U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
F O R M 10 - QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 2004
Commission file number 0-49784
SOUTHERN CONNECTICUT BANCORP, INC.
(Name of Small Business Issuer as Specified in Its Charter)
Connecticut 06-1609692
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
215 Church Street
New Haven, Connecticut 06510
(Address of Principal Executive Offices)
(203) 782-1100
--------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. YES [X] No [ ]
The number of shares of the issuer's Common Stock, par value $.01 per share,
outstanding as of
July 23, 2004: 2,791,864
Transitional Small Business Disclosure Format
Yes __ No X
1
Table of Contents
Part I
Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Operations
for the three months and six months ended June 30, 2004
and 2003 (unaudited) 4
Consolidated Statements of Changes in
Shareholders' Equity for the six months ended
June 30, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 (unaudited) 6 - 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operation 17
Item 3. Controls and Procedures 33
Part II
Other Information
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
Exhibit Index 38
2
PART I
Financial Information
Item 1. Financial Statements
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2004 (unaudited) and December 31, 2003
2004 2003
------------ ------------
Assets
Cash and due from banks $ 812,222 $ 1,147,883
Federal funds sold 7,346,000 966,000
Short-term investments 3,124,989 454,115
------------ ------------
Cash and cash equivalents 11,283,211 2,567,998
------------ ------------
Available for sale securities 15,450,607 8,478,068
Federal Home Loan Bank Stock 47,100 21,500
Loans receivable (net of allowance for loan losses of
$455,033 in 2004 and $421,144 in 2003) 44,785,570 40,818,718
Accrued interest receivable 249,075 196,545
Premises and equipment, net 3,398,132 3,459,915
Other assets 962,010 843,296
------------ ------------
Total assets $ 76,175,705 $ 56,386,040
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing deposits $ 15,986,600 $ 13,781,286
Interest bearing deposits 36,940,879 33,492,589
------------ ------------
Total deposits 52,927,479 47,273,875
Repurchase agreements 913,984 339,752
Accrued expenses and other liabilities 511,551 267,232
Capital lease obligations 1,190,452 1,190,879
------------ ------------
Total liabilities 55,543,466 49,071,738
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock, no par value; 500,000 shares authorized;
none issued
Common stock, par value $.01; 5,000,000, shares authorized;
shares issued and outstanding: 2004 2,791,864; 2003 1,063,320 27,919 10,633
Additional paid-in capital 24,066,354 10,704,269
Accumulated deficit (3,044,968) (3,100,842)
Accumulated other comprehensive loss - net unrealized
loss on available for sale securities (417,066) (299,758)
------------ ------------
Total stockholders' equity 20,632,239 7,314,302
------------ ------------
Total liabilities and stockholders' equity $ 76,175,705 $ 56,386,040
============ ============
See Notes to Consolidated Financial Statements
3
SOUTHERN CONNECTICUT BANCORP,INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2004 and 2003 (unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest Income
Interest and fees on loans $ 861,867 $ 505,272 $ 1,677,078 $ 920,069
Interest on securities 55,594 49,872 103,443 131,801
Interest on federal funds sold and short-term investments 23,348 16,493 33,063 22,442
----------- ----------- ----------- -----------
Total interest income 940,809 571,637 1,813,584 1,074,312
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits 155,235 92,762 307,571 185,226
Interest on capital lease obligations 42,719 42,124 85,291 84,082
Interest on repurchase agreements 1,607 619 3,709 1,421
----------- ----------- ----------- -----------
Total interest expense 199,561 135,505 396,571 270,729
----------- ----------- ----------- -----------
Net interest income 741,248 436,132 1,417,013 803,583
Provision for Loan Losses 29,245 23,500 60,995 86,400
Net interest income after
----------- ----------- ----------- -----------
provision for loan losses 712,003 412,632 1,356,018 717,183
----------- ----------- ----------- -----------
Noninterest Income:
Service charges and fees 87,406 26,782 145,017 46,999
Gains and fees from sales and referrals of SBA loans 84,881 -- 216,715 --
Gains (losses) on sales of available for sale securities -- 5,000 (944) 44,505
Other noninterest income 87,154 19,143 111,428 38,598
----------- ----------- ----------- -----------
Total noninterest income 259,441 50,925 472,216 130,102
----------- ----------- ----------- -----------
Noninterest Expense
Salaries and benefits 473,784 385,239 933,074 681,872
Occupancy and equipment 135,667 93,453 261,596 168,037
Professional services 118,059 49,810 179,825 115,452
Data processing and other outside services 69,340 47,799 138,569 86,809
Advertising and promotional expense 23,113 18,317 34,307 37,501
Forms, printing and supplies 18,317 17,726 34,131 29,905
Other operating expenses 113,002 79,679 190,858 140,358
----------- ----------- ----------- -----------
Total noninterest expenses 951,282 692,023 1,772,360 1,259,934
----------- ----------- ----------- -----------
Net income (loss) $ 20,162 $ (228,466) $ 55,874 $ (412,649)
=========== =========== =========== ===========
Basic Income (Loss) per Share $ 0.02 $ (0.21) $ 0.05 $ (0.39)
=========== =========== =========== ===========
Diluted Income (Loss) per Share $ 0.01 $ (0.21) $ 0.04 $ (0.39)
=========== =========== =========== ===========
Dividends per Share $ -- $ -- $ -- $ --
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
4
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months ended June 30, 2004 and 2003 (unaudited)
Accumulated
Additional Other
Number Common Paid-in Accumulated Comprehensive
of Shares Stock Capital Deficit Income (Loss) Total
----------------------------------------------------------------------------------------
Balance December 31, 2002 966,667 $ 9,667 $ 10,705,382 $ (2,502,915) $ 62,545 $ 8,274,679
Comprehensive Loss:
Net Loss -- -- -- (412,649) -- (412,649)
Unrealized holding loss on available
for sale securities -- -- -- -- (104,384) (104,384)
------------
Total comprehensive loss (517,033)
----------------------------------------------------------------------------------------
Balance June 30, 2003 966,667 $ 9,667 $ 10,705,382 $ (2,915,564) $ (41,839) $ 7,757,646
========================================================================================
Balance December 31, 2003 1,063,320 $ 10,633 $ 10,704,269 $ (3,100,842) $ (299,758) $ 7,314,302
Comprehensive Loss:
Net Income -- -- -- 55,874 -- 55,874
Unrealized holding loss on available
for sale securities -- -- -- -- (117,308) (117,308)
------------
Total comprehensive loss (61,434)
Exercise of stock warrants 5,544 56 60,424 -- -- 60,480
Issuance of common stock 1,723,000 17,230 13,301,661 -- -- 13,318,891
----------------------------------------------------------------------------------------
Balance June 30, 2004 2,791,864 $ 27,919 $ 24,066,354 $ (3,044,968) $ (417,066) $ 20,632,239
========================================================================================
See Notes to Consolidated Financial Statements.
5
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004 and 2003 (unaudited)
Six Months Ended
June 30,
---------------------------
Cash Flows From Operations 2004 2003
-------------- ------------
Net income (loss) $ 55,874 $ (412,649)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization and accretion of premiums and discounts on investments, net 18,073 9,323
Provision for loan losses 60,995 86,400
Loss (Gain) on sales of available for sale securities 944 (44,405)
Gains on sales of SBA loans (202,196) -
Depreciation and amortization 138,962 96,346
Increase in cash surrender value of life insurance (6,155) -
Changes in assets and liabilities:
(Decrease) increase in deferred loan fees (5,419) 45,094
(Increase) decrease in accrued interest receivable (52,530) 33,969
(Increase) decrease in other assets (112,559) 10,231
Increase in accrued expenses and other liabilities 244,418 453,536
---------------------------
Net cash provided by operating activities 140,407 277,845
---------------------------
Cash Flows From Investing Activities
Purchases of available for sale securities (8,967,504) (9,628,661)
Principal repayments on available for sale securities 859,265 224,712
Proceeds from maturities of available for sale securities - 5,176,452
Proceeds from sales of available for sale securities 999,375 3,558,000
Purchases of Federal Home Loan Bank Stock (25,600) (21,000)
Proceeds from sales of SBA loans 1,986,863 -
Net increase in loans receivable (5,923,608) (8,962,735)
Purchases of premises and equipment (77,179) (592,531)
Proceeds from sale of OREO 116,414 -
---------------------------
Net cash used in investing activities (11,031,974) (10,245,763)
---------------------------
Cash Flows From Financing Activities
Net increase in demand, savings and money market deposits 6,036,014 12,030,386
Net decrease in certificates of deposit (382,410) (69,505)
Net increase (decrease) in repurchase agreements 574,232 (623,140)
Principal payments on capital lease obligations (427) (569)
Net proceeds from common stock offering 13,318,891 -
Exercise of stock warrants 60,480 -
---------------------------
Net cash provided by financing activities 19,606,780 11,337,172
---------------------------
Net increase in cash and cash equivalents 8,715,213 1,369,254
Cash and cash equivalents
Beginning 2,567,998 3,051,429
---------------------------
Ending $ 11,283,211 $ 4,420,683
===========================
See Notes to Consolidated Financial Statements.
