Southern Connecticut Bancorp, Inc. 10QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
 
F O R M  10 - QSB
 
x  Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2007
 
Commission file number 0-49784


SOUTHERN CONNECTICUT BANCORP, INC.
(Name of Small Business Issuer as Specified in Its Charter)

Connecticut
(State or Other Jurisdiction of Incorporation or Organization)
 
06-1609692
(I.R.S. Employer Identification Number)
215 Church Street
New Haven, Connecticut 06510
(Address of Principal Executive Offices)
 
 
(203) 782-1100
(Issuer’s Telephone Number)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [ ]

 
The number of shares of the issuer’s Common Stock, par value $.01 per share, outstanding as of
May 15, 2007: 2,943,735

Transitional Small Business Disclosure Format

Yes __ No X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes___ No X


Table of Contents
Part I
Financial Information
 
Page
 
   
 
   
 
 
   
 
 
   
 
   
   
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 


1


           
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
      
CONSOLIDATED BALANCE SHEETS
    
March 31, 2007 (unaudited) and December 31, 2006
 
   
2007
 
2006
 
Assets
          
    Cash and due from banks
  
$
7,017,922
  
$
5,821,084
  
    Federal funds sold
    
20,000,000
   
22,700,000
 
    Short-term investments
    
7,409,117
   
6,288,663
 
        Cash and cash equivalents
    
34,427,039
   
34,809,747
 
               
    Available for sale securities, at fair value
    
7,105,940
   
8,054,821
 
    Federal Home Loan Bank Stock
   
66,100
   
66,100
 
    Loans receivable (net of allowance for loan losses of
              
        $1,107,118 in 2007 and $1,062,661 in 2006)
    
78,090,922
   
75,306,255
 
    Loans held for sale
    
171,882
   
118,223
 
    Accrued interest receivable
    
535,166
   
467,698
 
    Premises and equipment, net
    
4,358,570
   
4,424,828
 
    Other assets
    
996,642
   
1,014,873
 
        Total assets
  
$
125,752,261
  
$
124,262,545
  
               
Liabilities and Shareholders’ Equity
              
               
Liabilities
              
    Deposits
              
        Noninterest bearing deposits
  
$
26,297,567
  
$
29,463,030
  
        Interest bearing deposits
   
76,795,401
   
71,810,490
 
        Total deposits
    
103,092,968
   
101,273,520
 
               
Repurchase agreements
    
403,578
   
883,603
 
Accrued expenses and other liabilities
    
630,430
   
585,445
 
Capital lease obligations
    
1,187,839
   
1,188,128
 
Total liabilities
    
105,314,815
   
103,930,696
 
               
    Commitments and Contingencies (Note 9)
              
               
Shareholders’ Equity
              
    Preferred stock, no par value; 500,000 shares authorized;
              
        none issued
              
    Common stock, par value $.01; 5,000,000, shares authorized;
              
        shares issued and outstanding: 2007 2,942,219; 2006 2,941,297
    
29,422
   
29,413
 
    Additional paid-in capital
    
24,170,644
   
24,147,883
 
    Accumulated deficit
    
(3,563,448
)
  
(3,595,370
)
    Accumulated other comprehensive loss – net unrealized
             
        loss on available for sale securities
   
(199,172
)
  
(250,077
)
            Total shareholders' equity
   
20,437,446
   
20,331,849
 
               
            Total liabilities and shareholders' equity
  
$
125,752,261
  
$
124,262,545
  
               
See Notes to Consolidated Financial Statements.
               
 
 
2

SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES  
    
CONSOLIDATED STATEMENTS OF INCOME  
  
For the Three Months Ended March 31, 2007 and 2006 (unaudited)  
            
   
 Three Months Ended
  
   
 March
  
   
 2007
  
2006
  
Interest Income
           
    Interest and fees on loans
  
$
1,732,175
  
$
1,281,113
  
    Interest on securities
    
68,028
   
78,721
 
    Interest on federal funds sold and short-term investments
    
314,310
   
143,496
 
    Total interest income
    
2,114,513
   
1,503,330
 
               
Interest Expense
              
    Interest on deposits
    
743,285
   
366,430
 
    Interest on capital lease obligations
    
43,868
   
43,541
 
    Interest on repurchase agreements
    
2,234
   
3,296
 
    Total interest expense
    
789,387
   
413,267
 
               
    Net interest income
    
1,325,126
   
1,090,063
 
               
Provision for Loan Losses
    
99,793
   
(58,032
)
    Net interest income after
              
    provision for loan losses
    
1,225,333
   
1,148,095
 
               
Noninterest Income
              
    Service charges and fees
    
138,004
   
86,359
 
    Gains on sales of loans
    
-
   
30,772
 
    Other noninterest income
    
102,840
   
63,321
 
    Total noninterest income
    
240,844
   
180,452
 
               
Noninterest Expense
              
    Salaries and benefits
    
905,623
   
683,782
 
    Occupancy and equipment
    
216,816
   
166,244
 
    Professional services
    
85,358
   
101,667
 
    Data processing and other outside services
    
103,911
   
81,180
 
    Advertising and promotional expense
    
1,806
   
44,425
 
    Forms, printing and supplies
    
18,511
   
32,303
 
    Other operating expenses
    
102,230
   
140,053
 
    Total noninterest expense
    
1,434,255
   
1,249,654
 
               
    Net income
  
$
31,922
  
$
78,893
  
               
Basic income per share
  
$
0.01
  
$
0.03
  
Diluted income per share
  
$
0.01
  
$
0.03
  
               
               
See Notes to Consolidated Financial Statements.
              
