U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
F O R M 10 - QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 2005
Commission file number 0-49784
SOUTHERN CONNECTICUT BANCORP, INC.
(Name of Small Business Issuer as Specified in Its Charter)
Connecticut 06-1609692
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
215 Church Street
New Haven, Connecticut 06510
(Address of Principal Executive Offices)
(203) 782-1100
------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. YES [X] No [ ]
The number of shares of the issuer's Common Stock, par value $.01 per share,
outstanding as of May 10, 2005: 2,937,596
Transitional Small Business Disclosure Format
Yes __ No X
Table of Contents
Part I
Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2005 (unaudited) and December 31, 2004 2
Consolidated Statements of Operations
for the three months ended March 31, 2005
and 2004 (unaudited) 3
Consolidated Statements of Changes in
Shareholders' Equity for the three months ended
March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2005 and 2004 (unaudited) 5 - 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Item 3. Controls and Procedures 32
Part II
Other Information
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 36
Exhibit Index 37
1
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2005 (unaudited) and December 2004
2005 2004
------------ ------------
Assets
Cash and due from banks $ 1,168,373 $ 1,986,193
Federal funds sold 8,603,000 5,385,000
Short-term investments 8,473,410 8,372,689
------------ ------------
Cash and cash equivalents 18,244,783 15,743,882
------------ ------------
Available for sale securities, at fair value 11,128,425 11,371,894
Federal Home Loan Bank Stock 47,100 47,100
Loans receivable (net of allowance for loan losses of
$770,144 in 2005 and $752,394 in 2004) 52,955,894 49,763,952
Loans held for sale, at fair value 636,921 98,742
Accrued interest receivable 327,139 265,581
Premises and equipment, net 3,704,847 3,516,814
Other assets 989,904 886,778
------------ ------------
Total assets $ 88,035,013 $ 81,694,743
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing deposits $ 17,206,127 $ 17,334,393
Interest bearing deposits 48,143,829 41,365,984
------------ ------------
Total deposits 65,349,956 58,700,377
Repurchase agreements 592,922 827,031
Accrued expenses and other liabilities 366,417 279,422
Capital lease obligations 1,189,953 1,190,186
------------ ------------
Total liabilities 67,499,248 60,997,016
------------ ------------
Commitments and Contingencies -- --
Shareholders' Equity
Preferred stock, no par value; 500,000 shares authorized;
none issued
Common stock, par value $.01; 5,000,000, shares authorized;
shares issued and outstanding: 2005 2,937,596; 2004 2,797,711 29,376 27,977
Additional paid-in capital 24,084,213 24,085,612
Accumulated deficit (3,214,693) (3,199,126)
Accumulated other comprehensive loss - net unrealized
loss on available for sale securities (363,131) (216,736)
------------ ------------
Total shareholders' equity 20,535,765 20,697,727
------------ ------------
Total liabilities and shareholders' equity $ 88,035,013 $ 81,694,743
============ ============
See Notes to Consolidated Financial Statements.
2
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2005 and 2004(unaudited)
Three Months Ended
March 31
--------------------------
2005 2004
Interest Income: ---- ----
Interest and fees on loans $ 988,078 $ 815,211
Interest on securities 86,660 47,849
Interest on federal funds sold and short-term investments 89,328 9,715
--------------------------
Total interest income 1,164,066 872,775
--------------------------
Interest Expense:
Interest expense on deposits 190,627 152,336
Interest expense on capital lease obligations 43,147 42,572
Interest expense on repurchase agreements and other borrowings 2,780 2,102
--------------------------
Total interest expense 236,554 197,010
--------------------------
Net interest income 927,512 675,765
Provision for Loan Losses 17,000 31,750
Net interest income after
--------------------------
provision for loan losses 910,512 644,015
--------------------------
Noninterest Income:
Service charges and fees 80,796 57,611
Gains and fees from sales and referrals of SBA loans 13,273 131,834
Gains on sales of available for sale securities -- (944)
Other noninterest income 43,660 24,274
--------------------------
Total noninterest income 137,729 212,775
--------------------------
Noninterest Expense
Salaries and benefits 557,433 459,290
Occupancy and equipment 143,339 125,929
Professional services 94,140 61,766
Data processing and other outside services 76,484 69,229
Advertising and promotional expense 27,534 11,194
Forms, printing and supplies 17,275 15,814
Other operating expenses 147,603 77,856
--------------------------
Total noninterest expenses 1,063,808 821,078
--------------------------
Provision for income taxes -- --
--------------------------
Net (loss) income $ (15,567) $ 35,712
==========================
Basic (Loss) Income per Share $ (0.01) $ 0.03
==========================
Diluted (Loss) Income per Share $ (0.01) $ 0.03
==========================
Dividends per Share $ -- $ --
==========================
See Notes to Consolidated Financial Statements.
3
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2005 and 2004(unaudited)
Accumulated
Additional Other
Number Common Paid-in Accumulated Comprehensive
of Shares Stock Capital Deficit Loss Total
-------------------------------------------------------------------------------------------
Balance December 31, 2003 1,063,320 $ 10,633 $ 10,704,269 $(3,100,842) $ (299,758) $(7,314,302 58)
Comprehensive Income:
Net Loss - - - 35,712 - 35,712
Unrealized holding gain on available
for sale securities - - - - 175,982 175,982
------------------
Total comprehensive income 211,694
------------------
Exercise of Stock Warrants 5,544 56 60,424 - - 60,480
-------------------------------------------------------------------------------------------
Balance March 31, 2004 1,068,864 $ 10,689 $ 10,764,693 $(3,065,130) $ (123,776) $ 7,586,476
===========================================================================================
Balance December 31, 2004 2,797,711 $ 27,977 $ 24,085,612 $(3,199,126) $ (216,736) $ (20,697,727)
Comprehensive Loss:
Net Loss - - - (15,567) - (15,567)
Unrealized holding loss on available
for sale securities - - - - (146,395) (146,395)
------------------
Total comprehensive loss (161,962)
------------------
5% stock dividend declared
April 12, 2005 139,885 1,399 (1,399) - - -
-------------------------------------------------------------------------------------------
Balance March 31, 2005 2,937,596 $ 29,376 $ 24,084,213 $(3,214,693) $ (363,131) $ 20,535,765
===========================================================================================
See Notes to Consolidated Financial Statements.
4
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and 2004 (unaudited)
Cash Flows From Operations 2005 2004
----------------------------
Net (loss) income $ (15,567) $ 35,712
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Amortization and accretion of premiums and discounts on investments, net (510) 14,663
Provision for loan losses 17,000 31,750
Losses on sales of available for sale securities -- 944
Loans originated for sale (538,179) --
Proceeds from sales of SBA loans -- 1,256,593
Gains on sales of SBA loans -- (125,986)
Depreciation and amortization 72,739 70,543
Increase in cash surrender value of life insurance (9,000) (3,061)
Changes in assets and liabilities:
Increase in deferred loan fees 1,257 8,262
Increase in accrued interest receivable (61,558) (26,015)
Increase in other assets (94,126) (52,460)
Increase (decrease) in accrued expenses and other liabilities 86,995 (69,573)
----------------------------
Net cash (used in) provided by operating activities (540,949) 1,141,372
----------------------------
Cash Flows From Investing Activities
Principal repayments on available for sale securities 97,584 319,768
Proceeds from sales of available for sale securities -- 999,375
Net increase in loans receivable (3,210,199) (6,216,055)
Purchases of premises and equipment (260,772) (32,442)
----------------------------
Net cash used in investing activities (3,373,387) (4,929,354)
----------------------------
Cash Flows From Financing Activities
Net increase in demand, savings and money market deposits 3,903,469 3,581,539
Net increase in certificates of deposit 2,746,110 4,789,675
Net (decrease) increase in repurchase agreements (234,109) 534,858
Principal payments on capital lease obligations (233) (211)
Exercise of stock options and warrants -- 60,480
----------------------------
Net cash provided by financing activities 6,415,237 8,966,341
----------------------------
Net increase in cash and cash equivalents 2,500,901 5,178,359
Cash and cash equivalents
Beginning 15,743,882 2,567,998
----------------------------
Ending $ 18,244,783 $ 7,746,357
============================
See Notes to Consolidated Financial Statements
5
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended March 31, 2005 and 2004 (unaudited)
2005 2004
Supplemental disclosures of cash flow information: ---------- --------
Cash paid during the period for:
Interest $ 226,233 $184,512
========== ========
Income taxes $ -- $ --
========== ========
Supplemental disclosures of noncash investing activities
Transfer of Loans to OREO $ -- $116,513
========== ========
Unrealized holding (losses) gains on available for sale securities arising
during the period $ (146,395) $175,982
========== ========
See Notes to Consolidated Financial Statements.
