The following tables detail the financial instruments carried at fair value and measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
| |
|
Balance as of
March 31, 2013
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Observable Inputs
(Level 2)
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$ |
2,350,000 |
|
|
$ |
2,350,000 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
Balance as of
December 31, 2012
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$ |
1,249,925 |
|
|
$ |
1,249,925 |
|
|
$ |
— |
|
|
$ |
— |
|
The following tables detail the financial instruments carried at fair value and measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
| |
|
Balance as of
March 31, 2013
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Financial assets held at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
| |
|
Balance as of
December 31, 2012
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Financial assets held at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (1)
|
|
$
|
3,448,058
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,448,058
|
|
|
(1)
|
Represents carrying value and related write-downs for which adjustments are based on appraised value. Management makes adjustments to the appraised values as necessary to consider declines in real estate values since the time of the appraisal. Such adjustments are based on management’s knowledge of the local real estate markets.
|
The following tables detail the nonfinancial asset amounts that were carried at fair value and measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
| |
|
Balance as of
March 31, 2013
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Other assets held for sale
|
|
$ |
315,000 |
|
|
$ |
— |
|
|
$ |
315,000 |
|
|
$ |
— |
|
|
Other real estate owned
|
|
$ |
582,911 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
582,911 |
|
| |
|
Balance as of
December 31, 2012
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Other assets held for sale
|
|
$ |
315,000 |
|
|
$ |
— |
|
|
$ |
315,000 |
|
|
$ |
— |
|
|
Other real estate owned
|
|
$ |
582,911 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
582,911 |
|
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The estimated fair value amounts as of March 31, 2013 and December 31, 2012 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at such dates.
The information presented should not be interpreted as an estimate of the fair value of the Company as a whole since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The following is a summary of the recorded book balances and estimated fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012:
| |
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
| |
Fair Value
|
|
Recorded
|
|
|
|
|
|
Recorded
|
|
|
|
|
| |
Hierarachy
|
|
Book
|
|
|
|
|
|
Book
|
|
|
|
|
| |
Level
|
|
Balance
|
|
|
Fair Value
|
|
|
Balance
|
|
|
Fair Value
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
Level 1
|
|
$ |
11,845,637 |
|
|
$ |
11,845,637 |
|
|
$ |
6,913,610 |
|
|
$ |
6,913,610 |
|
|
Short-term investments
|
Level 1
|
|
|
4,569,865 |
|
|
|
4,569,865 |
|
|
|
4,674,556 |
|
|
|
4,674,556 |
|
|
Interest bearing certificates of deposit
|
Level 1
|
|
|
409,811 |
|
|
|
409,811 |
|
|
|
655,278 |
|
|
|
655,278 |
|
|
Available for sale securities
|
Level 1
|
|
|
2,350,000 |
|
|
|
2,350,000 |
|
|
|
1,249,925 |
|
|
|
1,249,925 |
|
|
Federal Home Loan Bank stock
|
Level 3
|
|
|
60,600 |
|
|
|
60,600 |
|
|
|
60,600 |
|
|
|
60,600 |
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable inputs
|
Level 2
|
|
|
92,913,671 |
|
|
|
94,164,636 |
|
|
|
98,099,996 |
|
|
|
99,788,559 |
|
|
Unobservable inputs
|
Level 3
|
|
|
5,054,364 |
|
|
|
5,054,364 |
|
|
|
5,179,441 |
|
|
|
5,179,441 |
|
|
Accrued interest receivable
|
Level 1
|
|
|
362,323 |
|
|
|
362,323 |
|
|
|
397,497 |
|
|
|
397,497 |
|
|
Servicing rights
|
Level 2
|
|
|
5,604 |
|
|
|
14,081 |
|
|
|
6,012 |
|
|
|
15,106 |
|
|
Interest only strips
|
Level 2
|
|
|
7,239 |
|
|
|
11,676 |
|
|
|
7,769 |
|
|
|
12,531 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
Level 1
|
|
|
25,974,461 |
|
|
|
25,974,461 |
|
|
|
29,906,051 |
|
|
|
29,906,051 |
|
|
Interest bearing checking accounts
|
Level 1
|
|
|
3,615,320 |
|
|
|
3,615,320 |
|
|
|
5,110,736 |
|
|
|
5,110,736 |
|
|
Money market deposits
|
Level 1
|
|
|
38,603,326 |
|
|
|
38,603,326 |
|
|
|
36,649,525 |
|
|
|
36,649,525 |
|
|
Savings deposits
|
Level 1
|
|
|
2,770,395 |
|
|
|
2,770,395 |
|
|
|
2,877,303 |
|
|
|
2,877,303 |
|
|
Time certificates of deposits
|
Level 2
|
|
|
35,659,972 |
|
|
|
36,200,000 |
|
|
|
33,707,623 |
|
|
|
34,357,000 |
|
|
Accrued interest payable
|
Level 1
|
|
|
34,409 |
|
|
|
34,409 |
|
|
|
46,764 |
|
|
|
46,764 |
|
Unrecognized financial instruments
Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2013 and December 31, 2012.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent management believes necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 10. Commitments and Contingencies
Employment agreements
On February 28, 2012, the Company and the Bank entered into an employment agreement with the Chief Executive Officer effective as of February 28, 2012. The Company and the Chief Executive Officer also entered into a restricted stock agreement dated as of February 28, 2012.
Under the employment agreement, the individual will serve as Chief Executive Officer of the Company and the Bank from the date of the employment agreement through December 31, 2014, unless the Company and the Bank terminate the employment agreement earlier under the terms of the agreement. The Chief Executive Officer will also serve as a director of the Company and the Bank.
The Chief Executive Officer will earn an annual base salary over the term of the employment agreement and be entitled to receipt of incentive compensation at the end of each calendar year during the term in an amount up to 10% of the Chief Executive Officer’s base salary for achieving individual or corporate goals established by the Board of Directors of the Company or the Bank. In addition, the Chief Executive Officer has been granted 112,371 shares of restricted common stock of the Company pursuant to the restricted stock agreement. Under the restricted stock agreement, the 112,371 shares of restricted common stock vests as follows: 37,457 shares as of the date of the restricted stock agreement, 37,457 shares as of July 2, 2012 and 37,457 shares as of January 2, 2013.
During the term, the Chief Executive Officer will be entitled to benefits including, but not limited to, comprehensive health insurance and major medical and dental coverage, participation in any long-term disability insurance plan and pension plan maintained by the Company or the Bank, supplemental disability insurance such that the monthly disability benefit payable to the Chief Executive Officer is equal to 70% of the Chief Executive Officer monthly base salary, use of a Bank-owned vehicle with a purchase price of up to $40,000, and term life insurance in an amount not less than $300,000.
If the Chief Executive Officer is terminated for “Cause” or voluntarily terminates the Chief Executive Officer’s employment other than for “Good Reason,” the Chief Executive Officer will only be entitled to base salary accrued through the date of the Chief Executive Officer’s termination. If the Chief Executive Officer’s employment is terminated by reason of “Disability,” the Chief Executive Officer will receive disability benefits under any long-term disability plan maintained by the Company or the Bank. In the event of the Chief Executive Officer’s death, the Chief Executive Officer’s beneficiary(ies) or estate will be paid the Chief Executive Officer’s base salary for a period of six months following the Chief Executive Officer’s death. If the Chief Executive Officer is terminated for any reason other than for “Cause” or “Disability” or if the Chief Executive Officer voluntarily terminates the Chief Executive Officer’s employment for “Good Reason,” then the Chief Executive Officer will be entitled to receive (i) twelve months of base salary and (ii) the Chief Executive Officer’s individual and/or family health benefits coverage for a period of twelve months following the Chief Executive Officer’s termination (or such other period prescribed by the then applicable COBRA law), with the Chief Executive Officer paying the same portion of the cost of such coverage as existed at the time of termination; provided, however, that no payment will be made to the Chief Executive Officer if such payment would constitute a “golden parachute payments” and is made after the occurrence of certain events specified under regulations promulgated by the Federal Deposit Insurance Corporation (the “FDIC”), including the determination by the FDIC that the Bank is in “troubled condition.” Any lump sum payment made to the Chief Executive Officer is also subject to claw back by the Company and the Bank if it is later determined that the Chief Executive Officer committed or is substantially responsible for certain acts or omissions prohibited under regulations promulgated by the FDIC.