               

 
3

SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2007 and 2006 (unaudited)

       
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Number
 
Common
 
Paid-in
 
Accumulated
 
Comprehensive
 
 
 
 
 
of Shares
 
Stock
 
Capital
 
Deficit
 
Loss
 
Total
  
                           
Balance December 31, 2005
    
2,937,525
 
$
29,375
  
$
24,083,638
  
$
(3,477,576
)
$
(338,594
)
$
20,296,843
  
                                       
Comprehensive Income:
                                      
     Net Income
    
-
   
-
   
-
   
78,893
   
-
   
78,893
 
     Unrealized holding loss on available
                                     
          for sale securities
    
-
   
-
   
-
   
-
   
(45,232
)
  
(45,232
)
    Total comprehensive income
                                  
33,661
 
                                       
Balance March 31, 2006
    
2,937,525
 
$
29,375
  
$
24,083,638
  
$
(3,398,683
)
$
(383,826
)
$
20,330,504
  
                                       
Balance December 31, 2006
    
2,941,297
 
$
29,413
  
$
24,147,883
  
$
(3,595,370
)
$
(250,077
)
$
20,331,849
  
                                       
Comprehensive Income:
                                      
     Net Income
    
-
   
-
   
-
   
31,922
   
-
   
31,922
 
     Unrealized holding gain on available
                                     
          for sale securities
    
-
   
-
   
-
   
-
   
50,905
   
50,905
 
    Total comprehensive income
                                  
82,827
 
                                       
Directors fees settled in common stock
    
922
   
9
   
6,602
   
-
   
-
   
6,611
 
Restricted stock compensation
    
-
   
-
   
1,870
   
-
   
-
   
1,870
 
Stock option compensation
    
-
   
-
   
14,289
   
-
   
-
   
14,289
 
                                       
Balance March 31, 2007
    
2,942,219
 
$
29,422
  
$
24,170,644
  
$
(3,563,448
)
$
(199,172
)
$
20,437,446
  
                                       
See Notes to Consolidated Financial Statements.
  
                                       
 
 
4
 

SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
    
For the Three Months Ended March 31, 2007 and 2006 (unaudited)
           
Cash Flows From Operations
  
2007
  
2006
  
    Net income
  
$
31,922
  
$
78,893
  
    Adjustments to reconcile net income to net cash
              
        provided by operating activities:
              
        Amortization and accretion of premiums and discounts on investments, net
    
(214
)
  
(729
)
        Provision for loan losses
    
99,793
   
(58,032
)
        Share based compensation
    
22,770
   
-
 
        Loans originated for sale, net of principal payments received
    
5,650
   
(202,000
)
        Proceeds from sales of loans
    
-
   
276,375
 
        Gains on sales of loans
    
-
   
(30,772
)
        Depreciation and amortization
    
103,049
   
86,211
 
        Increase in cash surrender value of life insurance
    
(10,200
)
  
(8,250
)
        Changes in assets and liabilities:
              
            Increase (decrease) in deferred loan fees
   
34,060
   
(8,674
)
            Increase in accrued interest receivable
    
(67,468
)
  
(77,839
)
            Decrease (increase) in other assets
    
28,431
   
(28,303
)
            Increase in accrued expenses and other liabilities
    
44,985
   
166,419
 
    Net cash provided by operating activities
    
292,778
   
193,299
 
               
Cash Flows From Investing Activities
              
    Principal repayments on available for sale securities
   
-
   
2,608
 
    Proceeds from maturities of available for sale securities
    
1,000,000
   
-
 
    Net increase in loans receivable
    
(2,977,829
)
  
(2,190,337
)
    Purchases of premises and equipment
    
(36,791
)
  
(10,916
)
    Net cash used in investing activities
    
(2,014,620
)
  
(2,198,645
)
               
Cash Flows From Financing Activities
              
    Net decrease in demand, savings and money market deposits
    
(1,235,190
)
  
(1,781,210
)
    Net increase in certificates of deposit
    
3,054,638
   
3,342,515
 
    Net decrease in repurchase agreements
    
(480,025
)
  
(844,863
)
    Principal payments on capital lease obligations
    
(289
)
  
(260
)
    Net cash provided by financing activities
    
1,339,134
   
716,182
 
               
    Net decrease in cash and cash equivalents
    
(382,708
)
  
(1,289,164
)
               
Cash and cash equivalents
              
    Beginning
    
34,809,747
   
16,569,287
 
    Ending
  
$
34,427,039
  
$
15,280,123
  
               
(continued)
             
 

 
5
 

SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended March 31, 2007 and 2006 (unaudited)
           
   
2007
  
2006
  
Supplemental Disclosures of Cash Flow Information:
          
     Cash paid during the period for:
          
    Interest
 
$
775,756
  
$
394,318
  
               
    Income taxes
  
$
-
  
$
-
  
               
Supplemental Disclosures of Noncash Investing and Financing Activities:
              
Transfer of loans held for sale to loans receivable
  
$
-
  
$
(102,216
)
               
Transfer of loans receivable to loans held for sale
  
$
59,309
  
$
-
  
               
Unrealized holding gains (losses) on available for sale securities arising
              
     during the period
  
$
50,905
  
$
(45,232
)
               
               
See Notes to Consolidated Financial Statements.
              