6
Southern Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Operations
Southern Connecticut Bancorp, Inc. ("Bancorp"), a Connecticut
corporation, is a bank holding company incorporated on November 8, 2000 for the
purpose of forming, and becoming the sole shareholder of, The Bank of Southern
Connecticut (the "Bank"). The Bank provides a full range of banking services to
commercial and consumer customers, primarily concentrated in the New Haven
County area of Connecticut, through its main office in New Haven, Connecticut
and two branch offices in New Haven and Branford Connecticut. The Bank is a
Small Business Administration ("SBA") lender, and generally sells participations
in the guaranteed portion of such loans. In 2003, SCB Capital Inc. was formed as
a Connecticut corporation, and in April 2004 Bancorp capitalized SCB Capital,
Inc., which became a subsidary of the Company. SCB Capital, Inc. will engage in
a limited range of investment banking, advisory, and brokerage services,
primarily with small to medium size business clients. On April 28, 2004, Bancorp
received a temporary certificate of incorporation from the Banking Department of
the State of Connecticut to open a new bank, to be named The Bank of
Southeastern Connecticut, to be located in New London, Connecticut.
Note 2. Basis of Financial Statement Presentation
The consolidated balance sheet at December 31, 2004 has been derived
from the audited consolidated financial statements of Bancorp at that date, but
does not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
The accompanying consolidated unaudited financial statements as of and
for the three months ended March 31, 2005 and 2004 and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
The accompanying consolidated financial statements and notes thereto should be
read in conjunction with the audited financial statements of Bancorp and notes
thereto as of December 31, 2004.
The accompanying unaudited consolidated financial information reflects,
in the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the interim periods presented.
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results of operations that may be expected for all
of 2005.
7
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 March 31, 2005 and
December 31, 2004 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2005 Cost Gains Losses Value
-----------------------------------------------------------
U.S. Government Sponsored Agency Obligations $ 11,193,873 $ -- $ (346,602) $ 10,847,271
Mortgage Backed Securities 297,683 -- (16,529) 281,154
-----------------------------------------------------------
$ 11,491,556 $ -- $ (363,131) $ 11,128,425
===========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gains Losses Value
-----------------------------------------------------------
U.S. Government Sponsored Agency Obligations $ 11,192,594 $ 3,398 $ (214,486) $ 10,981,506
Mortgage Backed Securities 396,036 -- (5,648) 390,388
-----------------------------------------------------------
$ 11,588,630 $ 3,398 $ (220,134) $ 11,371,894
===========================================================
At March 31, 2005, gross unrealized holding losses on available for sale
securities totaled $363,131. Of the securities with unrealized losses, the total
unrealized losses on securities for twelve months or longer amounted to
$320,845. Management does not believe that any of the unrealized losses as of
March 31, 2005 are other than temporary as they relate to debt and
mortgage-backed securities issued by U.S. Government sponsored agencies
resulting from changes in the interest rate environment. Bancorp has the intent
and ability to hold these securities to maturity if necessary and expects to
receive all contractual principal and interest related to these investments. As
a result, management believes that these unrealized losses will not have a
negative impact on future earnings or a permanent effect on capital.
At December 31, 2004, gross unrealized holding losses on available for sale
securities totaled $220,134. Of the securities with unrealized losses, there
were unrealized losses in the amount of $217,164 for a period in excess of
twelve months.
8
Note 4. Loans Receivable
A summary of Bancorp's loan portfolio at March 31, 2005 and December 31, 2004 is
as follows:
March 31, 2005 December 31, 2004
-------------- -----------------
Commercial loans secured by real estate $ 24,261,673 $ 22,462,363
Commercial loans 25,674,825 24,418,458
Construction and land loans 2,345,389 2,276,818
Residential mortgages 160,000 --
Consumer home equity loans 762,948 853,858
Consumer installment loans 642,941 625,330
------------ ------------
Total loans 53,847,776 50,636,827
Net deferred loan fees (121,738) (120,481)
Allowance for loan losses (770,144) (752,394)
------------ ------------
Loans receivable, net $ 52,955,894 $ 49,763,952
============ ============
Note 5. Deposits
At March 31, 2005 and December 31, 2004, deposits consisted of the following:
March 31, 2005 December 31, 2004
-------------- -----------------
Noninterest bearing deposits $17,206,127 $17,334,393
----------- -----------
Interest bearing deposits
Checking 4,723,991 5,337,096
Now 3,539,256 3,371,834
Money Market 23,956,523 20,604,704
Savings 4,425,275 3,299,676
----------- -----------
Checking, money market & savings 36,645,045 32,613,310
----------- -----------
Time Certificates under $100,000 3,632,105 3,241,527
Time Certificates of $100,000 or more 7,866,679 5,511,147
----------- -----------
Time deposits 11,498,784 8,752,674
----------- -----------
48,143,829 41,365,984
----------- -----------
Total deposits $65,349,956 $58,700,377
=========== ===========
Note 6. Available Borrowings
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB").
At March 31, 2005, 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
9
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 March 31, 2005.
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 market value. For
disclosure purposes, such stock is assumed to have a market value which is equal
to cost since the Bank can redeem the stock with FHLB at cost.
Note 7. Stock Dividend and Income (Loss) Per Share
On April 12, 2005, the Company declared a 5% stock dvidend that was
distributed on May 9, 2005. As a result, the March 31, 2005 balance sheet and
statement of changes to in shareholders' equity, and all per share amounts, have
been retroactively revised to reflect this dividend as if it were effective at
March 31, 2005. Generally accepted accounting principals require such dividends
to be recorded at fair value, however, when there is an accumulated deficit, the
Securities and Exchange Commission ("SEC") advises that such stock dividends be
accounted for by capitalizing the stock issued at par value only, through a
reduction in additional paid-in capital.
Bancorp 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 in weighted average shares outstanding, unless the effect is
antidilutive. Bancorp is also required to provide a reconciliation of the
numerator and denominator used in the computation of both basic and diluted
(loss) income per share. The following is information about the computation of
(loss) income per share for the three months ended March 31, 2005 and 2004.
10
(Loss) Income per Share
Three Months Ended March 31, 2005
Amount
Net Income Shares Per Share
------------------- ------------------- -------------------
Basic Loss Per Share
Income available to common shareholders $ (15,567) 2,937,596 $ (0.01)
Effect of Dilutive Securities
Warrants/Stock Options outstanding - - -
------------------- ------------------- -------------------
Diluted Loss Per Share
Income available to common shareholders
plus assumed conversions $ (15,567) 2,937,596 $ (0.01)
=================== =================== ===================
Three Months Ended March 31, 2004
Amount
Net Income Shares Per Share
------------------- ------------------- -------------------
Basic Income Per Share
Income available to common shareholders $ 35,712 1,117,829 $ 0.03
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 61,936 -
------------------- ------------------- -------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 35,712 1,179,765 $ 0.03
=================== =================== ===================
For the three months ended March 31, 2005, common stock equivalents have been
excluded from the computation of the net loss per share because the inclusion of
such equivalents is antidilutive.
Note 8. Other Comprehensive Income (Loss)
Other comprehensive income (loss), which is comprised solely of the
change in unrealized gains and losses on available for sale securities, is as
follows:
11
Three Months Ended
March 31, 2005
-----------------------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
-----------------------------------------------------
Unrealized holding losses arising during the period $ (146,395) $ - ($146,395)
Add: Reclassification adjustment for amounts -
recognized in net loss - - -
-----------------------------------------------------
Unrealized holding loss on available for sale
securities $ (146,395) $ - $(146,395)
=====================================================
Three Months Ended
March 31, 2004
-----------------------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
-----------------------------------------------------
Unrealized holding gains arising during the period $175,038 $ - $175,038
Add: Reclassification adjustment for losses -
recognized in net income 944 - 944
-----------------------------------------------------
Unrealized holding gain on available for sale
securities $175,982 $ - $ 175,982
=====================================================
There is no tax effect relating to other comprehensive income because
there is a full valuation allowance recorded against the deferred tax asset.
Note 9. Stock Based Compensation
During the three months ended March 31, 2005, Bancorp granted 13,671
stock options to employees and directors at exercise prices ranging from $ 7.86
to $8.14 per share.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation", encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued to
employees and directors under Bancorp's stock option and warrant plans have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation cost
is recognized for them. Bancorp has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net loss and earnings per share and other disclosures, as if the
fair value based method of accounting had been applied.
Had compensation cost for issuance of such options and warrants been
recognized based on the fair values of awards on the grant dates, in accordance
with the method described in SFAS No. 123, reported net (loss) income and per
share amounts for and three months ended March 31, 2005 and 2004 would have
differed from the pro forma amounts as shown below:
12
For the three months ended March 31, 2005 and March 31, 2004
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
--------------------- -------------------
Net (loss) income as reported $ (15,567) $ 35,712
Deduct: total stock based employee
compensation expense determined under fair value based
method for all awards (61,196) (81,428)
--------- ----------
Pro forma net loss $ (76,763) $ (45,716)
========= ==========
Basic (loss) income per share:
As reported $ (0.01) $ 0.03
========= ==========
Pro forma $ (0.03) $ (0.04)
========= ==========
Diluted (loss) income per share:
As reported $ (0.01) $ 0.03
========= ==========
Pro forma $ (0.03) $ (0.04)
========= ==========
For the three months ended March 31, 2005 and 2004, common stock
equivalents have been excluded from the computation of the pro forma net loss
per share because the inclusion of such equivalents is antidilutive.
