Table of Contents
As filed with the Securities and Exchange Commission on September 20, 2010
Registration No. 333-167482
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Pre-Effective Amendment No. 1 to the
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Naugatuck Valley Financial Corporation
and
Naugatuck Valley Savings and Loan Employee Savings Plan
(Exact name of registrant as specified in its charter)
Maryland | 6035 | 01-0969655 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (IRS Employer Identification No.) |
333 Church Street
Naugatuck, Connecticut 06770
(203) 720-5000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
John C. Roman
President and Chief Executive Officer
Naugatuck Valley Financial Corporation
333 Church Street
Naugatuck, Connecticut 06770
(203) 720-5000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Paul M. Aguggia, Esquire Victor L. Cangelosi, Esquire Sean P. Kehoe, Esquire Kilpatrick Stockton LLP 607 14th Street, NW, Suite 900 Washington, DC 20005 (202) 508-5800 | Kent Krudys, Esquire Robert I. Lipsher, Esquire Luse Gorman Pomerenk & Schick, P.C. 5335 Wisconsin Avenue, NW, Suite 400 Washington, DC 20016 (202) 274-2000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Table of Contents
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Calculation of Registration Fee
Title of each class of securities to be registered | Amount to be registered | Proposed maximum offering price per unit | Proposed maximum Aggregate offering price (2) | Amount of Registration fee | ||||
Common Stock $0.01 par value | (1) 6,507,154 | Not Applicable | $55,350,150 | (4) | ||||
Participation Interests (3) | ||||||||
(1) | Represents the maximum number of shares of common stock of Naugatuck Valley Financial Corporation, that may be issued pursuant to the transactions described herein, based on (a) 5,313,904 shares of common stock of Naugatuck Valley Financial Corporation, which is the maximum number of shares of common stock of Naugatuck Valley Financial Corporation that may be outstanding upon the completion of the offering and exchange (based on 2,840,252 shares to be exchanged) described herein, (b) 2,946,297 shares of common stock of Southern Connecticut Bancorp, Inc., which is the maximum number of shares of Southern Connecticut Bancorp, Inc. common stock that may be outstanding immediately before the consummation of merger described herein, assuming the exercise of 249,395 options to purchase shares of common stock of Southern Connecticut Bancorp, Inc. and (c) an assumed exchange ratio of 0.675 shares of common stock of Naugatuck Valley Financial Corporation for each outstanding share of common stock of Southern Connecticut Bancorp, Inc. for 60% of the outstanding shares of Southern Connecticut Bancorp, Inc. common stock. |
(2) | Estimated solely for the purpose of calculating the registration fee. Pursuant to Rules 457(f)(1), 457(f)(3) and 457(c) under the Securities Act of 1933, the registration fee has been calculated based on (a) a price of $10.00 per share of common stock of Naugatuck Valley Financial Corporation, which is the purchase price in the offering, (b) a price of $6.45 per share of common stock of Naugatuck Valley Financial Corporation which equals the average of the high and low price per share of Naugatuck Valley Financial Corporation common stock as reported on the NASDAQ Global Market on September 10, 2010, and (c)(i) a price of $6.04 per share of Southern Connecticut Bancorp, Inc. common stock, which equals the average of the high and low price per share of Southern Connecticut Bancorp common stock as reported on American Stock Exchange on September 10, 2010 less (ii) the payment by Naugatuck Valley Financial Corporation of the cash component of the merger consideration of $6.75 per share for 40% of the outstanding shares of Southern Connecticut Bancorp, Inc. common stock. |
(3) | The securities of Naugatuck Valley Financial Corporation to be purchased by the Naugatuck Valley Savings and Loan Employees Savings Plan are included in the common stock being registered. Pursuant to Rule 457(h)(2) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests. |
(4) | The registration fee for the shares being registered is $3,946. A registration fee of $5,389 was previously paid upon the initial filing of the Form S-1 on June 11, 2010. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
Table of Contents
PROSPECTUS
(Proposed holding company for Naugatuck Valley Savings and Loan)
Up to 2,751,950 Shares of Common Stock
(Subject to increase to 3,164,743 shares)
$10.00 per Share
Naugatuck Valley Financial Corporation, a newly formed Maryland corporation, is offering common stock for sale in connection with the conversion of Naugatuck Valley Savings and Loan from the mutual holding company form of organization to the stock form. Simultaneous with the completion of the offering, new Naugatuck Valley Financial will acquire Southern Connecticut Bancorp, Inc. In connection with the merger, new Naugatuck Valley Financial will issue an aggregate of approximately 1,092,245 shares of common stock and pay approximately $7.3 million in cash to the stockholders of Southern Connecticut Bancorp.
We are offering up to 2,751,950 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 2,034,050 shares to complete the offering. Under certain circumstances, however, we may sell as few as1,728,943 shares in the offering and include up to305,107shares issued in connection with the merger with Southern Connecticut Bancorp in order to meet the 2,034,050 share minimum requirement.All shares are offered at a price of $10.00 per share.Purchasers will not pay a commission to purchase shares of common stock in the offering. The amount of capital being raised is based on an independent appraisal of new Naugatuck Valley Financial. Most of the terms of this offering are required by regulations of the Office of Thrift Supervision. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, the independent appraiser determines that our market value has increased, we may sell up to3,164,743 shares without giving you further notice or the opportunity to change or cancel your order.
The shares we are offering represent the 59.6% ownership interest in Naugatuck Valley Financial Corporation, a federal corporation, now owned by Naugatuck Valley Mutual Holding Company. The remaining 40.4% interest in Naugatuck Valley Financial currently owned by the public will be exchanged for shares of common stock of new Naugatuck Valley Financial. Each share of Naugatuck Valley Financial owned by the public will be exchanged for between0.4863 and0.6580 shares of common stock of new Naugatuck Valley Financial (subject to increase to0.7567 if we sell3,164,743 shares in the offering) so that Naugatuck Valley Financial’s existing public shareholders will own approximately the same percentage of new Naugatuck Valley Financial common stock as they owned of Naugatuck Valley Financial’s common stock immediately before the conversion without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares or shares that existing shareholders may purchase in the offering. The present Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will cease to exist upon completion of the conversion and offering. Naugatuck Valley Financial’s common stock is currently listed on the Nasdaq Global Market under the symbol “NVSL.” We expect that new Naugatuck Valley Financial’s common stock will trade on the Nasdaq Global Market under the trading symbol NVSLD for a period of 20 trading days after the completion of the offering. Thereafter, the trading symbol will revert to NVSL.
We are offering the shares of common stock in a “subscription offering” to eligible depositors of Naugatuck Valley Savings and Loan. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering,” with a preference given to residents of Fairfield and New Haven Counties, Connecticut and the shareholders of Naugatuck Valley Financial. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” managed by Stifel, Nicolaus & Company, Incorporated. We retain the right to accept or reject, in part or in whole, any order received in the community offering or the syndicated community offering. Stifel, Nicolaus & Company, Incorporated is not required to purchase any shares of common stock that are being offered for sale.
The minimum order is 25 shares. The subscription offering will end at 2:00 p.m., Eastern Time, on[DATE1], 2010. We expect that the community offering, if held, will terminate at the same time, although it may continue until[DATE2], 2010 without notice to you or longer if the Office of Thrift Supervision approves a later date. No single extension may exceed 90 days and the offering must be completed by[DATE3], 2012. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond[DATE2], 2010, or the number of shares of common stock to be sold is increased to more than3,164,743 shares or decreased to less than2,034,050 shares (which may include up to305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration). If we extend the offering beyond[DATE2], 2010, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than2,034,050 shares (which may include up to305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration) or more than3,164,743 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order. Funds received before the completion of the offering will be held in a segregated account at Naugatuck Valley Savings and Loan and will earn interest at Naugatuck Valley Savings and Loan’s passbook savings rate, which is currently 0.15%.
This investment involves a degree of risk, including the possible loss of principal.
Please read “Risk Factors” beginning on page 20.
OFFERING SUMMARY
Price Per Share: $10.00
Minimum | Midpoint | Maximum | Maximum, as adjusted | |||||||||
Number of shares | 2,034,050 | 2,393,000 | 2,751,950 | 3,164,743 | ||||||||
Gross offering proceeds | $20,340,500 | $ | 23,930,000 | $ | 27,519,500 | $ | 31,647,430 | |||||
Estimated offering expenses, excluding selling agent fees and expenses | $ | 960,000 | $ | 960,000 | $ | 960,000 | $ | 960,000 | ||||
Estimated selling agent fees and expenses (1)(2) | $ | 871,000 | $ | 989,000 | $ | 1,107,000 | $ | 1,243,000 | ||||
Estimated net proceeds | $ | 18,509,500 | $ | 21,981,000 | $ | 25,452,500 | $ | 29,444,430 | ||||
Estimated net proceeds per share | $ | 9.10 | $ | 9.19 | $ | 9.25 | $ | 9.30 |
(1) | Includes: (i) selling commissions payable by us to Stifel, Nicolaus & Company, Incorporated in connection with the subscription and community offerings equal to 1% of the aggregate amount of common stock in the subscription and community offerings (net of insider purchases and shares purchased by our employee stock ownership plan) or approximately $134,000 at the maximum, as adjusted, of the offering, assuming that 50.0% of the offering is sold in the subscription and community offerings; (ii) fees and selling commissions payable by us to Stifel, Nicolaus & Company, Incorporated and any other broker-dealer participating in the syndicated offering equal to 6.0% of the aggregate amount of common stock sold in the syndicated community offering, or approximately $949,000 at the maximum, as adjusted, of the offering, assuming that 50.0% of the offering is sold by a syndicate of broker-dealers in a syndicated community offering; and (iii) other expenses of the offering payable to Stifel, Nicolaus & Company, Incorporated as selling agent estimated to be $220,000. For information regarding compensation to be received by Stifel, Nicolaus & Company, Incorporated and other broker-dealers that may participate in the syndicated community offering, including the assumptions regarding the number of shares that may be sold in the subscription and community offerings and the syndicated community offering to determine the estimated offering expenses, see“Pro Forma Data” and“The Conversion and Offering—Marketing Arrangements.” |
(2) | If all shares of common stock are sold in the syndicated community offering, the maximum selling agent fees and expenses would be $1.4 million at the minimum, $1.7 million at the midpoint, $1.9 million at the maximum, and $2.1 million at the maximum, as adjusted. |
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
Stifel Nicolaus Weisel
For assistance, please contact the Stock Information Center, toll-free, at .
The date of this prospectus is [ ], 2010
Table of Contents
Table of Contents
Page | ||
1 | ||
20 | ||
29 | ||
Selected Consolidated Financial and Other Data of Naugatuck Valley Financial | 30 | |
Selected Consolidated Financial and Other Data of Southern Connecticut Bancorp | 32 | |
Summary Selected Pro Forma Condensed Consolidated Financial Data | 34 | |
35 | ||
37 | ||
38 | ||
39 | ||
41 | ||
43 | ||
60 | ||
68 | ||
95 | ||
98 | ||
115 | ||
125 | ||
126 | ||
127 | ||
133 | ||
135 | ||
157 | ||
160 | ||
Restrictions on Acquisition of New Naugatuck Valley Financial | 166 | |
169 | ||
170 | ||
170 | ||
170 | ||
170 | ||
170 | ||
172 |
Table of Contents
This summary highlights material information from this document and may not contain all the information that is important to you. To understand the conversion and offering fully, you should read this entire document carefully.
Our Company
Naugatuck Valley Financial Corporation. Naugatuck Valley Financial Corporation is, and new Naugatuck Valley Financial Corporation following the completion of the conversion and offering will be, the unitary savings and loan holding company for Naugatuck Valley Savings and Loan, a federally chartered savings bank. Our common stock is traded on the NASDAQ Global Market under the symbol “NVSL.” At June 30, 2010, Naugatuck Valley Financial had consolidated total assets of $565.2 million, total net loans of $482.5 million, total deposits of $394.3 million and total stockholders’ equity of $51.2 million. As of the date of this prospectus, Naugatuck Valley Financial had 7,022,659 shares of common stock outstanding.
Naugatuck Valley Mutual Holding Company. Naugatuck Valley Mutual Holding Company is the federally chartered mutual holding company of Naugatuck Valley Financial Corporation. Naugatuck Valley Mutual Holding Company’s sole business activity is the ownership of 4,182,407 shares of common stock of Naugatuck Valley Financial or 59.6% of the common stock outstanding as of the date of this prospectus. After completion of the conversion, Naugatuck Valley Mutual Holding Company will cease to exist.
Naugatuck Valley Savings and Loan. Naugatuck Valley Savings and Loan is headquartered in Naugatuck, Connecticut and has served customers in Connecticut since 1922. In addition to our main office, we operate nine branch offices in the Greater Naugatuck Valley which we consider our market area. The Greater Naugatuck Valley encompasses the communities in the central and lower Naugatuck Valley regions in New Haven and Fairfield Counties. At June 30, 2010, Naugatuck Valley Savings and Loan exceeded all regulatory capital requirements and was not a participant in any of the U.S. Treasury’s capital raising programs for financial institutions.
Our principal executive offices are located at 333 Church Street, Naugatuck, Connecticut 06770 and our telephone number is (203) 720-5000. Our website address iswww.nvsl.com. Information on our website should not be considered a part of this prospectus.
For a description of important provisions in new Naugatuck Valley Financial’s articles of incorporation and bylaws, see“Restrictions on Acquisition of New Naugatuck Valley Financial.”
Acquisition of Southern Connecticut Bancorp
Simultaneous with the completion of the offering, new Naugatuck Valley Financial will acquire Southern Connecticut Bancorp and its wholly owned subsidiary, The Bank of Southern Connecticut. Immediately following the merger of Southern Connecticut Bancorp with new Naugatuck Valley Financial, The Bank of Southern Connecticut will merge with and into Naugatuck Valley Savings and Loan, with Naugatuck Valley Savings and Loan as the surviving entity. The Bank of Southern Connecticut is a Connecticut chartered commercial bank that operates out of four locations in the greater New Haven, Connecticut area. At June 30, 2010, Southern Connecticut Bancorp had total consolidated assets of $160.1 million, deposits of $140.3 million and stockholders’ equity of $15.7 million.
In connection with the merger, each share of Southern Connecticut Bancorp common stock issued and outstanding immediately prior to the completion of the merger will automatically be converted into the right to receive, at the holder’s election, (a) $6.75 in cash without interest, (b) 0.675 shares of new Naugatuck Valley Financial common stock (plus cash in lieu of any fractional shares, or (c) a combination thereof. Elections will be subject to proration, if necessary, to assure that 60% of Southern Connecticut Bancorp’s outstanding shares are exchanged for new Naugatuck Valley Financial common stock and the remainder are exchanged for cash. As a result, new Naugatuck Valley Financial will issue an aggregate of approximately 1,092,245 shares of common stock and pay approximately $7.3 million in cash to the stockholders of Southern Connecticut Bancorp for aggregate merger consideration equal to approximately $18.2 million. At the midpoint of the offering range, former Southern Connecticut Bancorp stockholders will own approximately 21.4% of new Naugatuck Valley Financial. Under certain circumstances, if existing options to acquire Southern Connecticut Bancorp common stock are exercised prior to closing, the number of shares issued in the acquisition could be increased to 1,193,250 shares of common stock.
1
Table of Contents
Completion of the merger is expected to increase Naugatuck Valley Savings and Loan’s deposit base and its loan portfolio, and provide Naugatuck Valley Savings and Loan with greater access to customers in the greater New Haven area. In addition, the cash consideration to be paid to Southern Connecticut Bancorp shareholders in the merger will permit new Naugatuck Valley Financial to use a significant portion of the capital raised in the offering, while continuing to be a well-capitalized savings bank for regulatory purposes.
Immediately following the merger with Southern Connecticut Bancorp, the composition of our board of directors will change. Upon completion of the merger, we will expand the size of the board and appoint Elmer F. Laydon and Alphonse F. Spadaro, Jr., currently Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp and The Bank of Southern Connecticut, to the boards of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan.
We cannot complete the merger unless we have received the approval of the Office of Thrift Supervision and the Connecticut Department of Banking. We have made the necessary filings with the Office of Thrift Supervision and the Connecticut Department of Banking and received the requisite approvals on and , respectively.
In addition, we cannot complete the merger unless Southern Connecticut Bancorp’s stockholders approve the merger agreement. Southern Connecticut Bancorp’s stockholders will vote on the merger at a meeting to be held on , 2010. Each director of Southern Connecticut Bancorp has signed an agreement to vote his or her shares of Southern Connecticut Bancorp common stock in favor of the merger. In the aggregate, Southern Connecticut Bancorp directors owned % of the issued and outstanding shares of Southern Connecticut Bancorp common stock as of the , 2010 record date for the Southern Connecticut Bancorp meeting of stockholders.
Completion of the acquisition is contingent on the completion of the conversion and offering.
Although the completion of the conversion and offering is not contingent on the acquisition of Southern Connecticut Bancorp, the timing and manner of the offering would be subject to significant modification in the event the acquisition is terminated. If the merger agreement with Southern Connecticut Bancorp is terminated, the current offering will be canceled and all funds would be promptly returned to subscribers. A new offering could be conducted. Any new valuation range must be approved by the Office of Thrift Supervision. Any plan of conversion not reflecting a merger with Southern Connecticut Bancorp must be approved by the voting members of Naugatuck Valley Mutual Holding Company and the stockholders of Naugatuck Valley Financial.
Our Market Area
We are headquartered in Naugatuck, Connecticut, which is located in southwestern Connecticut approximately six miles south of Waterbury and 26 miles north of Bridgeport. Connecticut is one of the most attractive banking markets in the United States with a total population of approximately 3.5 million, the highest per capital income of $36,066 in the United States and a median household income of $70,949 as of June 30, 2009, ranking second in the United States and well above the U.S. median household income of $51,719, according to SNL Financial. In addition to our main office, we operate nine branch offices in the greater Naugatuck Valley market which we consider our market area. The greater Naugatuck Valley market encompasses the communities in the central and lower Naugatuck Valley regions in New Haven County, where our main office and eight of our branch offices are located, and Fairfield County, where one of our branch offices is located. The economy in our market area is primarily oriented to the service, retail, construction, and manufacturing industries. The median household and per capita income in New Haven County trailed slightly the comparable figures for Connecticut as a whole, while the median household and per capita income in Fairfield County exceeded the comparable figures for Connecticut.
The acquisition of Southern Connecticut Bancorp will enhance our market share in New Haven County and expand our presence into the city of New Haven and surrounding area. Southern Connecticut Bancorp currently serves the greater New Haven market, which is comprised of the communities located in and around New Haven County in Southern Central Connecticut. The greater New Haven market is located in the center of, and is a critical component of, the commercial activity of the northeast corridor in New England. The market focus resides in the busy transportation and commercial area between New York City to the south, Hartford to the north, Providence to the east, and Boston to the northeast. The diversified economic base of this market region includes pharmaceutical, advanced manufacturing, healthcare, defense, technology, service and energy companies. The region is also one of New England’s most popular tourist destinations, featuring popular shoreline and heritage sites. In addition, Southern Connecticut Bancorp’s headquarters is located in downtown New Haven, in the area of Yale University’s campus.
2
Table of Contents
Our Business
We operate as a community bank. Our primary business lines involve generating funds from deposits or borrowings and investing such funds in loans and investment securities. We currently operate ten retail banking locations in the greater Naugatuck Valley market.
Our primary lines of business are:
• | Retail Lending.We offer a variety of one- to four-family residential mortgage loans, home equity loans and consumer loans through our branch network. Retail loans constituted 54.0% of our total loan portfolio at June 30, 2010. |
• | Commercial and Construction Lending.We offer multi-family and commercial real estate loans and commercial business loans for property owners and businesses in our market area. We also offer residential construction loans to individuals to finance the construction of residential dwellings for personal use and commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties. Commercial and construction loans constituted 46.0% of our total loan portfolio at June 30, 2010. |
• | Deposit Products and Services.We offer a full range of traditional deposit products for consumers and businesses, such as checking accounts, savings accounts, money market accounts, retirement accounts, and certificates of deposit. These products can have additional features such as direct deposit, ATM and check card services, overdraft protection, telephone and Internet banking, and remote electronic deposits, thereby providing our customers multiple channels to access their accounts. |
Our Business Strategy
The following are the key elements of our business strategy:
• | Maintaining a well diversified loan portfolio.At June 30, 2010, approximately 46.0% of our loans were commercial in nature, consisting primarily of multi-family and commercial real estate, commercial business and construction loans, and 54.0% were retail in nature consisting of residential mortgage, home equity loans and lines of credit and other consumer loans. The Bank of Southern Connecticut’s loans are primarily commercial real estate and commercial business loans. On a pro forma basis, we anticipate that 56.9% of our loans will be commercial loans, while 43.1% will be retail loans. Upon completion of the offering and the merger with Southern Connecticut Bancorp, we plan to originate both commercial and retail loans in our market areas from all 14 of our locations. |
• | Expand retail deposits in the to be acquired New Haven branches.Our management team believes that an opportunity exists for a community bank to successfully compete for retail deposits in the New Haven market. We believe we will be able to build low cost core deposits through the four branches we will be acquiring from Southern Connecticut Bancorp and we plan to utilize our retail banking experience to build retail deposits in those branches to complement Southern Connecticut Bancorp’s commercial deposits. At these New Haven branches, we intend to increase product offerings and achieve higher levels of profitability by more effectively serving customers. |
• | Maintaining high levels of asset quality. Although we have sought to maintain our asset quality at high levels by applying what we consider to be conservative underwriting standards, our non-performing assets increased from $2.7 million or 0.5% of total assets at December 31, 2008 to $12.7 million, or 2.25% of total assets at June 30, 2010, due to weakened economic conditions. As a result of the merger with Southern Connecticut Bancorp, our non-performing assets will increase, on a proforma basis at June 30, 2010, to $19.3 million or 2.7% of total assets. |
To address increased problem assets, we have placed more attention and resources on loan workouts and, in certain cases, have modified loans with delinquent borrowers. Loan workouts and modifications are handled either by the collections department (in the case of home mortgages or home equity loans) or by the commercial workout department (in the case of commercial loans). Delinquent or otherwise nonperforming mortgage loan and home equity loan customers are asked to provide updated financial information and the reasons for their inability to pay or comply with the contractual terms of the loans. Once we have received this information, we obtain updated credit reports, appraisals, and title searches. One of our loan officers who has significant loan workout experience has been given primary responsibility for problem commercial loan workouts, although the specific modifications
3
Table of Contents
are handled by individual officers or by a commercial loan workout officer. Financial information is taken from the borrowers and a determination is made as to the best way to work out each of the loan credits.
From December 31, 2008 to June 30, 2010, we modified 18 residential mortgage loans, with aggregate outstanding balances of $3.5 million, either by a reduction of the interest rates, an extension of the terms, and/or interest only payments. As of June 30, 2010, of the 18 modified mortgage loans, two loans aggregating $192,000 were 30 days past due and the remaining were current.
From December 31, 2008 to June 30, 2010, we modified 13 commercial loans and commercial real estate loans, with aggregate outstanding balances of $6.8 million, either by an extension of the term, reduction of the interest rate, and/or temporary interest only period. As of June 30, 2010, of the 13 modified commercial loans, three loans aggregating $975,000 were in foreclosure, one borrower requested further modification on two loans that were current, and eight loans were current.
We have tightened underwriting standards by applying more stringent loan-to-value ratio requirements and debt- service coverage ratio requirements. In May 2010 we increased minimum debt-service coverage ratios on owner occupied commercial real estate loans from 1.20x to 1.25x, on non-owner occupied commercial real estate loans from 1.20x to 1.35x and on commercial business lines and loans from 1.20x to 1.35x. In addition, we decreased minimum loan-to-value ratio requirements for owner occupied commercial real estate loans from 80% to 75% and for non-owner occupied commercial real estate loans from 75% to 70%. Furthermore, we are contacting delinquent borrowers early on in the delinquency stage in order to increase the probability of successful workout efforts. The underwriting standards discussed above mirror the historical practice of The Bank of Southern Connecticut.
In addition, since May 2010 we have proactively reduced commercial loan originations and currently only make new commercial loans to existing customers. We also currently do not consider new loan participations with other financial institutions.
We expect that Southern Connecticut Bancorp’s experienced commercial origination and credit team, consisting of two senior vice presidents, three credit analysts and three commercial loan officers, will join us upon completion of the merger. In connection with our merger due diligence, we have reviewed approximately 80% of Southern Connecticut Bancorp’s loan portfolio and we believe that adequate provisions have been made for specific and general reserves given the characteristics of the loan portfolio we are acquiring. In addition, both Naugatuck Valley Financial and Southern Connecticut Bancorp annually engage an outside loan review firm to perform a thorough review of their respective loan portfolios. These reviews involved analyzing all large borrowing relationships, delinquency trends, and loan collateral valuation in order to identify impaired loans.
• | Maintaining capital at “well capitalized” levels. Our policy has always been to protect the safety and soundness of Naugatuck Valley Savings and Loan through conservative credit and operational risk management, balance sheet strength and sound operations. As a result, our capital ratios are in excess of the “well capitalized” standards set by the Office of Thrift Supervision. Although our asset size has grown significantly since our initial public offering in 2004 we have maintained “well capitalized” levels of regulatory capital through additions to capital from profits as well as through an effective dividend policy that balances capital adequacy with shareholder returns. We expect that at the minimum, as adjusted, of the offering range our capital ratios will increase even after a portion of the stock proceeds are used in the acquisition of Southern Connecticut Bancorp. |
• | Expanding our franchise and footprint through acquisition opportunities and the opening of additional branch offices. In 2000, our branch network consisted of three locations. During the past ten years we have expanded our franchise through the opening of seven de novo branches so that at June 30, 2010, we operated out of ten full service branch locations in the greater Naugatuck Valley market. Additionally, our acquisition of Southern Connecticut Bancorp will expand our footprint to an area previously not served by our branch network, the greater New Haven market. We currently intend to keep all of the Southern Connecticut Bancorp offices open, and as a result, upon completion of the offering and merger, we will operate out of 14 locations throughout the greater Naugatuck Valley and New Haven market areas. Although we currently do not have any specific plans for additional de novo branching or acquisitions, we intend to continue to pursue such opportunities to expand our franchise and footprint in future years. |
4
Table of Contents
• | Developing secondary mortgage market capabilities.During 2009, we began to pursue a significant initiative to develop a secondary mortgage operation which would generate fee income for Naugatuck Valley Savings and Loan. We invested in personnel and systems to increase our ability to sell residential mortgages in the secondary market with the goals of increasing fee income and reducing interest rate risk through the sale of conforming fixed-rate residential mortgages. With our systems in place we are now in process of hiring experienced loan production professionals in order to increase production. |
• | Improving our efficiency ratio.We monitor our efficiency ratio closely and strive to improve it through expense control and increases in non interest income and in net interest income. For the six months ended June 30, 2010, our efficiency ratio was 74.78%. Our largest non-interest expense is compensation. We work to limit growth of compensation expense by controlling increases in the number of employees to those needed to support our growth and by maximizing the use of technology to increase efficiency. We work to increase non-interest income by charging competitive fees for services related to deposit accounts as well as through new initiatives to sell current fixed-rate mortgage production in the secondary market. We work to increase our net interest income by optimizing loan pricing and though the growth of low cost core deposits. |
• | Managing interest rate risk. We believe we maintain manageable levels of interest rate risk by originating and holding adjustable rate commercial loans, by building core deposits which are less susceptible to interest rate changes and by borrowing long term from the Federal Home Loan Bank of Boston. We maintain “moderate” interest rate sensitivity as modeled by the Office of Thrift Supervision. We expect that the acquisition of Southern Connecticut Bancorp will reduce our interest rate sensitivity due their asset/liability structure which consists primarily of variable rate commercial loans and core deposits. |
• | Maintaining multiple sources of liquidity.During the current period of slow economic growth, we recognize the importance of maintaining multiple sources of liquidity. Our primary source of liquidity is local deposits for which we compete aggressively with competitive rates and superior levels of customer service. We also utilize borrowings from both the Federal Home Loan Bank of Boston and our correspondent bank and recently we established a liquidity line with the Federal Reserve. In addition, we occasionally sell investments to meet liquidity needs. We also have the ability to sell a portion of our residential mortgage portfolio in the secondary market to meet liquidity needs. |
Description of the Conversion (page )
In 2004, we reorganized Naugatuck Valley Savings and Loan into a stock savings bank with a mutual holding company structure. As a part of that reorganization, we formed Naugatuck Valley Financial as the mid-tier holding company for Naugatuck Valley Savings and Loan and sold a minority interest in Naugatuck Valley Financial common stock to our depositors and our employee stock ownership plan in a subscription offering. The majority of Naugatuck Valley Financial’s shares were issued to Naugatuck Valley Mutual Holding Company, a mutual holding company organized under federal law. As a mutual holding company, Naugatuck Valley Mutual Holding Company does not have any shareholders, does not hold any significant assets other than the common stock of Naugatuck Valley Financial, and does not engage in any significant business activity. Our current ownership structure is as follows:
5
Table of Contents
The “second-step” conversion process that we are now undertaking involves a series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. In the stock holding company structure, all of Naugatuck Valley Savings and Loan’s common stock will be owned by new Naugatuck Valley Financial, and all of new Naugatuck Valley Financial’s common stock will be owned by the public. We are conducting the conversion and offering under the terms of our plan of conversion and reorganization (which is referred to as the “plan of conversion”). Upon completion of the conversion and offering, the present Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will cease to exist.
As part of the conversion, we are offering for sale common stock representing the 59.6% ownership interest of Naugatuck Valley Financial that is currently held by Naugatuck Valley Mutual Holding Company. At the conclusion of the conversion and offering, existing public shareholders of Naugatuck Valley Financial will receive shares of common stock in new Naugatuck Valley Financial in exchange for their existing shares of common stock of Naugatuck Valley Financial, based upon an exchange ratio of0.4863 to0.7567. The actual exchange ratio will be determined at the conclusion of the conversion and the offering based on the total number of shares sold in the offering, and is intended to result in Naugatuck Valley Financial’s existing public shareholders owning the same percentage interest of new Naugatuck Valley Financial common stock as they currently own of Naugatuck Valley Financial common stock, without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares or shares that existing shareholders may purchase in the offering. However, assuming completion of the merger with Southern Connecticut Bancorp, existing public stockholders will own approximately between 30.6% and 33.5% of new Naugatuck Valley Financial.
After the conversion and offering and merger with Southern Connecticut Bancorp, our ownership structure will be as follows:
We may cancel the conversion and offering with the concurrence of the Office of Thrift Supervision. If canceled, orders for common stock submitted will be canceled, subscribers’ funds will be promptly returned with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate and all deposit account withdrawal authorizations will be cancelled.
The normal business operations of Naugatuck Valley Savings and Loan will continue without interruption during the conversion and offering, and the same officers and directors who currently serve Naugatuck Valley Savings and Loan in the mutual holding company structure will serve the new holding company and Naugatuck Valley Savings and Loan in the fully converted stock form. Upon completion of the merger, we will expand the size of the board and appoint Elmer F. Laydon and Alphonse F. Spadaro, Jr., currently Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp and The Bank of Southern Connecticut, to the boards of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. In addition, we will appoint Matthew Proto, Sr., Senior Vice President and Chief Lending Officer of The Bank of Southern Connecticut, and Sunil Pallan, Senior Vice President and Chief Credit Officer of The Bank of Southern Connecticut, as Senior Vice Presidents of Naugatuck Valley Savings and Loan effective upon completion of the merger.
Reasons for the Conversion and Offering (page )
Our primary reasons for the conversion and offering are the following:
• | The conversion and offering will facilitate the acquisition of Southern Connecticut Bancorp by enabling us to issue stock and raise cash to pay the merger consideration. |
6
Table of Contents
• | While Naugatuck Valley Savings and Loan currently exceeds all regulatory capital requirements, the proceeds from the sale of common stock will increase our capital, which will support our continued lending and operational growth. Our board of directors considered current market conditions, the amount of capital needed for continued growth, that the offering will not raise excessive capital, and the interests of existing shareholders in deciding to conduct the conversion and offering at this time. |
• | The larger number of shares that will be in the hands of public investors after completion of the conversion and offering is expected to result in a more liquid and active market than currently exists for Naugatuck Valley Financial common stock. A more liquid and active market would make it easier for our shareholders to buy and sell our common stock. See “Market for the Common Stock.” |
• | The stock holding company structure is a more familiar form of organization, which we believe will make our common stock more appealing to investors, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings and to acquire other financial institutions or financial service companies. Our current mutual holding company structure limits our ability to raise capital or issue stock in an acquisition transaction because Naugatuck Valley Mutual Holding Company must own at least 50.1% of the shares of Naugatuck Valley Financial. Other than our acquisition of Southern Connecticut Bancorp, we have no plans, agreements or understandings regarding any additional securities offerings or acquisitions. |
• | As a mutual holding company, we are currently regulated by the Office of Thrift Supervision. Proposed financial regulatory reforms may result in changes to our primary bank regulator and holding company regulator, as well as changes in regulations applicable to us, including, but not limited to, capital requirements, payment of dividends and conversion to full stock form. While it is impossible to predict whether such reforms will be enacted or the form they may take, our board of directors believes that the reorganization will eliminate some of the uncertainties associated with the proposed legislation, and better position us to meet all future regulatory capital requirements. |
Terms of the Offering
We are offering between2,034,050 and 2,751,950 shares of common stock in a subscription offering to eligible depositors of Naugatuck Valley Savings and Loan and to our tax-qualified employee benefit plans, including our employee stock ownership plan. To the extent shares remain available, we will offer shares in a community offering to natural persons (and trusts of natural persons) residing in Fairfield and New Haven Counties, Connecticut, to our existing public shareholders as of , 2010 and to the general public. With regulatory approval, we may increase the number of shares to be sold up to3,164,743 shares without giving you further notice or the opportunity to change or cancel your order. In considering whether to increase the offering size, the Office of Thrift Supervision will consider the level of subscriptions, the views of our independent appraiser, our financial condition and results of operations, and changes in financial market conditions. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond[DATE2], 2010, or the number of shares of common stock to be sold is increased to more than3,164,743 shares or decreased to less than2,034,050 shares (which may include up to305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration). If we extend the offering beyond[DATE2], 2010, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than2,034,050 shares (which may include up to305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration) or more than3,164,743 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order.
If we do not receive orders for at least2,034,050 shares of common stock, then we may sell as few as1,728,943 shares in the offering and include up to 305,107 shares issued to Southern Connecticut Bancorp stockholders as merger consideration, but only in order to complete the offering at the minimum of the offering range.
Shares of our common stock not purchased in the subscription offering or the community offering may be offered for sale to the general public in a syndicated community offering through a syndicate of selected dealers on a best efforts basis. We may begin the syndicated community offering at any time following the commencement of the subscription offering. Stifel, Nicolaus & Company, Incorporated will act as sole book-running manager. Neither Stifel, Nicolaus & Company, Incorporated nor any other member of the syndicate is required to purchase any shares in the syndicated community offering.
7
Table of Contents
The purchase price is $10.00 per share. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Stifel, Nicolaus & Company, Incorporated, our conversion advisor and marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock.
How We Determined the Offering Range and Exchange Ratio (page )
Federal regulations require that the aggregate purchase price of the securities sold in the offering be based upon our estimated pro forma market value after the conversion (i.e., taking into account the expected receipt of proceeds from the sale of securities in the offering) and acquisition of Southern Connecticut Bancorp, as determined by an independent appraisal. We have retained FinPro, Inc., which is experienced in the evaluation and appraisal of financial institutions, to prepare the appraisal. FinPro has indicated that in its valuation as of September 8, 2010, our common stock’s estimated full market value ranged from $45.1 million to $57.1 million, with a midpoint of $51.1 million, inclusive of shares to be issued to Southern Connecticut Bancorp stockholders in connection with the merger. The pro forma market value of new Naugatuck Valley Financial includes:
• | the total number of shares that will be sold in the offering (representing the 59.6% ownership interest in Naugatuck Valley Financial currently owned by Naugatuck Valley Mutual Holding Company); |
• | the total number of shares to be issued to current Naugatuck Valley Financial stockholders in exchange for their shares of Naugatuck Valley Financial common stock (representing the remaining 40.4% ownership interest in Naugatuck Valley Financial currently owned by current Naugatuck Valley Financial stockholders); and |
• | the total number of shares to be issued to Southern Connecticut Bancorp stockholders in connection with the merger. |
This valuation and Naugatuck Valley Mutual Holding Company’s ownership interest in Naugatuck Valley Financial, results in an offering range of $20.3 million to $27.5 million, with a midpoint of $23.9 million. FinPro will receive fees totaling $40,000 for its appraisal report, plus $6,500 for any appraisal updates (of which there will be at least one) and reimbursement of out-of-pocket expenses. FinPro will also receive fees totaling $20,000 for preparation of the pro forma tables reflecting the independent appraisal and merger pro forma data in the prospectus.
The appraisal was based in part upon Naugatuck Valley Financial’s financial condition and results of operations, the impact of the merger with Southern Connecticut Bancorp, the effect of the additional capital we will raise from the sale of common stock in this offering, and an analysis of a peer group of ten publicly traded savings and loan holding companies that FinPro considered comparable to Naugatuck Valley Financial. The appraisal peer group consists of the companies listed below. Total assets are as of June 30, 2010.
Company Name | Ticker Symbol | Exchange | Headquarters | Total Assets | |||||
(in thousands) | |||||||||
Central Bancorp, Inc. | CEBK | NASDAQ | Somerville, MA | $ | 526,747 | ||||
Chicopee Bancorp, Inc. | CBNK | NASDAQ | Chicopee, MA | 556,973 | |||||
Hampden Bancorp, Inc. | HBNK | NASDAQ | Springfield, MA | 584,039 | |||||
Hingham Institution for Savings | HIFS | NASDAQ | Hingham, MA | 971,779 | |||||
Legacy Bancorp, Inc. | LEGC | NASDAQ | Pittsfield, MA | 956,239 | |||||
New England Bancshares | NEBS | NASDAQ | Enfield, CT | 692,596 | |||||
New Hampshire Thrift Bancshares, Inc. | NHTB | NASDAQ | Newport, NH | 993,206 | |||||
Newport Bancorp, Inc. | NFSB | NASDAQ | Newport, RI | 450,400 | |||||
United Financial Bancorp, Inc. | UBNK | NASDAQ | West Springfield, MA | 1,544,915 | |||||
Westfield Financial, Inc. | WFD | NASDAQ | Westfield, MA | 1,234,948 |
In preparing its appraisal, FinPro considered the information in this prospectus, including our financial statements and the impact of the merger with Southern Connecticut Bancorp. FinPro also considered the following factors, among others:
• | our historical and projected operating results and financial condition, including, but not limited to, net interest income, the amount and volatility of interest income and interest expense relative to changes in market conditions and interest rates, asset quality, levels of loan loss provisions, the amount and sources of non-interest income, and the amount of noninterest expense; |
8
Table of Contents
• | the economic, demographic and competitive characteristics of our market area, including, but not limited to, employment by industry type, unemployment trends, size and growth of the population, trends in household and per capita income, and deposit market share; |
• | a comparative evaluation of our operating and financial statistics with those of other similarly-situated, publicly-traded savings associations and savings association holding companies, which included a comparative analysis of balance sheet composition, income statement and balance sheet ratios, credit and interest rate risk exposure; |
• | the effect of the capital raised in this offering on our net worth and earnings potential, including, but not limited to, the increase in consolidated equity resulting from the offering, the estimated increase in earnings resulting from the investment of the net proceeds of the offering, and the estimated impact on consolidated equity and earnings resulting from adoption of the proposed employee stock benefit plans; and |
• | the trading market for Naugatuck Valley Financial common stock and securities of comparable institutions and general conditions in the market for such securities. |
Two measures that some investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and “tangible book value” and the ratio of the offering price to the issuer’s core earnings. FinPro considered these ratios in preparing its appraisal, among other factors. Book value is the same as total equity and represents the difference between the issuer’s assets and liabilities. Tangible book value is equal to total equity minus intangible assets. Core earnings, for purposes of the appraisal, was defined as net earnings after taxes, excluding the after-tax portion of income from nonrecurring items. FinPro’s appraisal also incorporates an analysis of a peer group of publicly traded companies that FinPro considered to be comparable to us. In applying each of the valuation methods, FinPro considered adjustments to our pro forma market value based on a comparison of Naugatuck Valley Financial with the peer group. FinPro made downward adjustments for financial condition (including asset quality), earnings quality and growth and trading liquidity and made an upward adjustment for balance sheet growth. No adjustments were made for market area, dividends, regulatory matters, management or subscription interest.
The following table presents a summary of selected pricing ratios for the peer group companies utilized by FinPro in its appraisal and the pro forma pricing ratios for us as calculated by FinPro in its appraisal report, based on financial data as of and for the 12 months ended June 30, 2010. The pricing ratios for Naugatuck Valley Financial are based on financial data as of or for the 12 months ended June 30, 2010.
Price to Book Value Ratio | Price to Tangible Book Value Ratio | Price to Core Earnings Multiple | ||||||
New Naugatuck Valley Financial (pro forma): | ||||||||
Minimum, as adjusted (1) | 55.49 | % | 57.97 | % | 26.32 | |||
Minimum | 57.31 | 59.74 | 28.57 | |||||
Midpoint | 62.46 | 65.02 | 32.26 | |||||
Maximum | 67.25 | 69.88 | 37.04 | |||||
Maximum, as adjusted | 72.31 | 75.02 | 41.67 | |||||
Pricing ratios of peer group companies as of September 8, 2010: | ||||||||
Average | 78.53 | 86.25 | 21.97 | |||||
Median | 74.98 | 84.49 | 18.14 |
(1) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 shares in the offering and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
Compared to the median pricing ratios of the peer group, at the maximum of the offering range our common stock would be priced at a discount of 10.31% to the peer group on a price-to-book basis, a discount of 17.29% to the peer group on a price-to-tangible book basis and a premium of 104.19% to the peer group on a price to core earnings basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on a book value and tangible book value basis and more expensive on a core earnings basis.
9
Table of Contents
Compared to the median pricing ratios of the peer group, at the minimum of the offering range our common stock would be priced at discount of 23.57% to the peer group on a price-to-book basis, a discount of 29.29% to the peer group on a price-to-tangible book basis and a premium of 57.50% to the peer group on a price to core earnings basis. This means that, at the minimum of the offering range, a share of our common stock would be less expensive than the peer group on a book value and tangible book value basis and more expensive on a core earnings basis.
Our board of directors reviewed FinPro’s appraisal report, including the methodology and the assumptions used by FinPro, and determined that the offering range was reasonable and adequate. Our board of directors has decided to offer the shares for a price of $10.00 per share. The purchase price of $10.00 per share was determined by us, taking into account, among other factors, the market price of our stock before adoption of the plan of conversion, the requirement under Office of Thrift Supervision regulations that the common stock be offered in a manner that will achieve the widest distribution of the stock, and desired liquidity in the common stock after the offering. Our board of directors also established the formula for determining the exchange ratio. Based upon such formula and the offering range, the exchange ratio ranged from a minimum of0.4863 to a maximum of0.6580 shares of new Naugatuck Valley Financial common stock for each current share of Naugatuck Valley Financial common stock, with a midpoint of0.5722. Based upon this exchange ratio, we expect to issue between 1,381,313 and 1,868,836 shares of new Naugatuck Valley Financial common stock to the holders of Naugatuck Valley Financial common stock outstanding immediately before the completion of the conversion and offering.
Because of differences in important factors such as operating characteristics, location, financial performance, asset size, capital structure and business prospects between us and other fully converted institutions, you should not rely on these comparative valuation ratios as an indication as to whether or not our common stock is an appropriate investment for you.The appraisal is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our common stock. The appraisal does not indicate market value. You should not assume or expect that the appraisal described above means that our common stock will trade at or above the $10.00 purchase price after the offering.
Our board of directors makes no recommendation of any kind as to the advisability of purchasing shares of common stock in the offering.
Possible Change in Offering Range
FinPro will update its appraisal before we complete the conversion and offering. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, FinPro determines that our estimated pro forma market value has increased, we may sell up to3,164,743 shares without further notice to you.In addition, in certain circumstances if existing options to acquire Southern Connecticut Bancorp common stock at June 30, 2010 are exercised prior to closing, the number of shares issued in the acquisition could be increased to 1,193,250 shares of common stock without further notice to you. If our pro forma market value at that time is either below $42.0 million or above $64.1 million, then, after consulting with the Office of Thrift Supervision, we may: terminate the offering and promptly return all funds; promptly return all funds, set a new offering range and give all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Office of Thrift Supervision and the Securities and Exchange Commission.
The Exchange of Existing Shares of Naugatuck Valley Financial Common Stock (page )
If you are a shareholder of Naugatuck Valley Financial on the date we complete the conversion and offering, your existing shares will be cancelled and exchanged for shares of new Naugatuck Valley Financial. The number of shares you will receive will be based on an exchange ratio determined as of the completion of the conversion and offering that is intended to result in Naugatuck Valley Financial’s existing public shareholders owning approximately 40.4% of new Naugatuck Valley Financial’s common stock without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, which is the same percentage of Naugatuck Valley Financial common stock currently owned by existing public shareholders. Assuming completion of the merger with Southern Connecticut Bancorp, existing public stockholders will own approximately between 30.6% and 33.5% of new Naugatuck Valley Financial. The following table shows how the exchange ratio will adjust,
10
Table of Contents
based on the number of shares sold in our offering. The table also shows how many shares a hypothetical owner of 100 shares of Naugatuck Valley Financial common stock would receive in the exchange, based on the number of shares sold in the offering.
Shares to be Sold in the Offering | Exchange Ratio | Shares to be Received for 100 Existing Shares (1) | Pro Forma Tangible Book Value Per Exchanged Share | ||||||
Minimum, as adjusted (2) | 1,728,943 | 0.4863 | 48 | $ | 8.39 | ||||
Minimum | 2,034,050 | 0.4863 | 48 | 8.14 | |||||
Midpoint | 2,393,000 | 0.5722 | 57 | 8.80 | |||||
Maximum | 2,751,950 | 0.6580 | 65 | 9.42 | |||||
Maximum, as adjusted | 3,164,743 | 0.7567 | 75 | 10.09 |
(1) | Cash will be paid instead of issuing any fractional shares. |
(2) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, up to305,107 unsubscribed shares may be issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
No fractional shares of new Naugatuck Valley Financial common stock will be issued in the conversion and offering. For each fractional share that would otherwise be issued, we will pay cash in an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 per share offering price.
We also will convert options previously awarded under the 2005 Equity Incentive Plan into options to purchase new Naugatuck Valley Financial common stock. At June 30, 2010, there were outstanding options to purchase343,204 shares of Naugatuck Valley Financial common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Naugatuck Valley Financial common stock outstanding will increase and the exchange ratio could be adjusted.
Ownership of New Naugatuck Valley Financial after Completion of the Conversion and Offering and the Merger
The following table shows the number of shares to be issued, and approximate percentage of the total stock issuance, for each of the shares to be sold in the offering, shares to be received in exchange for existing shares of Naugatuck Valley Financial and shares to be issued to Southern Connecticut Bancorp stockholders in connection with the merger.
Shares to be Sold in the Offering | Shares to be Received in Exchange for Existing Shares of Naugatuck Valley Financial | Shares to be issued to Southern Connecticut Bancorp Stockholders | Total Shares of Common Stock to be Outstanding | ||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||
Minimum, as adjusted (1) | 1,728,943 | 41.1 | % | 1,381,313 | 32.9 | % | 1,092,245 | 26.0 | % | 4,202,501 | |||||||
Minimum | 2,034,050 | 45.1 | 1,381,313 | 30.6 | 1,092,245 | 24.2 | 4,507,608 | ||||||||||
Midpoint | 2,393,000 | 46.8 | 1,625,075 | 31.8 | 1,092,245 | 21.4 | 5,110,320 | ||||||||||
Maximum | 2,751,950 | 48.2 | 1,868,836 | 32.7 | 1,092,245 | 19.1 | 5,713,031 | ||||||||||
Maximum, as adjusted | 3,164,743 | 49.4 | 2,149,161 | 33.5 | 1,092,245 | 17.0 | 6,406,149 |
(1) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
11
Table of Contents
How We Intend to Use the Proceeds of this Offering (page )
The following table summarizes how we intend to use the proceeds of the offering, based on the sale of shares at the minimum, as adjusted, minimum and maximum of the offering range.
(In thousands) | Minimum, as Adjusted, of Offering Range 2,034,050 Shares at $10.00 Per Share (1) | Minimum of Offering Range 2,034,050 Shares at $10.00 Per Share | Maximum of Offering Range 2,751,950 Shares at $10.00 Per Share | |||||||||
Offering proceeds | $ | 20,341 | $ | 20,341 | $ | 27,520 | ||||||
Less: offering expenses | (1,724 | ) | (1,831 | ) | (2,067 | ) | ||||||
Net offering proceeds | 18,617 | 18,510 | 25,453 | |||||||||
Merger shares used | (3,052 | ) | — | — | ||||||||
Net cash proceeds | 15,565 | 18,510 | 25,453 | |||||||||
Less: | ||||||||||||
Proceeds contributed to Naugatuck Valley Savings and Loan | (5,170 | ) | (7,526 | ) | (13,081 | ) | ||||||
Proceeds used for loan to employee stock ownership plan | (1,220 | ) | (1,220 | ) | (1,651 | ) | ||||||
Cash portion of merger consideration | (7,282 | ) | (7,282 | ) | (7,282 | ) | ||||||
Proceeds remaining for new Naugatuck Valley Financial | $ | 1,893 | $ | 2,482 | $ | 3,439 |
(1) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
(2) | We intend to contribute 80.0% of the net cash proceeds to Naugatuck Valley Savings and Loan, of which $7.3 million will be used to fund the cash portion of the merger consideration. |
Initially, we intend to invest the proceeds of the offering in short-term investments. In the future, new Naugatuck Valley Financial may use the funds it retains to invest in securities, pay cash dividends, repurchase shares of its common stock, subject to regulatory restrictions, or for general corporate purposes. Over time, Naugatuck Valley Savings and Loan intends to use the portion of the proceeds that it receives to fund new loans or to repay outstanding indebtedness. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand. We may also use the proceeds of the offering to diversify our business or acquire other companies or expand our branch network, although we have no specific plans to do so at this time.
Purchases by Directors and Executive Officers (page )
We expect that our directors and executive officers, together with their associates, will subscribe for approximately 43,500 shares, which is 1.8% of the midpoint of the offering. Our directors and executive officers will pay the same $10.00 per share price as everyone else who purchases shares in the offering. Like all of our depositors, our directors and executive officers have subscription rights based on their deposits and, in the event of an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of conversion. Purchases by our directors and executive officers will count towards the minimum number of shares we must sell to close the offering.
In addition, Elmer F. Laydon and Alphonse F. Spadaro, Jr., Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp who will become directors of new Naugatuck Valley Financial following the merger, and Matthew Proto, Sr. and Sunil Pallan, senior officers of The Bank of Southern Connecticut who will become executive officers of new Naugatuck Valley Financial following the merger, expect to elect to receive in the merger up to 85,489 shares in the aggregate of new Naugatuck Valley Financial common stock in exchange for their Southern Connecticut Bancorp common stock, based on the number of shares of Southern Connecticut Bancorp they own as of , 2010 and subject to the election and proration procedure set forth in the merger agreement. These individuals also intend to subscribe for 2,500 shares, or $25,000, of new Naugatuck Valley Financial common stock. Including the new directors from Southern Connecticut Bancorp and senior officers from The Bank of Southern Connecticut, all directors and executive officers, together with their associates, would own, upon completion of the offering, the exchange and the merger, up to approximately 5.0% of our outstanding shares at the minimum of the offering range.
12
Table of Contents
Benefits of the Conversion to Management (page )
We intend to adopt the stock benefit plans described below. We will recognize additional compensation expense related to the expanded employee stock ownership plan and the new equity incentive plan. The actual expense will depend on the market value of our common stock and will increase as the value of our common stock increases. As reflected under“Pro Forma Data,” based upon assumptions set forth therein, the annual after tax expense related to the employee stock ownership plan and the new equity incentive plan would have been $313,000 for the year ended December 31, 2009, assuming shares are sold at the maximum of the offering range. If awards under the new equity incentive plan are funded from authorized but unissued stock, your ownership interest would be diluted by up to approximately 5.9%. See“Pro Forma Data” for an illustration of the effects of each of these plans.
Employee Stock Ownership Plan.Our employee stock ownership plan intends to purchase an amount of shares equal to 6.0% of the shares sold in the offering. The plan will use the proceeds from a 20-year loan from new Naugatuck Valley Financial to purchase these shares in the offering. Alternatively, we reserve the right to purchase shares of common stock in the open market following the offering to fund all or a portion of the employee stock ownership plan. As the loan is repaid and shares are released from collateral, the shares will be allocated to the accounts of employee participants. Allocations will be based on a participant’s individual compensation as a percentage of total plan compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. The purchase of common stock by the employee stock ownership plan in the offering will comply with all applicable Office of Thrift Supervision regulations except to the extent waived by the Office of Thrift Supervision. We will incur additional compensation expense as a result of this plan. See“Pro Forma Data” for an illustration of the effects of this plan.
New Equity Incentive Plan.We intend to implement a new equity incentive plan no earlier than six months after completion of the conversion and offering. We will submit this plan to our shareholders for their approval. Under this plan, if implemented within 12 months following the completion of the conversion, we intend to grant stock options in an amount up to 10.0% of the number of shares sold in the offering and restricted stock awards in an amount equal to 3.0% of the shares sold in the offering, subject to adjustment as may be required by Office of Thrift Supervision regulations or policy to reflect restricted stock awards and stock option grants previously made by Naugatuck Valley Financial. Stock options will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. Shares of restricted stock will be awarded at no cost to the recipient. We will incur additional compensation expense as a result of this plan. See“Pro Forma Data” for an illustration of the effects of this plan. If the new equity incentive plan is adopted more than 12 months after the completion of the conversion, restricted stock awards and stock option grants under the plan may exceed the percentage limitations set forth above. The new equity incentive plan will supplement our existing 2005 Equity Incentive Plan, which will continue as a plan of new Naugatuck Valley Financial. The equity incentive plan will comply with all applicable Office of Thrift Supervision regulations except to the extent waived by the Office of Thrift Supervision.
The following table summarizes, at the maximum of the offering range, the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards and stock options that are expected to be available under the new equity incentive plan. At the maximum of the offering range, we will sell 2,751,950 shares and have 5,713,031 shares outstanding. The number of shares reflected for the benefit plans in the table below assumes that the new equity incentive plan is implemented with in 12 months following completion of the conversion and the application of the net proceeds as described under “Use of Proceeds.”
13
Table of Contents
Number of Shares to be Granted or Purchased | Dilution Resulting from Issuance of Additional Shares | Total Estimated Value | ||||||||||||
(Dollars in thousands) | At Maximum of Offering Range | As a % of Common Stock Sold | As a % of Common Stock Outstanding after Offering and Merger | |||||||||||
Employee stock ownership plan (1) | 165,117 | 6.0 | % | 2.9 | % | — | % | $ | 1,651,170 | |||||
Restricted stock awards (1) | 82,558 | 3.0 | 1.4 | 1.4 | $ | 825,580 | ||||||||
Stock options (2) | 275,195 | 10.0 | 4.8 | 4.6 | $ | 751,282 | ||||||||
Total | 522,870 | 19.0 | 9.2 | 5.9 | $ | 3,228,032 | ||||||||
(1) | Assumes the value of new Naugatuck Valley Financial common stock is $10.00 per share for determining the total estimated value. |
(2) | Assumes the value of a stock option is$2.73. See “Pro Forma Data.” |
We may fund our plans through open market purchases, as opposed to new issuances of common stock; however, if any options previously granted under our 2005 Equity Incentive Plan are exercised during the first year following completion of the offering, they will be funded with newly-issued shares as Office of Thrift Supervision regulations do not permit us to repurchase our shares during the first year following the completion of this offering except to fund the grants of restricted stock under the equity incentive plan or, with prior regulatory approval, under extraordinary circumstances. The Office of Thrift Supervision has previously advised that the exercise of outstanding options and cancellation of treasury shares in the conversion will not constitute an extraordinary circumstance or a compelling business purpose for satisfying this test.
The following table presents information regarding our existing employee stock ownership plan, options and restricted stock previously awarded or available for future awards under our 2005 Equity Incentive Plan, additional shares purchased by our employee stock ownership plan, and our proposed new equity incentive plan. The table below assumes that 5,713,031 shares are outstanding after the offering and merger, which includes the sale of 2,751,950 shares in the offering at the maximum of the offering range, the issuance of 1,868,836 shares in exchange for shares of Naugatuck Valley Financial using an exchange ratio of 0.6580 and 1,092,245 shares to be issued to Southern Connecticut Bancorp stockholders in connection with the merger. It is also assumed that the value of the stock is $10.00 per share.
Existing and New Stock Benefit Plans | Eligible Participants | Number of Shares at Maximum of Offering Range | Estimated Value of Shares | Percentage of Shares Outstanding After the Offering and Merger | ||||||||
(Dollars in thousands) | ||||||||||||
Employee Stock Ownership Plan: | Employees | |||||||||||
Shares purchased in 2004 offering (1) | 196,144 | (2) | $ | 1,961 | 3.43 | % | ||||||
Shares to be purchased in this offering | 165,117 | 1,651 | 2.89 | |||||||||
Total employee stock ownership plan | 361,261 | 3,613 | 6.32 | |||||||||
Restricted Stock Awards: | Directors and employees | |||||||||||
2005 Equity Incentive Plan (1) | 98,072 | (3) | 981 | (4) | 1.72 | |||||||
New shares of restricted stock | 82,558 | 826 | (4) | 1.45 | ||||||||
Total shares of restricted stock | 180,630 | 1,806 | 3.16 | |||||||||
Stock Options: | Directors and employees | |||||||||||
2005 Equity Incentive Plan (1) | 245,180 | (5) | 917 | (6) | 4.29 | |||||||
New stock options | 275,195 | 751 | (7) | 4.82 | ||||||||
Total stock options | 520,375 | 1,668 | 9.11 | |||||||||
Total stock benefit plans | 1,062,266 | $ | 7,087 | 18.59 | % | |||||||
(1) | Number of shares has been adjusted for the 0.6580 exchange ratio at the maximum of the offering range. |
(2) | As of June 30, 2010, of these shares,68,666 (104,356 before adjustment) have been allocated to the accounts of participants. |
14
Table of Contents
(3) | As of June 30, 2010, of these shares,95,885 (145,722 before adjustment) have been awarded and 2,187 (3,323 before adjustment) remain available for future awards. As of June 30, 2010, awards covering115,572 shares have vested and the shares have been distributed. |
(4) | The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. |
(5) | As of June 30, 2010, of these shares, options for 225,986 shares (343,444 shares before adjustment) have been awarded and options for 19,194 shares (29,170 shares before adjustment) remain available for future grants. As of June 30, 2010,240 options had been exercised. |
(6) | The fair value of stock options granted and outstanding under the 2005 Equity Incentive Plan has been estimated using the Black-Scholes option pricing model. Before the adjustment for the exchange ratio, there were343,204 outstanding options with a weighted average fair value of[$2.46] per option. Using this value and adjusting for the exchange ratio at the maximum of the offering range, the fair value of stock options granted or available for grant under the 2005 Equity Incentive Plan has been estimated at$3.73 per option. |
(7) | For purposes of this table, the fair value of stock options to be granted under the new equity incentive plan has been estimated at$2.73 per option using the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00;dividend yield, 1.86%; expected life, 6.5 years; expected volatility, 27.58%; and risk-free interest rate, 3.28%. |
Persons Who Can Order Stock in the Subscription and Community Offerings (page )
We are offering shares of new Naugatuck Valley Financial common stock in a subscription offering to the following persons in the following order of priority:
1. | Persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of the close of business on December 31, 2008. |
2. | Our employee stock ownership plan. |
3. | Persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of the close of business on , 2010 who are not eligible in category 1 above. |
4. | Naugatuck Valley Savings and Loan’s depositors as of the close of business on , 2010, who are not in categories 1 or 3 above. |
Unlike our employee stock ownership plan, the Naugatuck Valley Savings and Loan 401(k) Plan has not been granted priority subscription rights. Accordingly, a 401(k) plan participant who elects to purchase shares in the offering through self-directed purchases within the 401(k) plan will receive the same subscription priority, and be subject to the same purchase limitations, as if the participant had elected to purchase shares using funds outside the 401(k) plan.
Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering,” with a preference given to residents of Fairfield and New Haven Counties, Connecticut and the shareholders of Naugatuck Valley Financial as of , 2010. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” managed by Stifel, Nicolaus & Company, Incorporated. We retain the right to accept or reject, in part or in whole, any order received in the community offering or the syndicated community offering. Stifel, Nicolaus & Company, Incorporated is not required to purchase any shares of common stock that are being offered for sale.
If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or may only partially fill your order. Shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. See “The Conversion and Offering—Subscription Offering and Subscription Rights” for a description of the allocation procedure.
Subscription Rights are Not Transferable
You are not allowed to transfer your subscription rights and we will act to ensure that you do not do so. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person to sell or transfer subscription rights or the shares that you purchase in the subscription
15
Table of Contents
offering. We will not accept any stock orders that we believe involve the transfer of subscription rights.Eligible depositors who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.
Purchase Limitations (page )
Pursuant to our plan of conversion, our board of directors has established limitations on the purchase of common stock in the offering. These limitations include the following:
• | The minimum purchase is 25 shares. |
• | No individual may purchase more than $300,000 of common stock (which equals 30,000 shares) in the offering. |
• | No individual, together with any associates and no group of persons acting in concert, may purchase more than $600,000 of common stock (which equals 60,000 shares) in all the categories of the offering combined. For purposes of applying this limitation, your associates include: |
• | Any person who is related by blood or marriage to you and who either lives in your home or who is a director or officer of Naugatuck Valley Savings and Loan; |
• | Companies or other entities in which you are an officer or partner or have a 10% or greater beneficial ownership interest; and |
• | Trusts or other estates in which you have a substantial beneficial interest or as to which you serve as a trustee or in another fiduciary capacity. |
Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to this overall purchase limitation. We have the right to determine, in our sole discretion, whether prospective purchasers are associates or acting in concert.
• | No individual, together with any associates and no group of persons acting in concert, may purchase shares of common stock so that, when combined with shares of new Naugatuck Valley Financial common stock received in exchange for shares of Naugatuck Valley Financial common stock and received in the merger in exchange for shares of Southern Connecticut Bancorp, such person or persons would hold more than 5% of the number of shares of new Naugatuck Valley Financial common stock outstanding upon completion of the conversion and offering (the “5% Total Limit”). No person will be required to divest any shares of Naugatuck Valley Financial common stock or be limited in the number of shares of new Naugatuck Valley Financial to be received in exchange for shares of Naugatuck Valley Financial common stock or to be received in the merger in exchange for shares of Southern Connecticut Bancorp as a result of this purchase limitation. |
Subject to the Office of Thrift Supervision’s approval, we may increase or decrease the purchase limitations at any time. If we increase the maximum purchase limitation to 5% of the shares of common stock sold in the offering, we may further increase the maximum purchase limitation to 9.99%, provided that orders for common stock exceeding 5% of the shares of common stock sold in the offering may not exceed in the aggregate 10% of the total shares of common stock sold in the offering. Even under these increased purchase limits, purchases remain subject to the 5% Total Limit described above. Our tax-qualified employee benefit plans, including our employee stock ownership plan, are authorized to purchase up to 6.0% of the shares sold in the offering, without regard to these purchase limitations.
Conditions to Completing the Conversion and Offering
We cannot complete the conversion and offering unless:
• | the plan of conversion is approved by at leasta majority of votes eligible to be cast by voting members of Naugatuck Valley Mutual Holding Company (depositors of Naugatuck Valley Savings and Loan); |
• | the plan of conversion is approved by at leasttwo-thirds of the outstanding shares of Naugatuck Valley Financial, including shares held by Naugatuck Valley Mutual Holding Company; |
16
Table of Contents
• | the plan of conversion is approved by at least a majority of the votes eligible to be cast by shareholders of Naugatuck Valley Financial, excluding shares held by Naugatuck Valley Mutual Holding Company; |
• | we sell at least the minimum number of shares offered; and |
• | we receive the final approval of the Office of Thrift Supervision to complete the conversion and offering. |
Naugatuck Valley Mutual Holding Company, which owns 59.6% of the outstanding shares of Naugatuck Valley Financial, intends to vote these shares in favor of the plan of conversion. In addition, as of , 2010, directors and executive officers of Naugatuck Valley Financial and their associates beneficially owned shares of Naugatuck Valley Financial or % of the outstanding shares. They intend to vote those shares in favor of the plan of conversion.
Although the completion of the offering is not contingent on the acquisition of Southern Connecticut Bancorp, the timing and manner of the offering would be subject to significant modification in the event the acquisition is terminated. If the merger agreement with Southern Connecticut Bancorp is terminated, the current offering will be canceled and all funds would be promptly returned to subscribers. A new offering could be conducted. Any new valuation range must be approved by the Office of Thrift Supervision. Any plan of conversion not reflecting a merger with Southern Connecticut Bancorp must be approved by the voting members of Naugatuck Valley Mutual Holding Company and the stockholders of Naugatuck Valley Financial.
Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares
We must sell a minimum of2,034,050 shares (which may include305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration) to complete the conversion and offering. Purchases by our directors and executive officers and our employee stock ownership plan will count towards the minimum number of shares we must sell to complete the offering. If we do not receive orders for at least2,034,050 shares (which may include305,107 unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration) of common stock in the subscription, community and/or syndicated community offerings, we may increase the purchase limitations and/or seek regulatory approval to extend the offering beyond[DATE2], 2010 (provided that any such extension will require us to resolicit subscribers). Alternatively, we may terminate the offering, in which case we will promptly return your funds with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate, which is currently 0.15% per annum, and cancel all deposit account withdrawal authorizations.
How to Purchase Common Stock (page )
In the subscription offering and the community offering, you may pay for your shares by:
1. | personal check, bank check or money order made payable directly to “Naugatuck Valley Financial Corporation” (Naugatuck Valley Savings and Loan lines of credit checks and third-party checks of any type will not be accepted); or |
2. | authorizing us to withdraw money from the types of Naugatuck Valley Savings and Loan deposit accounts identified on the stock order form. |
Naugatuck Valley Savings and Loan is not permitted to lend funds (including funds drawn on a Naugatuck Valley Savings and Loan line of credit) to anyone to purchase shares of common stock in the offering. Please do not send cash or pay by wire transfer.
You may not designate on your stock order form a direct withdrawal from a retirement account held at Naugatuck Valley Savings and Loan. See the following section for guidance regarding use of retirement account funds. Additionally, you may not designate on your stock order form a direct withdrawal from Naugatuck Valley Savings and Loan accounts with check-writing privileges. Instead, a check must be provided. If you request a direct withdrawal, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount and we will immediately withdraw the amount from your checking account.
17
Table of Contents
Personal checks will be immediately cashed, so the funds must be available within the account when your stock order form is received by us. Subscription funds submitted by check or money order will be held in a segregated account at Naugatuck Valley Savings and Loan. We will pay interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate from the date those funds are processed until completion or termination of the offering. Withdrawals from certificate of deposit accounts at Naugatuck Valley Savings and Loan to purchase common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with Naugatuck Valley Savings and Loan must be available within the deposit accounts at the time the stock order form is received. A hold will be placed on the amount of funds designated on your stock order form. Those funds will be unavailable to you during the offering; however, the funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable contractual deposit account rate until the completion of the offering.
You may deliver your stock order form in one of three ways: by mail, using the stock order reply envelope provided, by overnight delivery to the Stock Information Center at the address indicated on the stock order form or by hand-delivery to Naugatuck Valley Savings and Loan’s main office, located at 333 Church Street, Naugatuck, Connecticut. Stock order forms will not be accepted at our other Naugatuck Valley Savings and Loan offices. Please do not mail stock order forms to Naugatuck Valley Savings and Loan. Once submitted, your order is irrevocable. We are not required to accept copies or facsimiles of order forms.
Using IRA Funds to Purchase Shares in the Offering (page )
You may be able to subscribe for shares of common stock using funds in your individual retirement account(s), or IRA. If you wish to use some or all of the funds in your Naugatuck Valley Savings and Loan IRA or other retirement account, the applicable funds must first be transferred to a self-directed retirement account maintained by an unaffiliated institutional trustee or custodian, such as a brokerage firm. An annual fee may be payable to the new trustee. If you do not have such an account, you will need to establish one and transfer your funds before placing your stock order. Our Stock Information Center can give you guidance if you wish to place an order for stock using funds held in a retirement account at Naugatuck Valley Savings and Loan or elsewhere. Because processing retirement account transactions takes additional time, we recommend that you contact our Stock Information Center for guidance promptly, preferably at least two weeks before the[DATE1], 2010 offering deadline. Whether you may use retirement funds for the purchase of shares in the offering will depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.
Deadline for Ordering Stock in the Subscription and Community Offerings
The subscription offering will end at 2:00 p.m., Eastern Time, on[DATE1], 2010. If you wish to purchase shares, a properly completed and signed original stock order form, together with full payment for the shares of common stock, must be received (not postmarked) no later than this time. We expect that the community offering, if held, will terminate at the same time, although it may continue until[DATE2], 2010, or longer if the Office of Thrift Supervision approves a later date. No single extension may be for more than 90 days. We are not required to provide notice to you of an extension unless we extend the offering beyond[DATE2], 2010, in which case all subscribers in the subscription and community offerings will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than2,034,050 shares or more than3,164,743 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order.
Market for New Naugatuck Valley Financial’s Common Stock (page )
Naugatuck Valley Financial common stock is listed on the Nasdaq Global Market under the symbol “NVSL.” We expect that new Naugatuck Valley Financial’s common stock will trade on the Nasdaq Global Market under the trading symbol NVSLD for a period of 20 trading days after the completion of the conversion and offering. Thereafter, the trading symbol will revert to NVSL. After shares of the common stock begin trading, you may contact a stock broker to buy or sell shares. There can be no assurance that persons purchasing the common stock in the offering will be able to sell their shares at or above the $10.00 offering price, and brokerage firms typically charge commissions related to the purchase or sale of securities.
18
Table of Contents
New Naugatuck Valley Financial’s Dividend Policy (page )
Naugatuck Valley Financial has paid quarterly cash dividends since the first quarter of 2005. For the quarter ended June 30, 2010, the quarterly cash dividend was $0.03 per share, which equals $0.12 per share on an annualized basis. We intend to continue to pay quarterly cash dividends after we complete the conversion and offering and the merger with Southern Connecticut Bancorp. We currently expect that the level of quarterly cash dividends per share after the conversion and offering and the merger to be $0.03 per share, or $0.12 per share on an annualized basis, at all levels of the offering range. This represents an annual dividend yield of 1.2% at all levels of the offering range based on a stock price of $10.00 per share. However, the dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced or eliminated in the future.
Tax Consequences (page )
As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to us or persons who receive or exercise subscription rights. Existing shareholders of Naugatuck Valley Financial who receive cash in lieu of fractional share interests in shares of new Naugatuck Valley Financial will recognize gain or loss equal to the difference between the cash received and the tax basis of the fractional share. Kilpatrick Stockton LLP and Whittlesey & Hadley, P.C. have issued us opinions to this effect.
Delivery of Prospectus
To ensure that each purchaser in the subscription and community offerings receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days before such date or hand-deliver prospectuses later than two days before that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.
We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 2:00 p.m., Eastern Time, on[DATE1], 2010 whether or not we have been able to locate each person entitled to subscription rights.
Delivery of Stock Certificates in the Subscription and Community Offerings (page )
Certificates representing shares of common stock issued in the subscription and community offerings will be mailed by regular mail by our transfer agent as soon as practicable following completion of the conversion and offering. Certificates will be mailed to purchasers at the registration address provided by them on the order form.Until certificates for common stock are available and delivered to purchasers, purchasers may not be able to sell their shares, even though trading of the common stock will have commenced.Your ability to sell the shares of common stock before your receipt of the stock certificate will depend on arrangements you may make with your brokerage firm.
Stock Information Center
Our banking office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the offering, please call our Stock Information Center. The toll-free telephone number is ( ) . The Stock Information Center is open Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. The Stock Information Center will be closed weekends and bank holidays.
19
Table of Contents
You should consider carefully the following risk factors before purchasing shares of new Naugatuck Valley Financial common stock.
Risks Related to Our Business
Our portfolio of loans with a higher risk of loss have increased recently and will increase further as a result of the merger with Southern Connecticut Bancorp.
Recently, we have emphasized and grown our commercial real estate, commercial business and construction lending. At June 30, 2010, $225.9 million, or 46.0%, of our loan portfolio consisted of multi-family and commercial real estate, commercial business and construction loans, an increase of 6.3% from $212.6 million at December 31, 2009 and 26.1% from $179.2 million at December 31, 2008. In addition, as a result of the merger with Southern Connecticut Bancorp, our portfolio of multi-family and commercial real estate, commercial business and construction loans will increase significantly. At June 30, 2010, the pro forma amount of multi-family and commercial real estate, commercial business and construction loans, giving effect to the merger, totals $350.2 million, or 56.9% of our total loan portfolio. Furthermore, we intend to grow these commercial and construction loan portfolios subsequent to completion of the conversion and offering and the merger. Multi-family and commercial real estate, commercial business and construction loans have a higher risk of default and loss than owner-occupied single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrower, and for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans also typically involve larger loan balances to single borrowers or groups of related borrowers than single-family residential loans. Also, many of our commercial and construction borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.
Our non-performing assets have increased recently and will increase further as a result of the merger with Southern Connecticut Bancorp which may negatively impact our earnings.
Our non-performing assets have increased recently as a result of the recent economic recession. At June 30, 2010, we had total non-performing assets of $12.7 million, or 2.25% of total assets, a $6.6 million increase from December 31, 2009 and an $10.1 million increase from December 31, 2008. In addition, as a result of the merger with Southern Connecticut Bancorp, our non-performing assets will increase significantly. Southern Connecticut Bancorp had total non-performing assets of $6.5 million, or 4.1% of total assets at June 30, 2010, and, on a pro forma basis at June 30, 2010, our pro forma total non-performing assets are $19.2 million, or 2.7% of total assets. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or investments or on real estate owned. We must reserve for probable losses, which are established through a current period charge to income in the provision for loan losses, and from time to time, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of operations and other income-producing activities of Naugatuck Valley Savings and Loan. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly. On a pro forma basis at June 30, 2010, assuming completion of the merger with Southern Connecticut Bancorp, our allowance for loan losses amounts to $5.1 million, or 0.84% of total loans outstanding and 29.06% of nonperforming loans.
The recent economic recession could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.
Our business activities and earnings are affected by general business conditions in the United States and in our local market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and in our market area in particular. The national economy has recently experienced a recession, with rising unemployment levels, declines in real estate values and an erosion in consumer confidence. Dramatic declines in the U.S. housing market over the past few years, with falling home prices and increasing foreclosures, have
20
Table of Contents
continued elevated levels of unemployment, further declines in the values of real estate, or other events that affect household and/or corporate incomes could impair the ability of our borrowers to repay their loans in accordance with their terms. Most of our loans are secured by real estate or made to businesses in the Greater Naugatuck Valley. As a result of this concentration, a prolonged or more severe downturn in the local economy could result in significant increases in nonperforming loans, which would negatively impact our interest income and result in higher provisions for loan losses, which would hurt our earnings. The economic downturn could also result in reduced demand for credit or fee-based products and services, which would negatively impact our revenues.
The unseasoned nature of our commercial and construction loan portfolio may expose us to increased lending risks.
Our multi-family and commercial real estate, commercial business and construction loan portfolio has increased $157.6 million, or 230.8%, from $68.3 million at December 31, 2005 to $225.9 million at June 30, 2010. Many of our multi-family, commercial real estate, commercial business and construction loans are unseasoned, meaning that they were originated recently. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectibility. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our future performance. At June 30, 2010, we had $11.6 million of commercial and construction loans that have had their terms extended and are still accounted for as performing.
Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.
When we loan money we incur the risk that our borrowers will not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The recent decline in the national economy and the local economies of the areas in which our loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss provisions in future periods. In addition, our determination as to the amount of our allowance for loan losses is subject to review by our primary regulator, the Office of Thrift Supervision, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the Office of Thrift Supervision after a review of the information available at the time of its examination. Our allowance for loan losses amounted to 1.05% of total loans outstanding and 40.73% of nonperforming loans at June 30, 2010. Our allowance for loan losses at June 30, 2010, may not be sufficient to cover future loan losses. On a pro forma basis at June 30, 2010, assuming completion of the merger with Southern Connecticut Bancorp, our allowance for loan losses amounts to $5.1 million, or 0.84% of total loans outstanding and 29.06% of nonperforming loans. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
Our emphasis on residential mortgage loans exposes us to a risk of loss due to a decline in property values.
At June 30, 2010, $225.6 million, or 46.0%, of our loan portfolio consisted of one- to four-family residential mortgage loans, and $36.4 million, or 7.4%, of our loan portfolio consisted of home equity loans. We originate home equity lines of credit with maximum combined loan-to-value ratios of up to 80%. Recent declines in the housing market have resulted in declines in real estate values in our market area. These declines in real estate values could cause some of our mortgage and home equity loans to be inadequately collateralized which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral.
Concentration of loans in our primary market area may increase risk.
Our success depends primarily on the general economic conditions in the State of Connecticut, as nearly all of our loans are to customers in this market. Accordingly, the local economic conditions in Connecticut have a significant impact on the
21
Table of Contents
ability of our borrowers to repay loans. As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could negatively affect our financial results.
Changes in interest rates could reduce our net interest income and earnings.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest spread and, as a result, our net interest income and net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract. This contraction could be more severe following a prolonged period of lower interest rates, as a larger proportion of our fixed rate residential loan portfolio will have been originated at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher interest rate environment. Changes in the slope of the “yield curve” —or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
Turmoil in the financial markets could have an adverse effect on our financial position or results of operations.
Beginning in 2008, United States and global financial markets experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic and regulatory environment, have had a negative impact on the industry. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have implemented programs intended to improve general economic conditions. The U.S. Department of the Treasury created the Capital Purchase Program under the Troubled Asset Relief Program, pursuant to which the Treasury Department provided additional capital to participating financial institutions through the purchase of preferred stock or other securities. Other measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; regulatory action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. Notwithstanding the actions of the United States and other governments, there can be no assurances that these efforts will be successful in restoring industry, economic or market conditions to their previous levels and that they will not result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including Naugatuck Valley Financial, are numerous and include (1) worsening credit quality, leading among other things to increases in loan losses and reserves, (2) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in asset values, (3) capital and liquidity concerns regarding financial institutions generally, (4) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system, or (5) recessionary conditions that are deeper or last longer than currently anticipated.
If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security.
Companies are required to record other-than-temporary impairment if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before recovery of its amortized cost basis. In addition, companies are required to record other-than-temporary impairment for the amount of credit losses, regardless of the intent or requirement to sell. We evaluate investments that have a fair value less than book value for other-than-temporary impairment on a quarterly basis. Changes in the expected cash flows, credit enhancement levels or credit ratings of investment securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other-than temporary, which would require a charge to earnings to write down the value of these securities. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.
22
Table of Contents
Increased and/or special FDIC assessments will hurt our earnings.
The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $246,793. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. Additional increases in the base assessment rate or special assessments would negatively impact our earnings.
Strong competition within our market area could reduce our profits and slow growth.
We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. As of June 30, 2009, which is the most recent date for which information is available, we held, on a pro forma basis including the merger with Southern Connecticut Bancorp, less than 3.0% of the deposits in each of the counties in which our offices are located. Several of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our primary federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Naugatuck Valley Savings and Loan rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in Naugatuck Valley Savings and Loan that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.
23
Table of Contents
Risks Related to the Proposed Merger with Southern Connecticut Bancorp
The integration of the operations of Naugatuck Valley Financial and Southern Connecticut Bancorp may be more difficult than anticipated.
The success of the merger will depend on a number of factors, including, but not limited to, Naugatuck Valley Financial’s ability to:
• | timely and successfully integrate the operations of Naugatuck Valley Financial and Southern Connecticut Bancorp; |
• | maintain existing relationships with The Bank of Southern Connecticut’s depositors and to minimize withdrawals of deposits subsequent to the merger; |
• | maintain and enhance existing relationships with borrowers to limit potential losses from loans made by The Bank of Southern Connecticut; |
• | control the incremental non-interest expense from the merger to maintain overall operating efficiencies; |
• | retain key personnel; and |
• | compete effectively in the communities served by The Bank of Southern Connecticut. |
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees of Southern Connecticut Bancorp who are expected to be retained by Naugatuck Valley Financial. Naugatuck Valley Financial may not be successful in retaining these employees for the time period necessary to successfully integrate Southern Connecticut Bancorp’s operations with those of Naugatuck Valley Financial. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business and results of operation of Naugatuck Valley Financial following the merger.
Naugatuck Valley Financial and Southern Connecticut Bancorp will be subject to business uncertainties while the merger is pending that could adversely affect their businesses.
Uncertainty among employees, depositors, vendors and others about the effect of the merger may have an adverse effect on Naugatuck Valley Financial and Southern Connecticut Bancorp and, consequently, on the combined company. Although Naugatuck Valley Financial and Southern Connecticut Bancorp intend to take actions to reduce any adverse effects, these uncertainties may impair their ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause depositors, vendors and others that do business with Naugatuck Valley Financial and Southern Connecticut Bancorp to seek to change existing business relationships with either or both companies.
Naugatuck Valley Financial and Southern Connecticut Bancorp will incur significant transaction costs which may diminish the anticipated benefits of the merger.
Naugatuck Valley Financial and Southern Connecticut Bancorp expect to incur merger-related costs totaling approximately $1.8 million in connection with completing the merger, including the expenses related to integrating the operations of the two companies. Substantially all merger-related costs to be incurred by the two companies will be charged to operations and will not be included as a component of the purchase price under acquisition accounting. The amount of merger-related costs expected to be incurred by Naugatuck Valley Financial and Southern Connecticut Bancorp are preliminary estimates and are subject to change.
Naugatuck Valley Financial and Southern Connecticut Bancorp are continuing to assess the magnitude of these costs, and, therefore, these estimates may change substantially as additional unanticipated costs may be incurred in the integration of the businesses of the two companies. Although Naugatuck Valley Financial and Southern Connecticut Bancorp believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Issuance of shares in the merger will dilute your ownership interest.
The acquisition of Southern Connecticut Bancorp will result in our recording goodwill and other intangible assets of approximately $3.1 million. As a result, subscribers in the offering will experience per share dilution in tangible capital of $0.71, $0.63, $0.56 and $0.50 at the minimum, midpoint, maximum and maximum, as adjusted of the offering range.
24
Table of Contents
In connection with the merger, new Naugatuck Valley Financial will issue an aggregate of approximately 1,092,245 shares of common stock and pay approximately $7.3 million in cash to the stockholders of Southern Connecticut Bancorp. Assuming 1,092,245 of the shares are issued to Southern Connecticut Bancorp shareholders in the merger, then the issuance of the shares in the merger would dilute the interests of holders of new Naugatuck Valley Financial shares after completion of the conversion and offering by approximately 24.2% and 19.1% at the minimum and maximum of the offering range, respectively.
We could potentially recognize goodwill impairment charges after the merger and conversion.
Our acquisition of Southern Connecticut Bancorp will be accounted for using the acquisition method of accounting. In accordance with applicable accounting principles, we estimate that, as a result of the merger, total intangible assets of $3.1 million, including goodwill totaling $919,000, will be recorded. As a result, at the maximum of the offering range, goodwill will equal approximately 1.08% of the $85.0 million of pro forma consolidated total stockholders’ equity at June 30, 2010. In accordance with applicable accounting principles, we will annually review the fair value of our investment in Southern Connecticut Bancorp to determine that such fair value equals or exceeds the carrying value of our investment, including goodwill. If the fair value of our investment in Southern Connecticut Bancorp does not equal or exceed our carrying value, we will be required to record goodwill impairment charges which may adversely affect our future earnings. The fair value of a banking franchise can fluctuate downward based on a number of factors that are beyond management’s control,e.g. adverse trends in interest rates and increased loan losses. If our banking franchise value declines after consummation of the conversion and the merger, there may be goodwill impairment charges to operations which would adversely affect our future earnings.
Risks Related to the Offering
Our share price will fluctuate.
The market price of our common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects. Factors that may affect market sentiment include:
• | operating results that vary from the expectations of our management or of securities analysts and investors; |
• | developments in our business or in the financial services sector generally; |
• | regulatory or legislative changes affecting our industry generally or our business and operations; |
• | operating and securities price performance of companies that investors consider to be comparable to us; |
• | changes in estimates or recommendations by securities analysts; |
• | announcements of strategic developments, acquisitions, dispositions, financings and other material events by us or our competitors; and |
• | changes in financial markets and national and local economies and general market conditions, such as interest rates and stock, commodity, credit or asset valuations or volatility. |
Beginning in 2007 and through the present, the business environment for financial services firms has been extremely challenging. During this period, many publicly traded financial services companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance or prospects of such companies. We may experience market fluctuations that are not directly related to our operating performance but are influenced by the market’s perception of the state of the financial services industry in general and, in particular, the market’s assessment of general credit quality conditions, including default and foreclosure rates in the industry.
While the U.S. and other governments continue efforts to restore confidence in financial markets and promote economic growth, we cannot assure you that further market and economic turmoil will not occur in the near- or long-term, negatively affecting our business, financial condition and results of operations, as well as the price, trading volume and volatility of our common stock.
25
Table of Contents
Additional expenses following the offering from new equity benefit plans will adversely affect our profitability.
Following the offering, we will recognize additional annual employee compensation expenses stemming from options and shares granted to employees, directors and executives under new benefit plans. Stock options and restricted stock may be granted under a new equity incentive plan adopted following the offering, if approved by shareholders. These additional expenses will adversely affect our profitability. We cannot determine the actual amount of these new stock-related compensation expenses at this time because applicable accounting practices generally require that these expenses be based on the fair market value of the options or shares of common stock at the date of the grant; however, they may be material. We recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients. Pro forma after tax benefits expenses for the year ended December 31, 2009 were $313,000 at the maximum of the offering range, as set forth in the pro forma financial information under“Pro Forma Data” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock, the number of shares awarded under the plans and the timing of the implementation of the plans. For further discussion of these plans, see“Our Management—Benefit Plans.”
Our stock price may decline when trading commences.
If you purchase shares in the offering, you might not be able to sell them later at or above the $10.00 purchase price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions.
Our return on equity will initially be low compared to other publicly traded financial institutions. A low return on equity may negatively impact the trading price of our common stock.
Net income divided by average equity, known as “return on equity,” is a ratio used by many investors to compare the performance of a financial institution with its peers. For the year ended December 31, 2009, our return on equity was 4.10%. Although we expect that our net income will increase following the offering, we expect that our return on equity will remain low as a result of the additional capital that we will raise in the offering. For example, our pro forma return on equity for the year ended December 31, 2009 is (2.29)%, assuming the sale of shares at the maximum of the offering range. In comparison, the peer group used by FinPro in its appraisal had an median return on equity of2.96% median for the 12 months ended June 30, 2010. Over time, we intend to use the net proceeds from the offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other similarly situated publicly held companies. This goal could take a number of years to achieve, and we might not attain it. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. See “Pro Forma Data” for an illustration of the financial impact of the offering.
We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.
We intend to contribute approximately 80% of the net proceeds of the offering to Naugatuck Valley Savings and Loan, a portion of which will be used to fund the cash portion of the merger consideration, and to use approximately6.5% of the net proceeds, at the midpoint of the offering, to fund the loan to the employee stock ownership plan. We may use the proceeds retained by the holding company to, among other things, invest in securities, pay cash dividends or repurchase shares of common stock, subject to regulatory restrictions. Naugatuck Valley Savings and Loan may use the portion of the proceeds that it receives to fund new loans, repay outstanding borrowings, invest in securities and expand its business activities. We may also use the proceeds of the offering to open new branches, diversify our business and acquire other companies, although we have no specific plans, other than our acquisition of Southern Connecticut Bancorp, to do so at this time. Other than as described in“Use of Proceeds,” we have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.
26
Table of Contents
Issuance of shares for benefit programs may dilute your ownership interest.
We intend to adopt a new equity incentive plan following the offering, subject to shareholder approval. We may fund the equity incentive plan through the purchase of common stock in the open market (subject to regulatory restrictions) or by issuing new shares of common stock. If we fund the awards under the equity incentive plan with new shares of common stock, your ownership interest would be diluted by approximately5.9%, assuming we award all of the shares and options available under the plan. We currently have outstanding options and shares available for future stock options under our 2005 Equity Incentive Plan. If we fund the awards under our existing plan with new shares of stock, your ownership interest would be diluted by approximately4.5%, assuming we award all of the shares and options available under the plan. See “Pro Forma Data” and“Our Management—Benefit Plans.”
The articles of incorporation and bylaws of new Naugatuck Valley Financial and certain laws and regulations may prevent or make more difficult certain transactions, including a sale or merger of new Naugatuck Valley Financial.
Provisions of the articles of incorporation and bylaws of new Naugatuck Valley Financial, state corporate law and federal banking regulations may make it more difficult for companies or persons to acquire control of new Naugatuck Valley Financial. As a result, our shareholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. The factors that may discourage takeover attempts or make them more difficult include:
• | Articles of incorporation and bylaws. Provisions of the articles of incorporation and bylaws of new Naugatuck Valley Financial may make it more difficult and expensive to pursue a takeover attempt that the board of directors opposes. Some of these provisions currently exist in the charter and bylaws of Naugatuck Valley Financial. These provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include: |
A limitation on voting rights.Our articles of incorporation provide that in no event will any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock, be entitled, or permitted to any vote in respect of the shares held in excess of the limit.
A classified board. Our board of directors is divided into three classes as nearly as equal in number as possible. The shareholders elect one class of directors each year for a term of three years. The classified board provision is designed to afford anti-takeover protection by making it more difficult and time consuming for a shareholder group to fully use its voting power to gain control of the board of directors at a single annual meeting of shareholders without the consent of the incumbent board of directors of new Naugatuck Valley Financial.
Advance notice provisions for shareholder nominations and proposals. Our bylaws establish an advance notice procedure for shareholders to nominate directors or bring other business before an annual meeting of shareholders. A person may not be nominated for election as a director unless that person is nominated by or at the direction of our board of directors or by a shareholder who has given appropriate notice to us before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given us appropriate notice of the shareholder’s intention to bring that business before the meeting. Advance notice of nominations or proposed business by shareholders gives our board of directors time to consider the qualifications of the proposed nominees, the merits of the proposals and, to the extent deemed necessary or desirable by our board of directors, to inform shareholders and make recommendations about those matters.
Director qualifications. Our bylaws provide for director qualifications, including age and integrity requirements, which may prevent shareholders from nominating themselves or persons of their choosing for election to the board of directors.
Limitations on calling special meetings of shareholders.Our shareholders must act only through an annual or special meeting. Special meetings of shareholders may only be called by the Chairman, the President, by two-thirds of the total number of directors or by the Secretary upon the written request of the holders of a majority of all the shares entitled to vote at a meeting. The limitations on the calling of special meetings of shareholders may have the effect of delaying consideration of a shareholder proposal until the next annual meeting.
Elimination of cumulative voting. Our articles of incorporation provide that no shares will be entitled to cumulative voting. The elimination of cumulative voting may afford anti-takeover protection by preventing a shareholder from electing nominees opposed by the board of directors of new Naugatuck Valley Financial.
27
Table of Contents
Limitations on filling of board vacancies and removal of directors. Our bylaws provide that any vacancy occurring in the board of directors, including a vacancy created by an increase in the number of directors, may be filled only by a vote of a majority of the directors then in office. A person elected to fill a vacancy on the board of directors will serve for the remainder of the full term of the class of directors in which the vacancy occurred and until his or her successor shall have been elected and qualified. Our bylaws provide that a director may be removed from the board of directors before the expiration of his or her term only for cause and only upon the vote of a majority of the shares entitled to vote in the election of directors. These provisions make it more difficult for shareholders to remove directors and replace them with their own nominees.
Supermajority voting requirement for the amendment of our articles of incorporation.Our articles of incorporation provide that certain amendments to our articles of incorporation relating to a change in control of us must be approved by at least 75% of the outstanding shares entitled to vote.
Supermajority voting requirement for the amendment of ourbylaws.Our articles of incorporation provide that our bylaws may not be adopted, repealed, altered, amended or rescinded by shareholders except by the affirmative vote of the holders of at least 75% of the voting stock.
Authorized but unissued shares of capital stock.Following the offering, we will have authorized but unissued shares of common and preferred stock. Our articles of incorporation authorize the board of directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, dividend rights, conversion and redemption rates, and liquidation preferences. Such shares of common and preferred stock could be issued by the board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
• | Maryland anti-takeover statute. Under Maryland law, any person who acquires more than 10% of a Maryland corporation without prior approval of its board of directors is prohibited from engaging in any type of business combination with the corporation for a five-year period. Any business combination after the five-year period would be subject to supermajority shareholder approval or minimum price requirements. |
• | Office of Thrift Supervision regulations. Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, including a second-step conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Office of Thrift Supervision. See “Restrictions on Acquisition of New Naugatuck Valley Financial.” |
28
Table of Contents
A Warning About Forward-Looking Statements
This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:
• | statements of our goals, intentions and expectations; |
• | statements regarding our business plans, prospects, growth and operating strategies; |
• | statements regarding the quality of our loan and investment portfolios; and |
• | estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
• | Naugatuck Valley Financial’s ability to integrate successfully the operations of Southern Connecticut Bancorp; |
• | general economic conditions, either nationally or in our market area, that are worse than expected; |
• | changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
• | increased competitive pressures among financial services companies; |
• | changes in consumer spending, borrowing and savings habits; |
• | legislative or regulatory changes that adversely affect our business; |
• | adverse changes in the securities markets; and |
• | changes in accounting policies and practices, as may be adopted by Naugatuck Valley Savings and Loan, regulatory agencies or the Financial Accounting Standards Board. |
Any of the forward-looking statements that we make in this prospectus and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.
Further information on other factors that could affect us are included in the section captioned“Risk Factors.”
29
Table of Contents
Selected Consolidated Financial and Other Data of
Naugatuck Valley Financial
The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1. The information at December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information presented below does not include the financial condition, results of operations or other data of Naugatuck Valley Mutual Holding Company. The information at June 30, 2010 and for the six months ended June 30, 2010 and 2009 was not audited, but in the opinion of management, reflects all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results of operations that may be expected for the entire year.
At June 30, 2010 | At December 31, | |||||||||||||||||
(In thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||
Total assets | $ | 565,249 | $ | 556,955 | $ | 535,386 | $ | 462,527 | $ | 413,855 | $ | 355,346 | ||||||
Securities held to maturity | 3,315 | 1,451 | — | 1,190 | 2,531 | 5,002 | ||||||||||||
Securities available for sale | 35,584 | 37,623 | 63,844 | 65,264 | 67,736 | 58,047 | ||||||||||||
Loans receivable, net | 482,481 | 473,304 | 431,976 | 359,831 | 308,376 | 259,427 | ||||||||||||
Cash and cash equivalents | 10,957 | 12,146 | 8,247 | 8,370 | 7,942 | 8,951 | ||||||||||||
Deposits | 394,286 | 380,931 | 363,026 | 321,398 | 289,198 | 240,846 | ||||||||||||
Borrowed funds | 112,538 | 118,984 | 119,148 | 85,107 | 68,488 | 57,059 | ||||||||||||
Total stockholders’ equity | 51,220 | 50,308 | 45,589 | 50,457 | 51,084 | 50,964 |
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Selected Operating Data: | ||||||||||||||||||||||
Interest and dividend income | $ | 14,329 | $ | 14,095 | $ | 28,291 | $ | 28,203 | $ | 25,030 | $ | 20,750 | $ | 15,908 | ||||||||
Interest expense | 5,187 | 6,681 | 12,537 | 13,904 | 13,174 | 9,350 | 4,941 | |||||||||||||||
Net interest income | 9,142 | 7,414 | 15,754 | 14,299 | 11,856 | 11,400 | 10,967 | |||||||||||||||
Provision for loan losses | 1,171 | 557 | 1,144 | 675 | 151 | 192 | 32 | |||||||||||||||
Net interest income after provision for loan losses | 7,971 | 6,857 | 14,610 | 13,624 | 11,705 | 11,208 | 10,935 | |||||||||||||||
Noninterest income (loss) | 1,230 | 1,353 | 2,742 | (1,048 | ) | 2,354 | 1,948 | 1,517 | ||||||||||||||
Noninterest expense | 7,773 | 7,396 | 14,541 | 13,454 | 12,422 | 11,504 | 10,097 | |||||||||||||||
Income (loss) before tax provision (benefit) | 1,428 | 814 | 2,811 | (878 | ) | 1,637 | 1,652 | 2,355 | ||||||||||||||
Income tax provision (benefit) | 435 | 206 | 818 | (566 | ) | 217 | 204 | 450 | ||||||||||||||
Net income (loss) | $ | 993 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | $ | 1,448 | $ | 1,905 | |||||||
Earnings (loss) per share, basic and diluted | $ | 0.15 | $ | 0.09 | $ | 0.29 | $ | (0.05 | ) | $ | 0.20 | $ | 0.20 | $ | 0.26 |
30
Table of Contents
At and For the Six Months Ended June 30, | At or For the Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Performance Ratios (1): | |||||||||||||||||||||
Return (loss) on average assets | 0.35 | % | 0.22 | % | 0.37 | % | (0.06 | )% | 0.33 | % | 0.38 | % | 0.62 | % | |||||||
Return (loss) on average equity | 3.86 | 2.56 | 4.10 | (0.64 | ) | 2.77 | 2.79 | 3.66 | |||||||||||||
Interest rate spread (2) | 3.39 | 2.81 | 3.00 | 2.88 | 2.76 | 3.07 | 3.68 | ||||||||||||||
Net interest margin (3) | 3.46 | 2.91 | 3.09 | 3.02 | 2.95 | 3.26 | 3.87 | ||||||||||||||
Noninterest expense to average assets | 2.76 | 2.73 | 2.68 | 2.66 | 2.86 | 3.03 | 3.27 | ||||||||||||||
Efficiency ratio (4) | 74.78 | 84.17 | 78.43 | 101.28 | 87.18 | 85.93 | 80.61 | ||||||||||||||
Dividend payout ratio (5) | 17.15 | 51.48 | 24.25 | N/M | 45.10 | 46.51 | 28.74 | ||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 103.61 | 103.77 | 103.77 | 104.46 | 105.65 | 107.18 | 111.20 | ||||||||||||||
Average equity to average assets | 9.14 | 8.77 | 8.97 | 9.71 | 11.80 | 13.65 | 16.87 | ||||||||||||||
Capital Ratios: | |||||||||||||||||||||
Total capital to risk-weighted assets | 11.25 | % | 11.11 | % | 11.10 | % | 11.09 | % | 12.88 | % | 14.29 | % | 17.88 | % | |||||||
Tier 1 capital to risk-weighted assets | 10.25 | 10.31 | 10.16 | 10.36 | 12.22 | 13.56 | 17.07 | ||||||||||||||
Tier 1 capital to adjusted total assets | 7.88 | 7.73 | 7.76 | 7.58 | 8.81 | 9.53 | 11.42 | ||||||||||||||
Total equity to total assets | 9.06 | 8.91 | 9.03 | 8.52 | 10.91 | 12.34 | 14.34 | ||||||||||||||
Asset Quality Ratios: | |||||||||||||||||||||
Allowance for loan losses as a percent of total loans | 1.05 | % | 0.72 | % | 0.84 | % | 0.66 | % | 0.60 | % | 0.67 | % | 0.72 | % | |||||||
Allowance for loan losses as a percent of nonperforming loans | 40.73 | 102.71 | 66.60 | 107.13 | 222.99 | 103.03 | 638.78 | ||||||||||||||
Net charge-offs (recoveries) to average loans outstanding during the period | (0.01 | ) | — | — | (0.01 | ) | 0.02 | — | 0.01 | ||||||||||||
Nonperforming loans as a percent of total loans | 2.58 | 0.70 | 1.26 | 0.62 | 0.27 | 0.65 | 0.11 | ||||||||||||||
Nonperforming assets as a percent of total assets | 2.25 | 0.65 | 1.10 | 0.50 | 0.21 | 0.49 | 0.10 | ||||||||||||||
Other Data: | |||||||||||||||||||||
Number of: | |||||||||||||||||||||
Deposit accounts | 30,928 | 30,938 | 30,712 | 30,721 | 29,489 | 27,385 | 25,592 | ||||||||||||||
Full service customer service facilities | 10 | 10 | 10 | 10 | 9 | 9 | 6 |
(1) | Performance ratios for the six-month periods have been annualized. |
(2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Represents net interest income as a percent of average interest-earning assets. |
(4) | Represents noninterest expense (less intangible amortization) divided by the sum of net interest income and noninterest income. |
(5) | Represents dividends declared (excluding waived dividends) divided by net income. Not meaningful for the 2008 period due to the net loss for the year. |
31
Table of Contents
Selected Consolidated Financial and Other Data of
Southern Connecticut Bancorp
The summary financial information presented below is derived in part from Southern Connecticut Bancorp’s consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes that appear in this document. The information at December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at June 30, 2010 and for the six months ended June 30, 2010 and 2009 was not audited, but in the opinion of management, reflects all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results of operations that may be expected for the entire year.
At June 30, 2010 | At December 31, | |||||||||||||||||
(In thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||
Total assets | $ | 160,138 | $ | 135,610 | $ | 114,917 | $ | 130,564 | $ | 124,263 | $ | 88,574 | ||||||
Securities available for sale | 3,408 | 2,220 | 5,130 | 5,266 | 8,055 | 9,973 | ||||||||||||
Loans receivable, net | 121,778 | 109,865 | 89,241 | 85,995 | 75,306 | 55,882 | ||||||||||||
Cash and cash equivalents | 20,018 | 2,542 | 5,267 | 3,891 | 5,821 | 967 | ||||||||||||
Short term investments | 9,576 | 15,383 | 8,638 | 29,456 | 28,989 | 15,603 | ||||||||||||
Deposits | 140,340 | 117,556 | 93,970 | 107,422 | 101,274 | 65,280 | ||||||||||||
Borrowed funds | 3,329 | 1,469 | 1,396 | 1,730 | 2,072 | 2,553 | ||||||||||||
Total shareholders’ equity | 15,683 | 15,632 | 18,541 | 20,084 | 20,332 | 20,297 |
At and For the Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||
Selected Operating Data: | ||||||||||||||||||||||||||
Interest and dividend income | $ | 3,666 | $ | 3,073 | $ | 6,426 | $ | 7,000 | $ | 9,143 | $ | 7,080 | $ | 5,179 | ||||||||||||
Interest expense | 973 | 1,075 | 2,173 | 2,240 | 3,378 | 2,223 | 1,152 | |||||||||||||||||||
Net interest income | 2,693 | 1,998 | 4,253 | 4,760 | 5,765 | 4,857 | 4,027 | |||||||||||||||||||
Provision for loan losses | 118 | 2,081 | 1,992 | 226 | 538 | 253 | 216 | |||||||||||||||||||
Net interest income (loss) after provision for loan losses | 2,575 | (83 | ) | 2,261 | 4,534 | 5,227 | 4,604 | 3,811 | ||||||||||||||||||
Noninterest income | 337 | 319 | 629 | 1,667 | 960 | 804 | 630 | |||||||||||||||||||
Noninterest expense | 2,877 | 2,801 | 5,797 | 6,067 | 6,761 | 5,526 | 4,719 | |||||||||||||||||||
Income (loss) before tax provision (benefit) | 35 | (2,565 | ) | (2,907 | ) | 134 | (574 | ) | (118 | ) | (278 | ) | ||||||||||||||
Income tax provision (benefit) | — | — | — | — | — | — | — | |||||||||||||||||||
Net income (loss) | $ | 35 | $ | (2,565 | ) | $ | (2,907 | ) | $ | 134 | $ | (574 | ) | $ | (118 | ) | $ | (278 | ) | |||||||
Earnings (loss) per share, basic and diluted | $ | 0.01 | $ | (0.95 | ) | $ | (1.08 | ) | $ | 0.05 | $ | (0.19 | ) | $ | (0.04 | ) | $ | (0.09 | ) |
32
Table of Contents
At and For the Six Months Ended June 30, | At or For the Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Performance Ratios (1): | |||||||||||||||||||||
Return (loss) on average assets | 0.05 | % | (4.26 | )% | (2.24 | )% | 0.12 | % | (0.45 | )% | (0.12 | )% | (0.33 | )% | |||||||
Return (loss) on average equity | 0.45 | (29.96 | ) | (17.50 | ) | 0.68 | (2.80 | ) | (0.58 | ) | (1.38 | ) | |||||||||
Interest rate spread (2) | 3.53 | 2.66 | 2.68 | 3.31 | 3.51 | 3.81 | 4.04 | ||||||||||||||
Net interest margin (3) | 4.11 | 3.53 | 3.45 | 4.46 | 4.89 | 5.27 | 5.02 | ||||||||||||||
Noninterest expense to average assets | 4.15 | 4.66 | 4.46 | 5.28 | 5.28 | 5.57 | 5.53 | ||||||||||||||
Efficiency ratio (4) | 94.95 | 120.89 | 118.74 | 94.40 | 100.54 | 97.62 | 101.33 | ||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 138.69 | 145.82 | 144.11 | 155.03 | 148.32 | 160.56 | 168.28 | ||||||||||||||
Average equity to average assets | 11.25 | 14.23 | 12.79 | 17.05 | 15.99 | 20.46 | 23.66 | ||||||||||||||
Capital Ratios: | |||||||||||||||||||||
Total capital to risk-weighted assets | 12.97 | % | 13.18 | % | 13.25 | % | 18.46 | % | 19.97 | % | 22.96 | % | 30.30 | % | |||||||
Tier 1 capital to risk-weighted assets | 11.71 | 11.92 | 11.99 | 17.13 | 18.80 | 21.80 | 29.17 | ||||||||||||||
Tier 1 capital to adjusted total assets | 10.89 | 12.28 | 11.24 | 15.64 | 15.08 | 17.56 | 24.17 | ||||||||||||||
Total equity to total assets | 9.79 | 11.63 | 11.53 | 16.13 | 15.38 | 16.36 | 22.92 | ||||||||||||||
Asset Quality Ratios: | |||||||||||||||||||||
Allowance for loan losses as a percent of total loans | 2.25 | % | 2.95 | % | 2.46 | % | 1.31 | % | 1.43 | % | 1.39 | % | 1.37 | % | |||||||
Allowance for loan losses as a percent of nonperforming loans | 39.41 | 46.42 | 47.36 | 93.44 | 100.08 | 351.99 | 134.37 | ||||||||||||||
Net charge-offs to average loans outstanding during the period | 0.07 | 0.45 | 0.42 | 0.36 | 0.41 | 0.05 | 0.35 | ||||||||||||||
Nonperforming loans as a percent of total loans | 5.70 | 6.34 | 5.19 | 1.40 | 1.43 | 0.39 | 1.02 | ||||||||||||||
Nonperforming assets as a percent of total assets | 4.44 | 4.48 | 4.31 | 1.10 | 0.96 | 0.24 | 0.65 | ||||||||||||||
Other Data: | |||||||||||||||||||||
Number of: | |||||||||||||||||||||
Deposit accounts | 3,597 | 3,530 | 3,727 | 3,647 | 3,657 | 3,181 | 2,063 | ||||||||||||||
Full service customer service facilities (5) | 4 | 4 | 4 | 4 | 5 | 5 | 4 |
(1) | Performance ratios for the six-month periods have been annualized. |
(2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Represents net interest income as a percent of average interest-earning assets. |
(4) | Represents noninterest expense (less intangible amortization) divided by the sum of net interest income and noninterest income. |
(5) | New London branch sold February 29, 2008. |
33
Table of Contents
Condensed Consolidated Financial Data
The following table shows selected financial information on a pro forma condensed consolidated basis giving effect to the merger with Southern Connecticut Bancorp and the stock offering assuming the offering is completed at the minimum, as adjusted, of the offering range based on the assumptions set forth in“Pro Forma Data.” The pro forma unaudited consolidated financial statements give effect to the merger with Southern Connecticut Bancorp as if this transaction had become effective at the end of the period presented, in the case of balance sheet information, and at the beginning of the period presented, in the case of income statement information.
We anticipate that the merger with Southern Connecticut Bancorp will provide the combined company with financial benefits that include, on a combined basis, operating expenses that would be less than the institutions operating independently and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies and financial institutions been combined as of the date and during the period presented.
You should read this summary pro forma information in conjunction with the information under “Pro Forma Data.”
(In thousands) | At June 30, 2010 | At December 31, 2009 | ||||
Pro Forma Combined Financial Condition Data: | ||||||
Total assets | $ | 737,694 | $ | 704,727 | ||
Cash and cash equivalents | 35,281 | 16,205 | ||||
Investments securities; available for sale | 39,091 | 40,190 | ||||
Investments securities; held to maturity | 3,315 | 1,451 | ||||
Loans receivable, net | 604,225 | 583,135 | ||||
Goodwill and intangible assets | 3,212 | 3,543 | ||||
Deposits | 535,857 | 499,718 | ||||
Borrowings | 114,695 | 119,278 | ||||
Stockholder equity | 75,716 | 74,608 |
(In thousands) | Six Months Ended June 30, 2010 | Twelve Months Ended December 31, 2009 | ||||||
Pro Forma Combined Operating Data: | ||||||||
Interest income | $ | 17,655 | $ | 34,038 | ||||
Interest expense | 5,936 | 14,262 | ||||||
Net interest income | 11,719 | 19,776 | ||||||
Provision for loan losses | 1,289 | 3,136 | ||||||
Net interest income after provision for loan losses | 10,430 | 16,640 | ||||||
Noninterest income | 1,567 | 3,371 | ||||||
Noninterest expense | 12,406 | 22,954 | ||||||
Loss before taxes | (409 | ) | (2,943 | ) | ||||
Income tax benefit | (188 | ) | (1,047 | ) | ||||
Net loss | $ | (221 | ) | $ | (1,896 | ) | ||
34
Table of Contents
The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Naugatuck Valley Savings and Loan will reduce Naugatuck Valley Savings and Loan’s deposits and will not result in the receipt of new funds for investment. See“Pro Forma Data” for the assumptions used to arrive at these amounts.