               
 
6
Southern Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.  Nature of Operations

Southern Connecticut Bancorp, Inc. (“Bancorp”), is a bank holding company headquartered in New Haven, Connecticut that was incorporated on November 8, 2000. Bancorp’s strategic objective is to serve as a bank holding company for a community-based commercial bank serving the greater New Haven and greater New London markets, as well as the approximately 62 miles of coastal towns and communities located between these two cities and extending to Rhode Island (the “Southern Connecticut Market”). Bancorp owns 100% of the capital stock of The Bank of Southern Connecticut (the “Bank”) a Connecticut-chartered bank with its headquarters in New Haven, Connecticut. The Bank commenced operations on October 1, 2001. The Bank operates five branches, through three “brand” names. The Bank of Southern Connecticut is headquartered in New Haven, Connecticut with branch offices in the Amity/Westville section of New Haven, and in Branford, Connecticut, just east of New Haven. The Bank of Southeastern Connecticut, a division of The Bank of Southern Connecticut, opened March 6, 2006, and is headquartered in New London, Connecticut. The Bank of North Haven, a division of The Bank of Southern Connecticut, opened July 10, 2006, and is headquartered in North Haven, Connecticut. Each division is marketed as an independent entity and is staffed with senior executives who take an active role in community affairs.

The Bank focuses on serving the banking needs of small to medium-sized businesses, professionals and professional corporations, and their owners and employees in the greater New Haven and greater New London markets. The Bank’s target commercial customer has between $1.0 and $30.0 million in revenues, 15 to 150 employees, and borrowing needs of up to $3.0 million. The primary focus on this commercial market makes the Bank uniquely qualified to move deftly in responding to the needs of its clients. The Bank has been successful in winning business by offering a combination of competitive pricing for its services, quick decision making processes and a high level of personalized, “high touch” customer service.

Note 2.  Basis of Financial Statement Presentation

The consolidated interim financial statements include the accounts of Southern Connecticut Bancorp, Inc. and its subsidiaries. The consolidated interim financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310b of Regulation SB. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results which may be expected for the year as a whole.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements of Bancorp and notes thereto as of December 31, 2006, filed with the Securities and Exchange Commission on Form 10-KSB on March 28, 2007.

Note 3.  Available for Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of available for sale securities at March 31, 2007 and December 31, 2006 are as follows:
 
 
7

     
 
Gross
 
Gross
 
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
March 31, 2007
 
Cost
 
Gains
 
Losses
 
Value
  
U.S. Government Sponsored Agency Obligations
  
$
7,199,685
  
$
-
  
$
(197,341
)
$
7,002,344
  
Mortgage Backed Securities
    
105,427
   
-
   
(1,831
)
  
103,596
 
   
$
7,305,112
  
$
-
  
$
(199,172
)
$
7,105,940
  
                           
 
                   
   
 
 
Gross
 
Gross
 
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
December 31, 2006
 
Cost
 
Gains
 
Losses
 
Value
  
U.S. Government Sponsored Agency Obligations
  
$
8,199,467
  
$
-
  
$
(247,627
)
$
7,951,840
  
Mortgage Backed Securities
    
105,431
   
-
   
(2,450
)
  
102,981
 
   
$
8,304,898
  
$
-
  
$
(250,077
)
$
8,054,821
  
                           

At March 31, 2007, gross unrealized holding losses on available for sale securities totaled $199,172. All such unrealized losses have existed for a period of twelve months or longer. Management does not believe that any of the unrealized losses as of March 31, 2007 are other than temporary, as they relate to debt and mortgage-backed securities issued by U.S. Government sponsored agencies resulting from changes in the interest rate environment. Bancorp has the intent and ability to hold these securities to maturity if necessary and expects to receive all contractual principal and interest related to these investments. As a result, management believes that these unrealized losses will not have a negative impact on future earnings or a permanent effect on capital.

At December 31, 2006, gross unrealized holding losses on available for sale securities totaled $250,077. All such unrealized losses have existed for a period of twelve months or longer.

Note 4.  Loans Receivable

A summary of Bancorp’s loan portfolio at March 31, 2007 and December 31, 2006 is as follows:
 
   
March 31, 2007
  
 December 31, 2006
  
            
Commercial loans secured by real estate
  
$
32,436,843
  
$
32,004,940
  
Commercial loans
    
39,588,077
   
39,621,667
 
Construction and land loans
    
5,744,474
   
3,253,511
 
Residential mortgage loans
    
147,648
   
149,358
 
Consumer home equity loans
    
665,638
   
603,394
 
Consumer installment loans
    
719,400
   
806,026
 
    Total gross loans
    
79,302,080
   
76,438,896
 
Net deferred loan fees
    
(104,040
)
  
(69,980
)
Allowance for loan losses
    
(1,107,118
)
  
(1,062,661
)
    Loans receivable, net
  
$
78,090,922
  
$
75,306,255
  
               
 
 
8
 

Allowance for Loan Losses
    
The following represents the activity in the allowance for loan losses for the three
 
months ended March 31, 2007 and 2006:
  
           
   
For the Period Ended March 31,
  
   
2007
  
2006
  
Balance at beginning of period
  
$
1,062,661
  
$
778,051
  
Charge-offs
    
(58,739
)
  
(2,568
)
Recoveries
    
3,403
   
59,339
 
Provision charged to operations
    
99,793
   
(58,032
)
Balance at end of period
  
$
1,107,118
  
$
776,790
  
               
               
Net (charge-offs) recoveries to average loans
    
(0.07
%)
  
0.10
%
               
Allowance for loan losses to gross loans receivable
    
1.39
%
  
1.31
%
               


Non-Accrual, Past Due and Restructured Loans
           
The following is a summary of non-accrual and past due loans:
           
   
March 31, 2007
  
December 31, 2006
  
Loans delinquent over 90 days and still accruing
  
$
-
  
$
-
  
Non-accrual loans
    
297,361
   
301,833
 
Total nonperforming loans
  
$
297,361
  
$
301,833
  
% of Total Loans
    
0.38
%
  
0.40
%
% of Total Assets
    
0.24
%
  
0.24
%
Ratio of allowance for loan losses to nonperforming loans
    
3.72
   
3.52
 
               

Note 5.  Deposits

At March 31, 2007 and December 31, 2006, deposits consisted of the following:
 