In December 2004, the FASB published Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. SFAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R) is a
replacement of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related interpretive guidance (APB 25).
The effect of SFAS 123(R) will be to require entities to measure the
cost of employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize cost over the period the
employee is required to provide services for the award. SFAS 123(R) permits
entities to use any option-pricing model that meets the fair value objective in
the Statement.
Bancorp will be required to apply SFAS 123(R) as of the beginning of
its first interim period that begins after December 15, 2005, which will be the
quarter ending March 31, 2006.
SFAS 123(R) allows two methods for determining the effects of the
transition: the modified prospective transition method and the modified
retrospective method of transition. Under the modified prospective transition
method, an entity would use the fair value based accounting method for all
employee awards granted, modified, or settled after the effective date. As of
the effective date, compensation cost related to the non-vested portion of
awards outstanding as of that date would be based on the grant-date fair value
of those rewards as calculated under the original provisions of Statement No.
123; that is, an entity would not remeasure the grant-date fair value estimate
of the unvested portion of awards granted prior to the effective date. An entity
will have the further option to either apply SFAS 123(R) to all quarters in the
fiscal year of adoption. Under the modified retrospective method of transition,
an entity would revise its previously issued financial statements to recognize
employee compensation cost for prior periods presented in accordance with the
original provisions of Statement No. 123.
Bancorp has not completed its study of the transition methods or made
any decisions about how it will adopt SFAS 123(R). The impact of SFAS 123(R) on
Bancorp in Fiscal 2006 and beyond will depend upon various factors, among them
being Bancorp's future compensation strategy. The pro forma compensation costs
presented in the table
13
above and in prior filings for Bancorp have been calculated using a
Black-Scholes option pricing model and may not be indicative of amounts which
should be expected in future years. No decision has been made as to which
option-pricing model is appropriate for Bancorp for future awards.
Note 10. Business Developments
During 2003, Bancorp's Board of Directors approved the establishment of
a new commercial bank in New London, Connecticut to be named The Bank of
Southeastern Connecticut ("TBSEC"). The opening of TBSEC is subject to receipt
of final approval from the Department of Banking, the approval of deposit
insurance from the FDIC and the approval of the Federal Reserve Board. In
October 2003, Bancorp submitted its final application to the State of
Connecticut Department of Banking related to the establishment of the new bank
to be located in New London. On April 28, 2004, the State of Connecticut
Department of Banking issued a temporary certificate of authority in connection
with this application. An application to insure the deposits of TBSEC to the
Federal Deposit Insurance Corporation was filed on July 30, 2004. As of
September 30, 2004, the application with the FDIC was extended to permit Bancorp
to provide additional information regarding the infrastructure in place to
support the two banks and to revise certain proposed policies of TBSEC. By
letter dated March 2, 2005, the FDIC requested that Bancorp provide it with
supplemental information pertaining to the initial areas of inquiry noted above.
Bancorp has responded to the FDIC's information requests and April 21, 2005 the
FDIC acknowledged receipt of the completed application. Bancorp will be required
to apply for approval from the Federal Reserve Bank after receipt of FDIC
approval. At this time, renovations on TBSEC's headquarters at 15 Masonic
Street, New London, are nearly complete. Subject to receipt of regulatory
approvals, TBSEC is expected to be open for business during the second half of
2005 and will be staffed, managed and operated in a comparable manner to the
Bank. Bancorp will provide certain management and operations support and
services to the two banks as well as certain infrastructure. Bancorp believes
that providing such services will benefit TBSEC by lowering its operating costs
in comparison to other de novo banks and in providing common frameworks of
operating policy and business philosophy with its affiliate, the Bank. Bancorp
will capitalize TBSEC with at least $6 million to be provided from Bancorp's
liquid resources.
Note 11. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, Bancorp 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 Bancorp 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.
Bancorp uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet and evaluates each customer's
creditworthiness on a case-by-case basis. Management believes that Bancorp
controls the credit risk of these financial instruments through credit
approvals, credit limits, monitoring procedures and the receipt of collateral as
deemed necessary.
14
Financial instruments whose contract amounts represent credit risk are as
follows at March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
------------------ --------------------
Commitments to extend credit
Future loan commitments $ 2,726,250 $ 5,855,800
Unused line of credit 8,587,449 8,767,479
Undisbursed construction loans 232,550 103,900
Financial standby letters of credit 1,827,100 1,138,055
------------------ --------------------
$13,373,349 $15,865,234
================== ====================
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 Bancorp upon extension of credit, is
based upon management's credit evaluation of the counter party. Collateral held
varies, but may include residential and commercial property, deposits and
securities.
Standby letters of credit are written commitments issued by Bancorp 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. Newly issued or modified guarantees
that are not derivative contracts have been recorded on Bancorp's books at their
fair value at inception. The liability related to guarantees recorded at March
31, 2005 and December 31, 2004 was not significant.
Item 2. Management's Discussion and Analysis or Plan of Operation
(a) Plan of Operation
Southern Connecticut Bancorp
Bancorp, a Connecticut corporation, was incorporated on November 8,
2000 to serve as a bank holding company for community based commercial banks.
Bancorp is a bank holding company registered in accordance with the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and is regulated by and subject
to the supervision of the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). Bancorp owns one hundred percent of the capital stock
of The Bank of Southern Connecticut ("Bank"), a Connecticut chartered bank
headquartered in New Haven, Connecticut. The Bank commenced operations on
October 1, 2001.
Bancorp's holding company structure provides organizational flexibility
for its growth plans. Bancorp may in the future decide to engage in additional
businesses permitted to bank holding companies and would form a subsidiary to
provide these services. For example, Bancorp could acquire additional banks;
establish de novo banks and other businesses, including mortgage companies,
leasing companies, insurance agencies and small business investment companies,
without having to go through a corporate reorganization. Before Bancorp could
acquire interests in other banks, establish de novo banks or expand into other
businesses, it will need to obtain relevant regulatory approvals.
Bancorp was marginally profitable in the fourth quarter of 2003, the
ninth quarter of operations, as well as profitable in the first two quarters of
2004. Profitability was achieved in these periods in part due to gains on sale
of participations in Small Business Loan Administration ("SBA") by the Bank. The
Bank originated SBA
15
loans during the first quarter of 2005 but did not complete any sales of
participations during the period. SBA guaranteed loan balances of $636,921 are
classified as held-for-sale on the accompanying balance sheet of Bancorp.
Bancorp experienced a loss of $15,567 in the first quarter of 2005 in part due
to the absence of gains from the sale of loan participations. The profitable
results of operations in the December 2003, March 2004 and June 2004 quarters
are largely attributable to fee income and gains on sales derived from referrals
and sales of SBA guaranteed loan participations. Bancorp intends to continue to
originate and to sell at a profit participations in SBA guaranteed loans,
including those currently classified as held-for-sale, in the future.
Bancorp's plan of operation is to continue to operate the Bank and
increase its market share within the City of New Haven and the surrounding
areas, and possibly offer certain additional banking services, such as internet
based cash management services. De novo banks in Connecticut have reached
profitability on average within three to four years after commencement of
operations. The Bank was profitable in its ninth quarter of operation, and has
been profitable in four of the following five quarters. Bancorp has received a
Temporary Certificate of Authority from the Banking Commissioner of the State of
Connecticut for a second, wholly owned community based commercial bank
subsidiary to serve the New London, Connecticut market, called The Bank of
Southeastern Connecticut ("TBSEC.") Bancorp intends to develop both the Bank's
and TBSEC's geographic franchises with branch offices throughout the 45 miles of
coastal communities located between New Haven and New London Connecticut, and
from New London to the Rhode Island border with Connecticut. The opening of
TBSEC is subject to receipt of final approval from the Department of Banking,
the approval of deposit insurance from the Federal Deposit Insurance Corporation
("FDIC") and the approval of the Federal Reserve Board. Bancorp has applied to
the FDIC to insure the deposits of TBSEC. As of September 30, 2004, the
application with the FDIC was extended to permit Bancorp to provide additional
information regarding the infrastructure in place to support the two banks and
to revise certain proposed policies of TBSEC. By letter dated March 2, 2005, the
FDIC requested that Bancorp provide it with supplemental information pertaining
to the initial areas of inquiry noted above. Bancorp responded to the FDIC's
information requests and on April 21, 2005, the FDIC acknowledged receipt of the
completed application. Bancorp will also be required to apply for approval from
the Federal Reserve Bank after receipt of FDIC approval. At this time,
renovations on TBSEC's headquarters at 15 Masonic Street, New London, are nearly
complete and management anticipates that the premises will be ready for
occupancy shortly. Subject to receipt of regulatory approvals, TBSEC is expected
to be open for business during the second half of 2005 and will be staffed,
managed and operated in a comparable manner to the Bank. Bancorp will provide
certain management and operations support and services to the two banks as well
as certain infrastructure. Bancorp believes that providing such services will
benefit TBSEC by lowering its operating costs in comparison to other de novo
banks and in providing common frameworks of operating policy and business
philosophy with its affiliate, the Bank.