6
SOUTHERN CONNECTICUT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Six Months Ended June 30, 2004 and 2003 (unaudited) Six Months Ended
June 30,
---------------------------
2004 2003
-------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 388,875 $ 262,788
===========================
Income taxes $ - $ -
===========================
Supplemental disclosures of noncash investing activities
Liability incurred for investment security purchase $ - $1,300,000
============== ============
Transfer of Loans to OREO $ 116,513 $ -
============== ============
See Notes to Consolidated Financial Statements.
7
Southern Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Operations
Southern Connecticut Bancorp, Inc. ("Bancorp"), a Connecticut
corporation, is a bank holding company incorporated on November 8, 2000 for the
purpose of forming, and becoming the sole shareholder of, The Bank of Southern
Connecticut (the "Bank"). The Bank provides a full range of banking services to
commercial and consumer customers, primarily concentrated in the New Haven
County area of Connecticut, through its main office in New Haven, Connecticut
and two branch offices in New Haven and Branford, Connecticut. In 2003, SCB
Capital Inc. was formed as a Connecticut Corporation, and in April 2004 Bancorp
capitalized SCB Capital, Inc., which became a subsidary of the Company. SCB
Capital, Inc. will engage in a limited range of investment banking, advisory,
and brokerage services, primarily with small to medium size business clients. In
April 2004, Bancorp received a temporary certificate of incorporation from the
Banking Department of the State of Connecticut to open a new bank, to be named
The Bank of Southeastern Connecticut, to be located in New London, Connecticut.
Note 2. Basis of Financial Statement Presentation
The consolidated balance sheet at December 31, 2003 has been derived
from the audited consolidated financial statements of Bancorp at that date, but
does not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
The accompanying consolidated unaudited financial statements as of and
for the three and six months ended June 30, 2004 and 2003 and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements of
Bancorp and notes thereto as of December 31, 2003.
Certain 2003 amounts have been reclassified to conform with the 2004
presentation. Such reclassifications had no effect on the 2003 net loss.
The accompanying unaudited consolidated financial information reflects,
in the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the interim periods presented.
The results of operations for the three and six months ended June 30, 2004 are
not necessarily indicative of the results of operations that may be expected for
all of 2004.
8
Note 3. Available for Sale Securities
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of available for sale securities at June 30, 2004, and
December 31, 2003 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
June 30,2004 Cost Gains Losses Value
------------
--------------------------------------------------------------
U.S. Treasury Obligations $ 5,978,984 $ - $ (1,424) $ 5,977,560
U.S. Government Agency Obligations 9,188,809 - (369,795) 8,819,014
Mortgage Backed Securities 699,880 - (45,847) 654,033
--------------------------------------------------------------
$15,867,673 $ - $(417,066) $15,450,607
==============================================================
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gains Losses Value
-----------------
--------------------------------------------------------------
U.S. Government Agency Obligations $7,200,948 $ - $(269,550) $6,931,398
Mortgage Backed Securities 1,576,878 - (30,208) 1,546,670
--------------------------------------------------------------
$8,777,826 $ - $(299,758) $8,478,068
==============================================================
At June 30, 2004, gross unrealized holding losses on available for sale
securities totaled $417,066. Of the securities with unrealized losses, there is
one mortgage backed and six U.S. Government agency securities that had
unrealized losses for a period in excess of twelve months with a current
unrealized loss of $263,387. Management does not believe that any of the
unrealized losses are other than temporary as they relate to debt and
mortgage-backed securities issued by U. S. Government and U.S. Government
sponsored agencies resulting from changes in the interest rate environment.
Bancorp has the ability to hold these securities to maturity if necessary and
expects to receive all contractual principal and interest related to these
investments. As a result, management believes that these unrealized losses will
not have a negative impact on future earnings or a permanent effect on capital.
At December 31, 2003, gross unrealized holding losses on available for sale
securities totaled $299,758. Of the securities with unrealized losses, there are
no securities that had unrealized losses for a period in excess of twelve
months.
9
Note 4. Loans Receivable
A summary of Bancorp's loan portfolio at June 30, 2004 and December 31, 2003 is
as follows:
June 30, 2004 December 31, 2003
--------------------- -------------------
Commercial loans secured by real estate $21,118,714 $18,043,588
Commercial loans 21,457,240 18,584,292
Construction and land loans, net of undisbursed
portion of $986,476 in 2004 and $729,220 in 2003 846,297 1,500,891
Residential mortgages 56,204 948,258
Consumer home equity loans 947,768 1,042,717
Consumer installment loans 893,765 1,204,920
------------------- ------------------
Total loans 45,319,988 41,324,666
Net deferred loan fees (79,385) (84,804)
Allowance for loan losses (455,033) (421,144)
------------------- ------------------
Loans receivable, net $44,785,570 $40,818,718
=================== ==================
10
Note 5. Deposits
At June 30, 2004 and December 31, 2003, deposits consisted of the following:
June 30, December 31,
2004 2003
----------- -----------
Noninterest bearing deposits $15,986,600 $13,781,286
----------- -----------
Interest bearing deposits
Checking 3,968,357 3,499,378
Money Market 20,338,669 17,251,327
Savings 2,907,720 2,633,341
----------- -----------
Checking, money market & savings 27,214,746 23,384,046
----------- -----------
Time Certificates under $100,000 3,163,561 3,057,294
Time Certificates of $100,000 or more 6,562,572 7,051,249
----------- -----------
Time deposits 9,726,133 10,108,543
----------- -----------
36,940,879 33,492,589
----------- -----------
Total deposits $52,927,479 $47,273,875
=========== ===========
Note 6. Available Borrowings
During 2003 Bancorp obtained secured and unsecured lines of credit with
other financial institutions with total available borrowings of $4,400,000.
There are no borrowings against these lines of credit as of June 30, 2004.
Note 7. Income (Loss) Per Share
Bancorp is required to present basic income (loss) per share and
diluted income (loss) per share in its statements of operations. Basic per share
amounts are computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted per share amounts assume exercise
of all potential common stock in weighted average shares outstanding, unless the
effect is antidilutive. Bancorp is also required to provide a reconciliation of
the numerator and denominator used in the computation of both basic and diluted
income per share. The following is information about the computation of income
per share for the three and six months ended June 30, 2004 and 2003.
11
Income (Loss) per Share
Three Months Ended June 30,
2004 2003
------------------------------------------ ------------------------------------------
Weighted Weighted
Net Average Amount Net Average Amount
Income Shares Per Share Income Shares Per Share
------------ -------------- -------------- -------------- -------------- ------------
Basic Income (Loss) Per Share
Income available to common shareholders $ 20,162 1,333,941 $ 0.02 $ (228,466) 1,063,320 $ (0.21)
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 30,353 - - - -
------------ -------------- -------------- -------------- -------------- ------------
Diluted Income (Loss) Per Share
Income available to common shareholders
plus assumed conversions $ 20,162 1,364,294 $ 0.01 $ (228,466) 1,063,320 $ (0.21)
============ ============== ============== ============== ============== ============
Six Months Ended June 30,
2004 2003
------------------------------------------ ------------------------------------------
Weighted Weighted
Net Average Amount Net Average Amount
Income Shares Per Share Income Shares Per Share
------------ -------------- -------------- -------------- -------------- ------------
Basic Income (Loss) Per Share
Income available to common shareholders $ 55,874 1,199,270 $ 0.05 $ (412,649) 1,063,320 $ (0.39)
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 46,145 - - - -
------------ -------------- -------------- -------------- -------------- ------------
Diluted Income (Loss) Per Share
Income available to common shareholders
plus assumed conversions $ 55,874 1,245,415 $ 0.04 $ (412,649) 1,063,320 $ (0.39)
============ ============== ============== ============== ============== ============
For the three months and six months ended June 30, 2003, common stock
equivalents have been excluded from the computation of the net loss per share
because the inclusion of such equivalents is antidilutive.
12
Note 8. Other Comprehensive Loss
Other comprehensive loss, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as follows:
Six Months Ended
June 30, 2004
---------------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
---------------------------------------------
Unrealized holding losses arising during the period $ (118,252) $ - ($118,252)
Add: Reclassification adjustment for losses -
recognized in net income 944 - 944
---------------------------------------------
Unrealized holding losses on available for sale
securities, net of taxes $ (117,308) $ - $(117,308)
=============================================
Six Months Ended
June 30, 2003
---------------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
---------------------------------------------
Unrealized holding losses arising during the period $ (99,784) $ 27,597 $(72,187)
Less: Reclassification adjustment for gains
recognized in net income (44,505) 12,308 (32,197)
---------------------------------------------
Unrealized holding loss on available for sale
securities, net of taxes $ (144,289) $ 39,905 $(104,384)
=============================================
13
Note 9. Stock Based Compensation
During the six months ended June 30, 2004, Bancorp granted 18,050 stock
options to employees and directors at exercise prices ranging from $8.77 to
$9.75 per share.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation", encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued to
employees and directors under Bancorp's stock option and warrant plans have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation cost
is recognized for them. Bancorp has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net loss and earnings per share and other disclosures, as if the
fair value based method of accounting had been applied.