Adjusted Minimum of Offering Range (1) | Minimum of Offering Range | Midpoint of Offering Range | Maximum of Offering Range | 15% Above Maximum of Offering Range | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2,034,050 Shares at $10.00 per Share | Percent of Net Proceeds | 2,034,050 Shares at $10.00 per Share | Percent of Net Proceeds | 2,393,000 Shares at $10.00 per Share | Percent of Net Proceeds | 2,751,950 Shares at $10.00 per Share | Percent of Net Proceeds | 3,164,743 Shares at $10.00 per Share | Percent of Net Proceeds | |||||||||||||||||||||||||
Gross offering proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | |||||||||||||||||||||||||
Less: offering expenses | (1,724 | ) | (1,831 | ) | (1,949 | ) | (2,067 | ) | (2,203 | ) | |||||||||||||||||||||||||
Net offering proceeds | 18,617 | 18,510 | 21,981 | 25,453 | 29,444 | ||||||||||||||||||||||||||||||
Merger shares used to complete the offering (1) | (3,052 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Net cash proceeds | 15,565 | 100.00 | % | 18,510 | 100.00 | % | 21,981 | 100.00 | % | 25,453 | 100.00 | % | 29,444 | 100.00 | % | ||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||||||||
Proceeds contributed to Naugatuck Valley Savings and Loan (2) | (5,170 | ) | (33.22 | )% | (7,526 | ) | (40.66 | )% | (10,303 | ) | (46.87 | )% | (13,081 | ) | (51.39 | )% | (16,274 | ) | (55.27 | )% | |||||||||||||||
Proceeds used for loan to employee stock ownership plan | (1,220 | ) | (7.84 | )% | (1,220 | ) | (6.59 | )% | (1,436 | ) | (6.53 | )% | (1,651 | ) | (6.49 | )% | (1,899 | ) | (6.45 | )% | |||||||||||||||
Cash portion of merger consideration | (7,282 | ) | (46.78 | )% | (7,282 | ) | (39.34 | )% | (7,282 | ) | (33.13 | )% | (7,282 | ) | (28.61 | )% | (7,282 | ) | (24.73 | )% | |||||||||||||||
Proceeds remaining for Naugatuck Valley Financial (3) | $ | 1,893 | 12.16 | % | $ | 2,482 | 13.41 | % | $ | 2,960 | 13.47 | % | $ | 3,439 | 13.51 | % | $ | 3,989 | 13.55 | % |
(1) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
(2) | We intend to contribute 80.0% of the net cash proceeds to Naugatuck Valley Savings and Loan, of which $7.3 million will be used to fund the cash portion of the merger consideration. |
(3) | Does not include $26,930 of assets to be received from Naugatuck Valley Mutual Holding Company. |
We initially intend to invest the proceeds retained from the offering at new Naugatuck Valley Financial in short-term investments, such as U.S. treasury and government agency securities, mortgage-backed securities and cash and cash equivalents. The actual amounts to be invested in different instruments will depend on the interest rate environment and new Naugatuck Valley Financial’s liquidity requirements. In the future, new Naugatuck Valley Financial may liquidate its investments and use those funds:
• | to pay dividends to shareholders; |
• | to repurchase shares of its common stock, subject to regulatory restrictions; |
• | to finance the possible acquisition of financial institutions or other businesses that are related to banking; and |
• | for general corporate purposes, including contributing additional capital to Naugatuck Valley Savings and Loan. |
Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following completion of the conversion and offering, except to fund equity benefit plans other than stock options or, with prior regulatory approval, when extraordinary circumstances exist. For a discussion of our dividend policy and regulatory matters relating to the payment of dividends, see “Our Dividend Policy.”
35
Table of Contents
Naugatuck Valley Savings and Loan initially intends to invest the proceeds it receives from the offering, which is shown in the table above as the amount contributed to Naugatuck Valley Savings and Loan, in short-term investments. Over time, Naugatuck Valley Savings and Loan may use the proceeds that it receives from the offering:
• | to fund new loans; |
• | to invest in securities; |
• | to finance the possible expansion of its business activities; and |
• | for general corporate purposes. |
We may need regulatory approvals to engage in some of the activities listed above.
We currently anticipate that the proceeds of the offering contributed to Naugatuck Valley Savings and Loan will be used to fund new loans. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand. During the six months ended June 30, 2010, we originated $60.2 million of loans and had a net increase in the loan portfolio of $9.8 million. If loan originations continue at this level, we will be able to deploy the proceeds of the offering in a relatively short period of time.
Except as described above, we currently do not have any specific plans for any expansion or diversification activities that would require funds from this offering. Except as described above, we have no specific plans for the investment of the proceeds of the offering and have not allocated a specific portion of the proceeds to any particular use. For a discussion of our business reasons for undertaking the offering, see“The Conversion and Offering—Reasons for the Conversion and Offering.”
36
Table of Contents
Naugatuck Valley Financial has paid quarterly cash dividends since the first quarter of 2005. For the quarter ended June 30, 2010, the quarterly cash dividend was $0.03 per share, which equals $0.12 per share on an annualized basis. We intend to continue to pay quarterly cash dividends after we complete the conversion and offering and the merger with Southern Connecticut Bancorp. We currently expect that the level of quarterly cash dividends per share after the conversion and offering and the merger to be $0.03 per share, or $0.12 per share on an annualized basis, at all levels of the offering range. This represents an annual dividend yield of 1.2% at all levels of the offering range based on a stock price of $10.00 per share. However, the dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced or eliminated in the future.
New Naugatuck Valley Financial is subject to Maryland law, which generally permits a corporation to pay dividends on its common stock unless, after giving effect to the dividend, the corporation would be unable to pay its debts as they become due in the usual course of its business or the total assets of the corporation would be less than its total liabilities. Pursuant to Office of Thrift Supervision regulations, new Naugatuck Valley Financial may not make a distribution that would constitute a return of capital during the three years following the completion of the conversion and offering.
New Naugatuck Valley Financial’s ability to pay dividends may depend, in part, upon its receipt of dividends from Naugatuck Valley Savings and Loan. Any payment of dividends by Naugatuck Valley Savings and Loan to new Naugatuck Valley Financial that would be deemed to be drawn out of Naugatuck Valley Savings and Loan’s bad debt reserves would require the payment of federal income taxes by Naugatuck Valley Savings and Loan at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation—Federal Income Taxation” and note 12 of the notes to consolidated financial statements included elsewhere in this prospectus. New Naugatuck Valley Financial does not contemplate any distribution by Naugatuck Valley Savings and Loan that would result in this type of tax liability.
In addition, pursuant to the plan of conversion, neither new Naugatuck Valley Financial nor Naugatuck Valley Savings and Loan may declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect of such action would cause its equity to be reduced below (i) the amount required for the liquidation account established in connection with the conversion or (ii) the regulatory capital requirements of Naugatuck Valley Financial (to the extent applicable) or Naugatuck Valley Savings and Loan.
37
Table of Contents
The common stock of Naugatuck Valley Financial is currently listed on the Nasdaq Global Market under the symbol “NVSL.” Upon completion of the conversion and offering, the shares of common stock of new Naugatuck Valley Financial will replace Naugatuck Valley Financial’s common stock. We expect that new Naugatuck Valley Financial’s shares of common stock will trade on the Nasdaq Global Market under the trading symbol “NVSLD” for a period of 20 trading days after completion of the offering. Thereafter, our trading symbol will revert to “NVSL.” To list our common stock on the Nasdaq Global Market we are required to have at least three broker-dealers who will make a market in our common stock. Naugatuck Valley Financial currently has approximately 25 registered market makers.
The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should recognize that there are risks involved in their investment and that there may be a limited trading market in the common stock.
The following table sets forth high and low sales prices for Naugatuck Valley Financial’s common stock and the cash dividends per share declared for the periods indicated. Naugatuck Valley Financial did not pay any dividends during these periods.
High | Low | Dividends | |||||||
Year Ending December 31, 2010: | |||||||||
Fourth Quarter (through , 2010) | $ | $ | $ | ||||||
Third Quarter | |||||||||
Second Quarter | 7.10 | 5.51 | 0.03 | ||||||
First Quarter | 7.00 | 5.28 | 0.03 | ||||||
Year Ended December 31, 2009: | |||||||||
Fourth Quarter | $ | 7.42 | $ | 4.14 | $ | 0.03 | |||
Third Quarter | 6.30 | 4.11 | 0.03 | ||||||
Second Quarter | 7.24 | 5.10 | 0.03 | ||||||
First Quarter | 7.71 | 4.37 | 0.05 | ||||||
Year Ended December 31, 2008: | |||||||||
Fourth Quarter | $ | 8.25 | $ | 5.08 | $ | 0.06 | |||
Third Quarter | 10.00 | 7.75 | 0.06 | ||||||
Second Quarter | 9.69 | 7.75 | 0.06 | ||||||
First Quarter | 9.95 | 8.51 | 0.06 |
At February 22, 2010, the business day immediately preceding the public announcement of the conversion and offering and the merger with Southern Connecticut Bancorp, and at , 2010, the date of this prospectus, the closing prices of Naugatuck Valley Financial common stock were $5.80 per share and $ per share, respectively. At , 2010, Naugatuck Valley Financial had approximately shareholders of record, not including those who hold shares in “street name.” On the effective date of the conversion, all publicly held shares of Naugatuck Valley Financial common stock, including shares held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of new Naugatuck Valley Financial common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio.” The above table reflects actual prices and has not been adjusted to reflect the exchange ratio. Options to purchase shares of Naugatuck Valley Financial common stock will be converted into options to purchase a number of shares of new Naugatuck Valley Financial common stock adjusted pursuant to the exchange ratio, for the same aggregate exercise price.
38
Table of Contents
The following table presents the historical capitalization of Naugatuck Valley Financial and Southern Connecticut Bancorp at June 30, 2010 and the capitalization of new Naugatuck Valley Financial reflecting the offering and the merger with Southern Connecticut Bancorp (referred to as “pro forma” information). The table depicts adjustments to capitalization resulting from the merger with Southern Connecticut Bancorp and then depicts new Naugatuck Valley Financial’s capitalization following the merger and the offering. The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares as a result of the exercise of options granted under the 2005 Equity Incentive Plan or the proposed new equity incentive plan.A change in the number of shares to be issued in the offering may materially affect pro forma capitalization.We must sell a minimum of2,034,050 shares to complete the offering (which may include up to305,107unsubscribed shares issued to Southern Connecticut Bancorp stockholders as merger consideration.
Pro Forma Capitalization Based Upon Sale at $10.00 Per Share | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Naugatuck Valley Financial Historical | Southern Connecticut Historical | Merger Adjustments (1) | 2,034,050 Shares (Minimum, as adjusted, of Offering Range) (2) | 2,034,050 Shares (Minimum of Offering Range) | 2,393,000 Shares (Midpoint of Offering Range) | 2,751,950 Shares (Maximum of Offering Range) | 3,164,743 Shares (15% above Maximum of Offering Range) | ||||||||||||||||||||||||
Deposits (3) | $ | 394,286 | $ | 140,340 | $ | 1,231 | $ | 535,857 | $ | 535,857 | $ | 535,857 | $ | 535,857 | $ | 535,857 | ||||||||||||||||
Borrowings | 112,538 | 2,157 | — | 114,695 | 114,695 | 114,695 | 114,695 | 114,695 | ||||||||||||||||||||||||
Total deposits and borrowings | $ | 506,824 | $ | 142,497 | $ | 1,231 | $ | 650,552 | $ | 650,552 | $ | 650,552 | $ | 650,552 | $ | 650,552 | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||||||||||
Preferred stock | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Common stock (4) | 76 | 27 | (16 | ) | 42 | 45 | 51 | 57 | 64 | |||||||||||||||||||||||
Additional paid-in capital | 33,872 | 22,564 | (11,653 | ) | 60,393 | 63,335 | 66,800 | 70,266 | 74,250 | |||||||||||||||||||||||
Retained earnings (5) | 25,685 | (6,908 | ) | 6,720 | 25,497 | 25,497 | 25,497 | 25,497 | 25,497 | |||||||||||||||||||||||
Mutual holding company capital | — | — | — | 27 | 27 | 27 | 27 | 27 | ||||||||||||||||||||||||
Accumulated other comprehensive gain (loss) | 5 | — | — | 5 | 5 | 5 | 5 | 5 | ||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||
Treasury stock | (6,134 | ) | — | — | (6,134 | ) | (6,134 | ) | (6,134 | ) | (6,134 | ) | (6,134 | ) | ||||||||||||||||||
Common stock acquired by existing employee stock ownership plan | (1,937 | ) | — | — | (1,937 | ) | (1,937 | ) | (1,937 | ) | (1,937 | ) | (1,937 | ) | ||||||||||||||||||
Common stock acquired by existing equity incentive plan | (347 | ) | — | — | (347 | ) | (347 | ) | (347 | ) | (347 | ) | (347 | ) | ||||||||||||||||||
Common stock to be acquired by employee stock ownership plan (6) | — | — | — | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | |||||||||||||||||||
Common stock to be acquired by equity incentive plan (7) | — | — | — | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | |||||||||||||||||||
Total stockholders’ equity | $ | 51,220 | $ | 15,683 | $ | (4,949 | ) | $ | 75,716 | $ | 78,661 | $ | 81,808 | $ | 84,957 | $ | 88,577 | |||||||||||||||
Equity to assets | 9.06 | % | 9.79 | % | 10.26 | % | 10.62 | % | 11.00 | % | 11.37 | % | 11.80 | % |
(1) | Reflects the merger adjustments resulting from the acquisition of Southern Connecticut Bancorp, including acquisition accounting adjustments applied to deposits and borrowings to reflect fair value adjustments, the issuance of common stock by new Naugatuck Valley Financial as merger consideration, and the effect of one-time restructuring expenses that have been or will be charged to expense. See also“Pro Forma Data – June 30, 2010 Pro Forma Balance Sheet – Minimum of Offering Range.” |
(2) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
39
Table of Contents
(3) | Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits by the amounts of the withdrawals. |
(4) | Reflects total issued and outstanding shares of 4,202,501, 4,507,608, 5,110,320, 5,713,031 and 6,406,149 at the minimum, as adjusted, minimum, midpoint, maximum, and 15% above the maximum of the offering range, respectively. |
(5) | Retained earnings are restricted by applicable regulatory capital requirements. |
(6) | Assumes that 6.0% of the common stock sold in the offering will be acquired by the employee stock ownership plan with funds borrowed from new Naugatuck Valley Financial. Under U.S. generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and, accordingly, is reflected as a reduction of capital. As shares are released to plan participants’ accounts, a compensation expense will be charged, along with related tax benefit, and a reduction in the charge against capital will occur. Since the funds are borrowed from new Naugatuck Valley Financial, the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the financial statements of new Naugatuck Valley Financial. See “Our Management—Benefit Plans—Employee Stock Ownership Plan.” |
(7) | Assumes the purchase in the open market at $10.00 per share, for restricted stock awards under the proposed equity incentive plan, of a number of shares equal to 3.0% of the shares of common stock sold in the offering. The shares are reflected as a reduction of stockholders’ equity. The equity incentive plan will be submitted to shareholders for approval at a meeting following the offering. See “Risk Factors—Issuance of shares for benefit programs may dilute your ownership interest,” “Pro Forma Data” and “Our Management—Benefit Plans—Future Equity Incentive Plan.” |
40
Table of Contents
At June 30, 2010, Naugatuck Valley Savings and Loan exceeded all regulatory capital requirements. The following table presents Naugatuck Valley Savings and Loan’s capital position relative to its regulatory capital requirements at June 30, 2010, on a historical and a pro forma basis assuming completion of the merger with Southern Connecticut Bancorp and the offering. The table reflects receipt by Naugatuck Valley Savings and Loan of 80% of the net proceeds of the offering after funding the expenses and cash costs of the merger. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan has been deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of Thrift Supervision. For a discussion of the capital standards applicable to Naugatuck Valley Savings and Loan, see“Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”
Pro Forma (giving effect to merger and offering) at June 30, 2010 (1)(6) | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Naugatuck Valley Savings and Loan Historical at June 30, 2010 | Minimum, As Adjusted, of Offering Range 2,034,050 Shares at $10.00 per share (2) | Minimum of Offering Range 2,034,050 Shares at $10.00 per share | Midpoint of Offering Range 2,393,000 Shares at $10.00 per share | Maximum of Offering Range 2,751,950 Shares at $10.00 per share | Maximum, As Adjusted, of Offering Range 3,164,743 Shares at $10.00 per share | ||||||||||||||||||||||||||||||
GAAP capital | $ | 44,405 | 7.89 | % | $ | 64,636 | 8.84 | % | $ | 66,992 | 9.13 | % | $ | 69,445 | 9.43 | % | $ | 71,900 | 9.73 | % | $ | 74,722 | 10.08 | % | ||||||||||||
Tangible capital: | ||||||||||||||||||||||||||||||||||||
Actual (3)(4) | $ | 44,335 | 7.88 | % | $ | 59,531 | 8.39 | % | $ | 61,887 | 8.69 | % | $ | 64,340 | 9.00 | % | $ | 66,795 | 9.31 | % | $ | 69,617 | 9.67 | % | ||||||||||||
Requirement | 8,441 | 1.50 | 10,648 | 1.50 | 10,683 | 1.50 | 10,720 | 1.50 | 10,757 | 1.50 | 10,799 | 1.50 | ||||||||||||||||||||||||
Excess | $ | 35,894 | 6.38 | % | $ | 48,883 | 6.89 | % | $ | 51,204 | 7.19 | % | $ | 53,620 | 7.50 | % | $ | 56,038 | 7.81 | % | $ | 58,818 | 8.17 | % | ||||||||||||
Core Capital: | ||||||||||||||||||||||||||||||||||||
Actual (3)(4) | $ | 44,352 | 7.88 | % | $ | 59,548 | 8.39 | % | $ | 61,904 | 8.69 | % | $ | 64,357 | 9.01 | % | $ | 66,812 | 9.32 | % | $ | 69,634 | 9.67 | % | ||||||||||||
Requirement | 22,509 | 4.00 | 28,394 | 4.00 | 28,488 | 4.00 | 28,586 | 4.00 | 28,685 | 4.00 | 28,797 | 4.00 | ||||||||||||||||||||||||
Excess | $ | 21,843 | 3.88 | % | $ | 31,154 | 4.39 | % | $ | 33,416 | 4.69 | % | $ | 35,771 | 5.01 | % | $ | 38,127 | 5.32 | % | $ | 40,837 | 5.67 | % | ||||||||||||
Tier 1 risk-based capital: | ||||||||||||||||||||||||||||||||||||
Actual (5) | $ | 44,352 | 10.24 | % | $ | 59,548 | 10.39 | % | $ | 61,904 | 10.79 | % | $ | 64,357 | 11.21 | % | $ | 66,812 | 11.62 | % | $ | 69,634 | 12.10 | % | ||||||||||||
Requirement | 17,331 | 4.00 | 22,935 | 4.00 | 22,954 | 4.00 | 22,974 | 4.00 | 22,993 | 4.00 | 23,016 | 4.00 | ||||||||||||||||||||||||
Excess | $ | 27,021 | 6.24 | % | $ | 36,613 | 6.39 | % | $ | 38,950 | 6.79 | % | $ | 41,383 | 7.21 | % | $ | 43,819 | 7.62 | % | $ | 46,618 | 8.10 | % | ||||||||||||
Total risk-based capital: | ||||||||||||||||||||||||||||||||||||
Actual (5) | $ | 48,748 | 11.25 | % | $ | 63,944 | 11.15 | % | $ | 66,300 | 11.55 | % | $ | 68,753 | 11.97 | % | $ | 71,208 | 12.39 | % | $ | 74,030 | 12.87 | % | ||||||||||||
Requirement | 34,663 | 8.00 | 45,871 | 8.00 | 45,908 | 8.00 | 45,947 | 8.00 | 45,987 | 8.00 | 46,032 | 8.00 | ||||||||||||||||||||||||
Excess | $ | 14,085 | 3.25 | % | $ | 18,073 | 3.15 | % | $ | 20,392 | 3.55 | % | $ | 22,806 | 3.97 | % | $ | 25,221 | 4.39 | % | $ | 27,998 | 4.87 | % |
(1) | Reflects the issuance of 1,092,245 shares in the merger with Southern Connecticut Bancorp. |
(2) | If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement. |
(3) | Tangible and core capital levels are shown as a percentage of average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. |
(4) | Goodwill and certain other intangible assets and accumulated losses (gains) on certain securities and cash flow hedges account for the difference between capital calculated under generally accepted accounting principles and each of tangible and core capital. |
(5) | Pro forma amounts and percentages include capital contributed to Naugatuck Valley Savings and Loan from the offering and assume net proceeds are invested in assets that carry a 20% risk-weighting. |
41
Table of Contents
(6) | Reconciliation of capital adjustment for Naugatuck Valley Savings and Loan: |
(Dollars in thousands) | Minimum, as Adjusted, of Offering Range | Minimum of Offering Range | Midpoint of Offering Range | Maximum of Offering Range | Maximum, as Adjusted, of Offering Range | |||||||||||||||
Gross offering proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | ||||||||||
Less: Offering expenses | (1,724 | ) | (1,831 | ) | (1,949 | ) | (2,067 | ) | (2,203 | ) | ||||||||||
Less: Cost of merger shares used | (3,052 | ) | — | — | — | — | ||||||||||||||
Less: Cash retained by holding company | (3,113 | ) | (3,702 | ) | (4,396 | ) | (5,090 | ) | (5,888 | ) | ||||||||||
Net cash infused into bank | 12,452 | 14,808 | 17,585 | 20,363 | 23,556 | |||||||||||||||
Less: employee stock ownership plan | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | ||||||||||
Less: equity incentive plan | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | ||||||||||
Net increase in capital from offering | 10,622 | 12,978 | 15,431 | 17,886 | 20,708 | |||||||||||||||
Net increase in capital from merger (a) | 9,609 | 9,609 | 9,609 | 9,609 | 9,609 | |||||||||||||||
Increase in GAAP capital | 20,231 | 22,587 | 25,040 | 27,495 | 30,317 | |||||||||||||||
Less: increase in disallowed intangible assets (b) | (5,035 | ) | (5,035 | ) | (5,035 | ) | (5,035 | ) | (5,035 | ) | ||||||||||
Increase in Tier I capital | 15,196 | 17,552 | 20,005 | 22,460 | 25,282 | |||||||||||||||
Plus: increase in allowable Tier 2 capital | — | — | — | — | — | |||||||||||||||
Increase in risk-based capital | $ | 15,196 | $ | 17,552 | $ | 20,005 | $ | 22,460 | $ | 25,282 |
(a) | Includes The Bank of Southern Connecticut equity and other accounting entries related to the application of acquisition accounting. |
(b) | Adjustment to intangible assets includes $919,000 of goodwill and $2.2 million of core deposit intangibles created as a result of the acquisition of Southern Connecticut Bancorp. |
42
Table of Contents
The following tables and related footnotes are included in this“Pro Forma Data” section:
The following pro forma unaudited condensed consolidated statements of financial condition and the pro forma unaudited consolidated statements of income give effect to the proposed offering and the merger with Southern Connecticut Bancorp, based on the assumptions set forth below. As a result, the pro forma data assumes the completion of the offering and the merger with Southern Connecticut Bancorp. The condensed pro forma unaudited consolidated financial statements are based, in part, on the audited consolidated financial statements of Naugatuck Valley Financial and Southern Connecticut Bancorp for the year ended December 31, 2009 and the unaudited consolidated financial statements of Naugatuck Valley Financial and Southern Connecticut Bancorp for the six months ended June 30, 2010. The pro forma unaudited condensed consolidated financial statements give effect to the offering at historical cost and the merger using acquisition accounting as required by accounting principles generally accepted in the United States of America.
The pro forma adjustments in the tables assume the issuance of2,034,050 shares, which is the minimum of the offering range, and3,164,743 shares, which is the maximum of the offering range, as adjusted, in the offering and the merger with Southern Connecticut Bancorp. Southern Connecticut Bancorp stockholders will receive in the merger $6.75 in cash, 0.675 shares of new Naugatuck Valley Financial common stock for each share of Southern Connecticut Bancorp stock, or a combination thereof with the aggregate amount of common stock being issued in the merger equal to 60% of the merger consideration based on the terms of the merger agreement. The remainder of the merger consideration will consist of cash. For a more detailed discussion of how many shares will be issued in connection with the conversion and the offering and the merger, see the analysis set forth below.The purchase price for purposes of the pro forma presentation for Southern Connecticut Bancorp was calculated as follows:
(In thousands) | June 30, 2010 | December 31, 2009 | ||||||
Net assets acquired | $ | 15,683 | $ | 15,632 | ||||
Acquisition accounting adjustments: | ||||||||
Estimated non tax deductible merger costs (1) | (6 | ) | (272 | ) | ||||
Estimated tax deductible merger costs (1) | (1,164 | ) | (1,164 | ) | ||||
Net loan adjustment (2) | (34 | ) | (34 | ) | ||||
Fixed assets | (100 | ) | (100 | ) | ||||
Deposit adjustment (2) | (1,231 | ) | (1,231 | ) | ||||
Core deposit intangible (3) | 2,223 | 2,223 | ||||||
Other liability adjustment | (865 | ) | (865 | ) | ||||
Tax impact acquisition accounting adjustments: | ||||||||
Increase in deferred tax asset | 4,177 | 4,177 | ||||||
Increase in deferred tax liability | (1,398 | ) | (1,398 | ) | ||||
Goodwill (4) | 919 | 1,236 | ||||||
Purchase price | $ | 18,204 | $ | 18,204 |
43
Table of Contents
(1) | The non-tax deductible merger costs and the tax deductible merger costs have been or will be incurred prior to consummation of the merger. |
(2) | Loans and deposit adjustments reflect the market value adjustment assigned to each class of these items. For loans receivable, the acquisition accounting adjustments were calculated as the present value difference between the yields of acquired loans and market rates for similar loans as of June 30, 2010, plus a one-time credit adjustment of $1.9 million for loans. For deposits, the acquisition accounting adjustments were calculated as the present value difference between the interest costs of the acquired liabilities and market interest costs for liabilities with comparable maturities as of June 30, 2010. Acquisition accounting adjustments are amortized using the estimated lives of the respective assets and liabilities. |
(3) | Core deposit intangible, which equals 1.58% of the present value of acquired core deposits, was calculated to be $2.2 million. Core deposit intangible reflects the present value benefit to Naugatuck Valley Financial of utilizing the acquired core deposits as a funding source relative to wholesale funding costs based on the rates of Federal Home Loan Bank advances. The core deposit intangible is calculated using deposit balances and interest rates as of June 30, 2010. Costs of the acquired core deposits include interest costs, plus estimated operating expenses, less estimated noninterest income to be derived from the core deposits. Acquired core deposits are projected to decay based on assumptions promulgated by the Office of Thrift Supervision. The yield benefit for each period is discounted to present value using a weighted average cost of capital. The core deposit intangible resulting from the acquisition of Southern Connecticut Bancorp will be fully amortized over an estimated life of 10 years. The estimated life is based upon the specific composition and characteristics of the deposit base acquired from Southern Connecticut Bancorp. The core deposit intangible will be amortized using the double declining balance methodology, an accelerated amortization methodology that approximates the recognition of value from the acquired deposits, and will be reviewed annually for impairment. |
(4) | Including the increase in goodwill resulting from the Southern Connecticut Bancorp acquisition, Naugatuck Valley Financial will report a pro forma balance of goodwill of $919,000 at June 30, 2010. Goodwill will not be amortized but will be tested annually for impairment. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. In the event of impairment, an impairment loss would be recognized in an amount equal to that excess. |
Net proceeds indicated in the following tables are based upon the following assumptions:
• | 50% of the shares of common stock will be sold in the subscription and community offerings and 50% of the shares will be sold in a syndicated community offering; |
• | Our employee stock ownership plan will purchase a number of shares equal to 6.0% of the shares sold in the offering with a loan from new Naugatuck Valley Financial that will be repaid in equal installments over 20 years; |
• | Stifel, Nicolaus & Company, Incorporated will receive an aggregate management fee equal to 1.0% of the aggregate purchase price of the shares sold in the subscription and community offerings, except that no fee will be paid with respect to shares purchased by the employee stock ownership plan or by our officers, directors and employees or members of their immediate families; |
• | The sales commission and management fee for shares sold in the syndicated community offering will be equal to 6.0% of the aggregate purchase price of the shares sold in the syndicated community offering; and |
• | Total expenses of the offering, excluding sales commissions and management fees referenced above, will be approximately $960,000. |
Actual expenses may vary from this estimate, and the amount of fees paid will depend upon the number of shares sold in the subscription and community offerings, as opposed to the syndicated community offering.
The unaudited condensed consolidated pro forma balance sheets assume the offering and merger were consummated on June 30, 2010 and December 31, 2009.
The stockholders’ equity represents the resulting book value of the common stockholders’ ownership of new Naugatuck Valley Financial and Southern Connecticut Bancorp computed in accordance with accounting principles generally accepted in the United States of America. Pro forma stockholders’ equity and book value are not intended to represent the fair market value of the common stock and, due to the existence of the tax bad debt reserve, intangible assets and the liquidation account, may be different than amounts that would be available for distribution to stockholders in the event of liquidation.
44
Table of Contents
The pro forma unaudited statements are provided for informational purposes only. The pro forma financial information presented is not necessarily indicative of the actual results that would have been achieved had the offering and merger with Southern Connecticut Bancorp been consummated on June 30, 2010 or December 31, 2009, and is not indicative of future results. The pro forma unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto of Naugatuck Valley Financial and Southern Connecticut Bancorp contained elsewhere in this document.
Pro forma net earnings has been calculated for the six months ended June 30, 2010 and for the year ended December 31, 2009 as if the offering and the merger with Southern Connecticut Bancorp were completed at the beginning of the period. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of new Naugatuck Valley Financial common stock.
The unaudited pro forma net earnings and common stockholders’ equity derived from the above assumptions are qualified by the statements set forth under this caption and should not be considered indicative of the market value of new Naugatuck Valley Financial common stock or the actual results of operations of new Naugatuck Valley Financial and Southern Connecticut Bancorp for any period. Such pro forma data may be materially affected by the actual gross proceeds from the sale of shares of Naugatuck Valley Financial in the offering and the actual expenses incurred in connection with the offering and the merger with Southern Connecticut Bancorp.
Pro forma merger adjustments to net income include entries to reflect the estimated fair value adjustments on financial assets and liabilities and the amortization of identifiable intangible assets created in the merger with Southern Connecticut Bancorp. Excluded from the calculation of pro forma net income are any adjustments to reflect the estimated interest income to be earned on the net proceeds of the offering, the estimated interest income to be foregone on the cash required to fund the merger with Southern Connecticut Bancorp and related expenses, and other estimated expense reductions from consolidating the operations of Southern Connecticut Bancorp with those of Naugatuck Valley Financial. Such entries will be recorded as incurred, are non-recurring and are thus not reflected in the calculations of pro forma income. See “Use of Proceeds.”
45
Table of Contents
June 30, 2010 Pro Forma Balance Sheet—Minimum, as Adjusted, of Offering Range.The following table presents pro forma balance sheet information at June 30, 2010 at the minimum, as adjusted, of the offering range assuming the issuance of 1,728,943 shares in the offering, the issuance of 1,381,313 shares to be exchanged for existing shares of Naugatuck Valley Financial and the issuance of 1,092,245 shares to stockholders of Southern Connecticut Bancorp in the merger. If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 shares and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Minimum, as Adjusted, Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 10,141 | $ | 13,762 | (3) | $ | 23,903 | $ | 20,018 | $ | (8,640 | )(9) | $ | 35,281 | ||||||||||
Investments in federal funds | 816 | — | 816 | 9,576 | — | 10,392 | ||||||||||||||||||
Investments, available for sale | 35,584 | — | 35,584 | 3,507 | — | 39,091 | ||||||||||||||||||
Investments, held-to-maturity | 3,315 | — | 3,315 | — | — | 3,315 | ||||||||||||||||||
Loans held for sale | 561 | — | 561 | — | — | 561 | ||||||||||||||||||
Loans receivable, net | 482,481 | — | 482,481 | 121,778 | (34 | )(10) | 604,225 | |||||||||||||||||
Premises and equipment, net | 9,842 | — | 9,842 | 2,350 | (100 | )(11) | 12,092 | |||||||||||||||||
FHLB Stock, at cost | 6,252 | — | 6,252 | 66 | — | 6,318 | ||||||||||||||||||
Goodwill | — | — | — | — | 919 | (12) | 919 | |||||||||||||||||
Core deposit intangible | — | — | — | — | 2,223 | (13) | 2,223 | |||||||||||||||||
Other intangible assets | 70 | — | 70 | — | — | 70 | ||||||||||||||||||
Bank owned life insurance | 9,088 | — | 9,088 | 858 | — | 9,946 | ||||||||||||||||||
Other assets | 7,099 | — | 7,099 | 1,985 | 4,177 | (14) | 13,261 | |||||||||||||||||
Total assets | $ | 565,249 | $ | 13,762 | $ | 579,011 | $ | 160,138 | $ | (1,455 | ) | $ | 737,694 | |||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | $ | 394,286 | $ | — | $ | 394,286 | $ | 140,340 | $ | 1,231 | (15) | $ | 535,857 | |||||||||||
Borrowings | 112,538 | — | (4) | 112,538 | 2,157 | — | 114,695 | |||||||||||||||||
Other liabilities | 7,205 | — | 7,205 | 1,958 | 2,263 | (16) | 11,426 | |||||||||||||||||
Total liabilities | $ | 514,029 | $ | — | $ | 514,029 | $ | 144,455 | $ | 3,494 | $ | 661,978 | ||||||||||||
Common Stock | 76 | (45 | )(5) | 31 | 27 | (16 | )(17) | 42 | ||||||||||||||||
Addition paid in capital | 33,872 | 15,637 | (6) | 49,509 | 22,564 | (11,653 | )(18) | 60,420 | ||||||||||||||||
Retained earnings | 25,685 | — | 25,685 | (6,908 | ) | 6,720 | (19) | 25,497 | ||||||||||||||||
Accumulated other comprehensive (loss) income | 5 | — | 5 | — | — | (20) | 5 | |||||||||||||||||
Treasury stock | (6,134 | ) | — | (6,134 | ) | — | — | (6,134 | ) | |||||||||||||||
Unearned ESOP shares | (1,937 | ) | (1,220 | )(7) | (3,157 | ) | — | — | (3,157 | ) | ||||||||||||||
Unearned stock awards | (347 | ) | (610 | )(8) | (957 | ) | — | — | (957 | ) | ||||||||||||||
Total equity | $ | 51,220 | $ | 13,762 | $ | 64,982 | $ | 15,683 | $ | (4,949 | ) | $ | 75,716 | |||||||||||
Total liabilities and equity | $ | 565,249 | $ | 13,762 | $ | 579,011 | $ | 160,138 | $ | (1,455 | ) | $ | 737,694 | |||||||||||
(See footnotes to table beginning on page )
46
Table of Contents
June 30, 2010 Pro Forma Balance Sheet—Maximum, as Adjusted, of Offering Range.The following table presents pro forma balance sheet information at June 30, 2010 at the adjusted maximum of the offering range assuming the issues of 3,164,743 shares in the offering, the issuance of 2,149,161 shares to be exchanged for existing shares of Naugatuck Valley Financial and the issuance of 1,092,245 shares to stockholders of Southern Connecticut Bancorp in the merger.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Maximum, as Adjusted, Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 10,141 | $ | 26,623 | (3) | $ | 36,764 | $ | 20,018 | $ | (8,640 | )(9) | $ | 48,142 | ||||||||||
Investments in federal funds | 816 | — | 816 | 9,576 | — | 10,392 | ||||||||||||||||||
Investments, available for sale | 35,584 | — | 35,584 | 3,507 | — | 39,091 | ||||||||||||||||||
Investments, held-to-maturity | 3,315 | — | 3,315 | — | — | 3,315 | ||||||||||||||||||
Loans held for sale | 561 | — | 561 | — | — | 561 | ||||||||||||||||||
Loans receivable, net | 482,481 | — | 482,481 | 121,778 | (34 | )(10) | 604,225 | |||||||||||||||||
Premises and equipment, net | 9,842 | — | 9,842 | 2,350 | (100 | )(11) | 12,092 | |||||||||||||||||
FHLB Stock, at cost | 6,252 | — | 6,252 | 66 | — | 6,318 | ||||||||||||||||||
Goodwill | — | — | — | — | 919 | (12) | 919 | |||||||||||||||||
Core deposit intangible | — | — | — | — | 2,223 | (13) | 2,223 | |||||||||||||||||
Other intangible assets | 70 | — | 70 | — | — | 70 | ||||||||||||||||||
Bank owned life insurance | 9,088 | — | 9,088 | 858 | — | 9,946 | ||||||||||||||||||
Other assets | 7,099 | — | 7,099 | 1,985 | 4,177 | (14) | 13,261 | |||||||||||||||||
Total assets | $ | 565,249 | $ | 26,623 | $ | 591,872 | $ | 160,138 | $ | (1,455 | ) | $ | 750,555 | |||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | $ | 394,286 | $ | — | $ | 394,286 | $ | 140,340 | $ | 1,231 | (15) | $ | 535,857 | |||||||||||
Borrowings | 112,538 | — | (4) | 112,538 | 2,157 | — | 114,695 | |||||||||||||||||
Other liabilities | 7,205 | — | 7,205 | 1,958 | 2,263 | (16) | 11,426 | |||||||||||||||||
Total liabilities | $ | 514,029 | $ | — | $ | 514,029 | $ | 144,455 | $ | 3,494 | $ | 661,978 | ||||||||||||
Common Stock | 76 | (23 | )(5) | 53 | 27 | (16 | )(17) | 64 | ||||||||||||||||
Addition paid in capital | 33,872 | 29,494 | (6) | 63,366 | 22,564 | (11,653 | )(18) | 74,277 | ||||||||||||||||
Retained earnings | 25,685 | — | 25,685 | (6,908 | ) | 6,720 | (19) | 25,497 | ||||||||||||||||
Accumulated other comprehensive (loss) income | 5 | — | 5 | — | — | (20) | 5 | |||||||||||||||||
Treasury stock | (6,134 | ) | — | (6,134 | ) | — | — | (6,134 | ) | |||||||||||||||
Unearned ESOP shares | (1,937 | ) | (1,899 | )(7) | (3,836 | ) | — | — | (3,836 | ) | ||||||||||||||
Unearned stock awards | (347 | ) | (949 | )(8) | (1,296 | ) | — | — | (1,296 | ) | ||||||||||||||
Total Equity | $ | 51,220 | $ | 26,623 | $ | 77,843 | $ | 15,683 | $ | (4,949 | ) | $ | 88,577 | |||||||||||
Total Liabilities and Equity | $ | 565,249 | $ | 26,623 | $ | 591,872 | $ | 160,138 | $ | (1,455 | ) | $ | 750,555 | |||||||||||
(See footnotes to table beginning on page )
47
Table of Contents
December 31, 2009 Pro Forma Balance Sheet—Minimum, as Adjusted, of Offering Range.The following table presents pro forma balance sheet information at December 31, 2009 at the minimum, as adjusted, of the offering range assuming the issuance of1,728,943 shares in the offering, the issuance of 1,381,313 shares to be exchanged for existing shares of Naugatuck Valley Financial and the issuance of 1,092,245 shares to stockholders of Southern Connecticut Bancorp in the merger. If we do not receive orders for at least2,034,050shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 shares and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Minimum, as Adjusted, Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 9,003 | $ | 13,762 | (3) | $ | 22,765 | $ | 2,542 | $ | (9,102 | )(9) | $ | 16,205 | ||||||||||
Investments in federal funds | 3,143 | — | 3,143 | 15,383 | — | 18,526 | ||||||||||||||||||
Investments, available for sale | 37,623 | — | 37,623 | 2,567 | — | 40,190 | ||||||||||||||||||
Investments, held-to-maturity | 1,451 | — | 1,451 | — | — | 1,451 | ||||||||||||||||||
Loans held for sale | — | — | — | — | — | — | ||||||||||||||||||
Loans receivable, net | 473,304 | — | 473,304 | 109,865 | (34 | )(10) | 583,135 | |||||||||||||||||
Premises and equipment, net | 9,948 | — | 9,948 | 2,486 | (100 | )(11) | 12,334 | |||||||||||||||||
FHLB Stock, at cost | 6,252 | — | 6,252 | 66 | — | 6,318 | ||||||||||||||||||
Goodwill | — | — | — | — | 1,236 | (12) | 1,236 | |||||||||||||||||
Core deposit intangible | — | — | — | — | 2,223 | (13) | 2,223 | |||||||||||||||||
Other intangible assets | 84 | — | 84 | — | — | 84 | ||||||||||||||||||
Bank owned life insurance | 8,920 | — | 8,920 | 838 | — | 9,758 | ||||||||||||||||||
Other assets | 7,227 | — | 7,227 | 1,863 | 4,177 | (14) | 13,267 | |||||||||||||||||
Total assets | $ | 556,955 | $ | 13,762 | $ | 570,717 | $ | 135,610 | $ | (1,600 | ) | $ | 704,727 | |||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | $ | 380,931 | $ | — | $ | 380,931 | $ | 117,556 | $ | 1,231 | (15) | $ | 499,718 | |||||||||||
Borrowings | 118,984 | — | (4) | 118,984 | 294 | — | 119,278 | |||||||||||||||||
Other liabilities | 6,732 | — | 6,732 | 2,128 | 2,263 | (16) | 11,123 | |||||||||||||||||
Total liabilities | $ | 506,647 | $ | — | $ | 506,647 | $ | 119,978 | $ | 3,494 | $ | 630,119 | ||||||||||||
Common Stock | 76 | (45 | )(5) | 31 | 27 | (16 | )(17) | 42 | ||||||||||||||||
Addition paid in capital | 33,756 | 15,637 | (6) | 49,393 | 22,560 | (11,649 | )(18) | 60,304 | ||||||||||||||||
Retained earnings | 24,849 | — | 24,849 | (6,943 | ) | 6,559 | (19) | 24,465 | ||||||||||||||||
Accumulated other comprehensive (loss) income | 51 | — | 51 | (12 | ) | 12 | (20) | 51 | ||||||||||||||||
Treasury stock | (6,132 | ) | — | (6,132 | ) | — | — | (6,132 | ) | |||||||||||||||
Unearned ESOP shares | (1,937 | ) | (1,220 | )(7) | (3,157 | ) | — | — | (3,157 | ) | ||||||||||||||
Unearned stock awards | (355 | ) | (610 | )(8) | (965 | ) | — | — | (965 | ) | ||||||||||||||
Total Equity | $ | 50,308 | $ | 13,762 | $ | 64,070 | $ | 15,632 | $ | (5,094 | ) | $ | 74,608 | |||||||||||
Total Liabilities and Equity | $ | 556,955 | $ | 13,762 | $ | 570,717 | $ | 135,610 | $ | (1,600 | ) | $ | 704,727 | |||||||||||
(See footnotes to table beginning on page )
48
Table of Contents
December 31, 2009 Pro Forma Balance Sheet—Maximum, as Adjusted, of Offering Range.The following table presents pro forma balance sheet information at December 31, 2009 at the adjusted maximum of the offering range assuming the issues of3,164,743 shares in the offering, the issuance of 2,149,161 shares to be exchanged for existing shares of Naugatuck Valley Financial and the issuance of 1,092,245 shares to stockholders of Southern Connecticut Bancorp in the merger.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Maximum, as Adjusted Offering Adjustments (1) | Naugatuck Valley Financial Pro-Forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 9,003 | $ | 26,623 | (3) | $ | 35,626 | $ | 2,542 | $ | (9,102 | )(9) | $ | 29,066 | ||||||||||
Investments in federal funds | 3,143 | — | 3,143 | 15,383 | — | 18,526 | ||||||||||||||||||
Investments, available for sale | 37,623 | — | 37,623 | 2,567 | — | 40,190 | ||||||||||||||||||
Investments, held-to-maturity | 1,451 | — | 1,451 | — | — | 1,451 | ||||||||||||||||||
Loans held for sale | — | — | — | — | — | — | ||||||||||||||||||
Loans receivable, net | 473,304 | — | 473,304 | 109,865 | (34 | )(10) | 583,135 | |||||||||||||||||
Premises and equipment, net | 9,948 | — | 9,948 | 2,486 | (100 | )(11) | 12,334 | |||||||||||||||||
FHLB Stock, at cost | 6,252 | — | 6,252 | 66 | — | 6,318 | ||||||||||||||||||
Goodwill | — | — | — | — | 1,236 | (12) | 1,236 | |||||||||||||||||
Core deposit intangible | — | — | — | — | 2,223 | (13) | 2,223 | |||||||||||||||||
Other intangible assets | 84 | — | 84 | — | — | 84 | ||||||||||||||||||
Bank owned life insurance | 8,920 | — | 8,920 | 838 | — | 9,758 | ||||||||||||||||||
Other assets | 7,227 | — | 7,227 | 1,863 | 4,177 | (14) | 13,267 | |||||||||||||||||
Total assets | $ | 556,955 | $ | 26,623 | $ | 583,578 | $ | 135,610 | $ | (1,600 | ) | $ | 717,588 | |||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | $ | 380,931 | $ | — | $ | 380,931 | $ | 117,556 | $ | 1,231 | (15) | $ | 499,718 | |||||||||||
Borrowings | 118,984 | — | (4) | 118,984 | 294 | — | 119,278 | |||||||||||||||||
Other liabilities | 6,732 | — | 6,732 | 2,128 | 2,263 | (16) | 11,123 | |||||||||||||||||
Total liabilities | $ | 506,647 | $ | — | $ | 506,647 | $ | 119,978 | $ | 3,494 | $ | 630,119 | ||||||||||||
Common Stock | 76 | (23 | )(5) | 53 | 27 | (16 | )(17) | 64 | ||||||||||||||||
Addition paid in capital | 33,756 | 29,494 | (6) | 63,250 | 22,560 | (11,649 | )(18) | 74,161 | ||||||||||||||||
Retained Earnings | 24,849 | — | 24,849 | (6,943 | ) | 6,559 | (19) | 24,465 | ||||||||||||||||
Accumulated other comprehensive (loss) income | 51 | — | 51 | (12 | ) | 12 | (20) | 51 | ||||||||||||||||
Treasury stock | (6,132 | ) | — | (6,132 | ) | — | — | (6,132 | ) | |||||||||||||||
Unearned ESOP shares | (1,937 | ) | (1,899 | )(7) | (3,836 | ) | — | — | (3,836 | ) | ||||||||||||||
Unearned stock awards | (355 | ) | (949 | )(8) | (1,304 | ) | — | — | (1,304 | ) | ||||||||||||||
Total equity | $ | 50,308 | $ | 26,623 | $ | 76,931 | $ | 15,632 | $ | (5,094 | ) | $ | 87,469 | |||||||||||
Total liabilities and equity | $ | 556,955 | $ | 26,623 | $ | 583,578 | $ | 135,610 | $ | (1,600 | ) | $ | 717,588 | |||||||||||
(1) | Shows the effect of the offering of new Naugatuck Valley Financial, assuming net cash proceeds of $15.6 million and $29.4 million at the minimum, as adjusted, of the offering range and the maximum, as adjusted, of the offering range, respectively, and establishment of an employee stock ownership plan and an equity incentive plan that will acquire 6.0% and 3.0% of the shares issued in the offering, respectively. The employee stock ownership plan will purchase its shares in the offering and possibly open market purchases. The equity incentive plan will purchase shares in the open market. Open market share purchases by the employee stock ownership plan and equity incentive plan are assumed to occur at $10.00 per share. |
(2) | Reflects the acquisition accounting and acquisition adjustments related to the acquisition of Southern Connecticut Bancorp for a price of $6.75 per share in cash and common stock issued in the offering. |
49
Table of Contents
(3) | Pro forma adjustment to cash and cash equivalents calculated as follows: |
(in thousands) | Minimum, as Adjusted, of Offering Range | Maximum, as Adjusted, of Offering Range | ||||||
Gross proceeds | $ | 20,341 | $ | 31,647 | ||||
Less: estimated expenses | (1,724 | ) | (2,203 | ) | ||||
Less: merger shares used to complete the offering | (3,052 | ) | — | |||||
Less: employee stock ownership plan | (1,220 | ) | (1,899 | ) | ||||
Less: equity incentive plan | (610 | ) | (949 | ) | ||||
Assets from MHC | 27 | 27 | ||||||
Net investable proceeds | $ | 13,762 | $ | 26,623 |
(4) | The employee stock ownership plan loan is assumed to be funded internally with a loan from Naugatuck Valley Financial, thus no borrowing liability will be recorded on the consolidated balance sheet of Naugatuck Valley Financial. |
(5) | Par value $0.01 per share. |
(6) | Pro forma adjustment to additional paid-in capital calculated as follows: |
(in thousands) | Minimum, as Adjusted, of Offering Range | Maximum, as Adjusted, of Offering Range | ||||||
Net cash proceeds of offering | $ | 15,592 | $ | 29,471 | ||||
Less: par value | (45 | ) | (23 | ) | ||||
Pro-forma adjustment | $ | 15,637 | $ | 29,494 |
(7) | Contra-equity account established to reflect the obligation to repay the loan to the employee stock ownership plan. |
(8) | Contra-equity account established to reflect the equity incentive plan. |
(9) | Includes the cash portion of the merger consideration paid to Southern Connecticut Bancorp, non-tax deductible transaction costs, tax deductible acquisition costs, and one time non-restructuring expenses. |
(in thousands) | At June 30, 2010 | At December 31, 2009 | ||||
Cash portion of merger consideration | $ | 7,282 | $ | 7,282 | ||
Non-tax deductible expenses | 6 | 272 | ||||
Tax deductible expenses | 1,164 | 1,164 | ||||
One time non-restructuring expense | 188 | 384 | ||||
Total cash adjustment | $ | 8,640 | $ | 9,102 |
(10) | The yield adjustment reflects the present value difference between portfolio yields and market rates as of December 31, 2009 for loans acquired in the merger. For variable rate loans that reprice frequently and with no significant change in credit risk, fair value is the carrying value. For other categories of loans such as fixed rate residential mortgages, commercial and consumer loans, fair value is estimated based on discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar collateral and credit ratings and for similar remaining maturities. Yield adjustments are accreted into income over the lives of the related loans. Southern Connecticut Bancorp has loan balances aggregating $124.6 million and $112.6 million and related allowances of $2.8 million at both June 30, 2010 and December 31, 2009; generally accepted accounting standards prohibit the carryover of such allowances. The pro forma merger adjustments thus reflect elimination of the valuation allowance and an adjustment to the carrying value of the related loans of $1.9 million at both June 30, 2010 and December 31, 2009, which represents estimated losses based on a detailed review by Naugatuck Valley Financial of Southern Connecticut Bancorp’s non-performing and classified loans, as well as estimated losses inherent in the portfolio. |
(11) | Estimated market value of fixed assets acquired in the merger with Southern Connecticut Bancorp. |
50
Table of Contents
(12) | Goodwill is an intangible asset that is not subject to amortization. The goodwill balance will be tested annually for impairment. Goodwill is calculated as follows: |
(Dollars in thousands, except per share data) | At June 30, 2010 | At December 31, 2009 | ||||||
Purchase price per share | $ | 6.75 | $ | 6.75 | ||||
Number of shares acquired | 2,697 | 2,697 | ||||||
Purchase price | $ | 18,204 | $ | 18,204 | ||||
Less acquired shareholders equity | (15,683 | ) | (15,632 | ) | ||||
Estimated non tax deductible merger costs | 6 | 272 | ||||||
Estimated tax deductible merger costs | 1,164 | 1,164 | ||||||
Net loan adjustment | 34 | 34 | ||||||
Market value adjustment for fixed assets | 100 | 100 | ||||||
Yield adjustment for deposits | 1,231 | 1,231 | ||||||
Core deposit intangible | (2,223 | ) | (2,223 | ) | ||||
Other liability adjustment | 865 | 865 | ||||||
Tax impact acquisition accounting adjustments: | ||||||||
Change in deferred tax asset | (4,177 | ) | (4,177 | ) | ||||
Increase in deferred tax liability | 1,398 | 1,398 | ||||||
Goodwill | $ | 919 | $ | 1,236 |
(13) | Core deposit intangible, which equals1.58% of the present value of acquired core deposits, is an identifiable intangible asset representing the economic value of the acquired Southern Connecticut Bancorp core deposit base, calculated as the present value benefit of funding operations with the acquired core deposits versus using an alternative wholesale funding source. The core deposit intangible resulting from the acquisition of Southern Connecticut Bancorp will be fully amortized over an estimated life of 10 years. The estimated life is based upon the specific composition and characteristics of the deposit base acquired from Southern Connecticut Bancorp. The core deposit intangible will be amortized using the double declining balance methodology, an accelerated amortization methodology that approximates the timing of recognition of value from the acquired deposits. |
(14) | Deferred tax asset created as a result of acquisition accounting (see footnote 12) and as a result of one time restructuring expenses (see footnote 19). |
(15) | Yield adjustment to reflect the present value difference between portfolio yields and market rates as of June 30, 2010 and December 31, 2009, respectively, for time deposits acquired in the merger. The yield adjustment is estimated using present value analysis and the yield adjustment is accreted into income over the lives of the related time deposits. |
(16) | Reflects adjustments for other liability adjustments of$865,000 and deferred tax liability of $1.4 million. |
(17) | Pro forma adjustment to common stock is calculated as follows: |
(In thousands) | At June 30, 2010 | At December 31, 2009 | ||||||
Eliminate existing Southern Connecticut Bancorp common stock | $ | (27 | ) | $ | (27 | ) | ||
Par value of common stock issued in acquisition at $0.01 per share | 11 | 11 | ||||||
Adjustment to common stock | (16 | ) | (16 | ) |
(18) | Pro forma adjustment to paid in capital is calculated as follows: |
(In thousands) | At June 30, 2010 | At December 31, 2009 | ||||||
Eliminate existing Southern Connecticut Bancorp paid-in capital | $ | (22,564 | ) | $ | (22,560 | ) | ||
Stock issued to Southern Connecticut Bancorp stockholders in the merger | 10,922 | 10,922 | ||||||
Less par value of common stock issued in merger | (11 | ) | (11 | ) | ||||
Adjustment to paid-in capital | (11,653 | ) | (11,649 | ) |
51
Table of Contents
(19) | The pro forma adjustment to retained earnings is calculated as follows. The one time non-restructuring expenses are non-recurring and were thus not considered in the pro forma income statements. |
(In thousands) | At June 30, 2010 | At December 31, 2009 | ||||||
Eliminate existing Southern Connecticut Bancorp retained earnings | $ | (6,908 | ) | $ | (6,943 | ) | ||
One time non-restructuring expenses | 188 | 384 | ||||||
Adjustment to retained earnings | (6,720 | ) | (6,559 | ) |
(20) | Pro forma adjustment to eliminate capital accounts of Southern Connecticut Bancorp pursuant to acquisition accounting. |
June 30, 2010 Pro Forma Income Statement—Minimum, as Adjusted, of Offering Range.The following table presents pro forma income statement information for the six months ended June 30, 2010 for Naugatuck Valley Financial and Southern Connecticut Bancorp, at the minimum, as adjusted, of the offering range, including1,728,943 shares sold in the offering, 1,381,313 shares to be exchanged for existing shares of Naugatuck Valley Financial and 1,092,245 shares issued to stockholders of Southern Connecticut Bancorp in the merger. If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 shares and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Minimum, as Adjusted, Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | |||||||||||||||
Interest income and dividend income | $ | 14,329 | $ | 82 | $ | 14,411 | $ | 3,666 | $ | (422 | )(4) | $ | 17,655 | ||||||||
Interest expense | 5,187 | — | 5,187 | 973 | (224 | )(5) | 5,936 | ||||||||||||||
Net interest income | 9,142 | 82 | 9,224 | 2,693 | (198 | ) | 11,719 | ||||||||||||||
Provision for loan losses | 1,171 | — | 1,171 | 118 | — | 1,289 | |||||||||||||||
Net interest income after provision for loan losses | 7,971 | 82 | 8,053 | 2,575 | (198 | ) | 10,430 | ||||||||||||||
Noninterest income | 1,230 | — | 1,230 | 337 | — | 1,567 | |||||||||||||||
Noninterest expense | 7,773 | 147 | (3) | 7,920 | 2,877 | 1,580 | (6) | 1,237 | |||||||||||||
Income (loss) before income taxes | 1,428 | (65 | ) | 1,363 | 35 | (1,778 | ) | (380 | ) | ||||||||||||
Income tax provision (benefit) | 435 | (3 | ) | 432 | — | (591 | )(7) | (159 | ) | ||||||||||||
Net income (loss) | $ | 993 | $ | (62 | ) | $ | 931 | $ | 35 | $ | (1,187 | ) | $ | (221 | ) | ||||||
Basic earnings (loss) per share | $ | 0.15 | $ | 0.02 | $ | 0.32 | $ | 0.01 | $ | (0.06 | ) | ||||||||||
Diluted earnings (loss) per share | $ | 0.15 | $ | 0.02 | $ | 0.32 | $ | 0.01 | $ | (0.06 | ) |
(See footnotes to table beginning on page )
52
Table of Contents
June 30, 2010 Pro Forma Income Statement—Maximum, as Adjusted, of Offering Range.The following table presents pro forma income statement information for the six months ended June 30, 2010 for Naugatuck Valley Financial and Southern Connecticut Bancorp, at the maximum, as adjusted, of the offering range, including 3,164,743 shares sold in the offering, 2,149,161 shares to be exchanged for existing shares of Naugatuck Valley Financial and 1,092,245 shares issued to stockholders of Southern Connecticut Bancorp in the merger.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Super Maximum Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | |||||||||||||||
Interest income and dividend income | $ | 14,329 | $ | 159 | $ | 14,488 | $ | 3,666 | $ | (422 | )(4) | $ | 17,732 | ||||||||
Interest expense | 5,187 | — | 5,187 | 973 | (224 | )(5) | 5,936 | ||||||||||||||
Net interest income | 9,142 | 159 | 9,301 | 2,693 | (198 | ) | 11,796 | ||||||||||||||
Provision for loan losses | 1,171 | — | 1,171 | 118 | — | 1,289 | |||||||||||||||
Net interest income after provision for loan losses | 7,971 | 159 | 8,130 | 2,575 | (198 | ) | 10,507 | ||||||||||||||
Noninterest income | 1,230 | — | 1,230 | 337 | — | 1,567 | |||||||||||||||
Noninterest expense | 7,773 | 228 | (3) | 8,001 | 2,877 | 1,580 | (6) | 12,458 | |||||||||||||
Income (loss) before income taxes | 1,428 | (69 | ) | 1,359 | 35 | (1,778 | )(7) | (384 | ) | ||||||||||||
Income tax provision (benefit) | 435 | 6 | 441 | — | (591 | ) | (150 | ) | |||||||||||||
Net income (loss) | $ | 993 | $ | (75 | ) | $ | 918 | $ | 35 | $ | (1,187 | ) | $ | (234 | ) | ||||||
Basic earnings (loss) per share | $ | 0.15 | $ | 0.04 | $ | 0.18 | $ | 0.01 | $ | (0.04 | ) | ||||||||||
Diluted earnings (loss) per share | $ | 0.15 | $ | 0.04 | $ | 0.18 | $ | 0.01 | $ | (0.04 | ) |
(See footnotes to table beginning on page )
December 31, 2009 Pro Forma Income Statement—Minimum, as Adjusted, of Offering Range.The following table presents pro forma income statement information for the year ended December 31, 2009 for Naugatuck Valley Financial and Southern Connecticut Bancorp, at the minimum, as adjusted, of the offering range, including 1,728,943 shares sold in the offering, 1,381,313 shares to be exchanged for existing shares of Naugatuck Valley Financial and 1,092,245 shares issued to stockholders of Southern Connecticut Bancorp in the merger. If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 shares and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Minimum, as Adjusted, Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||
Interest income and dividend income | $ | 28,291 | $ | 165 | $ | 28,456 | $ | 6,426 | $ | (844 | )(4) | $ | 34,038 | |||||||||
Interest expense | 12,537 | — | 12,537 | 2,173 | (448 | )(5) | 14,262 | |||||||||||||||
Net interest income | 15,754 | 165 | 15,919 | 4,253 | (396 | ) | 19,776 | |||||||||||||||
Provision for loan losses | 1,144 | — | 1,144 | 1,992 | — | 3,136 | ||||||||||||||||
Net interest income after provision for loan losses | 14,610 | 165 | 14,775 | 2,261 | (396 | ) | 16,640 | |||||||||||||||
Noninterest income | 2,742 | — | 2,742 | 629 | — | 3,371 | ||||||||||||||||
Noninterest expense | 14,541 | 294 | (3) | 14,835 | 5,797 | 2,264 | (6) | 22,896 | ||||||||||||||
Income (loss) before income taxes | 2,811 | (129 | ) | 2,682 | (2,907 | ) | (2,660 | ) | (2,885 | ) | ||||||||||||
Income tax provision (benefit) | 818 | (7 | ) | 811 | — | (1,800 | )(7) | (989 | ) | |||||||||||||
Net income (loss) | $ | 1,993 | $ | (122 | ) | $ | 1,871 | $ | (2,907 | ) | $ | (860 | ) | $ | (1,896 | ) | ||||||
Basic earnings (loss) per share | $ | 0.29 | $ | 0.03 | $ | 0.65 | $ | (1.08 | ) | $ | (0.48 | ) | ||||||||||
Diluted earnings (loss) per share | $ | 0.29 | $ | 0.03 | $ | 0.65 | $ | (1.08 | ) | $ | (0.48 | ) |
(See footnotes to table beginning on page )
53
Table of Contents
December 31, 2009 Pro Forma Income Statement – Maximum, as Adjusted, of Offering Range.The following table presents pro forma income statement information for the year ended December 31, 2009 for Naugatuck Valley Financial and Southern Connecticut Bancorp, at the maximum, as adjusted, of the offering range, including3,164,743 shares sold in the offering, 2,149,161 shares to be exchanged for existing shares of Naugatuck Valley Financial and 1,092,245 shares issued to stockholders of Southern Connecticut Bancorp in the merger.
(Dollars in thousands) | Naugatuck Valley Financial Historical | Super Maximum Offering Adjustments (1) | Naugatuck Valley Financial Pro-forma Converted | Southern Connecticut Bancorp Historical | Merger Adjustments (2) | Naugatuck Valley Financial Pro-forma Consolidated | ||||||||||||||||
Interest income and dividend income | $ | 28,291 | $ | 318 | $ | 28,609 | $ | 6,426 | $ | (844 | )(4) | $ | 34,191 | |||||||||
Interest expense | 12,537 | — | 12,537 | 2,173 | (448 | )(5) | 14,262 | |||||||||||||||
Net interest income | 15,754 | 318 | 16,072 | 4,253 | (396 | ) | 19,929 | |||||||||||||||
Provision for loan losses | 1,144 | — | 1,144 | 1,992 | — | 3,136 | ||||||||||||||||
Net interest income after provision for loan losses | 14,610 | 318 | 14,928 | 2,261 | (396 | ) | 16,793 | |||||||||||||||
Noninterest income | 2,742 | — | 2,742 | 629 | — | 3,371 | ||||||||||||||||
Noninterest expense | 14,541 | 458 | (3) | 14,999 | 5,797 | 2,264 | (6) | 23,060 | ||||||||||||||
Income (loss) before income taxes | 2,811 | (140 | ) | 2,671 | (2,907 | ) | (2,660 | ) | (2,896 | ) | ||||||||||||
Income tax provision (benefit) | 818 | 11 | 829 | — | (1,800 | )(7) | (971 | ) | ||||||||||||||
Net income (loss) | $ | 1,993 | $ | (151 | ) | $ | 1,842 | $ | (2,907 | ) | $ | (860 | ) | $ | (1,925 | ) | ||||||
Basic earnings (loss) per share | $ | 0.29 | $ | 0.08 | $ | 0.37 | $ | (1.08 | ) | $ | (0.32 | ) | ||||||||||
Diluted earnings (loss) per share | $ | 0.29 | $ | 0.08 | $ | 0.37 | $ | (1.08 | ) | $ | (0.32 | ) |
(1) | Shows the effect of the offering of Naugatuck Valley Financial assuming net cash proceeds of $15.6 million and $29.4 million at the minimum, as adjusted, of the offering range and at the maximum, as adjusted, of the offering range, respectively, and establishment of an employee stock ownership plan and restricted stock awards under an equity incentive plan that will acquire 6.0% and 3.0% of the shares issued in the offering, respectively. The employee stock ownership plan will purchase shares in the offering and in open market purchases. Employee stock ownership plan share purchases will be financed by a loan from Naugatuck Valley Financial amortizing over 20 years on a straight line basis. The equity incentive plan will purchase shares in the open market, with such purchases assumed to occur at $10.00 per share. Equity incentive plan restricted stock awards will vest over a period of five years. The equity incentive plan will also provide for the granting of stock options that will include 10.0% of the shares issued in the offering. Pursuant to an application of the Black-Scholes option pricing model, the stock options are assumed to have a value of$2.73 per option and option grants will vest over a period of five years. The equity incentive plan is subject to stockholder approval. Adjustments to record estimated employee stock ownership plan expense are included in the table and are calculated assuming employee stock ownership plan shares are released based on the 20 year amortization term of the employee stock ownership plan loan and that employee stock ownership plan shares are released at a value of $10.00 per share. Adjustments to record estimated equity incentive plan expense and interest income to be earned on the net proceeds of the offering will be recorded as incurred. Since these estimates are speculative, they are not reflected in the calculations of pro forma income. The estimated interest income, assuming net reinvestible cash proceeds of $13.8 million and $26.6 million at the minimum, as adjusted, and maximum, as adjusted, of the offering range are invested at an average pretax yield of1.20% for the six months ended June 30, 2010 and for the year ended December 31, 2009, would be approximately $82,000 and $159,000, respectively, pretax, for the six months ended June 30, 2010 and$165,000 and $318,000, respectively, pretax, for the year ended December 31, 2009. The yield utilized approximates the yield on a three year U.S. Treasury security as of June 30, 2010. The estimated expense for the restricted stock awards under equity incentive plan assuming gross proceeds of $31.6 million and a five year vesting period is $95,000 pretax for the six months ended June 30, 2010 and $189,000 pretax for the year ended December 31, 2009. The estimated expense for the stock options under the equity incentive plan assuming gross proceeds of $31.6 million, a fair value of$2.73 per option and a five year vesting period is $86,000 pretax for the six months ended June 30, 2010 and $173,000 pretax for the year ended December 31, 2009. Taxes are calculated on an assumed marginal income tax rate of 34.0%. No effect is shown for merger related expenses, all of which are one time expenses. |
(2) | Reflects the acquisition accounting and acquisition adjustments related to the acquisition of Southern Connecticut Bancorp for a price of $6.75 per share in cash and common stock issued in the offering. |
54
Table of Contents
(3) | Includes the expense of the employee stock ownership plan and the grant of stock options and restricted stock under the equity incentive plan. The employee stock ownership plan loan is funded internally, so no interest expense is recorded on the consolidated income statement of Naugatuck Valley Financial. Employee stock ownership plan expense reflects the amortization of principal and the release of shares at an assumed value of $10.00 per share. The estimated expenses for the employee stock ownership plan assuming gross proceeds of $31.6 million is $47,000 pretax for the six months ended June 30, 2010 and $95,000 for the year ended December 31, 2009. |
(4) | Adjustment to interest income is the amortization of the loan premium on the Southern Connecticut Bancorp loans resulting from acquisition accounting and the accretion of the discount on investment securities available for sale. Adjustments to record estimated interest income to be foregone as a result of funding the cash portion of the merger consideration paid to stockholders of Southern Connecticut Bancorp and the expenses of the merger will be recorded as incurred. The estimated reduction in interest income assuming funding requirements of $7.3 million for the merger, assuming such cash costs were funded with investments yielding1.20% for the six months ended June 30, 2010 and for the year ended December 31, 2009 would be approximately $44,000 and $88,000 on a pretax basis for the six months ended June 30, 2010 and the year ended December 31, 2009. The yield utilized approximates the yield on a three year U.S. Treasury security as of June 30, 2010 and December 31, 2009, respectively. The adjustment is calculated as follows: |
(In thousands) | Six Months Ended June 30, 2010 | Year Ended December 31, 2009 | ||||||
Amortization of loan premium from acquisition accounting | $ | (378 | ) | ($ | 756 | ) | ||
Accretion of investment securities discount from acquisition accounting | — | — | ||||||
Adjustment for funding the merger, pretax | (44 | ) | (88 | ) | ||||
Adjustment to interest income | $ | (422 | ) | ($ | 844 | ) |
(5) | Adjustment to interest expense is calculated as follows: |
(In thousands) | Six Months Ended June 30, 2010 | Year Ended December 31, 2009 | ||||||
Amortization of deposit premium from acquisition accounting | $ | (224 | ) | $ | (448 | ) | ||
Accretion of borrowings discount from acquisition accounting | — | 0 | ||||||
Adjustment to interest expense | $ | (224 | ) | $ | (448 | ) |
(6) | Adjustment to noninterest expense is calculated as follows: |
(In thousands) | Six Months Ended June 30, 2010 | Year Ended December 31, 2009 | ||||
Amortization of core deposit intangible | $ | 222 | $ | 444 | ||
Depreciation of increased fixed asset value | 0 | 0 | ||||
Expenses for merger, not yet expensed | 1,358 | 1,820 | ||||
Adjustment to noninterest expense | $ | 1,580 | $ | 2,264 |
(7) | Marginal tax rate of 34.0%. |
55
Table of Contents
Additional Pro Forma Conversion Data
The following tables illustrate Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s historical combined consolidated net income and stockholders’ equity prior to the offering and merger and the pro forma impact of the conversion and offering on the combined company’s net income and stockholders’ equity based on the sale of common stock at the minimum, as adjusted (assuming Naugatuck Valley Financial elects to use up to 305,107 of the unsubscribed shares to complete the offering), the minimum, the midpoint, the maximum and 15% above the maximum of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the offering is completed. Net proceeds indicated in the following tables are based upon the following assumptions:
• | 50% of the shares of common stock will be sold in the subscription and community offerings and 50% of the shares will be sold in a syndicated community offering; |
• | Our employee stock ownership plan will purchase a number of shares equal to 6% of the shares sold in the offering with a loan from new Naugatuck Valley Financial that will be repaid in equal installments over 20 years; |
• | Stifel, Nicolaus & Company, Incorporated will receive an aggregate management fee equal to 1.0% of the aggregate purchase price of the shares sold in the subscription and community offerings, except that no fee will be paid with respect to shares purchased by the employee stock ownership plan or by our officers, directors and employees or members of their immediate families; |
• | The sales commission and management fee for shares sold in the syndicated community offering will be equal to 6.0% of the aggregate purchase price of the shares sold in the syndicated community offering; and |
• | Total expenses of the offering, excluding sales commissions and management fees referenced above, will be approximately $960,000. |
Actual expenses may vary from this estimate, and the amount of fees paid will depend upon the number of shares sold in the subscription and community offerings, as opposed to the syndicated community offering.
Pro forma net income for the six months ended June 30, 2010 and for the year ended December 31, 2009 has been calculated as if the offering and merger were completed at the beginning of the period, and the net proceeds had been invested at1.20% which represents the rate of the three-year United States Treasury security. A pro forma after-tax return of0.79% is used for the six months ended June 30, 2010 and for the year ended December 31, 2009, after giving effect to a combined federal and state income tax rate of 34.0%. The actual rate experienced by new Naugatuck Valley Financial may vary. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.
When reviewing the following tables you should consider the following:
• | Since funds on deposit at Naugatuck Valley Savings and Loan may be withdrawn to purchase shares of common stock, those funds will not result in the receipt of new funds for investment. The pro forma tables do not reflect withdrawals from deposit accounts. |
• | Historical per share amounts have been computed as if the shares of common stock expected to be issued in the offering had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or the proposed equity incentive plan. |
• | Pro forma stockholders’ equity (“book value”) represents the difference between the stated amounts of our assets and liabilities. Book value amounts do not represent fair market values or amounts available for distribution to shareholders in the unlikely event of liquidation. The amounts shown do not reflect the federal income tax consequences of the restoration to income of Naugatuck Valley Savings and Loan’s special bad debt reserves for income tax purposes or liquidation accounts, which would be required in the unlikely event of liquidation. See“Federal and State Taxation.” |
• | The amounts shown as pro forma stockholders’ equity per share do not represent possible future price appreciation of our common stock. |
The following pro forma data, which are based on Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s stockholders’ equity at June 30, 2010 and December 31, 2009, and net income for the six months ended June 30, 2010 and for the year ended December 31, 2009, may not represent the actual financial effects of the offering or our operating results after the offering. The pro forma data rely exclusively on the assumptions outlined above and in the notes to the pro forma
56
Table of Contents
tables.The pro forma data do not represent the fair market value of our common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to shareholders if we were to be liquidated after the conversion.
At or For the Six Months Ended June 30, 2010
(Dollars in thousands, except per share amount) | Appraised Value | |||||||||||||||||||
Minimum, As Adjusted, 2,034,050 Shares at $10.00 per share (1) | Minimum 2,034,050 Shares at $10.00 per share | Midpoint 2,393,000 Shares at $10.00 per share | Maximum 2,751,950 Shares at $10.00 per share | Maximum, As Adjusted, 3,164,743 Shares at $10.00 per share | ||||||||||||||||
Gross Proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | ||||||||||
Plus: Shares issued in exchange | 13,813 | 13,813 | 16,251 | 18,688 | 21,492 | |||||||||||||||
Plus: Shares issued in merger (1) | 7,871 | 10,922 | 10,922 | 10,922 | 10,922 | |||||||||||||||
Pro forma market capitalization | $ | 42,025 | $ | 45,076 | $ | 51,103 | $ | 57,130 | $ | 64,061 | ||||||||||
Gross proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | ||||||||||
Less: estimated expenses | (1,724 | ) | (1,831 | ) | (1,949 | ) | (2,067 | ) | (2,203 | ) | ||||||||||
Estimated net proceeds | 18,617 | 18,510 | 21,981 | 25,453 | 29,444 | |||||||||||||||
Less: merger shares used to complete offering (1) | (3,052 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | ||||||||||
Assets from MHC | 27 | 27 | 27 | 27 | 27 | |||||||||||||||
Net investable proceeds | $ | 13,762 | $ | 16,707 | $ | 19,854 | $ | 23,003 | $ | 26,623 | ||||||||||
Funds required to effect merger with Southern Connecticut Bancorp | $ | 7,282 | $ | 7,282 | $ | 7,282 | $ | 7,282 | $ | 7,282 | ||||||||||
Pro Forma Net Income: | ||||||||||||||||||||
Pro forma net income | ||||||||||||||||||||
Historical combined including merger adjustments | $ | (130 | ) | $ | (130 | ) | $ | (130 | ) | $ | (130 | ) | $ | (130 | ) | |||||
Pro forma income on net proceeds | 54 | 66 | 78 | 91 | 105 | |||||||||||||||
Pro forma impact of funding merger | (29 | ) | (29 | ) | (29 | ) | (29 | ) | (29 | ) | ||||||||||
Less: pro forma employee stock ownership plan expense (2) | (20 | ) | (20 | ) | (24 | ) | (27 | ) | (31 | ) | ||||||||||
Less: pro forma restricted stock award expense (3) | (40 | ) | (40 | ) | (47 | ) | (54 | ) | (63 | ) | ||||||||||
Less: pro forma stock option expense (4) | (56 | ) | (56 | ) | (65 | ) | (75 | ) | (86 | ) | ||||||||||
Pro forma net income | $ | (221 | ) | $ | (209 | ) | $ | (217 | ) | $ | (224 | ) | $ | (234 | ) | |||||
Pro forma net income per share: | ||||||||||||||||||||
Historical combined including merger adjustments | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | |||||
Pro-forma income on net proceeds | 0.01 | 0.02 | 0.02 | 0.02 | 0.02 | |||||||||||||||
Pro-forma impact of funding merger | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | — | |||||||||||
Less: pro forma employee stock ownership plan expense (2) | (0.01 | ) | (0.01 | ) | — | — | (0.01 | ) | ||||||||||||
Less: pro forma restricted stock award expense (3) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||
Less: pro forma stock option expense (4) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||
Pro forma net income | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.04 | ) | |||||
Offering price as a multiple of pro-forma net income per share | NM | NM | NM | NM | NM | |||||||||||||||
Number of shares used to calculate pro-forma net income per share (5) | 3,989,141 | 4,294,248 | 4,859,871 | 5,424,809 | 6,074,694 | |||||||||||||||
Pro forma Stockholder’s equity: | ||||||||||||||||||||
Pro forma stockholder’ equity (book value): | ||||||||||||||||||||
Historical combined including merger adjustments | $ | 61,954 | $ | 61,954 | $ | 61,954 | $ | 61,954 | $ | 61,954 | ||||||||||
Assets received from MHC | 27 | 27 | 27 | 27 | 27 | |||||||||||||||
Estimated net proceeds | 18,617 | 18,510 | 21,981 | 25,453 | 29,444 | |||||||||||||||
Merger shares used to complete offering | (3,052 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | ||||||||||
Pro forma stockholder’ equity | $ | 75,716 | $ | 78,661 | $ | 81,808 | $ | 84,957 | $ | 88,577 | ||||||||||
Less: intangible assets | (3,212 | ) | (3,212 | ) | (3,212 | ) | (3,212 | ) | (3,212 | ) | ||||||||||
Pro forma tangible stockholder’ equity | $ | 72,504 | $ | 75,449 | $ | 78,596 | $ | 81,745 | $ | 85,365 | ||||||||||
Pro forma stockholder’ equity per share: | ||||||||||||||||||||
Historical combined including merger adjustments | $ | 14.75 | $ | 13.74 | $ | 12.12 | $ | 10.84 | $ | 9.68 | ||||||||||
Assets received from MHC | 0.01 | 0.01 | 0.01 | — | — | |||||||||||||||
Estimated net proceeds | 4.43 | 4.11 | 4.30 | 4.46 | 4.60 | |||||||||||||||
Merger shares used to complete offering | (0.73 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (0.29 | ) | (0.27 | ) | (0.28 | ) | (0.29 | ) | (0.30 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (0.15 | ) | (0.14 | ) | (0.14 | ) | (0.14 | ) | (0.15 | ) | ||||||||||
Pro forma stockholder’ equity | $ | 18.02 | $ | 17.45 | $ | 16.01 | $ | 14.87 | $ | 13.83 | ||||||||||
Less: intangible assets | (0.77 | ) | (0.71 | ) | (0.63 | ) | (0.56 | ) | (0.50 | ) | ||||||||||
Pro forma tangible stockholder’ equity | $ | 17.25 | $ | 16.74 | $ | 15.38 | $ | 14.31 | $ | 13.33 | ||||||||||
Offering price as a percentage of pro-forma stockholders equity per share | 55.49 | % | 57.31 | % | 62.46 | % | 67.25 | % | 72.31 | % | ||||||||||
Offering price as a percentage of pro-forma tangible stockholders equity per share | 57.97 | % | 59.74 | % | 65.02 | % | 69.88 | % | 75.02 | % | ||||||||||
Number of shares used to calculate pro-forma tangible stockholders’ equity per share | 4,202,501 | 4,507,608 | 5,110,320 | 5,713,031 | 6,406,149 |
57
Table of Contents
At or For the Year Ended December 31, 2009
(Dollars in thousands, except per share amount) | Appraised Value | |||||||||||||||||||
Minimum, As Adjusted, 2,034,050 Shares at $10.00 per share (1) | Minimum 2,034,050 Shares at $10.00 per share | Midpoint 2,393,000 Shares at $10.00 per share | Maximum 2,751,950 Shares at $10.00 per share | Maximum, As Adjusted, 3,164,743 Shares at $10.00 per share | ||||||||||||||||
Gross Proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | ||||||||||
Plus: Shares issued in exchange | 13,813 | 13,813 | 16,251 | 18,688 | 21,492 | |||||||||||||||
Plus: Shares issued in merger (1) | 7,871 | 10,922 | 10,922 | 10,922 | 10,922 | |||||||||||||||
Pro forma market capitalization | $ | 42,025 | $ | 45,076 | $ | 51,103 | $ | 57,130 | $ | 64,061 | ||||||||||
Gross proceeds | $ | 20,341 | $ | 20,341 | $ | 23,930 | $ | 27,520 | $ | 31,647 | ||||||||||
Less: estimated expenses | (1,724 | ) | (1,831 | ) | (1,949 | ) | (2,067 | ) | (2,203 | ) | ||||||||||
Estimated net proceeds | 18,617 | 18,510 | 21,981 | 25,453 | 29,444 | |||||||||||||||
Less: merger shares used to complete offering (1) | (3,052 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | ||||||||||
Assets from MHC | 27 | 27 | 27 | 27 | 27 | |||||||||||||||
Net investable proceeds | $ | 13,762 | $ | 16,707 | $ | 19,854 | $ | 23,003 | $ | 26,623 | ||||||||||
Funds required to effect merger with Southern Connecticut Bancorp | $ | 7,282 | $ | 7,282 | $ | 7,282 | $ | 7,282 | $ | 7,282 | ||||||||||
Pro Forma Net Income: | ||||||||||||||||||||
Pro forma net income | ||||||||||||||||||||
Historical combined including merger adjustments | $ | (1,716 | ) | $ | (1,716 | ) | $ | (1,716 | ) | $ | (1,716 | ) | $ | (1,716 | ) | |||||
Pro forma income on net proceeds | 109 | 132 | 157 | 182 | 210 | |||||||||||||||
Pro forma impact of funding merger | (58 | ) | (58 | ) | (58 | ) | (58 | ) | (58 | ) | ||||||||||
Less: pro forma employee stock ownership plan expense (2) | (40 | ) | (40 | ) | (47 | ) | (54 | ) | (63 | ) | ||||||||||
Less: pro forma restricted stock award expense (3) | (81 | ) | (81 | ) | (95 | ) | (109 | ) | (125 | ) | ||||||||||
Less: pro forma stock option expense(4) | (111 | ) | (111 | ) | (131 | ) | (150 | ) | (173 | ) | ||||||||||
Pro forma net income | $ | (1,897 | ) | $ | (1,874 | ) | $ | (1,890 | ) | $ | (1,905 | ) | $ | (1,925 | ) | |||||
Pro-forma net income per share: | ||||||||||||||||||||
Historical combined including merger adjustments | $ | (0.44 | ) | $ | (0.40 | ) | $ | (0.35 | ) | $ | (0.31 | ) | $ | (0.28 | ) | |||||
Pro-forma income on net proceeds | 0.03 | 0.03 | 0.03 | 0.03 | 0.03 | |||||||||||||||
Pro-forma impact of funding merger | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||
Less: pro forma employee stock ownership plan expense (2) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||||
Less: pro forma restricted stock award expense (3) | (0.02 | ) | (0.02 | ) | (0.02 | ) | (0.02 | ) | (0.02 | ) | ||||||||||
Less: pro forma stock option expense (4) | (0.03 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | ||||||||||
Pro forma net income | $ | (0.48 | ) | $ | (0.44 | ) | $ | (0.39 | ) | $ | (0.35 | ) | $ | (0.32 | ) | |||||
Offering Price as a multiple of pro-forma net income per share | NM | NM | NM | NM | NM | |||||||||||||||
Number of shares used to calculate pro-forma net income per share (5) | 3,983,655 | 4,288,762 | 4,853,415 | 5,417,386 | 6,066,157 | |||||||||||||||
Pro forma Stockholder’s equity: | ||||||||||||||||||||
Pro forma stockholder’ equity (book value): | ||||||||||||||||||||
Historical combined including merger adjustments | $ | 60,846 | $ | 60,846 | $ | 60,846 | $ | 60,846 | $ | 60,846 | ||||||||||
Assets received from MHC | 27 | 27 | 27 | 27 | 27 | |||||||||||||||
Estimated net proceeds | 18,617 | 18,510 | 21,981 | 25,453 | 29,444 | |||||||||||||||
Merger shares used to complete offering | (3,052 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (1,220 | ) | (1,220 | ) | (1,436 | ) | (1,651 | ) | (1,899 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (610 | ) | (610 | ) | (718 | ) | (826 | ) | (949 | ) | ||||||||||
Pro forma stockholder’ equity | $ | 74,608 | $ | 77,553 | $ | 80,700 | $ | 83,849 | $ | 87,469 | ||||||||||
Less: intangible assets | (3,543 | ) | (3,543 | ) | (3,543 | ) | (3,543 | ) | (3,543 | ) | ||||||||||
Pro forma tangible stockholder’ equity | $ | 71,065 | $ | 74,010 | $ | 77,157 | $ | 80,306 | $ | 83,926 | ||||||||||
Pro forma stockholder’ equity per share: | ||||||||||||||||||||
Historical combined including merger adjustments | $ | 14.48 | $ | 13.49 | $ | 11.90 | $ | 10.65 | $ | 9.50 | ||||||||||
Assets received from MHC | 0.01 | 0.01 | 0.01 | — | — | |||||||||||||||
Estimated net proceeds | 4.43 | 4.11 | 4.30 | 4.46 | 4.60 | |||||||||||||||
Merger shares used to complete offering | (0.73 | ) | — | — | — | — | ||||||||||||||
Less: common stock acquired by employee stock ownership plan (2) | (0.29 | ) | (0.27 | ) | (0.28 | ) | (0.29 | ) | (0.30 | ) | ||||||||||
Less: common stock acquired by equity incentive plan (3) | (0.15 | ) | (0.14 | ) | (0.14 | ) | (0.14 | ) | (0.15 | ) | ||||||||||
Pro forma stockholder’ equity | $ | 17.75 | $ | 17.20 | $ | 15.79 | $ | 14.68 | $ | 13.65 | ||||||||||
Less: intangible assets | (0.84 | ) | (0.78 | ) | (0.69 | ) | (0.62 | ) | (0.55 | ) | ||||||||||
Pro forma tangible stockholder’ equity | $ | 16.91 | $ | 16.42 | $ | 15.10 | $ | 14.06 | $ | 13.10 | ||||||||||
Offering price as a percentage of pro-forma stockholders equity per share | 56.34 | % | 58.14 | % | 63.33 | % | 68.12 | % | 73.26 | % | ||||||||||
Offering price as a percentage of pro-forma tangible stockholders equity per share | 59.14 | % | 60.90 | % | 66.23 | % | 71.12 | % | 76.34 | % | ||||||||||
Number of shares used to calculate pro-forma tangible stockholders’ equity per share | 4,202,501 | 4,507,608 | 5,110,320 | 5,713,031 | 6,406,149 |
58
Table of Contents
(1) | If we do not receive orders for at least2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as1,728,943 and include up to305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the2,034,050 share minimum requirement. |
(2) | Assumes that the employee stock ownership plan will acquire a number of shares of stock equal to 6.0% of the shares sold in the offering 122,403, 122,403, 143,580, 165,117 and 189,889 shares at the minimum, as adjusted, minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively). The employee stock ownership plan will borrow the funds to acquire these shares from the proceeds retained by new Naugatuck Valley Financial. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net proceeds. This borrowing will have an interest rate equal to the prime rate as published inThe Wall Street Journal, which is currently3.25%, which will be fixed at the time of the offering and be for a term of 20 years. Naugatuck Valley Savings and Loan intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. As the debt is paid down, shares will be released for allocation to participants’ accounts and stockholders’ equity will be increased. |
The adjustment to pro forma net income for the employee stock ownership plan reflects the after-tax compensation expense associated with the plan. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. An equal number of shares (1/20 of the total, based on a 20-year loan) will be released each year over the term of the loan. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of the pro forma tables, was assumed to be equal to the $10.00 per share purchase price. If the average market value per share is greater than $10.00 per share, total employee stock ownership plan expense would be greater. See“Our Management—Benefit Plans—Employee Stock Ownership Plan.” |
(3) | Assumes that new Naugatuck Valley Financial will purchase in the open market a number of shares of common stock equal to 3.0% of the shares sold in the offering 61,021, 61,021, 71,790, 82,558 and 94,942 shares at the minimum, as adjusted, minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively), that will be reissued as restricted stock awards under a new equity incentive plan to be adopted following the offering. Purchases will be funded with cash on hand at new Naugatuck Valley Financial or with dividends paid to new Naugatuck Valley Financial by Naugatuck Valley Savings and Loan. The cost of these shares has been reflected as a reduction from gross proceeds to determine estimated net proceeds. In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period and that the shares were acquired at the $10.00 per share purchase price. The issuance of authorized but unissued shares of the common stock instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by approximately 1.5%. |
The adjustment to pro forma net income for the restricted stock awards reflects the after-tax compensation expense associated with the awards. It is assumed that the fair market value of a share of new Naugatuck Valley Financial common stock was $10.00 at the time the awards were made, that shares of restricted stock issued under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the shares awarded was an amortized expense during each year, and that the combined federal and state income tax rate was 34.0%. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the equity incentive plan, total equity incentive plan expense would be greater. |
(4) | The adjustment to pro forma net income for stock options reflects the after-tax compensation expense associated with the stock options that may be granted under the new equity incentive plan to be adopted following the offering. If the new equity incentive plan is approved by shareholders, a number of shares equal to 10.0% of the number of shares sold in the offering 203,405, 203,405, 239,300, 275,195 and 316,474 shares at the minimum, as adjusted, minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), will be reserved for future issuance upon the exercise of stock options that may be granted under the plan. Compensation cost relating to share-based payment transactions will be recognized in the financial statements over the period the employee is required to provide services for the award. The cost will be measured based on the fair value of the equity instruments issued. Applicable accounting standards do not prescribe a specific valuation technique to be used to estimate the fair value of employee stock options. For purposes of this table, the fair value of stock options to be granted under the new equity incentive plan has been estimated at$2.73 per option using the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield,1.86%; expected life, 6.5 years; expected volatility, 27.58%; and risk-free interest rate, 3.28%. It is assumed that stock options granted under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over the vesting period so that 20% of the value of the options awarded was an amortized expense during each year, that all of the options awarded are non-qualified options and that the combined federal and state income tax rate was 34.0%. We plan to use the Black-Scholes option-pricing formula; however, if the fair market value per share is different than $10.00 per share on the date options are awarded under the equity incentive plan, or if the assumptions used in the option-pricing formula are different from those used in preparing this pro forma data, the value of the stock options and the related expense would be different. The issuance of authorized but unissued shares of common stock to satisfy option exercises instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by approximately 4.9%. |
(5) | The number of shares used to calculate pro forma net income per share is equal to the weighted average shares outstanding for the period 3,989,000 and 3,984,000 for the six months ended June 30, 2010 and the year ended December 31, 2009, respectively) multiplied by the exchange ratio at the minimum, as adjusted, minimum, midpoint, maximum, and 15% above the maximum of the offering range, less the number of shares purchased by the employee stock ownership plan not committed to be released within the one year period following the offering as adjusted to effect a weighted average over the period. The total number of shares to be outstanding upon completion of the conversion and offering includes the number of shares sold in the offering plus the number of shares issued in exchange for outstanding shares of Naugatuck Valley Financial common stock held by persons other than Naugatuck Valley Mutual Holding Company plus the number of shares issued to stockholders of Southern Connecticut Bancorp in the merger. The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering and the merger. |
(6) | In the event that all existing options to acquire shares of Southern Connecticut Bancorp at December 31, 2009 were exercised prior to the acquisition, the number of shares issued to Southern Connecticut Bancorp stockholders would increase to 1,193,250 shares of common stock, the pro forma shares outstanding including shares issued in the offering, in the exchange and in the acquisition would be 6,507,154 shares of common stock representing a market value of $65.1 million. |
59
Table of Contents
General
Naugatuck Valley Financial. Naugatuck Valley Financial was organized on September 30, 2004 under the laws of the United States to be a holding company for Naugatuck Valley Savings and Loan, a stock savings bank also organized under the laws of the United States in connection with Naugatuck Valley Savings and Loan’s conversion from the mutual to the mutual holding company form of organization. On September 30, 2004, Naugatuck Valley Financial completed its initial public offering in which it sold 3,269,881 shares, or 43.0%, of its common stock to the public, including 298,091 shares to the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan. An additional 4,182,407 shares, or 55.0% of Naugatuck Valley Financial’s outstanding stock, were issued to Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial’s federally chartered mutual holding company. Additionally, Naugatuck Valley Financial contributed 152,087 shares, or 2.0% of its outstanding common stock, to the Naugatuck Valley Savings and Loan Foundation.
Naugatuck Valley Financial’s business activities consist of the ownership of Naugatuck Valley Savings and Loan’s capital stock and the management of the offering proceeds it retained. Naugatuck Valley Financial does not own or lease any property. Instead, it uses the premises, equipment and other property of Naugatuck Valley Savings and Loan. Accordingly, the information set forth in this prospectus, including the consolidated financial statements and related financial data, relates primarily to Naugatuck Valley Savings and Loan. As a federally chartered savings and loan holding company, Naugatuck Valley Financial is subject to the regulation of the Office of Thrift Supervision.
Naugatuck Valley Savings and Loan. Naugatuck Valley Savings and Loan operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in its market areas. Naugatuck Valley Savings and Loan attracts deposits from the general public and uses those funds to originate one- to four-family real estate, multi-family and commercial real estate, construction, commercial and consumer loans, which Naugatuck Valley Savings and Loan generally holds for investment. Naugatuck Valley Savings and Loan also maintains an investment portfolio. Naugatuck Valley Savings and Loan is regulated by the Office of Thrift Supervision and its deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation. Naugatuck Valley Savings and Loan is also a member of the Federal Home Loan Bank of Boston.
Naugatuck Valley Savings and Loan’s website address iswww.nvsl.com. Information on our website should not be considered a part of this prospectus.
Naugatuck Valley Financial (new). New Naugatuck Valley Financial, a Maryland corporation, was incorporated in June 2010 to become the holding company for Naugatuck Valley Savings and Loan upon completion of the conversion and reorganization. Before the completion of the conversion and reorganization, new Naugatuck Valley Financial has not engaged in any significant activities other than organizational activities. Following completion of the conversion and reorganization, new Naugatuck Valley Financial’s business activity will be the ownership of the outstanding capital stock of Naugatuck Valley Savings and Loan. New Naugatuck Valley Financial will not own or lease any property but will instead use the premises, equipment and other property of Naugatuck Valley Savings and Loan with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement that new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan will enter into upon completion of the conversion and reorganization. The expense allocation agreement generally provides that new Naugatuck Valley Financial will pay to Naugatuck Valley Savings and Loan fees for its use of Naugatuck Valley Savings and Loan’s premises, furniture, equipment and employees in an amount to be determined by the board of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. Such fees shall not be less than the fair market value received for such goods or services. In addition, new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan will also enter into a tax allocation agreement upon completion of the conversion and reorganization as a result of their status as members of an affiliated group under the Internal Revenue Code. The tax allocation agreement generally provides that new Naugatuck Valley Financial will file consolidated federal tax income returns with Naugatuck Valley Savings and Loan and its subsidiaries. The tax allocation agreement also formalizes procedures for allocating the consolidated tax liability of the group among its members and establishes procedures for the future payments by Naugatuck Valley Savings and Loan to new Naugatuck Valley Financial for tax liabilities attributable to Naugatuck Valley Savings and Loan and its subsidiaries. In the future, new Naugatuck Valley Financial may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.
60
Table of Contents
Market Area
We are headquartered in Naugatuck, Connecticut, which is located in southwestern Connecticut approximately six miles south of Waterbury and 26 miles north of Bridgeport. In addition to our main office, we operate nine branch offices in the greater Naugatuck Valley market which we consider our market area. The greater Naugatuck Valley market encompasses the communities in the central and lower Naugatuck Valley regions in New Haven County, where our main office and eight of our branch offices are located, and Fairfield County, where one of our branch offices is located. The economy in our market area is primarily oriented to the service, retail, construction, and manufacturing industries. The median household and per capita income in New Haven County trailed slightly the comparable figures for Connecticut as a whole, while the median household and per capita income in Fairfield County exceeded the comparable figures for Connecticut.
The acquisition of Southern Connecticut Bancorp will enhance our market share in New Haven County and expand our presence into the city of New Haven and surrounding area. Southern Connecticut Bancorp currently serves the Greater New Haven Market, which is comprised of the communities located in and around New Haven County in Southern Central Connecticut. The Greater New Haven Market is located in the center of, and is a critical component of, the commercial activity of the northeast corridor in New England. The market focus resides in the busy transportation and commercial area between New York City to the south, Hartford to the north, Providence to the east, and Boston to the northeast. The diversified economic base of this market region includes pharmaceutical, advanced manufacturing, healthcare, defense, technology, service and energy companies. The region is also one of New England’s most popular tourist destinations, featuring popular shoreline and heritage sites. In addition, Southern Connecticut Bancorp’s headquarters is located in downtown New Haven, in the area of Yale University’s campus.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the numerous financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2009, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, both Naugatuck Valley Savings and Loan and The Bank of Southern Connecticut held less than 2% of the deposits in each county in which their offices are located. In addition, larger banks such as Bank of America, Wells Fargo (formerly Wachovia), J.P. Morgan Chase and TD Bank also operate in our market areas. These institutions are significantly larger than us and, therefore, have greater resources.
Our competition for loans comes primarily from financial institutions in our market areas, and, to a lesser extent, from other financial service providers such as mortgage companies, mortgage brokers and credit unions. Competition for loans also comes from non-depository financial service companies entering the mortgage and commercial lending markets such as insurance companies, securities companies and specialty finance companies.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our future growth.
Lending Activities
General.Our loan portfolio consists of one- to four-family residential mortgage loans, multi-family and commercial real estate loans, construction loans, commercial business loans and consumer loans. Substantially all of our loans are made to borrowers residing within Connecticut.
One- to Four-Family Residential Loans. We originate mortgage loans to enable borrowers to purchase or refinance existing homes in our market area. We generally offer fixed-rate and adjustable-rate mortgage loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-
61
Table of Contents
rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.
We offer fixed-rate mortgage loans with terms of either 10, 15, 20 or 30 years. Our adjustable-rate mortgage loans are based on either a 15, 20 or 30 year amortization schedule and interest rates and payments on our adjustable-rate mortgage loans adjust annually after either a one, three, five or seven year initial fixed period. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate typically equal to 2.75% above the one-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. As interest rates declined and remained low over the past few years, we have experienced high levels of loan repayments and refinancings.
We generally do not make conventional loans with loan-to-value ratios exceeding 97% and generally make loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied one- to four-family residences. Loans with loan-to-value ratios in excess of 80% require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a Board-approved independent appraiser. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, or flood insurance for loans on property located in a flood zone, before closing the loan.
We do not engage in subprime lending or offer Alt-A loans.
Multi-Family and Commercial Real Estate Loans. We offer adjustable-rate mortgage loans secured by multi-family and commercial real estate. Our multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings, offices, retail and other income producing properties, as well as owner-occupied properties used for businesses. We intend to continue to grow this segment of our loan portfolio.
We originate multi-family and commercial real estate loans for terms generally up to 20 years. Interest rates and payments on adjustable-rate loans adjust every one, three, five or ten years. Interest rates on our adjustable rate loans generally are adjusted to a rate typically equal to 2.00% to 2.50% above the one-year, three-year, five-year or ten-year Federal Home Loan Bank classic advance rate. There are no adjustment period or lifetime interest rate caps. Loan amounts generally do not exceed 80% of the appraised value.
The largest outstanding multi-family or commercial real estate loan at June 30, 2010 was$4.8 million, of which $4.8 million was outstanding. This loan is secured by commercial real estate for future retail development and was performing according to its terms at June 30, 2010.
Construction Loans.We originate loans to individuals to finance the construction of residential dwellings for personal use. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually nine months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans generally can be made with a maximum loan to value ratio of 80% of the appraised value with a maximum term of 30 years.Our largest residential construction loan at June 30, 2010 was $1.4 million, of which $656,000 was outstanding. This loan was performing according to its terms at June 30, 2010. We also make commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties. These loans provide for payment of interest only during the construction phase and may, in the case of an apartment or commercial building, convert to a permanent mortgage loan or, in the case of a single family subdivision or construction or builder loan, be paid in full with the sale of the property after construction is complete. In the case of a commercial construction loan, the construction period may be from nine months to two years. Loans are generally made to a maximum of 80% of the appraised value as determined by an appraisal of the
62
Table of Contents
property made by an independent licensed appraiser. We also require an inspection of the property before disbursement of funds during the term of the construction loan for both residential and commercial construction loans.Our largest commercial construction loan at June 30, 2010 was $5.4 million, of which $2.6 million was outstanding. This loan is secured by real estate for the construction of single family homes, and was performing according to its terms at June 30, 2010. Our largest commercial real estate loan relationship at June 30, 2010 involved seven loans totaling $6.6 million, consisting of one residential mortgage, one second mortgage, four commercial real estate loans and one commercial demand loan. These loans were performing according to their original terms at June 30, 2010.
We originate land loans to individuals on approved residential building lots for personal use for terms of up to 20 years and to a maximum loan-to-value ratio of 75% of the lower of the appraisal value or purchase price. Our land loans adjust annually after a five-year initial fixed period. Interest rates after adjustment are equal to 2.75% above the one-year constant maturity Treasury index.
We also originate loans to local contractors and developers for the purpose of making improvements to, and on, approved subdivisions and condominium projects within two years of the date of the original loan. Such loans generally are written with a maximum loan-to-value ratio of 80% of the lower of the appraised value or purchase price of the land. These loans adjust when and as the index changes at a rate that is generally equal to the prime rate as published inThe Wall Street Journal plus 1%. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste.
Commercial Business Loans. We make commercial business loans to a variety of professionals, sole proprietorships and small businesses primarily in our market area. We offer a variety of commercial lending products. These loans aretypically secured, primarily by business assets. These loans are originated with maximum loan-to-value ratios of 75% of the value of the business assets. We originate one- to ten-year term loans for the acquisition of equipment or business expansion, lines of credit for seasonal financing needs and demand loans for short term financing needs with specific repayment sources. Commercial business loans are generally written at variable rates which use the prime rate as published inThe Wall Street Journal as an index and, depending on the qualifications of the borrower, a zero to 3.0% margin is added. These rates will change when and as the index rate changes without caps. Fixed-rate loans are written at market rates determined at the time the loan is granted and are based on the length of the term and the qualifications of the borrower.Our largest commercial business loan relationship at June 30, 2010 was a loan in the amount of $1.2 million of which $1.2 million was outstanding and performing according to the original terms at June 30, 2010. This loan is secured by assignment of receivables.
When making commercial business loans, we consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, and viability of the industry in which the customer operates and the value of the collateral.
Consumer Loans. We offer a variety of consumer loans, primarily second mortgage loans and home equity lines of credit, and, to a much lesser extent, loans secured by passbook or certificate accounts, automobiles, as well as unsecured personal loans and overdraft protection accounts. Unsecured loans generally have a maximum borrowing limit of $5,000 and a maximum term of three years.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Second mortgage loans have fixed rates of interest for terms of up to 20 years. These loans are originated with maximum combined loan-to-value ratios of 75% of the appraised value of the property. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as published inThe Wall Street Journal for terms of up to 10 years. These loans are originated with maximum loan-to-value ratios of 75% of the appraised value of the property and we require that we have a second lien position on the property.
Loan Underwriting Risks.
Adjustable-Rate Loans.Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. The
63
Table of Contents
marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Multi-Family and Commercial Real Estate Loans. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, where applicable, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history, profitability and the value of the underlying property. We require an environmental survey for multi-family and commercial real estate loans.
Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and to a lesser extent, local mortgage brokers, advertising and referrals from customers. We occasionally purchase loans or participation interests in loans.
We consider loan sales as a part of our interest rate risk management efforts. We have the ability to sell longer-term fixed-rate loans in the secondary market based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management goals. Generally, loans are sold without recourse and with servicing retained. We did not sell any loans in the years ended December 31, 2009 and 2008. However, in 2009, we began to pursue a significant initiative to develop a strong secondary mortgage operation. We have hired experienced loan production professionals and have increased production and sales into the secondary market. We occasionally sell participation interests in loans.
Loan Approval Procedures and Authority. Our lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by our board of directors and management.
64
Table of Contents
For one- to four-family loans and owner occupied residential construction loans, two members of the mortgage loan committee, one of which must be a vice president or above, may approve loans up to $417,000 and a majority of the members of the Board loan committee must approve loans over $417,000. For unsecured commercial business loans, a majority of the members of the Board must approve loans over $500,000 and two members of the board of directors loan committee must approve loans over $250,000 and up to $500,000. Unsecured business loans of $250,000 or less must be approved by two members of the officers’ loan committee. Loans of $100,000 or less which are unsecured can be approved by one member of the officers’ loan committee and later presented to the officers’ loan committee for ratification. For secured commercial loans and commercial construction loans, a majority of the members of the Board must approve loans over $1.5 million and two members of the board of directors loan committee must approve loans over $750,000 and up to $1.5 million. Loans of $500,001 to $750,000 secured by real estate, where the loan to value ratio is 80% or less supported by a conforming appraisal, can be approved by the officers’ loan committee. Loans of $500,000 or less secured by real estate where the loan-to-value is 80% or less can be approved by two members of the officers’ loan committee and for $100,000 or less secured by real estate with an 80% loan-to-value one member of the officers’ loan committee can approve with a later ratification by the officers’ loan committee. The board of directors must approve all consumer loans over $200,000. Various bank personnel have been delegated authority to approve smaller commercial loans and consumer loans.
Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by regulation, to 15% of our stated capital and reserves. At June 30, 2010, our regulatory limit on loans to one borrower was $7.4 million. At that date, our largest lending relationship was$6.6 million and consisted of one residential mortgage, one second mortgage, four commercial real estate loans and one commercial demand loan all of which were performing according to the original repayment terms.
Loan Commitments.We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers and generally expire in 45 days or less.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock.
At June 30, 2010, our investment portfolio consisted of U.S. government and agency securities with maturities primarily less than five years, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less, collateralized mortgage obligations with stated final maturities of 30 years or less, and preferred money market securities with terms of primarily 91 days or less.
Our investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak, and to generate a favorable return. During 2009, we enhanced our overall interest rate risk position by selling our entire municipal bond portfolio, using the majority of the funds to pay off Federal Home Loan Bank advances as they came due. Our board of directors has the overall responsibility for our investment portfolio, including approval of our investment policy and appointment of our Asset/Liability and Investment Committees. The Investment Committee meets regularly and is responsible for approval of investment strategies and monitoring of investment performance. Our Controller is the designated investment portfolio manager and has the responsibility for the daily investment activities and is authorized to make investment decisions consistent with our investment policy.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. The vast majority of our depositors are residents of the State of Connecticut. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including NOW
65
Table of Contents
accounts, checking accounts, money market accounts, regular savings accounts, club savings accounts, certificate accounts, health savings accounts and various retirement accounts.Generally, we do not utilize brokered funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates, but not be the market leader in every type and maturity.
Borrowings. We borrow from the Federal Home Loan Bank of Boston to supplement our supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Boston and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 25% of a member’s assets, and short-term borrowings of less than one year may not exceed 10% of the institution’s assets. The Federal Home Loan Bank determines specific lines of credit for each member institution.
We also use securities sold under agreements to repurchase as a source of borrowings, and we occasionally borrow short-term from correspondent banks to cover temporary cash needs.
Properties
We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities as of June 30, 2010.
Location | Year Opened/ Acquired | Net Book Value at June 30, 2010 | Square Footage | Owned/ Leased | Date of Lease Expiration | |||||||
(Dollars in thousands) | ||||||||||||
Main Office: | ||||||||||||
333 Church Street Naugatuck, CT 06770 | 1996 | $ | 2,435 | 23,000 | Owned | — | ||||||
Branches: | ||||||||||||
1009 New Haven Road Naugatuck, CT 06770 | 2001 | 1,193 | 3,300 | Owned | — | |||||||
127 South Main Street Beacon Falls, CT 06403 | 1997 | 264 | 960 | Owned | — | |||||||
49 Pershing Drive Derby, CT 06418 | 2003 | 80 | 1,950 | Leased | 2013 | (1) | ||||||
249 West Street (2) Seymour, CT 06483 | 2002 | 2,352 | 9,500 | Owned | — | |||||||
504 Bridgeport Avenue Shelton, CT 06484 | 2004 | 414 | 3,000 | Leased | 2020 | (3) | ||||||
1699 Highland Avenue, Cheshire, CT 06410 | 2006 | 31 | 3,000 | Leased | 2011 | (4) | ||||||
450 Heritage Road, Suite 3C Southbury, CT 06488 | 2008 | 80 | 3,000 | Leased | 2018 | (5) | ||||||
1570 Southford Road (6) Southbury, CT 06488 | 2006 | 1,728 | 4,823 | Owned | — |
66
Table of Contents
Location | Year Opened/ Acquired | Net Book Value at June 30, 2010 | Square Footage | Owned/ Leased | Date of Lease Expiration | ||||||
(Dollars in thousands) | |||||||||||
1030 Hamilton Avenue Waterbury, CT 06706 | 2006 | 6 | 1,239 | Leased | 2011 | (7) | |||||
Other Properties: | |||||||||||
1007 New Haven Road Naugatuck, CT 06770 | 1974 | 17 | 1,725 | Leased | 2014 | (8) | |||||
135 South Main Street (9) Beacon Falls, CT 06403 | 2003 | 159 | N/A | Owned | — |
(1) | We have an option to renew this lease for three additional five-year periods. |
(2) | This branch occupies 3,500 square feet of this building and 1,465 square feet is utilized as a training facility for Naugatuck Valley Savings and Loan. The building also includes 4,535 square feet of rentable space which is currently leased until 2013. The tenant has an option to renew this lease for three additional five year periods. |
(3) | We have an option to renew this lease for five additional five-year periods. |
(4) | We have an option to renew this lease for three additional five-year periods. |
(5) | We have an option to renew this lease for two additional five-year periods. |
(6) | This branch occupies 3,383 square feet of this building. The building also includes 1,440 square feet of rental space,none of which was rented as of June 30, 2010. |
(7) | We have an option to renew this lease for four additional five-year periods. |
(8) | Former branch site. We have an option to renew this lease for two additional ten-year periods. This property was leased to a subtenant under a sublease that expired in 2011. In April 2010, the subtenant terminated the lease and paid Naugatuck Valley Savings and Loan 13 months of rent payments. |
(9) | This property is designated for future parking, additional access and possible future expansions of our Beacon Falls branch. |
Legal Proceedings
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Subsidiaries
Naugatuck Valley Financial’s sole subsidiary is Naugatuck Valley Savings.