Overall, the Bank's plan of operation is focused on responsible growth
and pricing of deposits and loans, and investment in high quality U. S.
government securities to achieve a net interest margin sufficient to cover
operating expenses, achieve profitable operations and maintain liquidity.
Locations
Bancorp executed a lease for a free-standing building located at 215
Church Street, New Haven, Connecticut, in the central business and financial
district of New Haven. The lease was assigned to The Bank of Southern
Connecticut, and the Bank assumed all obligations there to. The location is a
former bank branch, which has been renovated for use as the headquarters of the
Bank and Bancorp. The building has a drive-up teller, an automated teller
machine, two vaults and a night deposit drop.
The lease is for an initial term of five years and three months,
commencing April 11, 2001 with an option to extend the lease for up to three
additional terms of five years. There was no base rent payable for the first
three months of the initial term and monthly rent was $4,117 until August 1,
2001. The annual base rent during the balance of the initial term will be
$107,400 for the first year and increases each year to $125,500 for
16
the fifth year. The base rent for the option periods is also fixed in the lease.
The Bank is responsible for all costs to maintain the building, other than
structural repairs, and for all real estate taxes. The Bank, as Bancorp's
assignee, will have a right of first refusal to purchase the building.
To the extent that the building contains space not needed for
operations, the Bank expects to sublease such excess to the extent practicable.
The Bank of Southern Connecticut had subleased approximately 1,045 square feet
to Laydon and Company, LLC, an entity owned by Elmer A. Laydon, the son of Elmer
F. Laydon, one of Bancorp's directors.
The following table sets forth the location of the Bank's branch
offices and other related information:
Office Location Square Feet Status
------ -------- ----------- ------
Main Office 215 Church Street, New Haven, Connecticut 11,306 Leased
Branford Office 445 West Main Street, Branford, Connecticut 3,714 Leased
Amity Office 1475 Whalley Avenue, New Haven, Connecticut 2,822 Owned
The Bank of Southern Connecticut entered into a lease agreement on
August 7, 2002 to lease the facility at 445 West Main Street, Branford,
Connecticut, the site of the Branford branch which opened for business on
October 7, 2002.
The Branford branch lease is for an initial term of five years, with an
option to extend the lease for up to three additional terms of five years. The
base rent payable for the initial term and monthly rent is $3,095 until
September 30, 2007. The base rent for the option periods increases and is fixed
in the lease. The Bank is responsible for all costs to maintain the building,
other than structural repairs, and for all real estate taxes.
On August 15, 2002 the Bank also purchased an additional branch
facility at 1475 Whalley Avenue, New Haven, Connecticut, the site of the Amity
branch location which opened March 24, 2003.
On January 14, 2004 Bancorp entered into a lease agreement to lease the
facility at 15 Masonic Street, New London, Connecticut, the site of the proposed
TBSEC. Pending regulatory approval of TBSEC, the facility is in the process of
being improved to accommodate the new bank, which is expected to be completed
shortly. Improvements, furnishings and equipment are estimated to be $363,000.
TBSEC is expected to commence operations during the second half of 2005. The
Lease is for an initial term of five years, with three successive five year
option periods. Base rent is $45,580 annually until January 14, 2009. The base
rent for the option years is subject to increases. Bancorp is responsible for
pro rata allocations for taxes, utilities, common facility charges and other
customary tenant expenses of the premises. Upon the commencement of bank
operations, it is Bancorp's intention to assign the lease to TBSEC.
On June 23, 2004, Bancorp, through a nominee, entered into an agreement
to purchase an approximately one acre improved site with two buildings in
Clinton, Connecticut for the primary purpose of establishing a branch office of
the Bank. The net purchase price of the property is $495,000. The entity under
which title to the property will be ultimately held is to be determined. During
2004, the Bank filed applications to the Connecticut Department of Banking and
the FDIC to establish bank operations at the Clinton location. Due to a delay in
completing the acquisition of the Clinton property, the Bank's initial
application to the FDIC to establish the Clinton branch was withdrawn pending
completion of the acquisition of the property. Bancorp intends that Bancorp or
the Bank will improve the facility to accommodate banking services. The costs of
such improvements have not been fully determined at this time. Development of
the property is expected to begin in the second half of 2005, at which time the
Bank will reapply with the FDIC for permission to establish the Clinton branch.
17
The Bank focuses on serving the banking needs of small and mid sized
businesses, professionals and their employees. The Bank's target customer has up
to $30 million in revenues, up to 100 employees, and borrowing needs between
$250,000 and $2 million. The Bank serves the greater New Haven marketplace and
has a Board of Directors and management team drawn from the communities served,
each of whom is recognized and respected by the New Haven business community.
The Bank's focus on the commercial market makes it uniquely qualified to move
deftly in responding to the needs of its clients.
The Bank does not expect to compete with large institutions for the
primary banking relationships of large corporations, but it competes for the
small to medium-size businesses and for the consumer business of employees of
such entities. The Bank's geographic market focus also provides a unique
competitive advantage by clearly identifying the Bank as the independent local
bank focused on commercial lending and other commercial banking services. The
Bank's focus clients operate retail, service, wholesale distribution,
manufacturing and international businesses. Many of these customers use the
services of the Bank because of relationships and contacts with the Bank's
directors and management. We believe that the Bank is successfully winning new
business because of these relationships and a combination of a fair price for
our services, quick decision processes and a high-touch level of personalized
customer service.
Lending, Depository and Other Products
The Bank currently has a wide range of "core" bank products and
services offerings which are more completely described below. Additionally,
through correspondent and other relationships, the Bank helps its customers meet
all of their banking needs, including obtaining services which the Bank may not
offer directly.
The Bank offers core deposit products, including checking accounts,
money market accounts, savings accounts, sweep accounts, NOW accounts and a
variety of certificates of deposit and IRA accounts to the public. To attract
deposits, the Bank continues to employ an aggressive marketing plan in its
service area and features a broad product line and rates and services
competitive with those offered in the New Haven market and the surrounding
communities. The primary sources of deposits have been and are expected to be
businesses and their employees located in, and residents of, New Haven and the
surrounding communities. The Bank is obtaining these deposits through personal
solicitation by its officers and directors, outside programs and advertisements
published and / or broadcasted in the local media.
Deposits and the Bank's equity capital are the sources of funds for
lending and investment activities. Repayments on loans, investment income and
proceeds from the sale and maturity of investment securities will also provide
additional funds for these purposes. While scheduled principal repayments on
loans and investment securities are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Bank expects to manage the
pricing of deposits to maintain a desired deposit balance. The Bank offers
drive-in teller services, wire transfers and safe deposit services.
The Bank's loan strategy is to offer a broad range of loans to
businesses and individuals in its service area, including commercial and
business loans, personal loans, mortgage loans, home equity loans, and
automobile loans. The Bank has received lending approval status from the SBA to
enable it to make SBA guaranteed loans to both the greater New Haven business
community and companies throughout the State of Connecticut. The marketing focus
on small to medium-size businesses and professionals may result in an assumption
of certain lending risks that are different from or greater than those which
would apply to loans made to larger companies or consumers. Commercial loans
generally entail certain additional risks because repayment is usually dependent
on the success of the enterprise. The Bank seeks to manage the credit risk
inherent in its loan portfolio through credit controls, loan diversification and
personal guarantees of the principal owners of these small to medium-sized
businesses. Prior to approving a loan the Bank evaluates: the
18
credit histories of potential borrowers; the value and liquidity of available
collateral; the purpose of the loan; the source and reliability of funds for
repayment and other factors considered relevant in the circumstances.
Loans are made on a variable or fixed rate basis with fixed rate loans
limited to five-year terms. All loans are approved by the Bank's management and
the Loan Committee of the Bank's Board of Directors. At the present time, the
Bank is not syndicating or securitizing loans, however the Bank originates and
sells individual SBA guaranteed loan participations. The Bank at times
participates in multi-bank loans for companies in its service area. Commercial
loans and commercial real estate loans may be written for terms of up to twenty
years. Loans to purchase or refinance commercial real estate are collateralized
by the subject real estate. Loans to local businesses are generally supported by
the personal guarantees of the principal owners and are carefully underwritten
to determine appropriate collateral and covenant requirements.