Had compensation cost for issuance of such options and warrants been
recognized based on the fair values of awards on the grant dates, in accordance
with the method described in SFAS No. 123, reported net income (loss) and per
share amounts for the six and three months ended June 30, 2004 and 2003 would
have differed from the pro forma amounts as shown below:
14
For the six months ended June 30, 2004 and June 30, 2003
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------------------- ------------------------
Net income (loss) as reported $ 55,874 $ (412,649)
Deduct: total stock based employee
compensation expense determined under fair value based
method for all awards (159,709) (82,350)
------------------------- ------------------------
Pro forma net loss $ (103,835) $ (494,999)
========================= ========================
Basic income (loss) per share:
As reported $ 0.05 $ (0.39)
========================= ========================
Pro forma $ (0.09) $ (0.47)
========================= ========================
Diluted income (loss) per share:
As reported $ 0.04 $ (0.39)
========================= ========================
Pro forma $ (0.09) $ (0.47)
========================= ========================
For the three months ended June 30, 2004 and June 30, 2003
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------------- ------------------------
Net income (loss) as reported $ 20,162 $(228,466)
Deduct: total stock based employee
compensation expense determined under fair value based
method for all awards (78,281) (46,079)
------------------------- ------------------------
Pro forma net loss $(58,119) $(274,545)
========================= ========================
Basic income (loss) per share:
As reported $ 0.02 $ (0.21)
========================= ========================
Pro forma $ (0.04) $ (0.26)
========================= ========================
Diluted income (loss) per share:
As reported $ 0.01 $ (0.21)
========================= ========================
Pro forma $ (0.04) $ (0.26)
========================= ========================
For the three and six months ended June 30, 2003, common stock equivalents have
been excluded from the computation of the pro forma net loss per share because
the inclusion of such equivalents is antidilutive.
Note 10. Bank Application and Capital Raising
During 2003, Bancorp's Board of Directors approved the establishment of
a new commercial bank in New London, Connecticut. In October 2003, Bancorp
submitted its final application to the State of Connecticut Department of
Banking related to the establishment of the new bank to be located in the city
of New London. On April 28, 2004, the State of Connecticut Department of Banking
issued a temporary certificate of authority in connection with this application.
Subject to applicable State and Federal agency regulatory approval and the
issuance of a final certificate of authority from the State of Conecticut
Department of Banking, Bancorp plans to open the new bank in the fourth quarter
of 2004 or the first quarter of 2005.
On June 17, 2004, Bancorp completed a public offering of its common
stock with net proceeds of $13.3 million after deduction of underwriter's
discount and offering expenses. Bancorp issued 1,723,000 shares of common stock
in connection with this offering. On June 17, 2004, Bancorp invested $2,762,817
of the public offering proceeds in The Bank of Southern Connecticut. Bancorp has
also committed to capitalize the new bank with $6 million of the proceeds raised
from this public offering.
15
Note 11. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, Bancorp is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the financial statements. The contractual amounts
of these instruments reflect the extent of involvement Bancorp has in particular
classes of financial instruments.
The contractual amounts of commitments to extend credit represent the
amounts of potential accounting loss should: the contract be fully drawn upon;
the customer default; and the value of any existing collateral become worthless.
Bancorp uses the came credit policies in making commitments and conditional
obligations as it does for on-balance-sheet and evaluates each customer's
creditworthiness on a case-by-case basis. Management believes that Bancorp
controls the credit risk of these financial instruments through credit
approvals, credit limits, monitoring procedures and the receipt of collateral as
deemed necessary.
Financial instruments whose contract amounts represent credit risk are
as follows at June 30,2004 and December 31, 2003:
June 30, December 31,
2004 2003
---------------- -------------
Commitments to extend credit
Future loan commitments $ 5,152,000 $ 3,752,000
Unused line of credit 7,789,306 9,065,661
Undisbursed construction loans 727,507 729,220
Financial standby letters of credit 933,055 933,055
---------------- -------------
$14,601,868 $14,479,936
================ =============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the borrower. Since
these commitments could expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The amount of
collateral obtained, if deemed necessary by Bancorp upon extension of credit, is
based upon management's credit evaluation of the counter party. Collateral held
varies, but may include residential and commercial property, deposits and
securities.
Standby letters of credit are written commitments issued by
Bancorp to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Newly issued or modified
guarantees that are not derivative contracts have been recorded on Bancorp's
books at their fair value at inception. The liability related to guarantees
recorded at June 30, 2004 and December 31, 2003 was not significant.
16
Item 2. Management's Discussion and Analysis or Plan of Operation
(a) Plan of Operation
Southern Connecticut Bancorp
Bancorp, a Connecticut corporation, was incorporated on November 8,
2000 to serve as a bank holding company for community based commercial banks.
Bancorp is a bank holding company registered in accordance with the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and is regulated by and subject
to the supervision of the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). Bancorp owns one hundred percent of the capital stock
of The Bank of Southern Connecticut ("Bank"), a Connecticut chartered bank
headquartered in New Haven, Connecticut. The Bank commenced operations on
October 1, 2001.
Bancorp's holding company structure provides organizational flexibility
for its growth plans. Bancorp may in the future decide to engage in additional
businesses permitted to bank holding companies and would form a subsidiary to
provide these services. For example, Bancorp could acquire additional banks,
establish de novo banks and other businesses, including mortgage companies,
leasing companies, insurance agencies and small business investment companies,
without having to go through a corporate reorganization. Before Bancorp could
acquire interests in other banks, establish de novo banks or expand into other
businesses, it will need to obtain relevant regulatory approvals.
De novo banks in Connecticut have reached profitability on average
within three to four years after the commencement of operations. Bancorp was
marginally profitable in the fourth quarter of 2003, the ninth quarter of
operations, as well as profitable in the first two quarters of 2004. The three
recent profitable quarters are largely attributable to fee income and gains on
sale derived from referrals and sales of SBA guaranteed loan participations.
Bancorp's plan of operation is to continue to operate the Bank and
increase its market share within the City of New Haven and the surrounding
areas, and possibly offer certain additional banking services, such as internet
based cash management services. Bancorp has received a Temporary Certificate of
Authority from the Banking Commissioner of the State of Connecticut for a
second, wholly owned community based commercial bank subsidiary to serve the New
London, Connecticut market, called The Bank of Southeastern Connecticut. Bancorp
intends to develop both the Bank's and The Bank of Southeastern Connecticut's
geographic franchises with branch offices throughout the 45 miles of coastal
communities located between New Haven and New London Connecticut, and from New
London to the Rhode Island border with Connecticut. Bancorp has applied to the
Federal Deposit Insurance Corporation to insure the deposits of the new banking
subsidiary. Bancorp also is required to apply to the Federal Reserve for
approval. The Bank of Southeastern Connecticut is expected to open in the fourth
quarter of 2004 or the first quarter of 2005 and be staffed, managed and
operated in a manner consistent with the Bank.
Locations
Bancorp has leased a free-standing building located at 215 Church
Street, New Haven, Connecticut, located in the central business and financial
district of New Haven. It has assigned this lease to the Bank, and the Bank has
assumed all rights and obligations under this lease. Both Bancorp and the Bank
operate from this facility. On October 7, 2002 the Bank opened a branch office
in Branford, Connecticut at West Main Street and Summit Place. On August 15,
2002 the Bank also purchased a building at 1475 Whalley Avenue in the Westville
section of New Haven for a branch office site which was opened on March 24,
2003. The Bank is also evaluating locations for the establishment of additional
branch banking offices.
17
The following table sets forth the location of the Bank's branch
offices and other related information:
Office Location Square Feet Status
-------------- -------- ----------- ------
Main Office 215 Church Street, New Haven, CT 11,306 Leased
Branford Office 445 West Main Street, Branford, CT 3,714 Leased
Amity Office 1475 Whalley Avenue, New Haven, CT 2,822 Owned
Bancorp entered into a lease on January 14, 2004 with the City of New
London for a former banking facility located at 15 Masonic Street, New London,
Connecticut. This facility is intended to be the main office of The Bank of
Southeastern Connecticut. The Bank of Southeastern Connecticut is expected to be
staffed, managed and operated in a manner consistent with the Bank.
On June 23, 2004, Bancorp, through a nominee, entered into an agreement
to purchase an approximately one acre improved site with two buildings in
Clinton, Connecticut for the primary purpose of establishing a branch office of
the Bank. The net purchase price of the property is $495,000. The entity under
which title to the property will be ultimately held is to be determined. The
Bank is in the process of filing an application to its State and Federal
Regulators to establish bank operations at the Clinton location for late in the
fourth quarter of 2004 or in the first quarter of 2005. Bancorp intends that
Bancorp or the Bank will improve the facility to accommodate banking services.
The costs of such improvements have not been fully determined at this time.