Naugatuck Valley Savings has one subsidiary, Naugatuck Valley Mortgage Servicing Corporation. Naugatuck Valley Mortgage Servicing, established in 1999 under Connecticut law, is a passive investment corporation organized in order to take advantage of certain state tax benefits. Its primary business is to service mortgage loans which we have originated and subsequently transferred to Naugatuck Valley Mortgage Servicing. At June 30, 2010, Naugatuck Valley Mortgage Servicing had$260.0 million in assets.
Personnel
At June 30, 2010, we had118 full-time employees and 19 part-time employees, none of whom are represented by a collective bargaining unit. We believe our relationship with our employees is good.
67
Table of Contents
Management’s Discussion and Analysis of Financial Conditions and Results of Operations of Naugatuck Valley Financial
The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated statements of financial condition as of June 30, 2010 and as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the six month periods ended June 30, 2010 and June 30, 2009 and the years in the three-year period ended December 31, 2009 that appear at the end of this prospectus.
Overview
Income. We have two primary sources of income. The first is net interest income, which is the difference between interest income, the income that we earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.
To a lesser extent, we also recognize income from fees and service charges, which is the compensation we receive from providing products and services. Our primary noninterest income comes from fees and service charges on loan and deposit accounts. We also earn income from bank owned life insurance, sales of loans and investments and investment advisory services.
Expenses.The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, computer processing fees, advertising and professional fees and other expenses.
Compensation, taxes and benefits consist primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee benefits.
Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and costs of utilities.
Computer processing fees includes fees paid to our third-party data processing servicer and our network security expenses.
Professional fees include fees paid for our attorneys, accountants and consultants.
Federal Deposit Insurance Corporation assessments are a specified percentage of assessable deposits, depending on the risk characteristics of the institution. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the FDIC increased its assessment rates for 2009 and charged a special assessment to increase the balance of the insurance fund.
Other expenses include expenses for insurance, postage, expenses associated with being a public company, expenses related to checking accounts, supervisory examinations and other miscellaneous operating activities.
Our Business Strategy
The following are the key elements of our business strategy:
• | Maintaining a well diversified loan portfolio.At June 30, 2010, approximately 46.0% of our loans were commercial in nature, consisting primarily of multi-family and commercial real estate, commercial business and construction loans, and 54.0% were retail in nature consisting of residential mortgage, home equity loans and lines of credit and other consumer loans. The Bank of Southern Connecticut’s loans are primarily commercial real estate and commercial business loans. On a pro forma basis, we anticipate that 56.9% of our loans will be commercial loans, while 43.1% will be retail loans. Upon completion of the offering and the merger, with Southern Connecticut Bancorp we plan to originate both commercial and retail loans in our market areas from all 14 of our locations. |
• | Expand retail deposits in the to be acquired New Haven branches.Our management team believes that an opportunity exists for a community bank to successfully compete for retail deposits in the New Haven market. We believe we will be able to build low cost core deposits through the four branches we will be acquiring from Southern Connecticut Bancorp and we plan to utilize our retail banking experience to build retail deposits in those |
68
Table of Contents
branches to complement Southern Connecticut Bancorp’s commercial deposits. At these New Haven branches, we intend to increase product offerings and achieve higher levels of profitability by more effectively serving customers. |
• | Maintaining high levels of asset quality. Although we have sought to maintain our asset quality at high levels by applying what we consider to be conservative underwriting standards, our non-performing assets increased from $2.7 million or 0.5% of total assets at December 31, 2008 to $12.7 million, or 2.25% of total assets at June 30, 2010, due to weakened economic conditions. As a result of the merger with Southern Connecticut Bancorp, our non-performing assets will increase, on a pro forma basis at June 30, 2010, to $19.3 million or 2.7% of total assets. |
To address increased problem assets, we have placed more attention and resources on loan workouts and, in certain cases, have modified loans with delinquent borrowers. Loan workouts and modifications are handled either by the collections department (in the case of home mortgages or home equity loans) or by the commercial workout department (in the case of commercial loans). Delinquent or otherwise nonperforming mortgage loan and home equity loan customers are asked to provide updated financial information and the reasons for their inability to pay or comply with the contractual terms of the loans. Once we have received this information, we obtain updated credit reports, appraisals, and title searches. One of our loan officers who has significant loan workout experience has been given primary responsibility for problem commercial loan workouts, although the specific modifications are handled by individual officers or by a commercial loan workout officer. Financial information is taken from the borrowers and a determination is made as to the best way to work out each of the loan credits.
From December 31, 2008 to June 30, 2010, we modified 18 residential mortgage loans, with aggregate outstanding balances of $3.5 million, either by a reduction of the interest rates, an extension of the terms, and/or interest only payments. As of June 30, 2010, of the 18 modified mortgage loans, two loans aggregating $192,000 were 30 days past due and the remaining were current.
From December 31, 2008 to June 30, 2010, we modified 13 commercial loans and commercial real estate loans, with aggregate outstanding balances of $6.8 million, either by an extension of the term, reduction of the interest rate, and/or temporary interest only period. As of June 30, 2010, of the 13 modified commercial loans, three loans aggregating $975,000 were in foreclosure, one borrower requested further modification on two loans that were current and eight loans were current.
We have tightened underwriting standards by applying more stringent loan-to-value ratio requirements and debt- service coverage ratio requirements. In May 2010 we increased minimum debt-service coverage ratios on owner occupied commercial real estate loans from 1.20x to 1.25x, on non-owner occupied commercial real estate loans from 1.20x to 1.35x and on commercial business lines and loans from 1.20x to 1.35x. In addition, we decreased minimum loan-to-value ratio requirements for owner occupied commercial real estate loans from 80% to 75% and for non-owner occupied commercial real estate loans from 75% to 70%. Furthermore, we are contacting delinquent borrowers early on in the delinquency stage in order to increase the probability of successful workout efforts. The underwriting standards discussed above mirror the historical practice of The Bank of Southern Connecticut.
In addition, since May 2010 we have proactively reduced commercial loan originations and currently only make new commercial loans to existing customers. We also currently do not consider new loan participations with other financial institutions.
We expect that Southern Connecticut Bancorp’s experienced commercial origination and credit team, consisting of two senior vice presidents, three credit analysts and three commercial loan officers, will join us upon completion of the merger. In connection with our merger due diligence, we have reviewed approximately 80% of Southern Connecticut Bancorp’s loan portfolio and we believe that adequate provisions have been made for specific and general reserves given the characteristics of the loan portfolio we are acquiring. In addition, both Naugatuck Valley Financial and Southern Connecticut Bancorp annually engage an outside loan review firm to perform a thorough review of their respective loan portfolios. These reviews involved analyzing all large borrowing relationships, delinquency trends, and loan collateral valuation in order to identify impaired loans.
• | Maintaining capital at “well capitalized” levels. Our policy has always been to protect the safety and soundness of Naugatuck Valley Savings and Loan through conservative credit and operational risk management, balance sheet strength and sound operations. As a result, our capital ratios are in excess of the “well capitalized” standards set by the Office of Thrift Supervision. Although our asset size has grown significantly since our initial public offering in |
69
Table of Contents
2004 we have maintained “well capitalized” levels of regulatory capital through additions to capital from profits as well as through an effective dividend policy that balances capital adequacy with shareholder returns. We expect that at the minimum, as adjusted, of the offering range our capital ratios will increase even after a portion of the stock proceeds are used in the acquisition of Southern Connecticut Bancorp. |
• | Expanding our franchise and footprint through acquisition opportunities and the opening of additional branch offices. In 2000, our branch network consisted of three locations. During the past ten years we have expanded our franchise through the opening of seven de novo branches so that at June 30, 2010, we operated out of ten full service branch locations in the greater Naugatuck Valley area. Additionally, our acquisition of Southern Connecticut Bancorp will expand our footprint to an area previously not served by our branch network, the greater New Haven, Connecticut market. We currently intend to keep all of the Southern Connecticut Bancorp offices open, and as a result, upon completion of the offering and merger, we will operate out of 14 locations throughout the greater Naugatuck Valley and New Haven market areas. Although we currently do not have any specific plans for additional de novo branching or acquisitions, we intend to continue to pursue such opportunities to expand our franchise and footprint in future years. |
• | Developing secondary mortgage market capabilities.During 2009, we began to pursue a significant initiative to develop a secondary mortgage operation which would generate fee income for Naugatuck Valley Savings and Loan. We invested in personnel and systems to increase our ability to sell residential mortgages in the secondary market with the goals of increasing fee income and reducing interest rate risk through the sale of conforming fixed-rate residential mortgages. With our systems in place we are now in process of hiring experienced loan production professionals in order to increase production. |
• | Improving our efficiency ratio.We believe we monitor our efficiency ratio closely and strive to improve it through expense control and increases in non interest income and in net interest income. For the six months ended June 30, 2010, our efficiency ratio was 74.78%. Our largest non-interest expense is compensation. We work to limit growth of compensation expense by controlling increases in the number of employees to those needed to support our growth and by maximizing the use of technology to increase efficiency. We work to increase non-interest income by charging competitive fees for services related to deposit accounts as well as through new initiatives to sell current fixed-rate mortgage production in the secondary market. We work to increase our net interest income by optimizing loan pricing and though the growth of low cost core deposits. |
• | Managing interest rate risk. We maintain manageable levels of interest rate risk by originating and holding adjustable rate commercial loans, by building core deposits which are less susceptible to interest rate changes and by borrowing long term from the Federal Home Loan Bank of Boston. We maintain “moderate” interest rate sensitivity as modeled by the Office of Thrift Supervision. We expect that the acquisition of Southern Connecticut Bancorp will reduce our interest rate sensitivity due their asset/liability structure which consists primarily of variable rate commercial loans and core demand deposits. |
• | Maintaining multiple sources of liquidity.During the current period of slow economic growth we recognize the importance of maintaining multiple sources of liquidity. Our primary source of liquidity is local deposits for which we compete aggressively with competitive rates and superior levels of customer service. We also utilize borrowings from both the Federal Home Loan Bank of Boston and our correspondent bank and recently we established a liquidity line with the Federal Reserve. In addition, we occasionally sell investments to meet liquidity needs. We also have the ability to sell a portion of our residential mortgage portfolio in the secondary market to meet liquidity needs. |
Expected Increase in Non-Interest Expense as a Result of the Conversion
Following the completion of the conversion and merger, our non-interest expense is expected to increase because of the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan and the possible implementation of a stock-based incentive plan, if approved by our stockholders.
Assuming that2,393,000 shares are sold in the offering:
• | the employee stock ownership plan will acquire 143,600 shares of common stock with a $1.4 million loan that is expected to be repaid over 20 years, resulting in an annual pre-tax expense of approximately $47,000 (assuming that the shares of common stock maintain a value of $10.00 per share); and |
• | the new equity incentive plan would award a number of shares equal to 3% of the shares sold in the offering, or 71,800 shares, to eligible participants, and such awards would be expensed as the awards vest. Assuming all shares |
70
Table of Contents
are awarded under the plan at a price of $10.00 per share, and that the awards vest over five years, the corresponding annual pre-tax expense associated with shares awarded under the plan would be approximately $95,000; and |
• | the new equity incentive plan would award options to purchase a number of shares equal to 10% of the shares sold in the offering, or 239,300 shares, to eligible participants, and such options would be expensed as the options vest. Assuming all options are awarded under the stock-based incentive plan at a price of $10.00 per share, and that the options vest over a minimum of five years, the corresponding annual pre-tax expense associated with options awarded under the stock-based incentive plan would be approximately $131,000 (assuming a grant-date fair value of$2.73 per option, using the Black-Scholes option valuation methodology). |
The actual expense that will be recorded for the employee stock ownership plan will be determined by the number of shares acquired by the plan in the offering and the market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and accelerated repayment of the loan will increase the employee stock ownership plan expense for those periods in which accelerated or larger loan repayments are made. Further, the actual expense of the shares awarded under the equity incentive plan will be determined by the number of shares encompassed by the plan, the fair market value of the stock on the grant date, which might be greater than $10.00 per share, and the mix of stock options and stock awards granted under the plan.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be critical accounting policies: allowance for loan losses and deferred income taxes.
Allowance for Loan Losses. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectability of the loan portfolio.
Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. We engage an independent review of our commercial loan portfolio annually and adjust our loan ratings based in part upon this review. In addition, our banking regulator as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. See notes 3 and 5 of the notes to the financial statements included in this prospectus.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed periodically as regulatory and business factors change. See note 12 of the notes to the financial statements in this prospectus.
Balance Sheet
Loans. Our principal lending activity is the origination of loans secured by real estate primarily located in our market area. We originate real estate loans secured by one- to four-family residential homes and multi-family and commercial real estate and construction loans. At June 30, 2010, real estate loans totaled $419.6 million, or 85.5% of total loans, compared to $410.9 million, or 85.4% of total loans, at December 31, 2009 and $372.8 million, or 85.4% of total loans, at December 31, 2008. Real estate loans have increased due to favorable interest rates together with real estate development continuing in our market area.
71
Table of Contents
The largest segment of our real estate loan portfolio is one- to four-family residential loans. At June 30, 2010, these loans totaled $225.6 million and represented 53.8% of real estate loans and 46.0% of total loans, compared to $229.7 million, which represented 55.9% of real estate loans and 47.7% of total loans, at December 31, 2009, and $216.2 million, which represented 58.0% of real estate loans and 49.5% of total loans, at December 31, 2008. One- to four-family residential loans decreased $4.1 million, or 1.8% from December 31, 2009 to June 30, 2010 and increased $13.5 million, or 6.2%, from December 31, 2008 to December 31, 2009. The decrease in the 2010 period reflects the effects of selling one- to four-family fixed rate mortgages in the secondary market. The increase in the 2009 period reflects growth in the mortgage portfolio from new borrowers and refinancing of existing customers.
Multi-family and commercial real estate loans are the second largest segment of our real estate loan portfolio. These loans were $160.1 million, which represented 38.2% of real estate loans and 32.6% of total loans, at June 30, 2010 compared to $134.9 million, which represented 32.8% of real estate loans and 28.0% of total loans, at December 31, 2009, and $106.0 million, which represented 28.4% of real estate loans and 24.3% of total loans, at December 31, 2008. Multi-family and commercial real estate loans increased due to the efforts of our business development officers to grow market share and attract new business.
We also originate construction loans secured by residential and commercial real estate. These loans were $33.8 million and represented 8.1% of real estate loans and 6.9% of total loans at June 30, 2010 compared to $46.3 million, which represented 11.3% of real estate loans and 9.6% of total loans, at December 31, 2009, and $50.6 million, which represented 13.6% of real estate loans and 11.6% of total loans, at December 31, 2008. Construction loans decreased primarily due to decreased loan demand by contractors for construction loans, combined with a portion of these loans rolling over to permanent loans at the end of the construction period.
We originate commercial business loans secured by business assets other than real estate, such as business equipment, inventory and accounts receivable and letters of credit. Commercial business loans totaled $31.9 million, or 6.5% of total loans, at June 30, 2010, compared to $31.3 million, or 6.5% of total loans, at December 31, 2009, and $22.6 million, or 5.2% of total loans, at December 31, 2008.
We also originate a variety of consumer loans, including second mortgage loans, home equity lines of credit and loans secured by savings accounts and automobiles. Consumer loans totaled $39.4 million, or 8.0% of total loans, at June 30, 2010, compared to $38.9 million, or 8.1% of total loans, at December 31, 2009, and $41.3 million, or 9.5% of total loans, at December 31, 2008.
The following table sets forth the composition of our loan portfolio at the dates indicated.
At June 30, 2010 | At December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||
Real estate loans: | ||||||||||||||||||
One-to four-family | $ | 225,624 | 45.97 | % | $ | 229,693 | 47.74 | % | $ | 216,201 | 49.51 | % | ||||||
Construction | 33,843 | 6.89 | 46,298 | 9.62 | 50,596 | 11.59 | ||||||||||||
Multi-family and commercial real estate | 160,149 | 32.62 | 134,931 | 28.05 | 106,028 | 24.28 | ||||||||||||
Total real estate loans | 419,616 | 85.48 | 410,922 | 85.41 | 372,825 | 85.38 | ||||||||||||
Commercial business loans | 31,899 | 6.50 | 31,325 | 6.51 | 22,567 | 5.17 | ||||||||||||
Consumer loans: | ||||||||||||||||||
Savings accounts | 2,549 | 0.52 | 1,113 | 0.23 | 1,093 | 0.25 | ||||||||||||
Personal | 266 | 0.05 | 256 | 0.05 | 262 | 0.06 | ||||||||||||
Automobile | 185 | 0.04 | 230 | 0.05 | 271 | 0.06 | ||||||||||||
Home equity | 36,375 | 7.41 | 37,276 | 7.75 | 39,655 | 9.08 | ||||||||||||
Total consumer loans | 39,375 | 8.02 | 38,875 | 8.08 | 41,281 | 9.45 | ||||||||||||
Total loans | 490,890 | 100.00 | % | 481,122 | 100.00 | % | 436,673 | 100.00 | % | |||||||||
Less: | ||||||||||||||||||
Allowance for loan losses | 5,119 | 3,996 | 2,869 | |||||||||||||||
Undisbursed construction loans | 2,766 | 3,336 | 1,299 | |||||||||||||||
Deferred loan origination fees | 524 | 486 | 529 | |||||||||||||||
Loans receivable, net | $ | 482,481 | $ | 473,304 | $ | 431,976 | ||||||||||||
72
Table of Contents
At December 31, | ||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||
Real estate loans: | ||||||||||||||||||
One-to four-family | $ | 193,787 | 53.24 | % | $ | 179,374 | 57.27 | % | $ | 156,900 | 59.44 | % | ||||||
Construction | 41,041 | 11.27 | 30,124 | 9.62 | 24,943 | 9.45 | ||||||||||||
Multi-family and commercial real estate | 70,051 | 19.25 | 45,879 | 14.65 | 33,608 | 12.73 | ||||||||||||
Total real estate loans | 304,879 | 83.76 | 255,377 | 81.54 | 215,451 | 81.62 | ||||||||||||
Commercial business loans | 16,690 | 4.59 | 13,508 | 4.31 | 9,728 | 3.69 | ||||||||||||
Consumer loans: | ||||||||||||||||||
Savings accounts | 1,272 | 0.35 | 634 | 0.20 | 785 | 0.30 | ||||||||||||
Personal | 302 | 0.08 | 275 | 0.09 | 212 | 0.08 | ||||||||||||
Automobile | 327 | 0.09 | 186 | 0.06 | 160 | 0.06 | ||||||||||||
Home equity | 40,517 | 11.13 | 43,220 | 13.80 | 37,628 | 14.25 | ||||||||||||
Total consumer loans | 42,418 | 11.65 | 44,315 | 14.15 | 38,785 | 14.69 | ||||||||||||
Total loans | 363,987 | 100.00 | % | 313,200 | 100.00 | % | 263,964 | 100.00 | % | |||||||||
Less: | ||||||||||||||||||
Allowance for loan losses | 2,163 | 2,071 | 1,878 | |||||||||||||||
Undisbursed construction loans | 1,532 | 2,343 | 2,258 | |||||||||||||||
Deferred loan origination fees | 461 | 410 | 401 | |||||||||||||||
Loans receivable, net | $ | 359,831 | $ | 308,376 | $ | 259,427 | ||||||||||||
The following table sets forth certain information at June 30, 2010 and December 31, 2009 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.
At June 30, 2010 | ||||||||||||
(In thousands) | Real Estate Loans | Commercial Business Loans | Consumer Loans | Total Loans | ||||||||
One year or less | $ | 61,249 | $ | 22,454 | $ | 23,015 | $ | 106,718 | ||||
More than one year to five years | 104,204 | 6,034 | 5,248 | 115,306 | ||||||||
More than five years | 254,343 | 3,411 | 11,112 | 268,866 | ||||||||
Total | $ | 419,616 | $ | 31,899 | $ | 39,375 | $ | 490,890 | ||||
At December 31, 2009 | ||||||||||||
(In thousands) | Real Estate Loans | Commercial Business Loans | Consumer Loans | Total Loans | ||||||||
One year or less | $ | 54,992 | $ | 17,553 | $ | 22,387 | $ | 94,932 | ||||
More than one year to five years | 92,609 | 8,696 | 3,615 | 104,920 | ||||||||
More than five years | 263,321 | 5,076 | 12,873 | 281,270 | ||||||||
Total | $ | 410,922 | $ | 31,325 | $ | 38,875 | $ | 481,122 | ||||
73
Table of Contents
The following table sets forth the dollar amount of all loans at June 30, 2010 and December 31, 2009 that are due after June 30, 2011 and December 31, 2010, respectively, and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude applicable loans in process, nonperforming loans and deferred loan fees, net.
At June 30, 2010 and Due After June 30, 2011 | |||||||||
(In thousands) | Fixed-Rates | Floating or Adjustable- Rates | Total | ||||||
Real estate loans: | |||||||||
One- to four-family | $ | 211,100 | $ | 12,003 | $ | 223,103 | |||
Construction | 4,894 | — | 4,894 | ||||||
Multi-family and commercial | 9,240 | 121,130 | 130,370 | ||||||
Commercial business loans | 5,974 | 3,471 | 9,445 | ||||||
Consumer loans | 14,509 | 1,851 | 16,360 | ||||||
Total | $ | 245,717 | $ | 138,455 | $ | 384,172 | |||
At December 31, 2009 and Due After December 31, 2010 | |||||||||
(In thousands) | Fixed-Rates | Floating or Adjustable- Rates | Total | ||||||
Real estate loans: | |||||||||
One- to four-family | $ | 213,925 | $ | 19,791 | $ | 233,716 | |||
Construction | 7,612 | 555 | 8,167 | ||||||
Multi-family and commercial | 5,214 | 108,832 | 114,046 | ||||||
Commercial business loans | 10,378 | 3,395 | 13,773 | ||||||
Consumer loans | 16,176 | 312 | 16,488 | ||||||
Total | $ | 253,305 | $ | 132,885 | $ | 386,190 | |||
The following table shows loan origination activity during the periods indicated.
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Total loans at beginning of period | $ | 481,122 | $ | 436,673 | $ | 436,673 | $ | 363,987 | $ | 313,200 | ||||||||||
Loans originated: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
One- to four-family | 16,117 | 24,142 | 48,387 | 41,472 | 30,172 | |||||||||||||||
Construction | 8,630 | 11,252 | 24,518 | 34,459 | 32,913 | |||||||||||||||
Multi-family and commercial | 19,559 | 8,090 | 24,547 | 40,566 | 30,009 | |||||||||||||||
Commercial business loans | 7,534 | 9,462 | 21,598 | 15,597 | 10,714 | |||||||||||||||
Consumer loans | 8,376 | 7,178 | 13,726 | 13,235 | 15,914 | |||||||||||||||
Total loans originated | 60,216 | 60,124 | 132,776 | 145,329 | 119,722 | |||||||||||||||
Deduct: | ||||||||||||||||||||
Real estate loan principal repayments | (26,287 | ) | (30,592 | ) | (59,355 | ) | (48,551 | ) | (43,595 | ) | ||||||||||
Loan sales | (9,325 | ) | — | — | — | — | ||||||||||||||
Other repayments | (14,836 | ) | (12,573 | ) | (28,972 | ) | (24,092 | ) | (25,340 | ) | ||||||||||
Net loan activity | 9,768 | 16,959 | 44,449 | 72,686 | 50,787 | |||||||||||||||
Total loans at end of period | $ | 490,890 | $ | 453,632 | $ | 481,122 | $ | 436,673 | $ | 363,987 | ||||||||||
We did not purchase any loans during the periods presented in the table above.
Securities. Our securities portfolio consists primarily of mortgage-backed securities and collateralized mortgage obligations with maturities of 30 years or less, money market preferred obligations, as well as U.S. Government and agency obligations. Securities decreased by $175,000 in the six months ended June 30, 2010 due to thepurchase of additional mortgage-backed securities during this period offset by the sale of a corporate bond and principal repayments on mortgage-backed securities. Securities decreased by $24.8 million in the year ended December 31, 2009 primarily due to the sale of our entire municipal bond portfolio, combined with the sale of a portion of our mortgage-backed security portfolio.
74
Table of Contents
Securities decreased by $2.6 million in the year ended December 31, 2008 primarily due to the Other Than Temporary Impairment (“OTTI”) write down on our auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral as a result of the actions of the United States Treasury Department and the Federal Housing Finance Agency, with respect to Fannie Mae and Freddie Mac, in the third quarter of 2008. Substantially all of our mortgage-backed securities and collateralized mortgage obligations were issued either by Ginnie Mae, Fannie Mae or Freddie Mac. Our securities portfolio also includes a private label collateralized mortgage obligation and a corporate obligation.
The following table sets forth the amortized costs and fair values of our securities portfolio at the dates indicated.
At June 30, 2010 | At December 31, | |||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
U.S. Government and agency obligations | $ | 1,526 | $ | 1,594 | $ | 1,529 | $ | 1,583 | $ | 1,537 | $ | 1,604 | $ | 2,749 | $ | 2,744 | ||||||||
Mortgage-backed securities | 22,454 | 23,533 | 23,561 | 24,500 | 42,297 | 43,030 | 31,352 | 31,261 | ||||||||||||||||
Collateralized mortgage obligations | 3,029 | 2,971 | 3,091 | 3,000 | 3,339 | 3,183 | 3,547 | 3,494 | ||||||||||||||||
Municipal obligations | — | — | — | — | 8,888 | 8,993 | 14,092 | 14,075 | ||||||||||||||||
Money market preferred obligations | 8,200 | 7,486 | 8,200 | 7,880 | 9,273 | 6,744 | 12,700 | 12,700 | ||||||||||||||||
Corporate obligations | — | — | 1,000 | 660 | 1,000 | 290 | 1,000 | 990 | ||||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||
US Government and agency obligations | — | — | — | — | — | — | 1,000 | 998 | ||||||||||||||||
Mortgage-backed securities | 3,315 | 3,352 | 1,451 | 1,475 | — | — | — | — | ||||||||||||||||
Interest-bearing balances | — | — | — | — | — | — | 190 | 190 | ||||||||||||||||
Total | $ | 38,524 | $ | 38,936 | $ | 38,832 | $ | 39,098 | $ | 66,334 | $ | 63,844 | $ | 66,630 | $ | 66,452 | ||||||||
At June 30, 2010, we did not own any securities, other than U.S. Government and agency securities, that had an aggregate book value in excess of 10% of our total capital at that date.
The following table sets forth the final maturities and weighted average yields of securities at June 30, 2010. Mortgage-backed securities and collateralized mortgage obligations are secured by mortgages and as a result produce monthly principal repayments which are not reflected in the table below. Certain mortgage-backed securities, collateralized mortgage obligations and money market preferred obligations have adjustable interest rates and reprice within the various maturity ranges. These repricing schedules are not reflected in the table below. At June 30, 2010, mortgage-backed securities and collateralized mortgage obligations with adjustable rates totaled $9.9 million. The auction markets for the money market preferred obligations listed are not currently active. As a result, the money market preferred obligations are listed below based on their repricing schedule, rather than their expected maturities.
One Year or Less | More than One Year to Five Years | More than Five Years to Ten Years | ||||||||||||||||
(Dollars in thousands) | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | ||||||||||||
Available-for-sale securities: | ||||||||||||||||||
U.S. Government and agency obligations | $ | — | $ | 1,090 | 4.38 | % | $ | 504 | 5.55 | % | ||||||||
Mortgage-backed securities | 321 | 3.50 | % | — | % | — | ||||||||||||
Collateralized mortgage obligations | — | — | — | |||||||||||||||
Money market preferred obligations | 7,486 | 4.40 | % | — | % | — | ||||||||||||
Total available-for-sale securities | $ | 7,807 | 4.36 | % | $ | 1,090 | 4.38 | % | $ | 504 | 5.55 | % | ||||||
Held-to-maturity securities: | �� | |||||||||||||||||
Mortgage-backed securities | — | — | — | |||||||||||||||
Total held-to-maturity securities | — | — | — | |||||||||||||||
Total | $ | 7,807 | 4.36 | % | $ | 1,090 | 4.38 | % | $ | 504 | 5.55 | % | ||||||
75
Table of Contents
More than Ten Years | Total | |||||||||||
(Dollars in thousands) | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | ||||||||
Available-for-sale securities: | ||||||||||||
U.S. Government and agency obligations | $ | — | — | % | $ | 1,594 | 4.75 | % | ||||
Mortgage-backed securities | 23,212 | 4.51 | 23,533 | 4.50 | ||||||||
Collateralized mortgage obligations | 2,971 | 4.24 | 2,971 | 4.24 | ||||||||
Money market preferred obligations | — | 7,486 | 4.40 | |||||||||
Total available-for-sale securities | $ | 26,183 | 4.48 | $ | 35,584 | 4.47 | ||||||
Held-to-maturity securities: | ||||||||||||
Mortgage-backed securities | $ | 3,315 | 4.47 | % | $ | 3,315 | 4.47 | % | ||||
Total held-to-maturity securities | 3,315 | 4.47 | 3,315 | 4.47 | ||||||||
Total | $ | 29,498 | 4.48 | $ | 38,899 | 4.47 | ||||||
Bank Owned Life Insurance. During 2003, we purchased life insurance policies on certain key executives. We purchased $2.5 million of additional policies in the fourth quarter of 2005. Bank owned life insurance is recorded as an asset at the lower of its cash surrender value or the amount that can be realized. Income earned on bank owned life insurance policies is exempt from income taxes.
Deposits. Our primary source of funds is retail deposit accounts held principally by individuals and businesses within our market area. The deposit base is comprised of certificate accounts, regular savings accounts, checking and NOW accounts, money market savings accounts and health savings accounts. At June 30, 2010 and December 31, 2009, we had no brokered deposits. Total deposits increased $13.4 million or 3.5% in the six months ended June 30, 2010. During that time period, certificate accounts increased by 2.7%, regular savings accounts increased by 8.5%, checking and NOW accounts increased by 3.3% and money market accounts decreased by 1.7%. Total deposits increased $17.9 million or 4.9% in the year ended December 31, 2009. During that time period, certificate accounts decreased 1.6%, regular savings accounts increased by 36.1%, checking and NOW accounts increased by 9.1% and money market savings accounts decreased by 1.9%. The increase in deposits was primarily due to competitive pricing in our market area. The increase in regular savings accounts was primarily due to the inflow of funds into a more liquid regular savings product with an attractive rate.
The following table sets forth the balances of our deposit products at the date indicated.
At June 30, 2010 | At December 31, | |||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Certificate accounts | $ | 238,204 | $ | 231,905 | $ | 235,764 | $ | 202,411 | ||||
Regular savings accounts | 71,507 | 65,916 | 48,427 | 41,480 | ||||||||
Checking and NOW accounts | 59,230 | 57,319 | 52,537 | 49,511 | ||||||||
Money market savings accounts | 25,345 | 25,791 | 26,298 | 27,996 | ||||||||
Total | $ | 394,286 | $ | 380,931 | $ | 363,026 | $ | 321,398 | ||||
The following table indicates the amount of jumbo certificate accounts by time remaining until maturity at June 30, 2010. Jumbo certificate accounts require minimum deposits of $100,000.
Maturity Period | Certificate Accounts | ||
(In thousands) | |||
Three months or less | $ | 12,824 | |
Over three through six months | 11,657 | ||
Over six through twelve months | 15,515 | ||
Over twelve months | 47,995 | ||
Total | $ | 87,991 | |
76
Table of Contents
The following table sets forth the time deposits classified by rates at the dates indicated.
At June 30, 2010 | At December 31, | |||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
0.00 – 0.99% | $ | 44,589 | $ | 40,634 | $ | 302 | $ | 256 | ||||
1.00 – 1.99% | 73,437 | 52,467 | 23,824 | 21,855 | ||||||||
2.00 – 2.99% | 11,020 | 13,623 | 42,991 | 1,583 | ||||||||
3.00 – 3.99% | 29,826 | 43,968 | 85,314 | 8,022 | ||||||||
4.00 – 4.99% | 77,352 | 78,787 | 78,579 | 118,310 | ||||||||
5.00 – 5.99% | 1,980 | 2,426 | 4,754 | 52,385 | ||||||||
Total | $ | 238,204 | $ | 231,905 | $ | 235,764 | $ | 202,411 | ||||
The following table sets forth the amount and maturities of time deposits classified by rates at June 30, 2010.
Amount Due | Total | Percent of Total Time Deposit Accounts | ||||||||||||||||
(Dollars in thousands) | Less Than One Year | More Than One Year to Two Years | More Than Two Years to Three Years | More Than Three Years | ||||||||||||||
0.00 – 0.99% | $ | 38,452 | $ | 4,915 | $ | 586 | $ | 636 | $ | 44,589 | 18.72 | % | ||||||
1.00 – 1.99% | 57,771 | 15,201 | 150 | 315 | 73,437 | 30.83 | ||||||||||||
2.00 – 2.99% | 724 | 1,962 | 3,626 | 4,708 | 11,020 | 4.63 | ||||||||||||
3.00 – 3.99% | 8,476 | 14,320 | 1,506 | 5,524 | 29,826 | 12.52 | ||||||||||||
4.00 – 4.99% | 11,497 | 52,306 | 8,465 | 5,084 | 77,352 | 32.47 | ||||||||||||
5.00 – 5.99% | 757 | 81 | 1,044 | 98 | 1,980 | 0.83 | ||||||||||||
Total | $ | 117,677 | $ | 88,785 | $ | 15,377 | $ | 16,365 | $ | 238,204 | 100.00 | % | ||||||
The following table sets forth deposit activity for the periods indicated.
Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||
Beginning balance | $ | 380,931 | $ | 363,026 | $ | 363,026 | $ | 321,398 | $ | 289,198 | |||||
Increase before interest credited | 9,730 | 6,220 | 9,435 | 32,365 | 22,457 | ||||||||||
Interest credited | 3,625 | 4,459 | 8,470 | 9,263 | 9,743 | ||||||||||
Net increase in deposits | 13,355 | 10,679 | 17,905 | 41,628 | 32,200 | ||||||||||
Ending balance | $ | 394,286 | $ | 373,705 | $ | 380,931 | $ | 363,026 | $ | 321,398 | |||||
Borrowings. We borrow funds from the Federal Home Loan Bank of Boston during periods of low liquidity to match fund increases in our fixed-rate mortgage portfolio and to provide long-term fixed-rate funding with the goal of decreasing our exposure to an increase in interest rates. In addition, we occasionally borrow short-term from correspondent banks to cover temporary cash needs. At June 30, 2010, we had the ability to borrow a total of $3.5 million from a correspondent bank, none of which was borrowed at such date. We also use securities sold under agreements to repurchase as a source of borrowings.
The following table presents certain information regarding our Federal Home Loan Bank advances during the periods and at the dates indicated.
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
Maximum amount of advances outstanding at any month end during the period | $ | 112,339 | $ | 117,211 | $ | 117,211 | $ | 119,628 | $ | 84,878 | ||||||||||
Average advances outstanding during the period | 108,703 | 109,300 | 104,268 | 107,182 | 69,866 | |||||||||||||||
Weighted average interest rate during the period | 2.77 | % | 3.96 | % | 3.77 | % | 4.31 | % | 4.89 | % | ||||||||||
Balance outstanding at end of period | $ | 108,396 | $ | 100,808 | $ | 112,553 | $ | 118,421 | $ | 84,878 | ||||||||||
Weighted average interest rate at end of period | 2.53 | % | 4.09 | % | 2.91 | % | 3.80 | % | 4.66 | % |
77
Table of Contents
Equity. Total equity increased by $912,000, or 1.8%, to $51.2 million at June 30, 2010 from $50.3 million at December 31, 2009. Total equity increased by $4.7 million, or 10.3%, to $50.3 million at December 31, 2009 from $45.6 million at December 31, 2008. The increase in stockholders’ equity for the six months ended June 30, 2010 was primarily due to net income of $993,000 for the six month period, and $122,000 in capital adjustments related to our 2005 Equity Incentive Plan, partially offset by dividends of $157,000 paid to stockholders, a net decrease to the unrealized loss on available-for-sale securities of $46,000 and stock repurchases of $2,000. The increase in 2009 resulted from net income of $2.0 million, a net decrease to the unrealized loss on available for sale securities of $2.6 million and $643,000 in capital adjustments related to our 2005 Equity Incentive Plan, partially offset by dividends of $447,000 paid to stockholders and stock repurchases of $25,000. Our average equity to average assets ratio was 9.14% at June 30, 2010, compared to 8.97% at December 31, 2009 and 9.71% at December 31, 2008.
Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009
Overview.
Six Months Ended June 30, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Net income | $ | 933 | $ | 608 | ||||
Return on average assets | 0.35 | % | 0.22 | % | ||||
Return on average equity | 3.86 | % | 2.56 | % |
For the six months ended June 30, 2010, Naugatuck Valley Financial recorded net income of $993,000 compared to net income of $608,000 for the six months ended June 30, 2009. The increase was primarily due to a higher level of net interest income, partially offset by a higher loan loss provision, lower noninterest income and higher noninterest expense.
Net Interest Income. Net interest income increased by $1.7 million, or 23.3%, to $9.1 million for the six months ended June 30, 2010. For the six month period ended June 30, 2010, total interest income increased $234,000, or 1.7%, combined with a decrease of $1.5 million, or 22.4%, in total interest expense. We experienced an increase in the average balances of interest earning assets of 3.5% in the six month period, while the average rate earned on these assets decreased by 10 basis points in the period. The increase in interest earning assets is attributed primarily to an increase in the loan portfolio. The average balance in the loan portfolio increased by 9.3% in the period, primarily in the commercial mortgage portfolio. We experienced a decrease in the average balance of investment securities of 31.2% in the six month period, due to sales of mortgage backed securities and increased prepayment speeds in the mortgage backed securities portfolio.
Interest expense decreased in the six month period ended June 30, 2010 by $1.5 million, or 22.4%, as a result of a decrease of 68 basis points in the average cost of interest bearing liabilities. The decrease in the average cost of interest bearing liabilities, due primarily to the decreasing rate environment, was partially offset by an increase in the average balance of interest-bearing liabilities of $18.1 million, or 3.7%.
78
Table of Contents
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances only. During the 2009 period, we held tax-exempt municipal securities with average balances of $3.9 million, and during the 2010 and 2009 periods we held preferred money market securities with an average balance of $8.2 million and $12.7 million, respectively, which recognize a dividends received deduction. The yields below do not reflect the tax benefits of these securities.
At June 30, 2010 | For the Six Months Ended June 30, | ||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||
(Dollars in thousands) | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | ||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Loans | 5.63 | % | $ | 479,210 | $ | 13,466 | 5.62 | % | $ | 438,591 | $ | 12,765 | 5.82 | % | |||||||
Fed Funds sold | 0.02 | 3,762 | 1 | 0.05 | 8,762 | 4 | 0.09 | ||||||||||||||
Investment securities | 4.20 | 38,876 | 862 | 4.43 | 56,530 | 1,326 | 4.69 | ||||||||||||||
Federal Home Loan Bank stock | 0.00 | 6,252 | — | 0.00 | 6,252 | — | 0.00 | ||||||||||||||
Total interest-earning assets | 5.45 | 528,100 | 14,329 | 5.43 | 510,135 | 14,095 | 5.53 | ||||||||||||||
Noninterest-earning assets | 35,064 | 31,071 | |||||||||||||||||||
Total assets | $ | 563,164 | $ | 541,206 | |||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Certificate accounts | 2.73 | $ | 234,759 | $ | 3,292 | 2.80 | $ | 240,527 | $ | 4,071 | 3.39 | ||||||||||
Regular savings accounts and escrow | 0.60 | 71,315 | 194 | 0.54 | 56,818 | 199 | 0.70 | ||||||||||||||
Checking and NOW accounts | 0.08 | 56,913 | 24 | 0.08 | 53,577 | 23 | 0.09 | ||||||||||||||
Money market savings accounts | 0.88 | 26,289 | 117 | 0.89 | 25,468 | 171 | 1.34 | ||||||||||||||
Total interest-bearing deposits | 1.96 | 389,276 | 3,627 | 1.86 | 376,390 | 4,464 | 2.37 | ||||||||||||||
FHLB advances | 2.54 | 108,703 | 1,503 | 2.77 | 109,299 | 2,166 | 3.96 | ||||||||||||||
Other borrowings | 0.89 | 11,717 | 57 | 0.97 | 5,932 | 51 | 1.72 | ||||||||||||||
Total interest-bearing liabilities | 1.96 | 509,696 | 5,187 | 2.04 | 491,621 | 6,681 | 2.72 | ||||||||||||||
Noninterest-bearing liabilities | 1,974 | 2,102 | |||||||||||||||||||
Total liabilities | 511,670 | 493,723 | |||||||||||||||||||
Capital | 51,494 | 47,483 | |||||||||||||||||||
Total liabilities and capital | $ | 563,164 | $ | 541,206 | |||||||||||||||||
Net interest income | $ | 9,142 | $ | 7,414 | |||||||||||||||||
Interest rate spread | 3.49 | 3.39 | 2.81 | ||||||||||||||||||
Net interest margin | 3.56 | 3.46 | 2.91 | ||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 103.68 | 103.61 | 103.77 |
79
Table of Contents
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. The net column represents the sum of the prior columns.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
(In thousands) | Volume | Rate | Net | |||||||||
Interest income: | ||||||||||||
Loans | $ | 1,117 | $ | (416 | ) | $ | 701 | |||||
Fed Funds sold | (2 | ) | (1 | ) | (3 | ) | ||||||
Investment securities | (395 | ) | (69 | ) | (464 | ) | ||||||
Total interest income | 720 | (486 | ) | 234 | ||||||||
Interest expense: | ||||||||||||
Certificate accounts | (96 | ) | (683 | ) | (779 | ) | ||||||
Regular savings accounts | (40 | ) | 35 | (5 | ) | |||||||
Checking and NOW accounts | 1 | — | 1 | |||||||||
Money market savings accounts | 6 | (60 | ) | (54 | ) | |||||||
Total deposit expense | (129 | ) | (708 | ) | (837 | ) | ||||||
FHLBB advances | (12 | ) | (651 | ) | (663 | ) | ||||||
Other borrowings | 11 | (5 | ) | 6 | ||||||||
Total interest expense | (130 | ) | (1,364 | ) | (1,494 | ) | ||||||
Net interest income | $ | 850 | $ | 878 | $ | 1,728 | ||||||
Provision for Loan Losses.We recorded a provision for loan losses of $1.2 million for the six month period ended June 30, 2010, compared to $557,000 for the same 2009 period. The increase in the provision in the 2010 period was due primarily to an increase in non-performing and classified loans, the growth of the total loan portfolio, a change in the mix of the portfolio towards commercial real estate loans which are generally inherently riskier than one-to-four family loans, and general economic conditions. Additionally, the six month period ended June 30, 2010 includes the allocation of a specific reserve of $275,000 for one commercial real estate loan based primarily on the results of a recent independent appraisal of the collateral property. The charge-offs in the 2010 period were due to a write down of the value of a two properties taken as a deed-in-lieu of foreclosure, the charge-off of a commercial line of credit and a personal line of credit.
Noninterest Income. The following table shows the components of noninterest income and the percentage changes for the six months ended June 30, 2010 and 2009.
Six Months Ended June 30, | ||||||
(Dollars in thousands) | 2010 | 2009 | ||||
Fees for services related to deposit accounts | $ | 490 | $ | 493 | ||
Fees for other services | 386 | 299 | ||||
Income from bank owned life insurance | 167 | 171 | ||||
Income from investment advisory services, net | 95 | 158 | ||||
Gain on investments | 11 | 176 | ||||
Other income | 81 | 56 | ||||
Total | $ | 1,230 | $ | 1,353 | ||
Noninterest income decreased $123,000, or 9.1% in the six month period, as compared to the same 2009 period. The decrease in the six month period was primarily due to a lower level of gains realized on the sale of investments and income from investment advisory services in the 2010 period, partially offset by an increase in fees for other services. The increase in fees for other services is largely due to the fees associated with the increase in activity in the secondary mortgage market.
80
Table of Contents
Noninterest Expense.The following table shows the components of noninterest expense and the percentage changes for the six months ended June 30, 2010 and 2009.
Six Months Ended June 30, | ||||||
(Dollars in thousands) | 2010 | 2009 | ||||
Compensation, taxes and benefits | $ | 4,196 | $ | 3,827 | ||
Office occupancy | 1,178 | 1,093 | ||||
Computer processing | 462 | 470 | ||||
Directors compensation | 388 | 317 | ||||
Professional fees | 370 | 216 | ||||
FDIC insurance premiums | 332 | 625 | ||||
Advertising | 166 | 185 | ||||
Office supplies | 64 | 54 | ||||
Loss on foreclosed real estate, net | 31 | 9 | ||||
Other expenses (1) | 586 | 600 | ||||
Total | $ | 7,773 | $ | 7,396 | ||
(1) | Other expenses for all periods include, among other items, insurance, postage and expenses related to checking accounts. |
Noninterest expense increased by $377,000 for the six month period ended June 30, 2010 over the same 2009 period. The increase was primarily the result of increases in compensation costs, directors compensation, office occupancy and loss on foreclosed real estate, partially offset by decreases in Federal Deposit Insurance Corporation insurance premiums, advertising and computer processing over the 2009 period. The 2009 period includes the accrual for the Federal Deposit Insurance Corporation onetime special assessment in the amount of $250,000. Additionally, “other expenses” in the 2010 period includes nonrecurring costs associated with the planned acquisition of Southern Connecticut Bancorp totaling approximately $155,000.
Income Taxes. The provision for income taxes increased by $229,000, to $435,000 for the six months ended June 30, 2010 compared to $206,000 for the six months ended June 30, 2009, primarily as a result of higher earnings. The effective tax rate for the six months ended June 30, 2010 was 30.4%, compared to 25.3% for the same period in 2009. The increase in the effective tax rate is primarily the result of selling the entire municipal bond portfolio in the first quarter of 2009.
Comparison of Operating Results for the Years Ended December 31, 2009, 2008 and 2007
Overview.
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Net income (loss) | $ | 1,993 | $ | (312 | ) | $ | 1,420 | |||||
Return (loss) on average assets | 0.37 | % | (0.06 | )% | 0.33 | % | ||||||
Return (loss) on average equity | 4.10 | % | (0.64 | )% | 2.77 | % |
Net income for the year ended December 31, 2009 increased $2.3 million from net income in 2008. The increase was primarily due to the OTTI charge of $3.4 million ($2.2 million after tax) on auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral which was recorded in 2008. We experienced an increase of $469,000 in the provision for loan losses and an increase in noninterest expense of $1.1 million, which were offset by a $1.5 million increase in net interest income. Excluding the OTTI charge, we experienced an increase in noninterest income of $400,000.
Net income for the year ended December 31, 2008 decreased $1.7 million from net income in 2007. The decrease resulted primarily from an after tax OTTI charge of $3.4 million ($2.2 million after tax) on auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral. In addition, we experienced an increase of $524,000 in the provision for loan losses and an increase in noninterest expense of $1.0 million, partially offset by a $2.4 million increase in net interest income and a $25,000 increase in noninterest income.
81
Table of Contents
Net Interest Income.Net interest income for the year ended December 31, 2009, totaled $15.8 million compared to $14.3 million for the year ended December 31, 2008, an increase of $1.5 million, or 10.2%. The increase in net interest income was primarily due to a decrease in interest expense. Interest expense decreased by $1.4 million, or 9.8% during this period, primarily due to a decrease in the average rates paid on interest bearing liabilities. The average rates paid on deposits and borrowings decreased by 51 basis points in 2009. We experienced an increase in the average balances of deposits of 9.2% for the twelve month periods, while the average balances of borrowings increased by 5.3% in the twelve month period. Increases in average balances of deposits were experienced in all categories, except checking and NOW accounts and money market accounts where there was a small decrease.
We also experienced an increase in the average balance of interest earning assets of 7.5%, partially offset by a decrease in the average rate earned on these assets of 40 basis points. The increase in interest earning assets is attributed primarily to an increase in the loan portfolio, partially offset by decreases in the average balances of the investment portfolio over the same periods. The average balances in the loan portfolio increased by 13.0% in 2009. The largest increases were in the commercial mortgage portfolio followed by the residential mortgage portfolio, due in part to the efforts of our business development officers to grow market share and attract new customers.
Net interest income for the year ended December 31, 2008, totaled $14.3 million compared to $11.9 million for the year ended December 31, 2007, an increase of $2.4 million or 20.6%. The increase in 2008 was due to an increase in the average balance of interest earning assets of 17.6%, partially offset by a decrease in the average rate earned on these assets of 27 basis points.
The increase in interest earning assets is attributed primarily to an increase in the loan portfolio. The average balances in the loan portfolio increased by 19.6% in 2008. The largest increases were in the commercial mortgage portfolio followed by the residential mortgage portfolio.
The increase in interest income was partially offset by an increase in interest expense. Interest expense increased by $730,000, or 5.5% in 2008 due to increases in the average balances of deposits and borrowings, partially offset by falling rates on deposits and borrowings. The average balances of deposits increased by 11.3% in 2008, and the average balance of borrowings increased by 53.7% due to increased loan demand. We experienced a decrease of 40 basis points in the average rate paid on deposits and borrowings during 2008. The largest increases in deposits were in certificates of deposit, followed by smaller increases in money market accounts and savings accounts, partially offset by a decrease in checking accounts. The increase in certificates of deposit was partially due to the opening of our 10th office in the third quarter of 2008, combined with promotional rate accounts.
82
Table of Contents
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances only. During the 2009, 2008 and 2007 periods, we held tax-exempt municipal securities with average balances of $950,000, $9.9 million and $15.0 million, respectively, and during the 2009, 2008 and 2007 periods we held preferred money market securities with an average balance of $9.2 million, $11.9 million and $12.7 million, respectively, which recognize a dividends received deduction. The yields below do not reflect the tax benefits of these securities.
At December 31, 2009 | |||||||||||||||||||||||||||
2009 | 2008 | 2007 | |||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | ||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans | $ | 448,131 | $ | 25,954 | 5.79 | % | $ | 396,524 | $ | 24,556 | 6.19 | % | $ | 331,490 | $ | 21,681 | 6.54 | % | |||||||||
Fed Funds sold | 5,444 | 5 | 0.09 | 2,391 | 57 | 2.38 | 2,599 | 143 | 5.50 | ||||||||||||||||||
Investment securities | 50,025 | 2,332 | 4.66 | 69,498 | 3,391 | 4.88 | 64,290 | 2,938 | 4.57 | ||||||||||||||||||
Federal Home Loan Bank stock | 6,252 | — | — | 5,735 | 199 | 3.47 | 4,179 | 268 | 6.41 | ||||||||||||||||||
Total interest-earning assets | 509,852 | 28,291 | 5.55 | 474,148 | 28,203 | 5.95 | 402,558 | 25,030 | 6.22 | ||||||||||||||||||
Noninterest-earning assets | 32,484 | 30,910 | 31,629 | ||||||||||||||||||||||||
Total assets | $ | 542,336 | $ | 505,058 | $ | 434,187 | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Certificate accounts | $ | 237,850 | $ | 7,741 | 3.25 | $ | 216,595 | $ | 8,297 | 3.83 | $ | 183,172 | $ | 8,414 | 4.59 | ||||||||||||
Regular savings accounts and escrow | 60,825 | 390 | 0.64 | 48,130 | 288 | 0.60 | 46,093 | 258 | 0.56 | ||||||||||||||||||
Checking and NOW accounts | 53,258 | 45 | 0.08 | 53,732 | 159 | 0.30 | 56,915 | 487 | 0.86 | ||||||||||||||||||
Money market savings accounts | 25,790 | 301 | 1.17 | 27,607 | 527 | 1.91 | 24,709 | 591 | 2.39 | ||||||||||||||||||
Total interest-bearing deposits | 377,723 | 8,477 | 2.24 | 346,064 | 9,271 | 2.68 | 310,889 | 9,750 | 3.14 | ||||||||||||||||||
FHLB advances | 104,268 | 3,931 | 3.77 | 107,182 | 4,615 | 4.31 | 69,866 | 3,414 | 4.89 | ||||||||||||||||||
Other borrowings | 9,316 | 129 | 1.38 | 654 | 18 | 2.75 | 290 | 10 | 3.45 | ||||||||||||||||||
Total interest-bearing liabilities | 491,307 | 12,537 | 2.55 | 453,900 | 13,904 | 3.06 | 381,045 | 13,174 | 3.46 | ||||||||||||||||||
Noninterest-bearing liabilities | 2,391 | 2,138 | 1,899 | ||||||||||||||||||||||||
Total liabilities | 493,698 | 456,038 | 382,944 | ||||||||||||||||||||||||
Stockholders’ equity | 48,638 | 49,020 | 51,243 | ||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 542,336 | $ | 505,058 | $ | 434,187 | |||||||||||||||||||||
Net interest income | $ | 15,754 | $ | 14,299 | $ | 11,856 | |||||||||||||||||||||
Interest rate spread | 3.00 | % | 2.89 | % | 2.76 | % | |||||||||||||||||||||
Net interest margin | 3.09 | % | 3.02 | % | 2.95 | % | |||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 103.77 | % | 104.46 | % | 105.65 | % |
83
Table of Contents
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. The net column represents the sum of the prior columns.
2009 Compared to 2008 | 2008 Compared to 2007 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
(In thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | $ | 2,784 | $ | (1,386 | ) | $ | 1,398 | $ | 3,943 | $ | (1,068 | ) | $ | 2,875 | ||||||||||
Fed Funds sold | (211 | ) | 159 | (52 | ) | (11 | ) | (75 | ) | (86 | ) | |||||||||||||
Investment securities | (914 | ) | (145 | ) | (1,059 | ) | 247 | 206 | 453 | |||||||||||||||
Federal Home Loan Bank stock | 20 | (219 | ) | (199 | ) | 297 | (366 | ) | (69 | ) | ||||||||||||||
Total interest income | 1,679 | (1,591 | ) | 88 | 4,476 | (1,303 | ) | 3,173 | ||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Certificate accounts | 1,044 | (1,600 | ) | (556 | ) | (1,302 | ) | 1,185 | (117 | ) | ||||||||||||||
Regular savings accounts | 80 | 22 | 102 | 12 | 18 | 30 | ||||||||||||||||||
Checking and NOW accounts | (1 | ) | (113 | ) | (114 | ) | (26 | ) | (302 | ) | (328 | ) | ||||||||||||
Money market savings accounts | (33 | ) | (193 | ) | (226 | ) | 89 | (153 | ) | (64 | ) | |||||||||||||
Total deposit expense | 1,090 | (1,884 | ) | (794 | ) | (1,227 | ) | 748 | (479 | ) | ||||||||||||||
FHLB advances | (123 | ) | (561 | ) | (684 | ) | 1,545 | (344 | ) | 1,201 | ||||||||||||||
Other borrowings | 115 | (4 | ) | 111 | 10 | (2 | ) | 8 | ||||||||||||||||
Total interest expense | 1,082 | (2,449 | ) | (1,367 | ) | 328 | 402 | 730 | ||||||||||||||||
Net interest income | $ | 597 | $ | 858 | $ | 1,455 | $ | 4,148 | $ | (1,705 | ) | $ | 2,443 | |||||||||||
Provision for Loan Losses. During the year ended December 31, 2009, a $1.1 million provision was made to the allowance for loan losses. The provision was primarily due to the increased size of the portfolio, a change in the mix of the portfolio towards commercial loans which are generally riskier than one-to-four family loans, and general economic conditions.
During the year ended December 31, 2008, a $675,000 provision was made to the allowance for loan losses. The provision was primarily due to the increased size of the loan portfolio, a change in the mix of the portfolio towards commercial loans which are generally riskier than one-to-four family loans, and general economic conditions.
During the year ended December 31, 2007, a $151,000 provision was made to the allowance for loan losses. The provision was primarily due to the increasing size of the loan portfolio, a change in the mix of the portfolio towards commercial loans which are generally riskier than one-to four-family loans and a small adjustment to the factor used for general economic conditions.
Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2009 to 2008 and 2008 to 2007.
(In thousands) | 2009 | 2008 | 2007 | |||||||
Fees for services related to deposit accounts | $ | 1,060 | $ | 1,053 | $ | 955 | ||||
Fees for other services | 574 | 529 | 559 | |||||||
Gain (loss) on investments | 388 | (3,398 | ) | 65 | ||||||
Income from bank owned life insurance | 341 | 315 | 308 | |||||||
Income from investment advisory services, net | 271 | 299 | 260 | |||||||
Other income | 108 | 154 | 207 | |||||||
Total | $ | 2,742 | $ | (1,048 | ) | $ | 2,354 | |||
84
Table of Contents
For the year ended December 31, 2009, noninterest income increased to $2.7 million, compared to $(1.0) million for 2008. The largest increase in noninterest income was the gain on sale of investments. The 2008 period included the OTTI charge of $3.4 million on auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral.
For the year ended December 31, 2008, noninterest income decreased to ($1.0) million, compared to $2.4 million for 2007. The largest decrease in noninterest income was the loss on investments, primarily from an OTTI charge of $3.4 million on auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral, which was partially offset by a small gain. The largest increases in noninterest income were in income from investment advisory services and fees related to deposit accounts, as a result of product growth in these areas.
Noninterest Expense.The following table shows the components of noninterest expense and the percentage changes from 2009 to 2008.
(In thousands) | 2009 | 2008 | 2007 | ||||||
Compensation, taxes and benefits | $ | 7,692 | $ | 7,521 | $ | 6,914 | |||
Office occupancy | 2,151 | 2,173 | 1,966 | ||||||
FDIC insurance premiums | 946 | 132 | 35 | ||||||
Computer processing | 916 | 861 | �� | 733 | |||||
Professional fees | 674 | 518 | 504 | ||||||
Directors compensation | 560 | 493 | 494 | ||||||
Advertising | 330 | 534 | 594 | ||||||
Office supplies | 207 | 195 | 201 | ||||||
Loss on foreclosed real estate, net | 36 | 1 | — | ||||||
Other expenses (1) | 1,029 | 1,026 | 981 | ||||||
Total | $ | 14,541 | $ | 13,454 | $ | 12,422 | |||
(1) | Other expenses for all periods include, among other items, insurance, postage and expenses related to checking accounts. |
Noninterest expense was $14.5 million for the year ended December 31, 2009, compared to $13.5 million for 2008. The increase was primarily the result of increases in FDIC insurance premiums. In the second quarter of 2009, the FDIC announced a special assessment of five basis points on each insured institution’s assets minus Tier-1 capital. This special assessment was paid on September 30, 2009. Additionally, the increases in noninterest expense were due to increased professional fees, primarily as a result of fees related to the announced acquisition of Southern Connecticut Bancorp, Inc, and increases in compensation costs, primarily as a result of filling two vacant positions. These increases were partially offset by a decrease in advertising expense and office occupancy expenses.
Noninterest expense was $13.5 million for the year ended December 31, 2008, compared to $12.4 million for 2007. The increase was primarily the result of increases in compensation costs, computer processing costs and office occupancy expenses over the 2007 period, all primarily resulting from the opening of a new branch office in 2008.
Income Taxes. The effective tax rate for 2009 was 29.1%, compared with 23.5% for 2008, excluding the tax benefit recorded for the OTTI charge in the 2008 period. See note 12 to the Naugatuck Valley Financial financial statements in this prospectus.
During the year ended December 31, 2008, we recorded a tax benefit of $566,000 resulting primarily from the OTTI charge on auction rate pass through certificates with Fannie Mae preferred stock as underlying collateral. Excluding the tax benefit for the OTTI charge, the effective tax rate for 2008 was 23.5%, compared with 13.3% for 2007. See note 12 to the Naugatuck Valley Financial financial statements in this prospectus.
Risk Management
Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the
85
Table of Contents
values of financial instruments, such as available-for-sale securities, that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. To address increased problem assets, we have placed our attention and resources on loan workouts. One of our loan officers who has significant loan workout experience has been given primary responsibility for problem commercial loan workouts. We have tightened underwriting standards, including applying more stringent loan to value ratio requirements, and are contacting delinquent borrowers earlier in order to improve our chances of a successful outcome of work-out efforts. We plan to bring over from Southern Connecticut Bancorp their experienced commercial origination and credit team consisting of two senior vice presidents, three credit analysts and three commercial loan officers. In connection with our merger due diligence, our loan and credit officers have reviewed approximately 80% of Southern Connecticut Bancorp’s loan portfolio and we believe that adequate provisions have been made for specific and general reserves given the characteristics of the loan portfolio we are acquiring. In addition, both Naugatuck Valley Financial and Southern Connecticut Bancorp annually engage an outside loan review firm to perform a thorough review of their respective loan portfolios. These reviews involved analyzing all large borrowing relationships, delinquency trends, and loan collateral valuation in order to identify impaired loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls are made. We send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 91 days. At this point, we may consider loan workout arrangements with certain borrowers under certain circumstances. If our workout efforts are unsuccessful, we generally commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure or taken by the bank as other real estate owned.
Management informs the board of directors on a monthly basis of the amount of loans delinquent more than 30 days. Management also provides detailed reporting of loans greater than 90 days delinquent, all loans in foreclosure and all foreclosed and repossessed property that we own.
Analysis of Nonperforming and Classified Assets. When a loan becomes more than 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases, the interest previously accrued to income is reversed and the loan is placed on a cash basis. Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.
We consider repossessed assets and loans that are more than 90 days past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income.
Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and consumer loans to be homogeneous and only evaluate them for impairment separately when they are delinquent or classified. Other loans are evaluated for impairment on an individual basis. At June 30, 2010 and December 31, 2009, 17 and nine loans, respectively, were considered impaired.
86
Table of Contents
The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.
(Dollars in thousands) | At June 30, 2010 | At December 31, | ||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||
One- to four-family | $ | 2,080 | $ | 1,826 | $ | 1,100 | $ | 422 | $ | 423 | $ | 165 | ||||||||||||
Construction | 5,418 | 1,250 | 370 | — | 1,036 | — | ||||||||||||||||||
Multi-family and commercial real estate | 2,807 | 2,114 | 1,001 | 356 | 352 | 120 | ||||||||||||||||||
Commercial business | 899 | 452 | 142 | 144 | 142 | 9 | ||||||||||||||||||
Consumer | 68 | 358 | 65 | 48 | 57 | — | ||||||||||||||||||
Total | 11,272 | 6,000 | 2,678 | 970 | 2,010 | 294 | ||||||||||||||||||
Troubled debt restructurings | 1,295 | — | — | — | — | — | ||||||||||||||||||
Foreclosed real estate | 167 | 140 | — | — | — | 47 | ||||||||||||||||||
Total nonperforming assets | $ | 12,734 | $ | 6,140 | $ | 2,678 | $ | 970 | $ | 2,010 | $ | 341 | ||||||||||||
Total nonperforming loans to total loans | 2.58 | % | 1.26 | % | 0.62 | % | 0.27 | % | 0.65 | % | 0.11 | % | ||||||||||||
Total nonperforming loans to total assets | 2.22 | % | 1.08 | % | 0.50 | % | 0.21 | % | 0.49 | % | 0.08 | % | ||||||||||||
Total nonperforming assets to total assets | 2.25 | % | 1.10 | % | 0.50 | % | 0.21 | % | 0.49 | % | 0.10 | % |
Other than disclosed in the nonperforming assets and classified assets tables, management believes that there are no other loans at June 30, 2010 and December 31, 2009 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms. Interest income that would have been recorded for the six months ended June 30, 2010 and years ended December 31, 2009 and December 31, 2008 had nonaccruing loans been current according to their original terms amounted to $525,000, $328,000 and $140,000, respectively. Income related to nonaccrual loans included in interest income for the six months ended June 30, 2010 and years ended December 31, 2009 and December 31, 2008 amounted to $151,000, $238,000 and $118,000, respectively.
Nonperforming assets totaled $12.7 million, or 2.25% of total assets, at June 30, 2010, which was an increase of approximately $6.6 million, or 107.4%, from December 31, 2009. Nonaccrual loans accounted for 88.5% of the total nonperforming assets at June 30, 2010. The increase was primarily the result of theplacing of two commercial mortgage relationships totaling $4.2 million on non-accrual status. Management is working with the borrowers to return the loans to accrual status. Management does not anticipate any material losses on these loans due to the value of the real estate securing the loans.
Nonperforming assets totaled $6.0 million, or 1.10% of total assets, at December 31, 2009, which was an increase of approximately $3.5 million, or 129.3%, from December 31, 2008. Nonaccrual loans accounted for 97.7% of the total nonperforming assets at December 31, 2009. This increase was primarily due to increases in nonaccrual loans in the commercial real estate and residential mortgage portfolios, along with smaller increases in consumer and commercial business loan portfolios.
Nonperforming assets totaled $2.7 million, or 0.50% of total assets, at December 31, 2008, which was an increase of approximately $1.7 million, or 176.1%, from December 31, 2007. Nonaccrual loans accounted for 100% of the total nonperforming assets at December 31, 2008. This increase was primarily due to the transfer of three commercial loans secured by real estate in the amount of $1.4 million to non-accrual status during this period.
Federal regulations require us to regularly review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. If we classify an asset as loss, we must charge off such amount.
87
Table of Contents
The following table shows the aggregate amounts of our classified assets at the dates indicated.
(In thousands) | At June 30, 2010 | At December 31, | |||||||
2009 | 2008 | ||||||||
Special mention assets | $ | 35,555 | $ | 43,539 | $ | 30,268 | |||
Substandard assets | 24,877 | 16,890 | 10,274 | ||||||
Doubtful assets | 1,619 | 37 | 4 | ||||||
Loss assets | — | — | — | ||||||
Total classified assets | $ | 62,051 | $ | 60,466 | $ | 40,546 | |||
Special mention assets at June 30, 2010 and December 31, 2009, each included loans in the amount of $424,000 and $70,000, respectively, which were nonaccrual. Special mention assets at December 31, 2008 did not include any nonaccrual loans. Substandard assets at June 30, 2010, December 31, 2009 and December 31, 2008 included nonaccrual loans of $8.0 million, $5.8 million and $2.7 million, respectively. Doubtful assets at June 30, 2010, December 31, 2009 and December 31, 2008 included nonaccrual loans of $1.5 million, $9,000 and zero, respectively. The increase in loans classified as special mention in the 2010 and 2009 periods was due in part to the timeliness of the borrower’s financial information and general economic conditions.
Delinquencies. The following table provides information about delinquencies in our loan portfolios at the dates indicated.
At June 30, 2010 | At December 31, | |||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
(In thousands) | 31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | ||||||||||||||||
One- to four-family | $ | 1,846 | $ | 64 | $ | 2,634 | $ | 328 | $ | 1,000 | $ | 724 | $ | 99 | $ | 950 | ||||||||
Construction | 3,176 | — | 279 | 531 | — | — | — | 603 | ||||||||||||||||
Multi-family and commercial real estate | 4,333 | 1,122 | 968 | 2,182 | 84 | — | 880 | 75 | ||||||||||||||||
Commercial business | 639 | — | 373 | 25 | 568 | 7 | 31 | 25 | ||||||||||||||||
Consumer loans | 390 | 257 | 364 | 162 | 2 | 4 | 11 | — | ||||||||||||||||
Total | $ | 10,384 | $ | 1,443 | $ | 4,618 | $ | 3,228 | $ | 1,654 | $ | 735 | $ | 1,021 | $ | 1,653 | ||||||||
The increase in delinquencies is attributable primarily to the downturn in general economic conditions.
Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for the probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are needed a provision for loan losses is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management to the board of directors on a quarterly basis.
The allowance for loan losses is established to recognize the inherent losses associated with lending activities. The methodology for assessing the appropriateness of the allowance for loan losses consists of the following process.
On a quarterly basis, or more often if warranted, management analyzes the loan portfolio. For individually evaluated loans that are considered impaired, a reserve will be established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependant, the fair value of the collateral. (A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual term of the loan agreement.)
All other loans, including loans that are individually evaluated but not considered impaired, are segregated into groups based on similar risk factors. Each of these groups is then evaluated based on several factors to estimate credit losses. Management will determine for each category of loans with similar risk characteristics the historical loss rate. Historical loss rates provide a reasonable starting point for the Bank’s analysis but analysis and trends in losses do not form a sufficient
88
Table of Contents
basis to determine the appropriate level of the loan loss reserve. Management also considers qualitative and environmental factors likely to cause losses. These factors include but are not limited to: changes in the amount and severity of past due, non-accrual and adversely classified loans; changes in local, regional, and national economic conditions that will affect the collectability of the portfolio; changes in the nature and volume of loans in the portfolio; changes in concentrations of credit, lending area, industry concentrations, or types of borrowers; changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests; and loan quality trends. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an acceptable level of loan loss reserve.
Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan loss reserve. The examination may require us to make additional provision for loan losses based on judgments different from ours. In addition, we engage an independent consultant to review our commercial loan portfolio and make recommendations based on their review as to the specific credits in the portfolio.
At June 30, 2010, our allowance for loan losses represented 1.04% of total gross loans and 40.73% of nonperforming loans compared to 0.83% of total gross loans and 66.6% of nonperforming loans at December 31, 2009. The allowance for loan losses increased $1.1 million from $4.0 million at December 31, 2009 to $5.1 million at June 30, 2010. The increase in the allowance was largely the result of an $1.2 million provision for loan losses made in the six month period. This provision was based on the increase in nonperforming and classified loans, the increasing size of the loan portfolio and a change in the mix of the portfolio towards commercial real estate loans which are generally riskier than one-to-four family loans. Total nonperforming assets increased from $6.0 million at December 31, 2009, to $12.6 million at June 30, 2010. The increase was primarily in the construction, commercial real estate and commercial business loan portfolios and in troubled debt restructurings.
At December 31, 2009, our allowance for loan losses represented 0.83% of total gross loans and 66.6% of nonperforming loans compared to 0.66% of total gross loans and 107.13% of nonperforming loans at December 31, 2008. The allowance for loan losses increased $1.1 million from $2.9 million at December 31, 2008 to $4.0 million at December 31, 2009. The increase in the allowance was largely the result of a $1.1 million provision for loan losses made during 2009. This provision was based on the increasing size of the loan portfolio and a change in the mix of the portfolio towards commercial real estate loans which are generally riskier than one-to-four family loans. In addition, as discussed above, nonperforming loans and classified loans increased during the 2009 year. Total nonperforming assets increased from $2.7 million at December 31, 2008, to $6.0 million at December 31, 2009. The increase was primarily in the commercial real estate and residential loan portfolios.
At December 31, 2008, our allowance for loan losses represented 0.66% of total gross loans and 107.13% of nonperforming loans. The allowance for loan losses increased $706,000 from December 31, 2007 to December 31, 2008. The increase in the allowance was largely the result of a $675,000 provision for loan losses made during 2008.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
89
Table of Contents
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to current income.
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Allowance at beginning of period | $ | 3,996 | $ | 2,869 | $ | 2,869 | $ | 2,163 | $ | 2,071 | $ | 1,878 | $ | 1,829 | ||||||||||||||
Provision for loan losses | 1,171 | 557 | 1,144 | 675 | �� | 151 | 192 | 32 | ||||||||||||||||||||
Less: Charge offs: | ||||||||||||||||||||||||||||
Real estate loans | 21 | — | — | — | 46 | — | — | |||||||||||||||||||||
Commercial business loans | 25 | 6 | 12 | — | 5 | — | 3 | |||||||||||||||||||||
Consumer loans | 2 | 5 | 6 | 7 | 10 | 2 | 1 | |||||||||||||||||||||
Total charge-offs | 48 | 11 | 18 | 7 | 61 | 2 | 4 | |||||||||||||||||||||
Plus: Recoveries: | ||||||||||||||||||||||||||||
Real estate loans | — | — | — | 38 | 1 | 3 | 18 | |||||||||||||||||||||
Commercial business loans | — | — | — | — | — | — | 3 | |||||||||||||||||||||
Consumer loans | — | 1 | 1 | — | 1 | — | — | |||||||||||||||||||||
Total recoveries | — | 1 | 1 | 38 | 2 | 3 | 21 | |||||||||||||||||||||
Net charge-offs (recoveries) | 48 | 10 | 17 | (31 | ) | 59 | (1 | ) | (17 | ) | ||||||||||||||||||
Allowance at end of period | $ | 5,119 | $ | 3,416 | $ | 3,996 | $ | 2,869 | $ | 2,163 | $ | 2,071 | $ | 1,878 | ||||||||||||||
Allowance to nonperforming loans | 40.73 | % | 102.71 | % | 66.60 | % | 107.13 | % | 222.99 | % | 103.03 | % | 638.78 | % | ||||||||||||||
Allowance to total loans outstanding at the end of the period | 1.05 | % | 0.72 | % | 0.84 | % | 0.66 | % | 0.60 | % | 0.67 | % | 0.72 | % | ||||||||||||||
Net charge-offs (recoveries) to average loans outstanding during the period | (0.01 | )% | — | % | — | % | (0.01 | )% | 0.02 | % | — | % | (0.01 | )% |
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
At June 30, | At December 31, | |||||||||||||||||
2010 | 2009 | |||||||||||||||||
(Dollars in thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | ||||||||||||
One- to four-family | $ | 1,252 | 24.46 | % | 47.24 | % | $ | 1,044 | 26.13 | % | 47.74 | % | ||||||
Construction | 477 | 9.32 | 7.23 | 632 | 15.81 | 9.62 | ||||||||||||
Multi-family and commercial real estate | 2,209 | 43.15 | 31.33 | 1,489 | 37.26 | 28.05 | ||||||||||||
Commercial business | 711 | 13.89 | 6.19 | 481 | 12.04 | 6.51 | ||||||||||||
Consumer loans | 470 | 9.18 | 8.01 | 350 | 8.76 | 8.08 | ||||||||||||
Unallocated | — | — | — | — | — | — | ||||||||||||
Total allowance for loan losses | $ | 5,119 | 100.00 | % | 100.00 | % | $ | 3,996 | 100.00 | % | 100.00 | % | ||||||
At December 31, | ||||||||||||||||||
2008 | 2007 | |||||||||||||||||
(Dollars in thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | ||||||||||||
One- to four-family | $ | 762 | 26.56 | % | 49.51 | % | $ | 661 | 30.56 | % | 53.24 | % | ||||||
Construction | 621 | 21.65 | 11.59 | 473 | 21.87 | 11.27 | ||||||||||||
Multi-family and commercial real estate | 903 | 31.47 | 24.28 | 495 | 22.88 | 19.25 | ||||||||||||
Commercial business | 251 | 8.75 | 5.17 | 185 | 8.55 | 4.59 | ||||||||||||
Consumer loans | 332 | 11.57 | 9.45 | 349 | 16.14 | 11.65 | ||||||||||||
Unallocated | — | — | — | — | — | — | ||||||||||||
Total allowance for loan losses | $ | 2,869 | 100.00 | % | 100.00 | % | $ | 2,163 | 100.00 | % | 100.00 | % | ||||||
90
Table of Contents
At December 31, | ||||||||||||||||||
2006 | 2005 | |||||||||||||||||
(Dollars in thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | ||||||||||||
One- to four-family | $ | 718 | 34.67 | % | 57.27 | % | $ | 724 | 38.55 | % | 59.44 | % | ||||||
Construction | 464 | 22.40 | 9.62 | 376 | 20.02 | 9.45 | ||||||||||||
Multi-family and commercial real estate | 347 | 16.76 | 14.65 | 379 | 20.18 | 12.73 | ||||||||||||
Commercial business | 209 | 10.09 | 4.31 | 113 | 6.02 | 3.69 | ||||||||||||
Consumer loans | 333 | 16.08 | 14.15 | 283 | 15.07 | 14.69 | ||||||||||||
Unallocated | — | — | — | 3 | 0.16 | — | ||||||||||||
Total allowance for loan losses | $ | 2,071 | 100.00 | % | 100.00 | % | $ | 1,878 | 100.00 | % | 100.00 | % | ||||||
Interest Rate Risk Analysis
Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between assets and liability maturities (or rate adjustment periods), while maintaining an acceptable interest rate spread, by originating adjustable-rate mortgage loans for retention in our loan portfolio, variable-rate home equity lines and variable-rate commercial loans and by purchasing variable-rate investments and investments with expected maturities of less than 10 years. In 2002-2004 we sold a small percentage of our originations of longer term fixed-rate one- to four-family mortgage loans in the secondary market based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management goals. Prior to 2010, we had not sold any loans since 2004. Generally, loans are sold without recourse and with servicing retained. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.
Our Asset/Liability Committee communicates, coordinates and controls all aspects of asset/liability management. The committee establishes and monitors the volume and mix of assets and funding sources with the objective of managing assets and funding sources.
Net Portfolio Value Analysis. We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or a 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in net portfolio value of Naugatuck Valley Savings at June 30, 2010 that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change.
Basis Point (“bp”) Change in Rates | Net Portfolio Value | Net Portfolio Value as % of Present Value of Assets | ||||||||||||
$ Amount | $ Change | % Change | NPV Ratio | Change | ||||||||||
(Dollars in thousands) | ||||||||||||||
300 bp | 45,374 | (16,320 | ) | (26 | )% | 8.10 | % | (2.33 | )% | |||||
200 | 53,212 | (8,482 | ) | (14 | ) | 9.29 | % | (1.14 | ) | |||||
100 | 59,541 | (2,153 | ) | (3 | ) | 10.19 | % | (0.24 | ) | |||||
50 | 61,307 | (387 | ) | (1 | ) | 10.42 | % | (0.01 | ) | |||||
0 | 61,694 | — | — | 10.43 | % | — | ||||||||
-50 | 60,956 | (738 | ) | (1 | ) | 10.27 | % | (0.16 | ) | |||||
-100 | 59,461 | (2,233 | ) | (4 | ) | 10.01 | % | (0.42 | ) |
91
Table of Contents
The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings institutions. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
Liquidity Management
Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, and advances from the Federal Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
Each quarter we project liquidity availability and demands on this liquidity for the next 90 days. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in federal funds and short- and intermediate-term U.S. Government agency obligations.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2010, cash and cash equivalents totaled approximately $11.0 million, including federal funds of $816,000. Securities classified as available for sale, which provide additional sources of liquidity, totaled $35.6 million. At June 30, 2010, we had the ability to borrow a total of $155.5 million from the Federal Home Loan Bank of Boston, of which $108.4 million was outstanding, along with $4.1 million in repurchase agreements. At June 30, 2010, we had arranged overnight lines of credit of $2.5 million with the Federal Home Loan Bank of Boston. We had no overnight advances outstanding with the Federal Home Loan Bank of Boston on this date. In addition, at June 30, 2010, we had the ability to borrow $3.5 million from a correspondent bank, none of which was outstanding at that date.
At June 30, 2010, we had $20.5 million in unused line availability on home equity lines of credit, $19.6 million in unadvanced commercial lines, $5.5 million in mortgage commitments, $2.8 million in commercial mortgage loan commitments, $24.5 million in unadvanced construction mortgage commitments, $4.2 million in letters of credit, $2.0 in commercial business loan commitments and $108,000 in overdraft line of credit availability. Certificates of deposit due within one year of June 30, 2010 totaled $17.7 million, or 29.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2010. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Historically, we have remained highly liquid. We expect that all of our liquidity needs, including the contractual commitments set forth in the table below, the estimated costs of our branch expansion plans and increases in loan demand can be met by our currently available liquid assets and cash flows. If loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the Federal Home Loan Bank of Boston. We expect that our currently available liquid assets and our ability to borrow from the Federal Home Loan Bank of Boston would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity. We are not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material decrease in liquidity.
92
Table of Contents
The following table presents certain of our contractual obligations as of June 30, 2010.
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less Than One Year | One to Three Years | Three to Five Years | More Than Five Years | ||||||||||
(Dollars in thousands) | |||||||||||||||
Operating lease obligations (1) | $ | 1,833 | $ | 301 | $ | 465 | $ | 358 | $ | 709 | |||||
FHLB advances and other borrowings (2) | 112,538 | 24,633 | 49,430 | 36,780 | 1,695 | ||||||||||
Total | $ | 114,371 | $ | 24,934 | $ | 49,895 | $ | 37,138 | $ | 2,404 | |||||
(1) | Represents lease obligations for five of Naugatuck Valley Savings and Loan’s branch offices and one former branch site which is subleased to another tenant. |
(2) | Represents principal amounts due. |
Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts and borrowed funds. Deposit flows are affected by the overall levels of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
The following table presents our primary investing and financing activities during the periods indicated.
Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | |||||||||||
Investing activities: | |||||||||||||||
Loan originations | $ | 60,216 | $ | 60,124 | $ | 132,776 | $ | 145,329 | |||||||
Other decreases in loans | 48,851 | 45,071 | 90,206 | 72,441 | |||||||||||
Security purchases | 11,084 | 1,566 | 1,566 | 25,017 | |||||||||||
Security sales | 7,992 | 10,535 | 19,374 | 13,171 | |||||||||||
Security maturities, calls and principal repayments | 3,388 | 5,489 | 10,022 | 8,691 | |||||||||||
Financing activities: | |||||||||||||||
Increases in deposits | 13,355 | 10,679 | 17,905 | 41,628 | |||||||||||
Net (decrease) increase in FHLB advances | (4,157 | ) | (17,613 | ) | (5,868 | ) | 33,542 | ||||||||
Increase (decrease) in other borrowings | (2,290 | ) | 5,422 | 4,363 | 1,839 | ||||||||||
Purchase of treasury stock | (1 | ) | — | 25 | 2,231 |
Capital Management. We have managed our capital to maintain strong protection for depositors and creditors. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2009, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. See“Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements,”and“—Regulatory Capital Compliance” and the notes to the consolidated financial statements included in this prospectus. In addition, due in part to its sufficient capital level, Naugatuck Valley Financial did not participate in the U.S. Government sponsored Troubled Asset Relief Program (“TARP”).
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans, commercial letters of credit and commitments to sell loans. See note 16 of the notes to the financial statements in this prospectus.
For the six months ended June 30, 2010 and the years ended December 31, 2009 and 2008, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
93
Table of Contents
Impact of Recent Accounting Pronouncements
The information required by this item is included in note 3 to the consolidated financial statements for Naugatuck Valley Financial included in this prospectus.
Effect of Inflation and Changing Prices
We have prepared the financial statements and related financial data presented in this prospectus in accordance with generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
94
Table of Contents
Business of Southern Connecticut Bancorp
Background
Southern Connecticut Bancorp is a bank holding company headquartered in New Haven, Connecticut that was incorporated on November 8, 2000. Southern Connecticut Bancorp’s strategic objective is to serve as a bank holding company for a community-based commercial bank and a mortgage broker serving primarily New Haven County (the “Greater New Haven Market”). Southern Connecticut Bancorp owns 100% of the capital stock of The Bank of Southern Connecticut, a Connecticut-chartered bank with its headquarters in New Haven, Connecticut, and 100% of the capital stock of SCB Capital Inc., operating under the name “Evergreen Financial Services” (“Evergreen”), which is licensed by the State of Connecticut Department of Banking to operate a mortgage brokerage business and also operates from Southern Connecticut Bancorp’s headquarters in New Haven, Connecticut. Southern Connecticut Bancorp and its subsidiaries focus on meeting the financial services needs of consumers and small to medium-sized businesses, professionals and professional corporations, and their owners and employees in the Greater New Haven Market.
The Bank of Southern Connecticut operates branches at four locations, including downtown New Haven, the Amity/Westville section of New Haven, Branford and North Haven. The Bank of Southern Connecticut’s branches have a consistent, attractive appearance. Each location has an open lobby, comfortable waiting area, offices for the branch manager and a loan officer, and a conference room. The design of the branches complements the business development strategy of The Bank of Southern Connecticut, affording an appropriate space to deliver personalized banking services in professional, confidential surroundings.
The Bank of Southern Connecticut 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 Market. The Bank of Southern Connecticut’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 of Southern Connecticut uniquely qualified to move deftly in responding to the needs of its clients. The Bank of Southern Connecticut 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.
Lending, Depository and Other Products
Lending Products. The Bank of Southern Connecticut offers a broad range of loans to businesses and individuals in its service area, including commercial and business loans, industrial loans, personal loans, commercial and home mortgage loans, home equity loans and automobile loans. The Bank of Southern Connecticut has received lending approval status from the Small Business Administration (“SBA”) to enable it to make SBA loans in communities located throughout the State of Connecticut. The Bank of Southern Connecticut holds certified lending status (“CLP”) from the SBA.
Loans are made on a variable or fixed rate basis, with fixed rate loans typically limited to three to five year terms. All loans are approved pursuant to lending policies and procedures authorized by The Bank of Southern Connecticut’s board of directors. The Bank of Southern Connecticut, at times, participates in multi-bank loans to companies in its market area. Commercial loans and commercial real estate loans may be written for maturities of up to twenty years. Loans to purchase or refinance commercial real estate are typically supported by personal guarantees of the principal owners and related parties, and are collateralized by the subject real estate, which may in certain cases be supplemented by additional collateral in the form of liquid assets. 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.
Depository Products. The Bank of Southern Connecticut has attracted a base of core deposits, including interest bearing and non-interest bearing checking accounts, money market accounts, savings accounts, sweep accounts, NOW accounts, repurchase agreements, and a variety of certificates of deposits and IRA accounts. To continue to attract deposits, The Bank of Southern Connecticut employs an aggressive marketing plan in its service area and features a broad product line and rates and services competitive with those offered in the Greater New Haven Market. The primary sources of deposits have been and are expected to continue to be small to medium-sized businesses, professionals (lawyers, doctors, accountants, etc.) and professional corporations, and their owners and employees. The Bank of Southern Connecticut obtains these deposits through personal solicitation by its officers and directors, outside programs and advertisements published and/or broadcasted in the local media. The Bank of Southern Connecticut offers internet-banking services to its customers, including commercial cash
95
Table of Contents
management services and personal banking services. The Bank of Southern Connecticut offers remote deposit capture, which offers check deposit capabilities for customers from their place of business. The Bank of Southern Connecticut also offers drive-in teller services, automated teller services, wire transfer, lock box and safe deposit services.
Other Services. The Bank of Southern Connecticut provides a broad range of other services and products, including cashier’s checks, money orders, travelers’ checks, bank-by-mail, direct deposit and U.S. Savings Bonds. The Bank of Southern Connecticut is associated with a shared network of automated teller machines that its customers are able to use throughout Connecticut and other regions. The Bank of Southern Connecticut does not expect to offer trust services directly in the near future, but may offer trust services in the future independently or possibly through a joint venture with a larger institution. To directly offer trust services, The Bank of Southern Connecticut would need the approval of the Connecticut Banking Commissioner and the FDIC.
Mortgage Brokerage Services
Evergreen operates from Southern Connecticut Bancorp’s headquarters in New Haven, Connecticut and is licensed by the State of Connecticut Department of Banking to operate a mortgage brokerage business.
Evergreen focuses on meeting the mortgage brokerage needs of residential and small to medium-sized businesses, professionals and professional corporations, and their owners and employees in the Southern Connecticut market.
Investment Services
Southern Connecticut Bancorp does not engage in investment services.
Investment Securities
Investment securities are held by Southern Connecticut Bancorp and The Bank of Southern Connecticut with the objective of maximizing the long-term rate of return for shareholders. Investments are overseen by the board of directors and a committee of officers who take into account returns, liquidity needs, and the overall asset/liability management of Southern Connecticut Bancorp and The Bank of Southern Connecticut. 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 of Southern Connecticut’s current investment portfolio is limited to U.S. Government agency obligations and agency issued collateralized mortgage obligations, which have been classified as available for sale. Accordingly, the principal risk associated with The Bank of Southern Connecticut’s current investing activities is market risk (variations in value resulting from general changes in interest rates) rather than credit risk. The Bank of Southern Connecticut does not take credit risk for the purposes of increasing interest income. Management continually reviews its portfolio and prevailing market conditions, and under certain market conditions, Southern Connecticut Bancorp’s strategy may be reviewed and revised by management and the board of directors.
Asset and Liability Management
Interest rate risk measures the impact that changing interest rates have on current and future earnings. Southern Connecticut Bancorp’s goal is to optimize long-term profitability while minimizing exposure to interest rate fluctuations. Interest rate risk exposure, including, among other things, Southern Connecticut Bancorp’s exposure to changes in interest income and equity value based on fluctuations in interest rates, is monitored by senior management and reported to The Bank of Southern Connecticut’s Asset Liability Committee (ALCO) and the board of directors on a quarterly basis. The Bank of Southern Connecticut employs the services of a national service provider for monitoring, analyzing and managing interest rate risk.
Regulatory Compliance
Southern Connecticut Bancorp operates in a heavily regulated industry and is subject to increasing regulatory review and scrutiny from the Federal Reserve Board, the Connecticut Banking Commissioner, and the FDIC. Southern Connecticut Bancorp and The Bank of Southern Connecticut have invested and continue to invest significant time and resources to ensure compliance and conformity with applicable regulations. The Bank of Southern Connecticut is committed to meeting its
96
Table of Contents
obligations under the Bank Secrecy Act, the Gramm-Leach-Bliley Act and the USA PATRIOT Act, as well as various other regulations. Management meets and reports to the board of directors on a regular basis regarding new developments in compliance and The Bank of Southern Connecticut’s efforts to comply therewith.
Employees
As of June 30, 2010, The Bank of Southern Connecticut and Evergreen had35 and one full-time equivalent employees, respectively, none of whom are represented by a collective bargaining unit. Relationships with all employees are believed to be excellent.
97
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results
of Operations of Southern Connecticut Bancorp
The following discussion is intended to assist you in understanding the financial condition and results of operations of Southern Connecticut Bancorp and The Bank of Southern Connecticut, and should be read in conjunction with Southern Connecticut Bancorp’s consolidated financial statements and related notes include in this prospectus.
Overview
Southern Connecticut Bancorp had net income during the six months ended June 30, 2010 of $35,000 (or basic and diluted earnings per share of $0.01), compared to a net loss of $2,565,000 (or basic and diluted loss per share of $0.95) for the same period in 2009.
During the first six months of 2010, earnings were reduced by $266,000 for merger related legal, accounting and advisory costs.
Southern Connecticut Bancorp’s increase in earnings during the six months ended June 30, 2010, as compared to the same period in 2009, was due to the combined effects of a $1,963,000 decrease in the provision for loan losses recorded by The Bank of Southern Connecticut to $118,000 for the six months ended June 30, 2010, compared to a provision for loan losses of $2,081,000 for the same period in 2009; and a $695,000 increase in net interest income. Net interest income increased due to increases in asset balances, higher yields on interest earning assets and lower costs on interest bearing liabilities, which were partially offset by increases in liability balances. The provision for loan losses during the first six months of 2009 was related to a group of ten impaired loans that were severely impacted by prevailing economic conditions, which is discussed in more detail under“—Allowance for Loan Losses.”
In addition to the impact of the provision for loan losses and growth in the loan portfolio, the operating results for the first six months of 2010 compared to the same period of 2009 were influenced by the following factors:
• | Noninterest income increased because of recognition of a gain on the sale of an available for sale security, as well as increases in rental income and an increase in servicing income on SBA loans. These increases were partially offset by decreases in service charges and fees resulting from changes in the business practices of customers of The Bank of Southern Connecticut; and |
• | Noninterest expenses, as noted above, increased due to legal and professional fees incurred relating to the merger with Naugatuck Valley Financial, partially offset by lower salaries and benefits expense and a decrease in the cost of FDIC insurance related to a special one time assessment accrued during the first six months of 2009. |
Southern Connecticut Bancorp’s net loss for fiscal year 2009 was $2,907,000 (or basic and diluted loss per share of $1.08), compared to net income of $134,000 (or basic and diluted income per share of $0.05) in fiscal year 2008.
Southern Connecticut Bancorp’s net loss for the year ended December 31, 2009 was largely attributable to a provision for loan losses of $1,992,000 for 2009 compared to $226,000 in 2008. The significant increase in the provision for loan losses during the 2009 is related to a group of ten impaired loans that have been severely impacted by prevailing economic conditions, discussed in more detail under “—Allowance for Loan Losses.”
In addition to the impact of the provision for loan losses, the operating results for the year ended December 31, 2009 compared to 2008 were influenced by the following factors:
• | Net interest income decreased due primarily to lower yields on interest earning assets, offset partially by lower costs on interest bearing liabilities and changes in asset and liability volumes; |
• | Noninterest income decreased because noninterest income in 2008 included the gain on the sale of the New London branch; a decrease in loan fees attributable to a prepayment penalty received in 2008; and due to a decrease in service charges and fees, resulting from changes in the business practices of customers of The Bank of Southern Connecticut; and |
• | Noninterest expenses decreased due to lower salaries and benefits resulting from reductions in staff, both from the sale of the New London branch and other reductions, and the elimination of certain employee benefits and bonuses |
98
Table of Contents
in 2009. In addition, salaries and benefits expense for 2008 included expenses related to separation payments made to the former Chief Executive Officer and President of The Bank of Southern Connecticut, and there were no such expenses in 2009; expense reductions attributable to lower negotiated rates on certain insurance and telecommunications service contracts; decreases in advertising and promotional campaigns; and expense savings related to printing Southern Connecticut Bancorp’s 2009 shareholders’ letter and proxy statement. These decreases were partially offset by the impairment write-down of goodwill relating to Evergreen; an increase in professional service fees; and by higher FDIC insurance premiums due to an increase in assessment rates and deposit balances subject to assessment, as well as a special one-time assessment paid during 2009. |
Southern Connecticut Bancorp offers a wide range of services to businesses, professionals, and individuals. Southern Connecticut Bancorp focuses on serving the needs of small to medium-sized businesses in its geographic areas. Southern Connecticut Bancorp makes commercial loans, industrial loans, real estate loans, construction loans and consumer loans, accepts demand, savings, and time deposits and provides a broad range of other services to its customers, either directly or through third parties. Southern Connecticut Bancorp derives revenues principally from interest earned on loans and fees from other banking-related services. The operations of Southern Connecticut Bancorp are influenced significantly by general economic conditions and by policies of financial institution regulatory agencies, primarily the Connecticut Banking Commissioner and the FDIC. Southern Connecticut Bancorp’s cost of funds is influenced by interest rates on competing investments and general market interest rates. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financings may be offered.
On February 22, 2010, Southern Connecticut Bancorp entered into an Agreement and Plan of Merger with Naugatuck Valley Financial and new Naugatuck Valley Financial, pursuant to which Southern Connecticut Bancorp will merge with and into new Naugatuck Valley Financial, with new Naugatuck Valley Financial being the surviving corporation.
At and For Six Months Ended June 30, | At and For Years Ended December 31, | |||||||||||||
2010 | 2009 | 2009 | 2008 | |||||||||||
Operating Data: | ||||||||||||||
Interest income | $ | 3,665,543 | $ | 3,072,682 | $ | 6,425,869 | $ | 7,000,100 | ||||||
Interest expense | 973,057 | 1,074,685 | 2,172,387 | 2,240,045 | ||||||||||
Net interest income | 2,692,486 | 1,997,997 | 4,253,482 | 4,760,055 | ||||||||||
(Credit) provision for loan losses | 117,638 | 2,080,716 | 1,992,113 | 226,019 | ||||||||||
Noninterest income | 337,390 | 319,387 | 628,944 | 1,666,625 | ||||||||||
Noninterest expenses | 2,876,978 | 2,801,565 | 5,797,738 | 6,066,912 | ||||||||||
Net (loss) income | 35,260 | (2,564,897 | ) | (2,907,425 | ) | 133,749 | ||||||||
Basic and diluted (loss) income per share | 0.01 | (0.95 | ) | (1.08 | ) | 0.05 | ||||||||
Balance Sheet Data: | ||||||||||||||
Cash and due from banks | $ | 20,018,125 | $ | 3,196,613 | $ | 2,541,557 | $ | 5,267,439 | ||||||
Short-term investments | 9,575,831 | 30,056,449 | 15,383,081 | 8,637,450 | ||||||||||
Interest bearing certificates of deposit | 99,371 | 1,550,816 | 347,331 | 1,642,612 | ||||||||||
Investment securities | 3,408,184 | 3,256,491 | 2,219,751 | 5,130,005 | ||||||||||
Loans, net | 121,777,906 | 94,054,556 | 109,865,195 | 89,241,432 | ||||||||||
Total assets | 160,137,703 | 137,219,837 | 135,610,178 | 114,916,562 | ||||||||||
Total deposits | 140,340,399 | 118,031,110 | 117,555,542 | 93,970,024 | ||||||||||
Repurchase agreements | 2,156,323 | 1,008,365 | 294,332 | 214,391 | ||||||||||
Total shareholders’ equity | 15,682,981 | 15,960,984 | 15,632,536 | 18,540,954 | ||||||||||
Number of shares | 2,696,902 | 2,689,902 | 2,695,902 | 2,688,152 | ||||||||||
Book value per share | 5.82 | 5.93 | 5.80 | 6.90 |
Segment Reporting
Southern Connecticut Bancorp has three reporting segments for purposes of reporting business line results: Community Banking, Mortgage Brokerage and our holding company. The Community Banking segment is defined as all operating results of The Bank of Southern Connecticut. The Mortgage Brokerage segment is defined as the results of Evergreen and the holding company segment is defined as the results of Southern Connecticut Bancorp on an unconsolidated or standalone basis. Southern Connecticut Bancorp uses an internal reporting system to generate information by operating segment. Estimates and allocations are used for noninterest expenses.
99
Table of Contents
Assets
Southern Connecticut Bancorp’s total assets were $160.1 million at June 30, 2010, an increase of $24.5 million from $135.6 million at December 31, 2009. The Bank of Southern Connecticut’s net loans receivable increased to $121.8 million at June 30, 2010 from $109.9 million at December 31. 2009, and cash and cash equivalents increased to $29.6 million as of June 30, 2010 from $17.9 million as of December 31, 2009. Total deposits increased to $140.3 million as of June 30, 2010 from $117.6 million as of December 31, 2009. The increase in deposit liabilities combined with decreases in lower yielding short-term investments and available for sale securities required to meet pledge obligations, funded the growth in net loans receivable and cash and cash equivalents during the six months ended June 30, 2010.
Southern Connecticut Bancorp’s total assets were $135.6 million as of December 31, 2009, an increase of $20.7 million over December 31, 2008 total assets of $114.9 million. $20.6 million of the increase in total assets during 2009 is attributable to an increase in loans receivable from December 31, 2008. Earning assets comprise $130.6 million of the total assets, and consist of short-term investments, interest-bearing certificates of deposit, securities and loans, which collectively increased $24.7 million from 2008. Southern Connecticut Bancorp has maintained liquidity by maintaining balances in overnight Federal Funds sold and in short-term investments, primarily money market mutual funds, to provide funding for higher yielding loans as they are approved. As of December 31, 2009 and 2008 short-term investments balances were $15.4 million and $8.6 million, respectively. During the latter part of 2008, due to historically low returns available on federal funds sold, Southern Connecticut Bancorp focused on money market funds as a short-term investment strategy. Investment securities classified as available for sale were $2.2 million and $5.1 million as of December 31, 2009 and 2008, respectively. The gross loan portfolio was $112.6 million and $90.4 million as of December 31, 2009 and 2008 respectively, an increase of $22.2 million. The allowance for loan losses increased $1.6 million to $2.8 million at December 31, 2009 compared to $1.2 million at the end of 2008.
Investments
Short-term investments, consisting of money market investments, were $9.6 million at June 30, 2010, compared to a balance of $15.4 million as of December 31, 2009. This $5.8 million decrease in short-term investments from December 31, 2009 was attributable to growth in the loan portfolio. Available for sale securities, consisting of U.S. Treasury Bills, U.S. government agency obligations and agency issued mortgage-backed securities, were $3.4 million at June 30, 2010, compared to a balance of $2.2 million as of December 31, 2009. Southern Connecticut Bancorp uses its available for sale securities portfolio to meet pledge requirements for public deposits and repurchase agreements. The $1.2 million increase in available for sale securities is in response to increased pledge requirements at June 30, 2010. Southern Connecticut Bancorp classifies its securities as “available for sale” to provide greater flexibility to respond to changes in interest rates as well as future liquidity needs.
The amortized cost of Southern Connecticut Bancorp’s investments decreased $2.9 million to $2.2 million during 2009, representing the difference between securities that matured ($7.1 million) and were called ($5.0 million) and purchases of new securities ($9.2 million).
The following table presents the maturity distribution of the amortized cost of investment securities at June 30, 2010, and the weighted average yield of such securities. The weighted average yields were calculated based on the amortized cost and effective yields to maturity of each security.
Available for Sale | One Year or Less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Total | Weighted Average Yield | |||||||||||||||||
U.S. Treasury bills | $ | 3,349,966 | $ | — | $ | — | $ | — | $ | 3,349,966 | 0.01 | % | |||||||||||
Mortgage-backed securities | — | — | 58,218 | — | 58,218 | 4.50 | |||||||||||||||||
Total | $ | 3,349,966 | $ | — | $ | 58,218 | $ | — | $ | 3,408,184 | |||||||||||||
Weighted Average Yield | 0.01 | % | — | % | 4.50 | % | — | % | 0.09 | % |
The following table presents a summary of investments for any issuer that exceeds 10% of shareholders’ equity at June 30, 2010:
Amortized Cost | Fair Value | |||||
U.S. Treasury bills | $ | 3,349,966 | $ | 3,349,966 |
100
Table of Contents
Loans
Interest income on loans is the most important component of our net interest income. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. Southern Connecticut Bancorp’s net loan portfolio was $121.8 million at June 30, 2010 versus $109.9 million at December 31, 2009, an increase of $11.9 million. Southern Connecticut Bancorp attributes the loan growth during the first six months of 2010 to the success of The Bank of Southern Connecticut’s loan business development program in generating loan demand to small to medium-sized businesses. Management believes that the loan growth will continue as The Bank of Southern Connecticut’s branch system deposit base grows and additional lending capacity is developed. The Bank of Southern Connecticut’s loans have been made to borrowers primarily in the New Haven, Connecticut market area. There are no other significant loan concentrations in the loan portfolio.
The Bank of Southern Connecticut’s net loan portfolio was $109.9 million at December 31, 2009 versus $89.2 million at December 31, 2008, an increase of $20.7 million. Southern Connecticut Bancorp attributes the 2009 loan growth to the success of The Bank of Southern Connecticut’s loan business development program in generating loan demand to small to medium-sized businesses.
The following table presents the maturities of loans in The Bank of Southern Connecticut’s portfolio at June 30, 2010 by type of loan, and the sensitivities of loans to changes in interest rates:
Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years | Total | % of Total | |||||||||||
Commercial loans secured by real estate | $ | 14,403,077 | $ | 43,486,799 | $ | 13,216,933 | $ | 71,106,809 | 57.02 | % | |||||
Commercial loans | 31,660,574 | 15,706,883 | 2,706,313 | 50,073,770 | 40.15 | ||||||||||
Construction and land loans | 2,873,777 | — | 296,906 | 3,170,683 | 2.54 | ||||||||||
Consumer installment loans | 103,694 | 211,822 | 38,449 | 353,965 | 0.29 | ||||||||||
Total |
$ |
49,041,122 |
$ |
59,405,504 |
$ |
16,258,601 |
$ |
124,705,227 |
100.00 |
% | |||||
Fixed rate loans | $ | 17,811,345 | $ | 12,036,943 | $ | 10,858,554 | $ | 40,706,842 | |||||||
Variable rate loans | 31,229,777 | 47,368,561 | 5,400,047 | 83,998,385 | |||||||||||
Total |
$ |
49,041,122 |
$ |
59,405,504 |
$ |
16,258,601 |
$ |
124,705,227 | |||||||
The following table presents the maturities of loans in The Bank of Southern Connecticut’s portfolio at December 31, 2009 by type of loan, and the sensitivities of loans to changes in interest rates:
Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years | Total | % of Total | |||||||||||
Commercial loans secured by real estate | $ | 14,812,625 | $ | 42,490,005 | $ | 6,534,082 | $ | 63,836,712 | 56.60 | % | |||||
Commercial loans | 30,742,366 | 11,365,251 | 1,785,574 | 43,893,191 | 38.91 | ||||||||||
Construction and land loans | 3,732,354 | 575,551 | 300,000 | 4,607,905 | 4.09 | ||||||||||
Consumer installment loans | 254,899 | 152,858 | 40,786 | 448,543 | 0.40 | ||||||||||
Total | $ | 49,542,244 | $ | 54,583,665 | $ | 8,660,442 | $ | 112,786,351 | 100.00 | % | |||||
Fixed rate loans | $ | 15,010,814 | $ | 11,488,564 | $ | 4,707,011 | $ | 31,206,389 | |||||||
Variable rate loans | 34,531,430 | 43,095,101 | 3,953,431 | 81,579,962 | |||||||||||
Total | $ | 49,542,244 | $ | 54,583,665 | $ | 8,660,442 | $ | 112,786,351 | |||||||
Critical Accounting Policy
In the ordinary course of business, Southern Connecticut Bancorp has made a number of estimates and assumptions relating to reporting the results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Southern Connecticut Bancorp believes the following discussion addresses Southern Connecticut Bancorp’s only critical accounting policy, which is the policy that is most important to the
101
Table of Contents
portrayal of Southern Connecticut 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. Southern Connecticut Bancorp has reviewed this critical accounting policy and estimates with its audit committee. Refer to the discussion below under “Allowance for Loan Losses” and Note 1 to the consolidated financial statements for a detailed description of our estimation process and methodology related to the allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are considered impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans, segregated generally by loan type, and is based on historical loss experience with adjustments for qualitative factors which are made after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data.
A loan is considered impaired when, based on current information and events, it is probable that Southern Connecticut Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Southern Connecticut Bancorp does not separately identify individual consumer installment loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Based upon this evaluation, management believes the allowance for loan losses of $2,799,000 or 2.24% of gross loans receivable at June 30, 2010 and of $2,769,000 or 2.46% of gross loans receivable at December 31, 2009 were adequate, under prevailing economic conditions, to absorb losses on existing loans.
At December 31, 2009, the allowance for loan losses was $2,769,000 or 2.46% of gross loans receivable. The $30,000 increase in the allowance during the six months ended June 30, 2010 was attributable to a $155,000 increase in the general component of the allowance, which was partially offset by a $125,000 decrease in the specific component of the allowance. The increase in the general component of the reserve was due to increased loan volume and an increase in classified loans. The decrease in the specific component was related to loans that were impaired at both June 30, 2010 and December 31, 2009. For the six months ended June 30, 2010, Southern Connecticut Bancorp received $138,000 in payments and charged off $84,000 on these impaired loans, which were partially offset by a $101,000 decline in the collateral supporting such loans. The decline in collateral value was primarily related to updated appraisals on four impaired loans completed during the six months ended June 30, 2010.
102
Table of Contents
At December 31, 2008, the allowance for loan losses was $1,183,000 or 1.31% of gross loans receivable. The $1,585,000 increase in the allowance during 2009 was attributable to a $1,327,000 increase in the specific component of the allowance and a $258,000 increase in the general component of the allowance. The increase in the specific component was due to an increase in specific reserves totaling $1,420,000 for ten loans (five construction and land loans, four commercial real estate loans and one commercial loan secured by residential real estate) identified as impaired during the year ended December 31, 2009. This was partially offset by a decrease in specific reserves totaling $5,000, for loans that were impaired, at both December 31, 2009 and December 31, 2008; and by $88,000 for loans charged off during the year that were classified as impaired at December 31, 2008. The increase in the general component of the reserve was primarily due to an increase in the reserve factors and increased loan volume, partially offset by the reclassification of thirteen loans to impaired loans.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Management considers all non-accrual loans and troubled-debt restructured loans to be impaired. In most cases, loan payments that are past due less than 90 days and the related loans are not considered to be impaired.
Allowance for Loan Losses and Non-Accrual, Past Due and Restructured Loans
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||
2010 | 2009 | 2009 | 2008 | |||||||||||||
Balance at beginning of period | $ | 2,768,567 | $ | 1,183,369 | $ | 1,183,369 | $ | 1,256,965 | ||||||||
Provision for loan losses | 117,638 | 2,080,716 | 1,992,113 | 226,019 | ||||||||||||
Recoveries of loan previously charged-off: | ||||||||||||||||
Commercial | — | — | 10,000 | 37,109 | ||||||||||||
Consumer |
|
1,137 |
|
|
356 |
|
|
563 |
|
|
— |
| ||||
Total recoveries |
|
1,137 |
|
|
356 |
|
|
10,563 |
|
|
37,109 |
| ||||
Loans charged-off: | ||||||||||||||||
Commercial loans secured by real estate | (84,387 | ) | (410,130 | ) | (413,839 | ) | (90,215 | ) | ||||||||
Commercial | (4,412 | ) | — | (2,300 | ) | — | ||||||||||
Consumer | | — | | — | (1,339 | ) | (246,509 | ) | ||||||||
Total charge-offs | (88,799 | ) | (410,130 | ) | (417,478 | ) | (336,724 | ) | ||||||||
Balance at end of period | $ | 2,798,543 | $ | 2,854,311 | $ | 2,768,567 | $ | 1,183,369 | ||||||||
Net charge-offs to average loans | (0.07 | )% | (0.45 | )% | (0.42 | )% | (0.36 | )% |
Allocation of the Allowance for Loan Losses
At June 30, 2010 | At December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
Balance | Percent of Loans in Each Category to Total Loans | Balance | Percent of Loans in Each Category to Total Loans | Balance | Percent of Loans in Each Category to Total Loans | |||||||||||||
Commercial loans secured by real estate | $ | 1,508,791 | 57.02 | % | $ | 1,530,085 | 56.60 | % | $ | 528,754 | 50.22 | % | ||||||
Commercial loans | 1,221,233 | 40.15 | 1,140,924 | 38.91 | 530,088 | 41.57 | ||||||||||||
Construction and land loans | 63,053 | 2.54 | 90,274 | 4.09 | 114,340 | 7.18 | ||||||||||||
Consumer home equity loans | 4,049 | 0.20 | 5,385 | 0.31 | 6,890 | 0.42 | ||||||||||||
Consumer installment loans | 1,417 | 0.09 | 1,899 | 0.09 | 3,297 | 0.61 | ||||||||||||
$ | 2,798,543 | 100.00 | % | $ | 2,768,567 | 100.00 | % | $ | 1,183,369 | 100.00 | % | |||||||
103
Table of Contents
Non-Accrual, Past Due and Restructured Loans
The following represents non-accrual and past due loans:
At June 30, 2010 | At December 31, | ||||||||
2009 | 2008 | ||||||||
Non-accrual loans | $ | 6,414,910 | $ | 5,363,061 | $ | 881,948 | |||
Accruing loans contractually past due 90 days or more: | |||||||||
Loans past due 90 days or more and still accruing | $ | 508,014 | $ | 483,897 | $ | 195,822 | |||
Matured loans pending renewal and still accruing | 180,420 | — | 188,620 | ||||||
Total | $ | 688,434 | $ | 483,897 | $ | 384,442 | |||
At the dates presented above, there were no loans considered “troubled debt restructurings.”