On January 29, 2013, the Company and the Bank entered into an employment agreement with the President and Senior Loan Officer effective January 1, 2013.
Under the employment agreement, the individual will serve as President of the Company and the Bank and Senior Loan Officer of the Bank for the period from January 1, 2013 to December 31, 2013, unless the employment agreement is terminated earlier in accordance with its terms. The President and Senior Loan Officer will be paid a base salary at the annual rate of $175,000 and be eligible for salary increases and bonuses reflecting job performance achievements at the discretion of the Board of Directors of the Company and the Bank. In addition, the President and Senior Loan Officer will be provided with group life insurance and comprehensive health insurance, including major medical coverage, comparable to the coverage provided to officers generally. The President and Senior Loan Officer will also be eligible to participate in any profit sharing plan or 401(k) plan in accordance with their terms.
The employment agreement may be terminated prior to December 31, 2013 as a result of the President and Senior Loan Officer engaging in certain specified acts that constitute cause or the death or disability of the President and Senior Loan Officer. In addition, in the event (i) the Company and the Bank enter into a “Business Combination” as defined in the employment agreement and (ii) the President and Senior Loan Officer (a) is not offered the same position at the President and Senior Loan Officer’s current base salary with the surviving entity, (b) determines in the President and Senior Loan Officer’s sole discretion that the position offered by the surviving entity is inconsistent with the President and Senior Loan Officer’s current position, including diminution in title, authority, duties or responsibilities, (c) has the President and Senior Loan Officer’s office relocated more than 25 miles from its current location or (d) is terminated within 2 years following the “Business Combination,” the President and Senior Loan Officer will be entitled to receipt of a lump sum payment equal to the President and Senior Loan Officer’s then current base salary; provided, however, that no payment will be made to the President and Senior Loan Officer if such payment would constitute a “golden parachute payment” and is made after the occurrence of certain events specified under regulations promulgated by the FDIC, including the determination by the FDIC that the Bank is in “troubled condition.” Any lump sum payment made to the President and Senior Loan Officer is also subject to claw back by the Company and the Bank if it is later determined that the President and Senior Loan Officer committed or is substantially responsible for certain acts or omissions prohibited under regulations promulgated by the FDIC.
On January 29, 2013, the Company and the Bank entered into an employment agreement with the Senior Vice President and Chief Financial Officer effective January 1, 2013.
Under the employment agreement, the individual will serve as Senior Vice President and Chief Financial Officer of the Company and the Bank for the period from January 1, 2013 to December 31, 2013, unless the employment agreement is terminated earlier in accordance with its terms. The Senior Vice President and Chief Financial Officer will be paid a base salary at the annual rate of $165,000 and be eligible for salary increases and bonuses reflecting job performance achievements at the discretion of the Board of Directors of the Company and the Bank. In addition, the Senior Vice President and Chief Financial Officer will be provided with group life insurance and comprehensive health insurance, including major medical coverage, comparable to the coverage provided to officers generally. The Senior Vice President and Chief Financial Officer will also be eligible to participate in any profit sharing plan or 401(k) plan in accordance with their terms.
The employment agreement may be terminated prior to December 31, 2013 as a result of the Senior Vice President and Chief Financial Officer engaging in certain specified acts that constitute cause or the death or disability of the Senior Vice President and Chief Financial Officer. In addition, in the event (i) the Company and the Bank enter into a “Business Combination” as defined in the employment agreement and (ii) the Senior Vice President and Chief Financial Officer (a) is not offered the same position at the Senior Vice President and Chief Financial Officer’s current base salary with the surviving entity, (b) determines in the Senior Vice President and Chief Financial Officer’s sole discretion that the position offered by the surviving entity is inconsistent with the Senior Vice President and Chief Financial Officer’s current position, including diminution in title, authority, duties or responsibilities, (c) has the Senior Vice President and Chief Financial Officer’s office relocated more than 25 miles from its current location or
(d) is terminated within 2 years following the “Business Combination,” the Senior Vice President and Chief Financial Officer will be entitled to receipt of a lump sum payment equal to the Senior Vice President and Chief Financial Officer’s then current base salary; provided, however, that no payment will be made to the Senior Vice President and Chief Financial Officer if such payment would constitute a “golden parachute payment” and is made after the occurrence of certain events specified under regulations promulgated by the FDIC, including the determination by the FDIC that the Bank is in “troubled condition.” Any lump sum payment made to the Senior Vice President and Chief Financial Officer is also subject to claw back by the Company and the Bank if it is later determined that the Senior Vice President and Chief Financial Officer committed or is substantially responsible for certain acts or omissions prohibited under regulations promulgated by the FDIC.
On January 29, 2013, the Company and the Bank entered into an employment agreement with the First Vice President, Human Resources Director and Corporate Secretary effective January 1, 2013.
Under the employment agreement, the individual will serve as First Vice President, Human Resources Director and Corporate Secretary of the Company and the Bank for the period from January 1, 2013 to December 31, 2013, unless the employment agreement is terminated earlier in accordance with its terms. The First Vice President, Human Resources Director and Corporate Secretary will be paid a base salary at the annual rate of $82,000 and be eligible for salary increases and bonuses reflecting job performance achievements at the discretion of the Board of Directors of the Company and the Bank. In addition, the First Vice President, Human Resources Director and Corporate Secretary will be provided with group life insurance and comprehensive health insurance, including major medical coverage, comparable to the coverage provided to officers generally. The First Vice President, Human Resources Director and Corporate Secretary will also be eligible to participate in any profit sharing plan or 401(k) plan in accordance with their terms.
The employment agreement may be terminated prior to December 31, 2013 as a result of the First Vice President, Human Resources Director and Corporate Secretary engaging in certain specified acts that constitute cause or the death or disability of the First Vice President, Human Resources Director and Corporate Secretary. In addition, in the event (i) the Company and the Bank enter into a “Business Combination” as defined in the employment agreement and (ii) the First Vice President, Human Resources Director and Corporate Secretary (a) is not offered the same position at the First Vice President, Human Resources Director and Corporate Secretary’s current base salary with the surviving entity, (b) determines in the First Vice President, Human Resources Director and Corporate Secretary’s sole discretion that the position offered by the surviving entity is inconsistent with the First Vice President, Human Resources Director and Corporate Secretary’s current position, including diminution in title, authority, duties or responsibilities, (c) has the First Vice President, Human Resources Director and Corporate Secretary’s office relocated more than 25 miles from its current location or (d) is terminated within 2 years following the “Business Combination,” the First Vice President, Human Resources Director and Corporate Secretary will be entitled to receipt of a lump sum payment equal to the First Vice President, Human Resources Director and Corporate Secretary’s then current base salary; provided, however, that no payment will be made to the First Vice President, Human Resources Director and Corporate Secretary if such payment would constitute a “golden parachute payment” and is made after the occurrence of certain events specified under regulations promulgated by the FDIC, including the determination by the FDIC that the Bank is in “troubled condition.” Any lump sum payment made to the First Vice President, Human Resources Director and Corporate Secretary is also subject to claw back by the Company and the Bank if it is later determined that the First Vice President, Human Resources Director and Corporate Secretary committed or is substantially responsible for certain acts or omissions prohibited under regulations promulgated by the FDIC.
Change in Control Agreement
Effective June 21, 2012, the Bank entered into a change in control agreement with its Senior Vice President of Retail Banking.
The agreement provides that in the event of (i) a “Change in Control” (as defined in the agreement) and (ii) the termination within twelve months of such “Change in Control” of the Senior Vice President of Retail Banking’s employment (a) for any reason other than for “Cause” (as defined in the agreement), death or “Disability” (as defined in the agreement) or (b) as result of his resignation for “Good Reason” (as defined in the agreement) following the cure period specified in the agreement, the Senior Vice President of Retail Banking will be entitled to receipt of an amount equal to one times his annual base salary immediately prior to his termination of employment or the “Change in Control,” whichever is higher. The Senior Vice President of Retail Banking will also be entitled to receipt of accrued but unpaid compensation and vacation time as well as an amount equal to one year’s medical and dental insurance premiums totaling approximately $20,000.