   
March 31, 2007
  
 December 31, 2006
  
Noninterest bearing deposits
  
$
26,297,567
  
$
29,463,030
  
               
Interest bearing deposits
              
     Checking
    
7,008,152
   
4,985,187
 
     Money Market
    
36,326,722
   
36,324,952
 
     Savings
    
2,012,892
   
2,107,354
 
     Total checking, money market & savings
    
45,347,766
   
43,417,493
 
               
     Time Certificates under $100,000
    
15,270,140
   
14,190,207
 
     Time Certificates of $100,000 or more
    
16,177,495
   
14,202,790
 
     Total time deposits
    
31,447,635
   
28,392,997
 
     Total interest bearing deposits
    
76,795,401
   
71,810,490
 
Total deposits
  
$
103,092,968
  
$
101,273,520
  
               
 
Note 6.  Available Borrowings

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At March 31, 2007, the Bank had the ability to borrow from the FHLB based on a certain percentage of the value of the Bank’s
 
 
 
9
 
qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. There were no borrowings outstanding with the FHLB at March 31, 2007.

The Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to a percentage of its outstanding mortgage loans and contracts secured by residential properties, including mortgage-backed securities. No ready market exists for FHLB stock and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost since the Bank can redeem the stock with FHLB at cost.

Note 7.  Income Per Share

Bancorp is required to present basic income per share and diluted income per share in its statements of income. Basic per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted per share amounts assume exercise of all potential common stock equivalents in weighted average shares outstanding, unless the effect is antidilutive. 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 month periods ended March 31, 2007 and 2006.
 

Income per Share
                          
                           
Three Months Ended March 31,
                          
   
2007
  
2006
  
       
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Net
 
Average
 
Amount
 
Net
 
Average
 
Amount
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
  
Basic Income Per Share
                          
   Income available to common shareholders
  
$
31,922
    
2,942,147
 
$
0.01
  
$
78,893
    
2,937,525
 
$
0.03
  
Effect of Dilutive Securities
                                      
   Warrants/Stock Options outstanding
    
-
   
10,389
    
-
   
-
   
2,171
   
-
 
Diluted Income Per Share
                                      
   Income available to common
                                      
    shareholders plus assumed conversions
  
$
31,922
    
2,952,536
  
$
0.01
  
$
78,893
    
2,939,696
 
$
0.03
  
                                       
 
Note 8. Other Comprehensive Income (Loss)

Other comprehensive income (loss), which is comprised solely of the change in unrealized gains (losses) on available for sale securities, is as follows:
 
 
10
 

   
Three Months Ended
  
   
March 31, 2007
  
   
Before-Tax
 
 
 
Net-of-Tax
 
 
 
Amount
 
Taxes
 
Amount
  
Unrealized holding gains arising during the period
  
$
50,905
  
$
-
  
$
50,905
  
                     
Reclassification adjustment for amounts
                    
   recognized in net income
    
-
   
-
   
-
 
                     
Unrealized holding gains on available for sale
                    
   securities
  
$
50,905
  
$
-
  
$
50,905
  
 
 
 
               
   
Three Months Ended
 
 
 
March 31, 2006
  
   
Before-Tax
 
 
 
Net-of-Tax
 
 
 
Amount
 
Taxes
 
Amount
 
Unrealized holding losses arising during the period
  
$
(45,232
)
$
-
    
($45,232
)
                     
Reclassification adjustment for amounts
                    
   recognized in net income
    
-
   
-
   
-
 
                     
Unrealized holding losses on available for sale
                    
   securities
  
$
(45,232
)
$
-
  
$
(45,232
)
                     
There is no tax effect relating to other comprehensive income (loss) because there is a full
             
    valuation allowance recorded against the deferred tax asset.
                    
                     
 
Note 9. Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, Bancorp is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement Bancorp has in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral become worthless. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Bancorp controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.
 
 
11
 

Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2007
and December 31, 2006:
               
       
March 31,
  
December 31,
  
       
2007
  
2006
  
 Commitments to extend credit  
 
          
Future loan commitments
        
$
19,249,591
  
$
7,044,313
  
Unused lines of credit
          
23,817,530
   
22,537,570
 
Undisbursed construction loans
          
1,690,138
   
1,588,933
 
Financial standby letters of credit
          
3,005,588
   
3,100,188
 
         
$
47,762,847
  
$
34,271,004
  
                     
 
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. As of January 1, 2003, newly issued or modified guarantees that are not derivative contracts have been recorded on Bancorp’s consolidated balance sheet at their fair value at inception. The liability related to guarantees recorded at March 31, 2007 and December 31, 2006 was not significant.

Note 10. Recent Accounting Pronouncements

In February 2007, the Fianncial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 155 (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 is effective for the Company beginning January 1, 2008. Management is evaluating the impact of the adpotion of SFAS 159 on the Company’s financial position and results of operations.

Effective January 1, 2007 Bancorp adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, de-recognition and measurement of benefits related to an entity’s uncertain income tax positions. Based on a detailed review of all tax positions, it was determined that Bancorp has no significant unrecognized tax benefits, and therefore Bancorp’s adoption of FIN 48 had no impact on the Company’s consolidated financial statements. If such amounts are recorded in future periods, Bancorp will present any related interest and penalties as part of the provision for income taxes.


12

Item 2. Management's Discussion and Analysis or Plan of Operation

The following discussion and analysis is intended to assist you in understanding the financial condition and results of operations of Bancorp. This discussion should be read in conjunction with the accompanying unaudited financial statements as of and for the three months ended March 31, 2007 and 2006, along with the audited financial statements as of and for the year ended December 31, 2006, included in Bancorp’s Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2007.