Classified Assets
The following table shows the aggregate amount of classified assets at the dates indicated.
(In thousands) | At June 30, 2010 | At December 31, | |||||||
2009 | 2008 | ||||||||
(Unaudited) | (Audited) | ||||||||
Special mention assets | $ | 11,311 | $ | 2,442 | $ | 6,287 | |||
Substandard assets | 7,972 | 6,404 | 2,040 | ||||||
Doubtful assets | — | — | — | ||||||
Loss assets | — | — | — | ||||||
Total classified assets | $ | 19,283 | $ | 8,846 | $ | 8,327 | |||
Loan Delinquencies
The following table provides information about delinquencies in our loan portfolios at the dates indicated.
(In thousands) | At June 30, 2010 | At December 31, | ||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | |||||||||||||||||
Commercial loans secured by real estate | $ | 35 | $ | — | $ | 1,324 | $ | — | $ | 1,378 | $ | 300 | $ | 500 | $ | — | ||||||||
Commercial loans | 318 | — | 363 | 14 | 859 | 97 | — | — | ||||||||||||||||
Construction and land loans | — | — | — | — | 178 | — | 1,364 | — | ||||||||||||||||
Consumer installment loans | — | — | — | — | — | — | 4 | — | ||||||||||||||||
Total | $ | 353 | $ | — | $ | 1,687 | $ | 14 | $ | 2,415 | $ | 397 | $ | 1,868 | $ | — | ||||||||
Deposits
Total deposits were $140.3 million at June 30, 2010 as compared to total deposits of $117.6 million at December 31, 2009. Non-interest bearing deposits were $30.7 million at June 30, 2010, an increase of $900,000 (3.0%) from $29.8 million at December 31, 2009. Total interest bearing checking, money market and savings deposits increased $2.4 million or 6.5% to $39.8 million at June 30, 2010 from $37.4 million at December 31, 2009. Time deposits increased to $69.9 million at June 30, 2010 from $50.3 million at December 31, 2009, a $19.6 million or 39.0% increase. Included in time deposits at June 30, 2010 and December 31, 2009 was $16.2 million and $14.0 million, respectively, in brokered deposits, which included Southern Connecticut Bancorp’s placement of $5.0 million and $3.4 million in customer deposits; and purchases of $4.0 million and $3.5 million in brokered certificates of deposit through the CDARS program at June 30, 2010 and December 31, 2009, respectively. The CDARS program offers The Bank of Southern Connecticut both reciprocal and one way swap programs which allow customers to enjoy additional Federal Deposit Insurance Corporation insurance for deposits that might not otherwise be eligible for Federal Deposit Insurance Corporation insurance and gives The Bank of Southern Connecticut additional access to funding.
104
Table of Contents
Total deposits were $117.6 million at December 31, 2009, an increase of $23.6 million (25.1%) in comparison to total deposits at December 31, 2008 of $94.0 million. The overall growth in deposit balances occurred primarily during the first six months of 2009 to fund anticipated increased loan volume. Non-interest bearing deposits were $29.8 million at December 31, 2009, an increase of $1.6 million (5.7%) from $28.2 million at December 31, 2008. The balance of interest bearing checking accounts can fluctuate as much as 5% to 10% on a daily basis. Total interest bearing checking, money market and savings deposits increased $3.6 million, or 10.8%, to $37.4 million at December 31, 2009 from $33.8 million at December 31, 2008. Time deposits increased to $50.3 million at December 31, 2009 from $32.0 million at December 31, 2008, an $18.3 million (57.2%) increase. Included in time deposits at December 31, 2009 is $14.0 million in brokered deposits, which includes The Bank of Southern Connecticut’s placement of $3.4 million in customer deposits and purchase of $3.5 million in brokered certificates of deposit through the CDARS program. As of December 31, 2009, core deposits represented 57.2% of total deposits compared to 66.0% at December 31, 2008. The decrease in core deposits as a percentage of total deposits is due to seasonal fluctuations in deposit levels as well as the effect of reduced economic activity in general, on The Bank of Southern Connecticut’s customer’s businesses.
The Bank of Southern Connecticut maintains relationships with several deposit brokers and could continue to utilize the services of one or more of such brokers if management determines that issuing brokered certificates of deposit would be in the best interest of The Bank of Southern Connecticut and Southern Connecticut Bancorp.
The Greater New Haven Market is highly competitive. The Bank of Southern Connecticut faces competition from a large number of banks (ranging from small community banks to large international banks), credit unions, and other providers of financial services. The level of rates offered by The Bank of Southern Connecticut reflects the high level of competition in our market.
As of June 30, 2010, The Bank of Southern Connecticut’s maturities of time deposits were:
$100,000 or greater | Less than $100,000 | Totals | |||||||
Three months or less | $ | 10,517,334 | $ | 5,246,138 | $ | 15,763,472 | |||
Over three months to six months | 8,316,978 | 6,133,724 | 14,450,702 | ||||||
Over six months to one year | 4,063,309 | 4,777,136 | 8,840,445 | ||||||
Over one year to two years | 12,414,192 | 11,483,823 | 23,898,015 | ||||||
Over two years to three years | 1,754,579 | 2,005,860 | 3,760,439 | ||||||
Over three years | 1,567,585 | 1,589,602 | 3,157,187 | ||||||
$ | 38,633,977 | $ | 31,236,283 | $ | 69,870,260 | ||||
Other
Repurchase agreement balances totaled $2.2 million at June 30, 2010 as compared to $294,000 at December 31, 2009. The increase was due to normal customer activity.
The increase in Other Assets of $457,000 during 2009 was due mainly to the prepayment in December 2009 of FDIC insurance premiums totaling $678,000, partially offset by the write-down in 2009 of $238,000 in Goodwill recorded by Southern Connecticut Bancorp related to the Evergreen asset purchase in 2008.
105
Table of Contents
Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009
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 months ended June 30, 2010 and 2009.
Distribution of Assets, Liabilities and Shareholders’ Equity;
Interest Rates and Interest Differential
Six Months Ended June 30, | (Decreases) Increases in Interest Income/ Expense | |||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | ||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Loans (1)(2) | $ | 117,918 | $ | 3,615 | 6.18 | % | $ | 91,964 | $ | 2,879 | 6.31 | % | $ | 736 | ||||||||||
Short-term and other investments | 10,985 | 42 | 0.77 | 18,353 | 105 | 1.15 | (63 | ) | ||||||||||||||||
Investments | 3,295 | 9 | 0.55 | 3,881 | 89 | 4.62 | (80 | ) | ||||||||||||||||
Total interest earning assets | 132,198 | 3,666 | 5.59 | 114,198 | 3,073 | 5.43 | 593 | |||||||||||||||||
Cash and due from banks | 5,343 | 4,354 | ||||||||||||||||||||||
Premises and equipment, net | 2,425 | 2,692 | ||||||||||||||||||||||
Allowance for loan losses | (2,777 | ) | (2,259 | ) | ||||||||||||||||||||
Other | 2,761 | 2,318 | ||||||||||||||||||||||
Total assets | $ | 139,950 | $ | 121,303 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Time certificates | $ | 55,690 | 687 | 2.49 | % | $ | 41,707 | 677 | 3.27 | % | 10 | |||||||||||||
Savings deposits | 2,362 | 8 | 0.68 | 1,634 | 12 | 1.48 | (4 | ) | ||||||||||||||||
Money market/checking deposits | 34,146 | 186 | 1.10 | 33,175 | 294 | 1.79 | (108 | ) | ||||||||||||||||
Capital lease obligations | 1,174 | 87 | 14.94 | 1,180 | 88 | 15.04 | (1 | ) | ||||||||||||||||
Repurchase agreements | 1,944 | 5 | 0.52 | 616 | 4 | 1.31 | 1 | |||||||||||||||||
Total interest bearing liabilities | 95,316 | 973 | 2.06 | 78,312 | 1,075 | 2.77 | (102 | ) | ||||||||||||||||
Non-interest bearing deposits | 27,990 | 24,655 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 901 | 1,074 | ||||||||||||||||||||||
Shareholder’s equity | 15,743 | 17,262 | ||||||||||||||||||||||
Total liabilities and equity | $ | 139,950 | $ | 121,303 | ||||||||||||||||||||
Net interest income | $ | 2,693 | $ | 1,998 | $ | 695 | ||||||||||||||||||
Interest spread | 3.53 | % | 2.66 | % | ||||||||||||||||||||
Interest margin | 4.11 | % | 3.53 | % | ||||||||||||||||||||
(1) | Average balance includes nonaccruing loans. |
(2) | Interest income includes loan fees, which are not material. |
106
Table of Contents
Rate Volume Variance Analysis.The following table summarizes the variance in interest income and expense resulting from changes in assets and liabilities and fluctuations in interest rates earned and paid. The changes in interest income and expense attributable to both rate and volume have been allocated to both rate and volume on a pro rata basis.
Six Months Ended June 30, | ||||||||||||
2010 vs. 2009 | ||||||||||||
Due to Change in Average | (Decrease) Increase | |||||||||||
(Dollars in thousands) | Volume | Rate | ||||||||||
Interest earning assets: | ||||||||||||
Loans | $ | 796 | $ | (60 | ) | $ | 736 | |||||
Short-term and other investments | (35 | ) | (28 | ) | (63 | ) | ||||||
Investments | (11 | ) | (69 | ) | (80 | ) | ||||||
Total interest earning assets | 750 | (157 | ) | 593 | ||||||||
Interest bearing liabilities: | ||||||||||||
Time certificates | 195 | (185 | ) | 10 | ||||||||
Savings deposits | 4 | (8 | ) | (4 | ) | |||||||
Money market/checking deposits | 9 | (117 | ) | (108 | ) | |||||||
Capital lease obligations | (1 | ) | — | (1 | ) | |||||||
Repurchase agreements | 5 | (4 | ) | 1 | ||||||||
Total interest bearing liabilities | 212 | (314 | ) | (102 | ) | |||||||
Net interest income | $ | 538 | $ | 157 | $ | 695 | ||||||
The following are measurements of Southern Connecticut Bancorp’s results of operations in relation to assets and equity, and average equity to average assets for the six months ended June 30, 2010 and 2009:
Six Months Ended June 30, | ||||||
2010 | 2009 | |||||
Income (loss) on average assets | 0.05 | % | (4.26 | )% | ||
Income (loss) on average equity | 0.45 | (29.96 | ) | |||
Average equity to average assets | 11.25 | 14.23 |
Results of Operations.Southern Connecticut Bancorp had net income during the six months ended June 30, 2010 of $35,000 (or basic and diluted earnings per share of $0.01), compared to a net loss of $2,565,000 (or basic and diluted loss per share of $0.95) for the same period in 2009.
During the first six months of 2010, earnings were reduced by $266,000 for merger related legal, accounting and advisory costs.
Southern Connecticut Bancorp’s increase in earnings during the six months ended June 30, 2010, as compared to the same period in 2009, was due to the combined effects of a $1,963,000 decrease in the provision for loan losses recorded by The Bank of Southern Connecticut to $118,000 for the six months ended June 30, 2010 from $2,081,000 for the same period in 2009; and a $695,000 increase in net interest income. Net interest income increased due to increases in asset balances, higher yields on interest earning assets and lower costs on interest bearing liabilities, which were partially offset by increases in liability balances. The provision for loan losses during the first six months of 2009 was related to a group of ten impaired loans that were severely impacted by prevailing economic conditions, discussed in more detail underAllowance for Loan Losses.
In addition to the impact of the provision for loan losses and increase in net interest income, the operating results for the first six months of 2010 compared to the same period of 2009 were influenced by the following factors:
• | Noninterest income increased because of recognition of a gain on the sale of an available for sale security, as well as increases in rental income and an increase in servicing income on SBA loans. These increases were partially offset by decreases in service charges and fees resulting from changes in the business practices of customers of The Bank of Southern Connecticut; and |
• | Noninterest expenses, as noted above, increased due to legal and professional fees incurred relating to the merger with Naugatuck Valley Financial, which were partially offset by lower salaries and benefits expense and a decrease in the cost of FDIC Insurance related to a special onetime special assessment accrued during the six months ended June 30, 2009. |
107
Table of Contents
Net Interest Income. The principal source of revenue for Southern Connecticut Bancorp is net interest income. The Bank of Southern Connecticut’s net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The Bank of Southern Connecticut, 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 six months ended June 30, 2010, net interest income was $2,693,000 versus $1,998,000 for the same period in 2009. The $695,000 or 34.8% increase was the result of a $593,000 increase in interest income and a $102,000 decrease in interest expense. This net increase was primarily the result of an increase in interest earning assets, as well as favorable changes in rates on both interest earning assets and interest bearing liabilities, partially offset by increased costs on interest bearing liabilities. The increase in the yield on average earning assets reflects the growth in The Bank of Southern Connecticut’s loan portfolio combined with the impact of reductions in interest income during the second quarter of 2009 related to the increase in non-performing assets.
Southern Connecticut Bancorp’s average total interest earning assets were $132.2 million during the six months ended June 30, 2010 compared to $114.2 million for the same period in 2009, an increase of $18.0 million or 15.8%. The increase in average interest earning assets of $18.0 million was comprised of increases in average balances of loans of $26.0 million, partially offset by decreases in average balances of short-term and other investments of $7.4 million and investments of $600,000.
The yield on average interest earning assets for the six months ended June 30, 2010 was 5.59% compared to 5.43% for the same period in 2009, an increase of 16 basis points. The increase in the yield on average earning assets was attributable to growth in The Bank of Southern Connecticut’s higher yielding loan portfolio and reductions in lower yielding short-term investments.
The combined effects of the $18.0 million increase in average balances of interest earning assets and the 16 basis point increase in yield on average interest earning assets resulted in the $593,000 increase in interest income for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.
The average balance of Southern Connecticut Bancorp’s interest bearing liabilities was $95.3 million during the six months ended June 30, 2010 compared to $78.3 million for the six months ended June 30, 2009, an increase of $17.0 million or 21.7%. The cost of average interest bearing liabilities decreased 71 basis points to 2.06% for the six months ended June 30, 2010 compared to 2.77% for the same period in 2009, which was primarily due to a general decrease in market interest rates.
The combined effects of the 71 basis point decrease in rates paid on average interest bearing liabilities and the $17.0 million increase in average balances of interest bearing liabilities resulted in the $102,000 decrease in interest expense for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.
Provision for Loan Losses.Southern Connecticut Bancorp’s provision for loan losses was $118,000 for the six months ended June 30, 2010 as compared to a provision for loan losses of $2,081,000 for the same period in 2009. The significant decrease in the provision for loan losses during the six months ended June 30, 2010, as compared to the same period in the prior year, was primarily related to specific reserves established for a group of ten impaired loans in 2009 that were severely impacted by prevailing economic conditions in 2009, discussed in more detail under “—Allowance for Loan Losses”.
Noninterest Income.Total noninterest income was $337,000 for the six months ended June 30, 2010 compared to $319,000 for the same period in 2009. Noninterest income included a $29,000 gain on the sale of an available for sale security. Service charges and fees decreased $39,000 due to changes in business practices of customers of The Bank of Southern Connecticut during the first quarter of 2010. Other noninterest income increased to $73,000 for the six months ended June 30, 2010 from $45,000 in the same period in 2009, due to a $14,000 increase in loan and SBA servicing related fees, a $12,000 increase in rental income and a $2,000 increase in other fees.
Noninterest Expenses. Total noninterest expense was $2,877,000 for the six months ended June 30, 2010 compared to $2,801,000 for the same period in 2009, an increase of $76,000 or 2.7%.
Salaries and benefits expense for the six months ended June 30, 2010 declined $21,000 to $1,519,000 compared to $1,540,000 for the same period in 2009.
108
Table of Contents
FDIC insurance expense decreased for the six months ended June 30, 2010 by $34,000 to $109,000 from $143,000 primarily due to a special onetime assessment accrued during the first six months of 2009, partially offset by increases in deposit balances during 2010.
Professional services for the six months ended June 30, 2010 increased by $135,000 from $273,000 to $408,000, primarily due to an increase in legal, accounting and advisory fees related to the merger with Naugatuck Valley Financial.
In addition, other operating expenses of $314,000 for the six months ended June 30, 2010 were relatively unchanged from $304,000 for the same period in 2009.
Comparison of Operating Results for the Years Ended December 31, 2009 and 2008
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 years ended December 31, 2009 and 2008.
Distribution of Assets, Liabilities and Shareholders’ Equity;
Interest Rates and Interest Differential
2009 | 2008 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | (Decreases) Increases in Interest Income/ Expense | |||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Loans (1)(2) | $ | 97,773 | $ | 6,102 | 6.24 | % | $ | 84,106 | $ | 6,334 | 7.53 | % | $ | (232 | ) | |||||||||
Short-term and other investments | 22,023 | 203 | 0.92 | 10,120 | 266 | 2.63 | (63 | ) | ||||||||||||||||
Investments | 3,353 | 121 | 3.61 | 5,051 | 196 | 3.88 | (75 | ) | ||||||||||||||||
Federal funds sold | — | — | — | 7,497 | 204 | 2.72 | (204 | ) | ||||||||||||||||
Total interest earning assets | 123,149 | 6,426 | 5.22 | 106,774 | 7,000 | 6.56 | (574 | ) | ||||||||||||||||
Cash and due from banks | 4,362 | 4,387 | ||||||||||||||||||||||
Premises and equipment, net | 2,625 | 2,974 | ||||||||||||||||||||||
Allowance for loan losses | (2,522 | ) | (1,213 | ) | ||||||||||||||||||||
Other | 2,319 | 1,995 | ||||||||||||||||||||||
Total assets | $ | 129,933 | $ | 114,917 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Time certificates | $ | 47,288 | 1,457 | 3.08 | % | $ | 29,904 | 1,251 | 4.18 | % | 206 | |||||||||||||
Savings deposits | 1,907 | 20 | 1.05 | 1,557 | 21 | 1.35 | (1 | ) | ||||||||||||||||
Money market/checking deposits | 34,318 | 514 | 1.50 | 35,661 | 783 | 2.20 | (269 | ) | ||||||||||||||||
Capital lease obligations | 1,178 | 176 | 14.94 | 1,184 | 176 | 14.86 | — | |||||||||||||||||
Repurchase agreements | 764 | 6 | 0.79 | 567 | 9 | 1.59 | (3 | ) | ||||||||||||||||
Total interest bearing liabilities | 85,455 | 2,173 | 2.54 | 68,873 | 2,240 | 3.25 | (67 | ) | ||||||||||||||||
Non-interest bearing deposits | 26,792 | 25,170 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 1,058 | 1,281 | ||||||||||||||||||||||
Shareholder’s equity | 16,628 | 19,593 | ||||||||||||||||||||||
Total liabilities and equity | $ | 129,933 | $ | 114,917 | ||||||||||||||||||||
Net interest income | $ | 4,253 | $ | 4,760 | $ | (507 | ) | |||||||||||||||||
Interest spread | 2.68 | % | 3.31 | % | ||||||||||||||||||||
Interest margin | 3.45 | % | 4.46 | % | ||||||||||||||||||||
(1) | Average balance includes nonaccruing loans. |
(2) | Interest income includes loan fees, which are not material. |
109
Table of Contents
Rate Volume Variances Analysis. The following table summarizes the variance in interest income and expense resulting from changes in assets and liabilities and fluctuations in interest rates earned and paid. The changes in interest income and expense attributable to both rate and volume have been allocated to both rate and volume on a pro rata basis.
Year Ended December 31, | ||||||||||||
2009 vs. 2008 | ||||||||||||
Due to Change in Average | (Decrease) Increase | |||||||||||
(Dollars in thousands) | Volume | Rate | ||||||||||
Interest earning assets: | ||||||||||||
Loans | $ | 943 | $ | (1,175 | ) | $ | (232 | ) | ||||
Short-term and other investments | 182 | (245 | ) | (63 | ) | |||||||
Investments | (62 | ) | (13 | ) | (75 | ) | ||||||
Federal funds sold | (204 | ) | — | (204 | ) | |||||||
Total interest earning assets | 859 | (1,433 | ) | (574 | ) | |||||||
Interest bearing liabilities: | ||||||||||||
Time certificates | 595 | (389 | ) | 206 | ||||||||
Savings deposits | 4 | (5 | ) | (1 | ) | |||||||
Money market/checking deposits | (29 | ) | (240 | ) | (269 | ) | ||||||
Capital lease obligations | (1 | ) | 1 | — | ||||||||
Repurchase agreements | 2 | (5 | ) | (3 | ) | |||||||
Total interest bearing liabilities | 571 | (638 | ) | (67 | ) | |||||||
Net interest income | $ | 288 | $ | (795 | ) | $ | (507 | ) | ||||
The decrease in net interest income during 2009 reflects the decrease in the yields on earning assets from 6.56% in 2008 to 5.22% in 2009, partially offset by an increase in total average interest earning asset balances from 2008, as the average interest earning assets in 2009 of $123.1 million were 15% higher than 2008. The decline in interest income attributable to average interest earning assets was partially offset by the combined effects of a decrease in rates on interest bearing liabilities from 3.25% in 2008 to 2.54% in 2009 and a $16.6 million increase in average interest bearing liabilities from $68.9 million in 2008 to $85.5 million in 2009. Overall, the change in interest income attributed to volume increases was $288,000 offset by a decrease of $795,000 due to the decrease in interest rates. Interest income from interest earning assets in 2009 compared to 2008 declined $1.4 million due to rates and increased $859,000 due to volume. Variances in the 2009 cost of interest bearing liabilities in comparison to 2008 were due to decreased rate considerations of $638,000 offset by increased volume considerations of $571,000.
Southern Connecticut Bancorp intends for The Bank of Southern Connecticut to continue to emphasize lending to small to medium-sized businesses in its market area as its strategy to increase assets under management and to improve earnings. The Bank of Southern Connecticut will seek opportunities through marketing to increase its deposit base, with a primary objective of attracting core non-interest checking and related money market deposit accounts, in order to support its earning assets and also by considering additional branch locations and new product and service offerings.
The following are measurements of Southern Connecticut Bancorp’s results of operations in relation to assets and equity, and average equity to average assets for the years ended December 31, 2009 and 2008:
Years Ended December 31, | ||||||
2009 | 2008 | |||||
(Loss) income on average assets | (2.24 | )% | 0.12 | % | ||
(Loss) income on average equity | (17.50 | ) | 0.68 | |||
Average equity to average assets | 12.79 | 17.05 |
Results of Operations.Southern Connecticut Bancorp’s net loss for fiscal year 2009 was $2,907,000 (or basic and diluted loss per share of $1.08), compared to net income of $134,000 (or basic and diluted income per share of $0.05) in fiscal year 2008.
Southern Connecticut Bancorp’s net loss for the year ended December 31, 2009 was largely attributable to a provision for loan losses of $1,992,000 for 2009 compared to $226,000 for 2008. The significant increase in the provision for loan
110
Table of Contents
losses during 2009 is related to a group of ten impaired loans that have been severely impacted by prevailing economic conditions, discussed in more detail underAllowance for Loan Losses.
In addition to the impact of the provision for loan losses, the operating results for the year ended December 31, 2009 compared to 2008 were influenced by the following factors:
• | Net interest income decreased due primarily to lower yields on interest earning assets, offset partially by lower costs on interest bearing liabilities and changes in asset and liability volumes; |
• | Noninterest income decreased because noninterest income in 2008 included the gain on the sale of the New London branch; a decrease in loan fees attributable to a prepayment penalty received in 2008; and due to a decrease in service charges and fees, resulting from changes in the business practices of customers of The Bank of Southern Connecticut; and |
• | Noninterest expenses decreased due to lower salaries and benefits resulting from reductions in staff, both from the sale of the New London branch and other reductions, and the elimination of certain employee benefits and bonuses in 2009. In addition, salaries and benefits expense for 2008 included expenses related to separation payments made to the former Chief Executive Officer and President of The Bank of Southern Connecticut, and there were no such expenses in 2009; expense reductions attributable to lower negotiated rates on certain insurance and telecommunications service contracts; decreases in advertising and promotional campaigns; and expense savings related to printing Southern Connecticut Bancorp’s 2009 shareholders’ letter and proxy statement. These decreases were partially offset by the impairment write-down of goodwill relating to Evergreen; an increase in professional service fees; and by higher FDIC insurance premiums due to an increase in assessment rates and deposit balances subject to assessment, as well as a special one-time assessment paid during 2009. |
Net Interest Income. The principal source of revenue for The Bank of Southern Connecticut is net interest income. The Bank of Southern Connecticut’s net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The Bank of Southern Connecticut, 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 year ended December 31, 2009, net interest income was $4,253,000 versus $4,760,000 for the same period in 2008. The $507,000 (or 10.6%) decrease was the result of a $574,000 decrease in interest income and a $67,000 decrease in interest expense. This net decrease was primarily the result of decreases in rates, partially offset by increases in volume, on both interest earning assets and interest bearing liabilities.
Southern Connecticut Bancorp’s average total interest earning assets were $123.1 million during the year ended December 31, 2009 compared to $106.8 million for the same period in 2008, an increase of $16.3 million (or 15.3%). The increase in average interest earning assets of $16.3 million was comprised of increases in average balances of loans of $13.7 million and short-term and other investments of $11.9 million, partially offset by decreases in average balances of federal funds sold of $7.5 million and investments of $1.6 million.
The yield on average interest earning assets for the year ended December 31, 2009 was 5.22% compared to 6.56% for 2008, a decrease of 134 basis points. The decrease in the yield on average earning assets reflects the impact of reductions in the FOMC rates, particularly in the prime lending rate, LIBOR and The Bank of Southern Connecticut’s base lending rate; as well as an increase in non-performing assets and an increasingly competitive market to attract new loans.
The combined effects of the 134 basis point decrease in yield on average interest earning assets and the $16.3 million increase in average balances of interest earning assets resulted in the $574,000 decrease in interest income between the year ended December 31, 2009 and the year ended December 31, 2008.
The average balance of Southern Connecticut Bancorp’s interest bearing liabilities was $85.5 million during the year ended December 31, 2009 compared to $68.9 million for 2008, an increase of $16.6 million (or 24.1%). The cost of average interest bearing liabilities decreased 71 basis points to 2.54% during the year ended December 31, 2009 compared to 3.25% for the same period in 2008, which was primarily due to a general decrease in market interest rates.
111
Table of Contents
The combined effects of the 71 basis point decrease in yield on average interest bearing liabilities and the $16.6 million increase in average balances of interest bearing liabilities resulted in the $67,000 decrease in interest expense between the year ended December 31, 2009 and the year ended December 31, 2008.
Provision for Loan Losses.The Bank of Southern Connecticut’s provision for loan losses was $1,992,000 for the year ended December 31, 2009, as compared to $226,000 for the year ended December 31, 2008. The significant increase in the provision for loan losses during the year ended December 31, 2009 was primarily related to specific reserves established for a group of ten impaired loans that have been severely impacted by prevailing economic conditions, discussed in more detail under Allowance for Loan Losses.
Noninterest Income. Total noninterest income was $629,000 for the year ended December 31, 2009 compared to $1,667,000 for the same period in 2008. Noninterest income in 2008 included an $875,000 gain on the sale of The Bank of Southern Connecticut’s New London branch. Service charges and fees decreased $70,000 due to changes in business practices of customers of The Bank of Southern Connecticut during the year ended December 31, 2009. Other non-interest income decreased to $122,000 in 2009 from $215,000 in 2008, due to decreases in loan prepayment fees ($74,000), insurance commissions ($9,000), letter of credit fees ($10,000), and other fees ($29,000), partially offset by increases in other loan and SBA servicing related fees ($29,000).
Noninterest Expenses. Total noninterest expenses were $5,797,000 for the year ended December 31, 2009 compared to $6,067,000 for 2008, a decrease of $270,000 or 4.4%.
Salaries and benefits expense for the year ended December 31, 2009 was $3,089,000 versus $3,688,000 for the same period in 2008. Salaries and benefits expense decreased $599,000, or 16.2%, primarily because of expense savings related to reductions in staff, both from the sale of the New London branch and other reductions, and the elimination of certain employee benefits and bonuses in 2009, as well as the reduction relating to separation payments made to the former Chief Executive Officer and President of The Bank of Southern Connecticut in 2008, with no such expenses incurred in 2009.
FDIC insurance expense increased by $168,000 from $79,000 to $247,000 primarily due to increased assessment rates and deposit balances subject to assessment, as well as a one time special assessment of five basis points based upon deposit balances on June 30, 2009. The Temporary Liquidity Guarantee Program announcement by the FDIC on October 17, 2008 provided banks with the option to fully insure non-interest bearing transaction deposit accounts. The Bank of Southern Connecticut elected to participate in the program, resulting in a 10 basis point annual rate surcharge applied to balances in such accounts over $250,000, beginning in 2009.
Professional services for the year ended December 31, 2009 increased by $152,000 from $358,000 to $510,000, primarily due to an increase in legal fees related to the merger announced on February 22, 2010 (see Note 18 to the Consolidated Financial Statements) and accounting fees, partially offset by a reduction in other professional fees.
Other operating expenses was unchanged for the year ended December 31, 2009, compared to the same period in 2008. During 2009, Southern Connecticut Bancorp recognized a $238,000 impairment write-down of goodwill relating to Evergreen, partially offset by expense reductions attributable to lower negotiated rates on certain insurance and telecommunications service contracts, and expense savings related to printing Southern Connecticut Bancorp’s 2009 shareholders’ letter and proxy statement. The goodwill impairment recognized was due to the recurring operating losses incurred by Evergreen since its acquisition, and the uncertainty that such results were not likely to improve in the near future.
Off-Balance-Sheet Arrangements
See Note 14 to the accompanying consolidated financial statements for Southern Connecticut Bancorp for required disclosure regarding off-balance-sheet arrangements.
Liquidity
Southern Connecticut Bancorp’s liquidity position as of June 30, 2010 and December 31, 2009 consisted of liquid assets totaling $33.2 million and $20.4 million, respectively. This represents 20.7% and 15.1% of total assets at June 30, 2010 and December 31, 2009, 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
112
Table of Contents
from banks, short-term investments, interest bearing certificates of deposit and securities available for sale. Liquidity is a measure of Southern Connecticut 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.
Southern Connecticut Bancorp’s liquidity position as of December 31, 2009 and 2008 consisted of liquid assets totaling $20.4 million and $20.7 million, respectively. This represents 15.1% and 18.0% of total assets at December 31, 2009 and 2008, respectively. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets as described in the accompanying balance sheet are considered liquid assets: Cash and due from banks, federal funds sold, short-term investments, interest-bearing certificates of deposit and securities available for sale. Liquidity is a measure of Southern Connecticut 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.
Management believes Southern Connecticut Bancorp’s short-term assets provide sufficient liquidity to cover potential fluctuations in deposit accounts and loan demand and to meet other anticipated operating cash and investment requirements.
Capital
The following table illustrates Southern Connecticut Bancorp’s and The Bank of Southern Connecticut’s regulatory capital ratios at June 30, 2010:
Southern Connecticut Bancorp | The Bank of Southern Connecticut | |||||||||||
Actual | Capital Adequacy Target Ratio | Actual | Capital Adequacy Target Ratio | |||||||||
Total Capital to Risk Weighted Assets | 12.97 | % | 8.00 | % | 12.22 | % | 8.00 | % | ||||
Tier 1 Capital to Risk Weighted Assets | 11.71 | % | 4.00 | 10.96 | % | 4.00 | ||||||
Tier 1 (leverage) Capital Ratio to Average Assets | 10.89 | % | 4.00 | 10.18 | % | 4.00 |
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and banking system. Based on the above ratios, Southern Connecticut Bancorp is considered to be “well capitalized” under applicable regulations by the Federal Reserve. The Bank of Southern Connecticut is also considered to be “well capitalized” under other applicable regulations. To be considered “well capitalized” an institution must generally have a leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%.
Market Risk
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. Based upon the nature of Southern Connecticut Bancorp’s business, market risk is primarily limited to interest rate risk, which is defined as the impact of changing interest rates on current and future earnings.
Southern Connecticut 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 Southern Connecticut 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, Southern Connecticut 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 loans for the portfolio to offset the short-term re-pricing of the liabilities. In fact, a number of the interest bearing deposit products have no contractual maturity. Customers may withdraw funds from their accounts at any time and deposits balances may therefore run off unexpectedly due to changing market conditions.
The exposure to interest rate risk is monitored by Senior Management of The Bank of Southern Connecticut and reported quarterly to the Asset and Liability Management Committee and the board of directors. Management reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk.
113
Table of Contents
Impact of Inflation and Changing Prices
Southern Connecticut Bancorp’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Notwithstanding this fact, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect Southern Connecticut Bancorp’s earnings in future periods.
114
Table of Contents
Board of Directors
The board of directors of new Naugatuck Valley Financial is comprised of seven persons who are elected for terms of three years, approximately one-third of whom will be elected annually. The current directors of new Naugatuck Valley Financial are the same individuals that comprise the boards of directors of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. Immediately following the merger with Southern Connecticut Bancorp, we will increase the size of our board to nine and will appoint Elmer F. Laydon and Alphonse F. Spadaro, Jr., Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp and The Bank of Southern Connecticut, to the boards of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan
All of our directors are independent under the current listing standards of the Nasdaq Stock Market, except for Mr. Roman, who is President and Chief Executive Officer of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan and Ms. Walsh, who is a former officer of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. Unless otherwise stated, each person has held his or her current occupation for the last five years. Ages presented are as of December 31, 2009.
Directors with Terms Ending in 2011:
Carlos S. Batista is Vice President of Sales and Business Development for Water and Waste Water Automation Solutions, a business unit of PWS/Power & Water Solutions, a Division of Emerson Process Management. Age 60. Director since 1999. Chairman of the Board since 2009. Mr. Batista is currently Chairman of the Audit Committee.
Mr. Batista holds a Bachelors Degree in Electrical and Electronics Engineering and a Masters in Business Administration from the University of New Haven. He is a member of the Alpha Sigma Lambda National Honor Society at the University of New Haven. He has extensive experience in Systems Contracting, Marketing and Sales Engineering, gained throughout his long history of experiences and various company wide positions in the industry. Through customer relationship management he has been a major contributor to the development and expansion of Products, systems and solutions in the Water, Wastewater treatment for RAS-Bristol/Emerson. His management experience in a regulated industry has exposed Mr. Batista to many of the issues facing public companies today, particularly regulated entities, making Mr. Batista a valued component of a well rounded Board. Based on his experiences, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Batista should serve as a director.
John C. Roman has served as President and Chief Executive Officer of Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company since 2004 and has been President and Chief Executive Officer of Naugatuck Valley Savings since September 1999. Mr. Roman previously was the Vice President and Chief Lending Officer of Naugatuck Valley Savings. Age 56. Director since 1999.
Since assuming the role of President and Chief Executive Office of Naugatuck Valley Savings in 1999, Mr. Roman has successfully completed a mutual to stock conversion and navigated the issues facing public companies within the banking sector. Mr. Roman’s knowledge of all aspects of the business and its history, combined with his drive for responsible growth and excellence, position him well to continue to serve as our President and Chief Executive Officer and as a Board member. Based on his experiences, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Roman should serve as a director.
Camilo P. Vieirais a consultant with, and previously served as the President of, CM Property Management, a property management firm. Mr. Vieira previously served with IBM Corp. as a project and financial manager for over 30 years. Age 66. Director since 2002.
Through his experience at IBM, Mr. Vieira brings substantial financial expertise, while his real estate management provides further experience in matters directly related to the business of the Company. Mr. Vieira’s varied experience in both real estate management and project management and finance is an integral part of the board’s composition. Based on his experiences, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Vieira should serve as a director.
Director with Term Ending in 2012:
Richard M. Famigliettihas been the owner of CM Property Management, a property management firm, since 2002. Previously, Mr. Famiglietti was a Vice President of sales for Naugatuck Glass Company, a glass fabricator. Age 62. Director since 2000.
115
Table of Contents
Mr. Famiglietti’s experience as owner of a property management company provides the Board with critical experience in real estate matters, as well as, experience as a small business owner. In addition, Mr. Famiglietti brings substantial management experience and expertise in sales and marketing, specifically within the region in which the Company conducts its business, through his experience as Vice President of sales for Naugatuck Glass Company. Based on his experience, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Famiglietti should serve as a director.
Frederick A. Dlugokeckiis an attorney and has maintained a private practice in Naugatuck, Connecticut focusing on real estate, bankruptcy, estate planning and business and tax issues since 1990. Mr. Dlugokecki graduated with high honors from The Catholic University of America, School of Law, and from the University of Connecticut, School of Business,magna cum laude, with Distinction in Finance. Age 53. Director since 2009.
Mr. Dlugokecki was previously employed in Washington, D.C., with The United States Department of Justice, Tax Division and the General Counsel’s Office of The Federal Deposit Insurance Corporation. In Philadelphia, PA, he was employed with the law firms of Duane, Morris, LLP and Saul, Ewing, LLP. Mr. Dlugokecki went on to hold the position of General Counsel with Hansen Properties of Ambler, PA. Mr. Dlugokecki has taught law classes at various universities, including Post University and Temple University Law School.
Mr. Dlugokecki’s experience and professional focus as an attorney correlates positively to the business and operational issues of Naugatuck Valley Savings. As an active legal practitioner in the local area, Mr. Dlugokecki also offers the Board valuable insight into the local business community. Based on his experience, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Dlugokecki should serve as a director.
Directors with Terms Ending in 2013:
James A. Mengaccihas been the owner of James A. Mengacci Associates LLC, a consulting firm, since 1999. Mr. Mengacci previously was the Secretary and Treasurer of Fitzgerald Funeral Home, Inc. Age 51. Director since 1988.
Through his experiences an independent business owner and as a treasurer of a local business, Mr. Mengacci brings substantial management experience and tenure to the Board and can offer the Board a unique perspective on the issues it faces. Based on his experience, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Mengacci should serve as a director.
Jane H. Walshserved as Senior Vice President of Naugatuck Valley Savings, Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company prior to her retirement in August 2007. Ms. Walsh has served with Naugatuck Valley Savings and Loan for over 31 years. Age 66. Director since 2001.
As a result of Ms. Walsh’ tenure with Naugatuck Valley Savings and Loan as Senior Vice President of Operations, she affords the Board the opportunity to utilize her deep knowledge of and insight into the institution, its market areas and operational risks. Based on her experience, qualifications, attributes and skills set forth above, the board of directors determined that Ms. Walsh should serve as a director.
Directors to Be Appointed Upon Completion of Merger with Southern Connecticut Bancorp:
Elmer F. Laydon is the Chairman of Southern Connecticut Bancorp and The Bank of Southern Connecticut. Mr. Laydon is the President of Elmer F. Laydon Construction Corp., a building contractor and former chairman of the board of Shoreline Bank and Trust Company. Mr. Laydon’s current and former experience as the chairman of the board of a community bank and as a contractor provides valuable insight on the banking industry and the local real estate market. Based on his experiences, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Laydon should serve as a director.
Alphonse F. Spadaro, Jr. is the Vice Chairman of the Board of Southern Connecticut Bancorp and The Bank of Southern Connecticut. Mr. Spadaro is also the managing principal of Levitsky & Berney, P.C. (public accounting firm). Age 68. Mr. Spadaro will provide the Board of Directors with valuable experience regarding accounting and financial matters. Based on his experience, qualifications, attributes and skills set forth above, the board of directors determined that Mr. Spadaro should serve as a director.
116
Table of Contents
Executive Officers
Our executive officers are elected by the board of directors and serve at the board’s discretion. The following individuals currently serve as executive officers of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan and will serve in the same positions with new Naugatuck Valley Financial following the conversion and the offering.
Name | Position | |
John C. Roman | President and Chief Executive Officer of Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and Naugatuck Valley Savings and Loan | |
Dominic J. Alegi, Jr. | Executive Vice President of Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and Naugatuck Valley Savings and Loan | |
Mark S. Graveline | Senior Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company; Senior Vice President and Chief Lending Officer of Naugatuck Valley Savings and Loan | |
William C. Nimons | Senior Vice President of Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and Naugatuck Valley Savings and Loan | |
Lee R. Schlesinger | Senior Vice President and Chief Financial Officer of Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and Naugatuck Valley Savings and Loan |
Below is information regarding the executive officers who are not also directors. Unless otherwise stated, each executive officer has held his current position for at least the last five years. Ages presented are as of December 31, 2009.
Dominic J. Alegi, Jr. has served as Executive Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual since September 2004 and has been Executive Vice President of Naugatuck Valley Savings since 1989. Mr. Alegi has served with Naugatuck Valley Savings since 1970. Age 63.
Mark S. Graveline has served as Senior Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual and as Senior Vice President and Chief Lending Officer of Naugatuck Valley Savings since February 2005. Mr. Graveline previously was a Vice President of Banknorth-Connecticut and a Vice President of North American Bank and Trust. Age 53.
William C. Nimons has served as Senior Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual since September 2004 and has been Senior Vice President of Naugatuck Valley Savings since 2001. Mr. Nimons previously was the Manager-Network Management of Prudential Real Estate and Relocation, a real estate and relocation firm and was an Executive Vice President at Shelton Savings Bank. Age 63.
Lee R. Schlesingerwas appointed Senior Vice President and Chief Financial Officer of Naugatuck Valley Mutual, Naugatuck Valley Financial and Naugatuck Valley Savings in December, 2007. Prior to that, he served as Vice President and Treasurer of Naugatuck Valley Financial and Naugatuck Valley Mutual since September 2004, and as Vice President and Treasurer of Naugatuck Valley Savings since August 2004. Mr. Schlesinger served as Vice President and Controller of Naugatuck Valley Savings from 2003 to 2004 and as Assistant Vice President and Controller of Naugatuck Valley Savings from 2000 to 2003. Mr. Schlesinger has served with Naugatuck Valley Savings since 1983. Age 49.
In addition, we will appoint Matthew Proto, Sr., Senior Vice President and Chief Lending Officer of The Bank of Southern Connecticut, and Sunil Pallan, Senior Vice President and Chief Credit Officer of The Bank of Southern Connecticut, as Senior Vice Presidents of Naugatuck Valley Savings and Loan effective upon completion of the merger.
Sunil Pallanserves as Senior Vice President and Chief Credit Officer for The Bank of Southern Connecticut. He has held this position since March 2008. He has been employed by The Bank of Southern Connecticut since 2005, holding various positions in the Credit Department. Mr. Pallan also serves as the Loan Compliance Officer for The Bank of Southern Connecticut. Age 47.
Matthew Proto, Sr. served as Senior Vice President in commercial lending since joining The Bank of Southern Connecticut in 2006. Prior to joining The Bank of Southern Connecticut, Mr. Proto was associated with New Alliance Bank, most recently as Vice President, from 1995 to 2006. Age 52.
117
Table of Contents
Board Leadership Structure and Board’s Role in Risk Oversight
The board of directors has determined that the separation of the offices of Chairman of the Board and President and Chief Executive Officer will enhance Board independence and oversight. Moreover, the separation of the Chairman of the Board and President and Chief Executive Officer will allow the President and Chief Executive Officer to better focus on his growing responsibilities of running the Company, enhancing shareholder value and expanding and strengthening our franchise while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. Consistent with this determination, Carlos S. Batista serves as Chairman of the Board of Directors. Mr. Batista is independent under the listing requirements of The NASDAQ Global Market.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of risks Naugatuck Valley Financial faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board meets regularly with management to discuss strategy and the risks facing Naugatuck Valley Financial. Senior management attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters. The Chairman of the Board and independent members of the Board work together to provide strong, independent oversight of Naugatuck Valley Financial’s management and affairs through its standing committees and, when necessary, special meetings of independent directors.
Director Compensation—For the 2009 Fiscal Year
The following table provides the compensation received by individuals who served as non-employee directors of Naugatuck Valley Financial during the 2009 fiscal year.
Name | Fees Earned or Paid in Cash (1) | Stock Awards (2) | Option Awards (3) | All Other Compensation | Total ($) | ||||||||||
Carlos S. Batista | $ | 66,200 | $ | — | $ | — | $ | 2,093 | $ | 68,293 | |||||
Frederick A. Dlugokecki | 20,625 | — | — | — | 20,625 | ||||||||||
Richard M. Famiglietti | 48,800 | — | — | 3,408 | 52,208 | ||||||||||
Ronald D. Lengyel (4) | 28,500 | — | — | 4,670 | 33,170 | ||||||||||
James A. Mengacci | 46,500 | — | — | 1,282 | 47,782 | ||||||||||
Michael S. Plude (4) | 49,100 | — | — | 1,772 | 50,872 | ||||||||||
Camilo P. Vieira | 43,300 | — | — | 1,282 | 44,582 | ||||||||||
Jane H. Walsh | 45,400 | — | — | 2,747 | 48,147 |
(1) | Includes fees earned for service with Naugatuck Valley Savings, Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company. Also includes $10,000 supplemental payment credited under the Deferred Compensation Plan for Directors. |
(2) | The aggregate number of unvested restricted stock award shares held in trust for each non-employee director at fiscal year end was 1,490 shares, except for Ms. Walsh, for whom 2,800 shares were held in trust at fiscal year end. |
(3) | The aggregate number of options held by each non-employee director at fiscal year end was 18,630, except for Ms. Walsh, who held 22,000 options at fiscal year end. |
(4) | Mr. Lengyel’s and Mr. Plude’s terms as directors expired at our 2009 and 2010 annual meeting of stockholders, respectively. |
Cash Retainer and Meeting Fees for Non-Employee Directors.Naugatuck Valley Savings maintains a standard compensation arrangement for its non-employee directors and committee members that is comprised of annual retainers for board service, board meeting attendance and committee meeting attendance. For the fiscal 2009 year, directors were paid $7,500 ($11,500 for Chairman) in an annual retainer for board service, $500 per board meeting attended (regular or special) and $400 per committee meeting attended. The Chairman of the Board also received $400 per month as Asset/Liability Committee liaison.
Non-employee directors of Naugatuck Valley Financial receive $500 quarterly retainers, and audit committee members receive $400 per audit committee meeting attended. Non-employee directors of Naugatuck Valley Mutual Holding Company receive a $500 annual retainer.
118
Table of Contents
Deferred Compensation Plan.Naugatuck Valley Financial and Naugatuck Valley Savings and Loan sponsor a deferred compensation plan for directors. Benefits under the plan consist of amounts previously deferred under a predecessor plan and current deferrals of board remuneration that would have otherwise been payable in cash. In addition, the deferred compensation plan provides supplemental benefits in the event of a change in control or upon a director’s death (before age 70), termination of service due to disability (before age 70) or the removal or failure to reelect a participating director for reasons other than cause (as such term is defined in the plan). The benefit payable upon death or due to the director’s termination as a result of his removal or failure to be re-elected (other than for cause) decreases by $10,000 each year while the director remains in service. The following table outlines the Company-provided benefits to which our current directors would have been entitled under the deferred compensation plan as of December 31, 2009:
Name | Death Benefit/ Removal or Failure to Reelect for Reasons Other than Cause | Disability | Change in Control | ||||||
Carlos S. Batista | $ | 120,000 | $ | 150,000 | $ | 300,000 | |||
Frederick A. Dlugokecki | — | — | — | ||||||
Richard M. Famiglietti | 120,000 | 150,000 | 300,000 | ||||||
James A. Mengacci | 220,000 | 250,000 | 500,000 | ||||||
Jane H. Walsh | 50,000 | 70,000 | 140,000 | ||||||
Camilo P. Vieira | 120,000 | 150,000 | 300,000 |
Executive Compensation
Summary Compensation Table.The following table provides information concerning total compensation earned or paid to Naugatuck Valley Financial’s principal executive officer and the two other most highly compensated executives. These three officers are referred to as the “named executive officers” in this document.
Name and Principal Position | Year | Salary (1) | Bonus (2) | Stock Awards (3) | Option Awards (4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings (5) | All Other Compensation (6) | Total | |||||||||||||||
John C. Roman | 2009 | $ | 179,203 | $ | — | $ | — | $ | — | $ | 7,000 | $ | 31,538 | $ | 217,741 | ||||||||
President and Chief Executive Officer | 2008 | 171,246 | 10,926 | — | — | 39,000 | 30,702 | 251,874 | |||||||||||||||
2007 | 168,062 | — | — | — | 5,000 | 32,738 | 205,800 | ||||||||||||||||
Dominic J. Alegi, Jr. | 2009 | 115,386 | — | — | — | 35,000 | 11,376 | 161,762 | |||||||||||||||
Executive Vice President | 2008 | 109,921 | 6,293 | — | — | 160,000 | 10,586 | 286,800 | |||||||||||||||
2007 | 107,199 | — | — | — | 33,000 | 12,824 | 153,023 | ||||||||||||||||
Mark S. Graveline | 2009 | 142,559 | — | — | — | — | 12,332 | 154,891 | |||||||||||||||
Senior Vice President | 2008 | 123,429 | 7,967 | 8,750 | 1,514 | — | 9,297 | 150,957 | |||||||||||||||
2007 | 109,695 | — | — | — | — | 10,708 | 120,403 |
(1) | Salary for Mr. Graveline in 2009 includes $1,461 in payments under a deposit incentive program. |
(2) | Bonus amounts for 2008 have been restated to reflect discretionary bonuses earned during the year. |
(3) | This amount reflects the aggregate grant date fair value for outstanding restricted stock awards granted during the year, computed in accordance with FASB ASC Topic 718. The amounts were calculated based on the Company’s stock price as of the date of grant, which was $8.75 for Mr. Graveline’s award. When shares become vested and are distributed from the trust in which they are held, the recipient will also receive an amount equal to accumulated cash and stock dividends (if any) paid with respect thereto, plus earnings thereon. |
(4) | This amount reflects the aggregate grant date fair value for outstanding stock option awards granted during the year, computed in accordance with FASB ASC Topic 718. For information on the assumptions used to compute the fair value, see note 11 to the consolidated financial statements. The actual value, if any, realized by an executive officer from any option will depend on the extent to which the market value of the common stock exceeds the exercise price of the option on the date the option is exercised. Accordingly, there is no assurance that the value realized by an executive officer will be at or near the value estimated above. |
(5) | Amounts represent the aggregate change in the actuarial present value of accumulated benefit under the Pentegra Defined Benefit Plan for Financial Institutions. |
(6) | For Mr. Roman, 2009 amount includes, but is not limited to, perquisites and personal benefits for automobile usage, automobile repairs and gas expenses. |
Employment Agreements.The Bank, the Company and Mr. Roman have entered into an employment agreement with a two-year term. The Boards of Directors may extend the term of the agreement for an additional year as of each anniversary of the effective date of the agreement. The board of directors last reviewed the employment agreement in October, 2009. At
119
Table of Contents
that time, the Boards of Directors extended the term of the agreement to October 8, 2011. The Boards of Directors review Mr. Roman’s base salary, currently $182,713, annually pursuant to the terms of the agreement. In addition to establishing a base salary for Mr. Roman, the agreement provides for, among other things, Mr. Roman’s participation in certain benefit plans, including stock-based benefit plans.
The employment agreement restricts Mr. Roman’s right to compete against the Bank for a period of one year following termination of his employment for good reason or other than for cause (as defined in the agreement). However, this provision does not apply if the Company and the Bank have not renewed the term of Mr. Roman’s employment agreement and he terminates his employment at a time when the remaining term of the agreement is one year or less.
See“Other Potential Post-Termination Benefits”for a discussion of the benefits and payments Mr. Roman may receive under his employment agreement upon his retirement or termination of employment.
The 2009 Valley Incentive Plan. The Valley Incentive Plan is intended to provide a cash compensation program that is competitive in level and form, to reward officers at the level of assistant vice president and above for achieving budgeted profits and for outstanding performance in furthering the goals of Naugatuck Valley Financial and its affiliates. If a participant is hired as an assistant vice president or promoted to an assistant vice president during a plan year the participant will receive a pro-rata share of the annual award (i.e. 1st Quarter – 75%, 2nd Quarter – 50%, 3rd Quarter – 25% and 4th Quarter – 0%). Participants have to be employed on December 31st to be eligible to receive an award and investment executives who participate in a commission plan are not eligible to participate in the Valley Incentive Plan.
The Plan is administered by Naugatuck Valley Savings and Loan’s board of directors. Awards are determined based on Naugatuck Valley Financial’s net income after taxes (“NIAT”) and individual performance measures which are specific to each participant’s position and responsibilities with Naugatuck Valley Savings and Loan. 75% of a participant’s award is dependent upon the achievement of the targeted NIAT and 25% is based on individual performance goals. Participants are assigned an individual award target which, with salary, is intended to provide a competitive cash compensation level. This target is expressed as a percentage of salary as of the last day of the applicable Plan year. NIAT may be adjusted at the board’s discretion for unbudgeted acquisition expenses, additions to loan loss reserves and gains or losses on sales of investments. The board of directors revised the Valley Incentive Plan for the 2010 fiscal year to provide that no payments will be made if Naugatuck Valley Financial’s NIAT is less than $2.0 million.
Valley Incentive Plan payouts for any given plan year will be determined as of the end of each fiscal year and distributed in the pay period following the January board meeting. If a plan participant terminates employment with Naugatuck Valley Savings because of death or disability, the award will be pro-rated. If a participant is involuntarily terminated by Naugatuck Valley Savings, the board will determine the award, if any, under the Valley Incentive Plan. The Board of Directors elected not to make incentive awards in 2009 and in the alternative increased base compensations by 3%. Salaries had been frozen for the 2009 fiscal year, therefore base salaries were adjusted retroactively to each employee’s 2009 annual review date.
Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning unexercised options and stock awards that have not vested for each named executive officer outstanding as of December 31, 2009.
Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested (1) | ||||||||||
John C. Roman | 29,600 | 7,400 | (2) | $ | 11.10 | 7/26/2015 | 4,400 | (2) | $ | 25,256 | ||||||
Dominic J. Alegi, Jr. | 17,600 | 4,400 | (2) | 11.10 | 7/26/2015 | 2,800 | (2) | 16,702 | ||||||||
Mark S. Graveline | 17,600 | 1,600 | (2) | 11.10 | 7/26/2015 | 800 | (2) | 4,592 | ||||||||
200 | 800 | (3) | 11.10 | 7/26/2018 | 800 | (3) | 4,592 |
(1) | Based upon Naugatuck Valley Financial’s closing stock price of $5.74 on December 31, 2009. |
(2) | Unexercisable stock options and restricted stock awards vest on July 26, 2010. |
(3) | Unexercisable stock options and restricted stock awards vest in four equal annual installments on July 26, 2010, 2011, 2012 and 2013. |
120
Table of Contents
Pension Benefits
Naugatuck Valley Savings participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Retirement Plan”) to provide retirement benefits for eligible employees. However, the accrual of benefits under the Retirement Plan was frozen as of September 1, 2005.
Other Potential Post-Termination Benefits
Payments Made Upon Termination for Cause. Mr. Roman’s employment agreement contains a narrow definition of cause for which Mr. Roman may be terminated. If Mr. Roman is terminated for cause, he will receive his base salary through the date of termination and retain the rights to any vested benefits subject to the terms of the plan or agreement under which those benefits are provided.
Payments Made Upon Voluntary Termination and Termination without Cause or for Good Reason.If Naugatuck Valley Financial terminates Mr. Roman’s employment for reasons other than cause, or if he terminates voluntarily under certain circumstances that constitute “good reason” as defined in the employment agreement, Mr. Roman, or his beneficiary should he die prior to receipt of payment, is entitled to a lump sum cash payment equal to his base salary for the remaining term of the employment agreement, as well as the value of continued benefits provided under tax-qualified and non-tax-qualified benefit plans for the remaining term, based on the amounts received during the 12 months preceding his termination. Mr. Roman is also entitled to continued medical, dental, life and disability insurance coverage for the remaining term of the agreement.
If Mr. Roman voluntarily terminates his employment under circumstances that would not constitute good reason, he will be entitled to receive his base salary through the date of termination and retain the rights to any vested benefits subject to the terms of the plan or agreement under which those benefits are provided.
Payments Made Upon Disability.If Mr. Roman becomes disabled, he will receive monthly disability pay equal to 75% of his base salary for a period ending on the earliest to occur of: (1) his return to full-time employment with Naugatuck Valley Savings; (2) his death; or (3) the attainment of age 65, as well as continued medical, dental and life insurance coverage (for Mr. Roman and his dependents) for the applicable disability period. Disability benefits under the employment agreement are reduced by payments made to Mr. Roman under any other company or bank-sponsored disability program.
Messrs. Roman, Alegi and Graveline are participants in the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan. The plan provides that upon termination due to disability, outstanding stock options and restricted stock awards automatically vest and become exercisable and, in the case of options, remain exercisable until the later of one year from the date of disability or the expiration date of the stock options.
Payments Made Upon Death. Upon Mr. Roman’s death, his employment agreement terminates and his estate receives only unpaid compensation through the last day of the month of his death.
Naugatuck Valley Savings has entered into death benefit agreements with Messrs. Roman and Alegi. Under Mr. Roman’s agreement, Mr. Roman’s beneficiary becomes entitled to a single lump sum payment of $193,000 upon Mr. Roman’s death while still an employee of Naugatuck Valley Savings, or $25,000 upon Mr. Roman’s death at any other time. Under the agreement with Mr. Alegi, the executive’s beneficiary becomes entitled to a single lump sum payment of $25,000 upon his death at any time. In addition, under separate bank owned life insurance, the beneficiaries of Messrs. Roman, Alegi and Graveline become entitled to an additional lump sum payment of $25,000 upon the executive’s death at any time.
The Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan provides that upon termination due to death, outstanding stock options and restricted stock awards automatically vest and become exercisable and, in the case of options, remain exercisable until the later of one year from the date of death or the expiration date of the stock options.
Payments Made Upon a Change in Control. Under Mr. Roman’s employment agreement, if he is involuntarily or constructively terminated within three years of a change in control, as defined in the employment agreement, he is generally entitled to receive a severance payment equal to three times his average annual compensation (as defined in the employment agreement) over the five preceding calendar years, as well as continued medical, dental, life insurance and disability insurance for three years following termination of employment.
121
Table of Contents
The Bank has entered into change in control agreements with Messrs. Alegi and Graveline. The change in control agreement for Mr. Alegi has a three-year term and the change in control agreements for Mr. Graveline have two year term, subject to annual renewal by the board of directors. The change in control agreements provide each executive with a severance benefit upon termination in connection with a change in control (as defined in the agreements). If the executive is terminated without cause, or voluntarily resigns under circumstances specified in the change in control agreements, following a change in control of Naugatuck Valley Financial or Naugatuck Valley Savings, he will receive a severance payment equal to three times (for Mr. Alegi) and two times for (Mr. Graveline) his average annual taxable income for the five most recent taxable years. Naugatuck Valley Savings will also continue medical, dental and life insurance coverage for 36 months following termination of employment.
The benefits provided by Mr. Roman’s employment agreement and the change in control agreements are limited to avoid adverse tax consequences to the Company and the Bank under Sections 280G and 4999 of the Internal Revenue Code of 1986. The provisions provide that total payments and benefits to the executives that constitute “parachute payments” made in connection with a change in control shall not equal or exceed in the aggregate three times the individual’s average annual taxable income over the five preceding taxable years.
The Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan provides that, in the event of a change in control of Naugatuck Valley Financial or Naugatuck Valley Savings, outstanding stock options and stock awards automatically vest and become exercisable.
2005 Equity Incentive Plan
The Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan was adopted by our board of directors and approved by our shareholders in May 2005. The 2005 Equity Incentive Plan authorized the granting of up to 372,614 stock options and 149,045 shares of restricted stock. The purpose of the 2005 Equity Incentive Plan is to promote Naugatuck Valley Financial’s success by linking the personal interests of its employees, officers and directors to those of Naugatuck Valley Financial’s stockholders, and by providing participants with an incentive for outstanding performance. The 2005 Equity Incentive Plan is further intended to provide flexibility to Naugatuck Valley Financial in its ability to motivate, attract, and retain the services of employees, officers and directors upon whose judgment, interest, and special effort the successful conduct of Naugatuck Valley Financial’s operation is largely dependent. The 2005 Equity Incentive Plan is administered by the Compensation Committee of Naugatuck Valley Financial’s board of directors, which has the authority to determine the eligible directors or employees to whom awards are to be granted, the number of awards to be granted, the vesting of the awards and the conditions and limitations of the awards.
As of June 30, 2010, options for343,024 shares were outstanding and options for 29,170 shares remained available for future awards under the plan. Of the options granted under the plan, 240 have been exercised. As of June 30, 2010, 145,722 shares of restricted stock had been granted and 3,323 shares remained available for future awards under the plan.
The 2005 Equity Incentive Plan provides that in the event any merger, consolidation, share exchange or other similar corporate transaction affects the shares of Naugatuck Valley Financial in such a manner that an adjustment is required to preserve the benefits available under the plan, the committee administering the plan has the authority to adjust the number of shares which may be granted, the number of shares subject to restricted stock awards or outstanding stock options, and the exercise price of any stock option grant. As a result, upon completion of the conversion and offering, outstanding shares of restricted stock and options to purchase shares of Naugatuck Valley Financial common stock will be converted into and become shares of restricted stock and options to purchase shares of new Naugatuck Valley Financial common stock. The number of shares of restricted stock and common stock to be received upon exercise of these options and the related exercise price will be adjusted for the exchange ratio in the conversion. The aggregate exercise price, duration and vesting schedule of these awards will not be affected.
Future Equity Incentive Plan
Following the offering, Naugatuck Valley Financial plans to adopt an equity incentive plan that will provide for grants of stock options and restricted stock. Under this plan, if implemented within 12 months following the completion of the conversion, we intend to grant stock options in an amount up to 10.0% of the number of shares sold in the offering and restricted stock awards in an amount equal to 3.0% of the shares sold in the offering, subject to adjustment as may be required by Office of Thrift Supervision regulations or policy to reflect restricted stock awards and stock option grants
122
Table of Contents
previously made by Naugatuck Valley Financial. Therefore, the number of shares reserved under the plan will range from 264,426 shares, assuming2,034,050 shares are issued in the offering, to 357,753 shares, assuming2,751,950 shares are issued in the offering. If the new equity incentive plan is adopted more than 12 months after the completion of the conversion, restricted stock awards and stock option grants under the plan may exceed the percentage limitations set forth above.
Naugatuck Valley Financial may fund the equity incentive plan through the purchase of common stock in the open market by a trust established in connection with the plan or from authorized, but unissued, shares of Naugatuck Valley Financial common stock. The issuance of additional shares after the offering would dilute the interests of existing shareholders. See“Pro Forma Data.”
Naugatuck Valley Financial will grant all stock options at an exercise price equal to 100% of the fair market value of the stock on the date of grant. Naugatuck Valley Financial will grant restricted stock awards at no cost to recipients. Restricted stock awards and stock options generally vest ratably over a five-year period (or as otherwise permitted by the Office of Thrift Supervision), but Naugatuck Valley Financial may also make vesting contingent upon the satisfaction of performance goals established by the board of directors or the committee charged with administering the plan. All outstanding awards will accelerate and become fully vested upon a change in control of Naugatuck Valley Financial.
The equity incentive plan will comply with all applicable Office of Thrift Supervision regulations except to the extent waived by the Office of Thrift Supervision. We will submit the equity incentive plan to shareholders for their approval not less than six months after completion of the conversion and offering, at which time we will provide shareholders with detailed information about the plan.
Policies and Procedures for Approval of Related Persons Transactions
Naugatuck Valley Financial maintains a Policy and Procedures Governing Related Persons Transactions, which is a written policy and set of procedures for the review and approval or ratification of transactions involving related persons. Under the policy, related persons consist of directors, director nominees, executive officers, persons or entities known to us to be the beneficial owner of more than five percent of any outstanding class of voting securities of Naugatuck Valley Financial, or immediate family members or certain affiliated entities of any of the foregoing persons.
Transactions covered by the policy consist of any financial transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, in which:
• | the aggregate amount involved will or may be expected to exceed $50,000 in any calendar year; |
• | Naugatuck Valley Financial is, will or may be expected to be a participant; and |
• | any related person has or will have a direct or indirect material interest. |
The policy excludes certain transactions, including:
• | any compensation paid to an executive officer of Naugatuck Valley Financial if the compensation committee of the board of directors approved (or recommended that the Board approve) such compensation; |
• | any compensation paid to a director of Naugatuck Valley Financial if the Board or an authorized committee of the Board approved such compensation; and |
• | any transaction with a related person involving consumer and investor financial products and services provided in the ordinary course of Naugatuck Valley Financial business and on substantially the same terms as those prevailing at the time for comparable services provided to unrelated third parties or to Naugatuck Valley Financial’s employees on a broad basis (and, in the case of loans, in compliance with the Sarbanes-Oxley Act of 2002). |
Related person transactions will be approved or ratified by the Audit Committee. In determining whether to approve or ratify a related person transaction, the Audit Committee will consider all relevant factors, including:
• | whether the terms of the proposed transaction are at least as favorable to Naugatuck Valley Financial as those that might be achieved with an unaffiliated third party; |
• | the size of the transaction and the amount of consideration payable to the related person; |
123
Table of Contents
• | the nature of the interest of the related person; |
• | whether the transaction may involve a conflict of interest; and |
• | whether the transaction involves the provision of goods and services to Naugatuck Valley Financial that are available from unaffiliated third parties. |
A member of the Audit Committee who has an interest in the transaction will abstain from voting on the approval of the transaction but may, if so requested by the Chair of the Audit Committee, participate in some or all of the discussion relating to the transaction.
Transactions with Related Persons
The Sarbanes-Oxley Act of 2002 generally prohibits loans by Naugatuck Valley Financial to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by Naugatuck Valley Savings and Loan to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured financial institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. Naugatuck Valley Savings and Loan is therefore prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public. Notwithstanding this rule, federal regulations permit Naugatuck Valley Savings and Loan to make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program generally available to all other employees and does not give preference to any executive officer or director over any other employee, although Naugatuck Valley Savings and Loan does not currently have such a program in place. At June 30, 2010, all Naugatuck Valley Savings and Loan loans to related persons (as defined under Securities and Exchange Commission rules) were made in the ordinary course of business, made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender and did not involve more than the normal risk of collectibility or present other unfavorable features.
Pursuant to Naugatuck Valley Financial’s Audit Committee Charter, the Audit Committee periodically reviews, no less frequently than quarterly, a summary of Naugatuck Valley Financial’s transactions with directors and executive officers of Naugatuck Valley Financial and with firms that employ directors, as well as any other related person transactions, to recommend to the disinterested members of the board of directors that the transactions are fair, reasonable and within Naugatuck Valley Financial policy and should be ratified and approved. Also, in accordance with banking regulations and its policy, the board of directors reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of Naugatuck Valley Financial’s capital and surplus (up to a maximum of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the board of directors. Additionally, pursuant to Naugatuck Valley Financial’s Code of Ethics and Business Conduct, all executive officers and directors of Naugatuck Valley Financial must disclose any existing or potential conflicts of interest to the President and Chief Executive Officer of Naugatuck Valley Financial. Such potential conflicts of interest include, but are not limited to, the following: (1) Naugatuck Valley Financial conducting business with or competing against an organization in which a family member of an executive officer or director has an ownership or employment interest and (2) the ownership of more than 5% of the outstanding securities or 5% of total assets of any business entity that does business with or is in competition with Naugatuck Valley Financial.
Indemnification for Directors and Officers
Naugatuck Valley Financial’s articles of incorporation provide that Naugatuck Valley Financial must indemnify all directors and officers of Naugatuck Valley Financial against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of Naugatuck Valley Financial. Such indemnification may include the advancement of funds to pay for or reimburse reasonable expenses incurred by an indemnified party. Except insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Naugatuck Valley Financial pursuant to its articles of incorporation or otherwise, Naugatuck Valley Financial has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
124
Table of Contents
The following table provides information as of , 2010 about the persons and entities known to Naugatuck Valley Financial to be the beneficial owners of more than 5% of the Company’s outstanding common stock. A person or entity may be considered to beneficially own any shares of common stock over which the person or entity has, directly or indirectly, sole or shared voting or investing power.
Name and Address | Number of Shares Owned | Percent of Common Stock Outstanding (1) | |||
Naugatuck Valley Mutual Holding Company (2) 333 Church Street Naugatuck, Connecticut 06770 | 4,182,407 | 59.6 | % |
(1) | Based on 7,022,659 shares of the Company’s common stock outstanding and entitled to vote as of , 2010. |
(2) | The members of the board of directors of Naugatuck Valley Financial and Naugatuck Valley Savings also constitute the board of directors of Naugatuck Valley Mutual Holding Company. |
The following table provides information as of , 2010 about the shares of Naugatuck Valley Financial common stock that may be considered to be beneficially owned by each director, named executive officer listed in theSummary Compensation Table, and all directors and executive officers of the Company as a group. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, none of the shares listed are pledged as security and each of the named individuals has sole voting power and sole investment power with respect to the number of shares shown.
Name | Number of Shares Owned (1)(2) | Number of Shares That May Be Acquired within 60 Days of Exercising Options | Total | Percent of Common Stock Outstanding (3) | ||||||
Directors: | ||||||||||
Carlos S. Batista | 24,066 | (4) | 14,904 | 38,970 | * | |||||
Frederick A. Dlugokecki | — | — | — | * | ||||||
Richard M. Famiglietti | 14,834 | 14,904 | 29,738 | * | ||||||
James A. Mengacci | 13,658 | (5) | 14,904 | 28,562 | * | |||||
John C. Roman | 35,198 | 29,600 | 64,798 | * | ||||||
Camilo P. Vieira | 8,907 | (6) | 14,904 | 23,811 | * | |||||
Jane H. Walsh | 22,320 | 17,600 | 39,920 | * | ||||||
Named Executive Officers Who Are Also Not Directors: | ||||||||||
Dominic J. Alegi, Jr. | 26,668 | (7) | 17,600 | 44,268 | * | |||||
Mark S. Graveline | 7,221 | 6,600 | 13,821 | * | ||||||
William C. Nimons | 32,123 | (8) | 14,400 | 46,523 | * | |||||
Lee R. Schlesinger | 15,243 | 8,000 | 23,243 | * | ||||||
All directors and executive officers as a group (11 persons) | 200,238 | 153,416 | 353,654 | 4.9 | % |
* | Less than 1.0%. |
(1) | Includes shares of unvested restricted stock held in trust as part of the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan with respect to which individuals have voting but not investment power as follows: Mr. Alegi—2,800 shares, Messrs. Batista, Famiglietti, Mengacci and Vieira—1,490 shares each, Mr. Roman—4,400 shares, Ms. Walsh—2,800 shares, Mr. Graveline—1,600 shares, Mr. Nimons—2,000 shares and Mr. Schlesinger—2,800 shares. |
(2) | Includes shares allocated to the accounts of individuals under the Bank’s ESOP with respect to which individuals have voting but not investment power as follows: Mr. Alegi—3,409 shares, Mr. Graveline—2,274 shares, Mr. Nimons—3,080 shares, Mr. Roman—5,348 shares, Mr. Schlesinger—2,505 shares and Ms. Walsh—1,335 shares. |
(3) | Based on 7,022,659 shares of the Company’s common stock outstanding and entitled to vote as of , 2010. |
(4) | Includes 300 shares held in three custodian accounts for Mr. Batista’s grandchildren. |
(5) | Includes 6,360 shares that are pledged as collateral for a third party loan. |
(6) | Includes 1,839 shares held in Mr. Vieira’s spouse’s individual retirement account. |
(7) | Includes 100 shares held by Mr. Alegi’s spouse and 400 shares held in custodian accounts for Mr. Alegi’s grandchildren. |
(8) | Includes 500 shares held by Mr. Nimmons’ spouse and 200 shares held by Mr. Nimons’ son. |
125
Table of Contents
Subscriptions by Executive Officers and Directors
The table below sets forth, for each of our directors and executive officers and for all of the directors and executive officers as a group, the following information:
• | the number of shares of Naugatuck Valley Financial common stock to be received in exchange for shares of new Naugatuck Valley Financial common stock upon consummation of the conversion and the offering, based upon their beneficial ownership of Naugatuck Valley Financial common stock as of , 2010; |
• | the proposed purchases of new Naugatuck Valley Financial common stock, assuming sufficient shares are available to satisfy their subscriptions; and |
• | the total amount of new Naugatuck Valley Financial common stock to be held upon consummation of the conversion and the offering. |
In each case, it is assumed that shares are sold and the exchange ratio is calculated at the midpoint of the offering range. No individual has entered into a binding agreement to purchase these shares and, therefore, actual purchases could be more or less than indicated. Directors and executive officers and their associates may not purchase more than 25% of the shares sold in the offering. Like all of our depositors, our directors and officers have subscription rights based on their deposits. For purposes of the following table, sufficient shares are assumed to be available to satisfy subscriptions in all categories. See “The Conversion and Offering—Limitations on Purchases of Shares.”
Name of Beneficial Owner | Number of Shares Received in Exchange for Shares of Naugatuck Valley Financial (2) | Proposed Purchases of Stock in the Offering (1) | Total Common Stock to be Held | |||||||||
Number of Shares | Dollar Amount | Number of Shares (2) | Percentage of Total Outstanding (3) | |||||||||
Directors: | ||||||||||||
Carlos S. Batista | 11,703 | 5,000 | $ | 50,000 | 16,703 | * | % | |||||
Frederick A. Dlugokecki | — | 10,000 | 100,000 | 10,000 | * | |||||||
Richard M. Famiglietti | 7,214 | 5,000 | 50,000 | 12,214 | * | |||||||
James A. Mengacci | 6,642 | 5,000 | 50,000 | 11,642 | * | |||||||
John C. Roman | 17,117 | 5,000 | 50,000 | 22,117 | * | |||||||
Camilo P. Vieira | 4,331 | — | — | 4,331 | * | |||||||
Jane H. Walsh | 10,854 | 1,000 | 10,000 | 11,854 | * | |||||||
Executive Officers Who Are Not Also Directors: | ||||||||||||
Dominic J. Alegi, Jr. | 12,969 | 500 | 5,000 | 13,469 | * | |||||||
Mark S. Graveline | 3,512 | 4,000 | 40,000 | 7,512 | * | |||||||
William C. Nimons | 15,621 | 7,500 | 75,000 | 23,121 | * | |||||||
Lee R. Schlesinger | 7,413 | 500 | 5,000 | 7,913 | * | |||||||
All Directors and Executive Officers as a group (11 persons) | 97,376 | 43,500 | $ | 435,000 | 140,876 | 3.1 | % |
* | Less than 1%. |
(1) | Includes an estimated 4,000, 500, 7,500 and 500 shares to be purchased by Messrs. Roman, Alegi, Nimons and Schlesinger through self-directed purchases within Naugatuck Valley Savings and Loan’s 401(k) plan. Such purchases will receive the same purchase priorities, and be subject to the same purchase limitations, as purchases made by such officers using other funds. Also includes proposed subscriptions, if any, by associates. |
(2) | Based on information presented in “Stock Ownership” and an exchange ratio calculated at the minimum of the offering range. Excludes shares that may be acquired upon the exercise of outstanding stock options. |
(3) | Assuming shares are sold and the exchange ratio is calculated at the minimum of the offering range. |
In addition, Elmer F. Laydon and Alphonse F. Spadaro, Jr., Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp who will become directors of new Naugatuck Valley Financial following the merger, and Matthew Proto, Sr. and Sunil Pallan, senior officers of The Bank of Southern Connecticut who will become executive officers of new Naugatuck Valley Financial following the merger, expect to elect to receive in the merger up to 85,489 shares in the aggregate of new Naugatuck Valley Financial common stock in exchange for their Southern Connecticut Bancorp common stock, based on the number of shares of Southern Connecticut Bancorp they own as of , 2010 and subject to the election and proration procedure set forth in the merger agreement. These individuals also intend to subscribe for 2,500 shares, or $25,000, of new Naugatuck Valley Financial common stock. Including the new directors from Southern Connecticut Bancorp and senior officers from The Bank of Southern Connecticut, all directors and executive officers, together with their associates, would own, upon completion of the offering, the exchange and the merger, up to approximately 5.0% of our outstanding shares at the minimum of the offering range.
126
Table of Contents
General
Naugatuck Valley Savings and Loan is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and by the Federal Deposit Insurance Corporation as the insurer of its deposits. Naugatuck Valley Savings and Loan is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation. Naugatuck Valley Savings and Loan must file reports with the Office of Thrift Supervision concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of Thrift Supervision to evaluate Naugatuck Valley Savings and Loan’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan and their operations. New Naugatuck Valley Financial, as a savings and loan holding company, will be required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Office of Thrift Supervision.
Certain of the regulatory requirements that are or will be applicable to Naugatuck Valley Savings and Loan and new Naugatuck Valley Financial are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Naugatuck Valley Savings and Loan and new Naugatuck Valley Financial and is qualified in its entirety by reference to the actual statutes and regulations.
Federal Banking Regulation
Business Activities.The activities of federal savings banks, such as Naugatuck Valley Savings and Loan, are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks,e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.
Capital Requirements.The Office of Thrift Supervision’s capital regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% Tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital less certain specified deductions from total capital such as reciprocal holdings of depository institution capital instruments and equity investments) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is generally defined as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital (Tier 2 capital) include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
127
Table of Contents
The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular risks or circumstances. At June 30, 2010, Naugatuck Valley Savings and Loan met each of its capital requirements.
Prompt Corrective Regulatory Action.The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings association that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings association that has a total risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company up to the lesser of 5% of the savings association’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
Insurance of Deposit Accounts. Naugatuck Valley Savings and Loan’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. Effective April 1, 2009, assessment rates range from seven to 77.5 basis points. The Federal Deposit Insurance Corporation has adopted a 3 basis point increase effective January 1, 2011 pursuant to its restoration plan to replenish the Deposit Insurance Fund. No institution may pay a dividend if in default of the federal deposit insurance assessment.
The Federal Deposit Insurance Corporation imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base), in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The Federal Deposit Insurance Corporation provided for similar assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the Federal Deposit Insurance Corporation required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which include an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular assessment with an offsetting credit to the prepaid asset.
Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until January 1, 2014. In addition, the Federal Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010, recently extended to December 31, 2010 with a possible further extension through December 31, 2011, and certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and December 31, 2009 would be guaranteed by the Federal Deposit Insurance Corporation through June 30, 2012, or in some cases, December 31, 2012. Naugatuck Valley Savings and Loan participates in the unlimited noninterest bearing transaction account coverage and Naugatuck Valley Savings and Loan and Naugatuck Valley Financial opted not to participate in the unsecured debt guarantee program.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the calendar year ending December 31, 2009 averaged 1.06 basis points of assessable deposits.
128
Table of Contents
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Naugatuck Valley Savings and Loan. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of Naugatuck Valley Savings and Loan does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Loans to One Borrower.Federal law provides that savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.
Qualified Thrift Lender Test.Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities but also including education, credit card and small business loans) in at least 9 months out of each 12-month period.
A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of June 30, 2010, Naugatuck Valley Savings and Loan maintained85.61% its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.
Limitation on Capital Distributions.Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Naugatuck Valley Savings and Loan, it is a subsidiary of a holding company. If Naugatuck Valley Savings and Loan’s capital ever fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice.
Standards for Safety and Soundness.The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness in various areas such as internal controls and information systems, internal audit, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a savings association fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.
Community Reinvestment Act. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. Naugatuck Valley Savings and Loan received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.
129
Table of Contents
Transactions with Related Parties.Federal law limits Naugatuck Valley Savings and Loan’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with Naugatuck Valley Savings and Loan, including new Naugatuck Valley Financial and their other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by new Naugatuck Valley Financial to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Naugatuck Valley Savings and Loan’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Naugatuck Valley Savings and Loan may make to insiders based, in part, on Naugatuck Valley Savings and Loan’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.
Enforcement.The Office of Thrift Supervision has primary enforcement responsibility over savings associations and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Assessments.Savings associations are required to pay assessments to the Office of Thrift Supervision to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are computed based upon the savings association’s (including consolidated subsidiaries) total assets, financial condition and complexity of its portfolio. The Office of Thrift Supervision assessments paid by Naugatuck Valley Financial and Naugatuck Valley Savings and Loan for the year ended December 31, 2009 totaled $130,459.
Federal Home Loan Bank System.Naugatuck Valley Savings and Loan is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Naugatuck Valley Savings and Loan, as a member of the Federal Home Loan Bank of Boston, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Naugatuck Valley Savings and Loan was in compliance with this requirement with an investment in Federal Home Loan Bank stock at June 30, 2010 of[$6.3 million.]
The Federal Home Loan Banks have been required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These and similar requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, our net interest income would likely also be reduced.
Federal Reserve System.The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking
130
Table of Contents
accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio is applied above $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually and, for 2010, require a 3% ratio for up to $55.2 million and an exemption of $10.7 million. Naugatuck Valley Savings and Loan complies with the foregoing requirements. In October 2008, the Federal Reserve Board began paying interest on certain reserve balances.
Other Regulations
Naugatuck Valley Savings and Loan’s operations are also subject to federal laws applicable to credit transactions, such as the:
• | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
• | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
• | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
• | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; |
• | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and |
• | rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of Naugatuck Valley Savings and Loan also are subject to the:
• | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
• | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and |
• | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check. |
Holding Company Regulation
General. New Naugatuck Valley Financial will register with the Office of Thrift Supervision and will be subject to Office of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift Supervision will have enforcement authority over new Naugatuck Valley Financial and its non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to Naugatuck Valley Savings and Loan. As a unitary savings and loan holding company, new Naugatuck Valley Financial will be able to engage only in activities permitted to a financial holding company, which includes non-banking activities that the Federal Reserve Board has determined to be permissible for bank holding companies, as well as activities that the Office of Thrift Supervision has determined to be permissible for multiple savings and loan holding companies.
Acquisition of Control.Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
131
Table of Contents
Regulatory Restructuring Legislation
On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in Naugatuck Valley Savings and Loan that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.
Federal Securities Laws
Naugatuck Valley Financial common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. As a result, Naugatuck Valley Financial files quarterly and annual reports with the Securities and Exchange Commission and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act. Upon completion of the conversion and offering, new Naugatuck Valley Financial common stock will be registered with the Securities and Exchange Commission under the Securities Exchange Act. As a result, new Naugatuck Valley Financial will be required to file quarterly and annual reports with the Securities and Exchange Commission and will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act.
132
Table of Contents
Federal Income Taxation
General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2005. For its 2009 fiscal year, Naugatuck Valley Financial’s maximum federal income tax rate was 34%.
New Naugatuck Valley Financial and Naugatuck Valley Savings and Loan will enter into a tax allocation agreement. Because new Naugatuck Valley Financial will own 100% of the issued and outstanding capital stock of Naugatuck Valley Savings and Loan, new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan will be members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group new Naugatuck Valley Financial is the common parent corporation. As a result of this affiliation, Naugatuck Valley Savings and Loan may be included in the filing of a consolidated federal income tax return with new Naugatuck Valley Financial and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.
Bad Debt Reserves.For fiscal years beginning before 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and requires savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $1.8 million of Naugatuck Valley Savings and Loan’s accumulated bad debt reserves would not be recaptured into taxable income unless Naugatuck Valley Savings and Loan makes a “non-dividend distribution” to Naugatuck Valley Financial as described below.
Distributions.If Naugatuck Valley Savings and Loan makes “non-dividend distributions” to new Naugatuck Valley Financial, the distributions will be considered to have been made from Naugatuck Valley Savings and Loan’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from Naugatuck Valley Savings and Loan’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Naugatuck Valley Savings and Loan’s taxable income. Non-dividend distributions include distributions in excess of Naugatuck Valley Savings and Loan’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Naugatuck Valley Savings and Loan’s current or accumulated earnings and profits will not be so included in Naugatuck Valley Savings and Loan’s taxable income.
The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Naugatuck Valley Savings and Loan makes a non-dividend distribution to new Naugatuck Valley Financial, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Naugatuck Valley Savings and Loan does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.
State Taxation
Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and its subsidiaries are subject to the Connecticut corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for the fiscal year ending December 31, 2009) to arrive at Connecticut income tax.
133
Table of Contents
In 1998, the State of Connecticut enacted legislation permitting the formation of passive investment companies by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. Naugatuck Valley Savings and Loan established a passive investment company in September, 1999 which substantially eliminated the state income tax expense of Naugatuck Valley Savings and Loan and its subsidiary. The State of Connecticut continues to be under pressure to find new sources of revenue, and therefore could propose legislation to eliminate the passive investment company exemption. If such legislation were enacted, we would be subject to state income taxes in Connecticut.
134
Table of Contents
This conversion is being conducted pursuant to a plan of conversion approved by the boards of directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. The Office of Thrift Supervision has conditionally approved the plan of conversion; however, such approval does not constitute a recommendation or endorsement of the plan of conversion by such agency.
General
On February 22, 2010, the boards of directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan unanimously adopted the plan of conversion, which was amended and restated on , 2010. The second-step conversion that we are now undertaking involves a series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. Under the plan of conversion, Naugatuck Valley Savings and Loan will convert from the mutual holding company form of organization to the stock holding company form of organization and become a wholly owned subsidiary of new Naugatuck Valley Financial, a newly formed Maryland corporation. Current shareholders of Naugatuck Valley Financial, other than Naugatuck Valley Mutual Holding Company, will receive shares of new Naugatuck Valley Financial common stock in exchange for their shares of Naugatuck Valley Financial common stock. Following the conversion and offering, Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will no longer exist.
The conversion to a stock holding company structure also includes the offering by new Naugatuck Valley Financial of its common stock to eligible depositors of Naugatuck Valley Savings and Loan in a subscription offering and, if necessary, to members of the general public through a community offering and/or a syndicate of registered broker-dealers. The amount of capital being raised in the offering is based on an independent appraisal of new Naugatuck Valley Financial. Most of the terms of the offering are required by the regulations of the Office of Thrift Supervision.
Consummation of the conversion and offering requires the approval of the Office of Thrift Supervision. In addition, pursuant to Office of Thrift Supervision regulations, consummation of the conversion and offering is conditioned upon the approval of the plan of conversion by (1) at least a majority of the total number of votes eligible to be cast by depositors of Naugatuck Valley Savings and Loan, (2) the holders of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock and (3) the holders of at least a majority of the outstanding shares of common stock of Naugatuck Valley Financial, excluding shares held by Naugatuck Valley Mutual Holding Company.
The Office of Thrift Supervision approved our plan of conversion, subject to, among other things, approval of the plan of conversion by Naugatuck Valley Mutual Holding Company’s members (depositors of the Naugatuck Valley Savings and Loan) and Naugatuck Valley Financial’s shareholders. Meetings of Naugatuck Valley Mutual Holding Company’s members and Naugatuck Valley Financial’s shareholders have been called for this purpose on , 2010.
Funds received in the subscription or community offerings will be maintained in a segregated account at Naugatuck Valley Savings and Loan. If we fail to receive the necessary shareholder or member approval, or if we cancel the conversion and offering for any reason, orders for common stock already submitted will be canceled, subscribers’ funds will be returned promptly with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate and all deposit account withdrawal holds will be cancelled. We will not make any deduction from the returned funds for the costs of the offering.
In connection with the conversion, Naugatuck Valley Financial will acquire Southern Connecticut Bancorp in a merger, whereby Southern Connecticut Bancorp will be merged with and into Naugatuck Valley Financial and Southern Connecticut Bancorp’s wholly owned subsidiary, The Bank of Southern Connecticut, will be merged with and into Naugatuck Valley Savings and Loan. In connection with the merger, Southern Connecticut Bancorp’s stockholders will be given the opportunity to exchange their shares of Southern Connecticut Bancorp common stock for $6.75 in cash, 0.675 shares of Naugatuck Valley Financial common stock, or a combination thereof, subject to the election and proration procedures set forth in the merger agreement. For more information on the merger with Southern Connecticut Bancorp, see“The Acquisition of Southern Connecticut Bancorp.”
The following is a brief summary of the pertinent aspects of the conversion and offering. A copy of the plan of conversion is available from Naugatuck Valley Financial upon request and is available for inspection at the offices of
135
Table of Contents
Naugatuck Valley Savings and Loan and at the Office of Thrift Supervision. The plan of conversion is also filed as an exhibit to the registration statement, of which this prospectus forms a part, that new Naugatuck Valley Financial has filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”
Reasons for the Conversion and Offering
After considering the advantages and disadvantages of the conversion and offering, the boards of directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan unanimously approved the conversion and offering as being in the best interests of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan and their respective shareholders and customers. The board of directors concluded that the conversion and offering provides a number of advantages that will be important to our future growth and performance and that outweigh the disadvantages of the conversion and offering.
The offering will facilitate the acquisition of Southern Connecticut Bancorp by enabling us to issue stock and raise cash to pay the merger consideration.
The conversion and offering also will result in the raising of additional capital that will support Naugatuck Valley Savings and Loan’s future lending and operational growth and may also support future branching activities or the acquisition of other financial institutions or financial service companies or their assets. Although Naugatuck Valley Savings and Loan is categorized as “well-capitalized” and does not require additional capital, the board of directors has determined that opportunities for continued growth make pursuing the conversion and offering at this time desirable.
We expect that the larger number of shares that will be in the hands of public investors after completion of the conversion and offering will result in a more liquid and active market than currently exists for Naugatuck Valley Financial common stock. A more liquid and active market would make it easier for our investors to buy and sell our common stock.
After completion of the conversion and offering, the unissued common and preferred stock authorized by new Naugatuck Valley Financial’s articles of incorporation will permit us to raise additional capital through further sales of securities. Although Naugatuck Valley Financial currently has the ability to raise additional capital through the sale of additional shares of Naugatuck Valley Financial common stock, that ability is limited by the mutual holding company structure, which, among other things, requires that Naugatuck Valley Mutual Holding Company hold a majority of the outstanding shares of Naugatuck Valley Financial common stock.
As a fully converted stock holding company, we will have greater flexibility in structuring mergers and acquisitions, including the form of consideration paid in a transaction. Our current mutual holding company structure, by its nature, limits our ability to offer our common stock as consideration in a merger or acquisition because we cannot now issue stock in an amount that would cause Naugatuck Valley Mutual Holding Company to own less than a majority of the outstanding shares of Naugatuck Valley Financial. Our new stock holding company structure will enhance our ability to compete with other bidders when acquisition opportunities arise by better enabling us to offer stock or cash consideration, or a combination of the two.
If Naugatuck Valley Financial had undertaken a standard conversion in 2004 rather than a minority stock offering, applicable regulations would have required a greater amount of Naugatuck Valley Financial common stock to be sold than the amount that was sold in the minority offering. If a standard conversion had been conducted in 2004, management of Naugatuck Valley Financial believed that it would have been difficult to prudently invest the larger amount of capital that would have been raised, when compared to the net proceeds raised in connection with the minority offering. In addition, a standard conversion in 2004 would have immediately eliminated all aspects of the mutual form of organization.
The disadvantage of the conversion and offering considered by board of directors is the fact that operating in the stock holding company form of organization could subject Naugatuck Valley Savings and Loan to contests for corporate control. The board of directors determined that the advantages of the conversion and offering outweighed this disadvantage.
136
Table of Contents
Description of the Conversion
New Naugatuck Valley Financial has been incorporated under Maryland law as a first-tier wholly owned subsidiary of Naugatuck Valley Financial. To effect the conversion, the following will occur:
• | Naugatuck Valley Mutual Holding Company will convert to stock form and simultaneously merge with and into Naugatuck Valley Financial, with Naugatuck Valley Financial as the surviving entity; and |
• | Naugatuck Valley Financial will merge with and into new Naugatuck Valley Financial, with new Naugatuck Valley Financial as the surviving entity. |
As a result of the series of mergers described above, Naugatuck Valley Savings and Loan will become a wholly owned subsidiary of new Naugatuck Valley Financial and the outstanding shares of Naugatuck Valley Financial common stock held by persons other than Naugatuck Valley Mutual Holding Company (i.e., “public shareholders”) will be converted into a number of shares of new Naugatuck Valley Financial common stock that will result in the holders of such shares owning in the aggregate approximately the same percentage of new Naugatuck Valley Financial common stock to be outstanding upon the completion of the conversion and offering (i.e., the common stock issued in the offering plus the shares issued in exchange for shares of Naugatuck Valley Financial common stock) as the percentage of Naugatuck Valley Financial common stock owned by them in the aggregate immediately before consummation of the conversion and offering before giving effect to (1) the shares issued to stockholders of Southern Connecticut Bancorp in connection with the merger, (2) the payment of cash in lieu of issuing fractional exchange shares and (3) any shares of common stock purchased by public shareholders in the offering.
Share Exchange Ratio for Current Shareholders
Office of Thrift Supervision regulations provide that in a conversion from mutual holding company to stock holding company form, the public shareholders will be entitled to exchange their shares for common stock of the stock holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the exchange is fair and reasonable. Under the plan of conversion, each publicly held share of Naugatuck Valley Financial common stock will, on the effective date of the conversion and offering, be converted automatically into and become the right to receive a number of new shares of new Naugatuck Valley Financial common stock. The number of new shares of common stock will be determined pursuant to an exchange ratio that ensures that the public shareholders of Naugatuck Valley Financial common stock will own approximately the same percentage of common stock in new Naugatuck Valley Financial after the conversion and offering as they held in Naugatuck Valley Financial immediately before the conversion and offering, before giving effect to (1) the shares issued to stockholders of Southern Connecticut Bancorp in connection with the merger, (2) the payment of cash in lieu of fractional shares and (3) their purchase of additional shares in the offering. At , 2010, there were shares of Naugatuck Valley Financial common stock outstanding, of which were held by persons other than Naugatuck Valley Mutual Holding Company. The exchange ratio is not dependent on the market value of Naugatuck Valley Financial common stock. It will be calculated based on the percentage of Naugatuck Valley Financial common stock held by the public, the appraisal of Naugatuck Valley Financial prepared by FinPro and the number of shares sold in the offering.
The following table shows how the exchange ratio will adjust, based on the number of shares sold in our offering. The table also shows how many shares a hypothetical owner of 100 shares of Naugatuck Valley Financial common stock would receive in the exchange, based on the number of shares sold in the offering.
Shares to be Sold in the Offering | Exchange Ratio | Shares to be Received for 100 Existing Shares (1) | Pro Forma Tangible Book Value Per Exchanged Share | ||||||
Minimum, as adjusted (2) | 1,728,943 | 0.4863 | 48 | $ | 8.39 | ||||
Minimum | 2,034,050 | 0.4863 | 48 | 8.14 | |||||
Midpoint | 2,393,000 | 0.5722 | 57 | 8.80 | |||||
Maximum | 2,751,950 | 0.6580 | 65 | 9.42 | |||||
Maximum, as adjusted | 3,164,743 | 0.7567 | 75 | 10.09 |
(1) | Cash will be paid instead of issuing any fractional shares. |
137
Table of Contents
(2) | If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement. |
No fractional shares of new Naugatuck Valley Financial common stock will be issued in the conversion and offering. For each fractional share that would otherwise be issued, we will pay cash in an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 per share offering price.
We also will convert options previously awarded under the 2005 Equity Incentive Plan into options to purchase new Naugatuck Valley Financial common stock. At June 30, 2010, there were outstanding options to purchase 343,204 shares of Naugatuck Valley Financial common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Naugatuck Valley Financial common stock outstanding will increase and the exchange ratio could be adjusted.
The following table shows the number of shares to be issued, and approximate percentage of the total stock issuance, for each of the shares to be sold in the offering, shares to be received in exchange for existing shares of Naugatuck Valley Financial and shares to be issued to Southern Connecticut Bancorp stockholders in connection with the merger.
Shares to be Sold in the Offering | Shares to be Received in Exchange for Existing Shares of Naugatuck Valley Financial | Shares to be issued to Southern Connecticut Bancorp Stockholders | Total Shares of Common Stock to be Outstanding | ||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||
Minimum, as adjusted (1) | 1,728,943 | 41.1 | % | 1,381,313 | 32.9 | % | 1,092,245 | 26.0 | % | 4,202,501 | |||||||
Minimum | 2,034,050 | 45.1 | 1,381,313 | 30.6 | 1,092,245 | 24.2 | 4,507,608 | ||||||||||
Midpoint | 2,393,000 | 46.8 | 1,625,075 | 31.8 | 1,092,245 | 21.4 | 5,110,320 | ||||||||||
Maximum | 2,751,950 | 48.2 | 1,868,836 | 32.7 | 1,092,245 | 19.1 | 5,713,031 | ||||||||||
Maximum, as adjusted | 3,164,743 | 49.4 | 2,149,161 | 33.5 | 1,092,245 | 17.0 | 6,406,149 |
(1) | If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement. |
How We Determined the Offering Range and the $10.00 Purchase Price
Federal regulations require that the aggregate purchase price of the securities sold in connection with the offering be based upon our estimated pro forma market value after the conversion (i.e., taking into account the expected receipt of proceeds from the sale of securities in the offering) and the merger with Southern Connecticut Bancorp, as determined by an appraisal by an independent person experienced and expert in corporate appraisal. We have retained FinPro, Inc., which is experienced in the evaluation and appraisal of business entities, to prepare the appraisal. FinPro will receive fees totaling $40,000 for its appraisal report, plus $6,500 for each appraisal update (of which there will be at least one more) and reasonable out-of-pocket expenses. FinPro will also receive fees totaling $20,000 for preparation of the pro forma tables reflecting the independent appraisal and merger pro forma data in the prospectus. We have agreed to indemnify FinPro under certain circumstances against liabilities and expenses, including legal fees, arising out of, related to, or based upon the offering.
FinPro prepared the appraisal taking into account the pro forma impact of the offering. For its analysis, FinPro undertook substantial investigations to learn about our business and operations. We supplied financial information, including annual financial statements, information on the composition of assets and liabilities, and other financial schedules. In addition to this information, FinPro reviewed our conversion application as filed with the Office of Thrift Supervision and our registration statement as filed with the Securities and Exchange Commission. Furthermore, FinPro visited our facilities and had discussions with our management. FinPro did not perform a detailed individual analysis of the separate components of our assets and liabilities. We did not impose any limitations on FinPro in connection with its appraisal.
138
Table of Contents
In connection with its appraisal, FinPro reviewed the following factors, among others:
• | the impact of the acquisition of Southern Connecticut Bancorp by new Naugatuck Valley Financial; |
• | the economic make-up of our primary market area; |
• | our financial performance and condition in relation to publicly traded, fully converted financial institution holding companies that FinPro deemed comparable to us; |
• | the specific terms of the offering of our common stock; |
• | the pro forma impact of the additional capital raised in the offering; |
• | our proposed dividend policy; |
• | conditions of securities markets in general; and |
• | the market for thrift institution common stock in particular. |
FinPro’s independent valuation also utilized certain assumptions as to the pro forma earnings of new Naugatuck Valley Financial after the offering. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds, and expenses related to the stock-based benefit plans of new Naugatuck Valley Financial, including the employee stock ownership plan and the new equity incentive plan. The employee stock ownership plan and new equity incentive plan are assumed to purchase 6.0% and 3.0%, respectively, of the shares of new Naugatuck Valley Financial common stock sold in the offering. The new equity incentive plan is assumed to grant options to purchase the equivalent of 10.0% of the shares of new Naugatuck Valley Financial common stock sold in the offering. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.
Consistent with Office of Thrift Supervision appraisal guidelines, FinPro applied three primary methodologies to estimate the pro forma market value of our common stock: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and estimated core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of a peer group of companies considered by FinPro to be comparable to us, subject to valuation adjustments applied by FinPro to account for differences between Naugatuck Valley Financial and the peer group. The peer group is comprised of publicly-traded thrifts all selected based on asset size, market area and operating strategy. In preparing its appraisal, FinPro placed emphasis on the price-to-earnings and the price-to-book approaches and placed lesser emphasis on the price-to-assets approaches in estimating pro forma market value. The peer group consisted of 10 publicly traded, fully converted, financial institution holding companies based in the New England region of the United States. The peer group included companies with:
• | average assets of $851.2 million; |
• | average nonperforming assets of 1.32% of total assets; |
• | average loans of 70.98% of total assets; |
• | average tangible equity of 11.19 of total tangible assets; and |
• | average core income of 0.36% of average assets. |
FinPro prepared a valuation dated September 8, 2010. FinPro has advised us that the estimated pro forma market value, or valuation range, of our common stock, including shares sold in the offering, exchange shares and shares issued in the merger with Southern Connecticut Bancorp ranged from a minimum of $45.1 million to a maximum of $57.1 million, with a midpoint of $51.1 million. The aggregate offering price of the shares of common stock will be equal to the valuation range, excluding shares issued in the merger, multiplied by the 59.6% ownership interest that Naugatuck Valley Mutual Holding Company has in Naugatuck Valley Financial. The number of shares offered will be equal to the aggregate offering price divided by the price per share. Based on the valuation range, the percentage of Naugatuck Valley Financial common stock owned by Naugatuck Valley Mutual Holding Company and the $10.00 price per share, the minimum of the offering range is 2,034,050 shares, the midpoint of the offering range is 2,393,000 shares, the maximum of the offering range is 2,751,950 shares and 15% above the maximum of the offering range is 3,164,743 shares. FinPro will update its independent valuation before we complete our offering.
The following table presents a summary of selected pricing ratios for the peer group companies and for all publicly traded thrifts and the resulting pricing ratios for new Naugatuck Valley Financial reflecting the pro forma impact of the
139
Table of Contents
offering and merger, as calculatedby FinPro in its appraisal report of September 8, 2010. Compared to the median pricing ratios of the peer group, Naugatuck Valley Financial’s pro forma pricing ratios at the maximum of the offering range indicated a discount of 10.31% to the peer group on a price-to-book value basis, a discount of 17.29% to the peer group on a price-to-tangible book value basis and a premium of 104.19% to the peer group on a price to core earnings basis.
Price to Book Value Ratio | Price to Tangible Book Value Ratio | Price to Core Earnings Multiple | |||||||
New Naugatuck Valley Financial (pro forma) (1): | |||||||||
Minimum as adjusted (2) | 55.49 | % | 57.97 | % | 26.32 | % | |||
Minimum | 57.31 | 59.74 | 28.57 | ||||||
Midpoint | 62.46 | 65.02 | 32.26 | ||||||
Maximum | 67.25 | 69.88 | 37.04 | ||||||
Maximum, as adjusted | 72.31 | 75.02 | 41.67 | ||||||
Pricing ratios of peer group companies as of September 8, 2010 (3): | |||||||||
Average | 78.53 | 86.25 | 21.97 | ||||||
Median | 74.98 | 84.49 | 18.14 | ||||||
All fully-converted, publicly-traded thrifts as of September 8, 2010 (3): | |||||||||
Average | 70.83 | 79.14 | 20.53 | ||||||
Median | 71.26 | 75.95 | 14.86 |
(1) | Based on Naugatuck Valley Financial financial data as of and for the 12 months ended June 30, 2010. |
(2) | If we do not receive orders for at least 2,034,050 shares in the offering, then, in our discretion in order to issue the minimum number of shares necessary to complete the conversion and offering, we may sell as few as 1,728,943 and include up to 305,107 shares issued to stockholders of Southern Connecticut Bancorp as merger consideration in order to meet the 2,034,050 share minimum requirement. |
(3) | Based on earnings for the 12 months ended June 30, 2010 and book value and tangible book value as of June 30, 2010. |
Our board of directors reviewed FinPro’s appraisal report, including the methodology and the assumptions used by FinPro, and determined that the offering range was reasonable and adequate. Our board of directors has decided to offer the shares for a price of $10.00 per share. The purchase price of $10.00 per share was determined by us, taking into account, among other factors, the market price of our stock before adoption of the plan of conversion, the requirement under Office of Thrift Supervision regulations that the common stock be offered in a manner that will achieve the widest distribution of the stock, and desired liquidity in the common stock after the offering. Our board of directors also established the formula for determining the exchange ratio. Based upon such formula and the offering range, the exchange ratio ranged from a minimum of 0.4863 to a maximum of 0.6580 shares of new Naugatuck Valley Financial common stock for each current share of Naugatuck Valley Financial common stock, with a midpoint of 0.5722. Based upon this exchange ratio, we expect to issue between 1,356,492 and 1,835,254 shares of new Naugatuck Valley Financial common stock to the holders of Naugatuck Valley Financial common stock outstanding immediately before the completion of the conversion and offering.
Our board of directors considered the appraisal when recommending that shareholders and depositors approve the plan of conversion. However, our board of directors makes no recommendation of any kind as to the advisability of purchasing shares of common stock.
Since the outcome of the offering relates in large measure to market conditions at the time of sale, it is not possible for us to determine the exact number of shares that we will issue at this time. The offering range may be amended, with the approval of the Office of Thrift Supervision, if necessitated by developments following the date of the appraisal in, among other things, market conditions, our financial condition or operating results, regulatory guidelines or national or local economic conditions.
If, upon expiration of the offering, at least the minimum number of shares are subscribed for, FinPro, after taking into account factors similar to those involved in its prior appraisal, will determine its estimate of our pro forma market value. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, FinPro determines that our pro forma market value has increased, we may sell up to 3,164,743 without any further notice to you. In addition, in certain circumstances if all the existing options to acquire Southern Connecticut Bancorp common stock at June 30, 2010 are exercised prior to closing, the number of shares issued in the acquisition could be increased to 1,193,250 shares of common stock without further notice to you.
140
Table of Contents
No shares will be sold unless FinPro confirms that, to the best of its knowledge and judgment, nothing of a material nature has occurred that would cause it to conclude that the actual total purchase price of the shares on an aggregate basis was materially incompatible with its appraisal. If, however, the facts do not justify that statement, a new offering range may be set, in which case all funds would be promptly returned and holds on funds authorized for withdrawal from deposit accounts will be released and all subscribers would be given the opportunity to place a new order. If FinPro establishes a new valuation range, it must be approved by the Office of Thrift Supervision. If the offering is terminated, all subscriptions will be cancelled and subscription funds will be returned promptly with interest, and holds on funds authorized for withdrawal from deposit accounts will be released.
In formulating its appraisal, FinPro relied upon the truthfulness, accuracy and completeness of all documents we furnished to it. FinPro also considered financial and other information from regulatory agencies, other financial institutions, and other public sources, as appropriate. While FinPro believes this information to be reliable, FinPro does not guarantee the accuracy or completeness of the information and did not independently verify the financial statements and other data provided by us or independently value our assets or liabilities.The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of purchasing shares of common stock. Moreover, because the appraisal must be based on many factors that change periodically, there is no assurance that purchasers of shares in the offering will be able to sell shares after the offering at prices at or above the purchase price.
Copies of the appraisal report of FinPro, including any amendments to the report, and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at our main office and the other locations specified under“Where You Can Find More Information.”
Subscription Offering and Subscription Rights
Under the plan of conversion, we have granted rights to subscribe for our common stock to the following persons in the following order of priority:
1. | Persons with deposits in Naugatuck Valley Savings and Loan with aggregate balances of $50 or more (“qualifying deposits”) as of the close of business on December 31, 2008 (“eligible account holders”). |
2. | Our employee stock ownership plan. |
3. | Persons with qualifying deposits in Naugatuck Valley Savings and Loan as of the close of business on , 2010 who are not eligible account holders, excluding our officers, directors and their associates (“supplemental eligible account holders”). |
4. | Depositors of Naugatuck Valley Savings and Loan as of the close of business on , 2010, who are not eligible or supplemental eligible account holders (“other members”). |
Unlike our employee stock ownership plan, the Naugatuck Valley Savings and Loan 401(k) Plan has not been granted priority subscription rights. Accordingly, a 401(k) plan participant who elects to purchase shares in the offering through self-directed purchases within the 401(k) plan will receive the same subscription priority, and be subject to the same purchase limitations, as if the participant had elected to purchase shares using funds outside the 401(k) plan.
The amount of common stock that any person may purchase will depend on the availability of the common stock after satisfaction of all subscriptions having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion. See “—Limitations on Purchases of Shares.”
Priority 1: Eligible Account Holders.Subject to the purchase limitations as described below under “—Limitations on Purchases of Shares,” each eligible account holder has the right to subscribe for up to the greater of:
• | $300,000 of common stock (which equals 30,000 shares); or |
• | one-tenth of 1% of the total offering of common stock; or |
• | 15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders. The balance of qualifying deposits of all eligible account holders was $ million. |
141
Table of Contents
If there are insufficient shares to satisfy all subscriptions by eligible account holders, shares first will be allocated so as to permit each subscribing eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total qualifying deposits of all remaining eligible account holders whose subscriptions remain unfilled. Subscription rights of eligible account holders who are also executive officers or directors of Naugatuck Valley Financial or Naugatuck Valley Savings and Loan or their associates will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in Naugatuck Valley Savings and Loan in the one year period preceding December 31, 2008.
To ensure a proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which such eligible account holder had an ownership interest at December 31, 2008. Failure to list an account, or providing incomplete or incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.