Other services provided currently or to be provided include cashier's
checks, money orders, travelers checks, bank by mail, lock box, direct deposit
and U. S. Savings Bonds. The Bank is associated with a shared network of
automated teller machines that its customers are able to use throughout
Connecticut and other regions. The Bank does not currently expect to offer trust
services but may offer trust services through a joint venture with a larger
institution. To offer trust services in the future, the Bank would need the
approval of the Connecticut Banking Commissioner and the FDIC.
Investment Securities
Another significant activity for the Bank is maintaining an investment
portfolio. Although granting a variety of loans to generate interest income and
loan fees is an important aspect of the Bank's business plan, the aggregate
amount of loans will be subject to maintaining a prudent loan-to-deposit ratio.
The Bank's overall portfolio objective is to maximize the long-term total rate
of return through active management of portfolio holdings taking into
consideration estimated asset/liability and liquidity needs, tax equivalent
yields and maturities. Permissible investments include debt securities such as
U. S. Government securities, government sponsored agency securities, municipal
bonds, domestic certificates of deposit that are insured by the FDIC,
mortgage-backed securities and collateralized mortgage obligations. The Bank
expects that investments in equity securities will be very limited. The Bank's
current investment portfolio is limited to U. S. government sponsored agency
obligations and sponsored agency collateralized mortgage obligations classified
as available for sale. Accordingly, the principal risk associated with the
Bank's current investing activities is market risk (variations in value
resulting from general changes in interest rates) rather than credit risk.
Market and Competition
There are numerous banks and other financial institutions serving the
Southern Connecticut Market posing significant competition for the Bank to
attract deposits and loans. The Bank also experiences competition from
out-of-state financial institutions with little or no traditional bank branches
in New Haven. To grow, we will have to win customers away from the customer base
of existing banks and financial institutions as well as win new customers from
growth in the Southern Connecticut Market. Many of such banks and financial
institutions are well established and well capitalized, allowing them to provide
a greater range of services than we will be able to offer in the near future.
19
The greater New Haven is currently served by approximately 80 offices
of commercial banks, none of which is headquartered in New Haven. All of these
banks are substantially larger than the Bank expects to be in the near future
and are able to offer products and services which may be impracticable for the
Bank to provide at this time. There are numerous banks and other financial
institutions serving the communities surrounding New Haven, which also draws
customers from New Haven, posing significant competition for the Bank to attract
deposits and loans. The Bank also experiences competition from out-of-state
financial institutions with little or no traditional bank branches in New Haven.
Many of such banks and financial institutions are well established and better
capitalized than the Bank, allowing them to provide a greater range of services.
Intense market demands, economic pressures and significant legislative
and regulatory actions have eroded traditional banking industry classifications
and have increased competition among banks and other financial institutions.
Market dynamics, as well as legislative and regulatory changes have resulted in
a number of new competitors offering services historically offered only by
commercial banks; non-bank corporations offering services traditionally offered
only by banks; increased customer awareness of product and service differences
among competitors; and increased merger activity.
Over the past ten years, the Connecticut banking market has been
characterized by significant consolidation among financial institutions. Since
January 1994, there have been at least 60 completed acquisitions of Connecticut
based banks and thrifts. Although our competitors are currently much larger than
us, we believe that the corporate service culture and operational infrastructure
at large banks often does not provide the type of personalized service that many
of our small to medium business and professional clients desire and that we
strive to provide.
Additional legislative and regulatory changes may affect the Bank in
the future; however, the nature of such changes and the effect of their
implementation cannot be assessed. New rules and regulations may, among other
things, revise limits on interest rates on various categories of deposits and
may limit or influence interest rates on loans. Monetary and fiscal policies of
the United States government and its instrumentalities, including the Federal
Reserve, significantly influence the growth of loans, investments and deposits.
The banking regulatory environment is undergoing significant change both as it
affects the banking industry directly and as it affects competition between
banks and non-bank financial institutions.
The Bank of Southeastern Connecticut
On July 2, 2003, Bancorp submitted an application to the State of
Connecticut, Department of Banking ("Department") for the establishment by
Bancorp of a new commercial bank in New London, Connecticut. The application was
subsequently temporarily withdrawn to complete additional information requested
by the Department, including a three-year balance sheet and income statement
forecast for the proposed new bank.
On August 7, 2003, the application, including the completed additional
information, was resubmitted to the Department, and on October 2, 2003, the
final application, including additional information, was submitted.
On April 28, 2004, a temporary certificate of authority was issued by
the State of Connecticut Department of Banking in connection with the new bank
application. Application to the Federal Insurance Deposit Corporation for
deposit insurance has been extended to allow Bancorp to provide information
regarding the infrastructure in place to support the two banks and to revise
certain proposed policies of the new bank. On April 21, 2005, the FDIC
acknowledged reciept of the now compete application. Application to the Federal
Reserve Bank of Boston for Bancorp to acquire the new bank will be filed in the
near future after receipt of approval from the FDIC. Subject to the reciept of
regulatory approvals, Bancorp expects the new bank to commence operations in the
second half of 2005.
20
SCB Capital, Inc.
On November 17, 2003, SCB Capital, Inc., a wholly-owned subsidiary of Bancorp,
was incorporated. SCB Capital, Inc. will engage in a limited range of investment
banking and advisory services primarily to small to medium size business clients
of Bancorp located in Connecticut. It is not anticipated that SCB Capital, Inc.
will directly provide financing or equity in the investment banking transactions
it facilitates or in which it acts as principal. SCB Capital, Inc. is in the
process of applying for approval as a broker-dealer and membership with the
National Association of Security Dealers ("NASD"). SCB Capital, Inc. has been
capitalized with $20,000 and has not commenced operations. Any additional amount
to be invested in SCB Capital, Inc. will be determined by Bancorp's Board of
Directors at the time of application to the NASD. SCB Capital, Inc. is expected
to act solely as broker and advisor and is not intended to make equity
investments in capital and debt security raises it completes or assists in. SCB
Capital, Inc. may accept warrants, options or similar instruments in partial
compensation for its services.
Recent Developments
The Board of Directors of the Bank adopted resolutions designed to
strengthen and enhance the Bank's Bank Secrecy Act compliance and the Bank's
Information Technology controls. During the quarter ended March 31, 2005, the
Bank continued to strengthen and enhance its infrastructure, policies and
staffing. During the quarter, the Bancorp added staff to its lending, loan
administration and operations staff. Also, the Bank reviewed its privacy and
information technology security policies and procedures to strengthen
compliance. Additionally, the Bank has retained an experienced outside
consultant to assist it in developing and implementing additional Information
Technology policies, controls and procedures.
Employees
As of March 31, 2005, the Bancorp has 34 full-time employees, the
majority with the Bank. Bancorp's employees perform most routine day-to-day
banking transactions for the Bank. However, the Bank has entered into a number
of arrangements for banking services such as correspondent banking, data
processing and armored carriers. Outside of staffing the new bank located in New
London and new offices of the Bank, Bancorp does not anticipate a significant
change in the number of its employees.
21
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary
Bancorp had a net loss of $15,567 (or basic and diluted loss per share
of $0.01) for the quarter ended March 31, 2005, compared to a net income of
$35,712 (or basic and diluted earnings per share of $0.03) for the quarter ended
March 31, 2004. The 2005 quarterly loss reflects: i) ongoing costs of developing
infrastructure to support The Bank of Southeastern Connecticut, and ii) the
absence of gains on the sale of SBA guaranteed loan participations during the
period ended March 31, 2005, in comparison to the period ending March 31, 2004,
in which $125,984 of such gains were recognized.
Financial Condition
Assets
Bancorp has reached total assets of $88.0 million at March 31, 2005, an
increase of $6.3 million (7.8%) from $81.7 million in assets as of December 31,
2004. Earning assets as of March 31, 2005 were $82.6 million, an increase of
$6.8 million (9.0%) during the first three months of 2005.
Bancorp has maintained liquidity by maintaining balances in overnight
Federal funds sold and short-term investments including money market mutual
funds to provide funding for higher yielding loans as they are approved and
closed. As of March 31, 2005, Federal funds sold were $8.6 million and
short-term investments balances were $8.5 million. Federal funds sold and
short-term investments increased by $3.2 million and $0.1 million, respectively,
during the first three months of 2005. The increases were due to increases in
deposits in excess of the increase in loans receivable.
Investments
Available for sale securities totaled $11.1 million as of March 31,
2005, a decrease of $0.2 million from December 31, 2004, reflecting amortization
on mortgage backed securities held in the portfolio. The portfolio is invested
in U.S. government sponsored agency and sponsored agency issued mortgage backed
securities.
As of March 31, 2005, gross unrealized losses on the available for sale
securities portfolio totaled $363,000. These losses were the result of
volatility in market rates and yield curve changes and impacted the market
prices in government sponsored agency bonds and mortgage-backed securities.
Management does not believe these losses are other than temporary, and Bancorp
has the ability to hold these securities to maturity if necessary, and has both
the intent and ability to retain its investments for a period of time sufficient
to allow for any anticipated recovery in fair value. As a result, management
believes that these unrealized losses will not have a negative impact on future
earnings and capital.