The Bank focuses on serving the banking needs of small and mid sized
businesses, professionals and their employees. The Bank's target customer has up
to $30 million in revenues, up to 100 employees, and borrowing needs between
$250,000 and $2 million. The Bank serves the greater New Haven marketplace and
has a Board of Directors and management team drawn from the communities served,
each of who is recognized and respected by the New Haven business community. The
Bank's focus on the commercial market makes it uniquely qualified to move deftly
in responding to the needs of its clients.
The Bank does not expect to compete with large institutions for the
primary banking relationships of large corporations, but it competes for the
small to medium-size businesses and for the consumer business of employees of
such entities. The Bank's geographic market focus also provides a unique
competitive advantage by clearly identifying the Bank as the independent local
bank focused on commercial lending and other commercial banking services. The
Bank's focus clients operate retail, service, wholesale distribution,
manufacturing and international businesses. Many of these customers use the
services of the Bank because of relationships and contacts with the Bank's
directors and management. We believe that the Bank is successfully winning new
business because of these relationships and a combination of a fair price for
our services, quick decision processes and a high-touch level of personalized
customer service.
Lending, Depository and Other Products
The Bank currently has a wide range of "core" bank products and
services offerings which are more completely described below. Additionally,
through correspondent and other relationships, the Bank helps its customers meet
all of their banking needs, including obtaining services which the Bank may not
offer directly.
The Bank continues to attract core deposits, including checking
accounts, money market accounts, savings accounts, sweep accounts, NOW accounts
and a variety of certificates of deposit and IRA accounts. To attract deposits,
the Bank is employing an aggressive marketing plan in its service area and
features a broad product line and rates and services competitive with those
offered in the New Haven market and the surrounding communities. The primary
sources of deposits have been and are expected to be businesses and their
employees located in, and residents of New Haven and the surrounding
communities. The Bank is obtaining these deposits through personal solicitation
by its officers and directors, outside programs and advertisements published and
/ or broadcasted in the local media.
18
Deposits and the Bank's equity capital are the sources of funds for
lending and investment activities. Repayments on loans, investment income and
proceeds from the sale and maturity of investment securities will also provide
additional funds for these purposes. While scheduled principal repayments on
loans and investment securities are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Bank expects to manage the
pricing of deposits to maintain a desired deposit balance. The Bank offers
drive-in teller services, wire transfers and safe deposit services.
The Bank's loan strategy is to offer a broad range of loans to
businesses and individuals in its service area, including commercial and
business loans, personal loans, mortgage loans, home equity loans, and
automobile loans. The Bank has received lending approval status from the Small
Business Administration ("SBA") to enable it to make SBA loans to both the
greater New Haven business community and companies throughout the State of
Connecticut. The marketing focus on small to medium-size businesses and
professionals may result in an assumption of certain lending risks that are
different from or greater than those which would apply to loans made to larger
companies or consumers. Commercial loans generally entail certain additional
risks because repayment is usually dependent on the success of the enterprise.
The Bank seeks to manage the credit risk inherent in its loan portfolio through
credit controls, loan diversification and personal guarantees of the principal
owners of these small to medium-sized businesses. Prior to approving a loan the
Bank evaluates: the credit histories of potential borrowers; the value and
liquidity of available collateral; the purpose of the loan; the source and
reliability of funds for repayment and other factors considered relevant in the
circumstances.
Loans are made on a variable or fixed rate basis with fixed rate loans
limited to five-year terms. All loans are approved by the Bank's management and
the Loan Committee of the Bank's Board of Directors. At the present time, the
Bank is not syndicating or securitizing loans. The Bank at times participates in
multi-bank loans for companies in its service area. Commercial loans and
commercial real estate loans may be written for terms of up to twenty years.
Loans to purchase or refinance commercial real estate are collateralized by the
subject real estate. Loans to local businesses are generally supported by the
personal guarantees of the principal owners and are carefully underwritten to
determine appropriate collateral and covenant requirements.
Other services provided currently or to be provided include cashier's
checks, money orders, travelers checks, bank by mail, lock box, direct deposit
and U. S. Savings Bonds. The Bank is associated with a shared network of
automated teller machines that its customers are able to use throughout
Connecticut and other regions. The Bank does not currently expect to offer trust
services but may offer trust services through a joint venture with a larger
institution. To offer trust services in the future, the Bank would need the
approval of the Connecticut Banking Commissioner and the FDIC.
Investment Securities
Another significant activity for the Bank is maintaining an investment
portfolio. Although granting a variety of loans to generate interest income and
loan fees is an important aspect of the Bank's business plan, the aggregate
amount of loans will be subject to maintaining a satisfactory loan-to-deposit
ratio. The Bank's overall portfolio objective is to maximize the long-term total
rate of return through active management of portfolio holdings taking into
consideration estimated asset/liability and liquidity needs, tax equivalent
yields and maturities. Permissible investments include debt securities such as
U. S. Government securities, government sponsored agency securities, municipal
bonds, domestic certificates of deposit that are insured by the FDIC,
mortgage-backed securities and collateralized mortgage obligations. The Bank
expects that investments in equity securities will be very limited. The Bank's
current investment portfolio is limited to U. S. government and agency
obligations and agency issue collateralized mortgage obligations classified as
available
19
for sale. Accordingly, the principal risk associated with the Bank's current
investing activities is market risk (variations in value resulting from general
changes in interest rates) rather than credit risk.
Market and Competition
There are numerous banks and other financial institutions serving the
Southern Connecticut Market posing significant competition for the Bank to
attract deposits and loans. The Bank also experiences competition from
out-of-state financial institutions with little or no traditional bank branches
in New Haven. To grow, we will have to win customers away from the customer base
of existing banks and financial institutions as well as win new customers from
growth in the Southern Connecticut Market. Many of such banks and financial
institutions are well established and well capitalized, allowing them to provide
a greater range of services than we will be able to offer in the near future.
The greater New Haven is currently served by approximately 70 offices
of commercial banks, none of which is headquartered in New Haven. All of these
banks are substantially larger than the Bank expects to be in the near future
and are able to offer products and services which may be impracticable for the
Bank to provide at this time. There are numerous banks and other financial
institutions serving the communities surrounding New Haven, which also draws
customers from New Haven, posing significant competition for the Bank to attract
deposits and loans. The Bank also experiences competition from out-of-state
financial institutions with little or no traditional bank branches in New Haven.
Many of such banks are and financial institutions are well established and
better capitalized than the Bank, allowing them to provide a greater range of
services.
Intense market demands, economic pressures and significant legislative
and regulatory actions have eroded traditional banking industry classifications
and have increased competition among banks and other financial institutions.
Market dynamics, as well as legislative and regulatory changes have resulted in
a number of new competitors offering services historically offered only by
commercial banks; non-bank corporations offering services traditionally offered
only by banks; increased customer awareness of product and service differences
among competitors; and increased merger activity.
Over the past ten years, the Connecticut banking market has been
characterized by significant consolidation among financial institutions. Since
January 1994, there have been 60 completed acquisitions of Connecticut based
banks and thrifts. Although our competitors are currently much larger than us,
we believe that the corporate service culture and operational infrastructure at
large banks often does not provide the type of personalized service that many of
our small to medium business and professional clients desire ant that we strive
to provide.
Additional legislative and regulatory changes may affect the Bank in
the future; however, the nature of such changes and the effect of their
implementation cannot be assessed. New rules and regulations may, among other
things, revise limits on interest rates on various categories of deposits and
may limit or influence interest rates on loans. Monetary and fiscal policies of
the United States government and its instrumentalities, including the Federal
Reserve, significantly influence the growth of loans, investments and deposits.
The banking regulatory environment is undergoing significant change both as it
affects the banking industry directly and as it affects competition between
banks and non-bank financial institutions.
The Bank of Southeastern Connecticut
On July 2, 2003, Bancorp submitted an application to the State of
Connecticut, Department of Banking ("Department"), for the establishment by
Bancorp of a new commercial bank in New London, Connecticut. The application was
subsequently temporarily withdrawn to complete additional information requested
by the Department, including a three-year balance sheet and income statement
forecast for the proposed new bank.
20
On August 7, 2003, the application, including the completed additional
information, was resubmitted to the Department, and on October 2, 2003, the
final application, including additional information, was submitted.
On April 28, 2004, a temporary certificate of authority was issued by
the State of Connecticut Department of Banking in connection with the new bank
application. Additional applications to the Federal Insurance Deposit
Corporation for deposit insurance, and to the Federal Reserve Bank of Boston for
Bancorp to acquire the new bank, will be filed in the near future. Subject to
the reciept of regulatory approvals, Bancorp expects the new bank to be
operating by the end of the fourth quarter of 2004 or the first quarter of 2005.
SCB Capital, Inc.
On November 17, 2003, SCB Capital, Inc., a wholly-owned subsidiary of
Bancorp, was incorporated. SCB Capital, Inc. will engage in a limited range of
investment banking and advisory services primarily to small to medium size
business clients of Bancorp located in Connecticut. It is not anticipated that
SCB Capital, Inc. will directly provide financing or equity in the investment
banking transactions it facilitates or in which it acts as principal. SCB
Capital, Inc. is in the process of applying for approval as a broker-dealer and
membership with the National Association of Security Dealers. SCB Capital, Inc.
has been capitalized with $20,000 and has not commenced operations. Any
additional amount to be invested in SCB Capital, Inc. will be determined by
Bancorp's Board of Directors following completion of the application.