Priority 2: Tax-Qualified Employee Benefit Plans.Subject to the purchase limitations as described below under “—Limitations on Purchases of Shares,” our tax-qualified employee benefit plans (other than our 401(k) plan) have the right to purchase up to 10% of the shares of common stock issued in the offering. As a tax-qualified employee benefit plan, our employee stock ownership plan intends to purchase 6.0% of the shares sold in the offering. Subscriptions by the employee stock ownership plan will not be aggregated with shares of common stock purchased by any other participants in the offering, including subscriptions by our officers and directors, for the purpose of applying the purchase limitations in the plan of conversion. If we increase the number of shares offered above the maximum of the offering range, the employee stock ownership plan will have a first priority right to purchase any shares exceeding that amount up to the amount of its subscription. If the plan’s subscription is not filled in its entirety due to oversubscription or by choice, the employee stock ownership plan may purchase shares after the offering in the open market or directly from us, with the approval of the Office of Thrift Supervision.
Priority 3: Supplemental Eligible Account Holders.Subject to the purchase limitations as described below under “—Limitations on Purchases of Shares,” each supplemental eligible account holder has the right to subscribe for up to the greater of:
• | $300,000 of common stock (which equals 30,000 shares); or |
• | one-tenth of 1% of the total offering of common stock; or |
• | 15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the supplemental eligible account holder and the denominator is the total amount of qualifying deposits of all supplemental eligible account holders. The balance of qualifying deposits of all supplemental eligible account holders was $ million. |
If eligible account holders and the employee stock ownership plan subscribe for all of the shares being sold, no shares will be available for supplemental eligible account holders. If shares are available for supplemental eligible account holders but there are insufficient shares to satisfy all subscriptions by supplemental eligible account holders, shares first will be allocated so as to permit each subscribing supplemental eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total qualifying deposits of all remaining supplemental eligible account holders whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which such eligible account holder had an ownership interest at , 2010. Failure to list an account, or providing incomplete or incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.
Priority 4: Other Members.Subject to the purchase limitations as described below under“—Limitations on Purchases of Shares,”each other member has the right to purchase up to the greater of $300,000 of common stock (which equals 30,000 shares) or one-tenth of 1% of the total offering of common stock. If eligible account holders, the employee stock ownership plan and supplemental eligible account holders subscribe for all of the shares being sold, no shares will be
142
Table of Contents
available for other members. If shares are available for other members but there are not sufficient shares to satisfy all subscriptions by other members, shares first will be allocated so as to permit each subscribing other member, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing other members whose subscriptions remain unfilled in the proportion that each other member’s subscription bears to the total subscriptions of all such subscribing other members whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each other member must list on his or her stock order form all deposit accounts in which such other member had an ownership interest at , 2010. Failure to list an account or providing incomplete or incorrect information could result in the loss of all or part of a subscriber’s stock allocation.
Expiration Date for the Subscription Offering.The subscription offering, and all subscription rights under the plan of conversion, will terminate at 2:00 p.m., Eastern Time, on[DATE1], 2010.We will not accept orders for common stock in the subscription offering received after that time.We will make reasonable attempts to provide a prospectus and related offering materials to holders of subscription rights; however, all subscription rights will expire on the expiration date whether or not we have been able to locate each person entitled to subscription rights.
We expect that the community offering, if held, will terminate at the same time, although it may continue until[DATE2], 2010, or longer if the Office of Thrift Supervision approves a later date. No single extension may be for more than 90 days. We are not required to provide notice to you of an extension unless we extend the offering beyond[DATE2], 2010, in which case all subscribers in the subscription and community offerings will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than 2,034,050 shares or more than 3,164,743 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order.
Persons in Non-Qualified States.We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock under the plan of conversion reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country or who resides in a state of the United States in which (1) only a small number of persons otherwise eligible to subscribe for shares of common stock reside; (2) the granting of subscription rights or the offer or sale of shares to such person would require that we or our officers or directors register as a broker, dealer, salesman or selling agent under the securities laws of the state, or register or otherwise qualify the subscription rights or common stock for sale or qualify as a foreign corporation or file a consent to service of process; or (3) we determine that compliance with that state’s securities laws would be impracticable or unduly burdensome for reasons of cost or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. Subscription rights are nontransferable.You may not transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of your subscription rights issued under the plan of conversion or the shares of common stock to be issued upon exercise of your subscription rights. Your subscription rights may be exercised only by you and only for your own account. When registering your stock purchase on the order form, you should not add the name(s) of persons who have no subscription rights or who qualify in a lower purchase priority than you do. Doing so may jeopardize your subscription rights. If you exercise your subscription rights, you will be required to certify on the order form that you are purchasing shares in the subscription offering solely for your own account and that you have no agreement or understanding regarding the sale or transfer of such shares. Federal regulations also prohibit any person from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or a subscriber’s shares of common stock before the completion of the offering.
If you sell or otherwise transfer your rights to subscribe for common stock in the subscription offering or subscribe for common stock on behalf of another person, you may forfeit those rights and face possible further sanctions and penalties imposed by the Office of Thrift Supervision or another agency of the U.S. Government. Illegal transfers of subscription rights, including agreements made before completion of the offering to transfer shares after the offering, have been subject to enforcement actions by the Securities and Exchange Commission as violations of Rule 10b-5 of the Securities Exchange Act of 1934.
We intend to report to the Office of Thrift Supervision and the Securities and Exchange Commission anyone who we believe sells or gives away their subscription rights. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.
143
Table of Contents
Community Offering
To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, we may, in our discretion, offer shares to the general public in a community offering. In the community offering, preference will be given first to natural persons and trusts of natural persons who are residents of Fairfield and New Haven Counties, Connecticut (“community residents”), second to shareholders of Naugatuck Valley Financial as of , 2010 and finally to members of the general public.
We will consider a person to be resident of a particular county if he or she occupies a dwelling in the county, has the intent to remain for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence together with an indication that such presence is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to make a determination as to a person’s resident status. In all cases, the determination of residence status will be made by us in our sole discretion.
Subject to the purchase limitations as described below under “—Limitations on Purchases of Shares,” purchasers in the community offering are eligible to purchase up to $300,000 of common stock (which equals 30,000 shares). If shares are available for community residents in the community offering but there are insufficient shares to satisfy all of their orders, the available shares will be allocated first to each community resident whose order we accept in an amount equal to the lesser of 100 shares or the number of shares ordered by each such subscriber, if possible. After that, unallocated shares will be allocated among the remaining community residents whose orders remain unsatisfied on an equal number of shares per order basis until all available shares have been allocated. If, after filling the orders of community residents in the community offering, shares are available for shareholders of Naugatuck Valley Financial in the community offering but there are insufficient shares to satisfy all orders, shares will be allocated in the same manner as for community residents. The same allocation method would apply if oversubscription occurred among the general public.
We expect that the community offering, if held, will terminate at the same time as the subscription offering, although it may continue without notice to you until[DATE2], 2010, or longer if the Office of Thrift Supervision approves a later date. No single extension may exceed 90 days. If we receive regulatory approval for an extension beyond[DATE2], 2010, all subscription and community offering subscribers will be notified of the duration of the extension, and will have the right to confirm, change or cancel their orders. If we do not receive a response from a subscriber to any resolicitation, the subscriber’s order will be rescinded and all funds received will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of conversion provides that shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering. Stifel, Nicolaus & Company, Incorporated is acting as sole bookrunning manager for the syndicated community offering. In such capacity, Stifel, Nicolaus & Company, Incorporated may form a syndicate of other brokers-dealers who are FINRA member firms. Neither Stifel, Nicolaus & Company, Incorporated, nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Stifel, Nicolaus & Company, Incorporated has agreed to use its best efforts in the sale of shares in any syndicated community offering. We have not selected any particular broker-dealers to participate in a syndicated community offering and will not do so until before the commencement of any syndicated community offering. The syndicated community offering would terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision.
The opportunity to subscribe for shares of common stock in the syndicated community offering is subject to our right in our sole discretion to accept or reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.
Common stock sold in the syndicated community offering will be sold at the $10.00 per share purchase price. Subject to the purchase limitations as described below under “—Limitations on Purchases of Shares,” purchasers in the syndicated community offering are eligible to purchase up to $300,000 of common stock (which equals 30,000 shares). We may begin the syndicated community offering at any time following the commencement of the subscription offering.
144
Table of Contents
The syndicated community offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best efforts offerings. Under these rules, Stifel, Nicolaus & Company, Incorporated or the other broker-dealers participating in the syndicated community offering generally will accept payment for shares of common stock to be purchased in the syndicated community offering through a “sweep” arrangement under which a customer’s brokerage account at the applicable participating broker-dealer will be debited in the amount of the purchase price for the shares of common stock that such customer wishes to purchase in the syndicated community offering on the settlement date. Customers who authorize participating broker-dealers to debit their brokerage accounts are required to have the funds for the payment in their accounts on, but not before, the settlement date. No funds will be debited from brokerage accounts until the settlement date, which will only occur if the minimum of the offering range is met, at which time the funds will be promptly paid to Naugatuck Valley Financial. Customers who do not wish to authorize participating broker-dealers to debit their brokerage accounts will not be permitted to purchase shares of common stock in the syndicated community offering. Customers without brokerage accounts will not be able to participate in the syndicated community offering. Institutional investors will pay Stifel Nicolaus & Company, Incorporated, in its capacity as sole book running manager, for shares purchased in the syndicated community offering on the settlement date through the services of the Depository Trust Company on a delivery versus payment basis. The closing of the syndicated community offering is subject to conditions set forth in an agency agreement among Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and Naugatuck Valley Savings and Loan on one hand and Stifel, Nicolaus & Company, Incorporated on the other hand. If and when all the conditions for the closing are met, funds for common stock sold in the syndicated community offering less fees and commissions payable by us, will be delivered promptly to us. If the offering is consummated, but some or all of an interested investor’s funds are not accepted by us, those funds will be returned to the interested investor promptly after the closing, without interest. If the offering is not consummated, funds in the account will be returned promptly, without interest, to the potential investor. Normal customer ticketing will be used for order placement. In the syndicated community offering, order forms will not be used.
Limitations on Purchases of Shares
In addition to the purchase limitations described above under “—Subscription Offering and Subscription Rights,” “—Community Offering“ and “—Syndicated Community Offering“ the plan of conversion provides for the following purchase limitations:
• | No individual may purchase more than $300,000 of common stock (which equals 30,000 shares), subject to increase as described below. |
• | Except for our employee stock ownership plan, no individual, together with any associates and no group of persons acting in concert, may purchase in all categories of the stock offering combined more than $600,000 of common stock (which equals 60,000 shares), subject to increase as described below. |
• | Each subscriber must subscribe for a minimum of 25 shares. |
• | Our directors and executive officers, together with their associates, may purchase in the aggregate up to 25% of the common stock sold in the offering. |
• | The maximum number of shares of new Naugatuck Valley Financial common stock that may be subscribed for or purchased in all categories of the stock offering combined by any person, together with associates of, or persons acting in concert with, such person, when combined with any shares of new Naugatuck Valley Financial common stock to be received in exchange for shares of Naugatuck Valley Financial common stock and received in the merger in exchange for shares of Southern Connecticut Bancorp, may not exceed 5.0% of the total shares of new Naugatuck Valley Financial common stock outstanding upon completion of the conversion and offering (the “5% Total Limit”). However, existing shareholders of Naugatuck Valley Financial will not be required to sell any shares of Naugatuck Valley Financial common stock or be limited from receiving any shares of new Naugatuck Valley Financial common stock in exchange for their shares of Naugatuck Valley Financial common stock or in exchange for shares of Southern Connecticut Bancorp or have to divest themselves of any shares of new Naugatuck Valley Financial common stock received in exchange for their shares of Naugatuck Valley Financial common stock or in exchange for shares of Southern Connecticut Bancorp as a result of this limitation. |
We may, in our sole discretion, increase the individual and/or aggregate purchase limitations to up to 5% of the shares of common stock sold in the offering. We do not intend to increase the maximum purchase limitation unless market conditions warrant. If we decide to increase the purchase limitations, persons who subscribed in the subscription offering for the maximum number of shares of common stock and so indicate on their stock order forms will be permitted to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights.
145
Table of Contents
If we increase the maximum purchase limitation to 5% of the shares of common stock sold in the offering, we may further increase the maximum purchase limitation to 9.99%, provided that orders for common stock exceeding 5% of the shares of common stock sold in the offering may not exceed in the aggregate 10% of the total shares of common stock sold in the offering. Even under these increased purchase limits, purchases remain subject to the 5% Total Limit described above.
The plan of conversion defines “acting in concert” to mean knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not by an express agreement or understanding; or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose under any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. In general, a person who acts in concert with another party will also be deemed to be acting in concert with any person who is also acting in concert with that other party. We may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that persons reside at the same address or may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission with respect to other companies. For purposes of the plan of conversion, our directors are not deemed to be acting in concert solely by reason of their board membership.
The plan of conversion defines “associate,” with respect to a particular person, to mean:
• | a corporation or organization other than Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan or a majority-owned subsidiary of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan of which a person is a senior officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities of such corporation or organization; |
• | a trust or other estate in which a person has a substantial beneficial interest or as to which a person serves as a trustee or a fiduciary; and |
• | any person who is related by blood or marriage to such person and who lives in the same home as such person or who is a director or senior officer of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan or any of their subsidiaries. |
For example, a corporation of which a person serves as an officer would be an associate of that person and, therefore, all shares purchased by the corporation would be included with the number of shares that the person could purchase individually under the purchase limitations described above. We have the right in our sole discretion to reject any order submitted by a person whose representations we believe to be false or who we otherwise believe, either alone or acting in concert with others, is violating or circumventing, or intends to violate or circumvent, the terms and conditions of the plan of conversion. Directors and officers are not treated as associates of each other solely by virtue of holding such positions. We have the sole discretion to determine whether prospective purchasers are “associates” or “acting in concert.”
Marketing Arrangements
To assist in the marketing of our common stock, we have retained Stifel, Nicolaus & Company, Incorporated, which is a broker-dealer registered with the Financial Industry Regulatory Authority. Stifel, Nicolaus & Company, Incorporated will assist us on a best efforts basis in the offering by:
(1) | acting as our financial advisor for the conversion and offering; |
(2) | providing administrative services and managing the Stock Information Center; |
(3) | educating our employees regarding the offering; |
(4) | targeting our sales efforts, including assisting in the preparation of marketing materials; and |
(5) | soliciting orders for common stock. |
For these services, Stifel, Nicolaus & Company, Incorporated will receive an advisory and administrative fee of $30,000 and 1% of the dollar amount of all shares of common stock sold in the subscription and community offering. The sales fee will be reduced by the advisory and administrative fee. No sales fee will be payable to Stifel, Nicolaus & Company, Incorporated with respect to shares purchased by officers, directors and employees or their immediate families and shares purchased by our tax-qualified and non-qualified employee benefit plans. In the event that Stifel, Nicolaus & Company, Incorporated sells common stock through a group of broker-dealers in a syndicated community offering, it will be paid a fee
146
Table of Contents
equal to 1.0% of the dollar amount of total shares sold in the syndicated community offering, which fee along with the fee payable to selected dealers (which may include Stifel, Nicolaus & Company, Incorporated) shall not exceed 6.0% in the aggregate. Stifel, Nicolaus & Company, Incorporated also will be reimbursed for allocable expenses in amount not to exceed $30,000 for the subscription offering and community offering and $50,000 for the syndicated offering, and for attorney’s fees in an amount not to exceed $100,000.
If we are required to resolicit subscribers for shares of our common stock in the subscription and community offerings, Stifel, Nicolaus & Company, Incorporated will be required to provide significant additional services in connection with the resolicitation (including repeating the services described above), and we may pay Stifel, Nicolaus & Company, Incorporated an additional fee for those services that will not exceed $50,000. Under such circumstances, with our consent, Stifel, Nicolaus & Company, Incorporated may be reimbursed for additional allowable expenses not to exceed $15,000 and additional reimbursable attorney’s fees not to exceed $25,000, provided that the aggregate of all reimbursable expenses and legal fees shall not exceed $220,000.
We will indemnify Stifel, Nicolaus & Company, Incorporated against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as amended.
Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular employees of Naugatuck Valley Savings and Loan may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. No sales activity will be conducted in a Naugatuck Valley Savings and Loan banking office. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of Stifel, Nicolaus & Company, Incorporated. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering.
In addition, we have engaged Stifel, Nicolaus & Company, Incorporated to act as our records management agent in connection with the conversion and offering. In its role as records management agent, Stifel, Nicolaus & Company, Incorporated will coordinate with our data processing contacts and interface with the Stock Information Center to provide the records processing and the proxy and stock order services, including but not limited to: (1) consolidating deposit accounts and vote calculation; (2) preparing information for order forms and proxy cards; (3) interfacing with our financial printer; (4) recording stock order information; and (5) tabulating proxy votes. For these services, Stifel, Nicolaus & Company, Incorporated will receive a fee of $22,500 (which may be negotiated in the event unexpected circumstances arise), and we will have made an advance payment of $5,000 with respect to this fee. We will also reimburse Stifel, Nicolaus & Company, Incorporated for its reasonable out-of-pocket expenses associated with its acting as information agent in an amount not to exceed $5,000.
Lock-up Agreements
We and our directors and executive officers have agreed not to, directly or indirectly, offer, sell, transfer, pledge, assign, hypothecate or otherwise encumber any shares of our common stock or options, warrants or other securities exercisable, convertible or exchangeable for our common stock during the period commencing with the filing of the registration statement for the offering and conversion and ending 90 days after completion of the offering and conversion without the prior written consent of Stifel, Nicolaus & Company, Incorporated. In addition, except for securities issued pursuant to existing employee benefit plans in accordance with past practices or securities issued in connection with a merger or acquisition by us, we have agreed not to issue, offer to sell or sell any shares of our common stock or options, warrants or other securities exercisable, convertible or exchangeable for our common stock without the prior written consent of Stifel, Nicolaus & Company, Incorporated for a period of 90 days after completion of the offering and conversion.
Prospectus Delivery
To ensure that each purchaser in the subscription and community offerings receives a prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, we may not mail a
147
Table of Contents
prospectus any later than five days prior to the expiration date or hand deliver a prospectus any later than two days prior to that date. We are not obligated to deliver a prospectus or order form by means other than U.S. Mail. Execution of an order form will confirm receipt of delivery of a prospectus in accordance with Rule 15c2-8. Stock order forms will be distributed only if preceded or accompanied by a prospectus.
In the syndicated community offering, a prospectus in electronic format may be made available on the Internet sites or through other online services maintained by Stifel, Nicolaus & Company, Incorporated or one or more other members of the syndicate, or by their respective affiliates. In those cases, prospective investors may view offering terms online and, depending upon the syndicate member, prospective investors may be allowed to place orders online. The members of the syndicate may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.
Other than the prospectus in electronic format, the information on the Internet sites referenced in the preceding paragraph and any information contained in any other Internet site maintained by any member of the syndicate is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or by Stifel, Nicolaus & Company, Incorporated or any other member of the syndicate in its capacity as selling agent or syndicate member and should not be relied upon by investors.
Procedure for Purchasing Shares in the Subscription and Community Offerings
Use of Order Forms. To purchase shares of common stock in the subscription offering and community offering, you must submit a properly completed original stock order form and remit full payment. Incomplete stock order forms or stock order forms that are not signed are not required to be accepted. We are not required to accept stock orders submitted on photocopied or facsimiled stock order forms.All stock order forms must be received (not postmarked) prior to 2:00 p.m. Eastern Time, on [DATE1], 2010. We are not required to accept stock order forms that are not received by that time, are executed defectively or are received without submitting full payment or without appropriate deposit account withdrawal instructions. We are not required to notify purchasers of incomplete or improperly executed stock order forms. We have the right to waive or permit the correction of incomplete or improperly executed stock order forms, but we do not represent that we will do so.
You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight delivery to our Stock Information Center at the indicated address on the order form. Stock order forms may only be hand-delivered to Naugatuck Valley Savings and Loan’s main office at 333 Church Street, Naugatuck, Connecticut. Stock order forms will not be accepted at our other Naugatuck Valley Savings and Loan offices. Please do not mail stock order forms to Naugatuck Valley Savings and Loan. Once tendered, a stock order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering.
If you are ordering shares in the subscription offering, by signing the stock order form you are representing that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares.
By signing the stock order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by Naugatuck Valley Savings and Loan or any federal or state government, and that you received a copy of this prospectus. However, signing the stock order form will not cause you to waive your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the stock order forms will be final.
Payment for Shares.Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made only by:
• | Personal check, bank check or money order made payable directly to “Naugatuck Valley Financial Corporation”; or |
• | Authorization of withdrawal from the types of Naugatuck Valley Savings and Loan deposit accounts provided for on the stock order form. |
148
Table of Contents
Appropriate means for designating withdrawals from deposit accounts at Naugatuck Valley Savings and Loan are provided on the order forms. The funds designated must be available in the account(s) at the time the stock order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the applicable contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate of deposit accounts will not apply to withdrawals authorized for the purchase of shares of common stock during the offering; however, if a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest calculated at the current passbook savings rate subsequent to the withdrawal.
If payment is made by personal check, funds must be available in the account. Payments made by check or money order will be immediately cashed and placed in a segregated account at Naugatuck Valley Savings and Loan or another depository institution and will earn interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate from the date payment is processed until the offering is completed, at which time a subscriber will be issued a check for interest earned.
You may not remit Naugatuck Valley Savings and Loan line of credit checks, and we will not accept wire transfers or third-party checks, including those payable to you and endorsed over to Naugatuck Valley Financial. Please do not submit cash. You may not designate on your stock order form a direct withdrawal from a Naugatuck Valley Savings and Loan retirement account. See“—Using Retirement Account Funds to Purchase Shares”for information on using such funds. Additionally, you may not designate on your stock order form a direct withdrawal from Naugatuck Valley Savings and Loan deposit accounts with check-writing privileges. Instead, a check should be provided. If you request a direct withdrawal, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account(s).
Once we receive your executed stock order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by[DATE2], 2010, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time.
Regulations prohibit Naugatuck Valley Savings and Loan from lending funds or extending credit to any persons to purchase shares of common stock in the offering.
The employee stock ownership plan will not be required to pay for shares at the time it subscribes, but rather may pay for shares upon the completion of the offering; provided that there is in force, from the time of its subscription until the completion of the offering, a loan commitment from an unrelated financial institution or from us to lend to the employee stock ownership plan, at that time, the aggregate purchase price of the shares for which it subscribed.
We may, in our sole discretion, permit institutional investors to submit irrevocable orders together with a legally binding commitment for payment and to thereafter pay for such shares of common stock for which they subscribe in the community offering at any time prior to the 48 hours before the completion of the offering. This payment may be made by wire transfer.
Using Retirement Account Funds To Purchase Shares.A subscriber interested in using funds in his or her individual retirement account(s) (IRAs) or any other retirement account at Naugatuck Valley Savings and Loan to purchase common stock must do so through a self-directed retirement account. Since we do not offer those accounts, before placing a stock order, a subscriber must make a transfer of funds from Naugatuck Valley Savings and Loan to a trustee (or custodian) offering a self-directed retirement account program (such as a brokerage firm). There will be no early withdrawal or Internal Revenue Service interest penalties for such transfers. The new trustee would hold the common stock in a self-directed account in the same manner as we now hold the depositor’s retirement funds. An annual administrative fee may be payable to the new trustee.We recommend that subscribers interested in using funds in a retirement account held at Naugatuck Valley Savings and Loanor elsewhere to purchase common stock should contact the Stock Information Center for guidance promptly, preferably at least two weeks before the [DATE1], 2010 offering expiration date, because processing such transactions takes additional time.Whether or not you may use retirement funds for the purchase of shares in the offering depends on timing constraints and, possibly, limitations imposed by the institution where the funds are held.
Termination of Offering.We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal authorizations and promptly return all funds submitted, with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate from the date of receipt.
149
Table of Contents
Effects of Conversion on Deposits and Borrowers
General.Each depositor in Naugatuck Valley Savings and Loan currently has both a deposit account in the institution and a pro rata ownership interest in the net worth of Naugatuck Valley Mutual Holding Company based upon the balance in his or her account. However, this ownership interest is tied to the depositor’s account and has no value separate from such deposit account. Furthermore, this ownership interest may only be realized in the unlikely event that Naugatuck Valley Mutual Holding Company is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Naugatuck Valley Mutual Holding Company after other claims are paid. Any depositor who opens a deposit account at Naugatuck Valley Savings and Loan obtains a pro rata ownership interest in the net worth of Naugatuck Valley Mutual Holding Company without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest in the net worth of Naugatuck Valley Mutual Holding Company, which is lost to the extent that the balance in the account is reduced. When a mutual holding company converts to stock holding company form, depositors lose all rights to the net worth of the mutual holding company, except the right to claim a pro rata share of funds representing the liquidation account established in connection with the conversion. See “—Liquidation Rights.”
Continuity.While the conversion and offering are being accomplished, the normal business of Naugatuck Valley Savings and Loan will continue without interruption, including being regulated by the Office of Thrift Supervision. After the conversion and offering, Naugatuck Valley Savings and Loan will continue to provide services for depositors and borrowers under its current policies by its present management and staff.
The directors of Naugatuck Valley Savings and Loan at the time of conversion will serve as directors of Naugatuck Valley Savings and Loan after the conversion and offering. The board of directors of new Naugatuck Valley Financial is composed of the individuals who serve on the board of directors of Naugatuck Valley Financial. All officers of Naugatuck Valley Savings and Loan at the time of conversion will retain their positions after the conversion and offering.
Deposit Accounts and Loans.The conversion and offering will not affect any deposit accounts or borrower relationships with Naugatuck Valley Savings and Loan. All deposit accounts in Naugatuck Valley Savings and Loan after the conversion and offering will continue to be insured up to the legal maximum by the Federal Deposit Insurance Corporation in the same manner as such deposit accounts were insured immediately before the conversion and offering. The conversion and offering will not change the interest rate or the maturity of deposits at Naugatuck Valley Savings and Loan.
After the conversion and offering, all loans of Naugatuck Valley Savings and Loan will retain the same status that they had before the conversion and offering. The amount, interest rate, maturity and security for each loan will remain as they were contractually fixed before the conversion and offering.
Liquidation Rights
Liquidation Prior to the Conversion.In the unlikely event of a complete liquidation of Naugatuck Valley Mutual Holding Company or Naugatuck Valley Financial prior to the conversion, all claims of creditors of Naugatuck Valley Financial, including those of depositors of Naugatuck Valley Savings and Loan (to the extent of their deposit balances), would be paid first. Thereafter, if there were any assets of Naugatuck Valley Financial remaining, these assets would be distributed to shareholders, including Naugatuck Valley Mutual Holding Company. Then, if there were any assets of Naugatuck Valley Mutual Holding Company remaining, members of Naugatuck Valley Mutual Holding Company would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in Naugatuck Valley Savings and Loan immediately prior to liquidation.
Liquidation Following the Conversion.In the unlikely event that new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the “liquidation account” maintained by Naugatuck Valley Financial pursuant to the plan of conversion to certain depositors, with any assets remaining thereafter distributed to Naugatuck Valley Financial as the holder of Naugatuck Valley Savings and Loan capital stock.
As required by Office of Thrift Supervision regulations, the plan of conversion provides for the establishment, upon the completion of the conversion, of a liquidation account by new Naugatuck Valley Financial for the benefit of eligible account holders and supplemental eligible account holders in an amount equal to Naugatuck Valley Mutual Holding Company’s ownership interest in the retained earnings of Naugatuck Valley Financial as of the date of its latest balance sheet contained
150
Table of Contents
in this prospectus. The plan of conversion also provides for the establishment of a parallel liquidation account in Naugatuck Valley Savings and Loan to support the new Naugatuck Valley Financial liquidation account in the event new Naugatuck Valley Financial does not have sufficient assets to fund its obligations under the new Naugatuck Valley Financial liquidation account.
The liquidation account established by new Naugatuck Valley Financial is designed to provide payments to depositors of their liquidation interests in the event of a liquidation of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan or a liquidation solely of Naugatuck Valley Savings and Loan. Specifically, in the unlikely event that either (i) Naugatuck Valley Savings and Loan or (ii) new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan were to completely liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of December 31, 2008 and , 2010 of the liquidation account maintained by new Naugatuck Valley Financial. In a liquidation of both entities, or of Naugatuck Valley Savings and Loan, when new Naugatuck Valley Financial has insufficient assets to fund the distribution due to eligible account holders and Naugatuck Valley Savings and Loan has positive net worth, Naugatuck Valley Savings and Loan will pay amounts necessary to fund new Naugatuck Valley Financial’s remaining obligations under the liquidation account. The plan of conversion also provides that if new Naugatuck Valley Financial is sold or liquidated apart from a sale or liquidation of Naugatuck Valley Savings and Loan, then the rights of eligible account holders in the liquidation account maintained by new Naugatuck Valley Financial will be surrendered and treated as a liquidation account in Naugatuck Valley Savings and Loan. Depositors will have an equivalent interest in the bank liquidation account and the bank liquidation account will have the same rights and terms as the liquidation account.
Pursuant to the plan of conversion, after two years from the date of conversion and upon the written request of the Office of Thrift Supervision, new Naugatuck Valley Financial will eliminate or transfer the liquidation account and the interests in such account to Naugatuck Valley Savings and Loan and the liquidation account shall thereupon become the liquidation account of Naugatuck Valley Savings and Loan and not be subject in any manner or amount to new Naugatuck Valley Financial’s creditors.
Also, under the rules and regulations of the Office of Thrift Supervision, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which new Naugatuck Valley Financial or Naugatuck Valley Savings and Loan is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution.
Each eligible account holder and supplemental eligible account holder would have an initial interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 or more held in Naugatuck Valley Savings and Loan on December 31, 2008 or , 2010, as applicable. Each eligible account holder and supplemental eligible account holder would have a pro rata interest in the total liquidation account for each such deposit account, based on the proportion that the balance of each such deposit account on December 31, 2008 or , 2010 bears to the balance of all deposit accounts in Naugatuck Valley Savings and Loan on such date.
If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on December 31, 2008 or , 2010 or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of eligible account holders and supplemental eligible account holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of eligible account holders and supplemental eligible account holders are satisfied would be available for distribution to shareholders.
Delivery of Stock Certificates
A certificate representing the common stock purchased in the subscription and community offerings will be mailed by regular mail, by our transfer agent to the registration address designated by the subscriber on the stock order form as soon as practicable following completion of the conversion and offering. Our transfer agent will hold certificates returned as undeliverable until claimed by the persons legally entitled to the certificates or otherwise disposed of in accordance with
151
Table of Contents
applicable law.Until certificates for common stock are available and delivered to purchasers, purchasers may not be able to sell their shares, even though trading of the common stock will have commenced. Your ability to sell the shares of common stock before your receipt of the stock certificate will depend on arrangements you may make with your brokerage firm. If you are currently a shareholder of Naugatuck Valley Financial, see “—Share Exchange Ratio for Current Shareholders.”
Stock Information Center
Our banking office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the offering, please call our Stock Information Center. The toll-free telephone number is ( ) . The Stock Information Center is open Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. The Stock Information Center will be closed weekends and bank holidays.
Restrictions on Repurchase of Stock
Under Office of Thrift Supervision regulations, for a period of one year from the date of the completion of the offering we may not repurchase any of our common stock from any person, except (1) in an offer made to all shareholders to repurchase the common stock on a pro rata basis, approved by the Office of Thrift Supervision, (2) the repurchase of qualifying shares of a director, or (3) repurchases to fund restricted stock plans or tax-qualified employee stock benefit plans. Where extraordinary circumstances exist, the Office of Thrift Supervision may approve the open market repurchase of up to 5% of our common stock during the first year following the conversion and offering. To receive such approval, we must establish compelling and valid business purposes for the repurchase to the satisfaction of the Office of Thrift Supervision. If any options previously granted under the 2005 Equity Incentive Plan are exercised during the first year following the conversion and offering, they will be funded with newly issued shares, as the Office of Thrift Supervision does not view pre-existing stock options as an extraordinary circumstance or compelling business purpose for a stock repurchase in the first year after conversion. Based on the foregoing restrictions, we anticipate that we will not repurchase any shares of our common stock in the year following completion of the conversion and offering.
Restrictions on Transfer of Shares Applicable to Officers and Directors
Common stock purchased in the offering will be freely transferable, except for shares purchased by our directors and executive officers.
Shares of common stock purchased by our directors and executive officers may not be sold for a period of one year following the offering, except upon the death of the shareholder or unless approved by the Office of Thrift Supervision. Shares purchased by these persons in the open market after the offering will be free of this restriction. Shares of common stock issued to directors and executive officers and their associates will bear a legend giving appropriate notice of the restriction and, in addition, we will give appropriate instructions to our transfer agent with respect to the restriction on transfers. Any shares issued to directors and executive officers as a stock dividend, stock split or otherwise with respect to restricted common stock will be similarly restricted.
Persons affiliated with us, including our directors and executive officers, received subscription rights based only on their accounts with Naugatuck Valley Savings and Loan as account holders. While this aspect of the offering makes it difficult, if not impossible, for insiders to purchase stock for the explicit purpose of meeting the minimum of the offering, any purchases made by persons affiliated with us for the explicit purpose of meeting the minimum of the offering must be made for investment purposes only, and not with a view towards redistribution. Furthermore, as set forth above, Office of Thrift Supervision regulations restrict sales of common stock purchased in the offering by directors and executive officers for a period of one year following the offering.
Purchases of outstanding shares of our common stock by directors, officers, or any person who becomes an executive officer or director after adoption of the plan of conversion, and their associates, during the three-year period following the offering may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to the purchase of stock under stock benefit plans.
We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be issued in the offering. This registration does not cover the resale of the shares.
152
Table of Contents
Shares of common stock purchased by persons who are not affiliates of us may be resold without registration. Shares purchased by an affiliate of us will have resale restrictions under Rule 144 of the Securities Act. If we meet the current public information requirements of Rule 144, each affiliate of ours who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. We may make future provision to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances.
Accounting Treatment
The conversion will be accounted for as a change in legal organization and form and not a business combination. Accordingly, the carrying amount of the assets and liabilities of Naugatuck Valley Savings and Loan will remain unchanged from their historical cost basis.
Material Income Tax Consequences
Although the conversion may be effected in any manner approved by the Office of Thrift Supervision that is consistent with the purposes of the plan of conversion and applicable law, regulations and policies, it is intended that the conversion will be effected through various mergers. Completion of the conversion and offering is conditioned upon prior receipt of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion with respect to Connecticut tax laws, that no gain or loss will be recognized by Naugatuck Valley Savings and Loan, Naugatuck Valley Financial or Naugatuck Valley Mutual Holding Company as a result of the conversion or by account holders receiving subscription rights, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. We believe that the tax opinions summarized below address all material federal income tax consequences that are generally applicable to Naugatuck Valley Savings and Loan, Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company, new Naugatuck Valley Financial, persons receiving subscription rights and shareholders of Naugatuck Valley Financial.
Kilpatrick Stockton LLP has issued an opinion to Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company and new Naugatuck Valley Financial that, for federal income tax purposes:
1. The merger of Naugatuck Valley Mutual Holding Company with and into Naugatuck Valley Financial (the mutual holding company merger) will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. (Section 368(a)(l)(A) of the Internal Revenue Code.)
2. Naugatuck Valley Mutual Holding Company will not recognize any gain or loss on the transfer of its assets to the Naugatuck Valley Financial and Naugatuck Valley Financial’s assumption of its liabilities, if any, in constructive exchange for a liquidation interest in Naugatuck Valley Financial or on the constructive distribution of such liquidation interest to Naugatuck Valley Mutual Holding Company’s members who remain depositors of Naugatuck Valley Savings and Loan. (Section 361(a), 361(c) and 357(a) of the Internal Revenue Code.)
3. No gain or loss will be recognized by Naugatuck Valley Financial upon the receipt of the assets of Naugatuck Valley Mutual Holding Company in the mutual holding company merger in exchange for the constructive transfer to the members of Naugatuck Valley Mutual Holding Company of a liquidation interest in Naugatuck Valley Financial. (Section 1032(a) of the Internal Revenue Code.)
4. Persons who have an interest in Naugatuck Valley Mutual Holding Company will recognize no gain or loss upon the constructive receipt of a liquidation interest in Naugatuck Valley Financial in exchange for their voting and liquidation rights in Naugatuck Valley Mutual Holding Company. (Section 354(a) of the Internal Revenue Code.)
5. The basis of the assets of Naugatuck Valley Mutual Holding Company (other than stock in Naugatuck Valley Financial) to be received by Naugatuck Valley Financial will be the same as the basis of such assets in the hands of Naugatuck Valley Mutual Holding Company immediately prior to the transfer. (Section 362(b) of the Internal Revenue Code.)
6. The holding period of the assets of Naugatuck Valley Mutual Holding Company in the hands of Naugatuck Valley Financial will include the holding period of those assets in the hands of Naugatuck Valley Mutual Holding Company. (Section 1223(2) of the Internal Revenue Code.)
153
Table of Contents
7. The merger of Naugatuck Valley Financial with and into new Naugatuck Valley Financial (the holding company merger) will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code and therefore will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. (Section 368(a)(1)(F) of the Internal Revenue Code.)
8. Naugatuck Valley Financial will not recognize any gain or loss on the transfer of its assets to new Naugatuck Valley Financial and new Naugatuck Valley Financial’s assumption of its liabilities in exchange for shares of common stock in new Naugatuck Valley Financial or on the constructive distribution of such stock to shareholders of Naugatuck Valley Financial other than Naugatuck Valley Mutual Holding Company and the liquidation accounts to the eligible account holders and supplemental eligible account holders. (Sections 361(a), 361(c) and 357(a) of the Internal Revenue Code.)
9. No gain or loss will be recognized by new Naugatuck Valley Financial upon the receipt of the assets of Naugatuck Valley Financial in the holding company merger. (Section 1032(a) of the Internal Revenue Code.)
10. The basis of the assets of Naugatuck Valley Financial (other than stock in Naugatuck Valley Savings and Loan) to be received by new Naugatuck Valley Financial will be the same as the basis of such assets in the hands of Naugatuck Valley Financial immediately prior to the transfer. (Section 362(b) of the Internal Revenue Code.)
11. The holding period of the assets of Naugatuck Valley Financial (other than stock in Naugatuck Valley Savings and Loan) to be received by new Naugatuck Valley Financial will include the holding period of those assets in the hands of Naugatuck Valley Financial immediately prior to the transfer. (Section 1223(2) of the Internal Revenue Code.)
12. Naugatuck Valley Financial shareholders will not recognize any gain or loss upon their exchange of Naugatuck Valley Financial common stock for new Naugatuck Valley Financial common stock. (Section 354 of the Internal Revenue Code.)
13. Eligible account holders and supplemental eligible account holders will not recognize any gain or loss upon their constructive exchange of their liquidation interests in Naugatuck Valley Financial for the liquidation accounts in new Naugatuck Valley Financial. (Section 354 of the Internal Revenue Code.)
14. The payment of cash to shareholders of Naugatuck Valley Financial in lieu of fractional shares of new Naugatuck Valley Financial common stock will be treated as though the fractional shares were distributed as part of the holding company merger and then redeemed by new Naugatuck Valley Financial. The cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under Section 302(a) of the Internal Revenue Code, with the result that such shareholders will have short-term or long-term capital gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares. (Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev. Proc. 77-41, 1977-2 C.B. 574.)
15. It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Naugatuck Valley Financial common stock is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by eligible account holders, supplemental eligible account Holders and other voting members upon distribution to them of nontransferable subscription rights to purchase shares of Naugatuck Valley Financial common stock. (Section 356(a) of the Internal Revenue Code.) Eligible account holders, supplemental eligible account holders and other voting members will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights. (Rev. Rul. 56-572, 1956-2 C.B. 182.)
16. It is more likely than not that the fair market value of the benefit provided by the bank liquidation account supporting the payment of the liquidation account in the event new Naugatuck Valley Financial lacks sufficient net assets is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by eligible account holders and supplemental eligible account holders upon the constructive distribution to them of such rights in the bank liquidation account as of the effective date of the holding company merger. (Section 356(a) of the Internal Revenue Code.)
17. It is more likely than not that the basis of common stock purchased in the offering by the exercise of the nontransferable subscription rights will be the purchase price thereof. (Section 1012 of the Internal Revenue Code.)
18. Each shareholder’s holding period in his or her new Naugatuck Valley Financial common stock received in the exchange will include the period during which the common stock surrendered was held, provided that the common stock surrendered is a capital asset in the hands of the shareholder on the date of the exchange. (Section 1223(1) of the Internal Revenue Code.)
154
Table of Contents
19. The holding period of the common stock purchased pursuant to the exercise of subscriptions rights shall commence on the date on which the right to acquire such stock was exercised. (Section 1223(5) of the Internal Revenue Code.)
20. No gain or loss will be recognized by new Naugatuck Valley Financial on the receipt of money in exchange for common stock sold in the offering. (Section 1032 of the Internal Revenue Code.)
The statements set forth in paragraph (15) above are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase our common stock at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock.
The statements set forth in paragraph 16 above are based on the position that the benefit provided by the bank liquidation account supporting the payment of the liquidation account if new Naugatuck Valley Financial lacks sufficient net assets has a fair market value of zero. According to our counsel: (1) there is no history of any holder of a liquidation account receiving any payment attributable to a liquidation account; (2) the interests in the liquidation account and bank liquidation account are not transferable; (3) the amounts due under the liquidation account with respect to each eligible account holder and supplemental eligible account holder will be reduced as their deposits in Naugatuck Valley Savings and Loan are reduced as described in the plan of conversion; and (4) the bank liquidation account payment obligation arises only if new Naugatuck Valley Financial lacks sufficient net assets to fund the liquidation account. If such bank liquidation account rights are subsequently found to have an economic value, income may be recognized by each eligible account holder and supplemental eligible account holder in the amount of such fair market value as of the effective date of the holding company merger.
The statements set forth in paragraphs (9) and (10) above are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase our common stock at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock.
The statements set forth in paragraph (11) above are based on the position that the benefit provided by the liquidation account in Naugatuck Valley Savings and Loan supporting the payment of the liquidation account in new Naugatuck Valley Financial if new Naugatuck Valley Savings and Loan lacks sufficient new assets has a market value of zero. Whether this benefit has a fair market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether these benefits have a fair market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that such a benefit has a market value.
Whittlesey & Hadley, P.C. has been engaged to issue an opinion to us to the effect that, more likely than not, the income tax consequences under Connecticut law of the conversion are not materially different than for federal tax purposes.
Unlike a private letter ruling issued by the Internal Revenue Service, an opinion of counsel is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached in the opinion. If there is a disagreement, no assurance can be given that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the Internal Revenue Service.
The opinions of Kilpatrick Stockton LLP and Whittlesey & Hadley, P.C. are filed as exhibits to the registration statement that we have filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”
155
Table of Contents
Interpretation, Amendment and Termination
All interpretations of the plan of conversion by our board of directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable by the board of directors, the plan of conversion may be substantively amended by a majority vote of the board of directors as a result of comments from regulatory authorities or otherwise, at any time before the submission of proxy materials to the members of Naugatuck Valley Mutual Holding Company and shareholders of Naugatuck Valley Financial. Amendment of the plan of conversion thereafter requires a majority vote of the board of directors, with the concurrence of the Office of Thrift Supervision. The plan of conversion may be terminated by a majority vote of the board of directors at any time before the earlier of the date of the special meeting of shareholders and the date of the special meeting of members of Naugatuck Valley Mutual Holding Company, and may be terminated by the board of directors at any time thereafter with the concurrence of the Office of Thrift Supervision. The plan of conversion will terminate if the conversion and offering are not completed within 24 months from the date on which the members of Naugatuck Valley Mutual Holding Company approved the plan of conversion, and may not be extended by us or the Office of Thrift Supervision.
156
Table of Contents
The Acquisition of Southern Connecticut Bancorp
General
On February 22, 2010, Naugatuck Valley Financial entered into an Agreement and Plan of Merger pursuant to which Southern Connecticut Bancorp will merge with and into new Naugatuck Valley Financial, with new Naugatuck Valley Financial as the surviving entity. Immediately following the merger of Southern Connecticut Bancorp with and into new Naugatuck Valley Financial, The Bank of Southern Connecticut, a subsidiary of Southern Connecticut Bancorp, will merge with and into Naugatuck Valley Savings and Loan with Naugatuck Valley Savings and Loan as the surviving entity.
Reasons for the Acquisition
Our board of directors believes that the merger will enhance the competitive position of Naugatuck Valley Financial by enabling us to expand the geographic scope of the Naugatuck Valley Savings and Loan franchise in the greater New Haven metropolitan area and facilitate our continued development as a full-service community bank. The merger will also increase Naugatuck Valley Savings and Loan’s deposit base and its loan portfolio, and enable it to better serve the convenience and needs of our customers and communities through becoming a larger institution better suited to compete against regional financial institutions operating in our market area.
In addition to enabling Naugatuck Valley Savings and Loan to expand its franchise and enhance its ability to compete in its market area, the merger, combined with the stock offering, will permit Naugatuck Valley Savings and Loan to use a significant portion of its capital, while continuing to well exceed each of its regulatory capital requirements.
Management of the Combined Company
The current board of directors of new Naugatuck Valley Financial consists of the seven current directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. Immediately following the merger with Southern Connecticut Bancorp, we will appoint Elmer F. Laydon and Alphonse F. Spadaro, Jr., currently Chairman and Vice Chairman of the Board, respectively, of Southern Connecticut Bancorp, to the boards of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. In addition, we will appoint Matthew Proto, Sr., Senior Vice President and Chief Lending Officer of The Bank of Southern Connecticut, and Sunil Pallan, Senior Vice President and Chief Credit Officer of The Bank of Southern Connecticut, as Senior Vice Presidents of Naugatuck Valley Savings and Loan effective upon completion of the merger.
For information about our existing and prospective directors and executive officers, see“Our Management.”
Acquisition Details
Consideration to be Received in the Merger.When the merger becomes effective, each share of Southern Connecticut Bancorp common stock issued and outstanding immediately prior to the completion of the merger will automatically be converted into the right to receive, at the holder’s election, (a) $6.75 in cash without interest, (b) 0.675 shares of Naugatuck Valley Financial common stock or (c) a combination thereof. Based on the current number of shares of Southern Connecticut Bancorp common stock outstanding, Naugatuck Valley Financial will issue an aggregate of approximately 1,092,245 shares of common stock and pay approximately $7.3 million in cash to stockholders of Southern Connecticut Bancorp. At the maximum of the offering range, former Southern Connecticut Bancorp stockholders will own approximately 19.1% of the outstanding common stock of Naugatuck Valley Financial. Under certain circumstances, if existing options to acquire Southern Connecticut Bancorp common stock are exercised prior to closing, the number of shares issued in the acquisition could be increased to 1,193,250 shares of common stock.
Under the terms of the merger agreement, Southern Connecticut Bancorp stockholders may elect to convert their shares into cash, Naugatuck Valley Financial common stock or a mixture of cash and Naugatuck Valley Financial common stock. All elections of Southern Connecticut Bancorp stockholders are further subject to the allocation and proration procedures described in the merger agreement. These procedures provide that the number of shares of Southern Connecticut Bancorp common stock to be converted into Naugatuck Valley Financial common stock in the merger must be 60% of the total number of shares of Southern Connecticut Bancorp common stock issued and outstanding on the date of the merger. Neither Naugatuck Valley Financial nor Southern Connecticut Bancorp is making any recommendation as to whether Southern Connecticut Bancorp
157
Table of Contents
stockholders should elect to receive cash or Naugatuck Valley Financial common stock in the merger. Each holder of Southern Connecticut Bancorp common stock must make his or her own decision with respect to such election.
It is unlikely that elections will be made in the exact proportions provided for in the merger agreement. As a result, the merger agreement describes procedures to be followed if Southern Connecticut Bancorp stockholders in the aggregate elect to receive more or less of the Naugatuck Valley Financial common stock than Naugatuck Valley Financial has agreed to issue. These procedures are summarized below.
• | If Stock Is Oversubscribed: If Southern Connecticut Bancorp stockholders elect to receive more Naugatuck Valley Financial common stock than Naugatuck Valley Financial has agreed to issue in the merger, then all Southern Connecticut Bancorp stockholders who have elected to receive cash or who have made no election will receive cash for their Southern Connecticut Bancorp shares and all stockholders who elected to receive Naugatuck Valley Financial common stock will receive a pro rata portion of the available Naugatuck Valley Financial shares plus cash for those shares not converted into Naugatuck Valley Financial common stock. |
• | If Stock Is Undersubscribed: If Southern Connecticut Bancorp stockholders elect to receive fewer shares of Naugatuck Valley Financial common stock than Naugatuck Valley Financial has agreed to issue in the merger, then all Southern Connecticut Bancorp stockholders who have elected to receive Naugatuck Valley Financial common stock will receive Naugatuck Valley Financial common stock and all stockholders who elected to receive cash or who have made no election will be treated in the following manner: |
• | If the number of shares held by Southern Connecticut Bancorp stockholders who have made no election is sufficient to make up the shortfall in the number of Naugatuck Valley Financial shares that Naugatuck Valley Financial is required to issue, then all Southern Connecticut Bancorp stockholders who elected cash will receive cash, and those stockholders who made no election will receive both cash and Naugatuck Valley Financial common stock in whatever proportion is necessary to make up the shortfall. |
• | If the number of shares held by Southern Connecticut Bancorp stockholders who have made no election is insufficient to make up the shortfall, then all Southern Connecticut Bancorp stockholders who made no election will receive Naugatuck Valley Financial common stock and those Southern Connecticut Bancorp stockholders who elected to receive cash will receive cash and Naugatuck Valley Financial common stock in whatever proportion is necessary to make up the shortfall. |
Notwithstanding these rules, it may be necessary for Naugatuck Valley Financial to reduce the number of shares of Southern Connecticut Bancorp common stock that will be converted into the right to receive cash and correspondingly increase the number of shares of Southern Connecticut Bancorp common stock that will be converted into Naugatuck Valley Financial common stock. If this adjustment is necessary, stockholders who elect to receive cash or a mixture of cash and stock may be required on a pro rata basis to receive a greater amount of Naugatuck Valley Financial common stock than they otherwise would have received.
Southern Connecticut Bancorp’s stockholders will not receive fractional shares of Naugatuck Valley Financial common stock. Instead, they will receive a cash payment for any fractional shares in an amount equal to the product of such fractional amount multiplied by $10.00.
Treatment of Southern Connecticut Bancorp Stock Options.At the effective time of the merger, each outstanding option to purchase shares of Southern Connecticut Bancorp common stock will be cancelled in exchange for a cash payment from Southern Connecticut Bancorp. The cash payment for each option will be equal to the excess of the $6.75 per share cash merger consideration over the exercise price per share of each option, net of any cash that must be withheld under the federal and state income and employment tax requirements.
Conditions to Completing the Acquisition
The merger agreement sets forth a series of conditions that must be satisfied or waived before Southern Connecticut Bancorp and Naugatuck Valley Financial are obligated to close the merger. These conditions include:
• | consummation of the conversion and offering; |
• | receipt of approval of the merger by Southern Connecticut Bancorp’s stockholders; |
158
Table of Contents
• | receipt of all regulatory approvals, provided that none contain any conditions that would so materially and adversely impact the economic or business benefits to Naugatuck Valley Financial or the transactions contemplated by the merger agreement that had such condition been known, Naugatuck Valley Financial would not, with reasonable judgment, have entered into the merger agreement; |
• | no injunctions or restraints exist preventing consummation of the merger; |
• | all required third party consents have been obtained; |
• | the other party’s representations and warranties in the merger agreement continuing to be true as of the closing date of the merger and the other party having performed its obligations under the merger agreement; |
• | receipt of a tax opinion from counsel for both parties; and |
• | the Registration Statement having been declared effective by the SEC. |
Any shares of new Naugatuck Valley Financial common stock to be issued in connection with the merger will be issued immediately following completion of the conversion and stock offering. The merger is contingent on completion of the conversion and subject to regulatory and stockholder approval.
159
Table of Contents
Comparison of Shareholders’ Rights
As a result of the conversion, current holders of Naugatuck Valley Financial common stock will become shareholders of new Naugatuck Valley Financial. There are certain differences in shareholder rights arising from distinctions between the federal stock charter and bylaws of Naugatuck Valley Financial and the articles of incorporation and bylaws of new Naugatuck Valley Financial and from distinctions between laws with respect to federally chartered savings and loan holding companies and Maryland law.
In some instances, the rights of shareholders of new Naugatuck Valley Financial will be less than the rights shareholders of Naugatuck Valley Financial currently have. The decrease in shareholder rights under the Maryland articles of incorporation and bylaws are not mandated by Maryland law but have been chosen by management as being in the best interest of new Naugatuck Valley Financial. In some instances, the differences in shareholder rights may increase management rights. In other instances, the provisions in new Naugatuck Valley Financial’s articles of incorporation and bylaws described below may make it more difficult to pursue a takeover attempt that management opposes. These provisions will also make the removal of the board of directors or management, or the appointment of new directors, more difficult. We believe that the provisions described below are prudent and will enhance our ability to remain an independent financial institution and reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our board of directors. These provisions also will assist us in the orderly deployment of the conversion proceeds into productive assets and allow us to implement our business plan during the initial period after the conversion. We believe these provisions are in the best interests of new Naugatuck Valley Financial and its shareholders.
The following discussion is not intended to be a complete statement of the differences affecting the rights of shareholders, but rather summarizes the more significant differences and certain important similarities. The discussion herein is qualified in its entirety by reference to the articles of incorporation and bylaws of new Naugatuck Valley Financial and Maryland law.
Authorized Capital Stock.The authorized capital stock of the current Naugatuck Valley Financial consists of 25,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share. The authorized capital stock of the new Naugatuck Valley Financial will consist of 25,000,000 shares of common stock, par value $0.01 per share and 1,000,000 shares of preferred stock, par value $0.01 per share.
Naugatuck Valley Financial’s charter and new Naugatuck Valley Financial’s articles of incorporation both authorize the board of directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, dividend rights, conversion and redemption rates and liquidation preferences. Although neither board of directors has any intention at the present time of doing so, it could issue a series of preferred stock that could, depending on its terms, impede a merger, tender offer or other takeover attempt.
Issuance of Capital Stock.Currently, pursuant to applicable laws and regulations, Naugatuck Valley Mutual Holding Company is required to own not less than a majority of the outstanding common stock of Naugatuck Valley Financial. There will be no such restriction applicable to new Naugatuck Valley Financial following consummation of the conversion, as Naugatuck Valley Mutual Holding Company will cease to exist.
New Naugatuck Valley Financial’s articles of incorporation do not contain restrictions on the issuance of shares of capital stock to the directors, officers or controlling persons of new Naugatuck Valley Financial, whereas Naugatuck Valley Financial’s federal stock charter provides that no shares may be issued to directors, officers or controlling persons other than as part of a general public offering, or to directors for purposes of qualifying for service as directors, unless the share issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Thus, new Naugatuck Valley Financial could adopt stock-related compensation plans such as stock option plans without shareholder approval and shares of the capital stock of new Naugatuck Valley Financial could be issued directly to directors or officers without shareholder approval. The rules of the Nasdaq Stock Market, however, generally require listed companies, like new Naugatuck Valley Financial will be, to obtain shareholder approval of most stock-related compensation plans for directors, officers and key employees of the corporation. Moreover, although generally not required, shareholder approval of stock-related compensation plans may be sought in certain instances to qualify such plans for favorable treatment under current federal income tax laws and regulations. We plan to submit the stock compensation plan discussed in this prospectus to shareholders for their approval.
160
Table of Contents
Neither the federal stock charter and bylaws of Naugatuck Valley Financial nor the articles of incorporation and bylaws of new Naugatuck Valley Financial provide for preemptive rights to shareholders in connection with the issuance of capital stock.
Voting Rights.Neither the federal stock charter of Naugatuck Valley Financial nor the articles of incorporation of new Naugatuck Valley Financial permits cumulative voting in the election of directors. Cumulative voting entitles you to a number of votes equaling the number of shares you hold multiplied by the number of directors to be elected. Cumulative voting allows you to cast all your votes for a single nominee or apportion your votes among any two or more nominees. For example, when three directors are to be elected, cumulative voting allows a holder of 100 shares to cast 300 votes for a single nominee, apportion 100 votes for each nominee, or apportion 300 votes in any other manner.
Payment of Dividends.The ability of Naugatuck Valley Savings and Loan to pay dividends on its capital stock is restricted by Office of Thrift Supervision regulations and by tax considerations related to savings associations. Naugatuck Valley Savings and Loan will continue to be subject to these restrictions after the conversion, and such restrictions will indirectly affect new Naugatuck Valley Financial because dividends from Naugatuck Valley Savings and Loan will be a primary source of funds for the payment of dividends to the shareholders of new Naugatuck Valley Financial.
Maryland law generally provides that, unless otherwise restricted in a corporation’s articles of incorporation, a corporation’s board of directors may authorize and a corporation may pay dividends to shareholders. However, a distribution may not be made if, after giving effect thereto, the corporation would not be able to pay its debts as they become due in the usual course of business or the corporation’s total assets would be less than its total liabilities.
Board of Directors.The bylaws of Naugatuck Valley Financial and the articles of incorporation of new Naugatuck Valley Financial each require the board of directors to be divided into three classes as nearly equal in number as possible and that the members of each class be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. Under both the bylaws of Naugatuck Valley Financial and the bylaws of new Naugatuck Valley Financial, any vacancy occurring in the board of directors, however caused, may be filled by an affirmative vote of the majority of the directors then in office, whether or not a quorum is present. Any director of Naugatuck Valley Financial so chosen shall hold office until the next annual meting of shareholders, and any director of new Naugatuck Valley Financial so chosen shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until his or her successor shall have been elected and qualified.
The bylaws of both Naugatuck Valley Financial and new Naugatuck Valley Financial provide that to be eligible to serve on the board of directors a person must not: (1) be under indictment for, or ever have been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) be a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) have been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit, or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.
Under the bylaws of Naugatuck Valley Financial, directors may be removed only for cause by the vote of the holders of a majority of the shares of stock entitled to vote at a meeting of shareholders called for such purpose. The bylaws of new Naugatuck Valley Financial impose the same limitation.
Limitations on Liability.The articles of incorporation of new Naugatuck Valley Financial provides that, to the fullest extent permitted under Maryland law, the directors and officers of new Naugatuck Valley Financial shall have no personal liability to new Naugatuck Valley Financial or its shareholders for money damages except (1) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received; or (2) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (3) to the extent otherwise provided by the Maryland General Corporation Law.
Currently, federal law does not permit federally chartered savings and loan holding companies like Naugatuck Valley Financial to limit the personal liability of directors in the manner provided by Maryland law and the laws of many other states.
161
Table of Contents
Indemnification of Directors, Officers, Employees and Agents.Federal regulations provide that Naugatuck Valley Financial must indemnify its directors, officers and employees for any costs incurred in connection with any action involving any such person’s activities as a director, officer or employee if such person obtains a final judgment on the merits in his or her favor. In addition, indemnification is permitted in the case of a settlement, a final judgment against such person or final judgment other than on the merits, if a majority of disinterested directors determines that such person was acting in good faith within the scope of his or her employment as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interest of Naugatuck Valley Financial or its shareholders. Naugatuck Valley Financial also is permitted to pay ongoing expenses incurred by a director, officer or employee if a majority of disinterested directors concludes that such person may ultimately be entitled to indemnification. Before making any indemnification payment, Naugatuck Valley Financial is required to notify the Office of Thrift Supervision of its intention and such payment cannot be made if the Office of Thrift Supervision objects thereto.
The articles of incorporation of new Naugatuck Valley Financial provides that it will indemnify its directors and officers, whether serving it or at its request any other entity, to the fullest extent required or permitted under Maryland law. Such indemnification includes the advancement of expenses. The articles of incorporation of new Naugatuck Valley Financial also provides that new Naugatuck Valley Financial will indemnify its employees and agents and any director, officer, employee or agent of any other entity to such extent as shall be authorized by the board of directors and be permitted by law.
Special Meetings of Shareholders.The bylaws of Naugatuck Valley Financial provide that special meetings of the shareholders of Naugatuck Valley Financial may be called by the Chairman, President, a majority of the board of directors or the holders of not less than one-tenth of the outstanding capital stock of Naugatuck Valley Financial entitled to vote at the meeting. The bylaws of new Naugatuck Valley Financial provide that special meetings of shareholders may be called by the Chairman, the President or by two-thirds of the total number of directors. In addition, Maryland law provides that a special meeting of shareholders may be called by the Secretary upon written request of the holders of a majority of all the shares entitled to vote at a meeting.
Shareholder Nominations and Proposals.The bylaws of Naugatuck Valley Financial provide an advance notice procedure for shareholders to nominate directors or bring other business before an annual or special meeting of shareholders of Naugatuck Valley Financial. A person may not be nominated for election as a director unless that person is nominated by or at the direction of the Naugatuck Valley Financial board of directors or by a shareholder who has given appropriate notice to Naugatuck Valley Financial before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given Naugatuck Valley Financial appropriate notice of its intention to bring that business before the meeting. Naugatuck Valley Financial’s secretary must receive notice of the nomination or proposal at least 30 days before the date of the annual meeting; provided, however, that if less than 40 days’ notice of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made.
New Naugatuck Valley Financial’s bylaws establish a similar advance notice procedure for shareholders to nominate directors or bring other business before an annual meeting of shareholders of new Naugatuck Valley Financial. A person may not be nominated for election as a director unless that person is nominated by or at the direction of the new Naugatuck Valley Financial board of directors or by a shareholder who has given appropriate notice to new Naugatuck Valley Financial before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given new Naugatuck Valley Financial appropriate notice of its intention to bring that business before the meeting. New Naugatuck Valley Financial’s secretary must receive notice of the nomination or proposal not less than 90 days before the annual meeting; provided, however, that if less than 100 days’ notice of prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder who desires to raise new business must provide certain information to new Naugatuck Valley Financial concerning the nature of the new business, the shareholder, the shareholder’s ownership in the new Naugatuck Valley Financial and the shareholder’s interest in the business matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide new Naugatuck Valley Financial with certain information concerning the nominee and the proposing shareholder.
Advance notice of nominations or proposed business by shareholders gives new Naugatuck Valley Financial’s board of directors time to consider the qualifications of the proposed nominees, the merits of the proposals and, to the extent deemed necessary or desirable by the board of directors, to inform shareholders and make recommendations about those matters.
162
Table of Contents
Shareholder Action Without a Meeting.Under Maryland law, action may be taken by shareholders of new Naugatuck Valley Financial without a meeting if all shareholders entitled to vote on the action give written consent to taking such action without a meeting. Similarly, the bylaws of Naugatuck Valley Financial provide that action may be taken by shareholders without a meeting if all shareholders entitled to vote on the matter consent to the taking of such action without a meeting.
Shareholder’s Right to Examine Books and Records.A federal regulation, which is currently applicable to Naugatuck Valley Financial, provides that shareholders holding of record at least $100,000 of stock or at least 1% of the total outstanding voting shares may inspect and make extracts from specified books and records of a federally chartered savings and loan association after proper written notice for a proper purpose.
Under Maryland law, a shareholder who has been a shareholder of record for at least six months or who holds, or is authorized in writing by holders of, at least 5% of the outstanding shares of any class or series of stock of a corporation has the right, for any proper purpose and upon at least 20 days’ written notice, to inspect in person or by agent, the corporation’s books of account and its stock ledger. In addition, under Maryland law, any shareholder or his agent, upon at least seven days’ written notice, may inspect and copy during usual business hours, the corporation’s bylaws, minutes of the proceedings of shareholders’ annual statements of affairs and voting trust agreements.
Limitations on Voting Rights.The articles of incorporation of new Naugatuck Valley Financial provide that in no event will any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock, be entitled, or permitted to any vote in respect of the shares held in excess of the limit. This limitation does not apply to any director or officer acting solely in their capacities as directors and officers, or any employee benefit plans of new Naugatuck Valley Financial or any subsidiary or a trustee of a plan.
In addition, Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the offering, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of new Naugatuck Valley Financial’s equity securities without the prior written approval of the Office of Thrift Supervision. Where any person acquires beneficial ownership of more than 10% of a class of our equity securities without the prior written approval of the Office of Thrift Supervision, the securities beneficially owned by such person in excess of 10% may not be voted by any person or counted as voting shares in connection with any matter submitted to the shareholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the shareholders for a vote.
Mergers, Consolidations and Sales of Assets.Federal regulations currently require the approval of two-thirds of the board of directors of Naugatuck Valley Financial and the holders of two-thirds of the outstanding stock of Naugatuck Valley Financial entitled to vote thereon for mergers, consolidations and sales of all or substantially all of its assets. Such regulation permits Naugatuck Valley Financial to merge with another corporation without obtaining the approval of its shareholders if:
• | it does not involve an interim savings institution; |
• | the charter of Naugatuck Valley Financial is not changed; |
• | each share of Naugatuck Valley Financial stock outstanding immediately before the effective date of the transaction is to be an identical outstanding share or a treasury share of Naugatuck Valley Financial after such effective date; and |
• | either: (a) no shares of voting stock of Naugatuck Valley Financial and no securities convertible into such stock are to be issued or delivered under the plan of combination or (b) the authorized unissued shares or the treasury shares of voting stock of Naugatuck Valley Financial to be issued or delivered under the plan of combination, plus those initially issuable upon conversion of any securities to be issued or delivered under such plan, do not exceed 15% of the total shares of voting stock of Naugatuck Valley Financial outstanding immediately before the effective date of the transaction. |
Under Maryland law, a merger or consolidation of new Naugatuck Valley Financial requires approval of two-thirds of all votes entitled to be cast by shareholders, except that no approval by shareholders is required for a merger if:
• | the plan of merger does not make an amendment of the articles of incorporation that would be required to be approved by the shareholders; |
163
Table of Contents
• | each shareholder of the surviving corporation whose shares were outstanding immediately before the effective date of the merger will hold the same number of shares, with identical designations, preferences, limitations, and rights, immediately after; and |
• | the number of shares of any class or series of stock outstanding immediately after the effective time of the merger will not increase by more than 20% the total number of voting shares outstanding immediately before the merger. The articles of incorporation of new Naugatuck Valley Financial reduce the vote required for a merger or consolidation to a majority of the total shares outstanding. |
In addition, under certain circumstances the approval of the shareholders shall not be required to authorize a merger with or into a 90% owned subsidiary of new Naugatuck Valley Financial.
Under Maryland law, a sale of all or substantially all of new Naugatuck Valley Financial’s assets other than in the ordinary course of business, or a voluntary dissolution of new Naugatuck Valley Financial, requires the approval of its board of directors and the affirmative vote of two-thirds of the votes entitled to be cast on the matter.
Business Combinations with Interested Shareholders.Under Maryland law, “business combinations” between new Naugatuck Valley Financial and an interested shareholder or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested shareholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested shareholder as: (1) any person who beneficially owns 10% or more of the voting power of new Naugatuck Valley Financial’s voting stock after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock; or (2) an affiliate or associate of new Naugatuck Valley Financial at any time after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of new Naugatuck Valley Financial A person is not an interested shareholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between new Naugatuck Valley Financial and an interested shareholder generally must be recommended by the board of directors of new Naugatuck Valley Financial and approved by the affirmative vote of at least: (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of new Naugatuck Valley Financial and (2) two-thirds of the votes entitled to be cast by holders of voting stock of new Naugatuck Valley Financial other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested shareholder. These super-majority vote requirements do not apply if new Naugatuck Valley Financial’s common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its shares.
Neither the charter or bylaws of Naugatuck Valley Financial nor the federal laws and regulations applicable to Naugatuck Valley Financial contain a provision that restricts business combinations between Naugatuck Valley Financial and any interested stockholder in the manner set forth above.
Dissenters’ Rights of Appraisal.A federal regulation that is applicable to Naugatuck Valley Financial generally provides that a shareholder of a federally chartered savings and loan association that engages in a merger, consolidation or sale of all or substantially all of its assets shall have the right to demand from such institution payment of the fair or appraised value of his or her stock in the institution, subject to specified procedural requirements. This regulation also provides, however, that the shareholders of a federally chartered savings and loan association that is listed on a national securities exchange are not entitled to dissenters’ rights in connection with a merger if the shareholder is required to accept only “qualified consideration” for his or her stock, which is defined to include cash, shares of stock of any institution or corporation which at the effective date of the merger will be listed on a national securities exchange or any combination of such shares of stock and cash.
164
Table of Contents
Under Maryland law, shareholders of new Naugatuck Valley Financial have the right to dissent from any plan of merger or consolidation to which new Naugatuck Valley Financial is a party, and to demand payment for the fair value of their shares unless the articles of incorporation provide otherwise. Pursuant to new Naugatuck Valley Financial’s articles of incorporation, holders of new Naugatuck Valley Financial common stock are not entitled to exercise the rights of an objecting shareholder.
Evaluation of Offers; Other Corporate Constituencies. The articles of incorporation of new Naugatuck Valley Financial provide that its directors, in discharging their duties to new Naugatuck Valley Financial and in determining what they reasonably believe to be in the best interest of new Naugatuck Valley Financial, may, in addition to considering the effects of any action on shareholders, consider any of the following: (a) the economic effect, both immediate and long-term, upon new Naugatuck Valley Financial’s shareholders, including shareholders, if any, choosing not to participate in the transaction; (b) effects, including any social and economic effects on the employees, suppliers, creditors, depositors and customers of, and others dealing with, new Naugatuck Valley Financial and its subsidiaries and on the communities in which new Naugatuck Valley Financial and its subsidiaries operate or are located; (c) whether the proposal is acceptable based on the historical and current operating results or financial condition of new Naugatuck Valley Financial; (d) whether a more favorable price could be obtained for new Naugatuck Valley Financial’s stock or other securities in the future; (e) the reputation and business practices of the offeror and its management and affiliates as they would affect the employees; (f) the future value of the stock or any other securities of new Naugatuck Valley Financial; and (g) any antitrust or other legal and regulatory issues that are raised by the proposal. If on the basis of these factors the board of directors determines that any proposal or offer to acquire new Naugatuck Valley Financial is not in the best interest of new Naugatuck Valley Financial, it may reject such proposal or offer. If the board of directors determines to reject any such proposal or offer, the board of directors shall have no obligation to facilitate, remove any barriers to, or refrain from impeding the proposal or offer.
By having these standards in the articles of incorporation of new Naugatuck Valley Financial, the board of directors may be in a stronger position to oppose such a transaction if the board of directors concludes that the transaction would not be in the best interest of new Naugatuck Valley Financial, even if the price offered is significantly greater than the market price of any equity security of new Naugatuck Valley Financial.
Amendment of Governing Instruments.No amendment of the charter of Naugatuck Valley Financial may be made unless it is first proposed by the board of directors, then preliminarily approved by the Office of Thrift Supervision, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. The articles of incorporation of new Naugatuck Valley Financial generally may be amended by the holders of a majority of the shares entitled to vote, provided that any amendment of Section C of Article Sixth (limitation on common stock voting rights), Section B of Article Seventh (classification of board of directors), Sections F and J of Article Eighth (amendment of bylaws and elimination of director and officer liability) and Article Tenth (amendment of certain provisions of the Articles), must be approved by the affirmative vote of the holders of at least 75% of the outstanding shares entitled to vote, except that the board of directors may amend the articles of incorporation without any action by the shareholders to the fullest extent allowed under Maryland law.
The bylaws of Naugatuck Valley Financial may be amended in a manner consistent with regulations of the Office of Thrift Supervision and shall be effective after (1) approval of the amendment by a majority vote of the authorized board of directors, or by a majority of the votes cast by the shareholders of Naugatuck Valley Financial at any legal meeting and (2) receipt of applicable regulatory approval. The bylaws of new Naugatuck Valley Financial may be amended by the affirmative vote of a majority of the directors or by the vote of the holders of not less than 75% of the votes entitled to be cast by holders of the capital stock of new Naugatuck Valley Financial entitled to vote generally in the election of directors (considered for this purpose as one class) at a meeting of the shareholders called for that purpose at which a quorum is present (provided that notice of such proposed amendment is included in the notice of such meeting).
165
Table of Contents
Restrictions on Acquisition of New Naugatuck Valley Financial
General
Certain provisions in the articles of incorporation and bylaws of new Naugatuck Valley Financial may have antitakeover effects. In addition, regulatory restrictions may make it more difficult for persons or companies to acquire control of us.
Articles of Incorporation and Bylaws of New Naugatuck Valley Financial
Although our board of directors is not aware of any effort that might be made to obtain control of us after the offering, the board of directors believed it appropriate to adopt certain provisions permitted by federal and state regulations that may have the effect of deterring a future takeover attempt that is not approved by our board of directors. The following description of these provisions is only a summary and does not provide all of the information contained in our articles of incorporation and bylaws. See “Where You Can Find More Information“ as to where to obtain a copy of these documents.
Limitation on Voting Rights.Our articles of incorporation provide that in no event will any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock, be entitled, or permitted to any vote in respect of the shares held in excess of the limit. This limitation does not apply to any director or officer acting solely in their capacities as directors and officers, or any employee benefit plans of new Naugatuck Valley Financial or any subsidiary or a trustee of a plan.
Board of Directors.
Classified Board. Our board of directors is divided into three classes as nearly as equal in number as possible. The shareholders elect one class of directors each year for a term of three years. The classified board makes it more difficult and time consuming for a shareholder group to fully use its voting power to gain control of the board of directors without the consent of the incumbent board of directors of new Naugatuck Valley Financial.
Filling of Vacancies; Removal. Our bylaws provide that any vacancy occurring in the board of directors, including a vacancy created by an increase in the number of directors, may be filled only by a vote of a majority of the directors then in office. A person elected to fill a vacancy on the board of directors will serve for the remainder of the full term of the class of directors in which the vacancy occurred and until his or her successor shall have been elected and qualified. Our bylaws provide that a director may be removed from the board of directors before the expiration of his or her term only for cause and only upon the vote of a majority of the shares entitled to vote in the election of directors. These provisions make it more difficult for shareholders to remove directors and replace them with their own nominees.
Qualification. Our bylaws provide that to be eligible to serve on the board of directors a person must not: (1) be under indictment for, or ever have been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) be a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) have been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit, or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency. These provisions contained in our bylaws may prevent shareholders from nominating themselves or persons of their choosing for election to the board of directors.
Elimination of Cumulative Voting. Our articles of incorporation provide that no shares will be entitled to cumulative voting. The elimination of cumulative voting makes it more difficult for a shareholder group to elect a director nominee.
Special Meetings of Shareholder.Our shareholders must act only through an annual or special meeting. Special meetings of shareholders may only be called by the Chairman, the President, by two-thirds of the total number of directors or by the Secretary upon the written request of the holders of a majority of all the shares entitled to vote at a meeting. The limitations on the calling of special meetings of shareholders may have the effect of delaying consideration of a shareholder proposal until the next annual meeting.
166
Table of Contents
Amendment of Articles of Incorporation.Our articles of incorporation provide that certain amendments to our articles of incorporation relating to a change in control of us must be approved by at least 75% of the outstanding shares entitled to vote.
Amendment of Bylaws.Our articles of incorporation provide that our bylaws may not be adopted, repealed, altered, amended or rescinded by shareholders except by the affirmative vote of the holders of at least 75% of the voting stock.
Advance Notice Provisions for Shareholder Nominations and Proposals. Our bylaws establish an advance notice procedure for shareholders to nominate directors or bring other business before an annual meeting of shareholders. A person may not be nominated for election as a director unless that person is nominated by or at the direction of our board of directors or by a shareholder who has given appropriate notice to us before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given us appropriate notice of the shareholder’s intention to bring that business before the meeting. Our Secretary must receive notice of the nomination or proposal not less than 90 days before the date of the annual meeting; provided, however, that if less than 100 days’ notice of prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder who desires to raise new business must provide us with certain information concerning the nature of the new business, the shareholder, the shareholder’s ownership of new Naugatuck Valley Financial and the shareholder’s interest in the business matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide us with certain information concerning the nominee and the proposing shareholder.
Advance notice of nominations or proposed business by shareholders gives our board of directors time to consider the qualifications of the proposed nominees, the merits of the proposals and, to the extent deemed necessary or desirable by our board of directors, to inform shareholders and make recommendations about those matters.
Authorized but Unissued Shares of Capital Stock.Following the offering, we will have authorized but unissued shares of common and preferred stock. Our articles of incorporation authorize the board of directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, dividend rights, conversion and redemption rates, and liquidation preferences. Such shares of common and preferred stock could be issued by the board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
Business Combinations with Interested Stockholders.Under Maryland law, “business combinations” between new Naugatuck Valley Financial and an interested shareholder or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested shareholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested shareholder as: (1) any person who beneficially owns 10% or more of the voting power of new Naugatuck Valley Financial’s voting stock after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock; or (2) an affiliate or associate of new Naugatuck Valley Financial at any time after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock who, within the two-year period before the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of new Naugatuck Valley Financial. A person is not an interested shareholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between new Naugatuck Valley Financial and an interested shareholder generally must be recommended by the board of directors of new Naugatuck Valley Financial and approved by the affirmative vote of at least: (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of new Naugatuck Valley Financial and (2) two-thirds of the votes entitled to be cast by holders of voting stock of new Naugatuck Valley Financial other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested shareholder. These super-majority vote requirements do not apply if new Naugatuck Valley Financial’s common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its shares.
167
Table of Contents
Regulatory Restrictions
Office of Thrift Supervision Regulations. Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the offering, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of our equity securities without the prior written approval of the Office of Thrift Supervision. Where any person acquires beneficial ownership of more than 10% of a class of our equity securities without the prior written approval of the Office of Thrift Supervision, the securities beneficially owned by such person in excess of 10% may not be voted by any person or counted as voting shares in connection with any matter submitted to the shareholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the shareholders for a vote.
Change in Bank Control Act.The acquisition of 10% or more of our outstanding common stock may trigger the provisions of the Change in Bank Control Act. The Office of Thrift Supervision has also adopted a regulation under the Change in Bank Control Act which generally requires persons who at any time intend to acquire control of a federally chartered savings association or its holding company to provide 60 days prior written notice and certain financial and other information to the Office of Thrift Supervision.
The 60-day notice period does not commence until the information is deemed to be substantially complete. Control for these purposes exists in situations in which the acquiring party has voting control of at least 25% of any class of our voting stock or the power to direct our management or policies. However, under Office of Thrift Supervision regulations, control is presumed to exist where the acquiring party has voting control of at least 10% of any class of our voting securities if specified “control factors” are present. The statute and underlying regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.
168
Table of Contents
Description of New Naugatuck Valley Financial Capital Stock
The common stock of new Naugatuck Valley Financial represents nonwithdrawable capital, is not an account of any type, and is not insured by the Federal Deposit Insurance Corporation or any other government agency.
|
General
New Naugatuck Valley Financial is authorized to issue 25,000,000 shares of common stock having a par value of $0.01 per share and 1,000,000 shares of preferred stock having a par value of $0.01. Each share of new Naugatuck Valley Financial’s common stock has the same relative rights as, and is identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock, as required by the plan of conversion, all stock will be duly authorized, fully paid and nonassessable. New Naugatuck Valley Financial will not issue any shares of preferred stock in the conversion and offering.
Common Stock
Dividends.New Naugatuck Valley Financial can pay dividends if, as and when declared by its board of directors. The payment of dividends by new Naugatuck Valley Financial is limited by law and applicable regulation. See “Our Dividend Policy.“ The holders of common stock of new Naugatuck Valley Financial will be entitled to receive and share equally in dividends declared by the board of directors of new Naugatuck Valley Financial. If new Naugatuck Valley Financial issues preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock of new Naugatuck Valley Financial will possess exclusive voting rights in new Naugatuck Valley Financial. They will elect new Naugatuck Valley Financial’s board of directors and act on other matters as are required to be presented to them under federal law or as are otherwise presented to them by the board of directors. Except as discussed in“Restrictions on Acquisition of New Naugatuck Valley Financial,” each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If new Naugatuck Valley Financial issues preferred stock, holders of new Naugatuck Valley Financial preferred stock may also possess voting rights.
Liquidation.If there is any liquidation, dissolution or winding up of Naugatuck Valley Savings and Loan, new Naugatuck Valley Financial, as the sole holder of Naugatuck Valley Savings and Loan’s capital stock, would be entitled to receive all of Naugatuck Valley Savings and Loan’s assets available for distribution after payment or provision for payment of all debts and liabilities of Naugatuck Valley Savings and Loan, including all deposit accounts and accrued interest. Upon liquidation, dissolution or winding up of new Naugatuck Valley Financial, the holders of its common stock would be entitled to receive all of the assets of new Naugatuck Valley Financial available for distribution after payment or provision for payment of all its debts and liabilities. If new Naugatuck Valley Financial issues preferred stock, the preferred stock holders may have a priority over the holders of the common stock upon liquidation or dissolution.
Preemptive Rights; Redemption.Holders of the common stock of new Naugatuck Valley Financial will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock cannot be redeemed.
Preferred Stock
New Naugatuck Valley Financial will not issue any preferred stock in the conversion and offering and it has no current plans to issue any preferred stock after the conversion and offering. Preferred stock may be issued with designations, powers, preferences and rights as the board of directors may from time to time determine. The board of directors can, without shareholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
169
Table of Contents
The transfer agent and registrar for the common stock of new Naugatuck Valley Financial will be Registrar and Transfer Company, Cranford, New Jersey.
In connection with the conversion and offering, we will register our common stock with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934, as amended, and will not deregister our common stock for a period of at least three years following the conversion and offering. As a result of registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of that statute will apply.
The legality of our common stock has been passed upon for us by Kilpatrick Stockton LLP, Washington, D.C. The federal income tax consequences of the conversion have been opined upon by Kilpatrick Stockton LLP. Whittlesey & Hadley, P.C. has provided an opinion to us regarding the Connecticut income tax consequences of the conversion. Kilpatrick Stockton LLP and Whittlesey & Hadley, P.C. have consented to the references to their opinions in this prospectus. Certain legal matters will be passed upon for Stifel, Nicolaus & Company, Incorporated by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C.
The consolidated financial statements of Naugatuck Valley Financial and subsidiaries as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, have been included herein in reliance upon the report of Whittlesey & Hadley, P.C., independent registered public accounting firm, which is included herein and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Southern Connecticut Bancorp and subsidiaries as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein and are included in reliance upon such report and upon the authority of said firm as experts in accounting and auditing.
FinPro has consented to the summary in this prospectus of its report to us setting forth its opinion as to our estimated pro forma market value and to the use of its name and statements with respect to it appearing in this prospectus.
Where You Can Find More Information
We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, that registers the common stock offered in the offering. This prospectus forms a part of the registration statement. The registration statement, including the exhibits, contains additional relevant information about us and our common stock. The rules and regulations of the Securities and Exchange Commission allow us to omit certain information included in the registration statement from this prospectus. You may read and copy the registration statement at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Securities and Exchange Commission’s public reference rooms. The registration statement also is available to the public from commercial document retrieval services and at the Internet World Wide Web site maintained by the Securities and Exchange Commission at “http://www.sec.gov.”
Naugatuck Valley Mutual Holding Company has filed an application for approval of the plan of conversion with the Office of Thrift Supervision. This prospectus omits certain information contained in the application. The application may be inspected, without charge, at the offices of the Office of Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552
170
Table of Contents
and at the offices of the Regional Director of the Office of Thrift Supervision at the Northeast Regional Office of the Office of Thrift Supervision, Harborside Financial Center Plaza Five, Suite 1600, Jersey City, New Jersey 07311.
A copy of the plan of conversion is available without charge from Naugatuck Valley Savings and Loan by contacting the Stock Information Center.
The appraisal report of FinPro has been filed as an exhibit to our registration statement and to our application to the Office of Thrift Supervision. Portions of the appraisal report were filed electronically with the Securities and Exchange Commission and are available on its Web site as described above. The entire appraisal report is available at the public reference room of the Securities and Exchange Commission and the offices of the Office of Thrift Supervision as described above.
171
Table of Contents
Index to Consolidated Financial Statements
Index to Financial Statements of Naugatuck Valley Financial Corporation | ||
Page | ||
F-1 | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-6 | ||
F-8 | ||
Index to Financial Statements of Southern Connecticut Bancorp, Inc. | ||
Page | ||
F-44 | ||
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009 and 2008 | F-45 | |
F-46 | ||
F-47 | ||
F-49 | ||
F-51 |
* * *
All schedules are omitted as the required information either is not applicable or is included in the financial statements or related notes.
Separate financial statements for new Naugatuck Valley Financial Corporation have not been included in this prospectus because new Naugatuck Valley Financial Corporation, which has engaged only in organizational activities to date, has no significant assets, contingent or other liabilities, revenues or expenses.
172
Table of Contents
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders
Naugatuck Valley Financial Corporation
We have audited the accompanying consolidated statements of financial condition of Naugatuck Valley Financial Corporation (the “Company”) and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years ended December 31, 2009, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Companies Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Naugatuck Valley Financial Corporation and subsidiary at December 31, 2009 and 2008, and the results of its operations and its cash flows for the each of the years ended December 31, 2009, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Whittlesey & Hadley, P.C.
Hartford, Connecticut
March 26, 2010
F-1
Table of Contents
CONSOLIDATED STATEMENTSOF FINANCIAL CONDITION
June 30, 2010 | December 31, | |||||||||||
(Dollars in thousands, except share data) | 2009 | 2008 | ||||||||||
(Unaudited) | (Audited) | |||||||||||
ASSETS | ||||||||||||
Cash and due from depository institutions | $ | 10,141 | $ | 9,003 | $ | 8,214 | ||||||
Investment in federal funds | 816 | 3,143 | 33 | |||||||||
Investment securities available-for-sale, at fair value | 35,584 | 37,623 | 63,844 | |||||||||
Investment securities held-to-maturity, at amortized cost | 3,315 | 1,451 | — | |||||||||
Loans held for sale, at fair value | 561 | — | — | |||||||||
Loans receivable, net | 482,481 | 473,304 | 431,976 | |||||||||
Accrued income receivable | 2,004 | 2,074 | 2,099 | |||||||||
Foreclosed real estate, net | 167 | 140 | — | |||||||||
Premises and equipment, net | 9,842 | 9,948 | 10,565 | |||||||||
Bank owned life insurance | 9,088 | 8,920 | 8,579 | |||||||||
Federal Home Loan Bank of Boston stock, at cost | 6,252 | 6,252 | 6,252 | |||||||||
Other assets | 4,998 | 5,097 | 3,824 | |||||||||
Total assets | $ | 565,249 | $ | 556,955 | $ | 535,386 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Liabilities | ||||||||||||
Deposits | $ | 394,286 | $ | 380,931 | $ | 363,026 | ||||||
Borrowed funds | 112,538 | 118,984 | 119,148 | |||||||||
Mortgagors’ escrow accounts | 4,935 | 4,888 | 4,562 | |||||||||
Other liabilities | 2,270 | 1,844 | 3,061 | |||||||||
Total liabilities | 514,029 | 506,647 | 489,797 | |||||||||
Commitments and contingencies | ||||||||||||
Stockholders’ equity | ||||||||||||
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding | — | — | — | |||||||||
Common stock, $.01 par value; 25,000,000 shares authorized; 7,604,375 shares issued; shares outstanding—7,022,659 at June 30, 2010, 7,022,866 at December 31, 2009, and 7,026,894 at December 31, 2008 | 76 | 76 | 76 | |||||||||
Paid-in capital | 33,872 | 33,756 | 33,637 | |||||||||
Retained earnings | 25,685 | 24,849 | 23,303 | |||||||||
Unearned ESOP shares (193,735 shares at June 30, 2010, 193,735 shares at December 31, 2009 and 213,624 shares at December 31, 2008) | (1,937 | ) | (1,937 | ) | (2,136 | ) | ||||||
Unearned stock awards (31,640 shares at June 30, 2010, 32,340 shares at December 31, 2009 and 61,780 shares at December 31, 2008) | (347 | ) | (355 | ) | (680 | ) | ||||||
Treasury Stock, at cost (583,549 shares at June 30, 2010, 583,342 shares at December 31, 2009 and 579,314 shares at December 31, 2008) | (6,134 | ) | (6,132 | ) | (6,107 | ) | ||||||
Accumulated other comprehensive income (loss) | 5 | 51 | (2,504 | ) | ||||||||
Total stockholders’ equity | 51,220 | 50,308 | 45,589 | |||||||||
Total liabilities and stockholders’ equity | $ | 565,249 | $ | 556,955 | $ | 535,386 | ||||||
F-2
Table of Contents
CONSOLIDATED STATEMENTSOF INCOME
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||
(Dollars in thousands, except earnings per share) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||
(Unaudited) | (Audited) | |||||||||||||||
Interest and dividend income | ||||||||||||||||
Interest on loans | $ | 13,466 | $ | 12,765 | $ | 25,954 | $ | 24,556 | $ | 21,681 | ||||||
Interest and dividends on investments and deposits | 863 | 1,330 | 2,337 | 3,647 | 3,349 | |||||||||||
Total interest income | 14,329 | 14,095 | 28,291 | 28,203 | 25,030 | |||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 3,627 | 4,464 | 8,477 | 9,271 | 9,750 | |||||||||||
Interest on borrowed funds | 1,560 | 2,217 | 4,060 | 4,633 | 3,424 | |||||||||||
Total interest expense | 5,187 | 6,681 | 12,537 | 13,904 | 13,174 | |||||||||||
Net interest income | 9,142 | 7,414 | 15,754 | 14,299 | 11,856 | |||||||||||
Provision for loan losses | 1,171 | 557 | 1,144 | 675 | 151 | |||||||||||
Net interest income after provision for loan losses | 7,971 | 6,857 | 14,610 | 13,624 | 11,705 | |||||||||||
Noninterest income | ||||||||||||||||
Fees for services related to deposit accounts | 490 | 493 | 1,060 | 1,053 | 955 | |||||||||||
Fees for other services | 386 | 299 | 574 | 529 | 559 | |||||||||||
Income from bank owned life insurance | 167 | 171 | 341 | 315 | 308 | |||||||||||
Income from investment advisory services, net | 95 | 158 | 271 | 299 | 260 | |||||||||||
Gain (loss) on investments | 11 | 176 | 388 | (3,398 | ) | 65 | ||||||||||
Other income | 81 | 56 | 108 | 154 | 207 | |||||||||||
Total noninterest income (loss) | 1,230 | 1,353 | 2,742 | (1,048 | ) | 2,354 | ||||||||||
Noninterest expense | ||||||||||||||||
Compensation, taxes and benefits | 4,196 | 3,827 | 7,692 | 7,521 | 6,914 | |||||||||||
Office occupancy | 1,178 | 1,093 | 2,151 | 2,173 | 1,966 | |||||||||||
Computer processing | 462 | 470 | 916 | 861 | 733 | |||||||||||
Directors compensation | 388 | 317 | 560 | 493 | 494 | |||||||||||
Professional fees | 370 | 216 | 674 | 518 | 504 | |||||||||||
FDIC insurance premiums | 332 | 625 | 946 | 132 | 35 | |||||||||||
Advertising | 166 | 185 | 330 | 534 | 594 | |||||||||||
Office supplies | 64 | 54 | 207 | 195 | 201 | |||||||||||
Loss on foreclosed real estate, net | 31 | 9 | 36 | 1 | — | |||||||||||
Other expenses | 586 | 600 | 1,029 | 1,026 | 981 | |||||||||||
Total noninterest expense | 7,773 | 7,396 | 14,541 | 13,454 | 12,422 | |||||||||||
Income (loss) before tax provision (benefit) | 1,428 | 814 | 2,811 | (878 | ) | 1,637 | ||||||||||
Income tax provision (benefit) | 435 | 206 | 818 | (566 | ) | 217 | ||||||||||
Net income (loss) | $ | 993 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | |||||
Earnings (loss) per share—basic and diluted | $ | 0.15 | $ | 0.09 | $ | 0.29 | $ | (0.05 | ) | $ | 0.20 | |||||
F-3
Table of Contents
CONSOLIDATED STATEMENTSOF CHANGESIN STOCKHOLDERS’ EQUITY
(Dollars in thousands) | Common Stock | Paid-in Capital | Retained Earnings | ||||||||
Balance at December 31, 2007 | $ | 76 | $ | 33,483 | $ | 24,233 | |||||
ESOP shares released—19,889 shares | — | (29 | ) | — | |||||||
Dividends paid ($0.23 per common share) | — | — | (614 | ) | |||||||
Stock based compensation—1,000 shares awarded | — | — | (4 | ) | |||||||
Stock based compensation—29,246 shares vested | — | — | — | ||||||||
Stock based compensation—options | — | 183 | — | ||||||||
Treasury stock acquired—241,840 shares | — | — | — | ||||||||
Comprehensive income: | |||||||||||
Net income | — | — | (312 | ) | |||||||
Net change in unrealized holding gain on available-for-sale securities, net of tax effect | |||||||||||
Comprehensive income | — | — | — | ||||||||
Balance at December 31, 2008 | 76 | 33,637 | 23,303 | ||||||||
ESOP shares released—19,889 shares | — | (87 | ) | — | |||||||
Dividends paid ($0.17 per common share) | — | — | (447 | ) | |||||||
Stock based compensation—29,446 shares vested | — | — | — | ||||||||
Stock based compensation—options | — | 206 | — | ||||||||
Treasury stock acquired—4,028 shares | — | — | — | ||||||||
Comprehensive income: | |||||||||||
Net income | — | — | 1,993 | ||||||||
Net change in unrealized holding gain on available-for-sale securities, net of tax effect | |||||||||||
Comprehensive income | — | — | — | ||||||||
Balance at December 31, 2009 | 76 | 33,756 | 24,849 | ||||||||
Dividends paid ($0.06 per common share) | — | — | (157 | ) | |||||||
Stock based compensation—700 shares vested | — | — | — | ||||||||
Stock based compensation—options | — | 116 | — | ||||||||
Treasury stock acquired—207 shares | — | — | — | ||||||||
Comprehensive income: | |||||||||||
Net income | — | — | 993 | ||||||||
Net change in unrealized holding gain on available-for-sale securities, net of tax effect | |||||||||||
Comprehensive income | — | — | — | ||||||||
Balance at June 30, 2010(Unaudited) | $ | 76 | $ | 33,872 | $ | 25,685 | |||||
Balance at December 31, 2008 | 76 | 33,637 | 23,303 | ||||||||
Dividends paid ($0.11 per common share) | — | — | (290 | ) | |||||||
Stock based compensation—700 shares vested | — | — | — | ||||||||
Stock based compensation—options | — | 109 | — | ||||||||
Treasury stock acquired—81 shares | — | — | — | ||||||||
Comprehensive income: | |||||||||||
Net income | — | — | 608 | ||||||||
Net change in unrealized holding gain on available-for-sale securities, net of tax effect | |||||||||||
Comprehensive income | — | — | — | ||||||||
Balance at June 30, 2009(Unaudited) | $ | 76 | $ | 33,746 | $ | 23,621 | |||||
F-4
Table of Contents
Unearned | Unearned Stock Awards | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||
$ | (2,335 | ) | $ | (995 | ) | $ | (3,889 | ) | $ | (116 | ) | $ | 50,457 | |||||
199 | — | — | — | 170 | ||||||||||||||
— | — | — | — | (614 | ) | |||||||||||||
— | (9 | ) | 13 | — | — | |||||||||||||
— | 324 | — | — | 324 | ||||||||||||||
— | — | — | — | 183 | ||||||||||||||
— | — | (2,231 | ) | — | (2,231 | ) | ||||||||||||
— | — | — | — | — | ||||||||||||||
|
(2,388 |
) |
|
— |
| |||||||||||||
— | — | — | — | (2,700 | ) | |||||||||||||
(2,136 | ) | (680 | ) | (6,107 | ) | (2,504 | ) | 45,589 | ||||||||||
199 | — | — | — | 112 | ||||||||||||||
— | — | — | — | (447 | ) | |||||||||||||
— | 325 | — | — | 325 | ||||||||||||||
— | — | — | — | 206 | ||||||||||||||
— | — | (25 | ) | — | (25 | ) | ||||||||||||
— | — | — | — | — | ||||||||||||||
|
2,555 |
|
|
— |
| |||||||||||||
— | — | — | — | 4,548 | ||||||||||||||
(1,937 | ) | (355 | ) | (6,132 | ) | 51 | 50,308 | |||||||||||
— | — | — | — | (157 | ) | |||||||||||||
— | 8 | — | — | 8 | ||||||||||||||
— | — | — | — | 116 | ||||||||||||||
— | — | (2 | ) | — | (2 | ) | ||||||||||||
— | — | — | — | — | ||||||||||||||
(46 | ) | — | ||||||||||||||||
— | — | — | — | 947 | ||||||||||||||
$ | (1,937 | ) | (347 | ) | $ | (6,134 | ) | $ | 5 | $ | 51,220 | |||||||
(2,136 | ) | (680 | ) | (6,107 | ) | (2,504 | ) | 45,589 | ||||||||||
— | — | — | — | (290 | ) | |||||||||||||
— | 8 | — | — | 8 | ||||||||||||||
— | — | — | — | 109 | ||||||||||||||
— | — | (1 | ) | — | (1 | ) | ||||||||||||
— | — | — | — | — | ||||||||||||||
|
1,869 |
|
|
— |
| |||||||||||||
— | — | — | — | 2,477 | ||||||||||||||
$ | (2,136 | ) | (672 | ) | $ | (6,108 | ) | $ | (635 | ) | $ | 47,892 | ||||||
F-5
Table of Contents
CONSOLIDATED STATEMENTSOF CASH FLOWS
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||
Net income (loss) | $ | 993 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
Provision for loan losses | 1,171 | 557 | 1,144 | 675 | 151 | |||||||||||||||
Depreciation and amortization expense | 396 | 426 | 821 | 835 | 776 | |||||||||||||||
Net amortization (accretion) from investments | 24 | 35 | 60 | 51 | (21 | ) | ||||||||||||||
Amortization of intangible assets | 17 | 17 | 34 | 34 | 34 | |||||||||||||||
Provision for deferred tax (benefit) | — | — | 704 | (1,574 | ) | 11 | ||||||||||||||
Loss (gain) on investment securities | (11 | ) | (176 | ) | (388 | ) | 3,398 | (65 | ) | |||||||||||
Stock-based compensation | 342 | 332 | 656 | 813 | 698 | |||||||||||||||
Loans originated for sale | (9,885 | ) | — | — | — | — | ||||||||||||||
Gain on sale of loans | (71 | ) | — | — | — | — | ||||||||||||||
Proceeds from sale of loans | 9,396 | — | — | — | — | |||||||||||||||
Net change in: | ||||||||||||||||||||
Accrued income receivable | 70 | 140 | 25 | (65 | ) | (130 | ) | |||||||||||||
Deferred loan fees | 39 | (18 | ) | (43 | ) | 68 | 51 | |||||||||||||
Cash surrender value of life insurance | (167 | ) | (171 | ) | (341 | ) | (315 | ) | (308 | ) | ||||||||||
Other assets | 716 | 76 | (2,291 | ) | (39 | ) | (35 | ) | ||||||||||||
Other liabilities | 208 | 501 | 222 | (110 | ) | 98 | ||||||||||||||
Net cash provided by operating activities | 3,238 | 2,327 | 2,596 | 3,459 | 2,680 | |||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Proceeds from maturities and repayments of available-for-sale securities | 3,388 | 5,489 | 10,022 | 7,501 | 12,236 | |||||||||||||||
Proceeds from sale of available-for-sale securities | 7,775 | 10,508 | 19,264 | 13,171 | 8,441 | |||||||||||||||
Proceeds from sale of held-to-maturity securities | — | — | 110 | — | — | |||||||||||||||
Proceeds from maturities of held-to-maturity securities | 217 | 27 | — | 1,190 | 1,390 | |||||||||||||||
Purchase of available-for-sale securities | (8,995 | ) | — | — | (25,017 | ) | (17,598 | ) | ||||||||||||
Purchase of held-to-maturity securities | (2,089 | ) | (1,566 | ) | (1,566 | ) | — | (250 | ) | |||||||||||
Loan originations net of principal payments | (11,365 | ) | (15,053 | ) | (42,570 | ) | (72,888 | ) | (51,656 | ) | ||||||||||
Purchase of Federal Home Loan Bank of Boston stock | — | — | — | (1,619 | ) | (734 | ) | |||||||||||||
Purchase of property and equipment | (293 | ) | (72 | ) | (212 | ) | (775 | ) | (325 | ) | ||||||||||
Proceeds from the sale of other real estate owned | 140 | — | — | — | — | |||||||||||||||
Net cash provided (used) by investing activities | (11,222 | ) | (667 | ) | (14,952 | ) | (78,437 | ) | (48,496 | ) | ||||||||||
F-6
Table of Contents
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Net change in time deposits | 6,299 | 2,442 | (3,859 | ) | 33,353 | 37,335 | ||||||||||||||
Net change in other deposit accounts | 7,056 | 8,237 | 21,764 | 8,275 | (5,135 | ) | ||||||||||||||
Advances from Federal Home Loan Bank of Boston | 13,900 | — | 52,550 | 55,915 | 46,927 | |||||||||||||||
Repayment of Advances from Federal Home Loan Bank of Boston | (18,057 | ) | (17,613 | ) | (58,418 | ) | (22,373 | ) | (30,538 | ) | ||||||||||
Net change in mortgagors’ escrow accounts | 47 | 325 | 327 | 691 | 376 | |||||||||||||||
Change in short-term borrowings | (2,290 | ) | 5,422 | 4,363 | 1,839 | 229 | ||||||||||||||
Common stock repurchased | (1 | ) | — | (25 | ) | (2,231 | ) | (2,364 | ) | |||||||||||
Cash dividends to common stockholders | (159 | ) | (289 | ) | (447 | ) | (614 | ) | (589 | ) | ||||||||||
Proceeds from exercise of options | — | — | — | — | 3 | |||||||||||||||
Net cash provided by financing activities | 6,795 | (1,476 | ) | 16,255 | 74,855 | 46,244 | ||||||||||||||
Increase (decrease) in cash and cash equivalents | (1,189 | ) | 184 | 3,899 | (123 | ) | 428 | |||||||||||||
Cash and cash equivalents at beginning of year | 12,146 | 8,247 | 8,247 | 8,370 | 7,942 | |||||||||||||||
Cash and cash equivalents at end of year | $ | 10,957 | $ | 8,431 | $ | 12,146 | $ | 8,247 | $ | 8,370 | ||||||||||
Supplemental disclosures | ||||||||||||||||||||
Non-cash investing activities: | ||||||||||||||||||||
Transfer of loans to foreclosed real estate | $ | 287 | $ | 223 | $ | 140 | $ | — | $ | — | ||||||||||
Cash paid during the year for: | ||||||||||||||||||||
Interest | $ | 5,213 | $ | 6,335 | $ | 12,283 | $ | 13,950 | $ | 13,130 | ||||||||||
Income taxes | 501 | 226 | 286 | 943 | 296 | |||||||||||||||
F-7
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
1. | Nature of Operations |
Naugatuck Valley Financial Corporation (the “Company”) was organized as a federal corporation at the direction of Naugatuck Valley Savings and Loan (the “Bank”) in connection with the mutual holding company reorganization of Naugatuck Valley Savings. The reorganization and initial public offering of Naugatuck Valley Financial was completed on September 30, 2004. In the offering, Naugatuck Valley Financial issued a majority of its outstanding shares of common stock to Naugatuck Valley Mutual Holding Company (the “MHC”), the mutual holding company parent of the Bank.
Originally organized in 1922, the Bank is a federally chartered stock savings bank which is headquartered in Naugatuck, Connecticut. The Bank provides a full range of personal banking services to individual and small business customers located primarily in the Naugatuck Valley and the immediate surrounding vicinity. It is subject to competition from other financial institutions throughout the region. The Bank is also subject to the regulations of various federal agencies and undergoes periodic examinations by those regulatory authorities.
The Bank owns the Naugatuck Valley Mortgage Servicing Corporation, which qualifies and operates as a Connecticut passive investment company pursuant to legislation.
2. | Basis of Presentation |
The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly-owned subsidiary, Naugatuck Valley Mortgage Servicing Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and income and expenses for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in economic conditions, particularly in Connecticut.
The accompanying interim consolidated statements of financial condition as of June 30, 2010, the consolidated statements of income, changes in stockholders’ equity and cash flows for the six months ended June 30, 2010 and 2009 are unaudited. The unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position at June 30, 2010, and its results of operations and cash flows for the six months ended June 30, 2010 and 2009. The results for the six-month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year. The information contained in these notes to the consolidated financial statements relating to the interim periods ended June 30, 2010 and 2009 is unaudited.
F-8
Table of Contents
Management has evaluated subsequent events for potential recognition or disclosure in the financial statements. On February 23, 2010, the Company announced its intention to acquire another bank. In addition, the MHC announced its intention to sell its approximate 60% ownership interest in the Company to the public. See Note 18 to these financial statements for additional disclosure regarding these events.
3. | Summary of Significant Accounting Policies |
The accounting and reporting policies of the Company and its subsidiary conform to generally accepted accounting principles in the United States of America and to general practices within the thrift industry. Such policies have been followed on a consistent basis. The significant accounting policies of the Company are summarized below.
Investment securities
Investments are accounted for in accordance with the intent of management at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities until maturity, they are classified as held-to-maturity. These securities are carried at historical cost adjusted for the amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income.
Securities to be held for indefinite periods of time are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported as a separate component of capital net of estimated income taxes. Effective January 1, 2008, the Company adopted the new valuation framework for fair value measurement and disclosure as specified by generally accepted accounting principles. The framework specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. See Note 17.
The Company has no securities held for trading.
Gains or losses on the sales of securities are recognized at trade date utilizing the specific identification method. Unrealized losses on securities are charged to noninterest income when the decline in fair value of a security is judged to be other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans receivable and allowance for loan losses
Loans receivable are stated at unpaid principal balance less undistributed construction loans, deferred loan fees, and allowances for loan losses.
Uncollected interest on loans receivable is accrued as earned based on rates applied to principal amounts outstanding. Recognition of income on the accrual basis is discontinued when there is sufficient question as to the collectibility of the interest. In these cases, the interest previously accrued to income is reversed, and the loans are placed on the cash basis.
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized on a level-yield basis as an adjustment to the related loan yield over its contractual life. Unamortized net fees are recognized upon early repayment of the loans.
F-9
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
3. | Summary of Significant Accounting Policies—(Continued) |
The allowance for loan losses is established by a provision charged to earnings and is maintained at a level considered adequate to provide for potential loan losses based on management’s evaluation of known and inherent risks in the loan portfolio. When a loan or portion of a loan is considered uncollectible, it is charged against the allowance for loan losses. Recoveries of loans previously charged-off are credited to the allowance when collected.
Management makes regular evaluations of the loan portfolio to determine the adequacy of the level of the allowance for loan losses. Numerous factors are considered in the evaluation, including a review of certain borrowers’ current financial status and credit standing, available collateral, loss experience in relation to outstanding loans, the overall loan portfolio quality, management’s judgment regarding prevailing and anticipated economic conditions, and other relevant factors.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Loan sales and mortgage-servicing rights
Residential mortgage loans originated and held for sale are classified separately in the consolidated statement of financial condition and reported at the lower of amortized cost or market value (based on secondary market prices). At June 30, 2010, loans held for sale approximated $561,000. There were no loans held for sale at December 31, 2009 and 2008. Gains or losses on the sale of loans are determined using the specific identification method.
The Bank sells residential mortgage loans with servicing rights retained. At the time of the sale, the Bank determines the value of the retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. If material, a portion of the gain on the sale of the loan is recognized as due to the value of the servicing rights, and a servicing asset is recorded. The Bank has had no loan sales which have resulted in the recording of a servicing asset, due to the immaterial differential between the contractual servicing fee (25 basis points) and adequate compensation, as described above.
Foreclosed real estate
Real estate properties acquired through loan foreclosure and other partial or total satisfaction of problem loans are carried at the lower of fair value or the related loan balance at the date of foreclosure.
Valuations are periodically performed by management and an allowance for losses is established if the carrying value of a property subsequently exceeds its fair value less estimated disposal costs. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs in the carrying value and expenses incurred to maintain the properties are charged to expense.
F-10
Table of Contents
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method at rates based on estimated useful lives.
Expenditures for replacements or major improvements are capitalized. Expenditures for normal maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of premises and equipment, the cost and accumulated depreciation are removed from their respective accounts and any gain or loss is included in income.
Bank owned life insurance
The cash surrender value of bank owned life insurance relates to policies on employees of the Bank for which the Bank is the beneficiary. Increases in cash surrender value are included in noninterest income in the consolidated income statements.
Income from investment advisory services, net
In conjunction with a third party, an employee of the Bank is licensed to sell non-deposit investment products, including mutual funds, annuities and other insurance products. The Bank records, as noninterest income, revenues earned from product sales in accordance with the terms of revenue sharing agreements with the third party, net of certain marketing and other expenses shared with the third party. The Bank currently employs the individual authorized to sell these products and pays most of the direct costs related to the sales activities. These costs are charged to expense as incurred, and are classified primarily in compensation and benefits expense.
Income taxes
The Company accounts for certain income and expense items differently for financial reporting purposes than for income tax purposes. Provisions for deferred taxes are being made in recognition of these temporary differences. It is the Company’s policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the consolidated statements of income.
Earnings per share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.
Accounting Standards Update
In December 2007, the FASB issued new authoritative guidance related to the accounting for Business Combinations. The objective of the guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The new standard applies prospectively to business combinations for which the acquisition date is on or after December 31, 2008.
F-11
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
3. | Summary of Significant Accounting Policies—(Continued) |
As discussed in Notes 1 and 18, the Company has announced its intention to acquire another bank which will be merged into the banking subsidiary of the Company. As a result of the new authoritative accounting guidance, the transaction will be accounted for as a purchase, and all of the assets and liabilities of the acquired bank will be re-measured and recorded at their respective fair value as of the date of acquisition.