Loans
The total of the Loans receivable portfolio increased $3.2 million
(6.4%) from $49.8 million at December 31, 2004 to $53.0 million at March 31,
2005. The increase in loans is due to strong commercial demand in the greater
New Haven and Connecticut markets. The increase in the loans receivable
portfolio was funded primarily by increases in deposits. The loans receivable to
deposit ratio as of March 31, 2005 was 81%, within Bancorp's target loan
receivable to deposit ratio of the 80% to 90% range. Bancorp and the Bank's
Boards of Directors may elect to review Bancorp's policy regarding this ratio.
22
Critical Accounting Policy
In the ordinary course of business, Bancorp has made a number of
estimates and assumptions relating to reporting results of operations and
financial condition in preparing its financial statements in conformity with
accounting principals generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. Bancorp believes the following discussion addresses
Bancorp's only critical accounting policy, which is the policy that is most
important to the portrayal of Bancorp'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.
Allowance for Loan Losses
The allowance for loan losses, a material estimate susceptible to
significant change in the near-term, is established as losses are estimated to
have occurred through a provision for losses charged against operations, and is
maintained at a level that management considers adequate to absorb losses in the
loan portfolio. Management's judgment in determining the adequacy of the
allowance is inherently subjective and is based on the evaluation of individual
loans, pools of homogeneous loans, the known and inherent risk characteristics
and size of the loan portfolios, the assessment of current economic and real
estate market conditions, estimates of the current value of underlying
collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of specific loans and other relevant
factors. Loans, including impaired loans, are charged against the allowance for
loan losses when management believes that the uncollectibility of principal is
confirmed. Any subsequent recoveries are credited to the allowance for loan
losses when received. In connection with the determination of the allowance for
loan losses, management obtains appraisals for significant properties, when
considered necessary.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component may be maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
Based on its evaluation, management believes the allowance for loan
losses of $770,000 at March 31, 2005, which represents 1.43% of gross loan
receivables outstanding, is adequate, under prevailing economic conditions, to
absorb probable losses on existing loans. At December 31, 2004, the allowance
for loan losses was $752,000 or 1.49% of gross loans outstanding.
23
Analysis of Allowance for Loan Losses
The following represents the activity in the allowance for loan losses for the
three months ended March 31:
Allowance for Loan Losses as of March 31, 2005 and 2004
As of March 31,
------------------------------------
2005 2004
----------------- ------------------
Balance at beginning of period $ 752,394 $ 421,144
Charge-offs - (153)
Recoveries 750 217
Provision charged to operations 17,000 31,750
----------------- ------------------
Balance at end of period $ 770,144 $ 452,958
================= ==================
Net charge-offs to average loans .00% .00%
================= ==================
Non-Accrual, Past Due and Restructured Loans
The following table represents non-accruing and past due loans
(Thousands of dollars) March 31, 2005 December 31, 2004
------------------------------------------------------- ---------------------- -----------------
Loans delinquent over 90 days and still accruing $ - $ -
Non-accruing loans 408,333 227,358
---------------------- -----------------
Total $ 408,333 $ 227,358
====================== =================
% of Total Loans 0.76% 0.45%
% of Total Assets 0.46% 0.28%
Potential Problem Loans
At March 31, 2005, the Bank had no other loans, other than those
disclosed in the table above, as to which management has significant doubts as
to the ability of the borrower to comply with the present repayment terms.
Deposits
Deposits were $65.3 million at March 31, 2005, an increase of $6.6
million (11.3%) from $58.7 million as of December 31, 2004. Interest bearing
checking and money market accounts increased by $2.7 million or 10.6%, followed
by time certificates which increased $2.7 million, or 31.4%. Savings accounts
increased $1.1 million, or 34.1% higher than at year end 2004. Non-interest
bearing checking and NOW accounts did not change significantly from December 31,
2004. The increase in the total deposit portfolio reflects the ongoing, vigorous
marketing effort of the Bank. Bancorp does not have any brokered deposits.
Other
Repurchase agreement balances decreased $0.2 million from December 31,
2004 to $593,000, as of March 31, 2005, due to normal customer activity.
24
Results of Operations
Bancorp was initially profitable in the fourth quarter of 2003, the
ninth quarter of operation. Bancorp was also profitable in both the first and
second quarters of 2004. Bancorp had a loss of $16,000 in the first quarter of
2005, due to a decline of approximately $126,000 from the first quarter of 2004
in SBA loan participation sale gains. Loans held for sale, comprised of SBA
guaranteed loan and other loan balances, increased during the first quarter of
2005 by $538,000 to $637,000, but Bancorp did not complete any loan
participation sale transactions during the quarter and thus did not realize any
gains. Bancorp intends to continue to originate and to sell at a profit
participations in SBA guaranteed loans and other loans, including those
currently classified as held-for-sale, in the future.
De Novo banks in Connecticut have reached profitability on average
within three to four years after commencement of operations. The Bank was
profitable in its ninth quarter of operation, and has been profitable in four of
the following five quarters. The Bank is Bancorp's sole source of SBA loan sales
and contributes substantially all net interest income and non-interest income to
Bancorp's consolidated results of operations.
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 and
three months ended March 31, 2005 compared to the three months ended March 31,
2004. Interest income on loans includes loan fee income which is not
significant. In addition, Bancorp does not have any tax-exempt securities or
loans.
25
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest differential
Three months Ended Three months Ended
March 31, 2005 March 31, 2004
----------------------------------- ------------------------------------ Fluctuations
Interest Interest in interest
Average Income/ Average Average Income/ Average Income/Expense
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Total
----------------------------------- ------------------------------------ ---------------------
Interest earning assets
Loans (1) $ 51,468 $ 988 7.79% $ 44,342 $ 815 7.35% $ 173
Short-term investments 8,422 41 1.97% 2,583 3 0.46% 38
Investments 11,341 87 3.11% 7,911 48 2.43% 39
Federal funds sold 8,126 48 2.40% 1,891 7 1.48% 41
------------------------- ------------------------- ---------------------
Total interest earning assets 79,357 1,164 5.95% 56,727 873 6.16% 291
---------- -----------
Cash and due from banks 812 1,387
Premises and equipment, net 3,619 3,449
Allowance for loan losses (757) (434)
Other 1,327 1,120
------------- -------------
Total assets $ 84,358 $ 62,249
============= =============
Interest bearing liabilities
Time certificates $ 10,110 63 2.53% $ 14,090 74 2.10% (11)
Savings deposits 3,814 12 1.28% 2,483 7 1.13% 5
Money market / checking deposits 31,472 115 1.48% 22,435 71 1.27% 44
Capital lease obligations 1,190 43 14.65% 1,191 43 14.44% -
Repurchase agreements 1,016 3 1.20% 959 2 0.83% 1
------------------------- ------------------------- ---------------------
Total interest bearing liabilities 47,602 236 2.01% 41,158 197 1.91% 39
---------------------- ----------------------- ---------------------
Non-interest bearing deposits 15,788 13,490
Accrued expenses and
other liabilities 274 185
Shareholder's equity 20,694 7,416
------------- -------------
Total liabilities and equity $ 84,358 $ 62,249
============= =============
Net interest income $ 928 $ 676 $ 252
============ ============ =====================
Interest spread 3.94% 4.25%
========== ===========
Interest margin 4.74% 4.77%
========== ===========
(1) Includes nonaccruing loans.
26
Changes in Assets and Liabilities and Fluctuations in Interest Rates
The following tables summarize the variance in interest income and
expense for the three months ended March 31, 2005 and 2004 resulting in 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
March 31, 2005 v. 2004
-----------------------------------------------------
Increase Due to Change in
Or Average
---------------------------------
(Dollars in thousands) (Decrease) Volume Rate
----------------- ----------------- -------------
(Dollars in thousands)
Interest earning assets
Loans $ 173 $ 126 # $ 47
Short-term investments 38 16 22
Investments 39 24 15
Federal funds sold 41 35 6
----------------- ----------------- -------------
Total interest earning assets 291 201 90
----------------- ----------------- -------------
Interest bearing liabilities
Time certificates (11) (77) 66
Savings deposits 5 4 1
Money market / checking deposits 44 32 12
Capital lease obligations - - -
Repurchase agreements 1 - 1
----------------- ----------------- -------------
Total interest bearing liabilities 39 (41) 80
----------------- ----------------- -------------
Net interest income $ 252 $ 242 $ 10
================= ================= =============
27
Net Interest Income
For the quarter ended March 31, 2005, net interest income was $928,000
versus $676,000 for the same period in 2004, a $252,000 or 37% increase. This
was the result of a $22.6 million increase in average earning assets in the
quarter ended March 31, 2005 in comparison to the same period a year ago,
including increases in average loans of $7.1 million, short term investments and
federal funds sold of $12.1 million and investments of $3.4 million. The
increase in short term investments reflects the receipt of net proceeds of
approximately $13.3 million from the June 2004 public offering of common shares
of Bancorp. Also, average interest bearing liabilities increased $6.4 million
during the quarter ended March 31, 2005 in comparison to the same period a year
ago, partially offsetting the favorable net interest income effects of the
increase in average earning assets volume. The ratio of average loans to average
total interest earning assets declined during the quarter ended March 31, 2005
in comparison to the quarter ended March 31, 2004, to 64.9% from 78.2%, due to
the increase in short term investments and investments following the completion
of Bancorp's common stock offering in June 2004.
