
) |
|
|
86 |
|
Net
interest income
|
|
$ |
75 |
|
|
$ |
(179 |
) |
|
$ |
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months
ended September 30, 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)
|
|
$ |
94,512 |
|
|
$ |
4,421 |
|
|
|
6.25 |
% |
|
$ |
82,651 |
|
|
$ |
4,770 |
|
|
|
7.71 |
% |
|
$ |
(349 |
) |
Short-term and
other investments
|
|
|
21,746 |
|
|
|
163 |
|
|
|
1.00 |
% |
|
|
8,358 |
|
|
|
179 |
|
|
|
2.86 |
% |
|
|
(16 |
) |
Investments
|
|
|
3,613 |
|
|
|
107 |
|
|
|
3.96 |
% |
|
|
5,024 |
|
|
|
136 |
|
|
|
3.62 |
% |
|
|
(29 |
) |
Federal
funds sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,009 |
|
|
|
204 |
|
|
|
2.72 |
% |
|
|
(204 |
) |
Total
interest earning assets
|
|
|
119,871 |
|
|
|
4,691 |
|
|
|
5.23 |
% |
|
|
106,042 |
|
|
|
5,289 |
|
|
|
6.66 |
% |
|
|
(598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
4,413 |
|
|
|
|
|
|
|
|
|
|
|
4,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
2,658 |
|
|
|
|
|
|
|
|
|
|
|
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(2,455 |
) |
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,313 |
|
|
|
|
|
|
|
|
|
|
|
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
126,800 |
|
|
|
|
|
|
|
|
|
|
$ |
114,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
certificates
|
|
$ |
45,732 |
|
|
|
1,095 |
|
|
|
3.20 |
% |
|
$ |
28,934 |
|
|
|
951 |
|
|
|
4.39 |
% |
|
|
144 |
|
Savings
deposits
|
|
|
1,807 |
|
|
|
16 |
|
|
|
1.18 |
% |
|
|
1,595 |
|
|
|
17 |
|
|
|
1.42 |
% |
|
|
(1 |
) |
Money
market / checking deposits
|
|
|
33,889 |
|
|
|
419 |
|
|
|
1.65 |
% |
|
|
36,202 |
|
|
|
609 |
|
|
|
2.25 |
% |
|
|
(190 |
) |
Capital
lease obligations
|
|
|
1,179 |
|
|
|
132 |
|
|
|
14.97 |
% |
|
|
1,184 |
|
|
|
132 |
|
|
|
14.89 |
% |
|
|
- |
|
Repurchase
agreements
|
|
|
710 |
|
|
|
5 |
|
|
|
0.94 |
% |
|
|
603 |
|
|
|
7 |
|
|
|
1.55 |
% |
|
|
(2 |
) |
Total
interest bearing liabilities
|
|
|
83,317 |
|
|
|
1,667 |
|
|
|
2.68 |
% |
|
|
68,518 |
|
|
|
1,716 |
|
|
|
3.35 |
% |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
25,580 |
|
|
|
|
|
|
|
|
|
|
|
24,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
1,088 |
|
|
|
|
|
|
|
|
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder's
equity
|
|
|
16,815 |
|
|
|
|
|
|
|
|
|
|
|
19,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
126,800 |
|
|
|
|
|
|
|
|
|
|
$ |
114,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
3,024 |
|
|
|
|
|
|
|
|
|
|
$ |
3,573 |
|
|
|
|
|
|
$ |
(549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
spread
|
|
|
|
|
|
|
|
|
|
|
2.55 |
% |
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
Interest
margin
|
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes nonaccruing loans.
|
|
|
|
|
|
|
Changes
in Assets and Liabilities and Fluctuations in Interest Rates
The following table summarizes the
variance in interest income and interest expense for the nine months ended
September 30, 2009 and 2008 resulting from changes in assets and liabilities and
fluctuations in interest rates earned and paid. The changes in
interest attributable to both rate and volume have been allocated to both rate
and volume on a pro rata basis.