In 2010, the FASB issued authoritative guidance expanding disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. The new guidance further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) disclosures should be provided about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required beginning January 1, 2011. The remaining disclosure requirements and clarifications made by the new guidance became effective on January 1, 2010.
In February, 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09,Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This update amends the guidance to remove the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. SEC filers must continue to evaluate subsequent events through the date the financial statements are issued. The amendment was effective and has been adopted by the Company upon issuance.
F-12
Table of Contents
In August 2009, the FASB issued ASU No. 2009-05,Fair Value Measurements and Disclosures (Topic 820)— Measuring Liabilities at Fair Value. This update applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
• | A valuation technique that uses: |
• | The quoted price of the identical liability when traded as an asset. |
• | Quoted prices for similar liabilities or similar liabilities when traded as assets. |
• | Another valuation technique that is consistent with the principles of ASC Topic 820. Two examples would be an income approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. |
The amendments in ASU 2009-05 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-05 is effective for the first reporting period beginning after issuance. The adoption of ASU 2009-05 will not have a material effect on the Company’s consolidated financial condition or results of operations.
Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the current reporting presentation. These reclassifications only changed the reporting categories but did not affect the results of operations or financial position.
4. | Investment Securities |
A summary of investment securities at June 30, 2010, and December 31, 2009 and 2008 was as follows:
(In thousands) | June 30, 2010 | December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Available-for-sale securities | $ | 35,584 | $ | 35,584 | $ | 37,623 | $ | 37,623 | $ | 63,844 | $ | 63,844 | ||||||
Held-to-maturity securities | 3,315 | 3,352 | 1,451 | 1,475 | — | — | ||||||||||||
Total investment securities | $ | 38,899 | $ | 38,936 | $ | 39,074 | $ | 39,098 | $ | 63,844 | $ | 63,844 | ||||||
F-13
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
4. | Investment Securities—(Continued) |
At June 30, 2010, the composition of the investment portfolio was as follows:
(In thousands) | Amortized Cost Basis | Gross Unrealized | Fair Value | ||||||||||
Gains | Losses | ||||||||||||
(Unaudited) | |||||||||||||
Available-for-sale securities: | |||||||||||||
U.S. government and agency obligations | |||||||||||||
From one through five years | $ | 1,026 | $ | 64 | $ | — | $ | 1,090 | |||||
From five through ten years | 500 | 4 | — | 504 | |||||||||
1,526 | 68 | — | 1,594 | ||||||||||
Mortgage-backed securities | 22,454 | 1,079 | — | 23,533 | |||||||||
Collateralized mortgage obligations | 3,029 | 17 | (75 | ) | 2,971 | ||||||||
Total debt securities | 27,009 | 1,164 | (75 | ) | 28,098 | ||||||||
Money market preferred stocks | 8,200 | — | (714 | ) | 7,486 | ||||||||
Total available-for-sale securities | $ | 35,209 | $ | 1,164 | $ | (789 | ) | $ | 35,584 | ||||
(In thousands) | Amortized Cost Basis | Gross Unrealized | Fair Value | ||||||||||
Gains | Losses | ||||||||||||
(Unaudited) | |||||||||||||
Held-to-maturity securities: | |||||||||||||
Mortgage-backed securities | $ | 3,315 | $ | 37 | $ | — | $ | 3,352 | |||||
Total held-to-maturity securities | $ | 3,315 | $ | 37 | $ | — | $ | 3,352 | |||||
At December 31, 2009, the composition of the investment portfolio was as follows:
(In thousands) | Amortized Cost Basis | Gross Unrealized | Fair Value | ||||||||||
Gains | Losses | ||||||||||||
(Audited) | |||||||||||||
Available-for-sale securities: | |||||||||||||
U.S. government and agency obligations | |||||||||||||
From one through five years | $ | 1,029 | $ | 40 | $ | — | $ | 1,069 | |||||
From five through ten years | 500 | 14 | — | 514 | |||||||||
1,529 | 54 | — | 1,583 | ||||||||||
Corporate bonds | |||||||||||||
From one through five years | 1,000 | — | (340 | ) | 660 | ||||||||
Mortgage-backed securities | 23,561 | 939 | — | 24,500 | |||||||||
Collateralized mortgage obligations | 3,091 | 13 | (104 | ) | 3,000 | ||||||||
Total debt securities | 29,181 | 1,006 | (444 | ) | 29,743 | ||||||||
Money market preferred stocks | 8,200 | — | (320 | ) | 7,880 | ||||||||
Total available-for-sale securities | $ | 37,381 | $ | 1,006 | $ | (764 | ) | $ | 37,623 | ||||
(In thousands) | Amortized Cost Basis | Gross Unrealized | Fair Value | ||||||||||
Gains | Losses | ||||||||||||
(Audited) | |||||||||||||
Held-to-maturity securities: | |||||||||||||
Mortgage-backed securities | $ | 1,451 | $ | 24 | $ | — | $ | 1,475 | |||||
Total held-to-maturity securities | $ | 1,451 | $ | 24 | $ | — | $ | 1,475 | |||||
F-14
Table of Contents
At December 31, 2008, the composition of the investment portfolio was as follows:
(In thousands) | Amortized Cost Basis | Gross Unrealized | Fair Value | ||||||||||
Gains | Losses | ||||||||||||
(Audited) | |||||||||||||
Available-for-sale securities: | |||||||||||||
U.S. government and agency obligations | |||||||||||||
From one through five years | $ | 1,037 | $ | 42 | $ | — | $ | 1,079 | |||||
From five through ten years | 500 | 25 | — | 525 | |||||||||
1,537 | 67 | — | 1,604 | ||||||||||
Municipal obligations | |||||||||||||
From five through ten years | 2,904 | 64 | — | 2,968 | |||||||||
After ten years | 5,984 | 49 | (8 | ) | 6,025 | ||||||||
8,888 | 113 | (8 | ) | 8,993 | |||||||||
Corporate bonds | |||||||||||||
From five through ten years | 1,000 | — | (710 | ) | 290 | ||||||||
Mortgage-backed securities | 42,297 | 804 | (71 | ) | 43,030 | ||||||||
Collateralized mortgage obligations | 3,339 | — | (156 | ) | 3,183 | ||||||||
Total debt securities | 57,061 | 984 | (945 | ) | 57,100 | ||||||||
Money market preferred stocks | 9,273 | — | (2,529 | ) | 6,744 | ||||||||
Total available-for-sale securities | $ | 66,334 | $ | 984 | $ | (3,474 | ) | $ | 63,844 | ||||
For the six months ended June 30, 2010 and 2009, the Company realized gross gains of $231,265 and $212,888 and gross losses of $220,000 and $37,203, respectively.
For the year ended December 31, 2009, the Company realized gross gains of $425,637 and gross losses of $37,203 compared with gross gains of $129,450 and gross losses of $100,622 for the year ended December 31, 2008, and gross gains of $68,686 and gross losses of $3,477 for the year ended December 31, 2007 on sales of investment securities. For the year ended December 31, 2009, gross gains included approximately $9,600 of gains realized on the sale of Fannie Mae preferred stock. During 2008, the Company realized an other-than-temporary impairment loss on these shares of stock, which collateralized auction rate pass through certificates, in the amount of $3.4 million.
The Company has identified other investment securities in which the fair value of the security is less than the cost of the security. This can be from an increase in interest rates since the time of purchase or from deterioration in credit quality of the issuer. All investment securities which have unrealized losses have undergone an internal impairment review.
Management’s review for impairment generally entails identification and analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and documentation of the results of these analyses. As a result of the reviews,
F-15
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
4. | Investment Securities—(Continued) |
management has determined that there has been no deterioration in credit quality subsequent to purchase, and believes that these unrealized losses are temporary and are the result of changes in market interest rates and market conditions over the past several years.
At June 30, 2010, these securities had an aggregate fair value of $2.6 million which resulted in an unrealized loss of $789,000. At December 31, 2009, these securities had an aggregate fair value of $3.4 million which resulted in unrealized losses of $764,000 as compared with an aggregate fair value of $16.7 million and unrealized losses of $3.5 million at December 31, 2008.
Unrealized losses on investment securities at June 30, 2010
The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Securities in Continuous Unrealized Loss Position Less Than 12 Months | |||||||||
(Dollars in thousands) | Number of Securities | Market Value | Unrealized Loss | ||||||
(Unaudited) | |||||||||
Collateralized mortgage obligations | 2 | $299 | $ (1) | ||||||
Total securities in unrealized loss position | 2 | $ | 299 | $ (1) | |||||
Securities in Continuous Unrealized Loss Position 12 or More Consecutive Months | |||||||||
(Dollars in thousands) | Number of Securities | Market Value | Unrealized Loss | ||||||
(Unaudited) | |||||||||
Collateralized mortgage obligations | 2 | $ | 607 | $ | (74 | ) | |||
Money market preferred stocks | 2 | 1,686 | (714 | ) | |||||
Total securities in unrealized loss position | 4 | $ | 2,293 | $ | (788 | ) | |||
Unrealized losses on investment securities at December 31, 2009
The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Securities in Continuous Unrealized Loss Position 12 or More Consecutive Months | |||||||||
(Dollars in thousands) | Number of Securities | Market Value | Unrealized Loss | ||||||
Collateralized mortgage obligations | 2 | $ | 652 | $ | (104 | ) | |||
Corporate bonds | 1 | 660 | (340 | ) | |||||
Money market preferred stocks | 2 | 2,080 | (320 | ) | |||||
Total securities in unrealized loss position | 5 | $ | 3,392 | $ | (764 | ) | |||
F-16
Table of Contents
Unrealized losses on investment securities at December 31, 2008
The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Securities in Continuous Unrealized Loss Position Less Than 12 Months | |||||||||
(Dollars in thousands) | Number of Securities | Market Value | Unrealized Loss | ||||||
Municipal obligations | 5 | $ | 2,173 | $ | (8 | ) | |||
Mortgage-backed securities | 5 | 2,761 | (18 | ) | |||||
Collateralized mortgage obligations | 2 | 792 | (114 | ) | |||||
Corporate bonds | 1 | 290 | (710 | ) | |||||
Money market preferred stocks | 9 | 6,744 | (2,529 | ) | |||||
Total securities in unrealized loss position | 22 | $ | 12,760 | $ | (3,379 | ) | |||
Securities in Continuous Unrealized Loss Position 12 or More Consecutive Months | |||||||||
(Dollars in thousands) | Number of Securities | Market Value | Unrealized Loss | ||||||
Mortgage-backed securities | 3 | $ | 1,554 | $ | (53 | ) | |||
Collateralized mortgage obligations | 3 | 2,391 | (42 | ) | |||||
Total securities in unrealized loss position | 6 | $ | 3,945 | $ | (95 | ) | |||
At June 30, 2010, and December 31, 2009 and 2008, securities with amortized costs of $18,410,095, $14,049,618 and $2,948,532, and fair values of $18,531,867, $14,382,522 and $3,098,955, respectively, were pledged as collateral to secure municipal deposits and reverse repurchase agreements.
F-17
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
5. | Loans Receivable |
A summary of loans receivable at June 30, 2010, and December 31, 2009 and 2008 is as follows:
(Dollars in thousands) | June 30, 2010 | December 31, | ||||||||||
2009 | 2008 | |||||||||||
(Unaudited) | (Audited) | |||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 225,624 | $ | 229,693 | $ | 216,201 | ||||||
Construction | 33,843 | 46,298 | 50,596 | |||||||||
Multi-family and commercial real estate | 160,149 | 134,931 | 106,028 | |||||||||
Total real estate loans | 419,616 | 410,922 | 372,825 | |||||||||
Commercial business loans | 31,899 | 31,325 | 22,567 | |||||||||
Consumer loans: | ||||||||||||
Savings accounts | 2,549 | 1,113 | 1,093 | |||||||||
Personal | 266 | 256 | 262 | |||||||||
Automobile | 185 | 230 | 271 | |||||||||
Home equity | 36,375 | 37,276 | 39,655 | |||||||||
Total consumer loans | 39,375 | 38,875 | 41,281 | |||||||||
Totals loans | 490,890 | 481,122 | 436,673 | |||||||||
Less: | ||||||||||||
Allowance for loan losses | 5,119 | 3,996 | 2,869 | |||||||||
Undisbursed construction loans | 2,766 | 3,336 | 1,299 | |||||||||
Deferred loan origination fees | 524 | 486 | 529 | |||||||||
Loans receivable, net | $ | 482,481 | $ | 473,304 | $ | 431,976 | ||||||
Weighted Average Yield | 5.63 | % | 5.67 | % | 5.85 | % | ||||||
F-18
Table of Contents
The Bank’s lending activities are conducted principally in the Naugatuck Valley area of Connecticut. The Bank’s investment in loans includes both adjustable and fixed rate loans. At June 30, 2010, and December 31, 2009 and 2008, the composition of the Bank’s investment in fixed rate loans was as follows:
Fixed Rate | |||||||||
Term to Maturity | June 30, 2010 | December 31, | |||||||
2009 | 2008 | ||||||||
(In thousands) | (Unaudited) | (Audited) | |||||||
Less than 1 year | $ | 6,821 | $ | 3,611 | $ | 1,394 | |||
1—3 years | 5,569 | 6,970 | 4,356 | ||||||
3—5 years | 5,953 | 5,906 | 4,799 | ||||||
5—10 years | 28,509 | 29,671 | 30,456 | ||||||
10—20 years | 48,053 | 50,818 | 48,759 | ||||||
Over 20 years | 157,633 | 159,940 | 142,820 | ||||||
Total loans at fixed rates | $ | 252,538 | $ | 256,916 | $ | 232,584 | |||
Adjustable rate loans have interest rate adjustment limitations and are indexed to treasury notes or FHLBB classic advances with similar repricing durations, or prime rate. At June 30, 2010, and December 31, 2009 and 2008, the Bank had the following adjustable rate loans:
Adjustable Rate | |||||||||
Rate Adjustment | June 30, 2010 | December 31, | |||||||
2009 | 2008 | ||||||||
(In thousands) | (Unaudited) | (Audited) | |||||||
Less than 1 year | $ | 99,897 | $ | 91,321 | $ | 79,525 | |||
1—3 years | 38,836 | 36,986 | 33,000 | ||||||
3—5 years | 64,948 | 55,058 | 48,883 | ||||||
5—10 years | 34,671 | 40,841 | 40,836 | ||||||
Over 10 years | — | — | 1,845 | ||||||
Total loans at adjustable rates | $ | 238,352 | $ | 224,206 | $ | 204,089 | |||
Nonperforming loans totaled approximately $12.6 million, $6.0 million and $2.7 million at June 30, 2010, and December 31, 2009 and 2008, respectively. These loans, primarily delinquent more than 90 days, were accounted for on a nonaccrual basis. The amount of income that was contractually due but not recognized on nonperforming loans totaled $525,000 for the six months ended June 30, 2010 and $328,000, $140,000 and $45,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
F-19
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
5. | Loans Receivable—(Continued) |
At June 30, 2010, the Bank had approximately $7.1 million of loans which were considered impaired, with an allocated allowance of $723,000, as compared to $744,000 and $254,000 of such loans, with an allowance allocation of $98,000 and $0, at December 31, 2009 and 2008, respectively. These loans averaged $6.8 million, $750,000 and $255,000 and paid $45,000, $23,000 and $11,000 of interest for the six months ended June 30, 2010 and for the years ended December 31, 2009 and 2008, respectively.
Transactions in the allowance for loan losses account for the six months ended June 30, 2010 and for the years ended December 31, 2009, 2008 and 2007 were as follows:
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Balance at beginning of year | $ | 3,996 | $ | 2,869 | $ | 2,869 | $ | 2,163 | $ | 2,071 | ||||||||||
Provision for loan losses | 1,171 | 557 | 1,144 | 675 | 151 | |||||||||||||||
Loans written off | (48 | ) | (11 | ) | (18 | ) | (7 | ) | (61 | ) | ||||||||||
Recoveries of loans written off | — | 1 | 1 | 38 | 2 | |||||||||||||||
Balance at end of year | $ | 5,119 | $ | 3,416 | $ | 3,996 | $ | 2,869 | $ | 2,163 | ||||||||||
At June 30, 2010, loans to related parties totaled approximately $3,286,000. New loans of approximately $184,000 were granted to these parties and principal payments of approximately $249,000 were received. During 2010, approximately $625,000 was removed from loans to related parties for individuals whose related interests changed during the year. As of December 31, 2009 and 2008, loans to related parties totaled approximately $3,976,000 and $3,845,000, respectively. For the year ended December 31, 2009, new loans of approximately $1,123,000 were granted to these parties and principal payments of approximately $992,000 were received. For the year ended December 31, 2008, new loans of approximately $14,000 were granted to these parties and principal payments of approximately $267,000 were received. During 2008, loans in the amount of $562,000 were removed from loans to related parties for individuals whose related interests changed during the year.
Related parties include directors and officers of the Bank, any respective affiliates in which they have a controlling interest, and their immediate families. For the six months ended June 30, 2010 and the years ended December 31, 2009 and 2008, all loans to related parties were performing in accordance with the original terms.
The Bank services loans for other financial institutions and agencies. These loans are originated by the Bank and then sold. The Bank continues to service these loans and remits the payments received to the purchasing institution. The amounts of these loans were approximately $15,926,000, $7,256,000 and $8,693,000 at June 30, 2010, and December 31, 2009 and 2008, respectively.
F-20
Table of Contents
6. | Premises and Equipment |
Premises and equipment at June 30, 2010, and December 31, 2009 and 2008 were summarized as follows:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | (Audited) | |||||||||||
Banking offices and branch buildings | $ | 8,469 | $ | 8,469 | $ | 8,469 | ||||||
Furniture and equipment | 3,921 | 3,651 | 3,553 | |||||||||
Land | 1,593 | 1,593 | 1,593 | |||||||||
Leasehold improvements | 1,326 | 1,326 | 1,326 | |||||||||
15,309 | 15,039 | 14,941 | ||||||||||
Accumulated depreciation and amortization | (5,467 | ) | (5,091 | ) | (4,376 | ) | ||||||
Premises and equipment, net | $ | 9,842 | $ | 9,948 | $ | 10,565 | ||||||
Depreciation and amortization expense is computed using the straight-line method over the estimated useful life of an asset. Estimated useful lives range from three to ten years for furniture and equipment, 39 years for the banking offices, and the initial lease term for leasehold improvements. Land is not depreciated. Depreciation and amortization expenses were $396,456 and $426,415 for the six months ended June 30, 2010 and 2009, and $821,257, $834,473 and $775,978 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Bank leases space for five of its branch offices. The leases for the branch offices have expiration dates ranging from 2011 through 2020, and are accounted for as operating leases. At December 31, 2009, future minimum rental income and lease payment expense were expected to be:
(In thousands) | Income | Expense | ||||
2010 | $ | 102 | $ | 320 | ||
2011 | 98 | 281 | ||||
2012 | 72 | 254 | ||||
2013 | 67 | 205 | ||||
2014 | — | 194 | ||||
Thereafter | — | 852 | ||||
Total future minimum rents | $ | 339 | $ | 2,106 | ||
During May, 2010 a tenant that was leasing space from the Bank terminated their lease. Upon termination, the Bank received thirteen months of rent. A new tenant signed a lease for this property in July 2010, and is expected to take occupancy late in the third quarter or early in the fourth quarter of 2010.
F-21
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
7. | Deposits |
Deposits and weighted average rates at June 30, 2010, and December 31, 2009 and 2008 are summarized as follows:
June 30, 2010 | December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
(Dollars in thousands) | Amount | Weighted Average Cost | Amount | Weighted Average Cost | Amount | Weighted Average Cost | ||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Certificate accounts | $ | 238,204 | 2.73 | % | $ | 231,905 | 2.95 | % | $ | 235,764 | 3.55 | % | ||||||
Regular savings accounts | 71,507 | 0.63 | % | 65,916 | 0.58 | % | 48,427 | 0.77 | % | |||||||||
Checking and NOW accounts | 59,230 | 0.08 | % | 57,319 | 0.09 | % | 52,537 | 0.08 | % | |||||||||
Money market savings accounts | 25,345 | 0.88 | % | 25,791 | 0.90 | % | 26,298 | 1.74 | % | |||||||||
Total deposits | $ | 394,286 | 1.83 | % | $ | 380,931 | 1.97 | % | $ | 363,026 | 2.55 | % | ||||||
The aggregate amount of individual certificate accounts of $100,000 or more at June 30, 2010, and December 31, 2009 and 2008 was $87,991,000, $82,940,000 and $80,795,000 respectively. Under the Emergency Economic Stabilization Act of 2008, deposits up to $250,000 are federally insured through December 31, 2013. In addition, federal law provides up to $250,000 in deposit insurance coverage for self-directed retirement accounts, such as Individual Retirement Accounts (IRAs).
The Bank is also participating in the FDIC’s Temporary Liquidity Guaranty Program (“TLGP”). Under that program, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire balance in the account until June 30, 2010, recently extended to December 31, 2010 with a possible further extension through December 31, 2011. Coverage under the TLGP is in addition to, and separate from, the coverage available under the FDIC’s general deposit insurance rules.
At June 30, 2010, and December 31, 2009 and 2008 the remaining maturities for certificate accounts were as follows:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | (Audited) | ||||||||
Certificate accounts maturing in: | |||||||||
Under 12 months | $ | 117,677 | $ | 115,648 | $ | 119,529 | |||
12 to 24 months | 88,785 | 73,704 | 22,665 | ||||||
24 to 36 months | 15,377 | 27,136 | 62,716 | ||||||
Over 36 months | 16,365 | 15,417 | 30,854 | ||||||
Total certificate accounts | $ | 238,204 | $ | 231,905 | $ | 235,764 | |||
F-22
Table of Contents
8. | Borrowed Funds |
Borrowings and advances, with calendar-year maturity dates and weighted average cost of funds at June 30, 2010, and December 31, 2009 and 2008, were as follows:
June 30, 2010 | December 31, | |||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||||||||||||
Amount Due | Weighted Average Cost | Amount Due | Weighted Average Cost | Amount Due | Weighted Average Cost | |||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Short-term borrowings | ||||||||||||||||||
Repurchase agreements | $ | 4,142 | 0.89 | % | $ | 6,431 | 0.92 | % | $ | 727 | 2.90 | % | ||||||
Long-term FHLBB advances | ||||||||||||||||||
Year of maturity: | ||||||||||||||||||
2009 | — | — | — | — | 58,418 | 3.93 | ||||||||||||
2010 | 20,491 | 1.57 | 26,548 | 3.30 | 22,742 | 3.74 | ||||||||||||
2011 | 26,629 | 2.59 | 26,629 | 2.59 | 16,262 | 3.46 | ||||||||||||
2012 | 22,801 | 2.88 | 22,801 | 2.88 | 10,522 | 4.12 | ||||||||||||
2013 | 21,087 | 2.81 | 19,187 | 2.93 | 6,789 | 3.92 | ||||||||||||
2014 | 15,693 | 2.96 | 15,693 | 2.96 | 1,993 | 3.70 | ||||||||||||
2015—2019 | 978 | 2.20 | 978 | 2.20 | 978 | 2.20 | ||||||||||||
2020—2024 | 382 | 0.18 | 382 | 0.18 | 382 | 0.18 | ||||||||||||
2025—2028 | 335 | 0.00 | 335 | 0.00 | 335 | 0.00 | ||||||||||||
Total long-term borrowings | 108,396 | 2.53 | 112,553 | 2.91 | 118,421 | 3.80 | ||||||||||||
Total borrowed funds | $ | 112,538 | 2.47 | $ | 118,984 | 2.80 | $ | 119,148 | 3.79 | |||||||||
The Bank has an agreement with Federal Home Loan Bank of Boston (“FHLBB”) providing for future credit availability of up to twenty times the amount of FHLBB stock held by the Bank, not to exceed 30% of its total assets. The Bank held $6,251,700 in FHLBB stock at June 30, 2010, and December 31, 2009 and 2008. In addition to the outstanding advances, the Bank has a $2,540,000 line of credit available from FHLBB, none of which was outstanding at June 30, 2010, and December 31, 2009 and 2008. The Bank also has a $3,500,000 line of credit available from another correspondent bank, none of which was outstanding at June 30, 2010 and December 31, 2009. $1,340,000 was outstanding on this line at December 31, 2008.
FHLBB advances are secured by a blanket lien on the Bank’s assets. Included in the amounts above are two long-term amortizing advances, which mature in 2023 and 2028 with interest rates of 0.27% and 0.00%, respectively, obtained under the Affordable Housing Program offered by FHLBB. These advances were used to provide loans, at nominal cost to the borrower, for development of low-cost housing in the Bank’s community.
Repurchase agreements generally have terms of one day, and are secured by government agency securities.
F-23
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
9. | Pension and Other Post-Retirement Benefits |
Pension Plan
Prior to September 1, 2005, the Bank participated in a multi-employer defined benefit pension plan covering all of its full time (as defined) employees who had been employed by the Bank for more than six months and were at least twenty-one years of age. Benefits under this plan became fully vested after five years of service. The Bank’s net pension cost for the period is the amount of contributions due. Total pension expense was $101,158 and $24,513 for the six months ended June 30, 2010 and 2009, and $88,000, $50,000 and $131,000 for the year ended December 31, 2009, 2008 and 2007, respectively. Current valuations of the Bank’s allocation of the plan’s pooled assets are not available. Effective September 1, 2005, the Plan was amended and as a result, is considered frozen, with no new participants being accepted. No future compensation will be considered for benefit accruals, and there will be no future credited service, service accruals, or additional accrued benefits.
Defined Contribution Plan
The Bank has a defined contribution 401(k) plan for eligible employees. The Bank provides 75% matching of employee contributions, with a maximum contribution on up to 6% of the employee’s salary. The Bank’s contribution vests over a 6 year graded vesting schedule. The Bank’s contribution to the plan was $98,643 and $93,849 for the six months ended June 30, 2010 and 2009, and $194,000, $191,000 and $168,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Directors Retirement Plan
Through December 27, 2006, the Bank sponsored a retirement and benefits plan for non-employee directors. All benefits earned were fully accrued based on a fixed amount at December 31, 2006, and were paid to the participating individuals in January, 2007.
Effective December 27, 2006, for fees and compensation earned beginning January 1, 2007, the Bank sponsors a deferred compensation plan under which non-employee directors may elect to defer up to 100% of their compensation in the form of either cash or stock-appreciation rights (“SARs”). If a deferral is made in SARs, then at the time of distribution an individual will receive in cash the value of an equivalent number of shares of the Company’s stock that could have been purchased at the time of the deferral. The individual will also receive in cash an amount equal to any dividends which would be paid on the equivalent shares during the deferral period. Under terms of the plan, an election to defer compensation, including which form (cash or SARs), must be made prior to December 31st of the preceding year. Each year the form of previous deferrals may be converted to the other form at the option of the individual participant.
Healthcare Benefits
In addition to providing pension benefits, the Bank provides certain health care benefits to retired employees. Substantially all of the Bank’s employees hired prior to February 2007 may become eligible for those benefits. The Bank’s policy is to accrue the expected cost of providing those benefits during the years that the employee renders the necessary service.
F-24
Table of Contents
The measurement date of the Healthcare Benefit Plan is the last day of the Bank’s fiscal year. As of June 30, 2010, the most recent measurement date of the Plan was December 31, 2009, as reflected in the following tables.
Obligation and Funded Status
The following table summarizes the obligation and funded status, as well as the amounts recognized in the consolidated statements of financial condition for the Healthcare Benefits Plan as of December 31, 2009 and 2008:
Healthcare Benefit Plan | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Measurement date | 12/31/2009 | 12/31/2008 | ||||||
Projected benefit obligation | $ | (361 | ) | $ | (334 | ) | ||
Fair value of plan assets | — | — | ||||||
Funded status | $ | (361 | ) | $ | (334 | ) | ||
Accrued benefit cost recognized in the statement of financial condition | $ | (361 | ) | $ | (334 | ) | ||
Net Periodic Benefit Cost and Contributions
The benefit costs and contributions related to the Healthcare Benefits plan for the years ended December 31, 2009 and 2008 were:
Healthcare Benefit Plan | |||||||
(In thousands) | 2009 | 2008 | |||||
Net periodic benefit cost | $ | 27 | $ | (32 | ) | ||
Employer contributions | 18 | 19 | |||||
Plan participants’ contributions | — | — | |||||
Benefits paid during the year | 18 | 19 |
Due to the unfunded status of the plan, the Bank expects to contribute the amount of the estimated benefit payments for the next fiscal year, which is $15,068 for the Healthcare Benefits Plan.
F-25
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
9. | Pension and Other Post-Retirement Benefits—(Continued) |
Assumptions and Effects
The actuarial assumptions used to determine the projected benefit obligations and net periodic benefit cost for the years ended December 31, 2009 and 2008 were as follows:
Healthcare Benefit Plan | ||||||
Weighted-average assumptions: | 2009 | 2008 | ||||
Discount rate | 6.250 | % | 6.875 | % | ||
Rate of compensation increase | — | — | ||||
Medical trend rate next year | 7.00 | % | 8.00 | % | ||
Ultimate medical trend rate | 5.00 | % | 5.00 | % | ||
Year ultimate trend rate is achieved | 2011 | 2011 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the Healthcare Benefits plan. At December 31, 2009, a one percentage-point increase in the assumed health care trend rates would increase the projected benefit obligation by $47,557 compared with a decrease of $40,727 if the assumed health care trend rate were to decrease by one percentage-point.
10. | Employee Stock Ownership Plan |
During 2004 the Bank implemented the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan (the “ESOP”). On September 30, 2004, the ESOP purchased 298,091 shares of the common stock of the Company. To fund the purchase, the ESOP borrowed $2,980,910 from the Company. The borrowing is at an interest rate of 4.75% and is to be repaid on a pro-rata basis in fifteen annual installments of $282,520 commencing with the quarter ended December 31, 2004 through September 30, 2019. In addition, dividends paid on the unreleased shares are used to reduce the principal balance of the loan. The collateral for the loan is the common stock of the Company purchased by the ESOP. Contributions by the Bank to the ESOP are discretionary, however, the Bank intends to make annual contributions in an aggregate amount at least equal to the principal and interest requirement on the debt.
The shares of stock purchased by the ESOP are held in a suspense account until they are released for allocation among participants. The shares will be released annually from the suspense account and the released shares will be allocated among the participants on the basis of each participant’s compensation for the year of allocation. As shares are released from collateral, the Bank recognizes compensation expense equal to the average market price of the shares during the period and the shares will be outstanding for earning per share purposes. The shares not released are reported as unearned ESOP shares in the capital accounts of the consolidated statements of financial condition. ESOP expense for the six months ended June 30, 2010 and 2009 and for the years ended December 31, 2009, 2008 and 2007 was $63,943, $60,164, $112,373, $169,056 and $226,735, respectively. At June 30, 2010 there were no unallocated ESOP shares and at December 31, 2009 and 2008, there were 19,889 unallocated ESOP shares and 193,735, 193,735 and 213,624 unreleased ESOP shares, respectively. At June 30, 2010, and December 31, 2009 and 2008, the unreleased shares had aggregate fair values of $1,201,000, $1,112,000 and $1,085,000, respectively.
F-26
Table of Contents
11. | Equity Incentive Plan |
In 2005, stockholders of the Company approved the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to 372,614 stock options and 149,045 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 521,659 shares of the Company’s common stock for issuance upon the grant or exercise of awards. Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan. Through June 30, 2010, the following awards have been made:
Date of Grant | |||||||||||||||
July 26, 2008 | December 18, 2007 | March 20, 2007 | March 21, 2006 | July 26, 2005 | |||||||||||
Option awards: | |||||||||||||||
Awarded | 1,000 | 2,000 | 7,500 | 6,500 | 354,580 | ||||||||||
Exercise price | $ | 11.10 | $ | 11.10 | $ | 12.49 | $ | 11.10 | $ | 11.10 | |||||
Maximum term | 10 | 10 | 10 | 10 | 10 | ||||||||||
Restricted stock awards: | |||||||||||||||
Awarded | 1,000 | 3,000 | 2,000 | 1,500 | 139,712 |
Stock option awards have been granted with an exercise price equal to the greater of the market price of the Company’s stock at the date of grant, or $11.10, which was the market price of the Company’s stock at the date stock option awards were initially granted under the Incentive Plan. Stock options and restricted stock awards are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis. A summary of the status of outstanding stock options at June 30, 2010, and December 31, 2009 and 2008 and changes therein was as follows:
For the Six Months Ended June 30, 2010 | For the Year Ended December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Options outstanding at beginning of year | 353,430 | $ | 11.13 | 353,580 | $ | 11.13 | 359,460 | $ | 11.13 | |||||||||
Granted | — | — | — | — | 1,000 | 11.10 | ||||||||||||
Forfeited | (5,426 | ) | 11.10 | — | — | (2,830 | ) | 11.10 | ||||||||||
Exercised | — | — | — | — | — | — | ||||||||||||
Expired | (4,800 | ) | 11.10 | (150 | ) | 11.10 | (4,050 | ) | 11.10 | |||||||||
Options outstanding at end of year | 343,204 | 11.13 | 353,430 | 11.13 | 353,580 | 11.13 | ||||||||||||
Options exercisable at end of year | 271,122 | 11.12 | 278,548 | 11.11 | 202,504 | 11.12 | ||||||||||||
Weighted-average fair value of options granted during the year | $ | — | $ | — | $ | 1.51 | ||||||||||||
F-27
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
11. | Equity Incentive Plan—(Continued) |
The Company records share-based compensation expense related to outstanding stock options and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. Both stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant.
The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to unearned stock awards. Compensation expenses related to unearned restricted shares are amortized to compensation, taxes and benefits expense over the vesting period of the restricted stock awards.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.
In determining the expected term of the option awards, the Company has estimated the expected term of the options as being equal to the average of the vesting term plus the original contractual term. The Company estimated its volatility using the historical volatility of other, similar companies during a period of time equal to the expected life of the options. The risk-free rate for the periods within the contractual life of the options is based upon the U.S. Treasury yield curve in effect at the time of grant.
Assumptions used to determine the weighted-average fair value of stock options granted were as follows:
Grant date | July 26, 2008 | December 18, 2007 | March 20, 2007 | March 21, 2006 | July 26, 2005 | |||||||||||||||
Dividend yield | 2.74 | % | 2.20 | % | 1.60 | % | 1.89 | % | 1.44 | % | ||||||||||
Expected volatility | 13.40 | % | 11.00 | % | 10.49 | % | 11.20 | % | 11.47 | % | ||||||||||
Risk-free rate | 3.56 | % | 3.63 | % | 4.48 | % | 4.61 | % | 4.18 | % | ||||||||||
Expected life in years | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | |||||||||||||||
Weighted average fair value of options at grant date | $ | 1.51 | $ | 1.18 | $ | 2.55 | $ | 2.25 | $ | 2.47 |
The Company recorded share-based compensation expense of $277,880 and $271,760 for the six months ended June 30, 2010 and 2009, and $531,743, $507,557 and $471,243 for the years ended December 31, 2009, 2008 and 2007, respectively, in connection with the stock option and restricted stock awards. At June 30, 2010, the Company has approximately $31,807 of unrecorded option expense to be recognized over the remaining vesting period of the options.
F-28
Table of Contents
12. | Income Taxes |
The Bank’s wholly-owned subsidiary, the Naugatuck Valley Mortgage Servicing Corporation, qualifies and operates as a Connecticut passive investment company pursuant to legislation. Because the subsidiary earns income from passive investments which is exempt from Connecticut Corporation Business Tax and its dividends to the Bank are exempt from state tax, the Bank no longer expects to incur state income tax expense.
Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Principal items making up the deferred income tax provision include impairment losses on investment securities for which the Company expects to realize a future benefit, a carry forward of charitable contributions, the provision for loan losses, accelerated tax depreciation and deferred mortgage fee income. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not, that some or all of the deferred tax assets will not be realized. The Company believes that all deferred tax assets will be realized in the future and that no valuation allowance is necessary.
The provision (benefit) for income taxes for the six months ended June 30, 2010 and 2009 and the years ended December 31, 2009, 2008 and 2007 consisted of:
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Current income tax expense | $ | 825 | $ | 425 | $ | 114 | $ | 1,008 | $ | 206 | ||||||||||
Deferred income tax expense (benefit), due to: | ||||||||||||||||||||
Impairment loss on investment securities | — | — | 1,165 | (1,165 | ) | — | ||||||||||||||
Reserve for loan losses | (382 | ) | (191 | ) | (389 | ) | (236 | ) | (31 | ) | ||||||||||
Deferred income | (70 | ) | (57 | ) | (65 | ) | (151 | ) | (34 | ) | ||||||||||
Charitable contributions | 80 | 47 | 36 | 16 | 88 | |||||||||||||||
Post retirement benefits | — | — | (9 | ) | 11 | 86 | ||||||||||||||
Depreciation | (18 | ) | (18 | ) | (36 | ) | (36 | ) | (73 | ) | ||||||||||
Other items | — | — | 2 | (13 | ) | (25 | ) | |||||||||||||
Total deferred income tax expense (benefit) | (390 | ) | (219 | ) | 704 | (1,574 | ) | 11 | ||||||||||||
Provision for income taxes | $ | 435 | $ | 206 | $ | 818 | $ | (566 | ) | $ | 217 | |||||||||
F-29
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
12. | Income Taxes—(Continued) |
A reconciliation of the statutory federal income tax rate applied to income before income taxes with the income tax provision is as follows:
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Income tax expense at statutory rate of 34% | $ | 486 | $ | 277 | $ | 956 | $ | (299 | ) | $ | 557 | |||||||||
Increase (decrease) in income tax expense: | ||||||||||||||||||||
Nondeductible compensation expense | 48 | 46 | 85 | 100 | 113 | |||||||||||||||
Income exempt from income tax | (99 | ) | (118 | ) | (225 | ) | (371 | ) | (456 | ) | ||||||||||
Other items, net | — | 1 | 2 | 4 | 3 | |||||||||||||||
Provision for income taxes | $ | 435 | $ | 206 | $ | 818 | $ | (566 | ) | $ | 217 | |||||||||
Effective rate of income tax expense | 30.4 | % | 25.3 | % | 29.1 | % | 64.5 | % | 13.3 | % | ||||||||||
Income taxes receivable and payable included in the balance sheet at June 30, 2010, December 31, 2009 and 2008 were:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | (Audited) | |||||||||||
Current tax receivable (payable) | $ | (44 | ) | $ | 281 | $ | 110 | |||||
Deferred tax receivable | ||||||||||||
Impariment loss on investment securities | $ | — | $ | — | $ | 1,165 | ||||||
Reserve for loan losses | 1,742 | 1,360 | 971 | |||||||||
Deferred income | 534 | 464 | 399 | |||||||||
Charitable contributions carryforward | 180 | 261 | 261 | |||||||||
Post-retirement benefits | 123 | 123 | 114 | |||||||||
Total deferred tax receivable | 2,579 | 2,208 | 2,910 | |||||||||
Deferred tax payable | ||||||||||||
Depreciation | $ | (47 | ) | $ | (65 | ) | $ | (65 | ) | |||
Available-for-sale securities | (370 | ) | (191 | ) | (13 | ) | ||||||
Total deferred tax payable | (417 | ) | (256 | ) | (78 | ) | ||||||
Net deferred tax receivable | $ | 2,162 | $ | 1,952 | $ | 2,832 | ||||||
F-30
Table of Contents
Retained earnings at June 30, 2010 includes a contingency reserve for loan losses of $1,843,000, which represents the tax reserve balance existing at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to thrift institutions. It is not anticipated that the Company will incur a federal income tax liability related to the reduction of this reserve and accordingly, deferred income taxes of $627,000 has not been recognized as of June 30, 2010.
As of June 30, 2010, the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal and Connecticut income taxes for the years 2006-2009.
13. | Consolidated Statements of Comprehensive Income |
The source of the Company’s other comprehensive income (loss) is the unrealized gains and losses on its available for sale securities.
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Net income (loss) | $ | 993 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | |||||||||
Other comprehensive income (loss): | ||||||||||||||||||||
Unrealized gain (loss) on securities available-for-sale | 144 | 2,079 | 3,121 | (5,713 | ) | 384 | ||||||||||||||
Reclassification adjustment for losses (gains) realized in net income | (11 | ) | (176 | ) | (388 | ) | 3,398 | (65 | ) | |||||||||||
Other comprehensive income (loss) before tax effect | 133 | 1,903 | 2,733 | (2,315 | ) | 319 | ||||||||||||||
Income tax expense related to items of other comprehensive income (loss) | 179 | 34 | 178 | 73 | 109 | |||||||||||||||
Other comprehensive income (loss) net of tax effect | (46 | ) | 1,869 | 2,555 | (2,388 | ) | 210 | |||||||||||||
Total comprehensive income (loss) | $ | 947 | $ | 2,477 | $ | 4,548 | $ | (2,700 | ) | $ | 1,630 | |||||||||
At December 31, 2008, the Company did not recognize approximately $714,000 of income tax benefits related to its other comprehensive loss for the year due to the uncertainty regarding its ability to realize a tax benefit from the estimated unrealized losses.
F-31
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
14. | Regulatory Capital |
The Company, as a federally chartered holding company, is not subject to regulatory capital requirements. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.
The Office of Thrift Supervision (OTS) regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at June 30, 2010, the Bank was required to maintain a minimum ratio of tangible equity capital to total tangible assets of 1.5%; a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%; a minimum ratio of Tier I capital to risk-weighted assets of 4.0% and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. As of June 30, 2010, the Bank meets all capital requirements to which it is subject.
At June 30, 2010, the Bank was considered “well capitalized” for regulatory purposes. To be categorized as well capitalized, the Bank must maintain a minimum ratio of tangible equity capital to total tangible assets of 2.0%; a minimum ratio of Tier 1 (core) capital to adjusted total assets of 5.0%; a minimum ratio of Tier I capital to risk-weighted assets of 6.0% and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 10.0%. There have been no subsequent conditions or events which management believes have changed the Bank’s status.
The following is a summary of the Bank’s actual capital as computed under the standards established by the OTS at June 30, 2010, and December 31, 2009 and 2008, respectively.
June 30, 2010 | December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Tangible Equity Ratio (to Tangible Assets) | $ | 44,352 | 7.88 | % | $ | 43,050 | 7.76 | % | $ | 40,555 | 7.58 | % | ||||||
Tier I (Core) Capital (to Adjusted Total Assets) | 44,352 | 7.88 | % | 43,050 | 7.76 | % | 40,555 | 7.58 | % | |||||||||
Tier I Risk-Based Capital (to Risk-Weighted Assets) | 44,352 | 10.24 | % | 43,050 | 10.16 | % | 40,555 | 10.36 | % | |||||||||
Total Risk-Based Capital (to Risk-Weighted Assets) | 48,748 | 11.25 | % | 47,046 | 11.10 | % | 43,423 | 11.09 | % |
F-32
Table of Contents
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. The Bank will not be able to declare or pay a cash dividend on, or repurchase any of its common stock, if the effect thereof would be to reduce the regulatory capital of the Bank to an amount below amounts required under OTS rules and regulations.
The measurement of the Bank’s capital as computed under regulatory standards differs from its measurement under generally accepted accounting principles. A reconcilement of the Bank’s capital follows:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | (Audited) | |||||||||||
Total capital as calculated under generally accepted accounting principles (GAAP Capital) | $ | 44,405 | $ | 43,171 | $ | 38,197 | ||||||
Adjustments to reconcile Total GAAP Capital to Regulatory Capital: | ||||||||||||
Intangible assets | (70 | ) | (87 | ) | (121 | ) | ||||||
Accumulated other comprehensive income from available-for-sale securities | 17 | (34 | ) | 2,479 | ||||||||
Tier I Risk-Based Capital | 44,352 | 43,050 | 40,555 | |||||||||
Includible portion of allowance for loan losses | 4,396 | 3,996 | 2,868 | |||||||||
Total Risk-Based Capital | $ | 48,748 | $ | 47,046 | $ | 43,423 | ||||||
On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in the Bank that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.
F-33
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
15. | Earnings per Share |
Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed in a manner similar to basic net income per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. For the six months ended June 30, 2010 and for the years ended December 31, 2009 and December 31, 2008, anti-dilutive options excluded from the calculations totaled $335,704, 345,930 and 346,080 options, respectively (with an exercise price of $11.10) and 7,500 options in each period (with an exercise price of $12.49). Unreleased common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating either basic or diluted net income per common share.
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||
(Unaudited) | (Audited) | |||||||||||||||
Net income (loss) and income available to common stockholders | $ | 993 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | |||||
Weighted-average shares outstanding during the period | ||||||||||||||||
Basic | 6,829 | 6,813 | 6,812 | 6,859 | 7,118 | |||||||||||
Effect of dilutive stock options and restrictive stock awards | — | — | — | — | 17 | |||||||||||
Diluted | 6,829 | 6,813 | 6,812 | 6,859 | 7,135 | |||||||||||
Net income (loss) per common share: | ||||||||||||||||
Basic and Diluted Earnings per share | $ | 0.15 | $ | 0.09 | $ | 0.29 | $ | (0.05 | ) | $ | 0.20 | |||||
16. | Financial Instruments |
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.
F-34
Table of Contents
The following table summarizes these financial instruments and other commitments and contingent liabilities as of June 30, 2010, and December 31, 2009 and 2008:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | (Audited) | ||||||||
Commitments to extend credit: | |||||||||
Loan commitments | $ | 10,395 | $ | 10,611 | $ | 5,807 | |||
Unused lines of credit | 20,546 | 21,142 | 20,328 | ||||||
Amounts due mortgagors on construction loans | 24,457 | 28,843 | 25,855 | ||||||
Amounts due on commercial loans | 19,649 | 17,899 | 15,384 | ||||||
Commercial letters of credit | 4,191 | 4,332 | 5,125 |
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
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 are principally collateralized by mortgages on real estate, generally have fixed expiration dates or other termination clauses and may require payment of fees. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
17. | Fair Value |
The following is a summary of the carrying value and estimated fair value of the Company’s significant financial instruments as of June 30, 2010, and December 31, 2009 and 2008:
June 30, 2010 | December 31, | |||||||||||||||||
2009 | 2008 | |||||||||||||||||
(In thousands) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||
Financial Assets | ||||||||||||||||||
Cash and cash equivalents | $ | 10,957 | $ | 10,957 | $ | 12,146 | $ | 12,146 | $ | 8,247 | $ | 8,247 | ||||||
Investment securities, available-for-sale | 35,584 | 35,584 | 37,623 | 37,623 | 63,844 | 63,844 | ||||||||||||
Investment securities, held-to-maturity | 3,315 | 3,352 | 1,451 | 1,475 | — | — | ||||||||||||
Loans held for sale | 561 | 561 | — | — | — | — | ||||||||||||
Loans receivable, net | 482,481 | 493,293 | 473,304 | 476,665 | 431,976 | 440,405 | ||||||||||||
Accrued income receivable | 2,004 | 2,004 | 2,074 | 2,074 | 2,099 | 2,099 | ||||||||||||
Financial Liabilities | ||||||||||||||||||
Deposits | $ | 394,286 | $ | 393,899 | $ | 380,931 | $ | 379,176 | $ | 363,026 | $ | 358,474 | ||||||
Borrowed funds | 112,538 | 115,363 | 118,984 | 120,719 | 119,148 | 120,811 | ||||||||||||
Mortgagors’ escrow accounts | 4,935 | 4,935 | 4,888 | 4,888 | 4,562 | 4,562 |
F-35
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
17. | Fair Value—(Continued) |
Effective January 1, 2008, the Company adopted the new fair value measurement guidance, which defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standards describe three levels of inputs that may be used to measure fair values:
Level 1 | — | Quoted prices for identical instruments in active markets. | ||
Level 2 | — | Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which all significant inputs and value drivers are observable in active markets. | ||
Level 3 | — | Valuation derived from significant unobservable inputs. |
Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect the possible tax ramifications or estimated transaction costs.
The Company uses fair value measurements to record certain assets at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-downs of individual assets.
The Company used the following methods and significant assumptions to estimate the fair value of its financial instruments which are carried at fair value on a recurring basis in the financial statements:
Available-for-sale securities:
Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The Company’s available-for-sale securities that are traded on an active exchange, such as the New York Stock Exchange, are classified as Level 1. Available-for-sale securities valued using matrix pricing are classified as Level 2. During 2008, the Company transferred seven auction-rate preferred securities in the available-for-sale
F-36
Table of Contents
portfolio from Level 2 to Level 3. Market prices of comparable instruments became harder to identify due to inactive markets, which made it necessary for the Company to make adjustments to the matrix prices to compensate for the present value of expected cash flows, market liquidity, credit quality and volatility. As a result, the Company utilized Level 3 inputs of greater significance, which required the Company to move the valuation of these securities from Level 2 to Level 3. During 2009, two of the seven securities were sold and one was called at par. See Note 4.
Assets measured at fair value at June 30, 2010 are summarized below:
June 30, 2010 Carrying Value | ||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||
(Unaudited) | ||||||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||
Available-for-sale investment securities | $ | — | $ | 28,098 | $ | 7,486 | $ | 35,584 | ||||
Residential loans held for sale | — | 561 | — | 561 | ||||||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||
Impaired loans | — | 6,392 | 17 | 6,409 | ||||||||
Real estate owned | — | — | 167 | 167 |
Assets measured at fair value at December 31, 2009 are summarized below:
December 31, 2009 Carrying Value | ||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||
Available-for-sale investment securities | $ | — | $ | 29,743 | $ | 7,880 | $ | 37,623 | ||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||
Impaired loans | — | 628 | 18 | 646 | ||||||||
Real estate owned | — | — | 140 | 140 |
F-37
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
17. | Fair Value—(Continued) |
Assets measured at fair value at December 31, 2008 are summarized below:
December 31, 2008 Carrying Value | ||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||
Available-for-sale investment securities | $ | — | $ | 57,100 | $ | 6,744 | $ | 63,844 | ||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||
Impaired loans | — | 262 | 2 | 264 |
Impaired loans are carried at fair value. Collateral dependent loans are considered Level 2, as the fair value is based on an appraisal prepared using observable inputs. Non-collateral dependent loans are measured using a discounted cash flow technique and are considered to be Level 3 estimates.
The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis:
(In thousands) | For the Six Months Ended June 30, 2010 | For the Year Ended December 31, 2009 | ||||||
(Unaudited) | (Auditied) | |||||||
Balance at beginning of period | $ | 7,880 | $ | 6,744 | ||||
New purchases | — | — | ||||||
Transfer to (from) level 3 | — | — | ||||||
Increase (decrease) in fair value of securities included in accumulated other comprehensive income | (394 | ) | 2,219 | |||||
Impairment charges included in net income | — | — | ||||||
Proceeds from sale of level 3 securities | — | (83 | ) | |||||
Redemptions at par | — | (1,000 | ) | |||||
Balance at end of period | $ | 7,486 | $ | 7,880 | ||||
F-38
Table of Contents
The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.
Cash and cash equivalents—The carrying amounts reported in the statement of financial condition approximate these assets’ fair value.
Loans receivable—For variable rate loans that reprice frequently and without significant change in credit risk, fair values are based on carrying values. The fair value of other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of nonaccrual loans was estimated using the estimated fair values of the underlying collateral.
Accrued income receivable—The carrying amounts reported in the statement of financial condition approximate these assets’ fair value.
Deposits liabilities—The fair values of non-interest-bearing demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for time certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities on time deposits.
Borrowed Funds—Fair values are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.
Mortgagors’ escrow accounts—The carrying amounts reported in the statement of financial condition approximate the fair value of the mortgagors’ escrow accounts.
18. | Subsequent Events |
On February 23, 2010, the Company announced it had entered into a definitive agreement to acquire Southern Connecticut Bancorp, Inc (“SCBI”), the holding company for The Bank of Southern Connecticut. The Company also announced its mutual holding company parent, Naugatuck Valley Mutual Holding Company has adopted a Plan of Conversion and Reorganization to convert to a stock holding company by selling to the public its approximate 60% ownership interest in the Company in a transaction commonly referred to as a second step conversion. The completion of the acquisition of SCBI is contingent on the completion of the second step conversion. In addition to the completion of the second step conversion, the acquisition is contingent on the receipt of regulatory approvals, the approval of SCBI’s stockholders and other customary conditions. The acquisition is expected to be completed in the fourth calendar quarter of 2010 or first calendar quarter of 2011.
The acquisition is expected to occur immediately following the completion of the second step conversion. Upon completion of the conversion, Naugatuck Valley Savings and Loan will become the wholly-owned subsidiary of a new stock holding company (“Newco”). It is expected that Newco will retain the name “Naugatuck Valley Financial Corporation”.
F-39
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
18. | Subsequent Events—(Continued) |
As a result of the acquisition, SCBI will merge with and into Newco, with Newco as the surviving entity. SCBI shareholders will be able to elect to receive cash, shares of Newco common stock, or a combination of cash and stock, subject to proration, if necessary, to assure that 60% of SCBI’s outstanding shares are exchanged for Newco common stock and the remainder are exchanged for cash. The exchange ratio for determining the number of shares of Newco common stock to be exchanged for each share of SCBI common stock will equal $6.75 divided by the initial offering price per share to be established for Newco’s common stock in the second step conversion offering. SCBI stockholders who elect to receive stock are not expected to be subject to federal income tax on their receipt of Newco common stock. As part of the transaction, The Bank of Southern Connecticut will merge with and into Naugatuck Valley Savings and Loan, with Naugatuck Savings and Loan as the surviving entity. Naugatuck Valley Savings and Loan intends to continue to operate the four acquired banking offices of The Bank of Southern Connecticut, which are located in New Haven (two offices), Branford and North Haven, Connecticut, under the name “The Bank of Southern Connecticut.”
Information, including details of the stock offering and detailed business and financial information about Newco, NVFC and SCBI, will be provided in a prospectus and proxy statement when the stock offering commences, which is expected to occur late in the third or early in the fourth calendar quarter of 2010.
19. | Selected Quarterly Consolidated Financial Information(Unaudited) |
The following tables present quarterly consolidated information for the Company for 2009, 2008 and 2007.
For the Year Ended December 31, 2009 | ||||||||||||
(In thousands) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||
Interest and dividend income | $ | 7,141 | $ | 7,055 | $ | 7,007 | $ | 7,088 | ||||
Interest expense | 2,788 | 3,068 | 3,266 | 3,415 | ||||||||
Net interest income | 4,353 | 3,987 | 3,741 | 3,673 | ||||||||
Provision for loan losses | 285 | 302 | 272 | 285 | ||||||||
Net interest income after provision for loan losses | 4,068 | 3,685 | 3,469 | 3,388 | ||||||||
Noninterest income | 579 | 812 | 645 | 706 | ||||||||
Noninterest expense | 3,664 | 3,483 | 3,796 | 3,598 | ||||||||
Income before provision for income tax (benefit) | 983 | 1,014 | 318 | 496 | ||||||||
Provision for income tax (benefit) | 301 | 311 | 79 | 127 | ||||||||
Net income (loss) | $ | 682 | $ | 703 | $ | 239 | $ | 369 | ||||
F-40
Table of Contents
For the Year Ended December 31, 2008 | ||||||||||||||
(In thousands) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||
Interest and dividend income | $ | 7,256 | $ | 7,224 | $ | 6,877 | $ | 6,846 | ||||||
Interest expense | 3,516 | 3,499 | 3,343 | 3,546 | ||||||||||
Net interest income | 3,740 | 3,725 | 3,534 | 3,300 | ||||||||||
Provision for loan losses | 200 | 200 | 113 | 162 | ||||||||||
Net interest income after provision for loan losses | 3,540 | 3,525 | 3,421 | 3,138 | ||||||||||
Noninterest income | 300 | (2,636 | ) | 661 | 627 | |||||||||
Noninterest expense | 3,539 | 3,453 | 3,257 | 3,205 | ||||||||||
Income before provision for income tax (benefit) | 301 | (2,564 | ) | 825 | 560 | |||||||||
Provision for income tax (benefit) | (1,052 | ) | 157 | 223 | 106 | |||||||||
Net income (loss) | $ | 1,353 | $ | (2,721 | ) | $ | 602 | $ | 454 | |||||
For the Year Ended December 31, 2007 | ||||||||||||
(In thousands) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||
Interest and dividend income | $ | 6,632 | $ | 6,384 | $ | 6,030 | $ | 5,984 | ||||
Interest expense | 3,494 | 3,394 | 3,189 | 3,097 | ||||||||
Net interest income | 3,138 | 2,990 | 2,841 | 2,887 | ||||||||
Provision for loan losses | 100 | — | — | 51 | ||||||||
Net interest income after provision for loan losses | 3,038 | 2,990 | 2,841 | 2,836 | ||||||||
Noninterest income | 647 | 577 | 606 | 524 | ||||||||
Noninterest expense | 3,104 | 3,158 | 3,096 | 3,064 | ||||||||
Income before provision for income tax | 581 | 409 | 351 | 296 | ||||||||
Provision for income tax | 101 | 55 | 39 | 22 | ||||||||
Net income | $ | 480 | $ | 354 | $ | 312 | $ | 274 | ||||
F-41
Table of Contents
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and the Years Ended December 31, 2009, 2008 and 2007
20. | Parent Company Only Financial Statements |
The following financial statements are for the Company (Naugatuck Valley Financial Corporation) only, and should be read in conjunction with the consolidated financial statements of the Company.
Statements of Financial Condition
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | (Audited) | ||||||||
ASSETS | |||||||||
Cash on deposit with Naugatuck Valley Savings and Loan | $ | 2,333 | $ | 2,434 | $ | 1,872 | |||
Investment in subsidiary, Naugatuck Valley Savings and Loan | 44,405 | 43,171 | 38,197 | ||||||
Investment securities | 1,417 | 1,624 | 2,260 | ||||||
Loan to ESOP | 2,163 | 2,163 | 2,335 | ||||||
Deferred income taxes | 249 | 252 | 274 | ||||||
Other assets | 662 | 671 | 717 | ||||||
Total assets | $ | 51,229 | $ | 50,315 | $ | 45,655 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Liabilities | $ | 10 | $ | 7 | $ | 67 | |||
Stockholders’ equity | 51,219 | 50,308 | 45,588 | ||||||
Total liabilities and stockholders’ equity | $ | 51,229 | $ | 50,315 | $ | 45,655 | |||
Statements of Income
For the Six Months Ended June 30, | For the Year Ended December 31, | ||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||
(Unaudited) | (Audited) | ||||||||||||||||||
Interest income | $ | 73 | $ | 96 | $ | 181 | $ | 224 | $ | 351 | |||||||||
Other income | — | — | — | 1 | 1 | ||||||||||||||
Total income | 73 | 96 | 181 | 225 | 352 | ||||||||||||||
Other expense | 339 | 222 | 577 | 476 | 313 | ||||||||||||||
Income before income tax and equity in undistributed net income of subsidiary | (266 | ) | (126 | ) | (396 | ) | (251 | ) | 39 | ||||||||||
Income tax | (90 | ) | (43 | ) | (134 | ) | (85 | ) | 13 | ||||||||||
Income before equity in undistributed net income of subsidiary | (176 | ) | (83 | ) | (262 | ) | (166 | ) | 26 | ||||||||||
Equity in undistributed net income of subsidiary | 1,170 | 691 | 2,255 | (146 | ) | 1,394 | |||||||||||||
Net income (loss) | $ | 994 | $ | 608 | $ | 1,993 | $ | (312 | ) | $ | 1,420 | ||||||||
F-42
Table of Contents
Statements of Cash flows
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Net cash provided by operating activities | $ | (152 | ) | $ | 338 | $ | 61 | $ | 240 | $ | 438 | |||||||||
Cash flows from investing activities | ||||||||||||||||||||
Purchase of available-for-sale securities | — | — | — | — | (1,500 | ) | ||||||||||||||
Paydowns and maturities of available-for-sale securities | 211 | 371 | 689 | 497 | 4,234 | |||||||||||||||
Principal payments received from ESOP | — | — | 172 | 163 | 156 | |||||||||||||||
Net cash provided by investing activities | 211 | 371 | 861 | 660 | 2,890 | |||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Common stock repurchased | (1 | ) | — | (25 | ) | (2,244 | ) | (2,430 | ) | |||||||||||
Cash dividends to common shareholders | (159 | ) | (289 | ) | (447 | ) | (614 | ) | (588 | ) | ||||||||||
Release of ESOP shares | — | — | 112 | 169 | 227 | |||||||||||||||
Net cash used by financing activities | (160 | ) | (289 | ) | (360 | ) | (2,689 | ) | (2,791 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents | (101 | ) | 420 | 562 | (1,789 | ) | 537 | |||||||||||||
Cash and cash equivalents at beginning of year | 2,434 | 1,872 | 1,872 | 3,661 | 3,124 | |||||||||||||||
Cash and cash equivalents at end of year | $ | 2,333 | $ | 2,292 | $ | 2,434 | $ | 1,872 | $ | 3,661 | ||||||||||
F-43
Table of Contents
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Southern Connecticut Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Southern Connecticut Bancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Southern Connecticut Bancorp, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
March 29, 2010
F-44
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2010 | December 31, | |||||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | ||||||||||||
ASSETS | ||||||||||||
Cash and due from banks (Note 2) | $ | 20,018 | $ | 2,542 | $ | 5,267 | ||||||
Short-term investments | 9,576 | 15,383 | 8,638 | |||||||||
Cash and cash equivalents | 29,594 | 17,925 | 13,905 | |||||||||
Interest bearing certificates of deposit | 99 | 347 | 1,643 | |||||||||
Available for sale securities (at fair value) (Note 3) | 3,408 | 2,220 | 5,130 | |||||||||
Federal Home Loan Bank stock (Note 7) | 66 | 66 | 66 | |||||||||
Loans receivable (Note 4) | ||||||||||||
Loans receivable | 124,577 | 112,634 | 90,424 | |||||||||
Allowance for loan losses | (2,799 | ) | (2,769 | ) | (1,183 | ) | ||||||
Loans receivable, net | 121,778 | 109,865 | 89,241 | |||||||||
Accrued interest receivable | 548 | 480 | 412 | |||||||||
Premises and equipment (Note 5) | 2,350 | 2,486 | 2,754 | |||||||||
Other real estate owned | 112 | — | — | |||||||||
Other assets held for sale (Note 18) | 373 | 373 | 375 | |||||||||
Other assets | 1,810 | 1,848 | 1,391 | |||||||||
Total assets | $ | 160,138 | $ | 135,610 | $ | 114,917 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Liabilities | ||||||||||||
Deposits (Note 6) | ||||||||||||
Noninterest bearing deposits | $ | 30,677 | $ | 29,835 | $ | 28,214 | ||||||
Interest bearing deposits | 109,663 | 87,721 | 65,756 | |||||||||
Total deposits | 140,340 | 117,556 | 93,970 | |||||||||
Repurchase agreements | 2,157 | 294 | 215 | |||||||||
Capital lease obligations (Note 8) | 1,172 | 1,175 | 1,181 | |||||||||
Accrued expenses and other liabilities | 786 | 953 | 1,010 | |||||||||
Total liabilities | 144,455 | 119,978 | 96,376 | |||||||||
Commitments and Contingencies (Notes 7, 8 and 14) | ||||||||||||
Shareholders’ Equity (Notes 10 and 15) | ||||||||||||
Preferred stock, no par value; shares authorized: 500,000; none issued | — | — | — | |||||||||
Common stock, par value 5.01; shares authorized: 5,000,000; shares issued and outstanding: -2,696,902 at June 30, 2010, 2,695,902 at December 31, 2009, and 2,688,152 at December 31, 2008 | 27 | 27 | 27 | |||||||||
Additional paid-in capital | 22,564 | 22,560 | 22,521 | |||||||||
Accumulated deficit | (6,908 | ) | (6,943 | ) | (4,035 | ) | ||||||
Accumulated other comprehensive (loss) income—net unrealized (loss) gain on available for sale securities | — | (12 | ) | 28 | ||||||||
15,683 | 15,632 | 18,541 | ||||||||||
Total liabilities and shareholders’ equity | $ | 160,138 | $ | 135,610 | $ | 114,917 | ||||||
See Notes to Consolidated Financial Statements
F-45
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF OPERATIONS
(Dollars in thousands, except earnings per share) | For the Six Months Ended June 30, | For the Year Ended December 31, | ||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||
(Unaudited) | ||||||||||||||||||
Interest Income: | ||||||||||||||||||
Interest and fees on loans | $ | 3,615 | $ | 2,879 | $ | 6,102 | $ | 6,334 | $ | 7,539 | ||||||||
Interest on securities | 9 | 89 | 121 | 196 | 259 | |||||||||||||
Interest on Federal funds sold and short-term and other investments | 42 | 105 | 203 | 470 | 1,345 | |||||||||||||
Total interest income | 3,666 | 3,073 | 6,426 | 7,000 | 9,143 | |||||||||||||
Interest Expense: | ||||||||||||||||||
Interest expense on deposits | 881 | 983 | 1,990 | 2,055 | 3,192 | |||||||||||||
Interest expense on capital lease obligations | 87 | 88 | 176 | 176 | 176 | |||||||||||||
Interest expense on repurchase agreements and other borrowings | 5 | 4 | 7 | 9 | 10 | |||||||||||||
Total interest expense | 973 | 1,075 | 2,173 | 2,240 | 3,378 | |||||||||||||
Net interest income | 2,693 | 1,998 | 4,253 | 4,760 | 5,765 | |||||||||||||
Provision for loan losses | 118 | 2,081 | 1,992 | 226 | 538 | |||||||||||||
Net interest income (loss) after provision for loan losses | 2,575 | (83 | ) | 2,261 | 4,534 | 5,227 | ||||||||||||
Noninterest Income: | ||||||||||||||||||
Service charges and fees | 235 | 274 | 507 | 577 | 610 | |||||||||||||
Gain on sale of branch | — | — | — | 875 | — | |||||||||||||
Gain on sale of loans | — | — | — | — | 45 | |||||||||||||
Gain on sale of available for sale securities | 29 | — | — | — | — | |||||||||||||
Other noninterest income | 73 | 45 | 122 | 215 | 305 | |||||||||||||
Total noninterest income | 337 | 319 | 629 | 1,667 | 960 | |||||||||||||
Noninterest Expense: | ||||||||||||||||||
Salaries and benefits | 1,519 | 1,540 | 3,089 | 3,688 | 3,460 | |||||||||||||
Occupancy and equipment | 327 | 342 | 678 | 685 | 853 | |||||||||||||
Professional services | 408 | 272 | 510 | 358 | 786 | |||||||||||||
Data processing and other outside services | 200 | 200 | 413 | 397 | 421 | |||||||||||||
FDIC Insurance | 109 | 143 | 247 | 79 | 124 | |||||||||||||
Other operating expenses | 314 | 304 | 860 | 860 | 1,117 | |||||||||||||
Total noninterest expense | 2,877 | 2,801 | 5,797 | 6,067 | 6,761 | |||||||||||||
Net income (loss) | $ | 35 | $ | (2,565 | ) | $ | (2,907 | ) | $ | 134 | $ | (574 | ) | |||||
Basic and diluted income (loss) per share | $ | 0.01 | $ | (0.95 | ) | $ | (1.08 | ) | $ | 0.05 | $ | (0.19 | ) | |||||
See Notes to Consolidated Financial Statements
F-46
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY
(Dollars in thousands) | Number of Common Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balance, December 31, 2006 | 2,941,297 | $ | 29 | $ | 24,148 | $ | (3,595 | ) | $ | (250 | ) | $ | 20,332 | ||||||||||
Comprehensive loss: | |||||||||||||||||||||||
Net loss | — | — | — | (574 | ) | — | (574 | ) | |||||||||||||||
Unrealized holding gain on available for sale securities | — | — | — | — | 210 | 210 | |||||||||||||||||
Total comprehensive loss | (364 | ) | |||||||||||||||||||||
Directors fees settled in common stock | 2,605 | — | 20 | — | — | 20 | |||||||||||||||||
Exchange of stock options | 20,532 | — | 10 | — | — | 10 | |||||||||||||||||
Exercise of stock options | 1,280 | — | 10 | — | — | 10 | |||||||||||||||||
Restricted stock compensation (Note 10) | 4,000 | — | 28 | — | — | 28 | |||||||||||||||||
Stock option compensation (Note 10) | — | — | 48 | — | — | 48 | |||||||||||||||||
Balance, December 31, 2007 | 2,969,714 | 29 | 24,264 | (4,169 | ) | (40 | ) | 20,084 | |||||||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | — | 134 | — | 134 | |||||||||||||||||
Unrealized holding gain on available for sale securities | — | — | — | — | 68 | 68 | |||||||||||||||||
Total comprehensive income | 202 | ||||||||||||||||||||||
Restricted stock compensation (Note 10) | 6,750 | — | 55 | — | — | 55 | |||||||||||||||||
Stock option compensation (Note 10) | — | — | 20 | — | — | 20 | |||||||||||||||||
Stock repurchase (Note 10) | (288,312 | ) | (2 | ) | (1,818 | ) | — | — | (1,820 | ) | |||||||||||||
Balance, December 31, 2008 | 2,688,152 | 27 | 22,521 | (4,035 | ) | 28 | 18,541 | ||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||
Net loss | — | — | — | (2,907 | ) | — | (2,907 | ) | |||||||||||||||
Unrealized holding loss on available for sale securities | — | — | — | — | (40 | ) | (40 | ) | |||||||||||||||
Total comprehensive loss | (2,947 | ) | |||||||||||||||||||||
Restricted stock compensation (Note 10) | 7,750 | — | 54 | — | — | 54 | |||||||||||||||||
Stock option compensation (Note 10) | — | — | (15 | ) | — | — | (15 | ) | |||||||||||||||
Other | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||
Balance, December 31, 2009 | 2,695,902 | $ | 27 | $ | 22,560 | $ | (6,943 | ) | $ | (12 | ) | $ | 15,632 | ||||||||||
See Notes to Consolidated Financial Statements | (Continued) |
F-47
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY, CONTINUED
(Dollars in thousands) | Number of Common Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
For the Six Month Period Ended June 30, 2010 and 2009 (unaudited) Balance, December 31, 2009 | 2,695,902 | $ | 27 | $ | 22,560 | $ | (6,943 | ) | (12 | ) | $ | 15,632 | |||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | — | 35 | — | 35 | |||||||||||||||||
Unrealized holding gain on available for sale securities | — | — | — | — | 11 | 11 | |||||||||||||||||
Total comprehensive income | 46 | ||||||||||||||||||||||
Restricted stock compensation (Note 10) | 1,000 | — | 4 | — | — | 4 | |||||||||||||||||
Other | — | — | 1 | 1 | |||||||||||||||||||
Balance, June 30, 2010 | 2,696,902 | $ | 27 | $ | 22,564 | $ | (6,908 | ) | $ | — | $ | 15,683 | |||||||||||
Balance, December 31, 2008 | 2,688,152 | 27 | 22,521 | (4,035 | ) | 28 | 18,541 | ||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||
Net loss | — | — | — | (2,565 | ) | — | (2,565 | ) | |||||||||||||||
Unrealized holding loss on available for sale securities | — | — | — | — | (28 | ) | (28 | ) | |||||||||||||||
Total comprehensive loss | (2,593 | ) | |||||||||||||||||||||
Restricted stock compensation (Note 10) | 1,750 | — | 28 | — | — | 28 | |||||||||||||||||
Stock option compensation (Note 10) | — | — | (15 | ) | — | — | (15 | ) | |||||||||||||||
Balance, June 30, 2009 | 2,689,902 | $ | 27 | $ | 22,534 | $ | (6,600 | ) | $ | — | $ | 15,961 | |||||||||||
See Notes to Consolidated Financial Statements
F-48
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF CASH FLOWS
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Cash Flows From Operations | ||||||||||||||||||||
Net income (loss) | $ | 35 | $ | (2,565 | ) | $ | (2,907 | ) | $ | 134 | $ | (574 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||||||
Amortization and accretion of premiums and discounts on investments, net | (2 | ) | 2 | 26 | 4 | — | ||||||||||||||
Provision for loan losses | 118 | 2,081 | 1,992 | 226 | 538 | |||||||||||||||
Gain on sale of branch | — | — | — | (875 | ) | — | ||||||||||||||
Share based compensation | 4 | 13 | 39 | 75 | 106 | |||||||||||||||
Loans originated for sale, net of principal payments received | — | — | — | (59 | ) | (327 | ) | |||||||||||||
Proceeds from the sale of loans | — | — | — | — | 195 | |||||||||||||||
Gain on sale of loans | — | — | — | — | (45 | ) | ||||||||||||||
Gain on sale of available for sale securities | (29 | ) | — | — | — | — | ||||||||||||||
Depreciation and amortization | 141 | 146 | 290 | 300 | 407 | |||||||||||||||
Increase in cash surrender of life insurance | (20 | ) | (22 | ) | (40 | ) | (46 | ) | (44 | ) | ||||||||||
Write-down of other assets held for sale | — | 6 | 2 | 40 | 89 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
(Decrease) increase in deferred loan fees | (24 | ) | (18 | ) | 54 | 25 | 3 | |||||||||||||
(Increase) decrease in accrued interest receivable | (68 | ) | 50 | (69 | ) | 122 | (66 | ) | ||||||||||||
(Increase) decrease in other assets | 58 | (8 | ) | (417 | ) | (96 | ) | 50 | ||||||||||||
Decrease (increase) in accrued expenses and other liabilities | (167 | ) | 31 | (58 | ) | (433 | ) | 742 | ||||||||||||
Net cash provided by (used in) operating activities | 46 | (284 | ) | (1,088 | ) | (583 | ) | 1,074 | ||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||||||
Purchases of interest bearing certificates of deposit | — | — | — | (1,643 | ) | — | ||||||||||||||
Proceeds from maturities of interest bearing certificates of deposit | 248 | 92 | 1,295 | — | — | |||||||||||||||
Purchases of available for sale securities | (39,415 | ) | (4,156 | ) | (9,206 | ) | (11,500 | ) | — | |||||||||||
Principal repayments on available for sale securities | 47 | — | — | — | — | |||||||||||||||
Proceeds from maturities/calls of available for sale securities | 36,072 | 6,000 | 12,050 | 11,700 | 3,000 | |||||||||||||||
Proceeds from sales of available for sale securities | 2,151 | — | — | — | — | |||||||||||||||
Net payments on sale of branch | — | — | — | (496 | ) | — | ||||||||||||||
Net increase in loans receivable | (12,119 | ) | (7,147 | ) | (23,198 | ) | (10,333 | ) | (11,290 | ) | ||||||||||
Purchases of premises and equipment | (5 | ) | (9 | ) | (22 | ) | (114 | ) | (64 | ) | ||||||||||
Proceeds from the sale of other real estate owned | — | — | 528 | — | — | |||||||||||||||
Acquisition of mortgage broker | — | — | — | (130 | ) | — | ||||||||||||||
Net cash used in investing activities | (13,021 | ) | (5,220 | ) | (18,553 | ) | (12,516 | ) | (8,354 | ) | ||||||||||
Cash Flows From Financing Activities | ||||||||||||||||||||
Net increase (decrease) in demand, savings and money market deposits | 3,212 | 2,947 | 5,287 | (4,732 | ) | 3,086 | ||||||||||||||
Net increase in certificates of deposit | 19,572 | 21,114 | 18,299 | 544 | 3,063 | |||||||||||||||
Net increase (decrease) in repurchase agreements | 1,863 | 794 | 80 | (330 | ) | (339 | ) | |||||||||||||
Principal repayments on capital lease obligations | (3 | ) | (3 | ) | (5 | ) | (5 | ) | (2 | ) | ||||||||||
Stock repurchased | — | — | — | (1,820 | ) | — | ||||||||||||||
Proceeds from exercise of stock options | — | — | — | — | 9 | |||||||||||||||
Net cash provided by (used in) financing activities | 24,644 | 24,852 | 23,661 | (6,343 | ) | 5,817 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 11,669 | 19,348 | 4,020 | (19,442 | ) | (1,463 | ) | |||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning | 17,925 | 13,905 | 13,905 | 33,347 | 34,810 | |||||||||||||||
Ending | $ | 29,594 | $ | 33,253 | $ | 17,925 | $ | 13,905 | $ | 33,347 | ||||||||||
F-49
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||||||||||
Cash paid for: | ||||||||||||||||||||
Interest | $ | 940 | $ | 1,035 | $ | 2,124 | $ | 2,247 | $ | 3,366 | ||||||||||
Income taxes | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | ||||||||||||||||||||
Assets and liabilities transferred in sale of branch: | ||||||||||||||||||||
Premises and equipment | $ | — | $ | — | $ | — | $ | 645 | $ | — | ||||||||||
Loans receivable | $ | — | $ | — | $ | — | $ | 7,249 | $ | — | ||||||||||
Deposits | $ | — | $ | — | $ | — | $ | 9,264 | $ | — | ||||||||||
Transfer of loans held for sale to loans receivable | $ | — | $ | — | $ | — | $ | 413 | $ | 59 | ||||||||||
Transfer of loans receivable to other real estate owned | $ | 112 | $ | 271 | $ | 528 | $ | — | $ | — | ||||||||||
Transfer of premises and equipment to assets held for sale | $ | — | $ | — | $ | — | $ | — | $ | 415 | ||||||||||
Unrealized holding gains (losses) on available for sale securities arising during the period | $ | 12 | $ | (28 | ) | $ | (40 | ) | $ | 68 | $ | 210 | ||||||||
See Notes to Consolidated Financial Statements
F-50
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009(Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Southern Connecticut Bancorp, Inc. (the “Company”) is a bank holding company headquartered in New Haven, Connecticut that was incorporated on November 8, 2000. The Company’s strategic objective is to serve as a bank holding company for a community-based commercial bank and a mortgage broker serving primarily New Haven County (the “Greater New Haven Market”). The Company owns 100% of the capital stock of The Bank of Southern Connecticut (the “Bank”), a Connecticut-chartered bank with its headquarters in New Haven, Connecticut, and 100% of the capital stock of SCB Capital Inc., operating under the name “Evergreen Financial Services” (“Evergreen”), which is licensed by the State of Connecticut Department of Banking to operate a mortage brokerage business and also operates from the Company’s headquarters in New Haven, Connecticut. The Company and its subsidiaries focus on meeting the financial services needs of consumers and small to medium-sized businesses, professionals and professional corporations, and their owners and employees in the Greater New Haven Market.
The Bank operates branches at four locations, including downtown New Haven, the Amity/Westville section of New Haven, Branford and North Haven. The Bank’s branches have a consistent, attractive appearance. Each location has an open lobby, comfortable waiting area, offices for the branch manager and a loan officer, and a conference room. The design of the branches complements the business development strategy of the Bank, affording an appropriate space to deliver personalized banking services in professional, confidential surroundings.
The Bank 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 Market. 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.
On February 22, 2010, the Company entered into an Agreement and Plan of Merger with Naugatuck Valley Financial Corporation (“NVSL”) and Newco, a corporation to be formed by NVSL to be the holding company for Naugatuck Valley Savings and Loan (“NVSL Bank”), pursuant to which the Company will merge with and into NVSL, with NVSL being the surviving corporation.
In connection with the merger, Naugatuck Valley Mutual Holding Company (“NVSL MHC”), which is presently the majority shareholder of NVSL, will reorganize and convert from a mutual holding company form of organization to a stock holding company form of organization. The stock holding company will be Newco, which will (i) offer and sell shares of its common stock as prescribed in a Plan of Conversion adopted concurrently with the execution of the Agreement and Plan of Merger and (ii) exchange shares of its common stock for shares of NVSL common stock held by persons other than NVSL MHC. Additionally, in connection with the merger, the Bank will be merged with and into NVSL Bank. See Note 19 for additional information relating to the pending merger.
F-51
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Principles of consolidation and basis of financial statement presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. All significant intercompany balances and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates.
On July 1, 2009, the Accounting Standards Codification (“ASC”) became the Financial Accounting Standard Board’s (“FASB’s”) single source of authoritative U.S. accounting and reporting standards applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. The adoption of this ASC topic changed the applicable citations and naming conventions used when referencing generally accepted accounting principles.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of June 30, 2010, the consolidated statements of operations, and cash flows and shareholders’ equity for the six months ended June 30, 2010 and 2009 are unaudited. The unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position at June 30, 2010, and its results of operations and cash flows for the six months ended June 30, 2010 and 2009. The results for the six-month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year. The information contained in these notes to the consolidated financial statements relating to the interim periods ended June 30, 2010 and 2009 is unaudited.
Significant group concentrations of credit risk
Most of the Company’s activities are with customers located within New Haven County, Connecticut. Note 3 discusses the types of securities in which the Company invests and Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations in any one industry or customer.
The following is a summary of the Company’s significant accounting policies.
Cash and cash equivalents and statement of cash flows
Cash and due from banks, Federal funds sold, and short-term investments are recognized as cash equivalents in the statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash
F-52
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash flows from loans, deposits, and short-term borrowings are reported net. The Company maintains amounts due from banks and Federal funds sold which, at times, may exceed Federally insured limits. The Company has not experienced any losses from such concentrations.
Interest-bearing certificates of deposit
Interest-bearing certificates of deposit are carried at cost. At June 30, 2010 the balance in interest-bearing certificates of deposit was $99,000, which consisted of a fixed rate certificate of deposit which matures in June 2013. At December 31, 2009 the balance in interest-bearing certificates of deposit was $347,000, which consisted of fixed rate certificates of deposit which mature in March 2010 ($248,000) and June 2013 ($99,000).
Investments in debt and marketable equity securities
Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.
Debt securities that management has the positive intent and ability to hold to maturity, if any, are classified as “held to maturity” and recorded at amortized cost. “Trading” securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Effective April 1, 2009, the Company adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment. This recent accounting guidance amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairment losses on debt and equity securities. The recent guidance replaced the “intent and ability” indication in prior guidance by specifying that (a) if the Company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When the Company does not intend to sell the security, and it is more-likely-than-not the Company will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections
F-53
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
discounted at the applicable original yield of the security. The adoption of the other-than-temporary impairment accounting guidance had no impact on the Company’s consolidated financial statements.
Prior to the adoption of the recent accounting guidance on April 1, 2009, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The sale of a held-to-maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.
Loans held for sale
Loans held for sale, if any, are primarily the guaranteed portions of SBA loans the Company has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or market value. Gains and losses on sales of loans are determined by the difference between the sales proceeds and the carrying value of the loans.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
In June 2009, the FASB issued guidance which modifies certain guidance relating to transfers and servicing of financial assets. This guidance eliminates the concept of qualifying special purpose entities, provides guidance as to when a portion of a transferred financial asset can be evaluated for sale accounting, provides additional guidance with regard to accounting for transfers of financial assets and requires additional disclosures. This guidance is effective for the Company as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
F-54
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Servicing
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of loans, a portion of the original cost of the loan is allocated to the servicing right, and if the pass-through rate to the investor is less than the note rate, to an interest-only strip, based on relative fair value. Fair value is based on a valuation model that calculates the present value of estimated future net servicing and interest income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing and interest income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing assets are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Interest only strips are also reported in other assets and are amortized into other noninterest income under the same method as servicing assets.
Servicing assets and interest-only strips are evaluated for impairment based upon the fair value of the assets as compared to amortized cost. Impairment is determined by stratifying the assets into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income, and the amortization of interest-only strips is netted against other noninterest income.
Loans receivable
Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs.
Interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
F-55
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are considered impaired. For such impaired loans, an allowance is established when the discounted cash flows (or collateral value or observable market price if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans, segregated generally by loan type, and is based on historical loss experience with adjustments for qualitative factors which are made after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer installment loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
F-56
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Other real estate owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in operations upon disposal.
Premises and equipment
Premises and equipment are stated at cost for purchased assets, and, for assets under capital lease, at the lower of fair value or the net present value of the minimum lease payments required over the term of the lease, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets which range from 3 to 20 years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Goodwill
During 2008, in connection with a business combination, the Company recorded goodwill. Goodwill represents the cost of acquired assets in excess of value ascribed to net tangible assets. Goodwill is not amortized, but is evaluated for impairment annually. Goodwill recorded on the business combination of $238,440, which had been included in other assets, was written off during 2009 based upon management’s annual impairment evaluation performed in December 2009. The write down of goodwill was included in other operating expenses at December 31, 2009.
Impairment of long-lived assets
Long-lived assets, including premises and equipment, which are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expense.
Repurchase agreements
Repurchase agreements, which are classified as secured borrowings, generally mature within one to three days from the transaction date, and are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
F-57
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Income taxes
The Company files consolidated federal and state income tax returns. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit more than fifty percent likely of being realized upon settlement with the applicable taxing authority. The Company recognizes a liability for any tax position deemed less likely than not to be sustained under examination by the relevant taxing authorities. The Company’s open tax years that remain subject to examination by the relevant taxing authorities are 2006, 2007 and 2008.
Interest and penalties related to income taxes, if any, are recorded within the provision for income taxes.
Share-based compensation
The Company accounts for share-based compensation transactions at fair value and recognizes the related expense in the consolidated statement of operations.
Related party transactions
Directors and officers of the Company and the Bank and their affiliates have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, and on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectibility or favored treatment or terms, or present other unfavorable features. Note 16 contains details regarding related party transactions.
F-58
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the shareholders’ equity section of the balance sheets, such items, along with net income or loss, are components of comprehensive income.
Segment Reporting
The Company has three reporting segments for purposes of reporting business line results, Community Banking, Mortgage Brokerage and the Holding Company. The Community Banking segment is defined as all operating results of the Bank. The Mortgage Brokerage segment is defined as the results of Evergreen and the Holding Company segment is defined as the results of Southern Connecticut Bancorp. on an unconsolidated or standalone basis. The Company uses an internal reporting system to generate information by operating segment. Estimates and allocations are used for noninterest expenses.
Fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.
The Company’s fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:
Level 1 | Quoted prices in active markets for identical assets and liabilities. | |
Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not |
F-59
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
active; and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
Prior to 2009, the fair value guidance only pertained to financial assets and liabilities. In January 2009, the provisions of the fair value accounting guidance became effective for nonfinancial assets and liabilities. The Company adopted these provisions in 2009.
In April 2009, the FASB issued guidance which addressed concerns that fair value measurements emphasized the use of an observable market transaction even when that transaction may not have been orderly or the market for that transaction may not have been active. This guidance relates to the following: (a) determining when the volume and level of activity for the asset or liability has significantly decreased; (b) identifying circumstances in which a transaction is not orderly; and (c) understanding the fair value measurement implications of both (a) and (b). The Company adopted this new guidance in 2009, and the adoption had no impact on the Company’s consolidated financial statements.
In February 2010, the FASB issued guidance which amended the existing guidance related to Fair Value Measurements and Disclosures. The amendments will require the following new fair value disclosures:
• | Separate disclosure of the significant transfers in and out of Level 1 and Level 2 fair value measurements, and a description of the reasons for the transfers; and |
• | In the rollforward of activity for Level 3 fair value measurements (significant unobservable inputs), purchases, sales, issuances, and settlements should be presented separately (on a gross basis rather than as one net number). |
In addition, the amendments clarify existing disclosure requirements as follows:
• | Fair value measurements and disclosures should be presented for each class of assets and liabilities within a line item in the statement of financial position; and |
• | Reporting entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. |
F-60
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 1. Nature of Operations and Summary of Significant Accounting Policies—(Continued)
The new disclosures and clarifications of existing disclosures were effective for the Company beginning in the quarter ended March 31, 2010, except for the disclosures included in the rollforward of activity for Level 3 fair value measurements, for which the effective date is for fiscal years beginning after December 15, 2010 and for interim periods within these financial statements.
See Note 17 for additional information regarding fair value.
Subsequent events
In May 2009, the FASB issued guidance relating to accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or available to be issued. This guidance defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The guidance became effective for the Company during the year ended December 31, 2009.
In February 2010, the FASB issued an amendment to guidance originally issued in May 2009, relating to accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or available to be issued.
This update amends the guidance to remove the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. SEC filers must continue to evaluate subsequent events through the date the financial statements are issued. The amendment was effective and has been adopted by the Company upon issuance.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform with the 2010 presentation. Such reclassifications had no effect on net income.
Note 2. Restrictions on Cash and Cash Equivalents
The Company is required to maintain reserves against its transaction accounts and non-personal time deposits. At June 30, 2010, and December 31, 2009 and 2008, the Company was required to have cash and liquid assets of approximately $646,000, $536,000 and $428,000, respectively, to meet these requirements. In addition, at June 30, 2010, and December 31, 2009 and 2008, the Company was required to maintain $125,000 in the Federal Reserve Bank for clearing purposes.
F-61
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 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 June 30, 2010, and December 31, 2009 and 2008 are as follows:
(In thousands) At June 30, 2010 (Unaudited) | Amortized Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
U.S. Treasury Bills | $ | 3,350 | $ | — | $ | — | $ | 3,350 | ||||
U.S. Government Agency Mortgage Backed Securities | 58 | — | — | 58 | ||||||||
$ | 3,408 | $ | — | $ | — | $ | 3,408 | |||||
At December 31, 2009 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
U.S. Government Agency Obligations | $ | 2,126 | $ | — | $ | (12 | ) | $ | 2,114 | ||||
U.S. Government Agency Mortgage Backed Securities | 105 | 1 | — | 106 | |||||||||
$ | 2,231 | $ | 1 | $ | (12 | ) | $ | 2,220 | |||||
At December 31, 2008 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
U.S. Government Agency Obligations | $ | 4,996 | $ | 29 | $ | — | $ | 5,025 | |||||
U.S. Government Agency Mortgage Backed Securities | 106 | — | (1 | ) | 105 | ||||||||
$ | 5,102 | $ | 29 | $ | (1 | ) | $ | 5,130 | |||||
The following table presents the Company’s available for sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position, at June 30, 2010, and December 31, 2009 and 2008:
June 30, 2010 | ||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||
(In thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
(Unaudited) | ||||||||||||||||||
U.S. Treasury Bills | $ | 3,350 | $ | — | $ | — | $ | — | $ | 3,350 | $ | — | ||||||
U.S. Government Mortgage Backed Securities | 58 | — | — | — | 58 | — | ||||||||||||
$ | 3,408 | $ | — | $ | — | $ | — | $ | 3,408 | $ | — | |||||||
F-62
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 3. Available for Sale Securities—(Continued)
December 31, 2009 | ||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||
(In thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Government Mortgage Backed Securities | $ | 2,114 | $ | 12 | $ | — | $ | — | $ | 2,114 | $ | 12 | ||||||
Totals | $ | 2,114 | $ | 12 | $ | — | $ | — | $ | 2,114 | $ | 12 | ||||||
December 31, 2008 | ||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||
(In thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Government Mortgage Backed Securities | $ | — | $ | — | $ | 105 | $ | 1 | $ | 105 | $ | 1 | ||||||
Totals | $ | — | $ | — | $ | 105 | $ | 1 | $ | 105 | $ | 1 | ||||||
At June 30, 2010 the Company had 2 available for sale securities in an unrealized loss position. At both December 31, 2009 and 2008, the Company had 2 available for sale securities in an unrealized loss position.
Management believes that none of the unrealized losses on available for sale securities are other than temporary because all of the unrealized losses in the Company’s investment portfolio are due to market interest rate changes on debt securities issued by U.S. Government agencies. Management considers the issuers of the securities to be financially sound and the Company expects to receive all contractual principal and interest related to these investments. Because the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2010, and December 31, 2009 and 2008.
The amortized cost and fair value of available for sale debt securities at June 30, 2010, and December 31, 2009 and 2008 by contractual maturity are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties.
F-63
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 3. Available for Sale Securities—(Continued)
Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary:
December 31, | ||||||||||||||||||
June 30, 2010 | 2009 | 2008 | ||||||||||||||||
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
(Unaudited) | ||||||||||||||||||
Maturity: | ||||||||||||||||||
Within one year | $ | 3,350 | $ | 3,350 | $ | — | $ | — | $ | — | $ | — | ||||||
After one but within five years | — | — | — | — | 1,000 | 1,001 | ||||||||||||
After five but within ten years | — | — | — | — | 2,496 | 2,513 | ||||||||||||
Over 10 years | — | — | 2,126 | 2,114 | 1,500 | 1,511 | ||||||||||||
Mortgage-backed securities | 58 | 58 | 105 | 106 | 106 | 105 | ||||||||||||
$ | 3,408 | $ | 3,408 | $ | 2,231 | $ | 2,220 | $ | 5,102 | $ | 5,130 | |||||||
At June 30, 2010, and December 31, 2009 and 2008, available for sale securities with a carrying value of $3,408,000, $2,220,000 and $3,118,000, respectively, were pledged as collateral under repurchase agreements with Bank customers and to secure public deposits.
During the six months ended June 30, 2010 the Company sold a FNMA security with a $2 million par value and realized a gain of $29,000. There were no sales of available for sale securities in 2009 and 2008.
Note 4. Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio at June 30, 2010, and December 31, 2009 and 2008 was as follows:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | ||||||||||||
Commercial loans secured by real estate | $ | 71,107 | $ | 63,837 | $ | 45,462 | ||||||
Commercial loans | 50,074 | 43,893 | 37,625 | |||||||||
Construction and land loans | 3,171 | 4,608 | 6,500 | |||||||||
Consumer installment loans | 354 | 448 | 936 | |||||||||
Total loans | 124,706 | 112,786 | 90,523 | |||||||||
Net deferred loan fees | (129 | ) | (152 | ) | (99 | ) | ||||||
Allowance for loan losses | (2,799 | ) | (2,769 | ) | (1,183 | ) | ||||||
Loans receivable, net | $ | 121,778 | $ | 109,865 | $ | 89,241 | ||||||
F-64
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 4. Loans Receivable and Allowance for Loan Losses—(Continued)
The Company services certain loans that it has sold without recourse to third parties. The aggregate of loans serviced for others approximated $11,142,000, $9,448,000 and $4,574,000 as of June 30, 2010, December 31, 2009 and 2008, respectively.
The balance of capitalized servicing rights, included in other assets at June 30, 2010, and December 31, 2009 and 2008, was $15,000, $17,000 and $26,000, respectively. No impairment charges related to servicing rights were recognized during the six months ended June 30, 2010 and 2009 or the years ended December 31, 2009 and 2008.
The changes in the allowance for loan losses for the six months ended June 30, 2010 and 2009, and the years ended December 31, 2009, 2008 and 2007 are as follows:
For the Six Months Ended June 30, | For the Year Ended December 31, | |||||||||||||||||||
(In thousands) | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Balance at beginning of year | $ | 2,769 | $ | 1,183 | $ | 1,183 | $ | 1,257 | $ | 1,063 | ||||||||||
Provision for loan losses | 118 | 2,081 | 1,992 | 226 | 538 | |||||||||||||||
Recoveries of loans previously charged-off: | ||||||||||||||||||||
Commercial | — | — | 10 | 37 | 11 | |||||||||||||||
Consumer | 1 | — | 1 | — | 1 | |||||||||||||||
Total recoveries | 1 | — | 11 | 37 | 12 | |||||||||||||||
Loans charged-off: | ||||||||||||||||||||
Commercial loans secured by real estate | (84 | ) | (410 | ) | (414 | ) | (90 | ) | — | |||||||||||
Commercial | (5 | ) | — | (2 | ) | — | (356 | ) | ||||||||||||
Consumer | — | — | (1 | ) | (247 | ) | — | |||||||||||||
Total charge-offs | (89 | ) | (410 | ) | (417 | ) | (337 | ) | (356 | ) | ||||||||||
Balance at end of period | $ | 2,799 | $ | 2,854 | $ | 2,769 | $ | 1,183 | $ | 1,257 | ||||||||||
At June 30, 2010, and December 31, 2009 and 2008, the unpaid principal balances of loans placed on nonaccrual status were $6,415,000, $5,363,000 and $882,000, respectively. During the six months ended June 30, 2010 and 2009, and the years ended December 31, 2009, 2008 and 2007, there were no loans considered “troubled debt restructurings”. Accruing loans contractually past due 90 days or more were $688,000, $484,000 and $384,000 at June 30, 2010, and December 31, 2009 and 2008, respectively.
The following information relates to impaired loans as of June 30, 2010 and December 31, 2009 and 2008:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | |||||||||
Impaired loans for which there is a specific allowance | $ | 4,306 | $ | 4,635 | $ | 539 | |||
Impaired loans for which there is no specific allowance | $ | 2,166 | $ | 2,469 | $ | 1,958 | |||
Allowance for loan losses related to impaired loans | $ | 1,364 | $ | 1,489 | $ | 163 | |||
Average recorded investment in impaired loans | $ | 6,795 | $ | 5,776 | $ | 1,979 | |||
F-65
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 4. Loans Receivable and Allowance for Loan Losses—(Continued)
Interest income collected and recognized on impaired loans was $47,000 and $70,000, for the six months ended June 30, 2010 and 2009, respectively, and $149,000, $143,000 and $2,000 during the years ended December 31, 2009, 2008 and 2007, respectively. If nonaccrual loans had been current throughout their terms, additional interest income of approximately $518,000 and $234,000 would have been recognized in the six months ended June 30, 2010 and 2009, and $411,000, $111,000 and $96,000 during the years ended December 31, 2009, 2008 and 2007, respectively. The Company has no commitments to lend additional funds to borrowers whose loans are impaired.
The Company’s lending activities are conducted principally in New Haven County of Connecticut. The Company grants commercial and residential real estate loans, commercial business loans and a variety of consumer loans. In addition, the Company may grant loans for the construction of residential homes, residential developments and land development projects. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent in large part upon the status of the regional economy and regional real estate market. Accordingly, the ultimate collectibility of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.
The Company has established credit policies applicable to each type of lending activity in which it engages, evaluates the creditworthiness of each customer on an individual basis and, when deemed appropriate, obtains collateral. Collateral varies by each borrower and loan type. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Important types of collateral include business assets, real estate, automobiles, marketable securities and time deposits. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows.
Note 5. Premises and Equipment
At June 30, 2010, December 31, 2009 and 2008, premises and equipment consisted of the following:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | ||||||||||||
Land | $ | 256 | $ | 256 | $ | 256 | ||||||
Premises under capital lease | 1,192 | 1,192 | 1,192 | |||||||||
Buildings and improvements | 681 | 681 | 679 | |||||||||
Leasehold improvements | 1,027 | 1,027 | 1,027 | |||||||||
Furniture and fixtures | 528 | 528 | 528 | |||||||||
Equipment | 937 | 933 | 913 | |||||||||
Software | 91 | 91 | 91 | |||||||||
4,712 | 4,708 | 4,686 | ||||||||||
Less accumulated depreciation and amortization | (2,362 | ) | (2,222 | ) | (1,932 | ) | ||||||
$ | 2,350 | $ | 2,486 | $ | 2,754 | |||||||
F-66
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 5. Premises and Equipment—(Continued)
For the six months ended June 30, 2010 and 2009 depreciation and amortization expense related to premises and equipment was $141,000 and $146,000; and for the years ended December 31, 2009 and 2008 and 2007, depreciation and amortization expense related to premises and equipment was $290,000 and $300,000, $407,000, respectively.
Premises under capital lease of $1,192,000, and related accumulated amortization of $493,000, $463,000 and $404,000, as of June 30, 2010, December 31, 2009 and 2008, respectively, are included in premises and equipment.
Note 6. Deposits
At June 30, 2010, December 31, 2009 and 2008, deposits consisted of the following:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | |||||||||
Noninterest bearing | $ | 30,677 | $ | 29,835 | $ | 28,214 | |||
Interest bearing: | |||||||||
Checking | 8,481 | 8,604 | 5,686 | ||||||
Money Market | 28,829 | 26,435 | 26,578 | ||||||
Savings | 2,483 | 2,384 | 1,492 | ||||||
Time certificates, less than $100,000 (1) | 31,236 | 27,785 | 18,066 | ||||||
Time certificates, $100,000 or more (2) | 38,634 | 22,513 | 13,934 | ||||||
Total interest bearing | 109,663 | 87,721 | 65,756 | ||||||
Total deposits | $ | 140,340 | $ | 117,556 | $ | 93,970 | |||
(1) | Included in time certificates of deposit, less than $100,000, at June 30, 2010, and December 31, 2009 and 2008 were brokered deposit; totaling $6,373,000, $9,015,000 and $5,731,000, respectively. |
(2) | Included in time certificates of deposit, $100,000 or more at June 30, 2010, and December 31, 2009 and 2008 were brokered deposits totaling $9,843,000, $4,992,000 and $2,741,000, respectively. |
Brokered deposits at June 30, 2010, and December 31, 2009 and 2008 represented:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | |||||||||
Bank customer time certificates of deposit placed through CDARS to ensure FDIC coverage | $ | 5,018 | $ | 3,370 | $ | 2,202 | |||
Time certificates of deposit purchased by the Bank through CDARS | 4,033 | 3,544 | 1,999 | ||||||
Other brokered time certificates of deposit | 7,164 | 7,093 | 4,271 | ||||||
Total brokered deposits | $ | 16,215 | $ | 14,007 | $ | 8,472 | |||
F-67
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 6. Deposits—(Continued)
Interest expense on certificates of deposit in denominations of $100,000 or more was $306,000 and $277,000 for the six months ended June 30, 2010 and 2009, respectively, and $580,000, $499,000, and $759,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Contractual maturities of time certificate of deposit at June 30, 2010, and December 31, 2009 and 2008 are summarized below:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | |||||||||
Due within: | |||||||||
1 year | $ | 39,055 | $ | 33,546 | $ | 27,615 | |||
1-2 years | 23,898 | 7,443 | 1,143 | ||||||
2-3 years | 3,760 | 7,685 | 2,940 | ||||||
3-4 years | 815 | 17 | 171 | ||||||
4-5 years | 2,342 | 1,607 | 131 | ||||||
$ | 69,870 | $ | 50,298 | $ | 32,000 | ||||
Note 7. Commitments and Contingencies
Federal Home Loan Bank borrowings and stock
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At June 30, 2010, December 31, 2009 and 2008, the Bank had the ability to borrow from the FHLB based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. There were no borrowings outstanding with the FHLB at June 30, 2010, and December 31, 2009 and 2008.
The Bank is required to maintain an investment in capital stock of the FHLB, as collateral, 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.
Employment agreements
On December 28, 2009, the Company entered into an employment agreement with its President and Chief Operating Officer effective January 1, 2010. Under the agreement, he will serve as the President and Chief Operating Officer of the Company through December 31, 2010, unless the Company terminates the agreement earlier under the terms of the agreement. The President and Chief Operating Officer will receive a base salary over the term of the agreement and is eligible for salary increases and other merit bonuses at the discretion of the Company’s board of directors.
F-68
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 7. Commitments and Contingencies—(Continued)
The President and Chief Operating Officer is provided with health and life insurance, is reimbursed for certain business expenses, and is eligible to participate in the profit sharing or 401(k) plan of the Company (or its subsidiary).
If the President and Chief Operating Officer’s employment is terminated as a result of a business combination (as defined), the President and Chief Operating Officer will, subject to certain conditions, be entitled to receive a lump sum payment in an amount equal to two times the total of the President and Chief Operating Officer’s then current base annual salary plus the amount of any bonus for the prior calendar year in the event that the employee is not offered a position with the remaining entity at the President and Chief Operating Officer’s then current base annual salary. The President and Chief Operating Officer is also entitled to a continuation of benefits under the President and Chief Operating Officer Agreement for the balance of the unexpired term of his employment, which will be paid at his option as a lump sum payment or ratably over the balance of the unexpired term.
On December 28, 2009, the Company entered into an employment agreement with its Senior Vice President and Chief Financial Officer effective January 1, 2010. Under the agreement, he will serve as the Senior Vice President and Chief Financial Officer of the Company through December 31, 2010, unless the Company terminates the agreement earlier under the terms of the agreement. The Senior Vice President and Chief Financial Officer will receive a base salary that increases over the term of the agreement and is eligible for salary increases and other merit bonuses at the discretion of the Company’s board of directors.
The Senior Vice President and Chief Financial Officer is provided with health and life insurance, is reimbursed for certain business expenses, and is eligible to participate in the profit sharing or 401(k) plan of the Company (or its subsidiary).
If the Senior Vice President and Chief Financial Officer employment is terminated as a result of a business combination (as defined), the Senior Vice President and Chief Financial Officer will, subject to certain conditions, be entitled to receive a lump sum payment in an amount equal to two times the total of the Senior Vice President and Chief Financial Officer’s then current base annual salary plus the amount of any bonus for the prior calendar year in the event that the employee is not offered a position with the remaining entity at his then current base annual salary. The Senior Vice President and Chief Financial Officer is also entitled to a continuation of benefits under the terms of his agreement for the balance of the unexpired term of his employment, which will be paid at his option as a lump sum payment or ratably over the balance of the unexpired term.
Other
During 2007, upon the retirement of the former Chief Executive Officer (“Former CEO”), the Company entered into a consulting agreement (the “Consulting Agreement”) with the Former CEO, whereby the Former CEO would serve as a goodwill ambassador and a director of the Company through December 31, 2010, and receive certain annual compensation. In December 2007, the Former CEO retired from the board of directors, however the Company agreed to continue payments under the Consulting Agreement. As a result, the Company
F-69
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 7. Commitments and Contingencies—(Continued)
considers the future payments under the Consulting Agreement to be a postretirement benefit, and recorded a liability of approximately $280,000 at December 31, 2007 for the present value of the future payments.
Litigation
At June 30, 2010, December 31, 2009 and 2008, neither the Company nor any subsidiary was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits against the Company, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interest, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. However, neither the Company nor any subsidiary is a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Note 8. Lease and Subleases
The Company leases the Bank’s main and Branford branch offices under twenty-year capital leases that have terms, including renewal periods, through 2021 and 2022, respectively. Under the terms of the leases, the Bank will pay all executory costs including property taxes, utilities and insurance. In 2006, the Company entered into an operating lease for its North Haven branch. The Company also leases the driveway to its main office and certain equipment under non-cancelable operating leases.
At December 31, 2009, future minimum lease payments to be made under these leases by year and in the aggregate were as follows:
(In thousands) | Capital | Operating | |||||
Year | Leases | Leases | |||||
2010 | $ | 188 | $ | 50 | |||
2011 | 207 | 53 | |||||
2012 | 214 | 55 | |||||
2013 | 219 | 47 | |||||
2014 | 219 | 47 | |||||
2015 and thereafter | 1,593 | 554 | |||||
2,640 | $ | 806 | |||||
Less amount representing interest | (1,465 | ) | |||||
Present value of future minimum lease payments - capital lease obligation | $ | 1,175 | |||||
Total rent expense charged to operations under the operating leases approximated $23,000 and $27,000 for the six months ended June 30, 2010 and 2009, respectively. Rental income under a lease of space in premises owned, was $12,000 for the six months ended June 30, 2010. There were no subleases in effect at June 30,
F-70
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 8. Lease and Subleases—(Continued)
2010. The Company had no rental income under subleases, or from lease of space in premises owned, for the six months ended June 30, 2009.
Total rent expense charged to operations under the operating leases approximated $74,000, $83,000 and $114,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Rental income under subleases, and a lease of space in premises owned, approximated $4,000, $10,000 and $30,000 for the years ended December 31, 2009, 2008 and 2007, respectively. There were no subleases in effect at December 31, 2009.
Note 9. Income Taxes
A reconciliation of the anticipated income tax (benefit) expense (computed by applying the statutory Federal income tax rate of 34% to the (loss) income before income taxes) to the amount reported in the statement of operations for the years ended December 31, 2009, 2008 and 2007 is as follows:
For the Year Ended December 31, | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
(Benefit) expense for income taxes at statutory Federal rate | $ | (989 | ) | $ | 45 | $ | (195 | ) | ||||
State taxes, net of Federal benefit | (143 | ) | 7 | (28 | ) | |||||||
Increase (decrease) in valuation allowance | 1,148 | (36 | ) | 239 | ||||||||
Other | (16 | ) | (16 | ) | (16 | ) | ||||||
$ | — | $ | — | $ | — | |||||||
At December 31. 2009 and 2008. the components of gross deferred tax assets and liabilities were as follows:
(In thousands) | 2009 | 2008 | ||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 1,078 | $ | 461 | ||||
Net operating loss carryforwards | 1,173 | 763 | ||||||
Unrealized loss on available for sale securities | 5 | — | ||||||
Other | 607 | 455 | ||||||
Gross deferred tax assets | 2,863 | 1,679 | ||||||
Less valuation allowance | (2,763 | ) | (1,599 | ) | ||||
Deferred tax assets—net of valuation allowance | 100 | 80 | ||||||
Deferred tax liabilities: | ||||||||
Tax bad debt reserve | 100 | 63 | ||||||
Unrealized gain on available for sale securities | — | 11 | ||||||
Depreciation | — | 6 | ||||||
Gross deferred tax liabilities | 100 | 80 | ||||||
Net deferred taxes | $ | — | $ | — | ||||
F-71
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 9. Income Taxes—(Continued)
As of December 31, 2009, the Company had net operating loss carryforwards of approximately $3,015,000 and $2,103,000 available to reduce future federal and state taxable income, respectively, which expire in 2001 through 2029.
The net changes in the valuation allowance for 2009, 2008 and 2007 were a decrease of $1,163,000 in 2009, an increase of $63,000 in 2008, and an increase of $157,000 in 2007. The changes in the valuation allowance have been allocated between operations and equity to adjust the deferred tax asset to an amount considered by management more likely than not to be realized. The portion of the change in the valuation allowance allocated to equity is to eliminate the tax benefit related to the unrealized holding losses on available for sale securities.
During 2007, the Company had a tax deduction for compensation related to the shares issued to the former Chairman that exceeded the book compensation recorded for such shares and predecessor stock options. The tax benefit for this excess tax deduction is typically recorded as an increase to shareholders’ equity. However, because the Company is in a net operating loss position for tax purposes and has a full valuation allowance recorded for its net deferred tax asset, the Company did not record the tax benefit of this deduction in 2007, and will not record such benefit until the Company’s net operating losses are fully utilized. At June 30, 2010, and December 31, 2009 and 2008, approximately $140,000 of net operating losses resulting from this deduction, and related tax benefit of approximately $55,000, have been excluded from the calculation of deferred tax assets.
Note 10. Shareholders’ Equity
Stock repurchases
In November of 2007, the Company’s Board of Directors approved the adoption of a Stock Repurchase Program of up to 147,186 shares of its common stock representing 5% of its outstanding common stock. The Company completed this stock repurchase program in July 2008.