The yield on average interest earning assets for the three months ended
March 31, 2005 was 5.95% versus 6.16% for same period in 2004. The decrease in
the yield on average earning assets is due to the change in asset mix from 2004
to 2005, reflecting the larger investments in federal funds sold, short term
investments and available for sale investment securities which are at
significantly lower yields than loans. The cost of average interest bearing
liabilities was 2.01% for the three months ended March 31, 2005 versus 1.91% for
the same period in 2004. The increase in the cost of average interest bearing
liabilities was primarily the result of increased deposit balances and higher
rates paid on daily rate money market and interest checking accounts, offset
somewhat by lower balances in 2005 in comparison to 2004 in time deposits.
Volume related decreases in time deposit interest expense in the 2005 period in
comparison to the 2004 period were partially offset by increases in the rates of
interest paid on new time deposits acquired during the past year.
Provision for Loan Losses
The $17,000 provision for loan losses for the three months ended March
31, 2005 reflects the increase of the loans receivable portfolio during the
quarter and portfolio seasoning. During the quarter, net recoveries of $750 were
recorded. The provision for loan losses for the three months ended March 31,
2004 was $32,000 and was primarily due to the increase in the Bank's loan volume
during the period.
Noninterest Income
The $75,000 decrease in total noninterest income for the first quarter
of 2005 versus the first quarter 2004 is due to the presence of approximately
$126,000 in SBA guaranteed loan participation sales gains during the 2004
period. During the first quarter of 2005, Bancorp did not have any gains from
the sales of SBA guaranteed loan participations. Bancorp originated for sale in
the secondary market $538,000 of SBA guaranteed loans and other loans during the
first quarter of 2005, which are included in the loans held for sale total of
$637,000 on Bancorp's Consolidated Balance Sheet. Bancorp intends to continue to
originate SBA guaranteed loans in the future and expects to continue to earn
income from SBA loan participation sales and referrals. Separately, service
charges and fees derived from deposits, loans and other services increased by
approximately $43,000 in the quarter ended March 31, 2005 verses the same period
in 2004.
Noninterest Expense
Total noninterest expense was approximately $1,064,000 for the first
quarter of 2005 versus $821,000 for the same period in 2004, an increase of
$243,000 or 29.6%. A number of factors contributed to the increase in
non-interest expense year-over-year. Principal among these factors are 1)
ongoing investment in the
28
development of infrastructure to support the proposed new bank subsidiary,
TBSEC, 2) additional staff, principally in the areas of loan administration,
lending, and operations, 3) professional services relating to advisory and
compliance services, 4) upgrading and expansion of technology infrastructure,
including network facilities and 5) increased services costs due to increases in
the loan and deposit portfolios.
Salaries and benefits for the first quarter of 2005 of $557,000
increased by $98,000, or 21%, from the first quarter of 2004. The increase is
due to staff compensation and benefits increases in the first quarter of 2005 in
comparison to the same period a year ago, primarily arising from additions to
operations, lending, and loan administration staff.
Occupancy and equipment for the first quarter of 2005 increased by
$17,000, or 14%, due primarily to increases relating to depreciation of
buildings, equipment and furniture, rent and property taxes.
Professional fees for the first quarter of 2005 increased by $32,000 or
by 52% due primarily to the engagement of consultants to assist the Bank in
developing infrastructure and related policies and procedures, legal and other
professional costs relating to the chartering and operational planning of the
proposed banking subsidiary to be located in New London, consulting relating to
the proposed Clinton branch property, assistance in upgrading technology, and
other matters.
Data processing and other outside services for the first quarter
increased by $7,000, or 10%, primarily due to increased loan and deposit
volumes.
Advertising and promotional expense for the first quarter of 2005
increased $16,000, or 146% due to marketing initiatives, including promotional
cable and print media placement, undertaken during the quarter.
Other Operating Expense for the first three months of 2005 increased by
$70,000, or 90%, primarily due to increases in the legal, professional, and
other costs of the collection of delinquent and non-performing loans of $37,000,
insurance cost increases of $8,000, local tax increases of $9,000, filing fees
increases of $5,000 and a net increase of $11,000 in all other categories.
Off-Balance Sheet Arrangements
See Note 11 for information regarding Bancorp's off-balance sheet
arrangements.
Liquidity
Management believes that Bancorp's short-term assets have sufficient
liquidity to cover potential fluctuations in deposit accounts and loan demand
and to meet other anticipated operating cash requirements.
Bancorp's liquidity position as of March 31, 2005 and December 31, 2004
consisted of liquid assets totaling $29.4 million and $27.1 million,
respectively. This represents 33.4% and 33.2% of total assets at March 31, 2005
and December 31, 2004, respectively. The $2.3 million net increase in liquidity
during the first three months of 2005 is primarily due to increases in federal
funds sold, principally due to the $3.5 million excess of deposit portfolio
increase over loan increase offset by the $538,000 increase in loans held for
sale and a $800,000 decrease in Cash and due from banks. The following
categories of assets as described in the accompanying balance sheet are
considered liquid assets: cash and due from banks, federal funds sold,
short-term investments, and securities available for sale. Liquidity is a
measure of Bancorp'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.
29
Bancorp raised $13.3 million, net of underwriting discounts and
offering expenses, in equity capital though a public offering of common stock on
June 17, 2004. On June 17, 2004, Bancorp invested approximately $2.8 million of
these proceeds in the equity capital of The Bank of Southern Connecticut. Also,
Bancorp has committed to investing $6 million of the proceeds in the equity
capital of The Bank of Southeastern Connecticut at the time it receives all
final regulatory approvals and commences banking operations. On November 9,
2004, Bancorp committed to investing an additional $1 million in The Bank of
Southern Connecticut. The remaining balance of the public offering net proceeds
will be utilized for future branch office expansion and general corporate
purposes.
Currently, other than the potential start up of TBSEC in the second
half of 2005 and the establishment of new Bank branch offices (as previously
discussed on pages 16 and 17 under the "Locations" heading), there are no plans
involving the significant purchase or sale of property or equipment in the next
twelve months.
Capital
The following table illustrates Bancorp's regulatory capital ratios at:
March 31, December 31,
2005 2004
----------------- -----------------
Tier 1 (Leverage) Capital Ratio to Average assets 24.77% 24.66%
Tier 1 Capital to Risk Weighted Assets 30.27% 32.08%
Total Capital to Risk Weighted Assets 31.39% 33.24%
The following table illustrates the Bank's regulatory capital ratios at:
March 31, December 31,
2005 2004
----------------- -----------------
Tier 1 (Leverage) Capital Ratio to Average assets 14.89% 14.87%
Tier 1 Capital to Risk Weighted Assets 18.63% 19.59%
Total Capital to Risk Weighted Assets 19.87% 20.84%
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, Bancorp is considered to be well capitalized under applicable
regulations specified by the Federal Reserve. The Bank also is considered to be
"well capitalized" under applicable regulations. To be considered "well
capitalized" an institution must generally have a leverage capital ratio of at
least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10%.
Market Risk
Market risk is defined as the sensitivity of income to fluctuations in
interest rates, foreign exchange rates, equity prices, commodity prices and
other market-driven rates or prices. Based upon on the nature of the Company's
business, market risk is primarily limited to interest rate risk, which is the
impact changing interest rates have on current and future earnings.
30
Bancorp's goal is to maximize long-term profitability, while
controlling its exposure to interest rate fluctuations. The first priority is to
structure and price Bancorp'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, Bancorp must
generate loans and seek acceptable long-term investments to replace the lower
yielding balances in Federal Funds sold and short-term investments. The focus
also must be on maintaining a proper balance between the timing and volume of
assets and liabilities re-pricing within the balance sheet. One method of
achieving this balance is to originate variable rate loans for the portfolio to
offset the short-term re-pricing of the liabilities. In fact, a number of the
interest bearing deposit products have no contractual maturity. Customers may
withdraw funds from their accounts at any time and deposits balances may
therefore run off unexpectedly due to changing market conditions.
The exposure to interest rate risk is monitored by the Asset and
Liability Management Committee ("ALCO") consisting of senior management
personnel and selected members of the Board of Directors of the Bank. ALCO
reviews the interrelationships within the balance sheet to maximize net interest
income within acceptable levels of risk. ALCO reports to the Board of Directors
of Bancorp and the Bank on a quarterly basis regarding the status of ALCO
activities and interest rate risk.