Summary

As of March 31, 2007, Bancorp had $125.8 million of total assets, $78.1 million of loans receivable, and $103.1 million of total deposits. Total equity capital at March 31, 2007 was $20.4 million, representing a Tier I Leverage Capital Ratio of 17.16%. Net interest margin for the three months ended March 31, 2007 was 4.90%. Bancorp had net income of $31,922 (or basic and diluted earnings per share of $0.01) for the three months ended March 31, 2007, compared to a net income of $78,893 (or basic and diluted earnings per share of $0.03) for the three months ended March 31, 2006. The provision for loan losses for the three months ended March 31, 2007 was $99,793 as compared to ($58,032) for the same period in 2006, a difference of $157,825. This increase was attributable to growth in the loan portfolio along with the repayment of several substantial loans that had been secured by readily marketable collateral (therefore requiring less reserve). The negative provision for the three months ended March 31, 2006 was due in large part to a recovery recognized by the Bank on a loan that had previously been charged-off.

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. Bancorp has reviewed this critical accounting policy and estimate with its audit committee. Refer to the discussion below under “Allowance for Loan Losses” and Note 1 to the audited financial statements as of and for the year ended December 31, 2006, included in Bancorp’s Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2007.

Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as loss, 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.
 
 
13

Based upon this evaluation, management believes the allowance for loan losses of $1,107,118 or 1.39% of gross loans at March 31, 2007 is adequate, under prevailing economic conditions, to absorb losses on existing loans. At December 31, 2006, the allowance for loan losses was $1,062,661 or 1.39% of gross loans outstanding.

The accrual of interest income on loans is discontinued whenever reasonable doubt exists as to its collectibility and generally is discontinued when loans are past due 90 days as to either principal or interest, or are otherwise considered impaired. When the accrual of interest income is discontinued, all previously accrued and uncollected interest is reversed against interest income. The accrual of interest on loans past due 90 days or more may be continued if the loan is well secured, it is believed all principal and accrued interest income due on the loan will be realized, and the loan is in the process of collection. A non-accrual loan is restored to an accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt.

Management considers all non-accrual loans, other loans past due 90 days or more, based on contractual terms, and restructured loans to be impaired. Loans for which payments are past due, but not more than 90 days past due, are not considered to be impaired unless management determines that full collection of principal and interest is doubtful.

Recent Accounting Changes

Effective January 1, 2007 Bancorp adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, de-recognition and measurement of benefits related to an entity’s uncertain income tax positions. Based on a detailed review of all tax positions, it was determined that Bancorp has no significant unrecognized tax benefits, and therefore Bancorp’s adoption of FIN 48 had no impact on the Company’s consolidated financial statements. If such amounts are recorded in future periods, Bancorp will present any related interest and penalties as part of the provision for income taxes.

Comparison of Financial Condition as of March 31, 2007 versus December 31, 2006

General
Bancorp’s total assets were $125.8 million at March 31, 2007, an increase of $1.5 million (1.2%) from $124.3 million in assets as of December 31, 2006. Average interest earning assets for the three months ended March 31, 2007 were $109.6 million, an increase of $17.4 million (18.9%) from $92.2 million at December 31, 2006.

Investments
Available for sale securities totaled $7.1 million as of March 31, 2007, a decrease of $949,000 from a balance of $8.1 million December 31, 2006. The available for sale securities portfolio is invested entirely in U.S. government sponsored agency and sponsored agency issued mortgage backed securities. The reduction in balance was due to the maturity of one of Bancorp’s investments. The proceeds from the maturity were reinvested in short term financial instruments.

As of March 31, 2007, gross unrealized losses on the available for sale securities portfolio totaled $199,172. Management believes that none of the unrealized losses on available for sale securities are other than
 
 
14
 
temporary because all of the unrealized losses in Bancorp’s investment portfolio are due to market interest rate changes related to debt and mortgage-backed securities issued by U.S. Government sponsored agencies, which Bancorp has both the intent and the ability to hold until maturity or until the fair value fully recovers. In addition, management considers the issuers of the securities to be financially sound and further believes that Bancorp will receive all contractual principal and interest related to these investments.

Loans
Net loans receivable increased $2.8 million (3.7%) from $75.3 million at December 31, 2006 to $78.1 million at March 31, 2007. The increase in loans is due primarily to construction and land loans. The increase in the loans receivable portfolio was funded primarily by increased deposits. The ratio of loans receivable to deposits as of March 31, 2007 was 75.7%. Bancorp maintains a target ratio of loans receivable to deposits of 80% to 90%, subject to the review of Bancorp’s and the Bank’s Boards of Directors. The Bank currently has a large amount of loans pending closing; if these loans are closed, the ratio of loans receivable to deposits is expected to increase as well.

Allowance for Loan Losses and Non-Accrual, Past Due and Restructured Loans
 

Allowance for Loan Losses
  
The following represents the activity in the allowance for loan losses for the three
 
months ended March 31, 2007 and 2006:
           
   
For the Period Ended March 31,
  
   
2007
  
2006
  
Balance at beginning of period
  
$
1,062,661
  
$
778,051
  
Charge-offs
    
(58,739
)
  
(2,568
)
Recoveries
    
3,403
   
59,339
 
Provision charged to operations
    
99,793
   
(58,032
)
Balance at end of period
  
$
1,107,118
  
$
776,790
  
               


Non-Accrual, Past Due and Restructured Loans
          
           
The following is a summary of non-accrual and past due loans:
           
   
March 31, 2007
  
December 31, 2006
  
Loans delinquent over 90 days and still accruing
  
$
-
  
$
-
  
Non-accrual loans
    
297,361
   
301,833
 
Total nonperforming loans
  
$
297,361
  
$
301,833
  
% of Total Loans
    
0.38
%
  
0.40
%
% of Total Assets
    
0.24
%
  
0.24
%
Ratio of allowance for loan losses to nonperforming loans
    
3.72
   
3.52
 
               
 
Potential Problem Loans
At March 31, 2007, 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.
 