The agreement further provides that notwithstanding anything to the contrary contained in the agreement, unless all necessary regulatory approvals are obtained, no “Change in Control” payments will be made to the Senior Vice President of Retail Banking if such payments would constitute a “golden parachute payment” under regulations promulgated by the FDIC. If required, any payments may be suspended, prevented or subject to claw back in whole or in part when warranted to ensure that payments contrary to the intent of federal law and regulations promulgated by the FDIC are not made. In this regard, any payments made to the Senior Vice President of Retail Banking are subject to claw back by the Bank if it is later determined that the Senior Vice President of Retail Banking committed or is substantially responsible for certain acts or omissions prohibited under regulations promulgated by the FDIC.
Note 11. Segment Reporting
The Company has three reporting segments for purposes of reporting business line results: Community Banking, Mortgage Brokerage and the Holding Company. The Community Banking segment is defined as all operating results of the Bank. The Mortgage Brokerage segment is defined as mortgage brokerage activities through the Bank, and the Holding Company segment is defined as the results of Southern Connecticut Bancorp, Inc. on an unconsolidated or standalone basis. The Company uses an internal reporting system to generate information by operating segment. Estimates and allocations are used for noninterest expenses.
Information about the reporting segments and reconciliation of such information to the consolidated financial statements was as follows:
|
Three Months Ended March 31, 2013
|
|
| |
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
| |
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
|
Net interest income
|
|
$ |
1,137,871 |
|
|
$ |
523 |
|
|
$ |
255 |
|
|
$ |
— |
|
|
$ |
1,138,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
1,137,871 |
|
|
|
523 |
|
|
|
255 |
|
|
|
— |
|
|
|
1,138,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
124,676 |
|
|
|
— |
|
|
|
6,864 |
|
|
|
— |
|
|
|
131,540 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
1,319,164 |
|
|
|
193 |
|
|
|
37,232 |
|
|
|
— |
|
|
|
1,356,589 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(56,617 |
) |
|
|
330 |
|
|
|
(30,113 |
) |
|
|
— |
|
|
|
(86,400 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of March 31, 2013
|
|
|
121,137,880 |
|
|
|
45,228 |
|
|
|
11,477,168 |
|
|
|
(10,982,708 |
) |
|
|
121,677,568 |
|
|
Three Months Ended March 31, 2012
|
|
| |
|
Community
|
|
|
Mortgage
|
|
|
Holding
|
|
|
Elimination
|
|
|
Consolidated
|
|
| |
|
Banking
|
|
|
Brokerage
|
|
|
Company
|
|
|
Entries
|
|
|
Total
|
|
|
Net interest income
|
|
$ |
1,227,911 |
|
|
$ |
1,421 |
|
|
$ |
211 |
|
|
$ |
— |
|
|
$ |
1,229,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
1,197,911 |
|
|
|
1,421 |
|
|
|
211 |
|
|
|
— |
|
|
|
1,199,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
167,292 |
|
|
|
— |
|
|
|
8,955 |
|
|
|
— |
|
|
|
176,247 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
1,402,204 |
|
|
|
193 |
|
|
|
31,026 |
|
|
|
— |
|
|
|
1,433,423 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(37,001 |
) |
|
|
1,228 |
|
|
|
(21,860 |
) |
|
|
— |
|
|
|
(57,633 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of March 31, 2012
|
|
|
133,773,203 |
|
|
|
43,447 |
|
|
|
11,569,107 |
|
|
|
(10,977,731 |
) |
|
|
134,408,026 |
|
Note 12. Recent Accounting Pronouncement
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Non-public companies are required to comply with the requirements of ASU 2013-02 for all reporting periods (interim and annual) beginning after December 15, 2013. The Company adopted the methodologies prescribed by this ASU during the quarter ended March 31, 2013. Adoption of this guidance did not have a material effect on the Company’s financial statements.
Note 13. Regulatory Matters
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2013, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. While the Bank met the capital ratio quantitative requirements to be classified as a “well capitalized” financial institution as of March 31, 2013, the Bank is currently classified as “adequately capitalized” as a result of the Consent Order entered into by the Bank in July 2012 with the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking, which is described below in the following paragraphs. As an “adequately capitalized” financial institution, the Bank may not accept brokered deposits without first obtaining a waiver from the Federal Deposit Insurance Corporation. With such a waiver, the Bank generally may not pay an interest rate on the brokered deposits in excess of 75 basis points above interest rates in its normal market area or the national interest rate on deposits outside of its normal market area. The Federal Deposit Insurance Corporation insurance assessment also increases when a financial institution falls below the “well capitalized” classification. In addition, financial institutions that are not “well capitalized,” such as the Bank, may have more difficulty obtaining certain regulatory approvals (including for acquisitions of other financial institutions and opening of new branches).
On July 2, 2012, the Bank entered into a stipulation and consent to the Issuance of a Consent Order with the FDIC and the State of Connecticut Department of Banking (“Connecticut Department of Banking”). Thereafter, on July 3, 2012, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the Connecticut Department of Banking.
By entering into the Consent Order, the Bank has agreed to take certain measures in a number of areas, including, without limitation, the following: (i) having and retaining qualified management and reviewing and revising its assessment of senior management; (ii) maintaining minimum specified capital levels and developing and submitting a capital plan in the event any of its capital ratios fall below such minimum specified capital levels; (iii) formulating and submitting a profit and budget plan consisting of goals and strategies consistent with sound banking practices and implementing such plan;
(iv) formulating and submitting a plan to reduce classified assets and implementing such plan; (v) reviewing and improving the loan and credit risk management policies and procedures; (vi) developing and implementing action plans addressing all other recommendations identified within its most recent Report of Examination; (vii) complying with the Interagency Policy Statement on Internal Audit Function and its Outsourcing; and (viii) not accepting, renewing or rolling over any brokered deposits unless the Bank is in compliance with regulations governing the solicitation and acceptance of brokered deposits. The Consent Order also provides that the Bank will obtain prior regulatory approval before the payment of any dividends. The Bank has already adopted and implemented many of the actions prescribed in the Consent Order.
The Consent Order requires the Bank to maintain a minimum Tier 1 leverage ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 9% and a total risk-based capital ratio of at least 10%. At March 31, 2013, the Bank’s capital ratios exceeded such minimums set forth in the Consent Order. In September 2012, the Bank also submitted a revised capital plan outlining its strategy for increasing its capital amounts and ratios to the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking for their approval. The capital plan included a profit and budget plan and a plan to reduce classified assets. In October 2012, the Bank received regulatory approval for its revised capital plan. Further regulatory action is possible if the Bank does not continue to maintain the minimum capital ratios set forth in the Consent Order.
The Bank has an Oversight Committee that is responsible for supervising the implementation of the Consent Order. The Oversight Committee meets monthly and is currently composed of the Company’s Chairman of the Board, two additional directors, the Chief Executive Officer, the President and Senior Loan Officer and the Chief Financial Officer.
The Consent Order is the result of ongoing discussions between the Bank’s regulatory agencies and the Bank based on a regulatory examination conducted in early 2012. The Consent Order will remain in effect until it is modified or terminated by the FDIC and the Connecticut Department of Banking. The Bank’s customer deposits remain fully insured to the highest limit set by the FDIC.
Note 14. Pending Merger Transaction
On January 16, 2013, the Company and the Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Liberty Bank, a Connecticut-chartered mutual savings bank with its main office in Middletown, Connecticut (“Liberty”), pursuant to which a to-be-formed wholly-owned subsidiary of Liberty will be merged with and into the Company with the Company being the surviving entity, immediately followed by the merger of the Company with and into Liberty with Liberty being the surviving entity (collectively, the “Merger”), and immediately followed by the merger of the Bank with and into Liberty with Liberty being the surviving bank.
Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of common stock of the Company will be converted into the right to receive cash consideration in the amount of $3.76. In addition, each outstanding option to acquire shares of common stock of the Company will be cancelled and converted into the right to receive cash equal to the product of (i) the positive difference, if any, between $3.76 and the exercise price of such option multiplied by (ii) the number of shares of common stock of the Company underlying such option.