Impact of Inflation and Changing Prices
Bancorp'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 Bancorp's
earnings in future periods.
"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995
Certain statements contained in Bancorp's public reports, including
this report, and in particular in this "Management's Discussion and Analysis or
Plan of Operation", may be forward looking and subject to a variety of risks and
uncertainties. These factors include, but are not limited to, (1) changes in
prevailing interest rates which would affect the interest earned on Bancorp's
interest earning assets and the interest paid on its bearing liabilities, (2)
the timing of re-pricing of Bancorp'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 Bancorp and the conduct
of its business, (5) 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, (6) the effect of a loss of any
executive officer, key personnel, or directors, (7) 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, (8) the ability of competitors which are larger
than Bancorp to provide products and services which it is impracticable for
Bancorp to provide, (9) the effect of Bancorp's opening of branches and
organization of a new bank and the receipt of regulatory approval to complete
both actions, (10) the effect of any decision by Bancorp to engage in any
business not historically permitted to it, (11) concentration of our business in
Southern Connecticut, (12) the concentration of our 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 and (13) lack of
seasoning in our loan portfolio, which may increase the risk of future credit
defaults. Other such factors may be described in other filings made by Bancorp
with the SEC.
31
Although Bancorp 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 Bancorp 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.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based upon an evaluation of the effectiveness of Bancorp's disclosure
controls and procedures performed by Bancorp's management, with participation of
Bancorp's Chief Executive Officer, its Chief Operating Officer, and its Chief
Financial Officer as of the end of the period covered by this report, Bancorp's
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
concluded that Bancorp's disclosure controls have been effective.
As used herein, "disclosure controls and procedures" mean controls and
other procedures of Bancorp that are designed to ensure that information
required to be disclosed by Bancorp in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
Bancorp in the reports that it files or submits under the Securities Exchange
Act is accumulated and communicated to Bancorp's management, including its
principal executive, and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls
There have not been any significant changes in Bancorp's internal
controls or in other factors that occurred during Bancorp's quarter ended March
31, 2005 that could significantly affect these controls subsequent to the
evaluation referenced in paragraph (a) above.
32
PART II
Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
No. Description
-----------
3(i) Amended and Restated Certificate of Incorporation of the Issuer
(incorporated by reference to Exhibit 3(i) to Issuer's Quarterly Report
on Form 10-QSB dated June 30, 2002)
3(ii) By-Laws of the Issuer (incorporated by reference to Exhibit 3(ii) to
the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
10.1 Lease, dated as of August 17, 2000, between 215 Church Street, LLC and
the Issuer (incorporated by reference to Exhibit 10.1 to the Issuer's
Registration Statement on Form SB-2 (No. 333-59824))
10.2 Letter agreement dated January 3, 2001 amending the Lease between 215
Church Street, LLC and the Issuer (incorporated by reference to Exhibit
10.2 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.3 First Amendment to Lease dated March 30, 2001 between 215 Church
Street, LLC and the Issuer (incorporated by reference to Exhibit 10.3
to the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
10.4 Second Amendment to Lease dated March 31, 2001 between 215 Church
Street, LLC and the Issuer (incorporated by reference to Exhibit 10.4
to the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
10.5 Assignment of Lease dated April 11, 2001 between the Issuer and The
Bank of Southern Connecticut (incorporated by reference to Exhibit 10.5
to the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
33
10.6 Employment Agreement dated as of January 23, 2001, between The Bank of
Southern Connecticut, the Issuer and Joseph V. Ciaburri (incorporated
by reference to Exhibit 10.6 to the Issuer's Registration Statement on
Form SB-2 (No. 333-59824))
10.7 Issuer's 2001 Stock Option Plan (incorporated by reference to Exhibit
10.8 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.8 Issuer's 2001 Warrant Plan (incorporated by reference to Exhibit 10.9
to the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
10.9 Sublease dated January 1, 2001 between Michael Ciaburri, d/b/a Ciaburri
Bank Strategies and The Bank of Southern Connecticut (incorporated by
reference to Exhibit 10.10 to the Issuer's Registration Statement on
Form SB-2 (No. 333-59824))
10.10 Sublease dated January 1, 2001 between Laydon and Company, LLC and The
Bank of Southern Connecticut (incorporated by reference to Exhibit
10.11 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.11 Issuer's 2001 Supplemental Warrant Plan (incorporated by reference to
Exhibit 10.12 to Issuer's Annual Report on Form 10-KSB dated March 29,
2002)
10.12 Issuer's 2002 Stock Option Plan (incorporated by reference to Appendix
B to Issuer's Definitive Proxy Statement dated April 18, 2002).
10.13 Employment Agreement dated as of February 12, 2003, between The Bank of
Southern Connecticut and Michael M. Ciaburri. (incorporated by
reference to Exhibit 10.14 to Issuer's Form 10-QSB dated May 14, 2003).
10.14 Amendment to Employment Agreement dated as of October 20, 2003, between
The Bank of Southern Connecticut and Southern Connecticut Bancorp, Inc.
and Joseph V. Ciaburri. (incorporated by reference to Exhibit 10.16 to
the Issuer's Form 10-QSB dated November 12, 2003
10.15 Lease dated January 14, 2004 between The City of New London and the
Issuer (incorporated by reference to Exhibit 10.16 to the Issuer's Form
10-KSB dated March 30, 2004
10.16 Lease dated August 2, 2002, between 469 West Main Street LLC and The
Bank of Southern Connecticut (incorporated by reference to Exhibit
10.17 to the Issuer's Form 10-KSB dated March 30, 2004
10.17 Underwriting Agreement between A.G. Edwards & Sons, Inc. and Keefe,
Bruyette & Woods, and Southern Connecticut Bancorp dated June 16, 2004.
(Incorporated by reference to Exhibit 1.1 to the Issuer's Registration
Statement on Form SB-2 (No. 333-115518)).
10.18 Form of Stock Option Agreement for a Non-Qualified Stock Option granted
under the Issuer's 2002 Stock Option Plan (incorporated by reference to
Exhibit 10.18 to Issuer's Form 10-QSB dated November 15, 2004)
10.19 Form of Stock Option Agreement for an Incentive Stock Option granted
under the Issuer's 2002 Stock Option Plan (incorporated by reference to
Exhibit 10.19 to Issuer's Form 10-QSB dated November 15, 2004)
10.20 Agreement of Sale of property and premises located in Clinton,
Connecticut made June 22, 2004 between Dr. Alan Maris and James S.
Brownstein, Trustee (incorporated by reference to Exhibit 10.20 to
Issuer's Form 10-QSB dated November 15, 2004)
10.21 Form of Non-Qualified Stock Option Agreement under Bancorp's 2005 Stock
Option Plan
10.22 Form of Incentive Stock Option Agreement under Bancorp's 2005 Stock
Option Plan
34
31.1 Section Rule 13(a)-14(a)/15(d)-14(a) Certification by Chairman and
Chief Executive Officer
31.2 Section Rule 13(a)-14(a)/15(d)-14(a) by Vice President and Chief
Financial Officer
32.1 Section 1350 Certification by Chairman and Chief Executive Officer
32.2 Section 1350 Certification by Vice President and Chief Financial
Officer
(b) Reports on Form 8-K
The issuer filed reports on Form 8-K during the quarter ended
March 31, 2005.
Date of Filing Item Reported
-------------- -------------
January 26, 2005 Entry into employment agreement
with Michael M. Ciaburri, Bancorp's
President and Chief Operating Officer.
January 27, 2005 Results of Bancorp's operations for
year ended December 31, 2004.
March 28, 2005 Appointment of Daniel R. Dennis,
Jr. as Chairman of the Bank of
Southeastern Connecticut
(In Organization)
35
SIGNATURES
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/ Joseph V. Ciaburri
-----------------------
Name: Joseph V. Ciaburri
Date: May 13, 2005 Title: Chairman & Chief
Executive Officer
By: /S/ Michael M. Ciaburri
-----------------------
Name: Michael M. Ciaburri
Date: May 13, 2005 Title: President &
Chief Operating Officer
By: /S/ William F. Weaver
-----------------------
Name: William F. Weaver
Date: May 13, 2005 Title: Vice President &
Chief Financial Officer
36
Exhibit Index
--------------
10.21 Form of Non-Qualified Stock Option Agreement under Bancorp's 2005 Stock
Option Plan
10.22 Form of Incentive Stock Option Agreement under Bancorp's 2005 Stock
Option Plan
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification by Chairman and Chief
Executive Officer.
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification by President and Chief
Operating Officer.
31.3 Rule 13(a)-14(a)/15(d)-14(a) Certification by Vice President and Chief
Financial Officer.
32.1 Section 1350 Certification by Chairman and Chief Executive Officer.
32.2 Section 1350 Certification by President and Chief Operating Officer
32.3 Section 1350 Certification by Vice President and Chief Financial
Officer.
37