|
|
Nine
Months Ended
|
|
|
|
September
30, 2009 vs 2008
|
|
|
|
Due
to Change in Average
|
|
|
(Decrease)
|
|
(Dollars in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Increase
|
|
Interest
earning assets
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
628 |
|
|
$ |
(977 |
) |
|
$ |
(349 |
) |
Short-term
and other investments
|
|
|
154 |
|
|
|
(170 |
) |
|
|
(16 |
) |
Investments
|
|
|
(35 |
) |
|
|
6 |
|
|
|
(29 |
) |
Federal
funds sold
|
|
|
(204 |
) |
|
|
- |
|
|
|
(204 |
) |
Total
interest earning assets
|
|
|
543 |
|
|
|
(1,141 |
) |
|
|
(598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
certificates
|
|
|
450 |
|
|
|
(306 |
) |
|
|
144 |
|
Savings
deposits
|
|
|
2 |
|
|
|
(3 |
) |
|
|
(1 |
) |
Money
market / checking deposits
|
|
|
(37 |
) |
|
|
(153 |
) |
|
|
(190 |
) |
Capital
lease obligations
|
|
|
(1 |
) |
|
|
1 |
|
|
|
0 |
|
Repurchase
agreements
|
|
|
1 |
|
|
|
(3 |
) |
|
|
(2 |
) |
Total
interest bearing liabilities
|
|
|
416 |
|
|
|
(465 |
) |
|
|
(49 |
) |
Net
interest income
|
|
$ |
127 |
|
|
$ |
(676 |
) |
|
$ |
(549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
The Bank’s (credit to) provision for
loan losses was $(137,255) and $1,943,461 for the three months and nine months
ended September 30, 2009, respectively, as compared to $39,661and $(64,082) for
the same periods in 2008. During the three months ended September 30, 2009, the
credit to the provision was primarily related to net decreases to the specific
allowances on certain impaired loans resulting from payments received and
improvement in the Company’s collateral position supporting two impaired loans.
The significant increase in the provision for loan losses during the nine months
ended September 30, 2009, compared to the same period in the prior year was
primarily related to specific reserves established for a group of eleven
impaired loans that have been severely impacted by prevailing economic
conditions, discussed in more detail under Allowance for Loan
Losses.
Noninterest
Income
Total
noninterest income was $139,150 for the three months ended September 30, 2009
versus $193,490 for the same period in 2008. Noninterest income in 2008 included
a $50,669 gain on the sale of the Bank’s New London branch. Service charges and
fees decreased $23,797 due to changes in business practices of customers of the
Bank during the third quarter of 2009. Other non-interest income increased to
$26,096 for the three months ended September 30, 2009 from $5,970 in the same
period in 2008, due to a $21,133 increase in loan and SBA servicing related
fees, offset by a $1,007 decrease in other fees.
Total
noninterest income was $458,538 for the nine months ended September 30, 2009
compared to $1,453,600 for the same period in 2008. Noninterest income in 2008
included a $874,912 gain on the sale of the Bank’s New London branch. Service
charges and fees decreased $16,027 due to changes in business practices of
customers of the Bank during the nine months ended September 30, 2009. Other
non-interest income decreased to $71,605 in 2009 from $175,728 in 2008, due to
decreases in loan prepayment fees ($74,384), insurance
commissions
($9,325), letter of credit fees ($7,173), rental income ($6,801), and other fees
($17,154), partially offset by increases in other loan and SBA servicing related
fees ($10,714).
Noninterest
Expense
Total noninterest expense was
$1,298,936 for the three months ended September 30, 2009 versus $1,325,139 for
the same period in 2008, a decrease of $26,203 or 2.0%.
Salaries
and benefits expense for the three months ended September 30, 2009 was $751,142
versus $835,386 for the same period in 2008. Salaries and benefits expense
decreased $84,244, or 10.1%, primarily because of expense savings related to
reductions in staff and the elimination of certain employee benefits and bonuses
in 2009.
FDIC
insurance expense increased for the three months ended September 30, 2009 by
$35,808 from $16,115 to $51,923, primarily due to increased assessment rates and
deposit balances subject to assessment. 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. As a result, this expense will continue to increase.