The Merger Agreement contains representations, warranties and covenants of the Company, the Bank and Liberty. Among other customary covenants, each of the Company and the Bank has agreed that it (i) will conduct its business in the ordinary course and consistent with past banking practices during the period between the execution of the Merger Agreement and the consummation of the Merger and (ii) will not engage in certain kinds of transactions during such period unless it obtains the prior written consent of Liberty. The Company has also agreed to not, subject to certain exceptions generally related to the Company’s Board of Directors’ evaluation and exercise of its fiduciary duties, (i) solicit proposals relating to alternative business combination transactions or (ii) enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combination transactions. The Merger Agreement also provides that Liberty will establish an advisory board for the Greater New Haven, Connecticut market area and invite each director of the Company to serve on such advisory board.
The Merger Agreement provides certain termination rights for both the Company and Liberty, and further provides that upon termination of the Merger Agreement under certain circumstances, the Company will be obligated to pay Liberty a termination fee of up to $450,000.
Completion of the Merger is subject to various conditions, including (i) receipt of the requisite approval of the shareholders of the Company, (ii) the absence of any law or order prohibiting the closing and (iii) receipt of regulatory approvals. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including the accuracy of the representations and warranties of the other party, compliance by the other party with its covenants in all material respects and the receipt of all material permits, authorizations, consents, waivers or approvals required to be obtained by the other party. If these conditions are satisfied, the Merger is expected to be completed in the second quarter of 2013.
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis is intended to assist you in understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the accompanying unaudited financial statements as of and for the three months ended March 31, 2013 and 2012 together with the audited financial statements as of and for the year ended December 31, 2012, included in the Company’s Form 10-K\A filed with the Securities and Exchange Commission on April 8, 2013.
Summary
As of March 31, 2013, the Company had $121.8 million of total assets, $100.2 million of gross loans receivable, and $106.6 million of total deposits. Total equity capital at March 31, 2013 was $11.5 million and the Company’s Tier I Leverage Capital Ratio was 9.53%.
The Company had a net loss for the quarter ended March 31, 2013 of $86,000 (or basic and diluted loss per share of $0.03) as compared to a net loss of $58,000 (or basic and diluted loss per share of $0.02) for the first quarter of 2012.
The Company’s operating results for the first quarter of 2013, when compared to the same period of 2012, were influenced by the following factors:
|
●
|
Net interest income decreased by $91,000 due to the combined effects of decreases in loan volume and lower yields on interest earning assets (primarily attributable to a decline in yields in the loan portfolio and the reversal of $42,000 of interest income for one commercial TDR loan resulting from the reclassification of such amount to a reduction in the loan’s principal balance where the amount was initially recorded), which were partially offset by decreases in liability volumes and lower rates paid on interest bearing liabilities;
|
| ● |
Provision for loan losses decreased by $30,000 primarily due to declines in loan balances subject to the general reserve; |
|
|
Noninterest income decreased by $44,000 because of decreases in loan prepayment fees recognized during the three months ended March 31, 2013 compared to the same period of 2012 as well as a decline in other noninterest income and a decrease in service charges and fees resulting from changes in the business practices of customers of the Bank; and
|
|
|
Noninterest expenses decreased by $76,000 during the first quarter of 2013 compared to the same period of 2012 primarily due to a decrease in salaries and benefits expense, which was partially offset by increases in occupancy and equipment expense, professional services and the cost of FDIC insurance. The decrease in salaries and benefits during the first quarter of 2013 when compared to the first quarter of 2012 was primarily attributable to restricted stock compensation expense recorded by the Company for restricted stock that vested during the first quarter of 2012 as a result of the Chief Executive Officer’s employment agreement and restricted stock agreement being executed on February 28, 2012 with no such expense incurred during the first quarter of 2013. The increase in occupancy and equipment expense was attributable to increased property taxes and maintenance costs. The increase in professional services was due to increased costs for legal and auditing services performed in the first quarter of 2013 when compared to the same period in 2012. The cost of FDIC insurance increased during the first quarter of 2013 compared to the first quarter of 2012 primarily due to an increase in FDIC assessment rates, which was partially offset by a decline in balances subject to the FDIC deposit insurance assessment.
|
Critical Accounting Policy
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to reporting the results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses the Company’s only critical accounting policy, which is the policy that is most important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has reviewed this critical accounting policy and estimates with its audit committee. Refer to the discussion below under “Allowance for Loan Losses” and Note 1 to the audited Consolidated Financial Statements as of and for the year ended December 31, 2012 included in the Company’s Form 10-K\A filed with the Securities and Exchange Commission on April 8, 2013.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are considered impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans, segregated generally by loan type (and further segregated by risk rating), and is based on historical loss experience with adjustments for qualitative factors which are made after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers either experiencing financial difficulties or absent such concessions, it is probable the borrowers would experience financial difficulty complying with the original terms of the loan. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: (1) the borrower is experiencing documented financial difficulty and (2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions and/or maturity extensions. Modified terms are dependent upon the financial position and needs of the individual borrower, as the Bank does not employ modification programs for temporary or trial periods. All modifications are permanent. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. The Company’s workout committee continues to monitor the modified loan and if a re-default occurs, the loan is classified as a re-defaulted TDR and collection is pursued through liquidation of collateral, from guarantors, if any, or through other legal action.
Most TDRs are placed on nonaccrual status at the time of restructuring, and continue on nonaccrual status until they have performed under the revised terms of the modified loan agreement for a minimum of six months. In certain instances, for TDRs that are on accrual status at the time the loans are restructured, the Bank may continue to classify the loans as accruing loans based upon the terms and conditions of the restructuring. At March 31, 2013, the Bank had two commercial and industrial loans and one commercial loan secured by real estate classified as TDRs on nonaccrual status and two commercial loans secured by real estate and one commercial loan classified as TDRs on accrual status. TDRs are classified as impaired loans and remain as TDRs for the remaining life of the loan. At March 31, 2013, all TDRs have been performing in accordance with the restructured terms.
Impairment analysis is performed on a loan by loan basis for all modified commercial loans, residential mortgages and consumer loans that are deemed to be TDRs, and related charge-offs are recorded or specific reserves are established as appropriate. Commercial loans include loans categorized as commercial loans secured by real estate, commercial loans, and construction and land loans. Impairment is measured by the present value of expected future cash flows discounted at the loan’s effective interest rate. The original contractual interest rate for the loan is used as the discount rate for fixed rate loan modifications. The current rate is used as the discount rate when the loan’s interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation.
The allowances established for losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the borrower’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed by the credit department, in consultation with the loan officers, for all commercial loans. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.
General valuation allowances are calculated based on the historical loss experience of specific types of loans. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include analogous risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.
Due to the relatively small asset size and loans outstanding of the Company, the Company uses readily available data from the FDIC regarding the loss experience of national banks with assets between $100 million and $300 million and combines this data with the Company’s actual loss experience to develop average loss factors by weighting the national banks’ loss experience and the Company’s loss experience. In reviewing the performance and trends of the Company’s loan portfolio during the year ended December 31, 2012 compared to the year ended December 31, 2011, management determined to update the methodology relating to the calculation of the general reserve by reducing the historical loss period to three years from the four year loss period utilized during the year ended December 31, 2011, which is considered more representative of average annual losses inherent in the Bank’s loan portfolio. The Company returned to the use of the three year loss period at December 31, 2012 after considering trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions, and continued using this three year loss period at March 31, 2013. Since there was no significant change in both the Company’s asset size and outstanding loan balance during 2012 or the first quarter of 2013, the Company determined to continue to weight the loss experience of national banks and the Company’s loss experience equally. As the size of the Company’s loan portfolio becomes more significant, the Company intends to weight the Company’s loss experience more heavily in determining the allowance for loan loss provision.
General valuation allowances are based on general economic conditions and other qualitative risk factors, both internal and external, to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Company’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; and (vi) the impact of national and local economic trends and conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then entered into a general allocation matrix to determine an appropriate general valuation allowance.