Recent Developments
Bancorp raised $13.3 million, net of underwriting discounts and
offering expenses, in equity capital though a public offering of common stock on
June 17, 2004. On June 17, 2004, Bancorp invested $2,762,817 of these proceeds
in the equity capital of The Bank of Southern Connecticut. Also, Bancorp has
committed to investing $6 million of the proceeds in the equity capital of The
Bank of Southeastern Connecticut at the time it receives all final regulatory
approvals and commences banking operations. The remaining balance of the public
offering net proceeds will be utilized for future branch office expansion and
general corporate purposes. Bancorp listed its common stock on the American
Stock Exchange in connection with its offering. Bancorp's common stock symbol is
"SSE".
For a more detailed discussion of Bancorp's liquidity, see Liquidity on
page 31 of this Form 10-QSB. Currently, other than the potential start up of a
new bank in late 2004 or early 2005 and the establishment of new Bank branch
offices (as previously discussed on page s 17 and 18 under the "Locations"
heading), there are no plans involving the significant purchase or sale of
property or equipment in the next twelve months. Outside of staffing the new
bank located in New London and new offices of the Bank, Bancorp does not
anticipate a significant change in the number of its employees.
The Board of Directors of the Bank has recently adopted resolutions
designed to strengthen and enhance the Bank's Bank Secrecy Act compliance and
the Bank's Information Technology controls. The Bank recently has promoted a new
Bank Secrecy Act Officer and has amended its Bank Secrecy Act policies to
strengthen compliance. Additionally, the Bank has retained an experienced
outside consultant to assist it in developing and implementing Information
Technology controls.
On August 11, 2004, Joseph V. Ciaburri, the Chairman and Chief
Executive Officer of Bancorp, and Michael M. Ciaburri, the President and Chief
Operating Officer of Bancorp, each entered into a settlement agreement with the
Banking Commissioner of the State of Connecticut and paid a civil penalty of
$2,500 in connection with three loans made by the Bank in November 2003 that
resulted in a concentration of unsecured credit by the Bank exceeding 15% of the
equity capital and reserves for loan and lease losses of the Bank. In
particular, the Commissioner found that the two officers voted to approve the
loans at a meeting of the loan committee of the
21
Bank without conditioning their approval to ensure that no commitment would be
issued prior to obtaining a participation commitment from another financial
institution to cover the excess loans over the applicable limitations. The
settlement agreement acknowledged the officers' claim that they were not aware
that their vote to approve the loans violated the applicable Connecticut
statutes. No violation was found on behalf of the Bank or Bancorp, and the
Commissioner acknowledged that the officers, in conjunction with the Bank's
board of directors, have implemented policies and procedures to prevent future
occurrences of such actions. In January 2004, the Bank sold a participation in
the loans bringing the loans within the Bank's lending limit. The loans have
fully performed at all times.
As of June 30, 2004, the Bank has 29 full-time employees. Its employees
perform most routine day-to-day banking transactions for the Bank. However, the
Bank has entered into a number of arrangements for banking services such as
correspondent banking, data processing and armored carriers.
Overall, the Bank's plan of operation is focused on responsible growth
and pricing of deposits and loans, and investment in high quality U. S.
government securities to achieve a net interest margin sufficient to cover
operating expenses, achieve profitable operations and maintain liquidity.
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary
Bancorp had net income of $20,162 (or basic earnings per share of $0.02
and diluted earnings per share of $0.01) for the quarter ended June 30, 2004,
compared to a net loss of $228,466 (or basic and diluted loss per share of
$0.21) for the quarter ended June 30, 2003. Bancorp had net income of $55,874
(or basic earnings per share of $0.05 and diluted earnings per share of $0.04)
for the six months ended June 30, 2004, compared to a net loss of $412,649 (or
basic and diluted loss per share of $0.39) for the six months ended June 30,
2003.
Financial Condition
Assets
Bancorp has reached total assets of $76.2 million at June 30, 2004, an
increase of $19.8 million (35%) from $56.4 million in assets as of December 31,
2003. Earning assets reached $71.2 million, increasing $20.0 million (39%)
during the first six months of 2004.
Bancorp has maintained liquidity by maintaining balances in overnight
Federal funds sold and short-term investments including money market mutual
funds to provide funding for higher yielding loans as they are approved and
closed. As of June 30, 2004, Federal funds sold were $7.3 million and short-term
investments balances were $3.1 million. Federal funds sold and short-term
investments increased by $6.4 million and $2.7 million, respectively, during the
first six months of 2004. The increases were due to receipt of the net proceeds
of the public offering of equity securities by Bancorp which were not invested
in available for sale securities and the excess of deposit volume over net new
loan volume during the six month period. In addition, Bancorp has invested $15.5
million in U.S. Treasury, government agency and mortgage backed securities
classified as available for sale.
Investments
Available for sale securities increased $7.0 million from December 31,
2003, reflecting in part the investment of approximately $8.0 million of net
proceeds received from the June 2004 public offering in U.S. Treasury and Agency
securities, less amortization and sales of securities.
22
During the six months ended June 30, 2004, gross unrealized losses on
the available for sale securities portfolio totaled $417,066. These losses were
the result of volatility in market rates and yield curve changes and impacted
the market prices in government agency bonds and mortgage-backed securities.
Management does not believe these losses are other than temporary, and Bancorp
has the ability to hold these securities to maturity if necessary, and has both
the intent and ability to retain its investments for a period of time sufficient
to allow for any anticipated recovery in fair value. As a result, management
believes that these unrealized losses will not have a negative impact on future
earnings and capital.
Loans
The net loan portfolio increased $4.0 million (10%) from $40.8 million
at December 31, 2003 to $44.8 million at June 30, 2004. The increase in loans is
due to the addition of a branch office in 2003 and continued robust demand in
the greater New Haven and Connecticut markets. The increase in the loan
portfolio was funded primarily by increases in deposits and the decrease in
investments. The loan to deposit ratio as of June 30, 2004 was 85%. Bancorp
continues to target a loan to deposit ratio in the 80% to 85% range.
Critical Accounting Policy
In the ordinary course of business, Bancorp has made a number of
estimates and assumptions relating to reporting results of operations and
financial condition in preparing its financial statements in conformity with
accounting principals generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. Bancorp believes the following discussion addresses
Bancorp's only critical accounting policy, which is the policy that is most
important to the portrayal of Bancorp's financial condition and results and
requires management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Allowance for Loan Losses
The allowance for loan losses, a material estimate susceptible to
significant change in the near-term, is established as losses are estimated to
have occurred through a provision for losses charged against operations, and is
maintained at a level that management considers adequate to absorb losses in the
loan portfolio. Management's judgment in determining the adequacy of the
allowance is inherently subjective and is based on the evaluation of individual
loans, pools of homogeneous loans, the known and inherent risk characteristics
and size of the loan portfolios, the assessment of current economic and real
estate market conditions, estimates of the current value of underlying
collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of specific loans and other relevant
factors. Loans, including impaired loans, are charged against the allowance for
loan losses when management believes that the uncollectibility of principal is
confirmed. Any subsequent recoveries are credited to the allowance for loan
losses when received. In connection with the determination of the allowance for
loan losses, management obtains appraisals for significant properties, when
considered necessary.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component may be maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
23
Based on its evaluation, management believes the allowance for loan
losses of $455,033 at June 30, 2004, which represents 1.00% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb
probable losses on existing loans. At December 31, 2003, the allowance for loan
losses was $421,144 or 1.02% of gross loans outstanding.
Analysis of Allowance for Loan Losses
The following represents the activity in the allowance for loan losses for the
six months ended June 30:
Allowance for Loan Losses as of June 30, 2004 and 2003
2004 2003
-------------- ---------------
Balance at beginning of period $421,144 $232,000
Charge-offs (27,323) (4,698)
Recoveries 217 -
Provision charged to operations 60,995 86,400
-------------- ---------------
Balance at end of period $455,033 $313,702
============== ===============
Non-Accrual, Past Due and Restructured Loans
The following table represents non-accruing and past due loans:
June 30, December 31,
2004 2003
-------------- ---------------
(Thousands of dollars)
Loans delinquent over 90 days and still accruing $ 30,075 $ 0
Non-accruing loans 37,024 94,063
-------------- ---------------
Total $ 67,099 $94,063
============== ===============
% of Total Loans 0.15% 0.23%
% of Total Assets 0.09% 0.17%
Potential Problem Loans
At June 30, 2004, the Bank had no other loans, other than those
disclosed in the table above, as to which management has significant doubts as
to the ability of the borrower to comply with the present repayment terms.
Deposits
Deposits were $52.9 million at June 30, 2004, an increase of $5.6
million (12%) from $47.3 million as of December 31, 2003. The increase in
deposits was primarily in non-interest bearing deposits, and interest bearing
money market and savings deposits, offset by a $382,410 decline in certificates
of deposit balances. The increase in the total deposit portfolio reflects the
continued vigorous marketing effort of the Bank. Bancorp does not have any
brokered deposits.