 
15

 
Deposits
Deposits were $103.1 million at March 31, 2007, an increase of $1.8 million (1.8%) from $101.3 million as of December 31, 2006. Non-interest bearing checking accounts were $26.3 million at March 31, 2007, a decrease of $3.2 million (10.8%) from $29.5 million. Time deposits were $31.4 million at March 31, 2007, an increase of $3.1 million or 10.7% from December 31, 2006. Savings accounts decreased approximately $94,000 from year-end 2006. Interest bearing checking accounts and money market demand accounts increased $2.0 million or 4.9% from March 31, 2007 to December 31, 2006.

While the Bank’s total deposit portfolio increased in the first quarter, the first quarter is traditionally a difficult time for the Bank to increase deposits. The typical commercial customer will pay down loans at the beginning of the calendar year and various tax payments generally tend to reduce deposit levels of commercial customers.
 
Currently the Bank does not have any brokered deposits. The Bank does maintain relationships with several deposit brokers and could utilize the services of one or more of such brokers if management determines that issuing brokered certificates of deposits was in the best interest of the Bank and the Company.

Other
Repurchase agreement balances decreased $480,025 from $883,603 at December 31, 2006 to $403,578 as of March 31, 2007, due to normal customer activity.

Results of Operations - Comparison of Results for the Three Months Ended March 31, 2007 and March 31, 2006

General
Bancorp had net income of $31,922 for the three months ended March 31, 2007 versus net income of $78,893 for the three months ended March 31, 2006. The decrease was attributable to increased Noninterest expense as well as increased provisions to the allowance for Loan Losses in 2007 over the same period in 2006.

Net Interest Income
The principal source of revenue is net interest income. Bancorp’s net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. Bancorp, like other banking institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets.

For the three months ended March 31, 2007, net interest income was $1.3 million versus $1.1 million for the three months ended March 31, 2006, an increase of $200,000 or 18.2%. This increase was attributable to an increase of $28.7 million in average earning assets. The increase in average earning assets was primarily comprised of increases in average loans of $19.4 million and an increase in average federal funds sold of $10.9 million, offset partially by a decrease in average investments of $2.1 million.

The yield on average earning assets for the three months ending March 31, 2007 was 7.82% versus 7.53% for the same period in 2006, a favorable increase of 29 basis points. The increase in the yield on assets reflects the increases in market interest rates that occurred throughout 2006 and early 2007, particularly in the prime lending rate and the Bank’s base lending rate.

The cost of average interest bearing liabilities was 4.33% for the three months ended March 31, 2007 versus 3.50% for the three months ended March 31, 2006, an increase of 83 basis points, reflecting a general increase in market interest rates. The increase in the cost of interest bearing liabilities was due principally to an increase in rates paid on deposit accounts. The average rate of interest paid on time deposits increased 134 basis points for the three months ended March 31, 2007 versus the three months ended March 31, 2006. Also, the Bank’s average cost of funds for money market and interest bearing checking increased 48 basis for the three months ended March 31, 2007 versus the three months ended March 31, 2006.
 
 
16

The prevailing interest rate market over the past year poses a challenge for the Bank. Short term rates have exceeded longer term rates for much of the past year. The inverted nature of the yield curve has adversely affected the Bank’s net interest income as much of the Bank’s deposit base is short-term. The Bank has taken steps to extend deposit repricing by increasing its percentage of time deposits, but approximately 70% of the Bank’s portfolio is comprised of checking, savings and money market accounts.

As a result of the yield curve and interest rates generally, Bancorp’s net interest margin and net interest spread have decreased for the three months ended March 31, 2007 versus the same period in 2006. For the three months ended March 31, 2007, Bancorp’s net interest margin was 4.90%, a decrease of 56 basis points versus 5.46% for the three months ended March 31, 2006. At the same time, Bancorp’s interest spread decreased 54 basis points from 4.03% to 3.49%.
 
Average Balances, Yields, and Rates
The following table presents average balance sheets (daily averages), interest income, interest expense, and the corresponding annualized rates on earning assets and rates paid on interest bearing liabilities for the three months ended March 31, 2007 and March 31, 2006.
 

17


                               
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential
                               
   
Three months Ended
 
Three months Ended
     
   
March 31, 2007
  
March 31, 2006
      
   
 
 
Interest
 
 
 
 
 
Interest
 
 
 
Fluctuations
 
 
 
Average
 
Income/
 
Average
 
Average
 
Income/
 
Average
 
in interest
 
(Dollars in thousands)
 
Balance
 
Expense
 
Rate
 
Balance
 
Expense
 
Rate
 
Income/Expense
 
                               
Interest earning assets
                              
    Loans (1)
  
$
77,058
  
$
1,732
    
9.12
%    
$
57,625
  
$
1,281
    
9.02
%    
$
451
  
    Short-term investments
    
6,588
   
84
   
5.17
%
  
6,062
   
65
   
4.35
%
  
19
 
    Investments
    
7,881
   
68
   
3.50
%
  
10,028
   
79
   
3.19
%
  
(11
)
    Federal funds sold
    
18,106
   
230
   
5.15
%
  
7,227
   
78
   
4.38
%
  
152
 
Total interest earning assets
    
109,633
   
2,114
   
7.82
%
  
80,942
   
1,503
   
7.53
%
  
611
 
                                             
Cash and due from banks
    
5,709
               
1,319
                   
Premises and equipment, net
    
4,395
               
4,434
                   
Allowance for loan losses
    
(1,087
)
              