Based upon this evaluation, management believes the allowance for loan losses of $2,234,391 or 2.23% of gross loans outstanding at March 31, 2013 is adequate, under prevailing economic conditions, to absorb losses on existing loans.
At December 31, 2012, the allowance for loan losses was $2,229,334 or 2.11% of gross loans outstanding. The increase in the allowance at March 31, 2013 compared to December 31, 2012 was attributable to a $5,000 increase in the general component of the allowance. The $5,000 increase in the general component of the reserve from December 31, 2012 to March 31, 2013 was due to net recoveries realized by the Company during the first quarter of 2013.
The Company’s provision for loan losses decreased by $30,000 for the quarter ended March 31, 2013 compared to the same period in 2012 primarily due to declines in loan balances subject to the general reserve.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Management considers all non-accrual loans and troubled-debt restructured loans to be impaired. In most cases, loan payments that are past due less than 90 days and the related loans are not considered to be impaired.
Allowance for Loan Losses and Nonaccrual, Past Due and Restructured Loans
The changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012 were as follows:
| |
|
2013
|
|
|
2012
|
|
|
Balance at beginning of year
|
|
$ |
2,229,334 |
|
|
$ |
2,299,625 |
|
|
Provision for loan losses
|
|
|
— |
|
|
|
30,000 |
|
|
Recoveries of loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
12,412 |
|
|
|
70,275 |
|
|
Commercial loans secured by real estate
|
|
|
2,589 |
|
|
|
— |
|
|
Total recoveries
|
|
|
15,001 |
|
|
|
70,275 |
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(9,944 |
) |
|
|
— |
|
|
Total charge-offs
|
|
|
(9,944 |
) |
|
|
— |
|
|
Balance at end of period
|
|
$ |
2,234,391 |
|
|
$ |
2,399,900 |
|
|
Net recoveries to average loans
|
|
|
0.01 |
% |
|
|
0.06 |
% |
Non-Performing Assets and Potential Problem Loans
The following table represents non-performing assets and potential problem loans at March 31, 2013 and December 31, 2012:
|
Nonaccrual loans:
|
|
2013
|
|
|
2012
|
|
|
Commercial
|
|
$ |
1,685,479 |
|
|
$ |
1,687,827 |
|
|
Construction and land
|
|
|
1,324,551 |
|
|
|
1,343,295 |
|
|
Residential mortgages
|
|
|
776,712 |
|
|
|
860,522 |
|
|
Commercial loans secured by real estate
|
|
|
787,023 |
|
|
|
796,775 |
|
|
Total non-accrual loans
|
|
|
4,573,765 |
|
|
|
4,688,419 |
|
|
Troubled debt restructured (TDR) loans:
|
|
|
|
|
|
|
|
|
|
Nonaccrual TDR loans not included in total nonaccrual loans above:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
241,421 |
|
|
|
247,344 |
|
|
Commercial loans secured by real estate
|
|
|
239,178 |
|
|
|
243,678 |
|
|
Accruing TDR impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
3,371,947 |
|
|
|
3,457,170 |
|
|
Commercial
|
|
|
1,604,775 |
|
|
|
1,628,761 |
|
|
Total impaired loans
|
|
|
10,031,086 |
|
|
|
10,265,372 |
|
|
Foreclosed assets:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
582,911 |
|
|
|
582,911 |
|
|
Total non-performing assets
|
|
$ |
10,613,997 |
|
|
$ |
10,848,283 |
|
| |
|
|
|
|
|
|
|
|
|
Ratio of non-performing assets to:
|
|
|
|
|
|
|
|
Total loans and foreclosed assets
|
|
|
10.53 |
% |
|
|
10.23 |
% |
|
Total assets
|
|
|
8.72 |
% |
|
|
8.93 |
% |
|
Accruing past due loans:
|
|
|
|
|
|
|
|
|
|
30 to 89 days past due
|
|
$ |
2,628,809 |
|
|
$ |
998,169 |
|
|
90 or more days past due
|
|
|
500,000 |
|
|
|
— |
|
|
Total accruing past due loans
|
|
$ |
3,128,809 |
|
|
$ |
998,169 |
|
|
Ratio of accruing past due loans to total loans net of unearned income:
|
|
|
|
|
|
|
|
30 to 89 days past due
|
|
|
2.62 |
% |
|
|
0.95 |
% |
|
90 or more days past due
|
|
|
0.50 |
% |
|
|
0.00 |
% |
|
Total accruing past due loans
|
|
|
3.12 |
% |
|
|
0.95 |
% |
Recent Accounting Changes
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Non-public companies are required to comply with the requirements of ASU 2013-02 for all reporting periods (interim and annual) beginning after December 15, 2013. The Company adopted the methodologies prescribed by this ASU during the quarter ended March 31, 2013. Adoption of this guidance did not have a material effect on the Company’s financial statements.
Comparison of Financial Condition as of March 31, 2013 versus December 31, 2012
General
The Company’s total assets were $121.8 million at March 31, 2013, an increase of $300,000 over total assets of $121.5 million at December 31, 2012. The Bank’s net loans receivable decreased to $98.0 million at March 31, 2013 from $103.3 million at December 31, 2012, and cash and cash equivalents, including short term investments, increased to $16.4 million as of March 31, 2013 from $11.6 million as of December 31, 2012. Total deposits decreased to $106.6 million as of March 31, 2013 from $108.2 million as of December 31, 2012. Accrued expenses and other liabilities increased $2.0 million to $2.5 million as of March 31, 2013 from $500,000 at December 31, 2012.
Short-term investments
Short-term investments, consisting of money market investments, decreased to $4.6 million at March 31, 2013 from $4.7 million at December 31, 2012.
Investments
Available for sale securities, which consisted of U.S. Treasury Bills, increased $1.1 million to $2.3 million at March 31, 2013 from $1.2 million at December 31, 2012. The Company uses the U.S. Treasury Bills included in its available for sale securities portfolio to meet pledge requirements for public deposits. The Company classifies its securities as “available for sale” to provide greater flexibility to respond to changes in interest rates as well as future liquidity needs.
Loans
Interest income on loans is the most important component of the Company’s net interest income. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The Company’s net loan portfolio was $98.0 million at March 31, 2013 versus $103.3 million at December 31, 2012, a decrease of $5.3 million. The Company attributes the decline in loan balances during the first three months of 2013 to a decline in loan demand. The Bank’s loans have been made to small to medium-sized businesses, primarily in the Greater New Haven Market. There are no other significant loan concentrations in the loan portfolio.
Deposits
Total deposits were $106.6 million at March 31, 2013, a decrease of $1.6 million or 1.5% from total deposits of $108.2 million at December 31, 2012. Non-interest bearing deposits were $26.0 million at March 31, 2013, a decrease of $3.9 million or 13.2% from $29.9 million at December 31, 2012. Total interest bearing checking, money market and savings deposits increased $400,000 or 0.8% to $45.0 million at March 31, 2013 from $44.6 million at December 31, 2012. Time deposits increased $1.9 million or 3.4% to $35.6 million at March 31, 2013 from $33.7 million at December 31, 2012. Included in time deposits at March 31, 2013 and December 31, 2012 were $2.5 million and $4.5 million, respectively, of brokered deposits. This included the Company’s placement of $2.0 million and $4.0 million in customer deposits at March 31, 2013 and December 31, 2012, respectively, and the purchase of $300,000 in brokered certificates of deposit through the CDARS program at both March 31, 2013 and December 31, 2012, respectively. As a result of the Consent Order, the Bank does not intend to renew or accept brokered deposits without obtaining prior regulatory approval during the period in which the Consent Order is in place.
The Greater New Haven Market is highly competitive. The Bank faces competition from a large number of banks (ranging from small community banks to large international banks), credit unions, and other providers of financial services. The level of rates offered by the Bank reflects the high level of competition in the Bank’s market.
Other
Accrued expenses and other liabilities totaled $2.5 million at March 31, 2013 as compared to $500,000 at December 31, 2012. The increase was attributable to $2.0 million in loan payments received from a borrower on March 31, 2013 that were due to a participating bank for such participating bank’s portion of the loan repayment. On April 1, 2013, the Bank remitted the $2.0 million to the participating bank and accrued expenses and other liabilities decreased by such amount.