Other
Repurchase agreements increased $574,232 from December 31, 2003 to
$913,984 as of June 30, 2004 due to increased activity in these customer
accounts.
24
Results of Operations
De Novo banks in Connecticut have reached profitability on average
within three to four years after commencement of operations. Bancorp was
initially profitable in the fourth quarter of 2003, the ninth quarter of
operation. Bancorp was also profitable in both the first and second quarters of
2004.
Average Balances, Yields and Rates
The following table presents average balance sheets (daily averages),
interest income, interest expense, and the corresponding annualized rates on
earning assets and rates paid on interest bearing liabilities for the six and
three months ended June 30, 2004 compared to the six and three months ended June
30, 2003. Interest income on loans includes loan fee income which is not
significant. In addition, Bancorp does not have any tax-exempt securities or
loans.
25
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest differential
Three months Ended Three months Ended
June 30, 2004 June 30, 2003
----------------------------- -----------------------------
Interest Interest Fluctuations in interest
Average Income/ Average Average Income/ Average Income/Expense
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Total
----------------------------- ----------------------------- ----------------------
Interest earning assets
Loans $ 45,759 $ 862 7.56% $ 26,307 $ 505 7.70% $ 357
Federal funds sold 6,383 14 0.88% 4,733 13 1.10% 1
Short-term investments 2,837 9 1.27% 1,879 4 0.85% 5
Investments 8,294 56 2.71% 8,103 50 2.48% 6
--------------------- -------------------- ----------------------
Total interest earning assets 63,273 941 5.97% 41,022 572 5.59% 369
Cash and due from banks 1,039 1,462
Premises and equipment, net 3,412 3,433
Allowance for loan losses (447) (301)
Other 1,257 824
----------- ----------
Total assets $ 68,534 $ 46,440
=========== ==========
Interest bearing liabilities
Time certificates $ 12,083 64 2.12% $ 6,197 40 2.59% 24
Savings deposits 2,713 8 1.18% 2,045 5 0.98% 3
Money market / checking deposits 26,479 83 1.26% 19,277 48 1.00% 35
Capital lease obligations 1,191 43 14.48% 1,192 42 14.13% 1
Repurchase agreements 1,293 2 0.62% 497 1 0.81% 1
--------------------- -------------------- ----------------------
Total interest bearing liabilities 43,759 200 1.83% 29,208 136 1.86% 64
---------- ---------- ----------------------
Non-interest bearing deposits 15,841 8,303
Accrued expenses and
other liabilities 207 946
Shareholder's equity 8,727 7,983
----------- ----------
Total liabilities and equity $ 68,534 $ 46,440
=========== ==========
Net interest income $ 741 $ 436 $ 305
========== ========== ======================
Interest spread 4.14% 3.73%
======== =========
Interest margin 4.70% 4.26%
======== =========
(1) Includes nonaccruing loans.
26
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest differential
Six months Ended Six months Ended
June 30, 2004 June 30, 2003
----------------------------- -----------------------------
Interest Interest Fluctuations in interest
Average Income/ Average Average Income/ Average Income/Expense
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Total
----------------------------- ----------------------------- ----------------------
Interest earning assets
Loans $ 45,050 $ 1,677 7.47% $ 24,068 $ 920 7.71% $ 757
Federal funds sold 4,137 18 0.87% 3,262 18 1.11% -
Short-term investments 2,710 16 1.18% 1,412 4 0.57% 12
Investments 8,103 103 2.55% 8,268 132 3.22% (29)
--------------------- -------------------- ----------------------
Total interest earning assets 60,000 1,814 6.06% 37,010 1,074 5.85% 740
Cash and due from banks 1,216 1,501
Premises and equipment, net 3,431 3,250
Allowance for loan losses (441) (269)
Other 1,211 838
----------- ----------
Total assets $ 65,417 $ 42,330
=========== ==========
Interest bearing liabilities
Time certificates $ 13,087 138 2.11% $ 6,270 82 2.64% 56
Savings deposits 2,598 15 1.16% 1,558 8 1.04% 7
Money market / checking deposits 24,457 155 1.27% 16,635 95 1.15% 60
Capital lease obligations 1,191 85 14.31% 1,192 84 14.21% 1
Repurchase agreements 1,126 4 0.71% 513 1 0.39% 3
--------------------- -------------------- ----------------------
Total interest bearing liabilities 42,459 397 1.88% 26,168 270 2.08% 127
---------- ---------- ----------------------
Non-interest bearing deposits 14,655 7,525
Accrued expenses and
other liabilities 210 549
Shareholder's equity 8,093 8,088
----------- ----------
Total liabilities and equity $ 65,417 $ 42,330
=========== ==========
Net interest income $ 1,417 $ 804 $ 613
========== ========== ======================
Interest spread 4.18% 3.77%
======== =========
Interest margin 4.74% 4.38%
======== =========
(1) Includes nonaccruing loans.
27
Changes in Assets and Liabilities and Fluctuations in Interest Rates
The following table summarizes the variance in interest income and
expense for the six and three months ended June 30, 2004 and 2003 resulting in
changes in assets and liabilities and fluctuations in interest rates earned and
paid. The changes in interest attributable to both rate and volume have been
allocated to both rate and volume on a pro rata basis.
Three months Ended
June 30, 2004 v. 2003
----------------------
Increase Due to Change in
Or Average
-----------
(Dollars in thousands) (Decrease) Volume Rate
----------------------
----------------------
(Dollars in thousands)
Interest earning assets
Loans $ 357 $ 421 $ (64)
Federal funds sold 1 13 (12)
Short-term investments 5 2 3
Investments 6 1 5
------- ------- ------
Total interest earning assets 369 437 (68)
------- ------- ------
Interest bearing liabilities
Time certificates $ 24 $ 69 $ (45)
Savings deposits 3 2 1
Money market / checking deposits 35 21 14
Capital lease obligations 1 - 1
Repurchase agreements 1 3 (2)
------- ------- ------
Total interest bearing liabilities 64 95 (31)
------- ------- ------
Net interest income $ 305 $ 342 $ (37)
======= ======= ======
28
Six months Ended
June 30, 2004 v. 2003
----------------------
Increase Due to Change in
Or Average
------------
(Dollars in thousands) (Decrease) Volume Rate
----------------------
----------------------
(Dollars in thousands)
Interest earning assets
Loans $ 757 $ 843 $ (86)
Federal funds sold - 9 (9)
Short-term investments 12 5 7
Investments (29) (2) (27)
------- ------- ------
Total interest earning assets 740 855 (115)
------- ------- ------
Interest bearing liabilities
Time certificates $ 56 $ 103 $ (47)
Savings deposits 7 6 1
Money market / checking deposits 60 49 11
Capital lease obligations 1 - 1
Repurchase agreements 3 1 2
------- ------- ------
Total interest bearing liabilities 127 159 (32)
------- ------- ------
Net interest income $ 613 $ 696 $ (83)
======= ======= ======
Net Interest Income
For the quarter ended June 30, 2004, net interest income was $741,248
versus $436,132 for the same period in 2003, a $305,116 or 70% increase. This
was the result of a $22.3 million increase in average earning assets in the
quarter ended June 30, 2004 in comparison to the same period a year ago,
including increases in average loans of $19.5 million and short term investments
and federal funds of $2.6 million. Also, average interest bearing liabilities
increased $14.6 million during the quarter ended June 30, 2004 in comparison to
the same period a year ago, also partially offsetting the favorable net interest
income effects of the increase in average earning assets balance (volume) and
the favorable change in the average earning assets mix.
The yield on average interest earning assets for the three months ended
June 30, 2004 was 5.97% versus 5.59% for same period in 2003. The cost of
average interest bearing liabilities was 1.83% for the three months ended June
30, 2004 versus 1.86% for the same period in 2003. The decrease in the cost of
average interest bearing liabilities was the primarily the result of lower rates
paid on daily rate money market and interest bearing checking accounts and lower
roll-over rates offered to renewing and new time deposits in the first quarter
of 2004, in comparison to those paid and offered in the first quarter of 2003.
For the six months ended June 30, 2004, net interest income was
$1,417,013 versus $803,583 for the same period in 2003, a $613,430 or 76%
increase. This was the result of a $23.0 million increase in average earning
assets in the six months ended June 30, 2004 in comparison to the same period a
year ago, due primarily to increases in average loans of $21.0 million and short
term investments and federal funds of $2.2 million. Also, average interest
bearing liabilities increased $16.3 million during the six months ended June 30,
2004 in comparison to the same period a year ago, also partially offsetting the
favorable net interest income effect of the increase in average earning assets.
29
The yield on average interest earning assets for the six months ended
June 30, 2004 was 6.06% versus 5.85% for same period in 2003. The cost of
average interest bearing liabilities was 1.88% for the six months ended June 30,
2004 versus 2.08% for the same period in 2003. The decrease in the cost of
average interest bearing liabilities was the primarily the result of lower
roll-over rates offered to renewing and new time deposits in the first six
months of 2004, in comparison to those paid and offered in the same period
during 2003.