(780
)
                  
Other
    
1,504
                
1,243
                    
Total assets
  
$
120,154
              
$
87,158
                    
                                             
Interest bearing liabilities
                                            
    Time certificates
  
$
29,843
    
369
   
5.01
%
$
13,385
    
121
   
3.67
%
  
248
 
    Savings deposits
    
2,026
   
7
   
1.40
%
  
2,794
   
10
   
1.45
%
  
(3
)
    Money market / checking deposits
    
40,186
   
367
   
3.70
%
  
29,561
   
235
   
3.22
%
  
132
 
    Capital lease obligations
   
1,188
   
44
   
15.02
%
  
1,189
   
44
   
15.01
%
  
-
 
    Repurchase agreements
    
604
   
2
   
1.34
%
  
891
   
3
   
1.37
%
  
(1
)
                                             
Total interest bearing liabilities
    
73,847
   
789
   
4.33
%
  
47,820
   
413
   
3.50
%
  
376
 
                                             
Non-interest bearing deposits
    
25,254
               
18,498
                   
Accrued expenses and
                                            
     other liabilities
    
631
               
460
                   
Shareholder's equity
    
20,422
               
20,380
                   
Total liabilities and equity
  
$
120,154
              
$
87,158
                    
                                             
Net interest income
        
$
1,325
              
$
1,090
        
$
235
  
                                             
Interest spread
                
3.49
%
              
4.03
%
      
Interest margin
                
4.90
%
              
5.46
%
      
                                             
(1) Includes nonaccruing loans.
                        
                                             
 
 
18
Changes in Assets and Liabilities and Fluctuations in Interest Rates
The following tables summarize the variance in interest income and interest expense for the three months ended March 31, 2007 and 2006 resulting from changes in assets and liabilities and fluctuations in interest rates earned and paid. The changes in interest attributable to both rate and volume have been allocated to both rate and volume on a pro rata basis.


   
Three months Ended
 
 
 
March 31, 2007 v. 2006
 
 
 
Increase
 
Due to Change in
 
 
 
Or
 
Average
 
(Dollars in thousands)
 
(Decrease)
 
Volume
 
Rate
  
               
Interest earning assets
              
       Loans
  
$
451
  
$
437
  
$
14
  
       Short-term investments
    
19
   
6
   
13
 
       Investments
    
(11
)
  
(50
)
  
39
 
       Federal funds sold
    
152
   
136
   
16
 
Total interest earning assets
    
611
   
529
   
82
 
                     
Interest bearing liabilities
                    
       Time certificates
    
248
   
191
   
57
 
       Savings deposits
    
(3
)
  
(3
)
  
0
 
       Money market / checking deposits
    
132
   
93
   
39
 
       Capital lease obligations
   
-
   
-
   
-
 
       Repurchase agreements
    
(1
)
  
(1
)
  
0
 
Total interest bearing liabilities
    
376
   
280
   
96
 
Net interest income
  
$
235
  
$
249
  
$
(14
)
                     
 
Provision for Loan Losses
Bancorp recorded $99,793 as provision for loan losses for the three months ended March 31, 2007. The provision reflects an increase in the size of the loan portfolio as well as the payoff of several large loans that had been secured by readily marketable collateral (principally deposit accounts held by the Bank). These loans that were paid off were replaced by conventional loans, therefore requiring an increased amount of provision for loan losses (as compared to a lower reserve requirement for a loan secured by readily marketable collateral). For the three months ended March 31, 2006, Bancorp recorded a credit to the loan loss provision of $58,000 which was charged to operations. This credit amount reflected the recovery of a loan that had previously been charged off, which resulted in a credit balance of the provision for loan losses for the quarter.

Noninterest Income
Noninterest income was $240,844 for the three months ended March 31, 2007 versus $180,452 for the three months ended March 31, 2006. The increase was attributable to an overall increase in business, along with substantial pre-payment penalties the Bank received for prepaid loans. The Bank did not record any gains on sales of loans during the three months ended March 31, 2007 versus approximately $31,000 of such income recorded for the three months ended March 31, 2006, as no loans were sold in the first quarter of 2007.
 
 
19

Noninterest Expense
Total noninterest expense was approximately $1.4 million for the three months ended March 31, 2007 versus $1.2 million for the same period in 2006, an increase of approximately $200,000 or 16.7%.

A primary factor contributing to the increase in non-interest expense year-over-year was the opening of two new branches of The Bank of Southern Connecticut. The Bank of Southeastern Connecticut, a division of The Bank of Southern Connecticut located in New London, Connecticut opened on March 6, 2006. The Bank of North Haven, a division of The Bank of Southern Connecticut located in North Haven, Connecticut opened on July 10, 2006, however costs were incurred in the first quarter of 2006 in anticipation of the branch opening. The opening of these two branches has increased the Bank’s operating expenses, primarily salaries and benefits expense and occupancy expense. In addition, the Bank’s data processing expense, which varies depending on the Bank’s total assets, has increased commensurately with the Bank’s increase in assets. The overall increase in noninterest expense was offset slightly by a decrease in professional services expense and a large decrease in advertising expense. The reduction in advertising expense was related largely to the decision by the Bank to hire an in-house marketing officer rather than retaining the services of a third party.

  Salaries and benefits for the first quarter of 2007 were $905,623, an increase of $221,841, or 32.4%, from the first quarter of 2006. Occupancy and equipment for the first quarter of 2007 increased by $50,572 or 30.4%. Professional fees for the first quarter of 2007 decreased by $16,309 or 16.0%. Data processing and other outside services for the first quarter of 2007 increased by $22,731 or 28.0%. Advertising and promotional expense for the first quarter of 2007 decreased $42,619 or 95.9%.