Results of Operations: Comparison of Results for the three months ended March 31, 2013 and 2012
General
The Company had a net loss for the quarter ended March 31, 2013 of $86,000 (or basic and diluted loss per share of $0.03) as compared to a net loss of $58,000 (or basic and diluted loss per share of $0.02) for the first quarter of 2012.
The Company’s operating results for the first quarter of 2013, when compared to the same period of 2012, were influenced by the following factors:
|
●
|
Net interest income decreased by $91,000 due to the combined effects of decreases in loan volume and lower yields on interest earning assets (primarily attributable to a decline in yields in the loan portfolio and the reversal of $42,000 of interest income for one commercial TDR loan resulting from the reclassification of such amount to a reduction in the loan’s principal balance where the amount was initially recorded), which were partially offset by decreases in liability volumes and lower rates paid on interest bearing liabilities;
|
| ● |
Provision for loan losses decreased by $30,000 primarily due to declines in loan balances subject to the general reserve; |
|
|
Noninterest income decreased by $44,000 because of decreases in loan prepayment fees recognized during the three months ended March 31, 2013 compared to the same period of 2012 as well as a decline in other noninterest income and a decrease in service charges and fees resulting from changes in the business practices of customers of the Bank; and
|
|
|
Noninterest expenses decreased by $76,000 during the first quarter of 2013 compared to the same period of 2012 primarily due to a decrease in salaries and benefits expense, which was partially offset by increases in occupancy and equipment expense, professional services and the cost of FDIC insurance. The decrease in salaries and benefits during the first quarter of 2013 when compared to the first quarter of 2012 was primarily attributable to restricted stock that vested during the first quarter of 2012 as a result of the Chief Executive Officer’s employment agreement and restricted stock agreement being executed on February 28, 2012 with no such expense incurred during the first quarter of 2013. The increase in occupancy and equipment expense was attributable to increased property taxes and maintenance costs. The increase in professional services was due to increased costs for legal and auditing services performed in the first quarter of 2013 when compared to the same period in 2012. The cost of FDIC insurance increased during the first quarter of 2013 compared to the first quarter of 2012 primarily due to an increase in FDIC assessment rates, which was partially offset by a decline in balances subject to the FDIC deposit insurance assessment.
|
Net Interest Income
The principal source of revenue for the Bank is net interest income. The Bank’s net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The Bank, like other banking institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets.
For the quarter ended March 31, 2013, net interest income was $1,139,000 versus $1,230,000 for the same period in 2012. The $91,000 or 7.4% decrease was the result of a $200,000 decrease in interest income partially offset by a $109,000 decrease in interest expense. This net decrease was primarily the result of decreased asset volumes and lower yields on interest earning assets, which were partially offset by decreases in average balances on interest bearing liabilities and lower rates on interest bearing liabilities.
The Company’s average total interest earning assets were $110.6 million during the quarter ended March 31, 2013 compared to $123.0 million for the same period in 2012, a decrease of $12.4 million or 10.1%. The decrease in average interest earning assets of $12.4 million during the quarter ended March 31, 2013 was comprised of decreases in average balances of loans of $8.0 million, decreases in average balances of short-term and other investments of $2.7 million and a $1.7 million decrease in average balance of investments.
The yield on average interest earning assets for the quarter ended March 31, 2013 was 4.98% compared to 5.08% for the same period in 2012, a decrease of 10 basis points. The decrease in the yield on average interest earning assets was primarily attributable to lower yields on the Bank’s loan portfolio because of the lower interest rate environment as well as the reversal of $42,000 of interest income for one commercial TDR loan resulting from the reclassification of such amount to a reduction in the loan’s principal balance where the amount was initially recorded.
The combined effects of the $12.4 million decrease in average balances of interest earning assets and the 10 basis point decrease in yield on average interest earning assets resulted in the $200,000 decline in interest income for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.
The average balance of the Company’s interest bearing liabilities was $80.4 million during the quarter ended March 31, 2013 compared to $98.1 million for the quarter ended March 31, 2012, a decrease of $17.7 million or 18.0%. The cost of average interest bearing liabilities decreased 24 basis points to 1.10% for the quarter ended March 31, 2013 compared to 1.34% for the same period in 2012 due to maturities of higher priced time deposits as well as a general decrease in market interest rates.
The combined effect of the 24 basis point decrease in cost of average interest bearing liabilities and the $17.7 million decrease in average balances of interest bearing liabilities resulted in the $109,000 decrease in interest expense for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.
Average Balances, Yields, and Rates
The following table presents average balance sheets (daily averages), interest income, interest expense, and the corresponding annualized rates on interest earning assets and rates paid on interest bearing liabilities for the three months ended March 31, 2013 and 2012:
|
Distribution of Assets, Liabilities and Shareholders’ Equity;
|
|
|
Interest Rates and Interest Differential
|
|
| |
|
2013
|
|
|
2012 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
| |
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
in Interest
|
|
|
Change in
|
|
| |
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Expense
|
|
|
Balance
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2)
|
|
$ |
103,072 |
|
|
$ |
1,341 |
|
|
|
5.28 |
% |
|
$ |
111,107 |
|
|
$ |
1,541 |
|
|
|
5.56 |
% |
|
$ |
(200 |
) |
|
$ |
(8,035 |
) |
|
Short-term and other investments
|
|
|
5,121 |
|
|
|
17 |
|
|
|
1.35 |
% |
|
|
7,813 |
|
|
|
17 |
|
|
|
0.87 |
% |
|
|
— |
|
|
|
(2,692 |
) |
|
Investments
|
|
|
2,377 |
|
|
|
— |
|
|
|
0.00 |
% |
|
|
4,122 |
|
|
|
— |
|
|
|
0.00 |
% |
|
|
— |
|
|
|
(1,745 |
) |
|
Total interest earning assets
|
|
|
110,570 |
|
|
|
1,358 |
|
|
|
4.98 |
% |
|
|
123,042 |
|
|
|
1,558 |
|
|
|
5.08 |
% |
|
|
(200 |
) |
|
|
(12,472 |
) |
|
Cash and due from banks
|
|
|
7,315 |
|
|
|
|
|
|
|
|
|
|
|
14,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,307 |
) |
|
Premises and equipment, net
|
|
|
1,904 |
|
|
|
|
|
|
|
|
|
|
|
1,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
Allowance for loan losses
|
|
|
(2,237 |
) |
|
|
|
|
|
|
|
|
|
|
(2,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
Other
|
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
|
3,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(567 |
) |
|
Total assets
|
|
$ |
120,290 |
|
|
|
|
|
|
|
|
|
|
$ |
140,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20,326 |
) |
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates
|
|
$ |
35,200 |
|
|
|
111 |
|
|
|
1.28 |
% |
|
$ |
43,005 |
|
|
|
198 |
|
|
|
1.85 |
% |
|
|
(87 |
) |
|
$ |
(7,805 |
) |
|
Money market / checking deposits
|
|
|
41,277 |
|
|
|
67 |
|
|
|
0.66 |
% |
|
|
50,656 |
|
|
|
87 |
|
|
|
0.69 |
% |
|
|
(20 |
) |
|
|
(9,379 |
) |
|
Savings deposits
|
|
|
2,796 |
|
|
|
1 |
|
|
|
0.15 |
% |
|
|
2,770 |
|
|
|
1 |
|
|
|
0.14 |
% |
|
|
— |
|
|
|
26 |
|
|
Capital lease obligations
|
|
|
1,151 |
|
|
|
40 |
|
|
|
14.09 |
% |
|
|
1,161 |
|
|
|
42 |
|
|
|
14.51 |
% |
|
|
(2 |
) |
|
|
(10 |
) |
|
Repurchase agreements
|
|
|
— |
|
|
|
— |
|
|
|
0.00 |
% |
|
|
493 |
|
|
|
— |
|
|
|
0.00 |
% |
|
|
— |
|
|
|
(493 |
) |
|
Total interest bearing liabilities
|
|
|
80,424 |
|
|
|
219 |
|
|
|
1.10 |
% |
|
|
98,085 |
|
|
|
328 |
|
|
|
1.34 |
% |
|
|
(109 |
) |
|
|
(17,661 |
) |
|
Non-interest bearing deposits
|
|
|
27,780 |
|
|
|
|
|
|
|
|
|
|
|
30,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,455 |
) |
|
Accrued expenses and other liabilities
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
Shareholder’s equity
|
|
|
11,580 |
|
|
|
|
|
|
|
|
|
|
|
11,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143 |
) |
|
Total liabilities and equity
|
|
$ |
120,290 |
|
|
|
|
|
|
|
|
|
|
$ |
140,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20,326 |
) |
|
Net interest income
|
|
|
|
|
|
$ |
1,139 |
|
|
|
|
|
|
|
|
|
|
$ |
1,230 |
|
|
|
|
|
|
$ |
(91 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread
|
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.74 |
% |
|
|
|
|
|
|
|
|
|
Interest margin
|
|
|
|
|
|
|
|
|
|
|
4.18 |
% |
|
|
|
|
|
|
|
|
|
|
4.01 |
% |
|
|
|
|
|
|
|
|
|
(1) Includes nonaccruing loans.