Provision for Loan Losses
The $29,245 provision for loan losses for the three months ended June
30, 2004 reflects loan portfolio growth and seasoning. During the quarter, net
charge-offs of $27,106 were recorded. The provision for loan losses for the
three months ended June 30, 2003 was $23,500, and was primarily due to the
increase in the Bank's loan volume during the period.
The $60,995 provision for loan losses for the six months ended June 30,
2004 primarily reflects loan portfolio growth and seasoning. The provision for
loan losses for the six months ended June 30, 2003 was $86,400, and was
primarily due to the increase in the Bank's loan volume during the period.
Noninterest Income
The $208,516 increase in total noninterest income for the second
quarter of 2004 versus 2003 is primarily the result of an increase in the gains
and fees from the sales and referrals of the guaranteed portion of Small
Business Administration ("SBA") guaranteed loans of $84,881, prepayment
penalties on loans of $35,050, and $93,585 in fees from increased deposit and
loan related volume and fees from other services. Bancorp intends to continue to
originate SBA guaranteed loans in the future and expects to continue to earn fee
income from SBA loan participation sales and referrals.
The $342,114 increase in total noninterest income for the first six
months of 2004 versus 2003 is primarily the result of an increase in the gains
and fees from the sales and referrals of the guaranteed portion of SBA
guaranteed loans of $216,715, increase in fees from deposit and loan related
volume and activity and fees from other services of $170,848, offset by a
decrease in realized gains on the sales of available for sale securities of
$45,449.
Noninterest Expense
Total noninterest expense was $951,282 for the second quarter of 2004
versus $692,023 for the same period in 2003, an increase of $259,259 or 37%. The
increase in expense is due to the growth in Bancorp's loan and deposit volume,
as well as the acquisition of additional infrastructure relating to
administration and compliance, requiring additional staffing and other operating
expenses.
Total noninterest expense was $1,772,360 for the first six months of
2004 versus $1,259,934 for the same period in 2003, an increase of $512,426 or
41%. The increase in expense is due to the growth in the Bancorp's loan and
deposit volume, the addition of the New Haven (Amity) office in March of 2003,
the acquisition of the New London facility in January 2004, as well as the
acquisition of additional infrastructure relating to administration and
compliance, requiring additional staffing and other operating expenses.
Salaries and benefits for the second quarter of 2004 increased by
$88,545 or 23% due to staff increases relating to new employees engaged due to
loan and deposit volume and infrastructure development.
30
Salaries and benefits for the first six months of 2004 increased by
$251,202 or 37% due to staff increases relating to the New Haven (Amity) office
and other new employees engaged due to loan and deposit volume increases and
infrastructure development.
Occupancy and equipment for the second quarter of 2004 increased by
$42,214 or 45% due primarily to increases relating to depreciation of buildings,
equipment and furniture of $18,664, rent and property taxes relating to the
future New London bank subsidiary facility of $13,523, and maintenance of
premises, furniture and equipment of $8,915
Occupancy and equipment for the first six months of 2004 increased by
$93,558 or 56% due primarily to increases relating to depreciation of buildings,
equipment and furniture of $41,426, rent and property taxes relating to the New
London facility of $21,477, and maintenance of $13,898.
Professional fees for the second quarter of 2004 increased by $68,249
or by 137% due primarily to the engagement of consultants to assist the Bank in
developing infrastructure and related policies and procedures, and legal and
other professional costs relating to the chartering and operational planning of
the proposed banking subsidiary to be located in New London and the investment
banking subsidiary SCB Capital, Inc.
Professional fees for the first six months of 2004 increased by $64,373
or 56% due primarily to the engagement of consultants in the second quarter of
2004 to assist the Bank in developing infrastructure and related policies and
procedures, and legal and other professional costs relating to the chartering of
the proposed banking subsidiary to be located in New London and the investment
banking subsidiary SCB Capital, Inc.
Data processing and other outside services for the second quarter
increased by $21,541, or 45%, primarily due to increased loan and deposit
volumes.
Data processing and other outside services for the first six months of
2004 increased by $51,760, or 60%, primarily due to increased loan and deposit
volumes.
Other Operating Expense for the second quarter of 2004 increased by
$33,323, or 42%, primarily due to insurance cost increases of $14,183, and
Bancorp filing fees in connection with the new proposed banking subsidiary to be
located in New London and SCB Capital, Inc. and other filings of $10,931.
Other Operating Expense for the first six months of 2004 increased by
$50,498, or 36%, primarily due to insurance cost increases of $22,215, Bancorp
filing fees in connection with the new proposed banking subsidiary to be located
in New London and SCB Capital, Inc. and other filings of $11,897, and increased
communication costs of $8,780.
Off-Balance Sheet Arrangements
See Note 11 for information regarding the Bancorp's off-balance sheet
arrangements.
Liquidity
Management believes that Bancorp's short-term assets have sufficient
liquidity to cover potential fluctuations in deposit accounts and loan demand
and to meet other anticipated operating cash requirements.
Bancorp's liquidity position as of June 30, 2004 and December 31, 2003
consisted of liquid assets totaling $26.7 million and $11.0 million,
respectively. This represents 35.0% and 19.6% of total assets at June 30, 2004
and December 31, 2003, respectively. The net increase in liquidity during the
first six months of 2004 is due to increases in federal funds sold, short-term
investments and available for sale securities principally due
31
to receipt of the net proceeds from the public offering of equity securities by
Bancorp and, to a lesser extent, deposit growth in excess of loan portfolio
growth. The following categories of assets as described in the accompanying
balance sheet are considered liquid assets: cash and due from banks, federal
funds sold, short-term investments, and securities available for sale. Liquidity
is a measure of Bancorp's ability to generate adequate cash to meet financial
obligations. The principal cash requirements of a financial institution are to
cover downward fluctuations in deposits and increases in its loan portfolio.
Capital
The following table illustrates Bancorp's regulatory capital ratios at:
June 30, 2004 December 31, 2003
--------------------- --------------------
Tier 1 (Leverage) Capital Ratio to Average assets 30.71% 14.17%
Tier 1 Capital to Risk Weighted Assets 37.57% 16.37%
Total Capital to Risk Weighted Assets 38.38% 17.28%
The following table illustrates the Bank's regulatory capital ratios at:
June 30, 2004 December 31, 2003
--------------------- --------------------
Tier 1 (Leverage) Capital Ratio to Average assets 15.49% 14.16%
Tier 1 Capital to Risk Weighted Assets 19.31% 16.33%
Total Capital to Risk Weighted Assets 20.14% 17.24%
Capital adequacy is one of the most important factors used to determine
the safety and soundness of individual banks and the banking system. Based on
the above ratios, Bancorp is considered to be well capitalized under applicable
regulations specified by the Federal Reserve. The Bank also is considered to be
"well capitalized" under applicable regulations. To be considered "well
capitalized" an institution must generally have a leverage capital ratio of at
least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10%.
Market Risk
Market risk is defined as the sensitivity of income to fluctuations in
interest rates, foreign exchange rates, equity prices, commodity prices and
other market-driven rates or prices. Based upon on the nature of the Company's
business, market risk is primarily limited to interest rate risk, which is the
impact that changing interest rates have on current and future earnings.
Bancorp's goal is to maximize long-term profitability, while minimizing
its exposure to interest rate fluctuations. The first priority is to structure
and price Bancorp's assets and liabilities to maintain an acceptable interest
rate spread, while reducing the net effect of changes in interest rates. In
order to reach an acceptable interest rate spread, Bancorp must generate loans
and seek acceptable long-term investments to replace the lower yielding balances
in Federal Funds sold and short-term investments. The focus also must be on
maintaining a proper balance between the timing and volume of assets and
liabilities re-pricing within the balance sheet. One method of achieving this
balance is to originate variable rate loans for the portfolio to offset the
short-term re-pricing of the liabilities. In fact, a number of the interest
bearing deposit products have no contractual maturity. Customers may withdraw
funds from their accounts at any time and deposits balances may therefore run
off unexpectedly due to changing market conditions.
32
The exposure to interest rate risk is monitored by the Asset and
Liability Management Committee ("ALCO") consisting of senior management
personnel and selected members of the Board of Directors of the Bank. ALCO
reviews the interrelationships within the balance sheet to maximize net interest
income within acceptable levels of risk. ALCO reports to the Board of Directors
on a quarterly basis regarding the status of ALCO activities within the Company.
Impact of Inflation and Changing Prices
Bancorp's financial statements have been prepared in terms of
historical dollars, without considering changes in relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effect of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. Notwithstanding this
fact, inflation can directly affect the value of loan collateral, in particular,
real estate. Inflation, or disinflation, could significantly affect Bancorp's
earnings in future periods.