Off-Balance Sheet Arrangements

See Note 9 to the Financial Statements for information regarding Bancorp’s off-balance sheet arrangements.

Liquidity

Management believes that Bancorp’s short-term assets offer sufficient liquidity to cover potential fluctuations in deposit accounts and loan demand and to meet other anticipated operating cash requirements.  

Bancorp’s liquidity position as of March 31, 2007 and December 31, 2006 consisted of liquid assets totaling $41.5 million and $42.9 million, respectively. This represents 33.0% and 34.5% of total assets at March 31, 2007 and December 31, 2006, respectively. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets as described in the accompanying balance sheet are considered liquid assets: cash and due from banks, federal funds sold, short-term investments, 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.

In addition to the foregoing sources of liquidity, the Bank maintains a relationship with the Federal Home Loan Bank of Boston and has the ability to pledge certain of the Bank’s assets as collateral for borrowings from that institution. In addition, the Bank maintains relationships with several brokers of certificates of deposits and could utilize the services of these brokers if the Bank needed additional liquidity to meet its needs.
 
 
 
20
 

Capital
          
           
The following Table illustrates Bancorp's regulatory capital ratios at:
  
           
   
March 31,
  
December 31,
  
   
2007
  
2006
  
Tier 1 (Leverage) Capital to Average Assets
    
17.16
%
  
17.56
%
Tier 1 Capital to Risk-Weighted Assets
    
21.05
%
  
21.80
%
Total Capital to Risk-Weighted Assets
    
22.18
%
  
22.96
%
               
 
           
The following Table illustrates the Bank's regulatory capital ratios at:
           
   
March 31,
  
December 31,
  
   
2007
  
2006
  
Tier 1 (Leverage) Capital to Average Assets
    
14.54
%
  
14.82
%
Tier 1 Capital to Risk-Weighted Assets
    
17.89
%
  
18.52
%
Total Capital to Risk-Weighted Assets
    
19.06
%
  
19.72
%
               

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 the nature of Bancorp’s business, market risk is primarily limited to interest rate risk, defined as the impact of changing interest rates 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 deposit balances may therefore run off unexpectedly due to changing market conditions.

The exposure to interest rate risk is monitored by Senior Management of the Bank and is reported quarterly to the Asset and Liability Management Committee and the Board of Directors of the Bank and Bancorp. Management reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk.
 
 
21

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

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Report on Form 10-QSB may include forward-looking statements which reflect our current views with respect to future events and financial performance. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements or that could adversely affect the holders of our common stock. These factors include, but are not limited to, (1) changes in prevailing interest rates which would affect the interest earned on Bancorp’s interest earning assets and the interest paid on its interest 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) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks and the impact of recently enacted federal legislation, (6) the ability of competitors which are larger than Bancorp to provide products and services which are impractical for Bancorp to provide, (7) the volatility of quarterly earnings, due in part to the variation in the number, dollar volume and profit realized from SBA guaranteed loan participation sales in different quarters, (8) the effect of a loss of any executive officer, key personnel, or directors, (9) the effect of Bancorp’s opening of branches and the receipt of regulatory approval to complete such actions, (10) concentration of Bancorp’s business in southern Connecticut, (11) the concentration of Bancorp’s loan portfolio in commercial loans to small-to-medium sized businesses, which may be impacted more severely than larger businesses during periods of economic weakness, (12) lack of seasoning in Bancorp’s loan portfolio, which may increase the risk of future credit defaults, and (13) the effect of any decision by Bancorp to engage in any business not historically permitted to it. 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.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

22
Item 3. Controls and Procedures

(a)  
Evaluation of Disclosure Controls and Procedures.

Based upon an evaluation of the effectiveness of Bancorp’s disclosure controls and procedures performed by Bancorp’s management, with participation of Bancorp’s Chief Executive Officer, its Chief Operating Officer, and its Chief Financial Officer as of the end of the period covered by this report, Bancorp’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures have been effective in ensuring that material information relating to Bancorp, including its subsidiary, is made known to the certifying officer by others within Bancorp and the Bank during the period covered by this report.

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 Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to Bancorp’s management, including its principal executive, and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)  
Changes in Internal Controls

There have not been any significant changes in Bancorp’s internal controls or in other factors that occurred during Bancorp’s quarter ended March 31, 2007 that could significantly affect these controls subsequent to the evaluation referenced in paragraph (a) above.


23
 
PART II
Other Information
 
Item 1. Legal Proceedings

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.

Item 6. Exhibits

(a) Exhibits
 
No.
Description
   
3(i)
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to Bancorp’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002)
   
3(ii)
By-Laws (incorporated by reference to Exhibit 3(ii) to Bancorp’s Registration Statement on Form SB-2, as filed with the Securities and Exchange Commission on April 30, 2001 (No. 333-59824))
   
   
 
  
   
   
   


24
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
SOUTHERN CONNECTICUT BANCORP, INC.
   
   
 
By: /s/ Joseph V. Ciaburri
 
Name: Joseph V. Ciaburri
Date: May 15, 2007
Title: Chairman & Chief Executive Officer
   
 
By: /s/ Michael M. Ciaburri
 
Name: Michael M. Ciaburri
Date: May 15, 2007
Title: President & Chief Operating Officer
   
 
By: /s/ Anthony M. Avellani
 
Name: Anthony M. Avellani
Date: May 15, 2007
Title: Vice President & Chief Accounting Officer




25

Exhibit Index
No.
 Description
 
3(i)
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to Bancorp’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002)
   
3(ii)
By-Laws (incorporated by reference to Exhibit 3(ii) to Bancorp’s Registration Statement on Form SB-2, as filed with the Securities and Exchange Commission on April 30, 2001 (No. 333-59824))
   
   
 
  
   
   
   


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