|
|
(2) Interest income includes loan fees, which are not material.
|
Changes in Assets and Liabilities and Fluctuations in Interest Rates
The following table summarizes the variance in interest income and interest expense for the three months ended March 31, 2013 and 2012 resulting from changes in assets and liabilities and fluctuations in interest rates earned and paid. The changes in interest attributable to both rate and volume have been allocated to both rate and volume on a pro rata basis:
| |
|
March, 2013 vs 2012
|
|
| |
|
Due to Change in Average
|
|
|
(Decrease)
|
|
|
(Dollars in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Increase
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
(102 |
) |
|
$ |
(98 |
) |
|
$ |
(200 |
) |
|
Short-term and other investments
|
|
|
(5 |
) |
|
|
5 |
|
|
|
— |
|
|
Total interest earning assets
|
|
|
(107 |
) |
|
|
(93 |
) |
|
|
(200 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates
|
|
|
(33 |
) |
|
|
(54 |
) |
|
|
(87 |
) |
|
Money market / checking deposits
|
|
|
(16 |
) |
|
|
(4 |
) |
|
|
(20 |
) |
|
Capital lease obligations
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Total interest bearing liabilities
|
|
|
(49 |
) |
|
|
(60 |
) |
|
|
(109 |
) |
|
Net interest income
|
|
$ |
(58 |
) |
|
$ |
(33 |
) |
|
$ |
(91 |
) |
The decrease in net interest income during the first quarter of 2013 reflected a $12.4 million decrease in total average interest earning assets to $110.6 million in the first quarter of 2013 from $123.0 million in the first quarter of 2012 and a decrease in the yields on interest earning assets to 4.98% for the three months ended March 31, 2013 from 5.08% in the same period of 2012. The combined effects of these changes were partially offset by a $17.7 million decrease in average interest bearing liabilities to $80.4 million for the three months ended March 31, 2013 from $98.0 million for the same period of 2012 as well as decreases in rates on interest bearing liabilities to 1.10% for the three months ended March 31, 2013 from 1.34% for the same period in 2012. Interest income from interest earning assets in the first quarter of 2013 when compared to the same period in 2012, decreased by $200,000 because of a $107,000 decrease due to volume considerations and a $93,000 decrease due to a decline in interest rates. Variances in the cost of interest bearing liabilities during the three months ended March 31, 2013 in comparison to the same period in 2012 were due to decreased rate considerations of $60,000 and decreased volume considerations of $49,000.
The Company intends for the Bank to continue to emphasize lending to small to medium-sized businesses in its market area as it maintains its strategy to increase assets under management and to improve earnings. The Bank will seek opportunities through marketing to increase its deposit base, with a primary objective of attracting core non-interest checking and related money market deposit accounts, in order to support its earning assets and through the consideration of additional branch locations and new product and service offerings.
Provision for Loan Losses
The Bank had no provision for loan losses during the three months ended March 31, 2013 compared to a provision for loan losses of $30,000 during the same period in 2012. The Bank recorded no provision for loan losses in the first quarter of 2013 primarily due to declines in the loan balances subject to the general reserve.
Noninterest Income
Total noninterest income decreased $44,000 to $132,000 for the three months ended March 31, 2013 from $176,000 for the same period in 2012. This decrease was primarily due to decline of $33,000 in loan prepayment fees recognized in the three months ended March 31, 2013 compared to the same period of 2012. In addition, service charges and fees decreased by $6,000 due to changes in business practices of customers of the Bank and other noninterest income decreased by $5,000 for the first quarter of 2013 as compared to the same period in 2012.
Noninterest Expense
Total noninterest expense was $1,357,000 for the three months ended March 31, 2013 compared to $1,433,000 for the same period in 2012, a decrease of $76,000 or 5.3%.
Salaries and benefits expense decreased $124,000 to $680,000 for the three months ended March 31, 2013 from $804,000 for the same period in 2012. The decrease in salaries and benefits expense during the first quarter of 2013 when compared to the first quarter of 2012 was primarily attributable to restricted stock compensation expense recorded by the Company for restricted stock that vested during the first quarter of 2012 relating to the Chief Executive Officer’s employment agreement and restricted stock agreement being executed on February 28, 2012 with no such expense incurred during the first quarter of 2013.
Occupancy and equipment expense increased by $13,000 to $173,000 for the three months ended March 31, 2013 from $160,000 for the same period in 2012 primarily due to increased property taxes and maintenance costs.
Professional services expense increased by $13,000 to $175,000 for the three months ended March 31, 2013 from $162,000 for the same period in 2012 due to increased costs for legal and auditing services performed during the quarter ended March 31, 2013 compared to the same period in 2012.
FDIC insurance expense increased by $13,000 to $68,000 for the three months ended March 31, 2013 from $55,000 for the same period in 2012. The increase was attributable to an increase in FDIC assessment rates, which was partially offset by a decline in balances subject to the FDIC deposit insurance assessment.
Other operating expenses of $113,000 for the three months ended March 31, 2013 were relatively unchanged from $117,000 for the same period in 2012.
Off-Balance Sheet Arrangements
See Note 8 to the Consolidated Financial Statements for information regarding the Company’s off-balance sheet arrangements.
Liquidity
Management believes the Company’s short-term assets provide sufficient liquidity to cover potential fluctuations in deposit accounts and loan demand and to meet other anticipated operating cash and investment requirements.
The Company’s liquidity position consisted of liquid assets totaling $19.2 million and $13.5 million as of March 31, 2013 and December 31, 2012, respectively. This represented 15.7% and 11.1%, respectively, of total assets at March 31, 2013 and December 31, 2012. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets as described in the accompanying balance sheet are considered liquid assets: Cash and due from banks, short-term investments, interest-bearing certificates of deposit and securities available for sale. Liquidity is a measure of the Company’s ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposits and increases in its loan portfolio.
In addition to the foregoing sources of liquidity, the Bank maintains a relationship with the Federal Home Loan Bank of Boston and has the ability to pledge certain of the Bank’s assets as collateral for borrowings from that institution.