Professional
services for the three months ended September 30, 2009 increased by $116,046
from $5,927 to $122,333, primarily due to an increase in legal fees. During the
third quarter of 2009, the Company recorded $82,432 in legal fees primarily
attributable to employment practices and errors and omissions matters not
covered by insurance.
Other
operating expenses decreased by $82,162 to $97,221 for the three months ended
September 30, 2009, compared to the same period in 2008, due to expense
reductions attributable to lower loan related collection expenses; and expense
savings related to lower negotiated rates on certain insurance and
telecommunications service contracts.
Total
noninterest expense was $4,100,500 for the nine months ended September 30, 2009
compared to $4,722,230 for the same period in 2008, a decrease of $621,730 or
13.2%.
Salaries
and benefits expense for the nine months ended September 30, 2009 was $2,294,451
versus $2,957,384 for the same period in 2008. Salaries and benefits expense
decreased $662,933, or 22.4%, 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 inclusion in the first quarter of 2008 of expenses related
to separation payments made to the former Chief Executive Officer and President
of the Bank.
FDIC
insurance expense increased by $134,953 from $59,478 to $194,431 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 nine months ended September 30, 2009 increased by $140,055 from
$254,686 to $394,741, primarily due to an increase in legal fees discussed above
and accounting fees, partially offset by a reduction in other professional
fees.
Other
operating expenses decreased by $182,581 to $386,566 for the nine months ended
September 30, 2009, compared to the same period in 2008. Expense reductions are
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.
Off-Balance
Sheet Arrangements
See Note 9 to the Financial Statements
for information regarding the Company’s off-balance sheet
arrangements.
Liquidity
Management
believes that the Company’s short-term assets offer sufficient liquidity to
cover potential fluctuations in deposit accounts and loan demand and to meet
other anticipated operating cash requirements.
The Company’s liquidity position as of
September 30, 2009 and December 31, 2008 consisted of liquid assets totaling
$30.6 million and $20.7 million, respectively. This represents 22.2%
and 18.0% of total assets at September 30, 2009 and December 31, 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, 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.
In addition to the foregoing sources of
liquidity, the Bank maintains a relationship with the Federal Home Loan Bank of
Boston and has the ability to pledge certain of the Bank’s assets as collateral
for borrowings from that institution. In addition, the Bank maintains
relationships with several brokers of certificates of deposits and could utilize
the services of these brokers if the Bank desires additional liquidity to meet
its needs.
Capital
The Company’s and Bank’s actual capital
amounts and ratios at September 30, 2009 and December 31, 2008 were as
follows:
The
Company's actual capital amounts and ratios at September 30, 2009 and
December 31, 2008
|
|
were
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
For
Capital
|
Prompt
Corrective
|
September 30, 2009
|
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Total
Capital to Risk-Weighted Assets
|
|
$
17,420
|
13.06%
|
$
10,675
|
8.00%
|
N/A
|
N/A
|
Tier
1 Capital to Risk-Weighted Assets
|
|
15,739
|
11.80%
|
5,337
|
4.00%
|
N/A
|
N/A
|
Tier
1 (Leverage) Capital to Average Assets
|
15,739
|
11.46%
|
5,495
|
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 September 30, 2009 and
December 31, 2008
|
|
were
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
For
Capital
|
Prompt
Corrective
|
September 30, 2009
|
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Total
Capital to Risk-Weighted Assets
|
|
$
16,089
|
12.17%
|
$
10,576
|
8.00%
|
$ 6,610
|
5.00%
|
Tier
1 Capital to Risk-Weighted Assets
|
|
14,423
|
10.91%
|
5,288
|
4.00%
|
7,932
|
6.00%
|
Tier
1 (Leverage) Capital to Average Assets
|
14,423
|
10.60%
|
5,445
|
4.00%
|
13,613
|
10.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%
|
|
|
|
|
|
|
|
|
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 Company is considered to be “well capitalized” under
applicable regulations specified by the Federal Reserve. The Bank is
also considered to be “well capitalized” under other 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, defined as the impact of
changing interest rates on current and future earnings.