On July 15, 2008, the Company’s Board of Directors approved the adoption of an additional Stock Repurchase Program of up to 141,126 shares representing 5% of the outstanding shares of the Company’s common stock. The Company completed this stock repurchase program in December 2008.
For the year ended December 31, 2008, the Company repurchased 288,312 of its shares for an aggregate purchase price of $1,820,312.
Income (loss) per share
The Company is required to present basic income (loss) per share and diluted income (loss) per share in its statements of operations. Basic and diluted income (loss) per share 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 instruments unless the effect is to reduce the loss or increase the income per share.
F-72
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 10. Shareholders’ Equity—(Continued)
For the Six Months Ended June 30, | ||||||||||||||||||
(Unaudited) (In thousands) | 2010 | 2009 | ||||||||||||||||
Net Income | Weighted Average Shares | Amount Per Share | Net Loss | Weighted Average Shares | Amount Per Share | |||||||||||||
Basic Income (Loss) Per Share | $ | 35 | 2,696 | $ | 0.01 | $ | (2,565 | ) | 2,689 | $ | (0.95 | ) | ||||||
Effect of Dilutive Securities Warrants Stock Options outstanding Restricted Stock | — | 2 | — | — | — | — | ||||||||||||
Diluted Income (Loss) Per Share | $ | 35 | 2,698 | $ | 0.01 | $ | (2,565 | ) | 2,689 | $ | (0.95 | ) | ||||||
For the Year Ended December 31, | ||||||||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||||||||||||||||||
Net Loss | Weighted Average Shares | Amount Per Share | Net Income | Weighted Average Shares | Amount Per Share | Net Loss | Weighted Average Shares | Amount Per Share | ||||||||||||||||||||
Basic (Loss) Income Per Share (Loss) Income available to common shareholders | $ | (2,907 | ) | 2,689 | $ | (1.08 | ) | $ | 134 | 2,849 | $ | 0.05 | $ | (574 | ) | 2,945 | $ | (0.19 | ) | |||||||||
Effect of Dilutive Securities Warrants Stock Options outstanding Restricted Stock | — | — | — | — | 9 | — | — | — | — | |||||||||||||||||||
Diluted (Loss) Income Per Share (Loss) Income available to common shareholders plus assumed conversions | $ | (2,907 | ) | 2,689 | $ | (1.08 | ) | $ | 134 | 2,858 | $ | 0.05 | $ | (574 | ) | 2,945 | $ | (0.19 | ) | |||||||||
Share-based plans
The Company has adopted three share-based plans, the 2001 Stock Option Plan (the “2001 Plan”), the 2002 Stock Option Plan (the “2002 Plan”), and the 2005 Stock Option and Award Plan (the “2005 Plan”), under which an aggregate of 460,012 shares of the Company’s common stock are reserved for issuance of the Company’s common stock, or upon the exercise of incentive options, nonqualified options and restricted stock granted under the share-based plans.
Under all three plans, the exercise price for each share covered by an option may not be less than the fair market value of a share of the Company’s common stock on the date of grant. For incentive options granted to a person who owns more than 10% of the combined voting power of the Company or any subsidiary (“ten percent shareholder”), the exercise price cannot be less than 110% of the fair market value on the date of grant.
Options under all three plans have a term of ten years unless otherwise determined at the time of grant, except that incentive options granted to any ten percent shareholder will have a term of five years unless a shorter term
F-73
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 10. Shareholders’ Equity—(Continued)
is fixed. Under the 2001 and 2002 plans, unless otherwise fixed at the time of grant, 40% of the options become exercisable one year from the date of grant, and 30% of the options become exercisable at each of the second and third anniversaries from the date of grant. Under the 2005 plan, the vesting terms of the awards is determined at the date of grant. Dividends are not paid on unexercised options.
Also, under the 2005 Plan, awards in the form of the Company’s common stock may be granted. The vesting terms of the awards are determined at the time of the grant.
Upon adoption of the 2002 Option Plan in May 2002, the Company determined that no additional options will be granted under the 2001 Option Plan.
A summary of the status of the stock options at December 31, 2009, 2008 and 2007, and changes during the year then ended, is as follows:
December 31, | ||||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | ||||||||||||||||
Outstanding at beginning of year | 203 | $ | 7.79 | 5.6 | 319 | $ | 7.69 | 6.6 | 459 | $ | 7.97 | 6.6 | ||||||||||||
Granted | — | — | — | — | — | — | ||||||||||||||||||
Exercised | — | — | — | — | (1 | ) | 7.68 | |||||||||||||||||
Exchanged | — | — | — | — | (116 | ) | — | |||||||||||||||||
Forfeited | (1 | ) | 7.11 | (116 | ) | 7.11 | (23 | ) | 7.29 | |||||||||||||||
Outstanding at end of year | 202 | 7.79 | 4.6 | 203 | 7.79 | 5.6 | 319 | 7.69 | 6.6 | |||||||||||||||
Vested or expected to vest at the end of year | 202 | $ | 7.79 | 4.5 | 201 | $ | 7.78 | 5.5 | 314 | $ | 7.68 | 6.6 | ||||||||||||
Exercisable at end of year | 202 | $ | 7.79 | 4.5 | 195 | $ | 7.80 | 5.5 | 292 | $ | 7.71 | 6.4 | ||||||||||||
There were no stock options granted or exercised during the years ended December 31, 2009, 2008 and 2007. During the years ended December 31, 2009 and 2008 the stock options had no intrinsic value. At December 31, 2007 the stock options had an intrinsic value of $29,000.
F-74
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 10. Shareholders’ Equity—(Continued)
A summary of the status of the Company’s nonvested restricted stock at December 31, 2009, 2008 and 2007, and changes during the year then ended, is as follows:
December 31, | ||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||
Number of Shares | Weighted- Average Grant- Date Fair Value | Number of Shares | Weighted- Average Grant- Date Fair Value | Number of Shares | Weighted- Average Grant- Date Fair Value | |||||||||||||
Nonvested restricted stock at beginning of the year | 9,750 | $ | 7.35 | 6,000 | $ | 7.35 | 2,500 | $ | 7.48 | |||||||||
Granted | — | — | 15,000 | 7.37 | 7,500 | 7.30 | ||||||||||||
Vested and Issued | (7,750 | ) | 7.38 | (6,750 | ) | 7.43 | (4,000 | ) | 7.35 | |||||||||
Forfeited | — | — | (4,500 | ) | 7.30 | — | — | |||||||||||
Nonvested restricted stock at end of the year | 2,000 | 7.05 | 9,750 | 7.35 | 6,000 | 7.35 | ||||||||||||
As of December 31, 2009 and 2008, there was $0 and $5,000, respectively, of unrecognized compensation cost relating to the option plans and $9,000 and $63,000, respectively, of total unrecognized compensation related to restricted stock. That cost is expected to be recognized over a weighted-average period of 1.3 years and 0.7 years, respectively. During the year ended December 31, 2009, a credit of $15,000 for options and expense of $54,000 for restricted stock, was recognized as net compensation cost. The credit for options resulted from the adjustment to compensation from the consideration of actual versus expected forfeitures in the final year of vesting. During the years ended December 31, 2008 and 2007, $20,000 and $48,000, respectively, for options, and $55,000 and $28,000, respectively, for restricted stock, was recognized as compensation cost. No tax benefit related to the compensation cost was recognized due to the uncertainty of realizing the tax benefit in the future.
Stock warrants
The Company adopted the 2001 Warrant Plan and the 2001 Supplemental Warrant Plan (the “Warrant Plans”), under which an aggregate of 77,184 shares of the Company’s common stock are reserved for issuance upon the exercise of warrants granted to non-employee directors of the Company and the Bank, and certain other individuals involved in the organization of the Bank.
Warrants under the Warrant Plans have a term of ten years. Forty percent of the warrants became exercisable one year from the date of grant, and 30% of the warrants became exercisable at each of the second and third anniversaries from the date of grant.
F-75
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 10. Shareholders’ Equity—(Continued)
A summary of the status of the warrants at December 31, 2009, 2008 and 2007, and changes during the year then ended, is as follows:
December 31, | |||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2007 | ||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | |||||||||||||
Outstanding at beginning of year | 77 | $ | 10.39 | — | 77 | $ | 10.39 | — | 77 | $ | 10.39 | — | |||||||||
Granted | — | — | — | ||||||||||||||||||
Exercised | — | — | — | ||||||||||||||||||
Terminated | — | — | — | ||||||||||||||||||
Outstanding at end of year | 77 | $ | 10.39 | 1.7 | 77 | $ | 10.39 | 2.7 | 77 | $ | 10.39 | 3.7 | |||||||||
Exercisable and vested at end of year | 77 | $ | 10.39 | 10.4 | 77 | $ | 10.39 | 2.7 | 77 | $ | 10.39 | 3.7 | |||||||||
The warrants had no intrinsic value at December 31, 2009, 2008 and 2007.
Note 11. 401(k) Profit Sharing Plan
The Bank’s employees are eligible to participate in The Bank of Southern Connecticut 401(k) Profit Sharing Plan (the “Plan”) under Section 401(k) of the Internal Revenue Code. The Plan covers substantially all employees of the Bank. Under the terms of the Plan, participants can contribute a discretionary percentage of compensation, with total annual contributions subject to Federal limitations. The Bank may make discretionary contributions to the Plan. Participants are immediately vested in their contributions and become fully vested in employer contributions after three years of service. There were no discretionary contributions made by the Bank in 2007, $30,000 in discretionary contributions made by the Bank during 2008, and no contributions made in 2009 or the six months ended June 30, 2010. The $30,000 in discretionary contributions made by the Bank in 2008 had been accrued for in 2007. The Company did not accrue a discretionary contribution in 2009 or 2010.
Note 12. Segment Reporting
The Company has three reporting segments for purposes of reporting business line results, Community Banking, Mortgage Brokerage and the Holding Company. The Community Banking segment is defined as all operating results of the Bank. The Mortgage Brokerage segment is defined as the results of Evergreen and the Holding Company segment is defined as the results of Southern Connecticut Bancorp on an unconsolidated or standalone basis. The following represents the operating results and total assets for the segments of the Company as of and for the six months ended June 30, 2010 and 2009, and for the years ended December 31, 2009 and 2008. The Company uses an internal reporting system to generate information by operating segment. Estimates and allocations are used for noninterest expenses.
F-76
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 12. Segment Reporting—(Continued)
Information about the reporting segments and reconciliation of such information to the consolidated financial statements follows:
Six Months Ended June 30, 2010 | ||||||||||||||||||
(In thousands) | Community Banking | Mortgage Brokerage | Holding Company | Elimination Entries | Consolidated Total | |||||||||||||
(Unaudited) | ||||||||||||||||||
Net interest income | $ | 2,669 | $ | 21 | $ | 3 | $ | — | $ | 2,693 | ||||||||
Provision for loan losses | 118 | — | — | — | 118 | |||||||||||||
Net interest income after credit to provision for loan losses | 2,552 | 20 | 3 | — | 2,575 | |||||||||||||
Noninterest income (loss) | 332 | (7 | ) | 12 | — | 337 | ||||||||||||
Noninterest expense | 2,710 | 107 | 60 | — | 2,877 | |||||||||||||
Net income (loss) | 174 | (94 | ) | (45 | ) | — | 35 | |||||||||||
Total assets as of June 30, 2010 | 159,129 | 132 | 15,709 | (14,833 | ) | 160,138 |
Six Months Ended June 30, 2009 | ||||||||||||||||||||
(In thousands) | Community Banking | Mortgage Brokerage | Holding Company | Elimination Entries | Consolidated Total | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net interest income | $ | 1,967 | $ | 26 | $ | 5 | $ | — | $ | 1,998 | ||||||||||
Provision for loan losses | 2,081 | — | — | — | 2,081 | |||||||||||||||
Net interest (loss) income after provision for loan losses | (114 | ) | 26 | 5 | — | (83 | ) | |||||||||||||
Noninterest income (loss) | 326 | (7 | ) | — | — | 319 | ||||||||||||||
Noninterest expense | 2,602 | 103 | 96 | — | 2,801 | |||||||||||||||
Net loss | (2,390 | ) | (84 | ) | (91 | ) | — | (2,565 | ) | |||||||||||
Goodwill | — | 238 | — | — | 238 | |||||||||||||||
Total assets as of June 30, 2009 | 135,690 | 357 | 15,980 | (14,807 | ) | 137,220 |
Year Ended December 31, 2009 | ||||||||||||||||||||
(In thousands) | Community Banking | Mortgage Brokerage | Holding Company | Elimination Entries | Consolidated Total | |||||||||||||||
Net interest income | $ | 4,174 | $ | 69 | $ | 10 | $ | — | $ | 4,253 | ||||||||||
Provision for loan losses | 1,992 | — | — | — | 1,992 | |||||||||||||||
Net interest income after provision for loan losses | 2,182 | 69 | 10 | — | 2,261 | |||||||||||||||
Noninterest income | 625 | — | 4 | — | 629 | |||||||||||||||
Noninterest expense | 5,177 | 481 | 139 | — | 5,797 | |||||||||||||||
Net loss | (2,370 | ) | (412 | ) | (125 | ) | — | (2,907 | ) | |||||||||||
Total assets as of December 31, 2009 | 134,437 | 106 | 15,653 | (14,586 | ) | 135,610 |
F-77
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 12. Segment Reporting—(Continued)
Year Ended December 31, 2008 | ||||||||||||||||||||
(In thousands) | Community Banking | Mortgage Brokerage | Holding Company | Elimination Entries | Consolidated Total | |||||||||||||||
Net interest income | $ | 4,701 | $ | 3 | $ | 56 | $ | — | $ | 4,760 | ||||||||||
Provision for loan losses | 226 | — | — | — | 226 | |||||||||||||||
Net interest income after provision for loan losses | 4,475 | 3 | 56 | — | 4,534 | |||||||||||||||
Noninterest income | 1,664 | — | 3 | — | 1,667 | |||||||||||||||
Noninterest expense | 5,778 | 101 | 188 | — | 6,067 | |||||||||||||||
Net income (loss) | 361 | (98 | ) | (129 | ) | — | 134 | |||||||||||||
Goodwill | — | 238 | — | — | 238 | |||||||||||||||
Total assets as of December 31, 2008 | 113,161 | 337 | 18,556 | (17,137 | ) | 114,917 | ||||||||||||||
Year Ended December 31, 2007 | ||||||||||||||||||||
(In thousands) | Community Banking | Mortgage Brokerage | Holding Company | Elimination Entries | Consolidated Total | |||||||||||||||
Net interest income | $ | 5,642 | $ | — | $ | 123 | $ | — | $ | 5,765 | ||||||||||
Provision for loan losses | 538 | — | — | — | 538 | |||||||||||||||
Net interest income after provision for loan losses | 5,104 | — | 123 | — | 5,227 | |||||||||||||||
Noninterest income | 947 | — | 13 | — | 960 | |||||||||||||||
Noninterest expense | 6,204 | — | 557 | — | 6,761 | |||||||||||||||
Net loss | (153 | ) | — | (421 | ) | — | (574 | ) | ||||||||||||
Goodwill | — | — | — | — | — | |||||||||||||||
Total assets as of December 31, 2007 | 127,649 | 20 | 20,223 | (17,328 | ) | 130,564 |
Note 13. Other Comprehensive Income (Loss)
Under relevant accounting guidance, certain transactions and other economic events that bypass the Company’s income statement must be displayed as other comprehensive income. The Company’s other comprehensive income (loss), which is comprised solely of the change in unrealized gains (losses) on available for sale securities, is as follows:
(Unaudited) (In Thousands) | Six Months Ended June 30, 2010 | ||||||||
Before-Tax Amount | Taxes | Net-of-Tax Amount | |||||||
Unrealized holding gains arising during period | $ | 41 | $ | — | $ | 41 | |||
Reclassification adjustment for amounts recognized in net income | 29 | — | 29 | ||||||
Unrealized holding gains on available for sale securities, net of taxes | $ | 12 | $ | — | $ | 12 | |||
F-78
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 13. Other Comprehensive Income (Loss)—(Continued)
(Unaudited) (In Thousands) | Six Months Ended June 30, 2009 | ||||||||||
Before-Tax Amount | Taxes | Net-of-Tax Amount | |||||||||
Unrealized holding losses arising during period | $ | (28 | ) | $ | — | $ | (28 | ) | |||
Reclassification adjustment for amounts recognized in net income | — | — | — | ||||||||
Unrealized holding losses on available for sale securities, net of taxes | $ | (28 | ) | $ | — | $ | (28 | ) | |||
Note 14. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis.
Management believes that the Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.
Financial instruments whose contract amounts represent credit risk were as follows at June 30, 2010, and December 31, 2009 and December 31, 2008:
June 30, 2010 | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
(Unaudited) | |||||||||
Commitments to extend credit: | |||||||||
Future loan commitments | $ | 7,348 | $ | 5,054 | $ | 16,398 | |||
Unused lines of credit | 23,775 | 28,179 | 23,158 | ||||||
Financial standby letters of credit | 3,356 | 3,359 | 3,570 | ||||||
Undisbursed construction loans | — | 437 | 237 | ||||||
$ | 34,479 | $ | 37,029 | $ | 43,363 | ||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of
F-79
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 14. Financial Instruments with Off-Balance-Sheet Risk—(Continued)
credit, is based on 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 the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts have been recorded on the Company’s consolidated balance sheet at their fair value at inception. The liability related to guarantees recorded at June 30, 2010 and December 31, 2009 and 2008 was not significant.
Note 15. Regulatory Matters
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2009, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of June 30, 2010, the most recent notification from the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since then, that management believes have changed the Bank’s category.
Evergreen offers mortgage brokerage services and is licensed by the State of Connecticut Department of Banking to operate a mortgage brokerage business. Minimum net worth requirements for mortgage brokers at June 30, 2010 increased to $100,000 compared to $50,000 at December 31, 2009 and 2008.
F-80
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 15. Regulatory Matters—(Continued)
The Company’s actual capital amounts and ratios at June 30, 2010, and December 31, 2009 and 2008 were:
(Dollars in thousands):
June 30,2010 (Unaudited) | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
Total Capital to Risk-Weighted Assets | $ | 17,371 | 12.97 | % | $ | 10,713 | 8.00 | % | N/A | N/A | ||||||
Tier 1 Capital to Risk-Weighted Assets | 15,683 | 11.71 | % | 5,356 | 4.00 | % | N/A | N/A | ||||||||
Tier 1 (Leverage) Capital to Average Assets | 15,683 | 10.89 | % | 5,761 | 4.00 | % | N/A | N/A | ||||||||
December 31, 2009 | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
Total Capital to Risk-Weighted Assets | $ | 17,290 | 13.25 | % | $ | 10,436 | 8.00 | % | N/A | N/A | ||||||
Tier 1 Capital to Risk-Weighted Assets | 15,645 | 11.99 | % | 5,218 | 4.00 | % | N/A | N/A | ||||||||
Tier 1 (Leverage) Capital to Average Assets | 15,645 | 11.24 | % | 5,569 | 4.00 | % | N/A | N/A | ||||||||
December 31,2008 | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
Total Capital to Risk-Weighted Assets | $ | 19,696 | 18.46 | % | $ | 8,537 | 8.00 | % | N/A | N/A | ||||||
Tier 1 Capital to Risk-Weighted Assets | 18,275 | 17.13 | % | 4,268 | 4.00 | % | N/A | N/A | ||||||||
Tier 1 (Leverage) Capital to Average Assets | 18,275 | 15.64 | % | 4,673 | 4.00 | % | N/A | N/A |
The Bank’s actual capital amounts and ratios at June 30, 2010, December 31, 2009, and December 31, 2008 were:
(Dollars in thousands):
June 30, 2010 (Unaudited) | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
Total Capital to Risk-Weighted Assets | $ | 16,233 | 12.22 | % | $ | 10,631 | 8.00 | % | $ | 12,620 | 10.00 | % | ||||||
Tier 1 Capital to Risk-Weighted Assets | 14,558 | 10.96 | % | 5,315 | 4.00 | % | 7,570 | 6.00 | % | |||||||||
Tier 1 (Leverage) Capital to Average Assets | 14,558 | 10.18 | % | 5,720 | 4.00 | % | 6,732 | 5.00 | % |
F-81
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 15. Regulatory Matters—(Continued)
December 31, 2009 | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
Total Capital to Risk-Weighted Assets | $ | 16,014 | 12.39 | % | $ | 10,340 | 8.00 | % | $ | 12,924 | 10.00 | % | ||||||
Tier 1 Capital to Risk-Weighted Assets | 14,384 | 11.13 | % | 5,170 | 4.00 | % | 7,755 | 6.00 | % | |||||||||
Tier 1 (Leverage) Capital to Average Assets | 14,384 | 10.44 | % | 5,512 | 4.00 | % | 6,889 | 5.00 | % | |||||||||
December 31, 2008 | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
Total Capital to Risk-Weighted Assets | $ | 17,938 | 17.09 | % | $ | 8,396 | 8.00 | % | $ | 10,495 | 10.00 | % | ||||||
Tier 1 Capital to Risk-Weighted Assets | 16,755 | 15.96 | % | 4,198 | 4.00 | % | 6,297 | 6.00 | % | |||||||||
Tier 1 (Leverage) Capital to Average Assets | 16,755 | 14.55 | % | 4,607 | 4.00 | % | 5,759 | 5.00 | % |
Restrictions on dividends, loans or advances
The Company’s ability to pay cash dividends is dependent on the Bank’s ability to pay dividends to the Company. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. Regulatory approval is required to pay cash dividends in excess of the Bank’s net earnings retained in the current year plus retained net earnings for the preceding two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements, and the Federal Reserve Board may impose further dividend restrictions on the Company. On October 23, 2008, the Bank declared a dividend of $403,000 payable to the Company.
Under Federal Reserve regulation, the Bank is also limited to the amount it may loan to the Company, unless such loans are collateralized by specified obligations. Loans or advances to the Company by the Bank are limited to 10% of the Bank’s capital stock and surplus on a secured basis. During the six months ended June 30, 2010 and the years ended December 31, 2009 and 2008, no loans or advances were made to the Company by the Bank.
Note 16. Related Party Transactions
In the normal course of business, the Company may grant loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. Such loans are transacted at terms including interest rates, similar to those available to unrelated customers.
F-82
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 16. Related Party Transactions—(Continued)
Changes in loans to such related parties during the six months ended June 30, 2010, and years ended December 31, 2009 and 2008 were as follows:
June 30, 2010 | December 31, | |||||||||||
(In thousands) | 2009 | 2008 | ||||||||||
(Unaudited) | ||||||||||||
Balance, at beginning of year | $ | 1,006 | $ | 798 | $ | 670 | ||||||
Additional loans | 914 | 870 | 1,462 | |||||||||
Repayments | (246 | ) | (662 | ) | (1,129 | ) | ||||||
Other | — | — | (204 | ) | ||||||||
Balance, end of year | $ | 1,674 | $ | 1,006 | $ | 799 | ||||||
Other related party loan transactions represent loans to related parties who either became related parties or ceased being related parties during the reported periods.
Related party deposits aggregated approximately $3,949,000, $4,207,000 and $4,337,000 as of June 30, 2010, and December 31, 2009 and 2008, respectively.
Included in professional services in both the six months ended June 30, 2010 and 2009 was approximately $51,000 in consulting fees paid to the former Chairman, as well as $51,000 and $42,000, respectively, in legal fees incurred for services provided by law firms, principals of which were directors of the Company. During the six months ended June 30, 2010 and 2009, the Company paid approximately $1,000 and $1,000, respectively, for capital expenditures and maintenance to certain companies, principals of which are directors of the Company
Included in professional services for the year ended December 31, 2009, 2008 and 2007 was approximately $102,000, $102,000 and $51,000, respectively, in consulting fees paid to the former Chairman, as well as $109,000, $131,000 and $1,000, respectively, in legal fees incurred for services provided by law firms, principals of which are directors of the Company. During 2009, 2008 and 2007, the Company paid approximately $1,000, $6,000 and $4,000, respectively, for capital expenditures and maintenance to certain companies, principals of which are directors of the Company.
Rental income and expense reimbursements of approximately $8,000 and $18,000 were received in 2008 and 2007 from a tenant, the principal of which is related to the Company’s Chairman. No such reimbursements were received during 2009 or 2010.
Note 17. Fair Value and Interest Rate Risk
As described in Note 1, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.
F-83
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
Cash and due from banks, Federal funds sold, short-term investments, interest bearing certificates of deposit, accrued interest receivable, Federal Home Loan Bank stock, accrued interest payable and repurchase agreements
The carrying amount is a reasonable estimate of fair value. The Company does not record these assets at fair value on a recurring basis.
Available for sale securities
These financial instruments are recorded at fair value in the financial statements on a recurring basis. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency bonds and mortgage-backed securities. Level 3 securities are securities for which significant unobservable inputs are utilized. Available-for-sale-securities are recorded at fair value on a recurring basis.
Loans receivable
For variable rate loans that reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated year end market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a level 3 measurement.
Servicing assets
The fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company does not record these assets at fair value on a recurring basis.
F-84
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
Other assets held for sale and other real estate owned
Other assets held for sale represents real estate that is not intended for use in operations and real estate acquired through foreclosure, and are recorded at fair value on a nonrecurring basis. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies the asset as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the asset as Level 3.
Interest only strips
The fair value is based on a valuation model that calculates the present value of estimated future cash flows. The Company does not record these assets at fair value on a recurring basis.
Deposits
The fair value of demand deposits, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. The Company does not record deposits at fair value on a recurring basis.
Off-balance-sheet instruments
Fair values for the Company’s off-balance-sheet instruments (lending commitments) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value on a recurring basis.
The following tables detail the financial asset amounts that are carried at fair value and measured at fair value on a recurring basis as of June 30, 2010, and December 31, 2009 and 2008, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
June 30, 2010 (Unaudited) (In thousands) | Balance as of June 30, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
U.S. Treasury Bills | $ | 3,350 | $ | 3,350 | $ | — | $ | — | ||||
U.S. Government Agency Mortgage Backed Securities | 58 | — | 58 | — | ||||||||
Available for sale securities | $ | 3,408 | $ | 3,350 | $ | 58 | $ | — | ||||
F-85
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
December 31, 2009 (In thousands) | Balance as of December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
U.S. Government Agency Obligations—FNMA | $ | 2,114 | $ | — | $ | 2,114 | $ | — | ||||
U.S. Government Agency Mortgage Backed Securities | 106 | — | 106 | — | ||||||||
Available for sale securities | $ | 2,220 | $ | — | $ | 2,220 | $ | — | ||||
December 31, 2008 (In thousands) | Balance as of December 31, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
U.S. Government Agency Obligations—FNMA | $ | 3,517 | $ | — | $ | 3,517 | $ | — | ||||
U.S. Government Agency Obligations—FHLMC | 1,508 | — | 1,508 | — | ||||||||
U.S. Government Agency Mortgage Backed Securities | 105 | — | 105 | — | ||||||||
Available for sale securities | $ | 5,130 | $ | — | $ | 5,130 | $ | — | ||||
The following tables detail the financial instruments carried at fair value and measured at fair value on a nonrecurring basis as of June 30, 2010, and December 31, 2009 and 2008, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Financial assets held at fair value June 30, 2010 (Unaudited) (In thousands) | Balance as of June 30, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans (1) | $ | 2,894 | $ | — | $ | — | $ | 2,894 | ||||
December 31, 2009 (In thousands) | Balance as of December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans (1) | $ | 3,098 | $ | — | $ | — | $ | 3,098 | ||||
December 31, 2008 (In thousands) | Balance as of December 31, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans (1) | $ | 2,249 | $ | — | $ | — | $ | 2,249 | ||||
(1) | Represents carrying value and related write-downs for which adjustments are based on appraised value. Management makes adjustments to the appraised values as necessary to consider declines in real estate values since the time of the appraisal. Such adjustments are based upon management’s knowledge of the local real estate markets. |
F-86
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
The following tables detail the nonfinancial assets carried at fair value and measured at fair value on a nonrecurring basis as of June 30, 2010, and December 31, 2009 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
June 30, 2010 (Unaudited) (In thousands) | Balance as of June 30, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Other assets held for sale | $ | 373 | $ | — | $ | 373 | $ | — | ||||
Other real estate owned | $ | 112 | $ | — | $ | 112 | ||||||
December 31, 2009 (In thousands) | Balance as of December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Other assets held for sale | $ | 373 | $ | — | $ | 373 | $ | — | ||||
Other real estate owned | $ | 271 | $ | — | $ | 271 | $ | — | ||||
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. Certain financial instruments are exluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The estimated fair value amounts have been measured as of the end of their respective periods and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at the end of each period.
The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
F-87
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
The following is a summary of the recorded book balances and estimated fair values of the Company’s financial instruments at June 30, 2010, and December 31, 2009 and 2008:
(In thousands) | June 30, 2010 | December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||||
Recorded Book Balance | Fair Value | Recorded Book Balance | Fair Value | Recorded Book Balance | Fair Value | |||||||||||||
(Unaudited) | ||||||||||||||||||
Financial Assets: | ||||||||||||||||||
Cash and due from banks | $ | 20,018 | $ | 20,018 | $ | 2,542 | $ | 2,542 | $ | 5,267 | $ | 5,267 | ||||||
Short-term investments | 9,576 | 9,576 | 15,383 | 15,383 | 8,638 | 8,638 | ||||||||||||
Interest bearing certificates of deposit | 99 | 99 | 347 | 347 | 1,643 | 1,643 | ||||||||||||
Available for sale securities | 3,408 | 3,408 | 2,220 | 2,220 | 5,130 | 5,130 | ||||||||||||
Federal Home Loan Bank stock | 66 | 66 | 66 | 66 | 66 | 66 | ||||||||||||
Loans receivable, net | 121,778 | 124,949 | 109,865 | 111,191 | 89,241 | 91,679 | ||||||||||||
Accrued interest receivable | 548 | 548 | 480 | 480 | 412 | 412 | ||||||||||||
Servicing rights | 15 | 34 | 17 | 32 | 26 | 32 | ||||||||||||
Interest only strips | 19 | 29 | 22 | 27 | 35 | 27 | ||||||||||||
Financial Liabilities: | ||||||||||||||||||
Noninterest-bearing deposits | 30,677 | 30,677 | 29,835 | 29,835 | 28,214 | 28,214 | ||||||||||||
Interest bearing checking accounts | 8,481 | 8,481 | 8,604 | 8,604 | 5,686 | 5,686 | ||||||||||||
Money market deposits | 28,829 | 28,829 | 26,435 | 26,435 | 26,578 | 26,578 | ||||||||||||
Savings deposits | 2,483 | 2,483 | 2,384 | 2,384 | 1,492 | 1,492 | ||||||||||||
Time certificates of deposits | 69,870 | 71,101 | 50,298 | 51,377 | 32,000 | 32,371 | ||||||||||||
Repurchase agreements | 2,157 | 2,157 | 294 | 294 | 215 | 215 | ||||||||||||
Accrued interest payable | 235 | 235 | 202 | 202 | 152 | 152 |
Unrecognized financial instruments
Loan commitments on which the committed interest rate is less than the current market rate are insignificant at June 30, 2010, and December 31, 2009 and 2008.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, members who are receiving fixed rates are
F-88
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 17. Fair Value and Interest Rate Risk—(Continued)
more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and shares and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 18. Assets and Liabilities Held for Sale
Branch Disposal
During 2007, the Company entered into an agreement for the sale of the majority of the assets and liabilities of its branch located in New London, Connecticut to another bank, and the sale was completed as of the close of business February 29, 2008. The Company realized a gain of $875,000 in 2008 from the disposition of these assets and liabilities.
Property Held for Sale
In June 2005, the Company purchased a one acre improved site with two buildings in Clinton, Connecticut for the primary purpose of establishing a branch office of the Bank. During 2007, the Bank determined that it would not establish a branch at this location and subsequently retained a commercial real estate broker to represent the Company with respect to the sale of the property, and the property is classified as other assets held for sale as of June 30 2010, and December 31, 2009 and 2008.
In August 2009, The Company entered into an agreement to lease one of the two buildings located in Clinton, Connecticut. The lease is for an initial term of five years, with two successive five-year option periods. Base rent is $24,000 annually until August 31, 2014. The base rent for the option periods increases and is fixed in the lease. The tenant has a right of first refusal to purchase the property. The tenant is responsible for all costs to maintain the building, other than structural repairs and real estate taxes. The Company received $4,000 in rent on this property in 2009 and $12,000 during the six months ended June 30, 2010.
Note 19. Subsequent Events
Subject to the terms and conditions of the Agreement and Plan of Merger, each outstanding share of common stock of the Company will be converted into the right to receive, at the election of the holder of such share of common stock of the Company, (i) cash consideration of $6.75, (ii) stock consideration equal to the number of shares of Newco common stock in an exchange ratio equal to the result obtained by dividing $6.75 by the initial offering price of Newco common stock in the conversion stock offering, or (iii) a combination of the cash consideration and the stock consideration, subject to customary proration and allocation procedures, if necessary, to assure that 60% of the outstanding shares of common stock of the Company are exchanged for Newco common stock and 40% of the outstanding shares of common stock of the Company are exchanged for cash.
The Agreement and Plan of Merger contains representations, warranties and covenants of the Company and NVSL. Among other customary covenants, the Company has agreed that it will conduct its business in the
F-89
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 19. Subsequent Events—(Continued)
ordinary course and consistent with prudent banking practices during the period between the execution of the Agreement and Plan of Merger and the consummation of the merger and will refrain from taking certain actions during such period unless it obtains the prior written consent of NVSL. The Board of Directors of the Company has agreed, subject to certain conditions, to submit the merger for approval by the shareholders of the Company and to recommend the approval of the merger. All of the Company’s directors have entered into voting agreements whereby they have agreed to vote their shares of common stock of the Company owned on the record date for the shareholder meeting to approve the merger. The Company has agreed not to solicit, initiate or encourage or, subject to certain exceptions, participate in any discussions or negotiations with or furnish any information to, any person, entity or group (other than NVSL) concerning the Company or the Bank entering into an alternative business combination.
Newco and NVSL Bank will select and invite, in their sole discretion and subject to their corporate governance policies and procedures, two directors of the Company to serve on the Board of Directors of Newco and NVSL. NVSL Bank will also establish an advisory board for the Company’s market area and invite each director of the Company other than the two directors selected and invited to join the Boards of Directors of Newco and NVSL Bank to serve on such advisory board. NVSL Bank will maintain the advisory board for a minimum period of one year following the consummation of the merger.
The merger is expected to be completed during the fourth quarter of 2010 or the first quarter of 2011 and is subject to the completion of the conversion, approval of the Company’s shareholders, the receipt of regulatory approvals and other customary closing conditions. The Agreement and Plan of Merger further provides that, upon termination of the Agreement and Plan of Merger under specified circumstances, the Company may be required to pay NVSL a termination fee of up to $900,000 and in other specified circumstances, NVSL may be required to pay the Bank a termination fee of up to $900,000. In addition, if the Agreement and Plan of Merger is terminated by either party because either (i) the merger has not been consummated by March 30, 2011 because the conversion has not been consummated by that date or (ii) a required regulatory approval has been denied or a governmental authority blocks the merger, then:
• | in the case of termination under clause (i) above: |
• | NVSL must pay the Company a termination fee of $900,000 if the failure to not consummate the conversion results from NVSL’s election not to consummate the conversion after having received the approval, consent or waiver of each governmental entity and satisfied all other conditions precedent required to consummate the conversion; or |
• | NVSL must pay the Company a termination fee of $350,000 if the failure to not consummate the conversion results from any other reason; and |
• | in the case of termination under clause (ii) above, NVSL must pay the Company a termination fee of $350,000. |
Note 20. Recent Accounting Pronouncements
In January 2010, the FASB issued guidance to improve disclosures about fair value measurements which requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also
F-90
Table of Contents
SOUTHERN CONNECTICUT BANCORP, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
and for the Years Ended December 31, 2009, 2008 and 2007
Note 20. Recent Accounting Pronouncements—(Continued)
clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in July 2010. The amendments in this ASU apply to all entities, both public and nonpublic, with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. The amendments in this ASU enhance disclosures about the credit quality of financing receivables and the allowance for credit losses. This ASU amends existing disclosure guidance to require entities to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. In addition, this ASU requires entities to disclose credit quality indicators, past due information, and modifications of its financing receivables. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This ASU encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, entities should provide comparative disclosures for those reporting periods ending after initial adoption.
In June 2009, the FASB issued new guidance for accounting for transfers of financial assets.The objective of this guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) are evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity must apply the transition guidance provided in the pronouncement that requires consolidation. This guidance was effective for the first reporting period (including interim periods) beginning after November 15, 2009 and was applied to transfers occurring on or after the effective date. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
F-91
Table of Contents
You should rely only on the information contained in this prospectus. Neither Naugatuck Valley Savings and Loan nor Naugatuck Valley Financial Corporation has authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered by this prospectus to any person or in any jurisdiction in which an offer or solicitation is not authorized or in which the person making an offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make an offer or solicitation in those jurisdictions. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.
(Proposed Holding Company for Naugatuck Valley Savings and Loan)
Up to
2,751,950 Shares
COMMON STOCK
Prospectus
STIFEL NICOLAUS WEISEL
, 2010
Until , 2010, or 25 days after commencement of the syndicated community offering, if any, whichever is later, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus when acting as underwriters and with respect to their unsold allotments of subscriptions.
Table of Contents
PROXY STATEMENT/PROSPECTUS
Explanatory Note
Naugatuck Valley Financial Corporation, a recently formed Maryland corporation, is offering shares of its common stock for sale to eligible depositors and the public in connection with the conversion of Naugatuck Valley Savings and Loan from the mutual holding company structure to the stock holding company structure. Concurrent with the completion of the conversion and the offering, shares of the existing Naugatuck Valley Financial Corporation, a federal corporation, common stock owned by persons other than Naugatuck Valley Mutual Holding Company will be canceled and exchanged for shares of new Naugatuck Valley Financial. In addition, simultaneous with the completion of the offering and exchange, new Naugatuck Valley Financial will acquire Southern Connecticut Bancorp, Inc. and in connection with the acquisition will issue shares of new Naugatuck Valley Financial and cash to shareholders of Southern Connecticut Bancorp. This document serves as the proxy statement for the special meeting of shareholders of the existing Naugatuck Valley Financial, at which meeting shareholders will be asked to approve the plan of conversion and the merger agreement, the proxy statement for the special meeting of shareholders of Southern Connecticut Bancorp, at which meeting shareholders will be asked to approve the merger agreement, and the prospectus for the shares of new Naugatuck Valley Financial to be issued in the exchange offer and in the merger. As indicated in this proxy statement/prospectus, portions of the proxy statement/prospectus will be identical to portions of the offering prospectus.
This explanatory note will not appear in the final proxy statement/prospectus.
Table of Contents
Proxy Statement/Prospectus | Proxy Statement |
Conversion and Merger Proposed—Your Vote is Important
Dear Stockholder:
Naugatuck Valley Financial Corporation, the holding company for Naugatuck Valley Savings and Loan, and Southern Connecticut Bancorp, Inc., the holding company for The Bank of Southern Connecticut, have entered into a merger agreement for new Naugatuck Valley Financial Corporation, a newly formed Maryland corporation, to acquire Southern Connecticut Bancorp. In connection with the merger, Naugatuck Valley Savings and Loan is converting from a mutual holding company structure to a fully-public ownership structure and selling a minimum of 2,034,050 shares of common stock of new Naugatuck Valley Financial, which will become the new holding company for Naugatuck Valley Savings and Loan. Completion of the acquisition is contingent on the completion of the conversion and offering.
If the merger is completed, Southern Connecticut Bancorp will be merged into new Naugatuck Valley Financial with new Naugatuck Valley Financial as the surviving entity and each share of Southern Connecticut Bancorp common stock issued and outstanding immediately prior to the completion of the merger will automatically be converted into the right to receive, at the holder’s election, (a) $6.75 in cash without interest, (b) 0.675 shares of new Naugatuck Valley Financial common stock (plus cash in lieu of any fractional shares), or (c) a combination thereof. Regardless of your choice, however, elections will be limited by the requirement that the number of shares of Southern Connecticut Bancorp common stock to be converted into new Naugatuck Valley Financial common stock in the merger must be 60% of the total number of shares of Southern Connecticut Bancorp common stock issued and outstanding on the date of the merger. Therefore, all allocations of cash and new Naugatuck Valley Financial common stock that you will receive will depend on the elections of other Southern Connecticut Bancorp stockholders. For example, if Southern Connecticut Bancorp stockholders elect to receive more Naugatuck Valley Financial common stock than Naugatuck Valley Financial has agreed to issue in the merger, then all Southern Connecticut Bancorp stockholders who have elected to receive cash or who have made no election will receive cash for their Southern Connecticut Bancorp shares and all stockholders who elected to receive Naugatuck Valley Financial common stock will receive a pro rata portion of the available Naugatuck Valley Financial shares plus cash for those shares not converted into Naugatuck Valley Financial common stock. In connection with the merger, new Naugatuck Valley Financial will issue approximately 1,092,245 shares of common stock to Southern Connecticut Bancorp stockholders.
On February 22, 2010, the last trading day before we announced the merger, the closing price of Naugatuck Valley Financial common stock was $5.80 per share and the closing price for Southern Connecticut Bancorp common stock was $3.34 per share. On , 2010, the last practicable day before the distribution of this proxy statement/prospectus, the closing price of Naugatuck Valley Financial common stock was $ per share and the closing price for Southern Connecticut Bancorp common stock was $ per share. Naugatuck Valley Financial’s common stock is currently listed on the Nasdaq Global Market under the symbol “NVSL.” We expect that new Naugatuck Valley Financial’s common stock will trade on the Nasdaq Global Market under the trading symbol NVSLD for a period of 20 trading days after the completion of the offering and merger. Thereafter, the trading symbol will revert to NVSL. Southern Connecticut Bancorp common stock is currently listed on the American Stock Exchange under the symbol “SSE.”
Naugatuck Valley Financial Stockholders
• | The Proxy Vote—Naugatuck Valley Financial is holding a special meeting of stockholders on[MEETINGDATE], 2010. This document is the proxy statement that Naugatuck Valley Financial is using to solicit your vote at the special meeting and the prospectus of new Naugatuck Valley Financial for the stock that will be issued to you in the conversion. Naugatuck Valley Financial is asking you to vote in favor of (1) the plan of conversion, under which the conversion and offering will be conducted, and (2) the merger agreement.Naugatuck Valley Financial’s board of directors unanimously recommends that stockholders vote “FOR” the plan of conversion and “FOR” the merger agreement. |
Table of Contents
• | The Exchange—As a result of the conversion, each share of Naugatuck Valley Financial common stock you own will be exchanged for between 0.4863 and 0.6580 shares of common stock of new Naugatuck Valley Financial so that Naugatuck Valley Financial’s existing public shareholders will own approximately the same percentage of new Naugatuck Valley Financial common stock as they owned of Naugatuck Valley Financial’s common stock immediately before the conversion without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp. The actual number of shares that you will receive cannot be calculated until the conversion is completed. Shortly after the completion of the conversion, the Naugatuck Valley Financial exchange agent will send a transmittal form to each stockholder of Naugatuck Valley Financial who holds stock certificates. The transmittal form will explain the procedure to follow to exchange your shares. Please do not deliver your certificate(s) before you receive the transmittal form. Shares of Naugatuck Valley Financial that are held in street name (e.g. in a brokerage account) will be converted automatically at the conclusion of the conversion; no action or documentation is required of you. |
• | The Stock Offering—We are offering the shares of common stock of new Naugatuck Valley Financial for sale at $10.00 per share. The shares are being offered in a subscription offering to eligible customers of Naugatuck Valley Savings and Loan. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to our local communities and Naugatuck Valley Financial stockholders. We may also offer for sale shares of common stock not purchased in the subscription or community offerings in a syndicated community offering through a syndicate of selected dealers. |
Southern Connecticut Bancorp Stockholders
• | The Proxy Vote—Southern Connecticut Bancorp is holding a special meeting of stockholders on[SSE MEETINGDATE], 2010. This document is the proxy statement that Southern Connecticut Bancorp is using to solicit your vote at the special meeting and is the prospectus of new Naugatuck Valley Financial for the stock that will be issued to you in the merger. Southern Connecticut Bancorp is asking you to vote in favor of the merger agreement.Southern Connecticut Bancorp’s board of directors unanimously recommends that stockholders vote “FOR” the merger agreement. |
• | The Election—An election form will be mailed separately to holders of shares of Southern Connecticut Bancorp common stock on or about the mail date for this proxy statement/prospectus. Each election form permits the holder of the Southern Connecticut Bancorp common stock to elect to receive cash, new Naugatuck Valley Financial common stock or a combination of cash and stock as a result of the merger. |
This proxy statement/prospectus contains information that you should consider in evaluating the plan of conversion and the merger agreement.We urge you to read this entire document carefully.In particular, you should carefully read the section captioned “Risk Factors” in this document for a discussion of certain risks factors relating to the conversion and offering and merger.
If you are interested in purchasing shares of our common stock, you may request a stock order form and prospectus by calling the Naugatuck Valley Financial Stock Information Center at the phone number in the Questions and Answers section in this document. The stock offering period is expected to expire on [DATE1], 2010.
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
None of the Securities and Exchange Commission, the Office of Thrift Supervision or any state securities regulator has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
The date of this proxy statement/prospectus is , 2010, and is first being mailed to shareholders of Naugatuck Valley Financial and Southern Connecticut Bancorp on or about , 2010.
Table of Contents
Table of Contents
Table of Contents
Naugatuck Valley Financial Corporation
333 Church Street
Naugatuck, Connecticut 06770
(203) 720-5000
Notice of Special Meeting of Shareholders
On[MEETINGDATE], 2010, Naugatuck Valley Financial Corporation will hold its special meeting of shareholders at , , Connecticut. The meeting will begin at :00 p.m., local time. At the meeting, shareholders will consider and act on the following:
1. | The approval of a plan of conversion and reorganization pursuant to which: (A) Naugatuck Valley Mutual Holding Company, which currently owns approximately 59.6% of the common stock of Naugatuck Valley Financial, will merge with and into Naugatuck Valley Financial, with Naugatuck Valley Financial being the surviving entity; (B) Naugatuck Valley Financial will merge with and into new Naugatuck Valley Financial, a Maryland corporation recently formed to be the holding company for Naugatuck Valley Savings and Loan, with new Naugatuck Valley Financial being the surviving entity; (C) the outstanding shares of Naugatuck Valley Financial, other than those held by Naugatuck Valley Mutual Holding Company, will be converted into shares of common stock of new Naugatuck Valley Financial; and (D) new Naugatuck Valley Financial will offer shares of its common stock for sale in a subscription offering and, if necessary, in a community offering and/or syndicated community offering. |
2. | The following informational proposals: |
2a. | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation requiring a super-majority vote to approve certain amendments to new Naugatuck Valley Financial’s articles of incorporation; and |
2b. | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of new Naugatuck Valley Financial’s outstanding voting stock. |
3. | The approval of the Agreement and Plan of Merger, dated as of February 22, 2010, as amended as of September 17, 2010 by and among Naugatuck Valley Financial, new Naugatuck Valley Financial and Southern Connecticut Bancorp. A copy of the merger agreement is included asAppendix Ato the accompanying proxy statement/prospectus. |
4. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion or the merger agreement. |
5. | Such other business that may properly come before the meeting. |
NOTE: The board of directors is not aware of any other business to come before the meeting.
The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals 2a and 2b were approved as part of the process in which the board of directors of Naugatuck Valley Financial approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervision’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals.
Only shareholders as of[RECORDDATE], 2010 are entitled to receive notice of the meeting and to vote at the meeting and any adjournments or postponements of the meeting.
Table of Contents
Please complete and sign the enclosed form of proxy, which is solicited by the board of directors, and mail it promptly in the enclosed envelope. The proxy will not be used if you attend the meeting and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS |
|
Bernadette A. Mole |
Corporate Secretary |
Naugatuck, Connecticut
, 2010
The Naugatuck Valley Financial board of directors unanimously recommends that you vote “FOR” approval of the plan of conversion and the merger agreement. Your vote is very important, regardless of the number of shares you own. Please vote as soon as possible to make sure that your shares are represented at the special meeting. Even if you plan to be present at the special meeting, you are urged to complete, date, sign and return the enclosed proxy card promptly in the envelope provided. Any proxy given may be revoked by you in writing or in person at any time prior to its exercise.
Table of Contents
Southern Connecticut Bancorp, Inc.
215 Church Street
New Haven, Connecticut 06510
(203) 782-1100
Notice of Special Meeting of Shareholders
On[SSE MEETINGDATE], 2010, Southern Connecticut Bancorp, Inc. will hold its special meeting of shareholders at The Quinnipiack Club, 221 Church Street, New Haven, Connecticut. The meeting will begin at 10:00 a.m., local time. At the meeting, shareholders will consider and act on the following:
1. | The approval of the Agreement and Plan of Merger, dated as of February 22, 2010, as amended as of September 17, 2010, by and among Naugatuck Valley Financial Corporation, new Naugatuck Valley Financial Corporation and Southern Connecticut Bancorp. A copy of the merger agreement is included asAppendix Ato the accompanying joint proxy statement/prospectus. |
2. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the merger agreement. |
3. | Such other business that may properly come before the meeting. |
NOTE: The board of directors is not aware of any other business to come before the meeting.
Only shareholders as of[SSE RECORDDATE], 2010 are entitled to receive notice of the meeting and to vote at the meeting and any adjournments or postponements of the meeting.
Please complete and sign the enclosed form of proxy, which is solicited by the board of directors, and mail it promptly in the enclosed envelope. The proxy will not be used if you attend the meeting and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS |
|
Rosemarie A. Romano |
Corporate Secretary |
New Haven, Connecticut
, 2010
The Southern Connecticut Bancorp board of directors unanimously recommends that you vote “FOR” approval of the merger agreement. Your vote is very important, regardless of the number of shares you own. Please vote as soon as possible to make sure that your shares are represented at the special meeting. Even if you plan to be present at the special meeting, you are urged to complete, date, sign and return the enclosed proxy card promptly in the envelope provided. Any proxy given may be revoked by you in writing or in person at any time prior to its exercise.
Table of Contents
Questions and Answers About the Conversion, Exchange and Offering
For shareholders of Naugatuck Valley Financial
You should read this document for more information about the conversion and offering. The plan of conversion described in this document has been conditionally approved by the Office of Thrift Supervision.
The Proxy Vote
Q. | What are shareholders of Naugatuck Valley Financial being asked to approve? |
A. | Naugatuck Valley Financial shareholders as of[RECORDDATE], 2010 are asked to vote on (1) the plan of conversion and (2) the merger agreement that provides for the acquisition of Southern Connecticut Bancorp by new Naugatuck Valley Financial. See“Questions and Answers About the Merger” for information regarding the merger. |
Under the plan of conversion, Naugatuck Valley Savings and Loan will convert from the mutual holding company form of organization to the stock holding company form, and as part of the conversion, new Naugatuck Valley Financial will offer for sale, in the form of shares of its common stock, Naugatuck Valley Mutual Holding Company’s 59.6% ownership interest in Naugatuck Valley Financial. In addition to the shares of common stock to be issued to those who purchase shares in the offering, public shareholders of Naugatuck Valley Financial as of the completion of the conversion and offering will receive shares of new Naugatuck Valley Financial common stock in exchange for their existing shares of Naugatuck Valley Financial common stock based on an exchange ratio that will result in Naugatuck Valley Financial’s existing public shareholders owning approximately the same percentage of new Naugatuck Valley Financial common stock as they owned of Naugatuck Valley Financial immediately prior to the conversion and offering without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares and shares that existing public shareholders may purchase in the offering.
Shareholders also are asked to vote on the following informational proposals with respect to the articles of incorporation of new Naugatuck Valley Financial:
• | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation requiring a super-majority vote to approve certain amendments to new Naugatuck Valley Financial’s articles of incorporation; and |
• | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of new Naugatuck Valley Financial’s outstanding voting stock. |
The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals were approved as part of the process in which the board of directors of Naugatuck Valley Financial approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervision’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals. The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of new Naugatuck Valley Financial, if such attempts are not approved by the board of directors, or may make the removal of the board of directors or management, or the appointment of new directors, more difficult.
In addition, shareholders will vote on a proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion or the merger agreement.
Q. | What is the conversion? |
A. | Naugatuck Valley Savings and Loan is converting from a partially-public mutual holding company structure to a fully-public stock holding company ownership structure. Currently, Naugatuck Valley Mutual Holding Company owns 59.6% of Naugatuck Valley Financial’s common stock. The remaining 40.4% of Naugatuck Valley Financial’s common stock is owned by public shareholders. As a result of the conversion, our newly formed company, also called Naugatuck Valley Financial, will become the parent of Naugatuck Valley Savings and Loan. |
i
Table of Contents
Shares of common stock of new Naugatuck Valley Financial, representing the 59.6% ownership interest of Naugatuck Valley Mutual Holding Company in Naugatuck Valley Financial, are being offered for sale to eligible depositors of Naugatuck Valley Savings and Loan and, possibly, to the public. At the completion of the conversion and offering, public shareholders of Naugatuck Valley Financial will exchange their shares of Naugatuck Valley Financial common stock for shares of common stock of new Naugatuck Valley Financial.
After the conversion and offering are completed, Naugatuck Valley Savings and Loan will be a wholly-owned subsidiary of new Naugatuck Valley Financial, and 100% of the common stock of new Naugatuck Valley Financial will be owned by public shareholders. As a result of the conversion and offering, Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will cease to exist.
See “Naugatuck Valley Financial’s Proposal 1—Approval of the Plan of Conversion” for more information about the conversion and offering.
Q. | What are reasons for the conversion and offering? |
A. | The primary reasons for the conversion and offering are to facilitate the acquisition of Southern Connecticut Bancorp by enabling new Naugatuck Valley Financial to issue stock and raise cash to pay the merger consideration, increase capital to support the growth of our interest-earning assets, create a more liquid and active market than currently exists for Naugatuck Valley Financial common stock, structure our business in a form that will provide access to capital markets and facilitate acquisitions of other financial institutions and eliminate some of the uncertainties associated with proposed financial regulatory reform. |
Q. | Why should I vote on the plan of conversion? |
A. | You are not required to vote, but your vote is very important. In order for us to implement the plan of conversion, we must receive the affirmative vote of (1) the holders of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock, including shares held by Naugatuck Valley Mutual Holding Company and (2) the holders of a majority of the outstanding shares of Naugatuck Valley Financial common stock entitled to vote at the special meeting, excluding shares held by Naugatuck Valley Mutual Holding Company.Your board of directors recommends that you vote “FOR” the plan of conversion. |
Q. | What happens if I don’t vote? |
A. | Your prompt vote is very important. Not voting will have the same effect as voting “Against” the plan of conversion.Without sufficient favorable votes “FOR” the plan of conversion, we will not proceed with the conversion and offering. |
Q. | How do I vote? |
A. | You should sign your proxy card and return it in the enclosed proxy reply envelope.Please vote promptly. Not voting has the same effect as voting “AGAINST” the plan of conversion. |
Q. | If my shares are held in street name, will my broker automatically vote on my behalf? |
A. | No. Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares, using the directions that your broker provides to you. |
Q. | What if I do not give voting instructions to my broker? |
A. | Your vote is important. If you do not instruct your broker to vote your shares, the unvoted proxy will have the same effect as a vote against the plan of conversion. |
ii
Table of Contents
The Exchange
Q: | I currently own shares of Naugatuck Valley Financial common stock. What will happen to my shares as a result of the conversion? |
A: | At the completion of the conversion, your shares of Naugatuck Valley Financial common stock will be canceled and exchanged for shares of common stock of new Naugatuck Valley Financial, a newly formed Maryland corporation. The number of shares you will receive will be based on an exchange ratio determined as of the closing of the conversion and offering that is intended to result in Naugatuck Valley Financial’s existing public shareholders owning the same percentage interest of new Naugatuck Valley Financial common stock as they currently own of Naugatuck Valley Financial common stock, without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares or shares that existing shareholders may purchase in the offering. However, assuming completion of the merger with Southern Connecticut Bancorp, existing public stockholders will own approximately between 30.6% and 33.5% of new Naugatuck Valley Financial. |
Q: | Does the exchange ratio depend on the market price of Naugatuck Valley Financial common stock? |
A: | No, the exchange ratio will not be based on the market price of Naugatuck Valley Financial common stock. Therefore, changes in the price of Naugatuck Valley Financial common stock between now and the completion of the conversion and offering will not effect the calculation of the exchange ratio. |
Q: | How will the actual exchange ratio be determined? |
A: | Because the purpose of the exchange ratio is to maintain the ownership percentage of the existing public shareholders of Naugatuck Valley Financial (without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares or shares that existing shareholders may purchase in the offering) the actual exchange ratio will depend on the number of shares of new Naugatuck Valley Financial’s common stock sold in the offering and, therefore, cannot be determined until the completion of the conversion and offering. |
Q: | How many shares will I receive in the exchange? |
A: | You will receive between 0.4863 and 0.6580 (subject to increase to 0.7567) shares of new Naugatuck Valley Financial common stock for each share of Naugatuck Valley Financial common stock you own on the date of the completion of the conversion and offering. For example, if you own 100 shares of Naugatuck Valley Financial common stock, and the exchange ratio is 0.4863 (at the minimum of the offering range), after the conversion and offering you will receive 48 shares of new Naugatuck Valley Financial common stock and $6.30 in cash, the value of the fractional share, based on the $10.00 per share purchase price in the offering. Shareholders who hold shares in street-name at a brokerage firm will receive these funds in their brokerage account. Shareholders with stock certificates will receive checks when they receive their new stock certificates. |
Q. | Should I submit my stock certificates now? |
A. | No. If you hold a stock certificate for Naugatuck Valley Financial common stock, instructions for exchanging your certificate will be sent to you after completion of the conversion and offering. Until you submit the transmittal form and certificate, you will not receive your new certificate and check for cash in lieu of fractional shares, if any. If your shares are held in street name at a brokerage firm, the share exchange will occur automatically upon completion of the conversion and offering, without any action on your part.Please do not send in your stock certificate until you receive a transmittal form and instructions. |
The Stock Offering
Q. | May I place an order to purchase shares in the offering, in addition to the shares that I will receive in the exchange? |
A. | Yes. Eligible depositors of Naugatuck Valley Savings and Loan have priority subscription rights allowing them to purchase common stock in the subscription offering. Shares not purchased in the subscription offering may be available |
iii
Table of Contents
for sale to the public in a community offering. Naugatuck Valley Financial shareholders as of , 2010 have a preference in the community offering after orders submitted by residents of our communities.If you would like to receive a prospectus and stock order form, please call our Stock Information Center toll-free at ( ) from 10:00 a.m. to 4:00 p.m. Eastern time, Monday through Friday. Order forms must be received (not postmarked) no later than 2:00 p.m., Eastern Time on [DATE1], 2010. |
Other Questions?
For answers to other questions, please read this proxy statement/prospectus. Questions about voting may be directed to our proxy information agent, Phoenix Advisory Partners, by calling toll-free ( ) - , Monday through Friday from to .
iv
Table of Contents
Questions and Answers About the Merger of Naugatuck Valley Financial
and Southern Connecticut Bancorp
For Shareholders of Naugatuck Valley Financial, Inc. and
Southern Connecticut Bancorp, Inc.
Q. | What are shareholders of Naugatuck Valley Financial and Southern Connecticut Bancorp being asked to approve? |
A. | Naugatuck Valley Financial shareholders as of[RECORDDATE], 2010 are asked to vote on the plan of conversion and the merger agreement. See“Questions and Answers About the Conversion, Exchange and Offering” for information regarding the plan of conversion. Southern Connecticut Bancorp shareholders as of[SSE RECORDDATE], 2010 are asked to vote on the merger agreement. The merger agreement provides for the acquisition of Southern Connecticut Bancorp by new Naugatuck Valley Financial. |
Q. | What will Southern Connecticut Bancorp stockholders be entitled to receive in the merger? |
A. | Under the merger agreement, each share of Southern Connecticut Bancorp common stock will be exchanged for either 0.675 shares of the new holding company common stock or $6.75 in cash. Southern Connecticut Bancorp shareholders may elect either of these options or, if they desire, may elect to exchange some common stock for cash and some common stock for the new holding company common stock. |
Elections will be limited by the requirement that the number of shares of Southern Connecticut Bancorp common stock to be converted into new Naugatuck Valley Financial common stock in the merger must be 60% of the total number of shares of Southern Connecticut Bancorp common stock issued and outstanding on the date of the merger. Therefore, the form of consideration received will depend in part on the elections of other Southern Connecticut Bancorp shareholders.
New Naugatuck Valley Financial will not issue fractional shares in the merger. Instead, Southern Connecticut Bancorp shareholders will receive a cash payment, without interest, for the value of any fraction of a share of Naugatuck Valley Financial common stock that they would otherwise be entitled to receive. See“Naugatuck Valley Financial’s Proposal 3 and Southern Connecticut Bancorp’s Proposal 1—Approval of the Merger Agreement” and“Description of New Naugatuck Valley Financial Capital Stock” in this proxy statement/prospectus.
Q. | What will my dividends be after the merger? |
A. | Naugatuck Valley Financial has paid quarterly cash dividends since the first quarter of 2005. For the quarter ended June 30, 2010, the quarterly cash dividend was $0.03 per share, which equals $0.12 per share on an annualized basis. We intend to continue to pay quarterly cash dividends after we complete the conversion and offering and the merger. We currently expect that the level of quarterly cash dividends per share after the conversion and offering and the merger to be $0.03 per share, or $0.12 per share on an annualized basis, at all levels of the offering range. This represents an annual dividend yield of 1.2% at all levels of the offering range based on a stock price of $10.00 per share. However, the dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced or eliminated in the future. |
Q. | How do shareholders of Southern Connecticut Bancorp elect to receive cash, stock or a combination of both for Southern Connecticut Bancorp stock? |
A. | A form for making an election will be sent to shareholders of Southern Connecticut Bancorp separately on or about the mail date for this proxy statement/prospectus. The exchange agent, Registrar and Transfer Company, will mail an election form to shareholders who hold stock certificates. Street name holders will receive a form from their brokerage firm. For your election to be effective, your properly completed election form must be returned by 5:00 pm. on[ELECTION DATE]. If you hold a stock certificate you must submit the stock certificate or an appropriate guarantee of delivery.Do not send your election form with your proxy card. If you do not make a timely election you will be allocated new Naugatuck Valley Financial common stock and/or cash depending on the elections made by other Southern Connecticut Bancorp shareholders. |
v
Table of Contents
Shareholders who hold Southern Connecticut Bancorp shares in street name will receive the cash/stock allocation directly into their brokerage account. The exchange agent will mail new Naugatuck Valley Financial stock certificate(s) and/or a check to each shareholder who holds Southern Connecticut Bancorp stock certificate(s).
Q. | How do stockholders of Southern Connecticut Bancorp exchange their stock certificates? |
A. | If you make an election, you must return your Southern Connecticut Bancorp stock certificates or an appropriate guarantee of delivery with your election form. Shortly after completion of the merger, new Naugatuck Valley Financial’s exchange agent will allocate cash and new Naugatuck Valley Financial common stock among Southern Connecticut Bancorp shareholders, consistent with their elections and the allocation and proration procedures in the merger agreement. If you do not submit an election form, promptly after completion of the merger new Naugatuck Valley Financial’s exchange agent will send you instructions on how and where to surrender your Southern Connecticut Bancorp stock certificates after the merger is completed. Please do not send your Southern Connecticut Bancorp stock certificates to the exchange agent before you receive the election form. Once you submit your Southern Connecticut Bancorp stock certificates with your election form, you may no longer trade your shares of Southern Connecticut Bancorp common stock unless you revoke your election before the election deadline. |
Q. | What are the federal tax consequences of the merger? |
A. | If you are a shareholder of Naugatuck Valley Financial, you will not recognize any gain or loss in connection with the merger with Southern Connecticut Bancorp. |
The tax consequence of the merger to shareholders of Southern Connecticut Bancorp will depend on whether you receive only cash, only new Naugatuck Valley Financial common stock, or a combination of cash and new Naugatuck Valley Financial common stock in exchange for your shares of Southern Connecticut Bancorp common stock. If you exchange your shares solely for new Naugatuck Valley Financial common stock, you should not recognize gain or loss except with respect to the cash you receive instead of any fractional share of new holding company common stock. If you exchange your shares solely for cash, you should recognize gain or loss on the exchange. If you exchange your shares for a combination of new Naugatuck Valley Financial common stock and cash, you should recognize capital gain, but not any loss, on the exchange. Because the allocations of cash and new Naugatuck Valley Financial common stock that you receive will depend on the elections of other Southern Connecticut Bancorp shareholders, you will not know the actual tax consequences of the merger to you until the allocations are completed. However, because individual stockholders may have differing tax positions, we recommend that you contact your individual tax advisor with respect to your individual tax consequences.
Q. | Are shareholders of Southern Connecticut Bancorp entitled to appraisal rights? |
A. | No. Shareholders of Southern Connecticut Bancorp are not entitled under applicable provisions of Connecticut law to appraisal, dissenters’ or similar rights as a result of the merger. |
Q. | When is the merger expected to be completed? |
A. | We intend to complete the merger as soon as possible. In order to do so, the merger agreement must be approved by Naugatuck Valley Financial’s shareholders and Southern Connecticut Bancorp’s shareholders and we must obtain the necessary regulatory approvals. Assuming holders of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock and at least a majority of the votes cast by Southern Connecticut Bancorp stockholders vote in favor of the merger agreement and we obtain the other necessary approvals, we expect to complete the merger late in the fourth quarter of 2010. However, the merger cannot be completed, and you will not receive any shares of new Naugatuck Valley Financial common stock or cash, unless and until the conversion and offering are completed. The offering is scheduled to terminate on[DATE1], 2010. The offering may be extended until[DATE2], 2010, unless the Office of Thrift Supervision approves a later date. |
Q. | Is completion of the merger subject to any conditions besides shareholder approval? |
A. | Yes. The merger is subject to the completion of the conversion and offering. In addition, the transaction must receive the required regulatory approvals, and there are other customary closing conditions that must be satisfied. To review the conditions of the merger in more detail, see“Naugatuck Valley Financial’s Proposal 3 and Southern Connecticut Bancorp’s Proposal 1—Approval of the Merger Agreement—Conditions to the Merger” of this proxy statement/prospectus. |
vi
Table of Contents
Q. | Why should I vote? |
A. | You are not required to vote, but your vote is very important. In order for us to implement the merger, we must receive the affirmative vote of (1) the holders of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock and (2) a majority of the votes cast by Southern Connecticut Bancorp stockholders. The boards of directors of Naugatuck Valley Financial and Southern Connecticut Bancorp recommend that you vote “FOR” the merger agreement. |
Q. | What happens if I don’t vote? |
A. | Your prompt vote is very important.Without sufficient favorable votes “FOR” the merger agreement, we will not proceed with the merger. |
Q. | How do I vote? |
A. | You should sign your proxy card and return it in the enclosed proxy reply envelope.PLEASE VOTE PROMPTLY. |
The Stock Offering
Q. | May I place an order to purchase shares in the offering, in addition to the shares that I will receive in the exchange? |
A. | Yes. If you would like to receive a prospectus and stock order form, please call the Naugatuck Valley Financial Stock Information Center toll-free at ( ) from 10:00 a.m. to 4:00 p.m. Eastern Time, Monday through Friday. Order forms must be received (not postmarked) no later than 2:00 p.m., Eastern Time on[DATE1], 2010. |
Other Questions?
For answers to other questions, please read this proxy statement/prospectus. Questions from Naugatuck Valley Financial shareholders about voting may be directed to the proxy information agent, Phoenix Advisory Partners, by calling toll-free ( ) - , Monday through Friday from to , Eastern Time. Questions for Southern Connecticut Bancorp shareholders about voting may be directed to Rosemarie Romano by calling her at (203) 782-1100.
vii
Table of Contents
This summary highlights material information from this document and may not contain all the information that is important to you. To understand the conversion and offering and merger fully, you should read this entire document carefully.
Naugatuck Valley Financial Special Meeting of Shareholders
Date, Time and Place; Record Date
The special meeting of Naugatuck Valley Financial shareholders is scheduled to be held at , , Connecticut at :00 a.m., local time, on[MEETINGDATE], 2010. Only Naugatuck Valley Financial shareholders of record as of the close of business on[RECORDDATE], 2010 are entitled to notice of, and to vote at, the special meeting of shareholders and any adjournments or postponements of the meeting.
Purpose of the Meeting
Shareholders will be voting on the following proposals at the special meeting:
1. | Approval of the plan of conversion; |
2. | The following informational proposals: |
2a. | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation requiring a super-majority vote to approve certain amendments to new Naugatuck Valley Financial’s articles of incorporation; and |
2b. | Approval of a provision in new Naugatuck Valley Financial’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of new Naugatuck Valley Financial’s outstanding voting stock; |
3. | Approval of the merger agreement with Southern Connecticut Bancorp; and |
4. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion or the merger agreement. |
The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals 2a and 2b were approved as part of the process in which the board of directors of Naugatuck Valley Financial approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervision’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals. The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of new Naugatuck Valley Financial, if such attempts are not approved by the board of directors, or may make the removal of the board of directors or management, or the appointment of new directors, more difficult.
Vote Required
Proposal 1: Approval of the Plan of Conversion. Approval of the plan of conversion requires the affirmative vote of holders of at leasttwo-thirds of the outstanding shares of Naugatuck Valley Financial, including shares held by Naugatuck Valley Mutual Holding Companyanda majority of the votes eligible to be cast by shareholders of Naugatuck Valley Financial, excluding shares held by Naugatuck Valley Mutual Holding Company.
Informational Proposals 2a and 2b. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals.
1
Table of Contents
Proposal 3: Approval of the Merger Agreement. Approval of the merger agreement requires the affirmative vote of holders of at leasttwo-thirds of the outstanding shares of Naugatuck Valley Financial.
Proposal 4: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of Naugatuck Valley Financial common stock to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion or the merger agreement.
As of the record date, there were shares of Naugatuck Valley Financial common stock outstanding, of which Naugatuck Valley Mutual Holding Company owned . The directors and executive officers of Naugatuck Valley Financial (and their affiliates), as a group, beneficially owned shares of Naugatuck Valley Financial common stock, representing % of the outstanding shares of Naugatuck Valley Financial common stock and % of the shares held by persons other than Naugatuck Valley Mutual Holding Company as of such date. Naugatuck Valley Mutual Holding Company and our directors and executive officers intend to vote their shares in favor of the plan of conversion and the merger agreement.
Southern Connecticut Bancorp Special Meeting of Shareholders
Date, Time and Place; Record Date
The special meeting of Southern Connecticut Bancorp shareholders is scheduled to be held at The Quinnipiack Club, 221 Church Street, New Haven, Connecticut at 10:00 a.m., local time, on[SSE MEETINGDATE], 2010. Only Southern Connecticut Bancorp shareholders of record as of the close of business on[SSE RECORDDATE], 2010 are entitled to notice of, and to vote at, the special meeting of shareholders and any adjournments or postponements of the meeting.
Purpose of the Meeting
Shareholders will be voting on the following proposals at the special meeting:
1. | Approval of the merger agreement with Naugatuck Valley Financial; and |
2. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the merger agreement. |
Vote Required
Proposal 1: Merger Agreement. Approval of the merger agreement requires the affirmative vote of a majority of the votes cast by Southern Connecticut Bancorp stockholders at the special meeting.
Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of Southern Connecticut Bancorp common stock to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.
As of the record date, there were shares of Southern Connecticut Bancorp common stock outstanding. The directors and executive officers of Southern Connecticut Bancorp (and their affiliates), as a group, beneficially owned shares of Southern Connecticut Bancorp common stock, representing % of the outstanding shares of Southern Connecticut Bancorp common stock. Our directors and executive officers intend to vote their shares in favor of the merger agreement.
Naugatuck Valley Financial
Naugatuck Valley Financial is, and new Naugatuck Valley Financial following the completion of the conversion and offering will be, the unitary savings and loan holding company for Naugatuck Valley Savings and Loan, a federally chartered savings bank. Naugatuck Valley Savings and Loan is headquartered in Naugatuck, Connecticut and has served customers in Connecticut since 1922. In addition to our main office, we operate nine branch offices in the Greater Naugatuck Valley which we consider our market area. Naugatuck Valley Financial’s common stock is traded on the Nasdaq Global Market under the symbol “NVSL.”
2
Table of Contents
At June 30, 2010, Naugatuck Valley Financial had consolidated total assets of $565.2 million, total net loans of $483.0 million, total deposits of $394.3 million and total shareholders’ equity of $51.2 million. At June 30, 2010, Naugatuck Valley Savings and Loan exceeded all regulatory capital requirements and was not a participant in any of the U.S. Treasury’s capital raising programs for financial institutions. Naugatuck Valley Financial’s principal executive offices are located at 333 Church Street, Naugatuck, Connecticut 06770 and its telephone number is (203) 720-5000. Naugatuck Valley Financial’s website address iswww.nvsl.com. Information on this website should not be considered a part of this proxy statement/prospectus.
Southern Connecticut Bancorp
Southern Connecticut Bancorp is a bank holding company headquartered in New Haven, Connecticut that was incorporated on November 8, 2000. Southern Connecticut Bancorp is the bank holding company for The Bank of Southern Connecticut, a Connecticut-chartered bank with its headquarters in New Haven, Connecticut. The Bank of Southern Connecticut operates branches at four locations, including downtown New Haven, the Amity/Westville section of New Haven, Branford and North Haven. Southern Connecticut Bancorp’s common stock is traded on the American Stock Exchange under the symbol “SSE.”
At June 30, 2010, Southern Connecticut Bancorp had consolidated total assets of $160.1 million, total net loans of $121.8 million, total deposits of $140.3 million and total shareholders’ equity of $15.7 million. At June 30, 2010, The Bank of Southern Connecticut exceeded all regulatory capital requirements and was not a participant in any of the U.S. Treasury’s capital raising programs for financial institutions. Southern Connecticut Bancorp’s principal executive offices are located at 215 Church Street, New Haven, Connecticut 06510 and its telephone number is (203) 782-1100. Southern Connecticut Bancorp’s website address iswww.scbancorponline.com. Information on this website should not be considered a part of this proxy statement/prospectus.
The Conversion
Description of the Conversion
In 2004, we reorganized Naugatuck Valley Savings and Loan into a stock savings bank with a mutual holding company structure. As a part of that reorganization, we formed Naugatuck Valley Financial as the mid-tier holding company for Naugatuck Valley Savings and Loan and sold a minority interest in Naugatuck Valley Financial common stock to our depositors and our employee stock ownership plan in a subscription offering. The majority of Naugatuck Valley Financial’s shares were issued to Naugatuck Valley Mutual Holding Company, a mutual holding company organized under federal law. As a mutual holding company, Naugatuck Valley Mutual Holding Company does not have any shareholders, does not hold any significant assets other than the common stock of Naugatuck Valley Financial, and does not engage in any significant business activity. Our current ownership structure is as follows:
The “second-step” conversion process that we are now undertaking involves a series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. In the stock holding company structure, all of Naugatuck Valley Savings and Loan’s common stock will be owned
3
Table of Contents
by new Naugatuck Valley Financial, and all of new Naugatuck Valley Financial’s common stock will be owned by the public. We are conducting the conversion and offering under the terms of our plan of conversion. Upon completion of the conversion and offering, the present Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will cease to exist.
As part of the conversion, we are offering for sale common stock representing the 59.6% ownership interest of Naugatuck Valley Financial that is currently held by Naugatuck Valley Mutual Holding Company. At the conclusion of the conversion and offering, existing public shareholders of Naugatuck Valley Financial will receive shares of common stock in new Naugatuck Valley Financial in exchange for their existing shares of common stock of Naugatuck Valley Financial, based upon an exchange ratio of0.4863 to0.6580. The actual exchange ratio will be determined at the conclusion of the conversion and the offering based on the total number of shares sold in the offering, and is intended to result in Naugatuck Valley Financial’s existing public shareholders owning the same percentage interest of new Naugatuck Valley Financial common stock as they currently own of Naugatuck Valley Financial common stock, without giving effect to shares issued in connection with the acquisition of Southern Connecticut Bancorp, cash paid in lieu of issuing fractional shares or shares that existing public shareholders may purchase in the offering. However, assuming completion of the merger with Southern Connecticut Bancorp, existing public stockholders will own approximately between 30.6% and 33.5% of new Naugatuck Valley Financial.
After the conversion and offering and merger with Southern Connecticut Bancorp, our ownership structure will be as follows:
We may cancel the conversion and offering at any time before the special meeting of members of Naugatuck Valley Mutual Holding Company and shareholders of Naugatuck Valley Financial to vote on the plan of conversion. We may also cancel the conversion and offering after these special meetings with the concurrence of the Office of Thrift Supervision.
The normal business operations of Naugatuck Valley Savings and Loan will continue without interruption during the conversion and offering, and the same officers and directors who currently serve Naugatuck Valley Savings and Loan in the mutual holding company structure will serve the new holding company and Naugatuck Valley Savings and Loan in the fully converted stock form. Upon completion of the merger, we will expand the size of the board and appoint , currently a director of Southern Connecticut Bancorp and The Bank of Southern Connecticut, to the boards of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan.
Reasons for the Conversion and Offering
[Same as prospectus]
Conditions to Completing the Conversion and Offering
[Same as prospectus]
The Exchange of Existing Shares of Naugatuck Valley Financial Common Stock
[Same as prospectus]
4
Table of Contents
Ownership of New Naugatuck Valley Financial after Completion of the Conversion and Offering and the Merger
[Same as prospectus]
How We Determined the Offering Range and Exchange Ratio
[Same as prospectus]
Possible Change in Offering Range
[Same as prospectus]
How We Intend to Use the Proceeds of the Offering
[Same as prospectus]
Benefits of the Conversion to Management
[Same as prospectus]
Purchases by Directors and Executive Officers
[Same as prospectus]
Market for New Naugatuck Valley Financial’s Common Stock
[Same as prospectus]
Naugatuck Valley Financial’s Dividend Policy
[Same as prospectus]
Dissenters’ Rights
Shareholders of Naugatuck Valley Financial do not have dissenters’ rights in connection with the conversion and offering.
Differences in Shareholder Rights
As a result of the conversion, existing shareholders of Naugatuck Valley Financial will become shareholders of new Naugatuck Valley Financial. The rights of shareholders of new Naugatuck Valley Financial will be less than the rights shareholders currently have. The decrease in shareholder rights results from differences between the articles of incorporation and bylaws of new Naugatuck Valley Financial and the charter and bylaws of Naugatuck Valley Financial and from distinctions between Maryland and federal law. The differences in shareholder rights under the articles of incorporation and bylaws of new Naugatuck Valley Financial are not mandated by Maryland law but have been chosen by management as being in the best interests of the corporation and all of its shareholders. However, the provisions in new Naugatuck Valley Financial’s articles of incorporation and bylaws may make it more difficult to pursue a takeover attempt that management opposes. These provisions will also make the removal of the board of directors or management, or the appointment of new directors, more difficult.
The differences in shareholder rights include the following:
• | supermajority voting requirements for certain business combinations and changes to some provisions of the articles of incorporation and bylaws; |
• | limitation on the right to vote shares; |
• | a majority of shareholders required to call special meetings of shareholders; and |
• | greater lead time required for shareholders to submit business proposals or director nominations. |
5
Table of Contents
Tax Consequences
[Same as prospectus]
Questions
Questions about voting may be directed to our proxy information agent, , at ( ) .
The Merger
The merger agreement is attached to this document asAppendix A. We encourage you to read this agreement carefully, as it is the legal document that governs the merger of Southern Connecticut Bancorp into new Naugatuck Valley Financial.
What Southern Connecticut Bancorp Stockholders Will Receive in the Merger
In the merger, if you are a Southern Connecticut Bancorp stockholder you may elect to receive for each of your shares of Southern Connecticut Bancorp common stock either (a) $6.75 in cash, without interest, or (b) 0.675 shares of common stock of new Naugatuck Valley Financial, or if the offering price per share in Naugatuck Valley Mutual Holding Company’s mutual to stock conversion is not $10.00, then such other number of shares as is equal to $6.75 divided by the offering price per share, subject to proration if either the cash election or the stock election is oversubscribed. Regardless of your choice, however, under the merger agreement, elections will be limited by the requirements that the number of shares of Southern Connecticut Bancorp common stock to be converted into new Naugatuck Valley Financial common stock in the merger must be 60% of the total number of shares of Southern Connecticut Bancorp common stock issue and outstanding on the date of the merger. As a result, if you elect to receive only cash or stock, you may nevertheless receive a mix of cash and stock, depending on the cash elections and stock elections of other Southern Connecticut Bancorp shareholders.
Any shares of new Naugatuck Valley Financial’s common stock to be issued in the merger will be issued immediately following completion of the conversion and offering. The merger is contingent upon the completion of the conversion of Naugatuck Valley Mutual Holding Company.
Southern Connecticut Bancorp Stockholders Election of Cash or Stock Consideration
If you own Southern Connecticut Bancorp common stock, you will receive under separate cover an election form that you may use to indicate whether your preference is to receive cash or shares of new Naugatuck Valley Financial’s common stock, or a combination of cash and stock. The election forms will be mailed to shareholders of Southern Connecticut Bancorp on or about the mail date for this proxy statement/prospectus. To make an election, a holder of Southern Connecticut Bancorp common stock must submit a properly completed election form and return it, together with all stock certificates, so that the form and certificates are actually received by the exchange agent by 5:00 pm. on[ELECTION DATE] in accordance with the instructions on the election form. Southern Connecticut Bancorp shareholders will be unable to sell their Southern Connecticut Bancorp stock from the time when the election is made until the merger is completed.
If Southern Connecticut Bancorp shareholders elect to receive more common stock than new Naugatuck Valley Financial has agreed to issue in the merger, then Southern Connecticut Bancorp shareholders who elect to receive cash or who have made no election will receive cash for each share of Southern Connecticut Bancorp common stock. All Southern Connecticut Bancorp stockholders who elected to receive new Naugatuck Valley Financial common stock will receive a pro rata portion of available new Naugatuck Valley Financial shares plus cash for those shares not converted into new Naugatuck Valley Financial common stock.
If Southern Connecticut Bancorp shareholders elect to receive more cash than new Naugatuck Valley Financial has agreed to pay in the merger, then Southern Connecticut Bancorp shareholders who elect to receive stock or who have made no election will receive new Naugatuck Valley Financial common stock. All Southern Connecticut Bancorp shareholders who elected to receive cash will receive a pro rata portion of the available cash plus shares of common stock of those Southern Connecticut Bancorp shares not converted into cash.
6
Table of Contents
Non-Electing Shares
Southern Connecticut Bancorp shareholders who make no election to receive cash or new Naugatuck Valley Financial common stock in the merger, and Southern Connecticut Bancorp shareholders who do not make a valid election, will be deemed not to have made an election. Shareholders not making an election may be paid in cash, new Naugatuck Valley Financial common stock or a mix of cash and shares of new Naugatuck Valley Financial common stock depending on, and after giving effect to, the number of valid cash elections and stock elections that have been made by other Southern Connecticut Bancorp shareholders.
No Fractional Shares
No fractional shares of new Naugatuck Valley Financial common stock will be issued in the merger. Instead of fractional shares, Southern Connecticut Bancorp shareholders will receive an amount of cash based on the offering price of $10.00 per share in the conversion of Naugatuck Valley Mutual Holding Company.
Opinion of Naugatuck Valley Financial’s Financial Advisor
In connection with the merger, the board of directors of Naugatuck Valley Financial received the written opinion from Naugatuck Valley Financial’s financial advisor, Ostrowski & Company, Inc., as to the fairness, from a financial point of view, to Naugatuck Valley Financial of the merger consideration to be paid in the merger. The full text of the opinion of Ostrowski & Company, Inc., dated as of September 17, 2010, is included in this document asAppendix B. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations of the review undertaken by Ostrowski & Company, Inc. The opinion of Ostrowski & Company, Inc. is directed to Naugatuck Valley Financial’s board of directors and does not constitute a recommendation to any Naugatuck Valley Financial shareholder as to how to vote with respect to the merger or any other matter relating to the proposed transaction. Ostrowski & Company, Inc. will receive a fee for its services, including rendering the fairness opinion, in connection with the merger.
Opinions of Southern Connecticut Bancorp’s Financial Advisor
In connection with the merger, the board of directors of Southern Connecticut Bancorp received the written opinion from Northeast Capital & Advisory as to the fairness, from a financial point of view, of the consideration to be received in the merger by holders of Southern Connecticut Bancorp common stock. The full text of the opinion of Northeast Capital & Advisory, dated as of September 17, 2010, is included in this document asAppendix C. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations of the review undertaken by both firms. The opinion of Northeast Capital & Advisory is directed to Southern Connecticut Bancorp’s board of directors and does not constitute a recommendation to any Southern Connecticut Bancorp shareholder as to how to vote with respect to the merger, the form of consideration to be elected in the merger, or any other matter relating to the proposed transaction. Northeast Capital & Advisory will receive a fee for its rendering the fairness opinion in connection with the merger.
Interests of Southern Connecticut Bancorp Directors and Executive Officers in the Merger
Some of the directors and executive officers of Southern Connecticut Bancorp have financial interests in the merger that are different from, or are in addition to, the interests of shareholders of Southern Connecticut Bancorp. These interests include rights of executive officers under employment and change in control agreements with Southern Connecticut Bancorp, rights under stock-based benefit programs and rights to continued indemnification and insurance coverage by Naugatuck Valley Financial after the merger for acts or omissions occurring before the merger. In addition, effective as of the completion of the merger, the new Naugatuck Valley Financial board of directors will include two directors of Southern Connecticut Bancorp, Elmer F. Laydon, Chairman of the Board, and Alphonse F. Spadaro, Vice Chairman of the Board, who will be appointed to serve as directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan upon completion of the merger. Naugatuck Valley Savings and Loan has also entered into employment agreements, to be effective upon completion of the merger, with Matthew Proto, Sr. and Sunil Pallan, both Senior Vice Presidents of The Bank of Southern Connecticut, under which they will be paid base salaries of $160,000 and $140,000, respectively. The Southern Connecticut Bancorp board of directors was aware of these interests and considered them in approving the merger agreement and the merger.
7
Table of Contents
Shareholders of Southern Connecticut Bancorp Do Not Have Dissenters’ Rights of Appraisal
Shareholders of Southern Connecticut Bancorp are not entitled under applicable provisions of Connecticut law to appraisal, dissenters’ or similar rights as a result of the merger.
Conditions to Completing the Merger
We cannot complete the merger unless:
• | the merger agreement is approved by at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock; |
• | the merger agreement is approved by a majority of the votes cast by Southern Connecticut Bancorp stockholders; |
• | the conversion and offering of Naugatuck Valley Financial is completed (the offering is scheduled to terminate on[DATE1], 2010. The offering may be extended until[DATE2], 2010, unless the Office of Thrift Supervision approves a later date; |
• | the merger is approved by the appropriate regulatory authorities; |
• | each party receives opinions from their respective legal counsel to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; and |
• | the representations and warranties made on the date of the merger agreement continue to be accurate. |
Termination of the Merger Agreement
The merger agreement may be terminated by mutual consent of Naugatuck Valley Financial and Southern Connecticut Bancorp at any time prior to the completion of the merger. Additionally, subject to conditions and circumstances described in the merger agreement, either Naugatuck Valley Financial or Southern Connecticut Bancorp may terminate the merger agreement if, among other things, any of the following occur:
• | the merger has not been consummated by March 30, 2011; |
• | Southern Connecticut Bancorp stockholders do not approve the merger agreement at the Southern Connecticut Bancorp special meeting; provided, however, that Southern Connecticut Bancorp will only be entitled to terminate the merger agreement for this reason if it has complied in all material respects with its obligations to seek stockholder approval; |
• | a required regulatory approval has been denied or a governmental authority blocks the merger; or |
• | there is a breach by the other party of any representation, warranty, covenant or agreement contained in the merger agreement, which cannot be cured, or has not been cured within 30 days after the giving of written notice to such party of such breach. |
Naugatuck Valley Financial may also terminate the merger agreement if Southern Connecticut Bancorp materially breaches its agreements regarding the solicitation of other acquisition proposals and the submission of the merger agreement to stockholders or if the board of directors of Southern Connecticut Bancorp does not recommend approval of the merger in the proxy statement/prospectus or withdraws or revises its recommendation in a manner adverse to Naugatuck Valley Financial.
Termination Fees
If Naugatuck Valley Financial terminates the merger agreement as a result of a material breach by Southern Connecticut Bancorp of its no-shop covenant or of its obligation to call a shareholder meeting and recommend approval of the merger, then Southern Connecticut Bancorp must pay Naugatuck Valley Financial $900,000.
8
Table of Contents
If either party terminates the merger agreement as a result of the failure of Southern Connecticut Bancorp’s stockholders to approve the merger or if Naugatuck Valley Financial terminates the merger agreement because of a material breach by Southern Connecticut Bancorp, and, in either case, an acquisition proposal from a third party has been publicly announced, disclosed or communicated, then Southern Connecticut Bancorp must pay Naugatuck Valley Financial $450,000. If within 12 months after such termination, Southern Connecticut Bancorp consummates or enters into any agreement with respect to an acquisition proposal, then it must pay an additional $450,000. In no case shall Southern Connecticut Bancorp be obligated to pay termination fees in excess of $900,000.
The merger agreement also provides that if the merger agreement is terminated by either party because either (i) the merger has not been consummated by March 30, 2011 because the conversion has not been consummated by that date or (ii) a required regulatory approval has been denied or a governmental authority blocks the merger, then:
• | in the case of termination under clause (i) above: |
• | Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $900,000 if the failure to not consummate the conversion results from Naugatuck Valley Financial’s election not to consummate the conversion after having received the approval, consent or waiver of each governmental entity and satisfied all other conditions precedent required to consummate the conversion; or |
• | Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $350,000 if the failure to not consummate the conversion results from any other reason; and |
• | in the case of termination under clause (ii) above, Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $350,000. |
Regulatory Approvals Required for the Merger
The merger cannot be completed unless it is first approved by the Office of Thrift Supervision and the Connecticut Department of Banking. New Naugatuck Valley Financial must also receive the prior approval, or a waiver thereof, of the Federal Reserve Board. New Naugatuck Valley Financial received a waiver from the Federal Reserve Board on , 2010, and the conditional approval of the Connecticut Department of Banking and the Office of Thrift Supervision on , 2010, and , 2010, respectively.
Material Federal Income Tax Consequences of the Merger
Naugatuck Valley Financial and Southern Connecticut Bancorp will not be required to complete the merger unless each receives an opinion of its respective counsel, dated the closing date of the merger, that the merger will qualify as a tax-free reorganization for United States federal income tax purposes. In connection with the filing of the registration statement of which this document is a part, each of Naugatuck Valley Financial and Southern Connecticut Bancorp has received an opinion of its counsel that the merger will qualify as a reorganization for United States federal income tax purposes. Accordingly, it is anticipated that for federal income tax purposes, shareholders of Southern Connecticut Bancorp generally will not recognize any gain or loss with respect to their shares of Southern Connecticut Bancorp common stock if they receive only shares of new holding company common stock in the merger, except with respect to any cash received instead of a fractional share interest in new holding company common stock.
If you receive cash in exchange for any of your shares of Southern Connecticut Bancorp common stock, you will generally recognize gain, but not in excess of the amount of cash you receive.
You should read“Naugatuck Valley Financial’s Proposal 3 and Southern Connecticut Bancorp’s Proposal 1—Approval of the Merger Agreement—Material Federal Income Tax Consequences” for a more complete discussion of the federal income tax consequences of the merger. Tax matters can be complicated and the tax consequences of the merger to you will depend on your particular tax situation. You should consult your tax advisor to fully understand the tax consequences of the merger to you.
Differences in Shareholders’ Rights for Existing Shareholders of Southern Connecticut Bancorp
As a result of the merger, existing shareholders of Southern Connecticut Bancorp who receive stock consideration will become shareholders of new Naugatuck Valley Financial. Some rights of shareholders of new Naugatuck Valley Financial
9
Table of Contents
will be different from the rights shareholders currently have. The differences in shareholder rights result principally from differences in the articles of incorporation and bylaws of new Naugatuck Valley Financial (and the law of the state of its incorporation, Maryland) and the articles of incorporation and bylaws of Southern Connecticut Bancorp (and the law of the state of its incorporation, Connecticut). See“Comparison of Shareholder Rights For Shareholders of Southern Connecticut Bancorp” for a discussion of these differences.
Equivalent Per Share Data
We have summarized below specified per common share information for our respective companies on a historical basis, combined pro forma amounts and pro forma equivalent basis as of or for the year ended December 31, 2009 and the six months ended June 30, 2010.
Naugatuck Valley Financial Historical | Southern Connecticut Bancorp Historical | Combined Pro Forma Amounts (1) | Pro Forma Southern Connecticut Bancorp Equivalent Shares (2) | ||||||||||||
Tangible book value per share: | |||||||||||||||
June 30, 2010 | $ | 7.28 | $ | 5.82 | $ | 15.38 | $ | 10.38 | |||||||
Shares outstanding: | |||||||||||||||
June 30, 2010 | 7,022,649 | 2,696,902 | 5,110,320 | 1,092,245 | |||||||||||
Cash dividends paid per share for period: | |||||||||||||||
Year ended December 31, 2009 | 0.14 | — | 0.14 | 0.09 | |||||||||||
Six months ended June 30, 2010 | 0.06 | — | 0.06 | 0.04 | |||||||||||
Basic earnings per share: | |||||||||||||||
Year ended December 31, 2009 | 0.29 | (1.08 | ) | (0.39 | ) | (0.26 | ) | ||||||||
Six months ended June 30, 2010 | 0.15 | 0.01 | (0.04 | ) | (0.03 | ) | |||||||||
Diluted earnings per share: | |||||||||||||||
Year ended December 31, 2009 | 0.29 | (1.08 | ) | (0.39 | ) | (0.26 | ) | ||||||||
Six months June 30, 2010 | 0.15 | 0.01 | (0.04 | ) | (0.03 | ) |
(1) | Assuming issuance of2,034,050 shares at the midpoint of the conversion and offering. |
(2) | Calculated by multiplying the combined pro forma amounts by a 0.675 exchange ratio which represents the number of shares of new holding company common stock a Southern Connecticut Bancorp shareholder electing to receive stock will receive for each share of stock owned based on a $10 offering price, subject to pro ration if the stock election is oversubscribed. This calculation does not consider the 60% cash portion of the merger consideration. |
Market Price of Naugatuck Valley Financial and Southern Connecticut Bancorp Common Stock
The following table sets forth the price per share of Naugatuck Valley Financial and Southern Connecticut Bancorp common stock based on the last reported sales price per share on The Nasdaq Global Market and the American Stock Exchange, respectively, on February 22, 2010, the last trading day before the public announcement of the execution of the merger agreement and on , 2010, the most recent date for which prices were available before mailing this document.
Date | Naugatuck Valley Financial Common Stock | Southern Connecticut Bancorp Common Stock | ||||
February 22, 2010 | $ | 5.80 | $ | 3.34 | ||
, 2010 |
10
Table of Contents
You should consider carefully the following risk factors when deciding how to vote on the conversion and before purchasing shares of new Naugatuck Valley Financial common stock.
Risks Related to the Proposed Merger
The integration of the operations of Naugatuck Valley Financial and Southern Connecticut Bancorp may be more difficult than anticipated.
The success of the merger will depend on a number of factors, including, but not limited to, Naugatuck Valley Financial’s ability to:
• | timely and successfully integrate the operations of Naugatuck Valley Financial and Southern Connecticut Bancorp; |
• | maintain existing relationships with The Bank of Southern Connecticut’s depositors and to minimize withdrawals of deposits subsequent to the merger; |
• | maintain and enhance existing relationships with borrowers to limit potential losses from loans made by The Bank of Southern Connecticut; |
• | control the incremental non-interest expense from the merger to maintain overall operating efficiencies; |
• | retain key personnel; and |
• | compete effectively in the communities served by The Bank of Southern Connecticut. |
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees of Southern Connecticut Bancorp who are expected to be retained by Naugatuck Valley Financial. Naugatuck Valley Financial may not be successful in retaining these employees for the time period necessary to successfully integrate Southern Connecticut Bancorp’s operations with those of Naugatuck Valley Financial. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business and results of operation of Naugatuck Valley Financial following the merger.
Naugatuck Valley Financial and Southern Connecticut Bancorp will be subject to business uncertainties while the merger is pending that could adversely affect their businesses.
Uncertainty among employees, depositors, vendors and others about the effect of the merger may have an adverse effect on Naugatuck Valley Financial and Southern Connecticut Bancorp and, consequently, on the combined company. Although Naugatuck Valley Financial and Southern Connecticut Bancorp intend to take actions to reduce any adverse effects, these uncertainties may impair their ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause depositors, vendors and others that do business with Naugatuck Valley Financial and Southern Connecticut Bancorp to seek to change existing business relationships with either or both companies.
Naugatuck Valley Financial and Southern Connecticut Bancorp will incur significant transaction costs which may diminish the anticipated benefits of the merger.
Naugatuck Valley Financial and Southern Connecticut Bancorp expect to incur merger-related costs totaling approximately $1.8 million in connection with completing the merger, including the expenses related to integrating the operations of the two companies. Substantially all merger-related costs to be incurred by the two companies will be charged to operations and will not be included as a component of the purchase price under purchase accounting. The amount of merger-related costs expected to be incurred by Naugatuck Valley Financial and Southern Connecticut Bancorp are preliminary estimates and are subject to change.
Naugatuck Valley Financial and Southern Connecticut Bancorp are continuing to assess the magnitude of these costs, and, therefore, these estimates may change substantially as additional unanticipated costs may be incurred in the integration of the businesses of the two companies. Although Naugatuck Valley Financial and Southern Connecticut Bancorp believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
11
Table of Contents
Issuance of shares in the merger will dilute the ownership interest of Naugatuck Valley Financial stockholders.
The acquisition of Southern Connecticut Bancorp will result in Naugatuck Valley Financial recording goodwill and other intangible assets of approximately $3.1 million. As a result, subscribers in the offering will experience per share dilution in tangible capital of $0.71, $0.63, $0.56 and $0.50 at the minimum, midpoint, maximum and maximum, as adjusted of the offering range.
In connection with the merger, new Naugatuck Valley Financial will issue an aggregate of approximately 1,092,245 shares of common stock and pay approximately $7.3 million in cash to the stockholders of Southern Connecticut Bancorp. Assuming 1,092,245 of the shares are issued to Southern Connecticut Bancorp shareholders in the merger, then the issuance of the shares in the merger would dilute the interests of holders of new Naugatuck Valley Financial shares after completion of the conversion and offering by approximately 4.2% and 19.1% at the minimum and maximum of the offering range, respectively.
If the Naugatuck Valley Financial stock offering does not close, the merger will be terminated
We anticipate that the Naugatuck Valley Financial stock offering and the merger will both be completed in the of 2010. At this time, we are not aware of any circumstances that are likely to cause the offering or the merger not to occur. However, certain conditions to the merger have not yet been satisfied, including receipt of all regulatory approvals, stockholder approval of the merger and the conversion and completion by Naugatuck Valley Financial of the offering. Completion of the offering is also subject to a number of conditions including the requirement that a minimum number of shares of Naugatuck Valley Financial be sold. If the offering cannot be completed, the merger will not occur.
Stockholders of Southern Connecticut Bancorp may receive a form of consideration different from what they elect
The consideration to be received by Southern Connecticut Bancorp stockholders in the merger is subject to the requirement that 60% of the shares of Southern Connecticut Bancorp common stock be exchanged for Naugatuck Valley Financial common stock and 40% be exchanged for cash. The merger agreement contains proration and allocation methods to achieve this desired result. If Southern Connecticut Bancorp stockholders elect all cash and the available cash is oversubscribed, then they will receive a portion of the merger consideration in Naugatuck Valley Financial common stock. If Southern Connecticut Bancorp stockholders elect all stock and the available stock is oversubscribed, then they will receive a portion of the merger consideration in cash.
Certain of Southern Connecticut Bancorp officers and directors have interests that are different from, or in addition to, interests of stockholders generally
You should be aware that the directors and officers of Southern Connecticut Bancorp have interests in the merger that are different from, or in addition to, the interests of Southern Connecticut Bancorp stockholders generally. These include: employment agreements that two officers of Southern Connecticut Bancorp will enter into upon completion of the merger; the cancellation of stock options in exchange for a cash payment equal to $6.75 minus the exercise price for each option; provisions in the merger agreement relating to indemnification of directors and officers and insurance for directors and officers of Southern Connecticut Bancorp for events occurring before the merger; and the appointment of a director of Southern Connecticut Bancorp to the board of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan.
For a more detailed discussion of these interests, see“Naugatuck Valley Financial’s Proposal 3 and Southern Connecticut Bancorp’s Proposal 1—Approval of the Merger Agreement—Description of the Merger and the Merger Agreement—Interests of Certain Persons in the Merger.”
Stockholders of Southern Connecticut Bancorp will have less influence as a stockholder of new Naugatuck Valley Financial than as a stockholder of Southern Connecticut Bancorp
Stockholders of Southern Connecticut Bancorp currently have the right to vote in the election of directors of Southern Connecticut Bancorp and on other matters affecting Southern Connecticut Bancorp. The merger will result in the transfer of control of Southern Connecticut Bancorp to new Naugatuck Valley Financial. Although stockholders of Southern Connecticut Bancorp may become stockholders of new Naugatuck Valley Financial as a result of the merger, their
12
Table of Contents
percentage ownership of Naugatuck Valley Financial will be smaller than their percentage ownership of Southern Connecticut Bancorp. Because of this, they will have less influence on the management and policies of Naugatuck Valley Financial than they now have on the management and policies of Southern Connecticut Bancorp.
Risks Related to Our Business
[same as prospectus]
Risks Related to the Offering
[same as prospectus]
Risks Related to the Offering and Share Exchange
The market value of new Naugatuck Valley Financial common stock received in the share exchange may be less than the market value of Naugatuck Valley Financial common stock exchanged.
The number of shares of new Naugatuck Valley Financial common stock you receive will be based on an exchange ratio that will be determined as of the date of completion of the conversion and offering. The exchange ratio will be based on the percentage of Naugatuck Valley Financial common stock held by the public before the completion of the conversion and offering, the final independent appraisal of new Naugatuck Valley Financial common stock prepared by FinPro and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public shareholders of Naugatuck Valley Financial common stock will own approximately the same percentage of new Naugatuck Valley Financial common stock after the conversion and offering as they owned of Naugatuck Valley Financial common stock immediately prior to completion of the conversion and offering, exclusive of the effect of the acquisition of Southern Connecticut Bancorp, the purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio will not depend on the market price of Naugatuck Valley Financial common stock.
The exchange ratio ranges from a minimum of0.4863 to a maximum of0.6580 shares of new Naugatuck Valley Financial common stock per share of Naugatuck Valley Financial common stock (subject to increase to0.7567shares). Shares of new Naugatuck Valley Financial common stock issued in the share exchange will have an initial value of $10.00 per share. Depending on the exchange ratio and the market value of Naugatuck Valley Financial common stock at the time of the exchange, the initial market value of the new Naugatuck Valley Financial common stock that you receive in the share exchange could be less than the market value of the Naugatuck Valley Financial common stock that you currently own. Based on the most recent closing price of Naugatuck Valley Financial common stock prior to the date of this proxy statement/prospectus, which was $ , unless at least shares of new Naugatuck Valley Financial common stock are sold in the offering (slightly above the of the offering range), the initial value of the new Naugatuck Valley Financial common stock you receive in the share exchange would be less than the market value of the Naugatuck Valley Financial common stock you currently own. See“Naugatuck Valley Financial’s Proposal 1—Approval of the Plan of Conversion—The Share Exchange Ratio.”
13
Table of Contents
A Warning About Forward-Looking Statements
This proxy statement/prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:
• | statements of our goals, intentions and expectations; |
• | statements regarding our business plans, prospects, growth and operating strategies; |
• | statements regarding the quality of our loan and investment portfolios; and |
• | estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
• | Naugatuck Valley Financial’s ability to integrate successfully the operations of Southern Connecticut Bancorp; |
• | general economic conditions, either nationally or in our market area, that are worse than expected; |
• | changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
• | increased competitive pressures among financial services companies; |
• | changes in consumer spending, borrowing and savings habits; |
• | legislative or regulatory changes that adversely affect our business; |
• | adverse changes in the securities markets; and |
• | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies or the Financial Accounting Standards Board. |
Any of the forward-looking statements that we make in this proxy statement/prospectus and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.
Further information on other factors that could affect us are included in the section captioned “Risk Factors.”
14
Table of Contents
Selected Consolidated Financial and Other Data
of Naugatuck Valley Financial
[Insert from prospectus]
15
Table of Contents
Selected Consolidated Financial and Other Data
of Southern Connecticut Bancorp
[Insert from prospectus]
16
Table of Contents
Summary Selected Pro Forma Condensed Consolidated
Financial Data
[Insert from prospectus]
17
Table of Contents
The following table shows information, for the periods indicated, about Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s historical net income per share, dividends per share and stockholders’ equity per share. The table also contains pro forma information that reflects Naugatuck Valley Financial’s offering at the minimum of the offering range and its acquisition of Southern Connecticut Bancorp. The table assumes that, as of June 30, 2010, Naugatuck Valley Financial sells2,034,050shares in the offering at the minimum of the offering range and issues 1,092,245 shares to Southern Connecticut Bancorp stockholders in the merger. In presenting the comparative pro forma information for certain time periods, we assumed that Southern Connecticut Bancorp and Naugatuck Valley Financial have been merged throughout those periods.
The information listed as“Per Equivalent Southern Connecticut Bancorp” was obtained by multiplying the pro forma combined amounts by the exchange ratio of 0.675. We present this information to reflect the fact that some Southern Connecticut Bancorp stockholders will receive shares of Naugatuck Valley Financial common stock for their shares of Southern Connecticut Bancorp common stock exchanged in the merger. We also anticipate that the combined company will derive financial benefits from the merger that may include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. The pro forma information also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods.
The information in the following table is based on, and should be read together with, the historical financial information and the condensed combined pro forma financial statements presented in this document. See“Pro Forma Financial Information.”
Naugatuck Valley Financial Historical | Southern Connecticut Bancorp Historical | Pro Forma Combined (1) | Per Equivalent Southern Connecticut Bancorp Share | ||||||||||||
Book value per share | |||||||||||||||
At June 30, 2010 | $ | 7.29 | $ | 5.82 | $ | 16.01 | $ | 10.81 | |||||||
Tangible book value per share | |||||||||||||||
At June 30, 2010 | $ | 7.28 | $ | 5.82 | $ | 15.38 | $ | 10.38 | |||||||
Cash dividends declared per share | |||||||||||||||
Year ended December 31, 2009 | $ | 0.14 | $ | — | $ | 0.14 | $ | 0.09 | |||||||
Six months ended June 30, 2010 | 0.06 | — | 0.06 | 0.04 | |||||||||||
Diluted net income per share | |||||||||||||||
Year ended December 31, 2009 | $ | 0.29 | $ | (1.08 | ) | $ | (0.39 | ) | $ | (0.26 | ) | ||||
Six months ended June 30, 2010 | 0.15 | 0.01 | (0.04 | ) | (0.03 | ) |
(1) | The pro forma combined book value per share of Naugatuck Valley Financial common stock is based upon the pro forma combined common stockholders’ equity for Naugatuck Valley Financial and Southern Connecticut Bancorp divided by total pro forma common shares of the combined entities. |
18
Table of Contents
Comparative Market Prices and Dividends
The common stock of Naugatuck Valley Financial is currently listed on the Nasdaq Global Market under the symbol “NVSL.” Upon completion of the conversion and offering, the shares of common stock of new Naugatuck Valley Financial will replace Naugatuck Valley Financial’s common stock. We expect that new Naugatuck Valley Financial’s shares of common stock will trade on the Nasdaq Global Market under the trading symbol “NVSLD” for a period of 20 trading days after completion of the offering. Thereafter, our trading symbol will revert to “NVSL.” To list our common stock on the Nasdaq Global Market we are required to have at least three broker-dealers who will make a market in our common stock. Naugatuck Valley Financial currently has approximately registered market makers.
The common stock of Southern Connecticut Bancorp is currently listed on the American Stock Exchange under the symbol “SSE.”
The following table sets forth high and low sales prices for Naugatuck Valley Financial and Southern Connecticut Bancorp common stock and the cash dividends per share declared for the periods indicated.
Naugatuck Valley Financial | Southern Connecticut Bancorp | |||||||||||||||||
High | Low | Dividends | High | Low | Dividends | |||||||||||||
Year Ending December 31, 2010: | ||||||||||||||||||
Fourth Quarter (through , 2010) | $ | $ | $ | $ | $ | $ | — | |||||||||||
Third Quarter | 0.03 | — | ||||||||||||||||
Second Quarter | 7.10 | 5.51 | 0.03 | 6.85 | 5.66 | — | ||||||||||||
First Quarter | 7.00 | 5.28 | 0.03 | 6.79 | 2.81 | — | ||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||||
Fourth Quarter | $ | 7.42 | $ | 4.14 | $ | 0.03 | $ | 4.65 | $ | 2.04 | $ | — | ||||||
Third Quarter | 6.30 | 4.11 | 0.03 | 6.25 | 4.13 | — | ||||||||||||
Second Quarter | 7.24 | 5.10 | 0.03 | 5.70 | 4.55 | — | ||||||||||||
First Quarter | 7.71 | 4.37 | 0.05 | 8.90 | 4.93 | — | ||||||||||||
Year Ended December 31, 2008: | ||||||||||||||||||
Fourth Quarter | $ | 8.25 | $ | 5.08 | $ | 0.06 | $ | 6.25 | $ | 1.40 | $ | — | ||||||
Third Quarter | 10.00 | 7.75 | 0.06 | 7.05 | 5.48 | — | ||||||||||||
Second Quarter | 9.69 | 7.75 | 0.06 | 7.45 | 6.95 | — | ||||||||||||
First Quarter | 9.95 | 8.51 | 0.06 | 7.50 | 6.73 | — |
At February 22, 2010, the business day immediately preceding the public announcement of the conversion and offering and the merger, the closing price for Naugatuck Valley Financial common stock was $5.80 per share and the closing price for Southern Connecticut Bancorp common stock was $3.34 per share. On , 2010, the last practicable day before the distribution of this proxy statement/prospectus, the closing price for Naugatuck Valley Financial common stock was $ per share and the closing price for Southern Connecticut Bancorp common stock was $ per share. At , 2010, Naugatuck Valley Financial had approximately shareholders of record, not including those who hold shares in “street name.” On the effective date of the conversion, all publicly held shares of Naugatuck Valley Financial common stock, including shares held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of new Naugatuck Valley Financial common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio.” The above table reflects actual prices and has not been adjusted to reflect the exchange ratio. Options to purchase shares of Naugatuck Valley Financial common stock will be converted into options to purchase a number of shares of new Naugatuck Valley Financial common stock adjusted pursuant to the exchange ratio, for the same aggregate exercise price.