"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995
Certain statements contained in Bancorp's public reports, including
this report, and in particular in this "Management's Discussion and Analysis or
Plan of Operation", may be forward looking and subject to a variety of risks and
uncertainties. These factors include, but are not limited to, (1) changes in
prevailing interest rates which would affect the interest earned on Bancorp's
interest earning assets and the interest paid on its bearing liabilities, (2)
the timing of re-pricing of Bancorp's interest earning assets and interest
bearing liabilities, (3) the effect of changes in governmental monetary policy,
(4) the effect of changes in regulations applicable to Bancorp and the conduct
of its business, (5) the effect of a loss of any executive officer, key
personnel, or directors, (6) changes in competition among financial service
companies, including possible further encroachment of non-banks on services
traditionally provided by banks and the impact of recently enacted federal
legislation, (7) the ability of competitors which are larger than Bancorp to
provide products and services which it is impracticable for Bancorp to provide,
(8) the effect of Bancorp's opening of branches and organization of a new bank,
(9) the effect of any decision by Bancorp to engage in any business not
historically permitted to it, (10) concentration of our business in Southern
Connecticut, (11) the concentration of our loan portfolio in commercial loans to
small-to-medium sized businesses, which may be impacted more severely than
larger businesses during periods of economic weakness and (12) lack of seasoning
in our loan portfolio, which may increase the risk of future credit defaults.
Other such factors may be described in other filings made by Bancorp with the
SEC.
Although Bancorp believes that it offers the loan and deposit products
and has the resources needed for success, future revenues and interest spreads
and yields cannot be reliably predicted. These trends may cause Bancorp to
adjust its operations in the future. Because of the foregoing and other factors,
recent trends should not be considered reliable indicators of future financial
results or stock prices.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based upon an evaluation of the effectiveness of Bancorp's
disclosure controls and procedures performed by Bancorp's management, with
participation of Bancorp's Chief Executive Officer and its Chief Financial
Officer as of the end of the period covered by this report, Bancorp's Chief
Executive Officer and Chief Financial Officer concluded that Bancorp's
disclosure controls have been effective.
33
As used herein, "disclosure controls and procedures" mean controls
and other procedures of Bancorp that are designed to ensure that information
required to be disclosed by Bancorp in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
Bancorp in the reports that it files or submits under the Securities Exchange
Act is accumulated and communicated to Bancorp's management, including its
principal executive, and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls
There have not been any significant changes in Bancorp's internal
controls or in other factors that occurred during Bancorp's quarter ended June
30, 2004 that could significantly affect these controls subsequent to the
evaluation referenced in paragraph (a) above.
PART II
Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Bancorp held its annual meeting of shareholders for 2004 on May 18,
2004. Three items were voted on at that meeting- the re-election of two
directors, Joseph V. Ciaburri and Elmer F. Laydon, each for a three (3) year
term; the ratification of the selection of McGladrey & Pullen, LLP as
independent accountants for Bancorp for the year ending December 31, 2004; and
approval of an increase in the number of authorized shares for issuance under
the 2002 Stock Option Plan from 275,000 shares to 365,000 shares. Each matter
passed. Director nominee Ciaburri received 1,042,339 votes "FOR", 0 votes
"WITHELD", and 4,757 votes "ABSTAIN". Director nominee Laydon received 1,045,639
votes "FOR", 0 votes "WITHELD", and 1,457 votes "ABSTAIN". With respect to the
ratification of the selection of McGladrey & Pullen, LLP, 1,044,292 votes were
cast "FOR" and 27 votes were cast "AGAINST" the proposition, and 2,777 votes
"ABSTAIN". The proposal to increase the number of authorized shares under the
2002 Stock Option Plan received 433,085 votes "FOR", 13,412 "AGAINST", 4,922
"ABSTAIN" and there were 595,677 broker non-votes.
Item 5. Other Information
Not applicable.
34
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
3(i) Amended and Restated Certificate of Incorporation of the Issuer
(incorporated by reference to Exhibit 3(i) to Issuer's Quarterly Report
on Form 10-QSB dated June 30, 2002)
3(ii) By-Laws of the Issuer (incorporated by reference to Exhibit 3(ii) to
the Issuer's Registration Statement on Form SB-2 (No. 333-59824))
10.1 Lease, dated as of August 17, 2000, between 215 Church Street, LLC and
the Issuer (incorporated by reference to Exhibit 10.1 to the Issuer's
Registration Statement on Form SB-2 (No. 333-59824))
10.2 Letter agreement dated January 3, 2001 amending the Lease between 215
Church Street, LLC and the Issuer (incorporated by reference to Exhibit
10.2 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.3 First Amendment to Lease dated March 30, 2001 between 215 Church
Street, LLC and the Issuer (incorporated by reference to Exhibit 10.3
to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.4 Second Amendment to Lease dated March 31, 2001 between 215 Church
Street, LLC and the Issuer (incorporated by reference to Exhibit 10.4
to the Issuer's Registration Statement Form SB-2 (No.
333-59824))
10.5 Assignment of Lease dated April 11, 2001 between the Issuer and The
Bank of Southern Connecticut (incorporated by reference to Exhibit 10.5
to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.6 Employment Agreement dated as of January 23, 2001, between The Bank of
Southern Connecticut, the Issuer and Joseph V. Ciaburri (incorporated
by reference to Exhibit 10.6 to the Issuer's Registration Statement on
Form SB-2 (No. 333-59824))
10.7 Employment Agreement dated as of March 29, 2001 between The Bank of
Southern Connecticut, and Gary D. Mullin (incorporated by reference to
Exhibit 10.7 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.8 Issuer's 2001 Stock Option Plan (incorporated by reference to Exhibit
10.8 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.9 Issuer's 2001 Warrant Plan (incorporated by reference to Exhibit 10.9
to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.10 Sublease dated January 1, 2001 between Michael Ciaburri, d/b/a Ciaburri
Bank Strategies and The Bank of Southern Connecticut (incorporated by
reference to Exhibit 10.10 to the Issuer's Registration Statement on
Form SB-2 (No. 333-59824))
10.11 Sublease dated January 1, 2001 between Laydon and Company, LLC and The
Bank of Southern Connecticut (incorporated by reference to Exhibit
10.11 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.12 Issuer's 2001 Supplemental Warrant Plan (incorporated by reference to
Exhibit 10.12 to Issuer's Annual Report on Form 10-KSB dated March 29,
2002)
10.13 Issuer's 2002 Stock Option Plan (incorporated by reference to Appendix
B to Issuer's Definitive Proxy Statement dated April 18, 2002).
35
10.14 Employment Agreement dated as of February 12, 2003, between The Bank
of Southern Connecticut and Michael M. Ciaburri.(incorporated by
reference to Exhibit 10.14 to Issuer's Form 10-QSB dated May 14, 2003).
10.15 Bancorp's Board of Directors approval of the establishment by Bancorp
of a new commercial bank in New London, Connecticut and a capital
raising by Bancorp.
10.16 Amendment to Employment Agreement dated as of October 20, 2003,
between The Bank of Southern Connecticut and Southern Connecticut
Bancorp, Inc. and Joseph V. Ciaburri. (incorporated by reference to
Exhibit 10.16 to the Issuer's Form 10-KSB dated March xx, 2004 (No.
333-59824))
10.17 Lease dated January 14, 2004 between The City of New London and the
Issuer (incorporated by reference to Exhibit 10.17 to the Issuer's
Registration Statement on Form SB-2 (No. 333-59824))
10.18 Lease dated August 2, 2002, between 469 West Main Street LLC and The
Bank of Southern Connecticut (incorporated by reference to Exhibit
10.18 to the Issuer's Registration Statement on Form SB-2 (No.
333-59824))
10.19 Underwriting Agreement between A.G. Edwards & Sons, Inc. and Keefe,
Bruyette & Woods, and Southern Connecticut Bancorp dated June 16,
2004.
31.1 Section Rule 13(a)-14(a)/15(d)-14(a) Certification by Chairman and
Chief Executive Officer.
31.2 Section Rule 13(a)-14(a)/15(d)-14(a) Certification by President and
Chief Operating Officer.
31.3 Section Rule 13(a)-14(a)/15(d)-14(a) by Vice President and Chief
Financial Officer.
32.1 Section 1350 Certification by Chairman and Chief Executive Officer.
32.2 Section 1350 Certification by President and Chief Operating Officer.
32.3 Section 1350 Certification by Vice President and Chief Financial
Officer.
(b) Reports on Form 8-K
-------------------
The issuer filed reports on Form 8-K during the quarter ended
June 30, 2004.
Date of Filing Item Reported
-------------- -------------
April 29, 2004
May 14, 2004
June 8, 2004
June 17, 2004
36
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOUTHERN CONNECTICUT BANCORP, INC.
By: /S/ Joseph V. Ciaburri
--------------------------
Name: Joseph V. Ciaburri
Title: Chairman & Chief
Executive Officer
Date: August 12, 2004
37
Exhibit Index
-------------
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification by Chairman and Chief
Executive Officer. (filed herewith)
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification by President and Chief
Operating Officer. (filed herewith)
31.3 Rule 13(a)-14(a)/15(d)-14(a) Certification by Vice President and
Chief Financial Officer. (filed herewith)
32.1 Section 1350 Certification by Chairman and Chief Executive Officer. (filed herewith)
32.2 Section 1350 Certification by President and Chief Operating Officer. (filed herewith)
32.3 Section 1350 Certification by Vice President and Chief Financial Officer. (filed herewith)
38