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 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 rate loans for the portfolio to
offset the short-term re-pricing of the liabilities since a number of the
interest bearing deposit products have no contractual
maturity. Customers may withdraw funds from their accounts at any
time and deposit 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
is reported quarterly to the Board of Directors of the Bank and the
Company. 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 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.
Cautionary
Statement Regarding Forward-Looking Statements
Some of the statements under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and elsewhere in this Report on Form 10-Q may include
forward-looking statements which reflect management’s 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 the Company’s 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 are 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) the
concentration of the Company’s business in southern 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) the 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 that was not historically permitted for the
Company. Other such factors may be described in other filings made by
the Company with the Securities and Exchange Commission.
Although
the Company believes that it offers the loan and deposit products and 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 3. Quantitative and Qualitative Disclosures about
Market Risk
Not required.
Item 4T. 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 and its Chief Financial Officer as of the end of the
period covered by this report, the Company’s President and Chief Operating
Officer and its Chief Financial Officer concluded that the Company’s disclosure
controls and procedures have been effective in ensuring that material
information relating to the Company, including its subsidiaries, is made known
to the certifying officers by others within the Company and the Bank during the
period covered by this report.
As used herein, “disclosure controls
and procedures” mean 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 of 1934,
as amended (the “Exchange Act”), is recorded, processed, summarized and
reported, within the time periods specified in the Security and Exchange
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 Exchange Act is accumulated and communicated to the
Company’s management, including its principal executive and financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
|
(b)
|
Changes
in Internal Control Over Financial
reporting
|
There have not been any changes in
the Company’s internal control over financial reporting that occurred during the
quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II
Other
Information
Item 1. Legal Proceedings
In September 2009, the Company and the
Bank entered into a settlement agreement relating to a lawsuit that had been
filed by its former Senior Vice President and Chief Marketing Officer for age
discrimination and breach of contract in connection with his layoff as part of a
reduction in staff announced by the Bank in July 2008. In commection with
the settlement, the lawsuit, which was pending with the United States District
Court, District of Connecticut in New Haven, Connecticut, was terminated.
The settlement agreement between the Company, the Bank and the former Senior
Vice President and Chief Marketing Officer, who were the only parties to the
lawsuit, had no significant impact on the Company's financial
statements.
Not required.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
Item 5. Other Information
Not applicable.
No.
|
Description
|
|
|
3(i)
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(i) of the Company’s Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2002, as filed with the Securities and
Exchange Commission on August 14, 2002)
|
|
|
3(ii)
|
By-Laws
(incorporated by reference to Exhibit 3(ii) of the Company’s Current
Report on Form 8-K, as filed with the Securities and Exchange Commission
on March 6, 2007)
|
|
|
31.1
|
|
|
|
31.2
|
|
|
|
31.3
|
|
|
|
32.1
|
|
|
|
32.2
|
|
|
|
32.3
|
|
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
SOUTHERN
CONNECTICUT BANCORP, INC.
|
|
|
|
|
|
By:
/s/ John H.
Howland
|
|
Name:
John H. Howland
|
Date:
November 12, 2009
|
Title:
President & Chief Operating Officer
|
|
|
|
By:
/s/ Stephen V.
Ciancarelli
|
|
Name:
Stephen V. Ciancarelli
|
Date:
November 12, 2009
|
Title:
Senior Vice President & Chief Financial Officer
|
|
|
|
|
|
By:
/s/ Anthony M.
Avellani
|
|
Name:
Anthony M. Avellani
|
Date:
November 12, 2009
|
Title:
Vice President & Chief Accounting
Officer
|
Exhibit
Index
No.
|
Description
|
|
|
3(i)
|
Amended
and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(i) of the Company’s Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2002, as filed with the Securities and
Exchange Commission on August 14, 2002)
|
|
|
3(ii)
|
By-Laws
(incorporated by reference to Exhibit 3(ii) of the Company’s Current
Report on Form 8-K, as filed with the Securities and Exchange Commission
on March 6, 2007)
|
|
|
31.1
|
|
|
|
31.2
|
|
|
|
31.3
|
|
|
|
32.1
|
|
|
|
32.2
|
|
|
|
32.3
|
|
41