Capital
The Company’s and Bank’s actual capital amounts and ratios at March 31, 2013 and December 31, 2012 were as follows:
The Company’s actual capital amounts and ratios at March 31, 2013 and December 31, 2012 were:
|
(dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
| |
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
March 31, 2013
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
| |
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$ |
12,716 |
|
|
|
12.79 |
% |
|
$ |
7,951 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
11,461 |
|
|
|
11.53 |
% |
|
|
3,976 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
Tier 1 (Leverage) Capital to Average Assets
|
|
|
11,461 |
|
|
|
9.53 |
% |
|
|
4,812 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
| |
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
December 31, 2012
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
| |
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$ |
12,863 |
|
|
|
12.33 |
% |
|
$ |
8,343 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
11,548 |
|
|
|
11.07 |
% |
|
|
4,171 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
Tier 1 (Leverage) Capital to Average Assets
|
|
|
11,548 |
|
|
|
9.31 |
% |
|
|
4,960 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
The Bank’s actual capital amounts and ratios at March 31, 2013 and December 31, 2012 were:
|
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
| |
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
March 31, 2013
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
| |
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$ |
11,940 |
|
|
|
12.06 |
% |
|
$ |
7,920 |
|
|
|
8.00 |
% |
|
$ |
9,900 |
|
|
|
10.00 |
% |
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
10,690 |
|
|
|
10.80 |
% |
|
|
3,960 |
|
|
|
4.00 |
% |
|
|
5,940 |
|
|
|
6.00 |
% |
|
Tier 1 (Leverage) Capital to Average Assets
|
|
|
10,690 |
|
|
|
8.93 |
% |
|
|
4,790 |
|
|
|
4.00 |
% |
|
|
5,988 |
|
|
|
5.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
| |
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
December 31, 2012
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
| |
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total Capital to Risk-Weighted Assets
|
|
$ |
12,057 |
|
|
|
11.60 |
% |
|
$ |
8,313 |
|
|
|
8.00 |
% |
|
$ |
10,391 |
|
|
|
10.00 |
% |
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
10,747 |
|
|
|
10.34 |
% |
|
|
4,156 |
|
|
|
4.00 |
% |
|
|
6,235 |
|
|
|
6.00 |
% |
|
Tier 1 (Leverage) Capital to Average Assets
|
|
|
10,747 |
|
|
|
8.70 |
% |
|
|
4,939 |
|
|
|
4.00 |
% |
|
|
6,174 |
|
|
|
5.00 |
% |
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. To be considered “well capitalized,” an institution must generally have a Tier 1 leverage 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%. While the Bank met the capital ratio quantitative requirements to be classified as a “well capitalized” financial institution as of March 31, 2013, the Bank is currently classified as “adequately capitalized” as a result of the Consent Order entered into by the Bank in July 2012 with the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking. The Consent Order required, among other things, that the Bank maintain a minimum Tier 1 leverage ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 9% and a total risk-based capital ratio of at least 10%. At March 31, 2013, the Bank’s capital ratios exceeded such minimums set forth in the Consent Order. As an “adequately capitalized” financial institution, the Bank may not accept brokered deposits without first obtaining a waiver from the Federal Deposit Insurance Corporation. With such a waiver, the Bank generally may not pay an interest rate on the brokered deposits in excess of 75 basis points above interest rates in its normal market area or the national interest rate on deposits outside of its normal market area. The Federal Deposit Insurance Corporation insurance assessment also increases when a financial institution falls below the “well capitalized” classification. In addition, financial institutions that are not “well capitalized,” such as the Bank, may have more difficulty obtaining certain regulatory approvals (including for acquisitions of other financial institutions and opening of new branches).
In September 2012, the Bank also submitted a revised capital plan outlining its strategy for increasing its capital amounts and ratios to the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking for their approval. In October 2012, the Bank received regulatory approval for its revised capital plan. In the event the Company and Bank’s pending merger with Liberty Bank is not consummated, the Company and the Bank will seek to implement the plan to increase capital as soon as practicable. Further regulatory action is possible if the Bank does not maintain the minimum capital ratios set forth in the Consent Order.
Market Risk
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. Based upon the nature of the Company’s business, market risk is primarily limited to interest rate risk, which is defined as the impact of changing interest rates on current and future earnings.
The Company’s goal is to maximize long-term profitability, while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price the Company’s assets and liabilities to maintain an acceptable interest rate spread, while reducing the net effect of changes in interest rates. In order to reach an acceptable interest rate spread, the Company must generate loans and seek acceptable long-term investments to replace the lower yielding balances in Federal Funds sold and short-term investments. The focus also must be on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable loans for the portfolio to offset the short-term re-pricing of the liabilities. In fact, a number of the interest bearing deposit products have no contractual maturity. Customers may withdraw funds from their accounts at any time and deposits balances may therefore run off unexpectedly due to changing market conditions.
The exposure to interest rate risk is monitored by senior management of the Bank and reported quarterly to the Asset and Liability Management Committee and the Board of Directors. Management reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk.
Impact of Inflation and Changing Prices
The Company’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Notwithstanding this fact, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect the Company’s earnings in future periods.
Factors Affecting Future Results
Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report on Form 10-Q may include forward-looking statements which reflect our current views with respect to future events and financial performance. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements or that could adversely affect the holders of our common stock. These factors include, but are not limited to,
(1) changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities, (2) the timing of re-pricing of the Company’s interest earning assets and interest bearing liabilities, (3) the effect of changes in governmental monetary policy, (4) the impact of recently enacted federal legislation and the effect of changes in regulations applicable to the Company and the conduct of its business, (5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks, (6) the ability of competitors which are larger than the Company to provide products and services which are impractical for the Company to provide, (7) the volatility of quarterly earnings, due in part to the variation in the number, dollar volume and profit realized from SBA guaranteed loan participation sales in different quarters, (8) the effect of a loss of any executive officer, key personnel, or directors, (9) the effect of the Company’s opening of branches and the receipt of regulatory approval to complete such actions, (10) the concentration of the Company’s business in southern and southeastern Connecticut, (11) the concentration of the Company’s loan portfolio in commercial loans to small-to-medium sized businesses, which may be impacted more severely than larger businesses during periods of economic weakness, (12) lack of seasoning in the Company’s loan portfolio, which may increase the risk of future credit defaults, and (13) the effect of any decision by the Company to engage in any business not historically permitted to it. Other such factors may be described in other filings made by the Company with the SEC.
Although the Company believes that it has the resources needed for success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
Not required.
(a) Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of the Company’s disclosure controls and procedures performed by the Company’s management, with participation of the Company’s Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer as of the end of the period covered by this report, the Company’s Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures have been effective in ensuring that material information relating to the Company, including its consolidated subsidiary, is made known to the certifying officers by others within the Company and the Bank during the period covered by this report.
As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Periodically, there have been various claims and lawsuits against the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to our business. However, neither the Company nor any subsidiary is a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
.
Not required.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None.
|
|
Defaults Upon Senior Securities
|
None.
Not applicable.
None.
|
Exhibit No.
|
Description
|
|
|
|
|
2.1
|
Agreement and Plan of Merger, dated as of January 16, 2013, by and among Liberty Bank and Southern Connecticut Bancorp, Inc. and The Bank of Southern Connecticut (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on January 16, 2013)
|
| |
|
|
3(i)
|
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-QSB filed on November 14, 2002)
|
| |
|
|
3(ii)
|
By-Laws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Registrant’s Current Report on Form 8-K filed on March 6, 2007)
|
| |
|
|
10.1
|
Employment Agreement, effective as of January 1, 2013, by and between Southern Connecticut Bancorp, Inc., The Bank of Southern Connecticut and Sunil Pallan covering the period from January 1, 2013 to December 31, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 29, 2013)
|
|
10.2
|
Employment Agreement, effective as of January 1, 2013, by and between Southern Connecticut Bancorp, Inc., The Bank of Southern Connecticut and Stephen V. Ciancarelli covering the period from January 1, 2013 to December 31, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on January 29, 2013)
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| |
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|
|
101.INS
|
XBRL Instance Document* (filed herewith)
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document* (filed herewith)
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document* (filed herewith)
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document* (filed herewith)
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document* (filed herewith)
|
|
|
|
|
101.DEF
|
Taxonomy Extension Definitions Linkbase Document* (filed herewith)
|
|
*
|
As provided in Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
SOUTHERN CONNECTICUT BANCORP, INC.
|
|
|
|
|
|
|
By:
|
/s/ Joseph J. Greco
|
|
|
Name:
|
Joseph J. Greco
|
|
Date: May 13, 2013
|
Title:
|
Chief Executive Officer
|
|
|
|
|
|
|
By:
|
/s/ Stephen V. Ciancarelli
|
|
|
Name:
|
Stephen V. Ciancarelli
|
|
Date: May 13, 2013
|
Title:
|
Senior Vice President & Chief Financial Officer
|
|
|
|
|
|
|
By:
|
/s/ Anthony M. Avellani
|
|
|
Name:
|
Anthony M. Avellani
|
|
Date: May 13, 2013
|
Title:
|
Vice President & Chief Accounting Officer
|
45