Restrictions on new Naugatuck Valley Financial’s ability to pay dividends are discussed under“Our Dividend Policy.”
19
Table of Contents
Special Meeting of Naugatuck Valley Financial Shareholders
Date, Place, Time and Purpose
Naugatuck Valley Financial’s board of directors is sending you this document for the purpose of requesting that you allow your shares of Naugatuck Valley Financial to be represented at the special meeting by the persons named in the enclosed proxy card. At the special meeting, the Naugatuck Valley Financial board of directors will ask you to vote on proposals to approve the plan of conversion and the merger agreement. You will also be asked to vote on informational proposals regarding new Naugatuck Valley Financial’s articles of incorporation. You also may be asked to vote on a proposal to adjourn the special meeting if necessary to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to approve the plan of conversion or the merger agreement. The special meeting will be held at , , Connecticut, at :00 a.m., local time, on[MEETINGDATE], 2010.
Who Can Vote at the Meeting
You are entitled to vote your Naugatuck Valley Financial common stock if our records show that you held your shares as of the close of business on[RECORDDATE], 2010. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner, you have the right to direct your broker or nominee how to vote.
As of the close of business on[RECORDDATE], 2010, there were shares of Naugatuck Valley Financial common stock outstanding. Each share of common stock has one vote.
Attending the Meeting
If you are a shareholder as of the close of business on[RECORDDATE], 2010, you may attend the meeting. However, if you hold your shares in street name, you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from a bank or broker are examples of proof of ownership. If you want to vote your shares of Naugatuck Valley Financial common stock held in street name in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.
Vote Required
The special meeting will be held only if there is a quorum. A quorum exists if a majority of the outstanding shares of common stock entitled to vote, represented in person or by proxy, is present at the meeting. If you return valid proxy instructions or attend the meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes also will be counted for purposes of determining the existence of a quorum. A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.
Proposal 1: Approval of the Plan of Conversion. To be approved, the plan of conversion requires the affirmative vote of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock, including the shares held by Naugatuck Valley Mutual Holding Company,and the affirmative vote of a majority of votes eligible to be cast at the meeting, excluding shares of Naugatuck Valley Mutual Holding Company. Abstentions and broker non-votes will have the same effect as a vote against the plan of conversion.
Informational Proposals 2a and 2b: Approval of Certain Provisions in New Naugatuck Valley Financial’s Articles of Incorporation. While we are asking you to vote with respect to each of the informational proposals, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals.
Proposal 3:Approval of the Merger Agreement.To be approved, the merger agreement requires the affirmative vote of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock. Abstentions and broker non-votes will have the same effect as a vote against the merger agreement.
20
Table of Contents
Proposal 4: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of a majority of the shares represented at the special meeting and entitled to vote at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion or the merger agreement. Abstentions will have the same effect as a vote against the merger agreement and broker non-votes if any will have no impact on the vote for adjournment of the special meeting.
Shares Held by Naugatuck Valley Mutual Holding Company and Our Officers and Directors
As of[RECORDDATE], 2010, Naugatuck Valley Mutual Holding Company beneficially owned shares of Naugatuck Valley Financial common stock. This equals 59.6% of our outstanding shares. Naugatuck Valley Mutual Holding Company intends to vote all of its shares in favor of the plan of conversion and the merger agreement.
As of[RECORDDATE], 2010, our officers and directors beneficially owned shares of Naugatuck Valley Financial common stock, not including shares that they may acquire upon the exercise of outstanding stock options. This equals % of our outstanding shares and % of shares held by persons other than Naugatuck Valley Mutual Holding Company.
Voting by Proxy
Our board of directors is sending you this proxy statement to request that you allow your shares of Naugatuck Valley Financial common stock to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of Naugatuck Valley Financial common stock represented at the meeting by properly executed and dated proxies will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our board of directors. Our board of directors recommends that you vote“FOR” approval of the plan of conversion and reorganization, “FOR” each of the Informational Proposals 2a and 2b, “FOR” approval of the merger agreement and“FOR”approval of the adjournment of the special meeting.
If any matters not described in this proxy statement are properly presented at the special meeting, the persons named in the proxy card will use their judgment to determine how to vote your shares. We do not know of any other matters to be presented at the special meeting.
You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy, you must either advise the Corporate Secretary of Naugatuck Valley Financial in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.
If your Naugatuck Valley Financial common stock is held in street name, you will receive instructions from your broker, bank or other nominee that you must follow to have your shares voted. Your broker, bank or other nominee may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form provided by your broker, bank or other nominee that accompanies this proxy statement/prospectus.
Solicitation of Proxies
Naugatuck Valley Financial will pay for this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of Naugatuck Valley Financial may solicit proxies personally and by telephone. None of these persons will receive additional or special compensation for soliciting proxies. Naugatuck Valley Financial will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. Naugatuck Valley Financial has retained Phoenix Advisory Partners LLC, a proxy solicitation firm, to assist it in soliciting proxies and has agreed to pay them a fee of $6,000 plus reasonable expenses and charges for telephone calls made and received in connection with these services.
Participants in the ESOP, 401(k) Plan, Equity Incentive Plan or Long-Term Incentive Plan
If you participate in the ESOP or the Equity Incentive Plan, or if you invest in Naugatuck Valley Financial common stock through the Naugatuck Valley Financial Stock Fund in our 401(k) Plan, you will receive a vote authorization form for
21
Table of Contents
each plan that reflects all shares you may direct the trustees to vote on your behalf under the respective plans. Under the terms of the ESOP, all allocated shares of Naugatuck Valley Financial common stock held by the ESOP are voted by the ESOP trustee, as directed by plan participants. All unallocated shares of Naugatuck Valley Financial common stock held by the ESOP and all allocated shares for which no timely voting instructions are received are voted by the ESOP trustee in the same proportion as shares for which the trustee has received timely voting instructions from other ESOP participants, subject to the exercise of its fiduciary duties. Under the terms of the 401(k) Plan, a participant may direct the trustee how to vote the shares in the Naugatuck Valley Financial Stock Fund credited to his or her account. The trustee will vote all shares for which it does not receive timely instructions from participants in the same proportion as shares for which the trustee received voting instructions from other 401(k) Plan participants. Under the Equity Incentive Plan, participants may direct the trustee how to vote their unvested restricted stock awards. The trustee will vote all shares held in the trust for which it does not receive timely instructions as directed by Naugatuck Valley Financial. The deadline for returning your voting instructions is , 2010.
22
Table of Contents
Special Meeting of Southern Connecticut Bancorp Shareholders
Date, Place, Time and Purpose
Southern Connecticut Bancorp’s board of directors is sending you this document for the purpose of requesting that you allow your shares of Southern Connecticut Bancorp to be represented at the special meeting by the persons named in the enclosed proxy card. At the special meeting, the Southern Connecticut Bancorp board of directors will ask you to vote on a proposal to approve the merger agreement. You also may be asked to vote on a proposal to adjourn the special meeting if necessary to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to approve the merger agreement. The special meeting will be held at The Quinnipiack Club, 221 Church Street, New Haven, Connecticut, at 10:00 a.m., local time, on[SSE MEETINGDATE], 2010.
Who Can Vote at the Meeting
You are entitled to vote your Southern Connecticut Bancorp common stock if our records show that you held your shares as of the close of business on[SSE RECORDDATE], 2010. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner, you have the right to direct your broker or nominee how to vote.
As of the close of business on[SSE RECORDDATE], 2010, there were shares of Southern Connecticut Bancorp common stock outstanding. Each share of common stock has one vote.
Attending the Meeting
If you are a shareholder as of the close of business on[SSE RECORDDATE], 2010, you may attend the meeting. However, if you hold your shares in street name, you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from a bank or broker are examples of proof of ownership. If you want to vote your shares of Southern Connecticut Bancorp common stock held in street name in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.
Vote Required
The special meeting will be held only if there is a quorum. A quorum exists if a majority of the outstanding shares of common stock entitled to vote, represented in person or by proxy, is present at the meeting. If you return valid proxy instructions or attend the meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes also will be counted for purposes of determining the existence of a quorum. A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.
Proposal 1: Approval of the Merger Agreement.To be approved, the merger agreement requires the affirmative vote of a majority of the votes cast at the special meeting. Abstentions and broker non-votes will have no impact on the vote for the merger agreement.
Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of a majority of the votes cast to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement. Abstentions and broker non-votes will have no impact on the vote for adjournment of the special meeting.
Shares Held by Our Officers and Directors
As of[RECORDDATE], 2010, our officers and directors beneficially owned shares of Naugatuck Valley Financial common stock, not including shares that they may acquire upon the exercise of outstanding stock options. This equals % of our outstanding shares and % of shares held by persons other than Naugatuck Valley Mutual Holding Company.
23
Table of Contents
Voting by Proxy
Our board of directors is sending you this proxy statement to request that you allow your shares of Southern Connecticut Bancorp common stock to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of Southern Connecticut Bancorp common stock represented at the meeting by properly executed and dated proxies will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our board of directors. Our board of directors recommends that you vote“FOR” approval of the merger agreement and“FOR”approval of the adjournment of the special meeting.
If any matters not described in this proxy statement are properly presented at the special meeting, the persons named in the proxy card will use their judgment to determine how to vote your shares. We do not know of any other matters to be presented at the special meeting.
You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy, you must either advise the Corporate Secretary of Southern Connecticut Bancorp in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.
If your Southern Connecticut Bancorp common stock is held in street name, you will receive instructions from your broker, bank or other nominee that you must follow to have your shares voted. Your broker, bank or other nominee may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form provided by your broker, bank or other nominee that accompanies this proxy statement/prospectus.
Solicitation of Proxies
Southern Connecticut Bancorp will pay for this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of Southern Connecticut Bancorp may solicit proxies personally and by telephone. None of these persons will receive additional or special compensation for soliciting proxies. Southern Connecticut Bancorp will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions.
24
Table of Contents
Proposal 1—Approval of the Plan of Conversion
This conversion is being conducted pursuant to a plan of conversion approved by the boards of directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. The Office of Thrift Supervision has conditionally approved the plan of conversion; however, such approval does not constitute a recommendation or endorsement of the plan of conversion by such agency.
General
On February 22, 2010, the boards of directors of Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan unanimously adopted the plan of conversion. The second-step conversion that we are now undertaking involves a series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. Under the plan of conversion, Naugatuck Valley Savings and Loan will convert from the mutual holding company form of organization to the stock holding company form of organization and become a wholly owned subsidiary of new Naugatuck Valley Financial, a newly formed Maryland corporation. Current shareholders of Naugatuck Valley Financial, other than Naugatuck Valley Mutual Holding Company, will receive shares of new Naugatuck Valley Financial common stock in exchange for their shares of Naugatuck Valley Financial common stock. Following the conversion and offering, Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company will no longer exist.
The conversion to a stock holding company structure also includes the offering by new Naugatuck Valley Financial of its common stock to eligible depositors of Naugatuck Valley Savings and Loan in a subscription offering and, if necessary, to members of the general public through a community offering and/or a syndicate of registered broker-dealers. The amount of capital being raised in the offering is based on an independent appraisal of new Naugatuck Valley Financial. Most of the terms of the offering are required by the regulations of the Office of Thrift Supervision.
Consummation of the conversion and offering requires the approval of the Office of Thrift Supervision. In addition, pursuant to Office of Thrift Supervision regulations, consummation of the conversion and offering is conditioned upon the approval of the plan of conversion by (1) at least a majority of the total number of votes eligible to be cast by depositors of Naugatuck Valley Savings and Loan, (2) the holders of at least two-thirds of the outstanding shares of Naugatuck Valley Financial common stock and (3) the holders of at least a majority of the outstanding shares of common stock of Naugatuck Valley Financial, excluding shares held by Naugatuck Valley Mutual Holding Company.
The Office of Thrift Supervision approved our plan of conversion, subject to, among other things, approval of the plan of conversion by Naugatuck Valley Mutual Holding Company’s members (depositors of the Naugatuck Valley Savings and Loan) and Naugatuck Valley Financial’s shareholders. Meetings of Naugatuck Valley Mutual Holding Company’s members and Naugatuck Valley Financial’s shareholders have been called for this purpose on , 2010.
Funds received in the subscription and community offerings will be maintained in a segregated account at Naugatuck Valley Savings and Loan. If we fail to receive the necessary shareholder or member approval, or if we cancel the conversion and offering for any reason, orders for common stock already submitted will be canceled, subscribers’ funds will be returned promptly with interest calculated at Naugatuck Valley Savings and Loan’s passbook savings rate and all deposit account withdrawal holds will be cancelled. We will not make any deduction from the returned funds for the costs of the offering.
In connection with the conversion, new Naugatuck Valley Financial will acquire Southern Connecticut Bancorp in a merger, whereby Southern Connecticut Bancorp will be merged with and into new Naugatuck Valley Financial and Southern Connecticut Bancorp’s wholly owned subsidiary, The Bank of Southern Connecticut, will be merged with and into Naugatuck Valley Savings and Loan. In connection with the merger, Southern Connecticut Bancorp’s stockholders will be given the opportunity to exchange their shares of Southern Connecticut Bancorp common stock for $6.75 in cash, 0.675 shares of new Naugatuck Valley Financial common stock, or a combination thereof, subject to the election and proration procedures set forth in the merger agreement. For more information on the merger with Southern Connecticut Bancorp, see“Naugatuck Valley Financial’s Proposal 3 and Southern Connecticut Bancorp’s Proposal 1—Approval of the Merger Agreement.”
25
Table of Contents
The following is a brief summary of the pertinent aspects of the conversion and offering. A copy of the plan of conversion is available from Naugatuck Valley Financial upon request and is available for inspection at the offices of Naugatuck Valley Savings and Loan and at the Office of Thrift Supervision. The plan of conversion is also filed as an exhibit to the registration statement, of which this prospectus forms a part, that new Naugatuck Valley Financial has filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”
The board of directors recommends that you vote “FOR” the adoption of the plan of conversion.
Reasons for the Conversion and Offering
[Insert from prospectus]
Description of the Conversion
[Insert from prospectus]
Share Exchange Ratio for Current Shareholders
[Insert from prospectus]
How We Determined the Offering Range and the $10.00 Purchase Price
[Insert from prospectus]
Subscription Offering and Subscription Rights
Under the plan of conversion, we have granted rights to subscribe for our common stock to the following persons in the following order of priority:
1. | Persons with deposits in Naugatuck Valley Savings and Loan with balances of $50 or more (“qualifying deposits”) as of the close of business on December 31, 2008 (“eligible account holders”). |
2. | Our employee stock ownership plan. |
3. | Persons with qualifying deposits in Naugatuck Valley Savings and Loan as of the close of business on [ ], 2010 who are not eligible account holders, excluding our officers, directors and their associates (“supplemental eligible account holders”). |
4. | Depositors of Naugatuck Valley Savings and Loan as of the close of business on , 2010, who are not eligible or supplemental eligible account holders (“other members”). |
The amount of common stock that any person may purchase will depend on the availability of the common stock after satisfaction of all subscriptions having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion.
Purchase of Shares
Eligible depositors of Naugatuck Valley Savings and Loan have priority subscription rights allowing them to purchase common stock in the subscription offering. Shares not purchased in the subscription offering may be available for sale to the public in a community offering. You, as a shareholder on the record date, will be given a preference in the community offering after natural persons residing in Fairfield and New Haven Counties, Connecticut. You may request a stock order form and prospectus by calling our Stock Information Center at , Monday through Friday, between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on weekends and bank holidays. The stock offering is expected to expire on .
Marketing Arrangements
[Insert from prospectus]
26
Table of Contents
Delivery of Certificates
After completion of the conversion, each holder of a certificate(s) evidencing shares of Naugatuck Valley Financial common stock (other than Naugatuck Valley Mutual Holding Company), upon surrender of the certificate to our transfer agent, which is anticipated to serve as the exchange agent for the conversion, will receive a certificate(s) representing the number of full shares of new Naugatuck Valley Financial common stock into which the holder’s shares have been converted based on the exchange ratio. Promptly following the consummation of the conversion, the exchange agent will mail to each such holder of record of an outstanding certificate evidencing shares of Naugatuck Valley Financial common stock a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the exchange agent) advising such holder of the terms of the exchange and of the procedure for surrendering to the exchange agent such certificate in exchange for a certificate(s) evidencing new Naugatuck Valley Financial common stock.Naugatuck Valley Financial shareholders should not forward their certificates to the exchange agent until they have received the transmittal letter. If you hold shares of Naugatuck Valley Financial common stock in street name, your account will automatically be credited with shares of new Naugatuck Valley Financial common stock following consummation of the conversion. No transmittal forms will be mailed relating to shares held in street name.
We will not issue any fractional shares of new Naugatuck Valley Financial common stock. For each fractional share that would otherwise be issued as a result of the exchange of new Naugatuck Valley Financial common stock for Naugatuck Valley Financial common stock, we will pay an amount equal to the product obtained by multiplying the fractional share interest to which the former Naugatuck Valley Financial shareholder would otherwise be entitled by $10.00. Payment for fractional shares will be made as soon as practicable after receipt by the exchange agent of surrendered Naugatuck Valley Financial stock certificates. If you hold shares of Naugatuck Valley Financial common stock in street name, your account will automatically be credited with cash in lieu of fractional shares. If you hold a stock certificate, you will receive a check.
No holder of a certificate representing shares of Naugatuck Valley Financial common stock will be entitled to receive any dividends on Naugatuck Valley Financial common stock until the certificate representing such holder’s shares of Naugatuck Valley Financial common stock is surrendered in exchange for certificates representing shares of new Naugatuck Valley Financial common stock. If we declare dividends after the conversion but before surrender of certificates representing shares of Naugatuck Valley Financial common stock, dividends payable on shares of Naugatuck Valley Financial common stock not then issued shall accrue without interest. Any such dividends shall be paid without interest upon surrender of the certificates representing shares of Naugatuck Valley Financial common stock. We will be entitled, after the completion of the conversion, to treat certificates representing shares of Naugatuck Valley Financial common stock as evidencing ownership of the number of full shares of new Naugatuck Valley Financial common stock into which the shares of Naugatuck Valley Financial common stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates.
We will not be obligated to deliver a certificate(s) representing shares of new Naugatuck Valley Financial common stock to which a holder of Naugatuck Valley Financial common stock would otherwise be entitled as a result of the conversion until such holder surrenders the certificate(s) representing the shares of Naugatuck Valley Financial common stock for exchange as provided above, or provides an appropriate affidavit of loss and indemnity agreement and/or a bond. If any certificate evidencing shares of Naugatuck Valley Financial common stock is to be issued in a name other than that in which the certificate evidencing Naugatuck Valley Financial common stock surrendered in exchange therefor is registered, it shall be a condition of the issuance that the certificate so surrendered shall be properly endorsed and otherwise be in proper form for transfer and that the person requesting such exchange pay to the exchange agent any transfer or other tax required by reason of the issuance of a certificate for shares of common stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the exchange agent that such tax has been paid or is not payable.
Restrictions on Repurchase of Stock
[Insert from prospectus]
Effects of Conversion on Depositors and Borrowers
[Insert from prospectus]
Liquidation Rights
[Insert from prospectus]
27
Table of Contents
Material Income Tax Consequences
[Insert from prospectus]
Accounting Consequences
The conversion will be accounted for as a change in legal organization and form and not a business combination. Accordingly, the carrying amount of the assets and liabilities of Naugatuck Valley Savings and Loan will remain unchanged from their historical cost basis.
Interpretation, Amendment and Termination
All interpretations of the plan of conversion by our board of directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable by the board of directors, the plan of conversion may be substantively amended by a majority vote of the board of directors as a result of comments from regulatory authorities or otherwise, at any time prior to the submission of proxy materials to the members of Naugatuck Valley Mutual Holding Company and shareholders of Naugatuck Valley Financial. Amendment of the plan of conversion thereafter requires a majority vote of the board of directors, with the concurrence of the Office of Thrift Supervision. The plan of conversion may be terminated by a majority vote of the board of directors at any time prior to the earlier of the date of the special meeting of shareholders and the date of the special meeting of members of Naugatuck Valley Mutual Holding Company, and may be terminated by the board of directors at any time thereafter with the concurrence of the Office of Thrift Supervision. The plan of conversion will terminate if the conversion and offering are not completed within 24 months from the date on which the members of Naugatuck Valley Mutual Holding Company approve the plan of conversion, and may not be extended by us or the Office of Thrift Supervision.
28
Table of Contents
Proposals 2a and 2b—Informational Proposals Related to the
Articles of Incorporation of New Naugatuck Valley Financial
By their approval of the plan of conversion as set forth in Proposal 1, the board of directors of Naugatuck Valley Financial has approved each of the informational proposals numbered 2a and 2b, both of which relate to provisions included in the articles of incorporation of new Naugatuck Valley Financial. Each of these informational proposals is discussed in more detail below.
As a result of the conversion, the public shareholders of Naugatuck Valley Financial, whose rights are presently governed by the charter and bylaws of Naugatuck Valley Financial, will become shareholders of new Naugatuck Valley Financial, whose rights will be governed by the articles of incorporation and bylaws of new Naugatuck Valley Financial. The following informational proposals address the material differences between the governing documents of the two companies. This discussion is qualified in its entirety by reference to the articles of incorporation of Naugatuck Valley Financial and the articles of incorporation of new Naugatuck Valley Financial. See“Where You Can Find Additional Information” for procedures for obtaining a copy of those documents.
The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals 2a and 2b were approved as part of the process in which the board of directors of Naugatuck Valley Financial approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervision’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. Naugatuck Valley Financial’s shareholders are not being asked to approve these informational proposals at the special meeting. While we are asking you to vote with respect to each of the informational proposals set forth below, the proposed provisions for which an informational vote is requested will become effective if shareholders approve the plan of conversion, regardless of whether shareholders vote to approve any or all of the informational proposals. The provisions of new Naugatuck Valley Financial’s articles of incorporation which are summarized as informational proposals may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of new Naugatuck Valley Financial, if such attempts are not approved by the board of directors, or may make the removal of the board of directors or management, or the appointment of new directors, more difficult.
Informational Proposal 2a—Approval of a Provision in new Naugatuck Valley Financial’s Articles of incorporation Requiring a Super-Majority Vote to Approve Certain Amendments to new Naugatuck Valley Financial’s Articles of incorporation.No amendment of the charter of Naugatuck Valley Financial may be made unless it is first proposed by the board of directors, then preliminarily approved by the Office of Thrift Supervision, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. The articles of incorporation of new Naugatuck Valley Financial generally may be amended by the holders of a majority of the shares entitled to vote; provided, however, that any amendment of Section C of Article Sixth (limitation on common stock voting rights), Section B of Article Seventh (classification of board of directors and director terms), Section F of Article Eighth (amendment of bylaws) , Section J of Article Eighth (elimination of director and officer liability), and Article Tenth (amendment of articles of incorporation), must be approved by the affirmative vote of the holders of at least 75% of the outstanding shares entitled to vote, except that the board of directors may amend the articles of incorporation without any action by the shareholders to the fullest extent allowed under Maryland law.
These limitations on amendments to specified provisions of new Naugatuck Valley Financial’s articles of incorporation are intended to ensure that the referenced provisions are not limited or changed upon a simple majority vote. While this limits the ability of shareholders to amend those provisions, Naugatuck Valley Mutual Holding Company, as the holder of a majority of the outstanding shares of Naugatuck Valley Financial, currently can effectively block any shareholder proposed change to the charter.
This provision in new Naugatuck Valley Financial’s articles of incorporation could have the effect of discouraging a tender offer or other takeover attempt where to ability to make fundamental changes through amendments to the articles of incorporation is an important element of the takeover strategy of the potential acquiror. The board of directors believes that the provisions limiting certain amendments to the articles of incorporation will put the board of directors in a stronger position to negotiate with third parties with respect to transactions potentially affecting the corporate structure of new Naugatuck Valley Financial and the fundamental rights of its shareholders, and to preserve the ability of all shareholders to have an effective voice in the outcome of such matters.
29
Table of Contents
The board of directors recommends that you vote “FOR” the approval of a provision in new Naugatuck Valley Financial’s articles of incorporation requiring a super-majority vote to approve certain amendments to new Naugatuck Valley Financial’s articles of incorporation.
Informational Proposal 2b.—Approval of a Provision in new Naugatuck Valley Financial’s Articles of Incorporation to Limit the Voting Rights of Shares Beneficially Owned in Excess of 10% of new Naugatuck Valley Financial’s Outstanding Voting Stock. The articles of incorporation of new Naugatuck Valley Financial provide that in no event shall any person who directly or indirectly beneficially owns in excess of 10% of the then-outstanding shares of common stock as of the record date for the determination of shareholders entitled or permitted to vote on any matter (the “10% limit”) be entitled or permitted to any vote in respect of the shares held in excess of the 10% limit. This 10% limit restriction does not apply if the beneficial owner’s ownership of shares in excess of the 10% limit was approved by a majority of unaffiliated directors. Beneficial ownership is determined pursuant to the federal securities laws and includes, but is not limited to, shares as to which any person and his or her affiliates (1) have the right to acquire upon the exercise of conversion rights, exchange rights, warrants or options and (2) have or share investment or voting power (but shall not be deemed the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of shareholders, and that are not otherwise beneficially, or deemed by new Naugatuck Valley Financial to be beneficially, owned by such person and his or her affiliates).
The foregoing restriction does not apply to:
• | any director or officer acting solely in their capacities as directors and officers; or |
• | any employee benefit plans of new Naugatuck Valley Financial or any subsidiary or a trustee of a plan. |
The charter of Naugatuck Valley Financial provides that, for a period of five years from the effective date of Naugatuck Valley Savings and Loan’s minority stock offering, no person, other than Naugatuck Valley Mutual Holding Company, shall directly or indirectly offer to acquire or acquire more than 10% of the then-outstanding shares of common stock. The foregoing restriction does not apply to:
• | the purchase of shares by underwriters in connection with a public offering; or |
• | the purchase of shares by any employee benefit plans of Naugatuck Valley Financial or any subsidiary. |
This provision is intended to limit the ability of any person to acquire a significant number of shares of new Naugatuck Valley Financial common stock and thereby gain sufficient voting control so as to cause new Naugatuck Valley Financial to effect a transaction that may not be in the best interests of new Naugatuck Valley Financial and its shareholders generally. This provision will not prevent a shareholder from seeking to acquire a controlling interest in new Naugatuck Valley Financial, but it will prevent a shareholder from voting more than 10% of the outstanding shares of common stock unless that shareholder has first persuaded the board of directors of the merits of the course of action proposed by the shareholder. The board of directors of new Naugatuck Valley Financial believes that fundamental transactions generally should be first considered and approved by the board of directors as the board generally believes that it is in the best position to make an initial assessment of the merits of any such transactions and that the board of directors’ ability to make the initial assessment could be impeded if a single shareholder could acquire a sufficiently large voting interest so as to control a shareholder vote on any given proposal. This provision in new Naugatuck Valley Financial’s articles of incorporation makes an acquisition, merger or other similar corporate transaction less likely to occur, even if such transaction is supported by most shareholders, because it can prevent a holder of shares in excess of the 10% limit from voting the excess shares in favor of the transaction. Thus, it may be deemed to have an anti-takeover effect.
The board of directors recommends that you vote “FOR” the approval of a provision in new Naugatuck Valley Financial’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of new Naugatuck Valley Financial’s outstanding voting stock.
30
Table of Contents
Proposal 3 and Southern Connecticut Bancorp’s
Proposal 1—Approval of the Merger Agreement
Description of the Merger and the Merger Agreement
The following summary of the merger agreement is qualified by reference to the complete text of the merger agreement. A copy of the merger agreement is attached asAppendix A to this proxy statement–prospectus and is incorporated by reference into this proxy statement/prospectus. You should read the merger agreement completely and carefully as it, rather than this description, is the legal document that governs the merger.
General
The merger agreement provides for the merger of Southern Connecticut Bancorp with and into new Naugatuck Valley Financial, with new Naugatuck Valley Financial as the surviving entity. Immediately following the merger of Southern Connecticut Bancorp with new Naugatuck Valley Financial, The Bank of Southern Connecticut will merge with and into Naugatuck Valley Savings and Loan, with Naugatuck Valley Savings and Loan as the surviving entity.
Consideration to be Received in the Merger
When the merger becomes effective, each share of Southern Connecticut Bancorp common stock issued and outstanding immediately prior to the completion of the merger will automatically be converted into the right to receive, at the holder’s election, (a) $6.75 in cash without interest, (b) 0.675 shares of new Naugatuck Valley Financial common stock and cash instead of fractional shares, or (c) a combination thereof.
Southern Connecticut Bancorp’s stockholders will not receive fractional shares of new Naugatuck Valley Financial common stock. Instead, they will receive a cash payment for any fractional shares in an amount equal to the product of such fractional amount multiplied by $10.00. If you hold your shares in street name, your brokerage account will automatically be credited. If you hold a stock certificate, you will receive a check.
Cash or Stock Election
Under the terms of the merger agreement, Southern Connecticut Bancorp stockholders may elect to convert their shares into cash, new Naugatuck Valley Financial common stock or a mixture of cash and new Naugatuck Valley Financial common stock. All elections of Southern Connecticut Bancorp stockholders are further subject to the allocation and proration procedures described in the merger agreement. These procedures provide that the number of shares of Southern Connecticut Bancorp common stock to be converted into new Naugatuck Valley Financial common stock in the merger must be 60% of the total number of shares of Southern Connecticut Bancorp common stock issued and outstanding on the date of the merger. Neither new Naugatuck Valley Financial nor Southern Connecticut Bancorp is making any recommendation as to whether Southern Connecticut Bancorp stockholders should elect to receive cash or new Naugatuck Valley Financial common stock in the merger. Each holder of Southern Connecticut Bancorp common stock must make his or her own decision with respect to such election.
It is unlikely that elections will be made in the exact proportions provided for in the merger agreement. As a result, the merger agreement describes procedures to be followed if Southern Connecticut Bancorp stockholders in the aggregate elect to receive more or less of the new Naugatuck Valley Financial common stock than new Naugatuck Valley Financial has agreed to issue. These procedures are summarized below.
• | If Stock Is Oversubscribed: If Southern Connecticut Bancorp stockholders elect to receive more new Naugatuck Valley Financial common stock than new Naugatuck Valley Financial has agreed to issue in the merger, then all Southern Connecticut Bancorp stockholders who have elected to receive cash or who have made no election will receive cash for their Southern Connecticut Bancorp shares and all stockholders who elected to receive new Naugatuck Valley Financial common stock will receive a pro rata portion of the available new Naugatuck Valley Financial shares plus cash for those shares not converted into new Naugatuck Valley Financial common stock. |
• | If Stock Is Undersubscribed:If Southern Connecticut Bancorp stockholders elect to receive fewer shares of new Naugatuck Valley Financial common stock than new Naugatuck Valley Financial has agreed to issue in the merger, then all Southern Connecticut Bancorp stockholders who have elected to receive new Naugatuck Valley Financial |
31
Table of Contents
common stock will receive new Naugatuck Valley Financial common stock and all stockholders who elected to receive cash or who have made no election will be treated in the following manner: |
• | If the number of shares held by Southern Connecticut Bancorp stockholders who have made no election is sufficient to make up the shortfall in the number of new Naugatuck Valley Financial shares that new Naugatuck Valley Financial is required to issue, then all Southern Connecticut Bancorp stockholders who elected cash will receive cash, and those stockholders who made no election will receive both cash and new Naugatuck Valley Financial common stock in whatever proportion is necessary to make up the shortfall. |
• | If the number of shares held by Southern Connecticut Bancorp stockholders who have made no election is insufficient to make up the shortfall, then all Southern Connecticut Bancorp stockholders who made no election will receive new Naugatuck Valley Financial common stock and those Southern Connecticut Bancorp stockholders who elected to receive cash will receive cash and new Naugatuck Valley Financial common stock in whatever proportion is necessary to make up the shortfall. |
Notwithstanding these rules, it may be necessary for new Naugatuck Valley Financial to reduce the number of shares of Southern Connecticut Bancorp common stock that will be converted into the right to receive cash and correspondingly increase the number of shares of Southern Connecticut Bancorp common stock that will be converted into new Naugatuck Valley Financial common stock. If this adjustment is necessary, stockholders who elect to receive cash or a mixture of cash and stock may be required on a pro rata basis to receive a greater amount of new Naugatuck Valley Financial common stock than they otherwise would have received.
No guarantee can be made that you will receive the amounts of cash and/or stock you elect. As a result of the allocation procedures and other limitations outlined in this document and in the merger agreement, you may receive new Naugatuck Valley Financial common stock or cash in amounts that vary from the amounts you elect to receive.
Election Procedures; Surrender of Stock Certificates
An election form will be mailed separately from this proxy statement/prospectus to holders of shares of Southern Connecticut Bancorp common stock on or about the mail date for this proxy statement/prospectus. The exchange agent, Registrar and Transfer Company, will mail an election form to shareholders who hold stock certificates. Street name holders will receive a form from their brokerage firm. Each election form entitles the holder of the Southern Connecticut Bancorp common stock to elect to receive cash, new Naugatuck Valley Financial common stock, or a combination of cash and stock, or make no election with respect to the merger consideration you wish to receive.
To make an effective election, your properly completed election form, must be returned no later than 5:00 p.m. on [ELECTION DATE]. If you hold a Southern Connecticut Bancorp stock certificate you must also submit your Southern Connecticut Bancorp stock certificate(s) representing all shares of Southern Connecticut Bancorp common stock covered by the election form (or an appropriate guarantee of delivery). Registrar and Transfer Company, as exchange agent, will process the exchange of Southern Connecticut Bancorp stock certificates for cash and/or new Naugatuck Valley Financial common stock. Shortly after the merger, the exchange agent will allocate cash and stock among Southern Connecticut Bancorp stockholders, consistent with their elections and the allocation and proration procedures. If you do not submit an election form, you will receive instructions from the exchange agent on where to surrender your Southern Connecticut Bancorp stock certificates after the merger is completed.In any event, do not forward your Southern Connecticut Bancorp stock certificates with your proxy cards.
Shareholders who hold Southern Connecticut Bancorp shares in street name will receive the cash/stock allocation directly into their brokerage account. The exchange agent will mail new Naugatuck Valley Financial stock certificate(s) and/or a check to each shareholder who holds Southern Connecticut Bancorp stock certificate(s).
You may change your election at any time prior to the election deadline by written notice accompanied by a properly completed and signed later-dated election form prior to the election deadline or by withdrawal of your stock certificates by written notice prior to the election deadline. All elections will be revoked automatically if the merger agreement is terminated. If you have a preference for receiving either new Naugatuck Valley Financial stock and/or cash for your Southern Connecticut Bancorp stock, you should complete and return the election form. If you do not make an election, you will be allocated new Naugatuck Valley Financial common stock and/or cash depending on the elections made by other stockholders. Once you submit your Southern Connecticut Bancorp common stock certificates with your election form, you may no longer trade your shares of Southern Connecticut Bancorp common stock unless you revoke your election before the election deadline.
32
Table of Contents
If you purchase Southern Connecticut Bancorp common stock after the election form deadline you will not be able to submit a timely election form and, if you continue to hold the shares at the time of the merger, you will be allocated new Naugatuck Valley Financial common stock and/or cash depending on the election made by other stockholders. In order to receive a new Naugatuck Valley Financial stock certificate you must surrender your Southern Connecticut Bancorp stock certificates to the exchange agent.
Neither new Naugatuck Valley Financial nor Southern Connecticut Bancorp makes any recommendation as to whether you should elect to receive cash, stock or a combination of cash and stock in the merger. You must make your own decision with respect to your election. Generally, the merger will be a tax-free transaction for Southern Connecticut Bancorp stockholders to the extent they receive new Naugatuck Valley Financial common stock. See “—Tax Consequences of the Merger.”
If your certificates for Southern Connecticut Bancorp common stock are not immediately available or you are unable to send the election form and other required documents to the exchange agent prior to the election deadline, Southern Connecticut Bancorp shares may be properly exchanged, and an election will be effective, if:
• | such exchanges are made by or through a member firm of a registered national securities exchange or of the Financial Industry Regulatory Authority, or by a commercial bank or trust company having an office, branch or agency in the United States; |
• | the exchange agent receives, prior to the election deadline, a properly completed and duly executed notice of guaranteed delivery substantially in the form provided with the election form (delivered by hand, mail, telegram, telex or facsimile transmission); and |
• | the exchange agent receives, within three business days after the election deadline, the certificates for all exchanged Southern Connecticut Bancorp shares, or confirmation of the delivery of all such certificates into the exchange agent’s account with The Depository Trust Company in accordance with the proper procedures for such transfer, together with a properly completed and duly executed election form and any other documents required by the election form. |
Southern Connecticut Bancorp stockholders who do not submit a properly completed election form or revoke their election form prior to the election deadline will have their shares of Southern Connecticut Bancorp common stock designated as non-election shares. Southern Connecticut Bancorp stock certificates represented by elections that have been revoked will be promptly returned without charge to the Southern Connecticut Bancorp stockholder revoking the election upon written request.
After the completion of the merger, the exchange agent will mail to Southern Connecticut Bancorp stockholders who do not submit election forms or who have revoked such forms a letter of transmittal, together with instructions for the exchange of their Southern Connecticut Bancorp common stock certificates for the merger consideration. Until you surrender your Southern Connecticut Bancorp stock certificates for exchange after completion of the merger, you will not be paid dividends or other distributions declared after the merger with respect to any new Naugatuck Valley Financial common stock into which your Southern Connecticut Bancorp shares have been converted. When you surrender your Southern Connecticut Bancorp stock certificates, new Naugatuck Valley Financial will pay any unpaid dividends or other distributions, without interest. After the completion of the merger, there will be no further transfers of Southern Connecticut Bancorp common stock. Southern Connecticut Bancorp stock certificates presented for transfer after the completion of the merger will be canceled and exchanged for the merger consideration.
If your Southern Connecticut Bancorp stock certificates have been either lost, stolen or destroyed, you will have to provide evidence of your ownership of these certificates and that they were lost, stolen or destroyed before you receive any consideration for your shares. The election form includes instructions on how to provide evidence of ownership.
Background of the Merger
As part of its ongoing oversight of Southern Connecticut Bancorp, management and the board of directors of Southern Connecticut Bancorp regularly review Southern Connecticut Bancorp’s strategic and financial prospects. Not less than annually, management and the board of directors have reviewed Southern Connecticut Bancorp’s prospects as an independent entity versus the alternative of merging with another institution.
33
Table of Contents
In the fall of 2008, the board of directors of Southern Connecticut Bancorp received two unsolicited, written indications of interest to acquire Southern Connecticut Bancorp. On December 3, 2008, the board of directors met to review these indications of interest and determined to explore discussions further as well as to discuss opportunities with other parties that had previously expressed oral indications of interest.
During the following month, Chairman Laydon held discussions with several potential acquirors. On January 23, 2009, the board of directors met to review Chairman Laydon’s progress with respect to these discussions as well as to discuss the possibility of retaining an investment banker to advise Southern Connecticut Bancorp in connection with a possible sale. At the meeting of the board of directors on February 12, 2009, the board of directors authorized Southern Connecticut Bancorp to interview investment bankers to advise Southern Connecticut Bancorp in a possible sale transaction.
On February 23, 2009, the board of directors met to interview three investment banking firms, including Stifel, Nicolaus & Company, Incorporated and Northeast Capital & Advisory, Inc.
Thereafter, through the next meeting of the board of directors, various discussions were held between members of the Southern Connecticut Bancorp board of directors and management and potential acquirors of Southern Connecticut Bancorp. On April 3, 2009 and April 21, 2009, the Southern Connecticut Bancorp board of directors met to discuss the status of discussions, and during the meeting on April 21, 2009, the board of directors authorized management to retain the services of Stifel, Nicolaus & Company, Inc. as advisor to Southern Connecticut Bancorp in connection with a possible sale.
On April 22, 2009, Southern Connecticut Bancorp retained Stifel, Nicolaus & Company, Inc. Over the next two months, Stifel, Nicolaus & Company, Inc. reviewed the financial and operating condition of Southern Connecticut Bancorp and prepared and distributed marketing materials to a number of financial institutions and investor groups. During that time, discussions and negotiations took place among Stifel, Nicolaus & Company, Inc., Southern Connecticut Bancorp, and approximately 35 financial institutions, including Naugatuck Valley Financial. Stifel, Nicolaus & Company, Inc. scheduled and coordinated discussions with the objective of obtaining indications of interest to acquire Southern Connecticut Bancorp.
Naugatuck Valley Financial first learned, through a phone call from Stifel, Nicolaus & Company, Inc. to John Roman, that Southern Connecticut Bancorp was interested in a possible strategic alliance on June 10, 2009. A confidentiality agreement between the parties was entered into on June 11, 2009 and the Southern Connecticut Bancorp marketing materials were received shortly thereafter. In early July 2009, Naugatuck Valley Financial submitted a nonbinding preliminary indication of interest, which set forth a pricing parameter of $7.50 cash per share of Southern Connecticut Bancorp common stock, subject to satisfactory completion of a full due diligence investigation, board approval and the negotiation of a definitive merger agreement.
On July 14, 2009, the Southern Connecticut Bancorp board of directors met with representatives of Stifel, Nicolaus & Company, Inc. to review the responses received to date and to review preliminary indications of interest. Based on the amount and form of consideration offered by Naugatuck Valley Financial, as well as the opportunity posed for customers and employees, the board of directors determined to move forward to negotiate exclusively with Naugatuck Valley Financial.
Representatives from Naugatuck Valley Financial conducted an onsite due diligence review of Southern Connecticut Bancorp from July 25 to July 27, 2009.
The Executive Committee of Southern Connecticut Bancorp (comprised of Chairman Laydon, Vice Chairman Spadaro and Director Borrelli) met three times in August 2009. At each of these meetings, an update of the negotiations was provided by management. During this time, Naugatuck Valley Financial continued to review various documents related to Southern Connecticut Bancorp and continued to revise its indication of interest in Southern Connecticut Bancorp. Naugatuck Valley Financial revised its preliminary pricing parameters to $7.40 cash per share in late August as a result of additional due diligence in August 2009.
Negotiations and merger discussions continued during the fall and winter of 2009 and into 2010. In October 2009, Naugatuck Valley Financial further revised the pricing parameters to $7.00 per share, initially 50% cash and 50% stock and then all cash. The Southern Connecticut Bancorp Executive Committee met on October 8, October 28, November 9, November 30, December 3, December 11, and December 22, 2009, and on January 5, January 7, and January 12, 2010. At each of these meetings, the status of the negotiations was reviewed, suggestions were made, and directives given to be carried out with the objective of furthering the transaction. The full board of directors of Southern Connecticut Bancorp also met and reviewed the status of negotiations on November 9, 2009. Issues being discussed between the parties included capital needs and consolidation plans.
34
Table of Contents
The merger agreement was drafted and negotiated during January and February 2010. During this period, there were numerous telephone calls and meetings among Southern Connecticut Bancorp’s management and counsel, and Naugatuck Valley Financial’s management and counsel. Naugatuck Valley Financial conducted additional due diligence in mid-February 2010. Based on the additional due diligence, Naugatuck Valley Financial revised the preliminary pricing terms to $7.25 per share, 50% cash and 50% stock.
In late January 2010, while attending a banking industry conference, Mr. Roman and Carlos Batista, Naugatuck Valley Financial’s Chairman of the Board, met with representatives of Stifel, Nicolaus & Company, Inc. During this meeting, a potential change in the proposed pricing structure from all cash to 50% stock/50% cash was discussed. During this discussion, the participants discussed the expected benefit that such a change in pricing structure would have on the pro forma capital position of the combined company.
Following this meeting and further deliberations between Naugatuck Valley Financial and its financial advisor, Naugatuck Valley Financial revised the preliminary pricing terms to $7.15 per share, 50% cash and 50% stock. In response to these revised terms, Southern Connecticut Bancorp communicated back to Naugatuck Valley Financial that an increase in the per share consideration was warranted given the variability in per share value introduced by the stock component to the pricing structure.
On February 9, 2010, the board of directors of Naugatuck Valley Financial met and determined to increase the pricing terms to $7.25 per share, 50% cash and 50% stock, and that such terms be communicated to Southern Connecticut Bancorp as being the final pricing terms.
The board of directors of Southern Connecticut Bancorp also met on February 9, 2010. During this meeting it was determined that Southern Connecticut Bancorp should obtain a second fairness opinion due to the anticipated role that Stifel, Nicolaus & Company, Inc. might serve in advising Naugatuck Valley Financial in its second step conversion. The board of directors determined that Northeast Capital & Advisory should be retained to perform this service. It was also determined to proceed with negotiations with Naugatuck Valley Financial based on the revised final terms communicated by Naugatuck Valley Financial.
From February 13 to 15, 2010, Southern Connecticut Bancorp and its advisors conducted due diligence on Naugatuck Valley Financial at an off-site location. Also in mid February 2010, Naugatuck Valley Financial conducted additional due diligence on Southern Connecticut Bancorp.
On February 19, 2010, the Naugatuck Valley Financial board of directors held a special meeting, also attended by members of Naugatuck Valley Financial’s senior management and outside financial and legal advisors, to review and discuss the second step conversion of Naugatuck Valley Mutual Holding Company and the proposed transaction with Southern Connecticut Bancorp, the proposed transaction agreements and the results of the discussions with Southern Connecticut Bancorp. Mr. Roman updated the board on the results of the updated due diligence review of Southern Connecticut Bancorp since the last board meeting. Kilpatrick Stockton LLP, outside counsel to Naugatuck Valley Financial, then reviewed with the board the fiduciary duties of directors in approving the second step conversion and the merger transaction, the terms of proposed merger and related agreements, the open items that remained to be negotiated and the proposed plan of conversion of Naugatuck Valley Mutual Holding Company. Representatives of Ostrowski & Company, Inc. then discussed financial information regarding the conversion of Naugatuck Valley Mutual Holding Company and the proposed acquisition of Southern Connecticut Bancorp and responded to questions from directors. The discussions covered a range of matters, including industry trends, the current conversion market, business and financial information regarding Naugatuck Valley Financial and Southern Connecticut Bancorp, historical stock price performance, valuation methodologies and analyses and the other matters set forth in“—Opinion of Naugatuck Valley Financial’s Financial Advisor.” During these discussions, the Naugatuck Valley Financial board discussed the proposed transaction and related agreements and asked questions of Naugatuck Valley Financial senior management and Naugatuck Valley Financial’s legal and financial advisors. At the end of the meeting, the board of directors determined to delay the vote on the plan of conversion and the merger agreement until all open items that remained to be negotiated by the parties were resolved.
On February 22, 2010, the Southern Connecticut Bancorp board of directors met to review presentations by its legal counsel, Day Pitney LLP, and by Stifel, Nicolaus & Company, Inc. and Northeast Capital & Advisory, which included, among other matters, commercial, financial and corporate information on Naugatuck Valley Financial and Southern Connecticut Bancorp, each entity’s historical stock price and performance, and valuation methodologies and analyses of the consideration offered by Naugatuck Valley Financial. Following the presentations, the board of directors engaged in discussions about the proposed transaction, the proposed merger agreement and other transaction documents and the effect of the transaction on the customers and employees of Southern Connecticut Bank. Members of the board of directors asked
35
Table of Contents
questions of Southern Connecticut Bancorp’s outside legal and financial advisors about the proposed transaction and their fiduciary duties to shareholders. It was noted that no other expressions of interest had been received by parties other than Naugatuck Valley Financial in which the consideration offered exceeded $7.25 per share. After further reviewing the consideration per share offered by Naugatuck Valley Financial and after giving consideration to the other factors described under“—Southern Connecticut Bancorp’s Reasons for the Merger”, the members of the board of directors of Southern Connecticut Bancorp unanimously voted to approve the merger agreement and the related transaction documents.
Also on February 22, 2010, the board of directors of Naugatuck Valley Financial held another special meeting, again attended by members of Naugatuck Valley Financial’s senior management and outside financial and legal advisors, to review the final plan of conversion and merger agreement. After a discussion regarding the financial impact of the conversion and offering and merger, Ostrowski & Company, Inc. rendered an oral opinion (subsequently confirmed in writing) to Naugatuck Valley Financial that the consideration to be paid by Naugatuck Valley Financial in the merger was fair from a financial point of view to Naugatuck Valley Financial stockholders. Following further review and discussion among the members of the Naugatuck Valley Financial board of directors, and after consideration of the factors described under“—Naugatuck Valley Financial’s Reasons for the Merger,” the Naugatuck Valley Financial board of directors unanimously approved the merger agreement and related documents. Additionally, the boards of directors Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan unanimously approved the plan of conversion and related documents.
The transaction was announced before the opening of the stock markets on the morning of February 23, 2010.
In September 2010, Naugatuck Valley Financial’s independent appraiser advised the Naugatuck Valley Financial board of directors that the recent market decline for financial institution equity securities would be reflected in a materially lower appraisal for the offering, and, consequently, materially lower pro forma regulatory capital ratios for the combined institutions upon completion of the merger.
As a result of this information and after further discussion with its legal and financial advisors, the Naugatuck Valley Financial board of directors met on September 10, 2010 and determined to ask Southern Connecticut Bancorp to consider a reduction in the merger consideration to $6.25 per share and an increase in the stock component percentage of the merger consideration to 60%. The Naugatuck Valley Financial Chairman of the Board was instructed to deliver this request to the Southern Connecticut Bancorp Chairman of the Board, which he did by letter dated September 12, 2010. In the letter, Naugatuck Valley Financial indicated that it believed that the reduced consideration and increase in the stock component percentage of the merger consideration would enhance the prospects for timely consummation of the transaction.
On September 12, 2010, the Southern Connecticut Bancorp board of directors met to discuss the contents of the September 12, 2010 letter from Naugatuck Valley Financial. Also present, by invitation, at the meeting was Southern Connecticut Bancorp’s outside legal counsel. In the meeting, the Southern Connecticut Bancorp board of directors and Southern Connecticut Bancorp’s outside legal counsel discussed numerous proposed responses to Naugatuck Valley Financial. Following extensive discussions on each of these proposed responses, the Southern Connecticut Bancorp board of directors determined that a reduction in the merger consideration would improve the probability of obtaining the necessary regulatory approvals for consummation of the merger. However, after discussing and analyzing Naugatuck Valley Financial’s proposal, the Southern Connecticut Bancorp board of directors determined that a counter-offer of $6.75 per share, subject to receipt of a fairness opinion for this price, be presented to Naugatuck Valley Financial. The Southern Connecticut Bancorp board of directors determined that it would get only one fairness opinion with respect to the reduced consideration of $6.75 per share and that this fairness opinion be given by Northeast Capital & Advisory. Accordingly, the Southern Connecticut Bancorp board of directors did not request a new fairness opinion from Stifel, Nicolaus & Company, Inc.
During the September 12, 2010 meeting, the Southern Connecticut Bancorp board of directors also determined that the counter-offer of $6.75 per share be conditioned on (i) the inclusion of a termination fee of not less than $350,000 from Naugatuck Valley Financial if the merger is not consummated by March 30, 2011 because (a) the conversion has not been consummated by that date for any reason or (b) a required regulatory approval has been denied or a governmental authority blocks the merger; and (ii) the addition of two members of Southern Connecticut Bancorp’s board of directors, instead of one member, to the board of directors of new Naugatuck Valley Financial. The counter-offer was made to Naugatuck Valley Financial late in the day on September 12, 2010.
36
Table of Contents
From September 13 to 16, 2010, senior management and outside legal advisors for both Southern Connecticut Bancorp and Naugatuck Valley Financial negotiated an amendment to the merger agreement. During this time, Northeast Capital & Advisory also performed a financial analysis on the reduced consideration of $6.75 per share. On September 16, 2010, the Southern Connecticut Bancorp board of directors received a draft of the First Amendment to the Agreement and Plan of Merger setting forth the above terms of the counter-offer.
On September 17, 2010, the Southern Connecticut Bancorp board of directors held a meeting with Southern Connecticut Bancorp’s legal and financial advisors to review the proposed First Amendment to the Agreement and Plan of Merger. During this meeting, outside legal counsel for Southern Connecticut Bancorp reviewed the terms of the First Amendment to the Agreement and Plan of Merger with the directors and responded to their questions regarding the document. Representatives from Northeast Capital & Advisory then presented an analysis of the fairness of the reduced consideration of $6.75 per share. Following this presentation, the Southern Connecticut Bancorp board of directors asked the representatives from Northeast Capital & Advisory numerous questions about their valuation methodologies and analyses. The representatives from Northeast Capital & Advisory responded to the questions and explained how the reduced consideration of $6.75 per share was still fair given the current market environment for stock of financial institutions, the business and financial information regarding Southern Connecticut Bancorp and the other reasons set forth in“—Opinion of Southern Connecticut Bancorp’s Financial Advisor.”Northeast Capital & Advisory then provided the Southern Connecticut Bancorp board of directors with a fairness opinion with respect to the reduced consideration of $6.75 per share. A lengthy discussion among the directors ensued about the reduced merger consideration and other revised terms of the merger. Following this discussion, the Southern Connecticut Bancorp board of directors determined that the reduced consideration of $6.75 per share was fair to shareholders of Southern Connecticut Bancorp and unanimously approved the First Amendment to the Agreement and Plan of Merger.
On September 17, 2010, the Naugatuck Valley Financial board of directors held a special meeting, also attended by members of Naugatuck Valley Financial’s senior management and outside financial and legal advisors, to review and discuss the proposed amendment to the merger agreement and the results of the discussions with Southern Connecticut Bancorp. Kilpatrick Stockton LLP, outside counsel to Naugatuck Valley Financial, reviewed with the board the terms of the proposed amendment. Representatives of Ostrowski & Company, Inc. discussed financial information regarding the proposed conversion and reorganization and the acquisition of Southern Connecticut Bancorp and responded to questions from directors. The discussions covered a range of matters, including industry trends, business and financial information regarding Naugatuck Valley Financial and Southern Connecticut Bancorp, historical stock price performance, valuation methodologies and analyses and the other matters set forth in“—Opinion of Naugatuck Valley Financial’s Financial Advisor.” During these discussions, the Naugatuck Valley Financial board discussed the proposed amendment and asked questions of Naugatuck Valley Financial senior management and Naugatuck Valley Financial’s legal and financial advisors. After a discussion regarding the financial impact of the conversion and offering and merger, Ostrowski & Company, Inc. rendered an oral opinion (subsequently confirmed in writing) to Naugatuck Valley Financial that the consideration to be paid by Naugatuck Valley Financial in the merger was fair from a financial point of view to Naugatuck Valley Financial stockholders. Following further review and discussion among the members of the Naugatuck Valley Financial board of directors, the Naugatuck Valley Financial board of directors unanimously approved the amendment to the merger agreement.
Naugatuck Valley Financial and Southern Connecticut Bancorp announced the amended merger agreement via a joint press release issued after the closing of the stock markets on September 17, 2010.
Potential Conflict of Interest for Stifel, Nicolaus & Company, Inc. After the initial contact by Stifel, Nicolaus & Company, Inc. regarding Naugatuck Valley Financial’s interest in receiving a confidential memorandum, both Naugatuck Valley Financial’s board of directors and Southern Connecticut Bancorp’s board of directors considered, with the advice of counsel, the potential conflicts of interest that might arise if Stifel, Nicolaus & Company, Inc. were to serve as both financial advisor to Southern Connecticut Bancorp in providing a fairness opinion and for the period following execution of the merger agreement and at the same time marketing agent for Naugatuck Valley Financial in connection with the offering. Naugatuck Valley Financial’s board of directors determined that it would be in the best interests of Naugatuck Valley Financial to continue to engage Stifel, Nicolaus & Company, Inc. as its marketing agent in connection with the offering in view of Stifel, Nicolaus & Company, Inc.’s knowledge of the banking markets in which Naugatuck Valley Financial conducts its business and Stifel, Nicolaus & Company, Inc.’s experience in serving as a conversion offering selling agent in connection with transactions of this type. Naugatuck Valley Financial’s board of directors also considered Stifel, Nicolaus & Company, Inc.’s knowledge of and familiarity with the businesses of Naugatuck Valley Financial and Southern Connecticut Bancorp, as well as Stifel, Nicolaus & Company, Inc.’s reputation in the financial services industry generally.
37
Table of Contents
In considering Stifel, Nicolaus & Company, Inc.’s potential conflicts of interest, both Naugatuck Valley Financial’s board of directors and Southern Connecticut Bancorp’s board of directors noted that both companies and Stifel, Nicolaus & Company, Inc. shared a common interest in the successful completion of Naugatuck Valley Financial’s conversion and offering. Both boards of directors addressed the potential future conflict of interest by agreeing to a provision in the merger agreement that requires that Southern Connecticut Bancorp consult with a financial advisor other than Stifel, Nicolaus & Company, Inc. in determining whether any unsolicited offer by a third party to acquire Southern Connecticut Bancorp, if one is received subsequent to the execution of the merger agreement, is more favorable to Southern Connecticut Bancorp stockholders from a financial point of view then the merger with Naugatuck Valley Financial. In addition, as discussed above, Southern Connecticut Bancorp determined to obtain a second fairness opinion.
The Southern Connecticut Bancorp board of directors determined that Stifel, Nicolaus & Company, Inc.’s service as marketing agent in connection with Naugatuck Valley Financial’s offering would be in the best interests of the stockholders of Southern Connecticut Bancorp for substantially the same reasons noted above. Although the Southern Connecticut Bancorp board of directors recognized that there might be an inconvenience associated with having to retain a new, independent financial advisor if Southern Connecticut Bancorp were to receive a competing offer, the Southern Connecticut Bancorp board of directors concluded that the benefits of having Stifel, Nicolaus & Company, Inc. serve as marketing agent in connection with the offering, which would further both Naugatuck Valley Financial’s interests and Southern Connecticut Bancorp’s interests in ensuring that the offering and merger are successfully completed, were substantially greater than the burden of this potential inconvenience. Stifel, Nicolaus & Company, Inc. has confirmed that they treated Naugatuck Valley Financial the same as any other company that was interested in acquiring Southern Connecticut Bancorp.
Naugatuck Valley Financial’s Reasons for the Merger
The board of directors reviewed and discussed the proposed merger with management and its financial and legal advisors in determining that the proposed transaction is in the best interests of Naugatuck Valley Financial and its stockholders. In reaching its conclusion to approve the merger agreement, the board of directors of Naugatuck Valley Financial considered a number of factors. The material factors considered by the board of directors are as follows:
• | the ability to expand Naugatuck Valley Financial’s presence in the greater New Haven market area by expanding its branch network by the addition of the four branch offices of The Bank of Southern Connecticut; |
• | information concerning the financial condition, results of operations, capital levels, asset quality and prospects of Naugatuck Valley Financial and Southern Connecticut Bancorp, including consideration of both companies’ historical and projected results of operation and financial condition and a review of Southern Connecticut Bancorp’ financial performance by comparison to a peer group; |
• | a comparison of the terms of the merger to other commercial bank merger transactions both nationally and involving companies headquartered in the New England region of the United States; |
• | the belief by Naugatuck Valley Financial that the merger will be accretive to the combined entity’s earnings per share beginning in the year the merger is completed; |
• | the anticipated short-term and long-term impact the conversion and the merger will have on Naugatuck Valley Financial’s consolidated results of operations, including expanded commercial real estate and commercial business lending as well as expanded banking products and services; |
• | the general structure of the transaction and the perceived compatibility of the respective management teams and business philosophies of Naugatuck Valley Financial and Southern Connecticut Bancorp which Naugatuck Valley Financial’s board believed would make it easier to integrate the operations of the two companies; |
• | the belief that the merger will enhance Naugatuck Valley Financial’s franchise value by the expansion of its branch network, among other things, and the enhancement of its ability to compete in relevant banking and non-banking markets; |
• | current industry and economic conditions facing Naugatuck Valley Financial and Southern Connecticut Bancorp, including an increasingly competitive environment facing both institutions characterized by intensifying competition from both non-financial institutions as well as other banks and savings institutions, the continuing consolidation of the financial services market and the increasing costs and complexities of compliance with the expanding regulatory requirements imposed on financial institutions as well as public reporting companies; |
38
Table of Contents
• | the assumed cost savings available to the combined entity as a result of the merger; |
• | the anticipated impact of conversion and the merger on the depositors, borrowers, employees, customers and communities served by Naugatuck Valley Financial and Southern Connecticut Bancorp through the contemplated expansion of commercial real estate and commercial business lending as well as the expansion of retail banking products and services; |
• | the opinion delivered to the board of directors of Naugatuck Valley Financial by Ostrowski & Company, Inc. that, as of the date of the opinion and based upon and subject to the considerations set forth in its opinion, the acquisition consideration was fair, from a financial point of view, to holders of Naugatuck Valley Financial common stock; |
• | the level of dilution to be experienced by the existing Naugatuck Valley Financial shareholders as well as the new shareholders who purchase shares of new Naugatuck Valley Financial in the conversion and offering as a result of the shares of new Naugatuck Valley Financial common stock being issued to Southern Connecticut Bancorp shareholders; |
• | the likely exchange ratio pursuant to which the existing shareholders of Naugatuck Valley Financial would exchange their shares, which ratio might be less than one-for-one; and |
• | the risk that the conversion and offering and the merger might not be completed on a timely basis or not at all due to the various regulatory, shareholder and member approvals required. |
The board of directors of Naugatuck Valley Financial evaluated the factors described above, including asking questions of management and its legal and financial advisors, and reached the unanimous decision that the merger was in the best interests of Naugatuck Valley Financial and its stockholders. In considering the factors described above, individual members of the board of directors may have given different weights to different factors. The board of directors of Naugatuck Valley Financial considered these factors as a whole, and overall considered them to be favorable to, and to support its determination. It should be noted that this explanation of the board of directors’ reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under“A Warning About Forward-Looking Statements.”The terms of the merger agreement were the product of arm’s length negotiations between representatives of Southern Connecticut Bancorp and Naugatuck Valley Financial.
The board of directors of Naugatuck Valley Financial determined that the acquisition, the merger agreement and the transactions contemplated thereby are advisable and in the best interests of Naugatuck Valley Financial and its stockholders. The board of directors also determined that the merger agreement and the transactions contemplated thereby are consistent with, and in furtherance of, Naugatuck Valley Financial’s business strategies. Accordingly, the board of directors unanimously approved the merger agreement and unanimously recommends that Naugatuck Valley Financial stockholders vote “FOR” approval of the merger agreement.
Southern Connecticut Bancorp’s Reasons for the Merger
In reaching its decision to approve the merger agreement and related transactions and recommend their approval to stockholders, the Board of Directors of Southern Connecticut Bancorp consulted with senior management, its legal counsel, Day Pitney LLP, its financial advisor, Stifel, Nicolaus & Company, Inc., and considered a number of factors, including, among others, the following, which are not presented in order of priority:
• | the business strategy and strategic plan of Southern Connecticut Bancorp, its prospects for the future, projected financial results, and expectations relating to the proposed merger, based on discussions with management of Southern Connecticut Bancorp; |
• | a review of the risks and prospects of Southern Connecticut Bancorp remaining independent, including the challenges to maintaining a small community bank in the prevailing financial and regulatory climate versus aligning Southern Connecticut Bancorp with a well capitalized, well run larger organization; |
• | a review of the historical financial statements and condition of Southern Connecticut Bancorp and certain other internal information, primarily financial in nature, relating to the respective businesses, earnings and balance sheets of Southern Connecticut Bancorp; |
• | the form and amount of the merger consideration; |
39
Table of Contents
• | the merger consideration which could reasonably be expected from other potential acquirers with apparent ability to consummate the acquisition of Southern Connecticut Bancorp, including depository institutions located proximate to the greater New Haven marketplace, as well non-depository institutions that had expressed an interest in acquiring a depository institution such as Southern Connecticut Bancorp; |
• | the ability of Naugatuck Valley Financial to pay the merger consideration; |
• | the geographic fit and increased customer convenience of the branch networks of Naugatuck Valley Financial and Southern Connecticut Bancorp; |
• | the anticipated effect of the acquisition on Southern Connecticut Bancorp’s employees (including the fact that Naugatuck Valley Financial anticipates offering employment to many of the employees of Southern Connecticut Bancorp, subject to review of personnel files and such employment criteria for particular positions as Naugatuck Valley Financial customarily applies, following the consummation of the merger); |
• | the effect on Southern Connecticut Bancorp’s customers and the communities served by Southern Connecticut Bancorp; |
• | the terms of the merger agreement and related transactions, including the representations and warranties of the parties, the covenants, the consideration, the benefits to Southern Connecticut Bancorp’s employees, the circumstances under which the Southern Connecticut Bancorp board of directors may consider a superior proposal and the absence of burdensome contingencies in the merger agreement; |
• | the increased legal lending limit available to borrowers by reason of the merger; and |
• | the likelihood of expeditiously obtaining the necessary regulatory approvals without unusual or burdensome conditions. |
• | the long-term and short term interests of Southern Connecticut Bancorp and its shareholders, the interests of the employees, customers, creditors and suppliers of Southern Connecticut Bancorp, and community and societal considerations including those of the communities in which Southern Connecticut Bancorp maintains offices. |
Based on the factors described above, the board of directors of Southern Connecticut Bancorp determined that the merger with Naugatuck Valley Financial would be advisable and in the best interests of Southern Connecticut Bancorp stockholders and other constituencies and unanimously approved the merger agreement and related transactions contemplated by those documents.
Opinion of Naugatuck Valley Financial’s Financial Advisor
Ostrowski & Company, Inc. was retained by Naugatuck Valley Financial on July 2, 2009 as its financial advisor in connection with a possible acquisition of Southern Connecticut Bancorp. Pursuant to the terms of its engagement, Ostrowski & Company, Inc. agreed to assist Naugatuck Valley Financial in analyzing, structuring, negotiating and effecting a transaction. Naugatuck Valley Financial selected Ostrowski & Company, Inc. as its financial advisor based upon Ostrowski & Company, Inc.’s in-depth knowledge of the banking and financial service industry and the qualifications, experience and reputation of its personnel in the financial services and investment communities, as well as its experience in the valuation of bank and thrift institutions and their securities in connection with mergers and acquisitions and other corporate transactions. No material relationship existed between the Company and Ostrowski & Company, Inc. during the last two years.
As part of the advisory services described above, Naugatuck Valley Financial’s Board of Directors requested Ostrowski & Company, Inc.’s opinion as to the fairness, from a financial point of view to holders of Naugatuck Valley Financial’s common stock, of the consideration to be paid pursuant to the terms of the merger agreement to the shareholders of Southern Connecticut Bancorp.
In connection with the merger, it is intended that Naugatuck Valley Financial will reorganize and convert from the mutual holding company form of organization to the stock holding company form of organization pursuant to certain transactions as the result of which, inter alia, Naugatuck Valley Savings and Loan will become a wholly owned subsidiary of new Naugatuck Valley Financial, and that in connection with such conversion, new Naugatuck Valley Financial will conduct a subscription offering of its common stock, and if necessary a community and/or syndicated community offering, and
40
Table of Contents
exchange of its common stock for shares of Naugatuck Valley Financial common stock held by persons other than Naugatuck Valley Mutual Holding Company, all pursuant to a plan of conversion and subject to regulatory review and amendment in connection with such review as provided therein.
Under the terms of the merger agreement, each share of Southern Connecticut Bancorp common stock, $0.01 par value, issued and outstanding immediately prior to the Merger (“Southern Connecticut Bancorp Shares”) will be converted into, at the election of the holder, the right to receive either (a) shares common stock of new Naugatuck Valley Financial, the exchange ratio to be determined based upon the conversion appraisal of new Naugatuck Valley Financial and with a market value of $6.75 per share of Southern Connecticut Bancorp (“Stock Consideration”) or (b) $6.75 in cash, without interest (“Cash Consideration”), subject to proration so that 60% of the total number of Southern Connecticut Bancorp Shares shall be converted into the Stock Consideration and the remaining Southern Connecticut Bancorp Shares shall be converted into the Cash Consideration. The aggregate of the Cash Consideration and Stock Consideration payable and/or issuable pursuant to the Agreement is the “Merger Consideration”. The terms and conditions of the Merger are more fully set forth in the merger agreement.
On September 17, 2010, Ostrowski & Company, Inc. rendered its oral opinion, which was subsequently confirmed in writing, to the board of directors of Naugatuck Valley Financial that, the Merger Consideration to be paid to shareholders of Southern Connecticut Bancorp is fair, from a financial point of view, to holders of Naugatuck Valley Financial common stock. The full text of Ostrowski & Company, Inc.’s fairness opinion dated September 17, 2010 is attached asAppendix B to this proxy statement and is incorporated into this document by reference. The description of the fairness opinion in this section is qualified in its entirety by reference toAppendix B. Holders of Naugatuck Valley Financial common stock are urged to read the opinion it its entirety. The opinion describes the procedures followed, assumptions made, matters considered and qualifications of the review undertaken by Ostrowski & Company, Inc. in connection with the fairness opinion. Ostrowski & Company, Inc.’s opinion is directed solely to the fairness from a financial point of view, to holders of Naugatuck Valley Financial’s common stock, of the merger consideration to be paid pursuant to the terms of the merger agreement and does not constitute any recommendation to Naugatuck Valley Financial’s board of directors or the holders of Naugatuck Valley Financial’s common stock with respect to any vote at the shareholders’ meeting. No limitations were imposed by Naugatuck Valley Financial’s board of directors upon Ostrowski & Company, Inc. with respect to the investigations made or procedures followed by it in arriving at its opinion.
In order to determine the fairness of the merger consideration from a financial point of view, Ostrowski & Company, Inc., in connection with rendering its opinion, reviewed and relied upon, among other things: (i) the merger agreement and its subsequent amendment; (ii) certain publicly available financial statements and other historical financial information of Naugatuck Valley Financial that were deemed relevant; (iii) certain publicly available financial statements and other historical financial information of Southern Connecticut Bancorp that were deemed relevant; (iv) internal financial projections for Naugatuck Valley Financial for the years ending December 31, 2009 through 2010 prepared by and reviewed with management of Naugatuck Valley Financial; (v) internal financial projections for Southern Connecticut Bancorp for the years ending December 31, 2010 through 2012 prepared by and reviewed with management of Southern Connecticut Bancorp (vi) the pro forma financial impact of the merger on Southern Connecticut Bancorp, based on assumptions relating to transaction expenses, purchase accounting adjustments and cost savings determined by senior management of Naugatuck Valley Financial and Southern Connecticut Bancorp; (vii) the publicly reported historical price and trading activity for Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s common stock, including a comparison of certain financial and stock market information for Naugatuck Valley Financial and Southern Connecticut Bancorp with similar publicly available information for certain other companies the securities of which are publicly traded; (viii) the financial terms of certain recent business combinations in the banking and savings industry, to the extent publicly available; (ix) the current market environment generally and the banking environment in particular; and (x) such other information, financial studies, analyses and investigations and financial, economic and market criteria considered relevant. Ostrowski & Company, Inc. also discussed with certain members of senior management of Naugatuck Valley Financial the business, financial condition, results of operations and prospects of Naugatuck Valley Financial and held similar discussions with certain members of senior management of Southern Connecticut Bancorp regarding the business, financial condition, results of operations and prospects of Southern Connecticut Bancorp.
In performing its review, Ostrowski & Company, Inc. relied upon the accuracy and completeness of all of the financial and other information that was available from public sources, that was provided by Naugatuck Valley Financial or Southern Connecticut Bancorp or that was otherwise reviewed by Ostrowski & Company, Inc., and assumed such accuracy and completeness for purposes of rendering its opinion. Ostrowski & Company, Inc. further relied on the assurances of
41
Table of Contents
management of Naugatuck Valley Financial and Southern Connecticut Bancorp that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Ostrowski & Company, Inc. was not asked to and has not undertaken an independent verification of any of such information and Ostrowski & Company, Inc. does not assume any responsibility or liability for the accuracy or completeness thereof. Ostrowski & Company, Inc. did not make an independent evaluation or appraisal of the specific assets, or the liabilities (contingent or otherwise) of Naugatuck Valley Financial or Southern Connecticut Bancorp. With respect to the financial projections for Naugatuck Valley Financial and Southern Connecticut Bancorp and all projections of transaction costs, purchase accounting adjustments and expected cost savings prepared and reviewed with the management of Naugatuck Valley Financial and Southern Connecticut Bancorp and used by Ostrowski & Company, Inc. in its analyses, Ostrowski & Company, Inc. assumed that they reflected the best currently available estimates and judgments of the respective management of the future financial performances of Naugatuck Valley Financial and Southern Connecticut Bancorp and that such performances will be achieved. Ostrowski & Company, Inc. has expressed no opinion as to such financial projections or the assumptions on which they are based. Ostrowski & Company, Inc. has also assumed that there has been no material change in Naugatuck Valley Financial or Southern Connecticut Bancorp’s assets, financial condition, results of operation, business or prospects since the date of the most recent financial statements made available. Ostrowski & Company, Inc. has assumed in all respects material to its analysis that Naugatuck Valley Financial and Southern Connecticut Bancorp will remain as going concerns for all periods relevant to its analyses, that all of the representations and warranties contained in the merger agreement and all related agreements are true and correct, that each party to such agreements will perform all of the covenants required to be performed by such party under such agreements, that the conditions precedent in the merger agreement are not waived and that the merger will qualify as a tax-free reorganization for federal income tax purposes.
The earnings projections furnished to Ostrowski & Company, Inc. and used by it in certain of its analyses were based on projections prepared by the senior management of Naugatuck Valley Financial and Southern Connecticut Bancorp. Naugatuck Valley Financial and Southern Connecticut Bancorp do not publicly disclose internal management projections of the type provided to Ostrowski & Company, Inc. in connection with its review of the merger. As a result, such projections were not prepared with a view towards public disclosure. The projections were based on numerous variables and assumptions which are inherently uncertain, including factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly from those set forth in the projections.
In performing its analyses, Ostrowski & Company, Inc. made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Naugatuck Valley Financial, Southern Connecticut Bancorp and Ostrowski & Company, Inc. Any estimates contained in the analyses performed by Ostrowski & Company, Inc. are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, Ostrowski & Company, Inc.’s opinion was among several factors taken into consideration by the Naugatuck Valley Financial board in making its determination to approve the merger agreement and the merger. Consequently, the analyses described below should not be viewed as determinative of the decision of the Naugatuck Valley Financial board or management with respect to the fairness of the consideration.
The following is a summary of the material analyses presented by Ostrowski & Company, Inc. to the Naugatuck Valley Financial board in connection with its oral and written opinion. The summary is not a complete description of the analyses underlying the Ostrowski & Company, Inc. opinion or the presentation made by Ostrowski & Company, Inc. to the Naugatuck Valley Financial board, but summarizes the material analyses performed and presented in connection with such opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion Ostrowski & Company, Inc. did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Ostrowski & Company, Inc. believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion. The summaries presented below do not constitute a complete description of the financial analyses.
42
Table of Contents
Summary of Proposal.Under the terms of the Agreement, each share of Southern Connecticut Bancorp common stock, $0.01 par value, issued and outstanding immediately prior to the Merger will be converted into, at the election of the holder, the right to receive either (a) shares common stock of new Naugatuck Valley Financial, the exchange ratio to be determined based upon the conversion appraisal of new Naugatuck Valley Financial and with a market value of $6.75 per share of Southern Connecticut Bancorp (“Stock Consideration”) or (b) $6.75 in cash, without interest (“Cash Consideration”), subject to proration so that 60% of the total number of SSE Shares shall be converted into the Stock Consideration and the remaining Southern Connecticut Bancorp Shares shall be converted into the Cash Consideration. Based upon Southern Connecticut Bancorp’s September 16, 2010 closing price of $6.00 the value of the merger consideration represented a 13% premium to Southern Connecticut Bancorp’s closing price, and 116% of Southern Connecticut Bancorp’s book value per share. Ostrowski & Company, Inc. calculated the premium paid as a percent of deposits (“franchise premium”) to be 1.8%. Southern Connecticut Bancorp reported a loss for the last twelve months; therefore, the merger consideration as a multiple to last twelve months earnings is not measured.
Comparable Transaction Analysis. Ostrowski & Company, Inc. reviewed certain financial data for comparable acquisitions of banks and thrifts headquartered in New England, announced between February 21, 2008 and September 15, 2010 based upon target asset size. Ostrowski & Company, Inc. calculated average multiples of deal price at announcement date to last twelve months earnings per share, or LTM EPS, to book value per share and the franchise premium for these comparable transactions. The results of the analysis are set forth in the following table.
Buyer Name | Target Name | ST | Buyer Assets ($000) | Target Assets ($000) | Target Equity ($000) | Date Announced | Deal Value ($M) | Price/ Book (%) | Price/ Tang. Book (%) | Price/ LTM EPS (x) | Premium/ Stock Price (%) | |||||||||||
Liberty Bank | Connecticut River Community Bank | CT | 3,223,655 | 175,150 | 13,974 | 7/23/2010 | 16.1 | 114.7 | 114.7 | NM | 115.00 | |||||||||||
Eastern Bank Corporation | Wainwright Bank & Trust Company | MA | 6,617,878 | 1,047,564 | 74,308 | 6/28/2010 | 158.3 | 198.3 | 200.2 | 26.0 | 106.07 | |||||||||||
Union Savings Bank | First Litchfield Financial Corporation | CT | 1,893,709 | 551,018 | 32,809 | 10/25/2009 | 36.9 | 155.8 | 155.8 | NM | 158.62 | |||||||||||
United Financial Bancorp, Inc. | CNB Financial Corp. | MA | 1,243,194 | 297,186 | 19,861 | 6/25/2009 | 24.8 | 124.2 | 124.2 | NM | 3.43 | |||||||||||
Danvers Bancorp, Inc. | Beverly National Corporation | MA | 1,738,009 | 484,708 | 41,752 | 6/16/2009 | 60.9 | 144.4 | 144.4 | NM | 33.98 | |||||||||||
New England Bancshares, Inc. | Apple Valley Bank & Trust Co | CT | 541,463 | 84,583 | 6,167 | 1/14/2009 | 7.1 | 114.7 | 114.7 | NM | 3.14 | |||||||||||
Average: | 2,542,985 | 440,035 | 31,479 | 50.7 | 142.0 | 142.3 | 26.0 | 70.04 | ||||||||||||||
Median: | 1,815,859 | 390,947 | 26,335 | 30.9 | 134.3 | 134.3 | 26.0 | 70.03 | ||||||||||||||
Southern Connecticut Bancorp, Inc. | CT | 160,138 | 15,683 | 18.2 | 116.0 | 116.0 | NM | 12.50 |
No company or transaction used as a comparison in the above analysis is identical to Naugatuck Valley Financial, Southern Connecticut Bancorp or the proposed merger. Accordingly, an analysis of these results is not solely mathematical. Rather, it involves complex considerations and judgments concerning differences in financial, operating, and market characteristics of the companies.
Trading Market Comparison. Ostrowski & Company, Inc. compared the change in market price of Naugatuck Valley Financial common stock with the performance of the Dow Jones Industrial Average and NASDAQ Banking Index for the twelve months ended September 16, 2010. Over the period Naugatuck Valley Financial’s price increased 35.8 percent compared to a 6.6 percent decrease in the NASDAQ Banking Index and 35.8 percent increase in the Dow Jones Industrial Average.
Ostrowski & Company, Inc. made similar comparison for Southern Connecticut Bancorp common stock, which during the same time period increased 22.5 percent compared to a decrease of 6.6 percent and an increase of 35.8 percent for the NASDAQ Banking Index and Dow Jones Industrial Average, respectively.
Selected Peer Group Analyses. Ostrowski & Company, Inc. compared the financial condition and operating performance of Southern Connecticut Bancorp with a peer group of exchange listed banks with total assets less than $250 million, the SSE Peer Group. The SSE Peer Group consisted of the following five institutions: Bank of Virginia, CommerceFirst Bancorp, Inc., Ohio Legacy Corporation,Optimum Bank Holdings, Inc. and Xenith Bankshares. Based on
43
Table of Contents
June 30, 2010 financial data, Southern Connecticut Bancorp reported a return on average assets of 0.05%, return on average equity of 2.17%, net interest margin of 4.13%, an efficiency ratio of 89.1% and an equity to total assets ratio of 9.8%. Based upon reported results for the same period, the SSE Peer Group averages were: return on average assets of -1.13%; return on average equity of -10.25%; net interest margin of 3.55%; an efficiency ratio of 101.63%; and an equity to total assets ratio of 10.7%.
Ostrowski & Company, Inc. also compared the trading market performance of Southern Connecticut Bancorp common stock with the trading market performance of the common stocks of the SSE Peer Group. On June 30, 2010, the closing price of Southern Connecticut Bancorp common stock on the NASDAQ Global Market was $6.45, or 111.0% of reported book value. This compares to the SSE Peer Group average, as of December 31, 2009, of 142.1% of reported book value.
Impact Analysis. Ostrowski & Company, Inc. analyzed the merger in conjunction with Naugatuck Valley Financial’s second step mutual-to-stock conversion and offering in terms of its effect on Naugatuck Valley Financial’s historical per share values. Ostrowski & Company, Inc. utilized projections prepared and provided by management of Naugatuck Valley Financial and Southern Connecticut Bancorp including projected income statements and balance sheets. Various assumptions were included in the preparation of the projections relating to accounting treatment of the merger, estimated transaction costs, projected cost savings and the estimated valuation of the proceeds from the second step conversion. These forward-looking projections may be effected by many factors beyond the control of Naugatuck Valley Financial and/or Southern Connecticut Bancorp, including the future direction of interest rates, economic conditions in the companies’ market, the actual amount and timing of cost savings achieved through the merger, the actual level of revenue enhancements brought about through the merger, future regulatory changes and various other factors. The actual results may vary from the projected results and the variations may be material. See “—Financial Forecasts provided to Ostrowski & Company, Inc.”
Ostrowski & Company, Inc. reviewed the impact of the merger on Naugatuck Valley Financial shares based upon the merger consideration and an anticipated price of $10.00 per share in the second step mutual-to-stock conversion. Based upon completion of the second step mutual-to-stock conversion at the mid-point of the offering range, Naugatuck Valley Financial’s stated book value per share would increase by 61.4% and tangible book value per share would increase by 65.0%. Following completion of the second step mutual-to-stock conversion and the merger, the pro forma capital ratios of new Naugatuck Valley Financial were above levels required to be considered “well capitalized” under current regulatory guidelines.
Pursuant to the Ostrowski & Company, Inc. engagement letter, Naugatuck Valley Financial agreed to pay Ostrowski & Company, Inc. an advisory fee for advice and assistance in connection with the merger, including rendering a written opinion as to the fairness of the proposed Merger Consideration, from a financial point of view, to Naugatuck Valley Financial’s shareholders. The total advisory fee payable to Ostrowski & Company, Inc. is approximately $204,500. Naugatuck Valley Financial has agreed to make interim payments to Ostrowski & Company, Inc. before the merger takes place which will be credited against the total advisory fee. Naugatuck Valley Financial has made interim payments to Ostrowski & Company, Inc. totaling $147,500 as of the mailing of this proxy statement. The remaining $57,000 payable to Ostrowski & Company, Inc. is contingent upon the successful completion of the transaction. Pursuant to the Ostrowski & Company, Inc. engagement letter, Naugatuck Valley Financial also agreed to reimburse Ostrowski & Company, Inc. for its reasonable out-of-pocket expenses, including legal fees, incurred in connection with Ostrowski & Company, Inc.’s engagement and to indemnify Ostrowski & Company, Inc. and its directors, officers, employees, agents and controlling persons against certain expenses and liabilities.
Financial Forecasts Provided to Ostrowski & Company, Inc. Ostrowski & Company, Inc. relied on internal financial projections for Naugatuck Valley Financial for the years ending December 31, 2010 through 2013 prepared by and reviewed with management of Naugatuck Valley Financial. Naugatuck Valley Financial does not, as a matter of course, publicly disclose projections of future revenues or earnings. Furthermore, the internal projections were not prepared with a view to compliance with published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The internal projections reflected management’s assessment, at that time, of Naugatuck Valley Financial’s prospects given its current operating environment. Naugatuck Valley Financial does not intend to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the internal projections are shown to be in error.
The internal financial forecasts provided by Naugatuck Valley Financial were prepared in 2010 and projected net interest income of approximately $17.1 million, $17.9 million, $18.9 million and $18.7 million; non-interest income of
44
Table of Contents
approximately $2.5 million, $2.5 million, $2.6 million and $2.7 million and total net income of approximately $2.3 million, $2.6 million, $2.9 million and $3.3 million for the twelve months ended December 31, 2010 through 2013, respectively. The internal financial forecasts also projected total assets and deposits of approximately $563 million and $405 million, respectively, at year end 2010 compared to projected total assets and deposits of $647 million and $481 million, respectively, at year end 2013. In addition to the aforementioned inherent uncertainties associated with forecasted information of any type, the internal projections do not take into account any matters contemplated by, and the expenses incurred with, the merger agreement and therefore shareholders are cautioned not to place undue reliance on this information.
Ostrowski & Company, Inc. relied on internal financial projections for Southern Connecticut Bancorp for the year ending December 31, 2010 prepared by and reviewed with management of Southern Connecticut Bancorp in preparing its fairness opinion. Southern Connecticut Bancorp does not, as a matter of course, publicly disclose financial projections or forecasts of future revenues or earnings. However, senior management did provide non-public financial projections to Ostrowski & Company, Inc. in connection with the preparation of our fairness opinion. These internal projections were not prepared with a view to public disclosure or compliance with GAAP, the published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information.
The internal financial forecasts described below are forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from such estimates and should be read with caution. Although presented with numerical specificity, these estimates are based upon a variety of assumptions and estimates as to future events made by Southern Connecticut Bancorp’s management that Southern Connecticut Bancorp’s management believed were reasonable at the time the internal projections were prepared. None of the assumptions may be realized, and as historical performance suggests, they are inherently subject to significant business, economic, and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of Southern Connecticut Bancorp. The inclusion of this information should not be regarded as an indication that Ostrowski & Company, Inc. considered, or now considers, it to be a reliable prediction of future results and the internal projections should not be relied upon as such. Southern Connecticut Bancorp does not intend to update or otherwise revise the internal projections to reflect circumstances existing after the date when prepared or to reflect the occurrences of future events even in the event that any or all of the assumptions underlying the internal projections are shown to be in error.
The internal financial forecasts provided by Southern Connecticut Bancorp were prepared in late 2009 and early 2010 and projected net interest income of approximately $5.8 million, non-interest income of approximately $666,900 and total net income of approximately $553,500 for 2010. The internal financial forecasts also projected total assets and deposits of approximately $165.8 million and $147.3 million, respectively, at year end 2010. In addition to the aforementioned inherent uncertainties associated with forecasted information of any type, the internal projections do not take into account any matters contemplated by, and the expenses incurred with, the merger agreement and therefore shareholders are cautioned not to place undue reliance on this information.
Opinion of Southern Connecticut Bancorp’s Financial Advisor
Southern Connecticut Bancorp’s board of directors retained Northeast Capital & Advisory, Inc. as its financial adviser in connection with the merger and to render an opinion as to the fairness, from a financial point of view, to Southern Connecticut Bancorp of the merger consideration pursuant to the terms of, and subject to the conditions set forth in, the merger agreement, as amended, dated September 17, 2010 among Southern Connecticut Bancorp, Naugatuck Valley Financial and new Naugatuck Valley Financial.
On September 17, 2010, Northeast Capital & Advisory rendered its oral and written opinion to Southern Connecticut Bancorp’s board of directors to the effect that, subject to the contents of such opinion, including the various assumptions made, methodologies used, factors considered and limitations set forth therein, Northeast Capital & Advisory was of the opinion that, as of such date, the merger consideration to be paid by Naugatuck Valley Financial was fair, from a financial point of view, to Southern Connecticut Bancorp. Northeast Capital & Advisory was not requested to express, and did not express, any opinion with respect to any of the other terms, conditions, determinations or actions with respect to the merger.
45
Table of Contents
The full text of Northeast Capital & Advisory’s written opinion, dated September 17, 2010, which sets forth the assumptions made, general procedures followed, methodologies used, factors considered and limitations upon the scope of review undertaken by Northeast Capital & Advisory in rendering its opinion, is attached asAppendix C and is incorporated herein by reference in its entirety. Northeast Capital & Advisory’s opinion is directed only to the fairness, as of the date of the opinion and from a financial point of view, to Southern Connecticut Bancorp of the merger consideration to be paid to Southern Connecticut Bancorp in the merger and does not constitute a recommendation to any shareholder as to how such shareholder should vote with respect to the merger, the merger agreement proposal or any other matter. The summary of Northeast Capital & Advisory’s opinion set forth below is qualified in its entirety by reference to the full text of such opinion attached asAppendix C. Southern Connecticut Bancorp shareholders are urged to read the opinion carefully in its entirety. Northeast Capital & Advisory has not assumed any responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion.
In conducting its investigation and analyses and in arriving at its opinion, Northeast Capital & Advisory reviewed such information and took into account such financial and economic factors, investment banking procedures and considerations as Northeast Capital & Advisory deemed relevant under the circumstances. In that connection, Northeast Capital & Advisory, among other things:
(i) | reviewed certain internal information, primarily financial in nature, including financial forecasts (the “Forecasts”), concerning the business and operations of Southern Connecticut Bancorp and Naugatuck Valley Financial and the strategic and operating benefits and cost savings and synergies associated with the merger (the “Synergies”), all as prepared and furnished to Northeast Capital & Advisory by senior management of Southern Connecticut Bancorp and Naugatuck Valley Financial for purposes of Northeast Capital & Advisory’s analysis; |
(ii) | reviewed certain publicly available information including, but not limited to, Southern Connecticut Bancorp’s and Naugatuck Valley Financial’s then recent filings with certain regulatory agencies and with the Securities and Exchange Commission; |
(iii) | reviewed the financial terms and conditions as set forth in the draft merger agreement, as amended in the form presented to Southern Connecticut Bancorp’s board of directors; |
(iv) | compared the financial position and operating results of Southern Connecticut Bancorp and Naugatuck Valley Financial with those of other publicly traded companies Northeast Capital & Advisory deemed relevant and considered the market trading multiples of such companies; |
(v) | compared the historical market prices and trading activity of Southern Connecticut Bancorp and Naugatuck Valley Financial common stock with those of other publicly traded companies Northeast Capital & Advisory deemed relevant; |
(vi) | compared the merger consideration with the financial terms of other business combinations Northeast Capital & Advisory deemed relevant; |
(vii) | considered the present values of the forecasted cash flows of Southern Connecticut Bancorp and Naugatuck Valley Financial as set forth in the Forecasts; |
(viii) | reviewed certain potential pro forma financial effects of the merger as prepared and provided to Northeast Capital & Advisory by senior management of Naugatuck Valley Financial and Southern Connecticut Bancorp; and |
(ix) | performed other studies and analyses that Northeast Capital & Advisory considered appropriate. |
Prior to rendering its opinion, Northeast Capital & Advisory held discussions with members of Southern Connecticut Bancorp and Naugatuck Valley Financial’s respective senior managements concerning Southern Connecticut Bancorp and Naugatuck Valley Financial’s historical and then current regulatory relations, financial condition and operating results, as well as the then expected future prospects of Southern Connecticut Bancorp and Naugatuck Valley Financial, respectively. Northeast Capital & Advisory also considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which it deemed relevant for the preparation of its opinion.
In arriving at its opinion, Northeast Capital & Advisory assumed and relied upon the accuracy and completeness of all of the financial and other information that was publicly available or provided to Northeast Capital & Advisory by or on behalf of Southern Connecticut Bancorp and Naugatuck Valley Financial, including the Forecasts, the Synergies and the potential pro forma financial effects of the merger. Northeast Capital & Advisory was not engaged to independently verify, and did not assume any responsibility to verify, assumed no liability for, and expressed no opinion on, any such information or the estimates or judgments on which they were based, and Northeast Capital & Advisory assumed that neither Southern
46
Table of Contents
Connecticut Bancorp nor Naugatuck Valley Financial was aware of any information prepared by it or its advisers that might be material to Northeast Capital & Advisory’s opinion that was not provided to Northeast Capital & Advisory. Northeast Capital & Advisory also assumed that:
(i) | all material assets and liabilities (contingent, derivative, off-balance sheet or otherwise, known or unknown) of Southern Connecticut Bancorp and Naugatuck Valley Financial were as set forth in their respective financial statements; |
(ii) | the financial statements of Southern Connecticut Bancorp and Naugatuck Valley Financial provided to Northeast Capital & Advisory presented fairly the results of operations, cash flows and financial condition of Southern Connecticut Bancorp and Naugatuck Valley Financial, respectively, for the periods and as of the dates indicated and were prepared in conformity with U.S. generally accepted accounting principles consistently applied; |
(iii) | the Forecasts for Southern Connecticut Bancorp and Naugatuck Valley Financial were reasonably prepared on bases reflecting the best available estimates and good faith judgments of Naugatuck Valley Financial’s senior management as to the future performance of Southern Connecticut Bancorp and Naugatuck Valley Financial, and Northeast Capital & Advisory relied upon such Forecasts, without independent verification, in the preparation of its opinion; |
(iv) | the Synergies and potential pro forma financial effects of the merger, all as then contemplated by Southern Connecticut Bancorp’s and Naugatuck Valley Financial’s senior management, would be realized in the amounts and over the time periods then contemplated by Southern Connecticut Bancorp’s and Naugatuck Valley Financial’s senior management, without independent verification; |
(v) | the merger would be consummated in accordance with the terms and conditions of the draft merger agreement, as amended, presented to Southern Connecticut Bancorp’s board of directors without any material amendment thereto and without waiver by any party of any of the material conditions to their respective obligations thereunder; |
(vi) | in all respects material to Northeast Capital & Advisory’s analysis, the representations and warranties contained in the draft merger agreement, as amended, presented to Southern Connecticut Bancorp’s board of directors were true and correct and that each party would perform all of the covenants and agreements required to be performed by it under the merger agreement, as amended; and |
(vii) | all material corporate, governmental, regulatory or other consents and approvals required to consummate the merger have been or will be obtained without impacting the merger consideration, the terms and conditions of the merger or the conclusions reached from Northeast Capital & Advisory’s review of the information described above. |
Northeast Capital & Advisory relied as to all legal and tax matters regarding the merger on the advice of counsel to Southern Connecticut Bancorp and Naugatuck Valley Financial, as well as their independent certified public accountants. In conducting its review, Northeast Capital & Advisory did not undertake or obtain an independent evaluation or appraisal of any of the assets or liabilities (contingent, derivative, off-balance sheet or otherwise) or solvency of Southern Connecticut Bancorp or Naugatuck Valley Financial, including any mark-to-market balance sheet adjustments resulting from the merger, market conditions or otherwise, nor did Northeast Capital & Advisory make a physical inspection of the properties or facilities of Southern Connecticut Bancorp or Naugatuck Valley Financial. Northeast Capital & Advisory did not make an independent evaluation of the adequacy of the allowance for loan losses of Southern Connecticut Bancorp or Naugatuck Valley Financial and Northeast Capital & Advisory did not review any individual credit files relating to Southern Connecticut Bancorp or Naugatuck Valley Financial. Northeast Capital & Advisory assumed, without independent verification, that the respective allowances for loan losses for both Southern Connecticut Bancorp and Naugatuck Valley Financial were adequate to cover such losses. Moreover, Northeast Capital & Advisory expressed no opinion about the fairness of the compensation to any officers, directors or employees of Southern Connecticut Bancorp or Naugatuck Valley Financial, or any class of such persons, relative to the merger consideration, Southern Connecticut Bancorp’s shareholders or otherwise. In each case above, Northeast Capital & Advisory made the assumptions and took the actions or inactions above with Southern Connecticut Bancorp’s consent.
Northeast Capital & Advisory’s opinion necessarily was based upon economic, monetary and market conditions as they existed and could be evaluated as of the date of its opinion, and Northeast Capital & Advisory’s opinion did not predict or take into account any changes which may occur, or information which may become available, after such date. Furthermore, Northeast Capital & Advisory expressed no opinion as to the price or trading range at which any of Southern Connecticut Bancorp’s or Naugatuck Valley Financial’s securities (including Southern Connecticut Bancorp common stock and Naugatuck Valley Financial common stock) would trade following the date of its opinion, including any earnings or ownership dilution that may result from Naugatuck Valley Financial’s issuance of its common stock in the merger. Although
47
Table of Contents
subsequent developments may affect the aggregate dollar value of the Naugatuck Valley Financial common stock to be issued pursuant to the exchange ratio, Northeast Capital & Advisory does not have any obligation to update, revise or reaffirm its opinion. Moreover, Northeast Capital & Advisory considered the unprecedented nature of the current market conditions for financial service companies and, in particular, financial institutions, banks and bank holding companies, and their uncertain future potential impact on the value, volatility and viability of such types of financial institutions, including Southern Connecticut Bancorp or Naugatuck Valley Financial, may render many assumptions and many customary and accepted valuation criteria and metrics less reliable as traditional measures of assessing the fairness, from a financial point of view, of a transaction such as the merger.
Northeast Capital & Advisory’s opinion was prepared at the request and solely for the information of Southern Connecticut Bancorp’s board of directors. Northeast Capital & Advisory’s opinion was only one of many factors considered by Southern Connecticut Bancorp’s board of directors in its evaluation of the merger and should not be viewed as being determinative of the views of Southern Connecticut Bancorp with respect to the merger, the exchange ratio, or the merger consideration. Northeast Capital & Advisory’s opinion did not address the relative merits of: (i) the merger, the merger agreement, as amended or any other agreements or other matters provided for or contemplated by the merger agreement, as amended; (ii) any other transactions that may be or might have been available as an alternative to the merger; or (iii) the merger compared to any other potential alternative transactions or business strategies considered by Southern Connecticut Bancorp’s board of directors and, accordingly, Northeast Capital & Advisory relied upon discussions with the senior management of Southern Connecticut Bancorp with respect to the availability and consequences of any alternatives to the merger. Northeast Capital & Advisory was not requested to, and did not, recommend the merger consideration or a specific exchange ratio or the agreed upon exchange ratio, which was determined through negotiations between Southern Connecticut Bancorp and Naugatuck Valley Financial and their other advisers.
The following is a summary of the material financial analyses performed by Northeast Capital & Advisory in connection with rendering its opinion, which is qualified in its entirety by reference to the full text of such opinion attached asAppendix C and to the other disclosures contained in this section. The following summary, however, does not purport to be a complete description of the financial analyses performed by Northeast Capital & Advisory. The order of analyses described below does not represent any relative importance or weight given to the analyses performed by Northeast Capital & Advisory. Some of the summaries of the financial analyses include information presented in a tabular format. These tables must be read together with the full text of each summary. The tables alone are not a complete description of Northeast Capital & Advisory’s financial analyses. Except as otherwise noted, the following quantitative information was based on market and financial data as it existed on or before September 17, 2010 and is not necessarily indicative of current or future market conditions.
Implied Valuation, Transaction Multiples and Transaction Premiums.Based on the exchange of either $6.75 in cash or 0.675 shares of new Naugatuck Valley Financial common stock for each share of Southern Connecticut Bancorp common stock and new Naugatuck Valley Financial’s stock price per share in conjunction with its second step conversion of $10, the
implied “per share purchase price” of Southern Connecticut Bancorp common stock pursuant to the merger as of such date was $6.75 per share. Northeast Capital & Advisory calculated the implied “equity purchase price” (defined as the per share purchase price multiplied by the total number of fully diluted common shares outstanding of Southern Connecticut Bancorp, including gross shares issuable upon the exercise of in-the-money stock options and warrants, less assumed option and warrant proceeds) of Southern Connecticut Bancorp pursuant to the merger to be approximately $18.2 million. Northeast Capital & Advisory then calculated the multiples of the per share purchase price to Southern Connecticut Bancorp’s diluted earnings per share (“EPS”) for the last 12 months (“LTM”) ended on June 30, 2010 and Southern Connecticut Bancorp’s book value per share (“BV”) and tangible book value per share (“TBV”) at June 30, 2010, as provided to Northeast Capital & Advisory by the senior management of Southern Connecticut Bancorp. Northeast Capital & Advisory also reviewed internal financial statements of Southern Connecticut Bancorp dated August 31, 2010 as provided to Northeast Capital & Advisory by senior management of Southern Connecticut Bancorp and noted there was no material change in the book value, net income, or deposits between June 30, 2010 and August 31, 2010. Northeast Capital & Advisory also calculated the core deposit premium for the transaction where core deposit premium was defined as transaction value less tangible book value divided by core deposits. Core deposits were defined as total deposits less time deposits greater than $100,000. These transaction multiples are summarized in the table below:
Transaction Metric | Multiple 6/30/2010 | Multiple 8/31/2010 | ||||
Price/Diluted EPS | NM | NM | ||||
Price/BV | 115.98 | % | 115.58 | % | ||
Price/TBV | 115.98 | % | 115.58 | % | ||
Core Deposit Premium | 2.47 | % | 2.45 | % |
48
Table of Contents
Northeast Capital & Advisory reviewed the historical price and trading activity of Southern Connecticut Bancorp common stock and noted that the high closing prices for Southern Connecticut Bancorp common stock were $6.85, $6.45 and $6.25, respectively, over the last year, the last month, and the last week prior to announcements of the transaction.
Southern Connecticut Bancorp Selected Publicly Traded Company Analysis.In choosing comparable companies to analyze, Northeast Capital & Advisory selected a peer group of publicly traded banks operating in the southern New England region of the United States with assets between $50 million and $300 million, with a ratio of non-performing assets to assets of less than 7.5%, a tangible equity ratio less than 20% and not the subject of an announced transaction. The selected comparable companies for Southern Connecticut Bancorp included:
• | Connecticut Bank and Trust Co. |
• | First Ipswich Bancorp |
• | Prime Bank |
• | Rockport National Bancorp, Inc. |
• | SBT Bancorp, Inc. |
Northeast Capital & Advisory chose these companies based on a review of publicly traded companies that possessed general business, operating and financial characteristics representative of companies in the industry in which Southern Connecticut Bancorp operates. Northeast Capital & Advisory noted that none of the companies reviewed was identical to Southern Connecticut Bancorp and that, accordingly, the analysis of such companies necessarily involved complex qualitative considerations and judgments concerning differences in the business, operating and financial characteristics of each company and other factors that affect the public market values of such companies.
To perform this analysis, Northeast Capital & Advisory used financial information at or for the LTM ended on June 30, 2010. Market price information was as of September 14, 2010. Northeast Capital & Advisory also reviewed internal financial statements of Southern Connecticut Bancorp dated August 31, 2010 as provided to Northeast Capital & Advisory by senior management of Southern Connecticut Bancorp and noted there was no material change in the book value, net income, or deposits between June 30, 2010 and August 31, 2010. Certain financial data prepared by Northeast Capital & Advisory, and as referenced in the tables presented below, may not correspond to the data presented in Southern Connecticut Bancorp’s and Naugatuck Valley Financial’s historical financial statements, or to the data prepared by Ostrowski & Co. presented under the section“Opinion of Naugatuck Valley Financial’s Financial Advisor”as a result of the different periods, assumptions and methods used by Northeast Capital & Advisory to compute the financial data presented.
Northeast Capital & Advisory’s analysis showed the following concerning Southern Connecticut Bancorp’s financial performance:
Financial Performance Measures (1): | Southern Connecticut | Southern Connecticut Peer Group Minimum | Southern Connecticut Peer Group Median | Southern Connecticut Peer Group Average | Southern Connecticut Peer Group Maximum | ||||||||||
Return on Average Equity | (1.95 | )% | (8.51 | )% | 3.85 | % | 2.82 | % | 10.89 | % | |||||
Return on Average Assets | (0.22 | )% | (0.46 | )% | 0.37 | % | 0.32 | % | 0.77 | % | |||||
Current Dividend Yield | — | % | — | % | 2.36 | % | 2.22 | % | 6.17 | % |
(1) | Calculated for the LTM period ended June 30, 2010. |
Northeast Capital & Advisory’s analysis showed the following concerning Southern Connecticut Bancorp’s financial condition:
Financial Condition Measures (1): | Southern Connecticut | Southern Connecticut Peer Group Minimum | Southern Connecticut Peer Group Median | Southern Connecticut Peer Group Average | Southern Connecticut Peer Group Maximum | |||||||||||||||
Tangible Common Equity to Tangible Assets | 9.79 | % | 4.98 | % | 6.87 | % | 8.26 | % | 15.41 | % | ||||||||||
Adjusted Non-Performing Assets to Assets | 4.08 | % | 0.00 | % | 1.06 | % | 1.07 | % | 2.26 | % | ||||||||||
Reserves to Loans | 2.25 | % | 1.13 | % | 1.15 | % | 1.21 | % | 1.40 | % | ||||||||||
Total Assets (in Millions) | $ | 160.1 | $ | 52.2 | $ | 262.4 | $ | 204.8 | $ | 275.0 |
49
Table of Contents
(1) | Calculated for the LTM period ended June 30, 2010. |
Northeast Capital & Advisory’s analysis showed the following concerning Southern Connecticut Bancorp’s market performance:
Market Performance Measures: | Southern Connecticut Peer Group Minimum | Southern Connecticut Peer Group Median | Southern Connecticut Peer Group Average | Southern Connecticut Peer Group Maximum | ||||||||
Price to LTM Earnings (1) | 11.32 | x | 24.30 | x | 22.65 | x | 32.33 | x | ||||
Price to BV | 33.34 | % | 77.26 | % | 66.84 | % | 91.06 | % | ||||
Price to TBV | 35.83 | % | 77.45 | % | 67.38 | % | 91.06 | % | ||||
Premium/Core Deposits | (15.54 | )% | (3.05 | )% | (4.87 | )% | (0.72 | )% |
(1) | Calculated based upon the closing stock price as of September 14, 2010 and earnings for the LTM ended June 30, 2010. |
Northeast Capital & Advisory then reviewed all bank acquisitions between 2000 and present, computing the premium to market price implied in the merger for all deals and then just transactions involving banks with total assets between $50-$300 million. A summary of the median and average premiums to market are provided in the table below:
Premium to Market (%) | ||||||||||
1 Day | 5 Days | 1 Month | 3 Months | |||||||
All Deals | Median Average | 28.3 37.9 | 31.6 40.1 | 35.3 43.3 | 37.5 44.1 | |||||
Deals $50-300 Million | Median Average | 35.9 45.1 | 37.9 47.7 | 41.1 50.4 | 44.7 51.8 |
Applying a 40% control premium to the market performance multiples of the comparable companies results in the following control multiples:
Minimum | Median | Average | Maximum | This Deal | |||||||||||
P/LTM Earnings | 15.85 | x | 34.02 | x | 31.71 | x | 45.26 | x | NA | ||||||
P/BV | 46.68 | % | 108.16 | % | 93.58 | % | 127.48 | % | 115.98 | % | |||||
P/TBV | 50.16 | % | 108.43 | % | 94.33 | % | 127.48 | % | 115.98 | % | |||||
Premium/Core Deposits | (11.12 | )% | 1.14 | % | (1.78 | )% | 2.24 | % | 2.47 | % |
Southern Connecticut Bancorp’s Selected Acquisition Analysis.Northeast Capital & Advisory reviewed publicly available information for 10 transactions it deemed relevant involving, as acquired institutions, publicly traded banks based in the United States that were announced between January 1, 2010 through September 17, 2010 with target assets greater than $50 million but less than $300 million. The transactions involved targets whose non-performing assets to asset ratio was less than 7.50% and whose tangible capital ratio was greater than 5.0% and less than 20%. Merger of equal transactions and acquisitions of Mutual Holding Companies were excluded from the analysis. The group of selected acquisition transactions is listed below:
Buyer | Target | |
Rabobank Nederland | Napa Community Bank | |
Veritex Holdings, Inc. | Professional Capital, Inc. | |
Bank of Princeton | MoreBank | |
Continental Bank Holdings, Inc. | First Resource Bank | |
Community Trust Bancorp, Inc. | Lafollette First National Corporation | |
Industry Bancshares, Inc. | First National Bank of Shiner | |
WSFS Financial Corporation | Christiana Bank & Trust Company | |
Liberty Bank | Connecticut River Community Bank | |
Investor group | Southern Arizona Community Bank | |
California United Bank | California Oaks State Bank |
Northeast Capital & Advisory chose these acquisition transactions based on a review of completed acquisition transactions involving target companies that possessed general business, operating and financial characteristics representative of companies in the industry in which Southern Connecticut Bancorp operates. Northeast Capital & Advisory noted that none of the acquisition transactions or subject target companies reviewed was identical to the merger or Southern Connecticut
50
Table of Contents
Bancorp, respectively, and that, accordingly, the analysis of such acquisition transactions necessarily involved complex qualitative considerations and judgments concerning differences in the business, operating and financial characteristics of each subject target company and each acquisition transaction and other factors that affect the values implied in such acquisition transactions.
For each transaction, Northeast Capital & Advisory calculated multiples of each target company’s purchase price per share to its LTM diluted EPS, its Price to TBV and its Adjusted Price to 8% common TBV where tangible common equity in excess of 8.0% of tangible assets is valued at 100%. In addition, Northeast Capital & Advisory calculated the deal value as a percentage of total deposits and core deposit premium of each transaction where core deposit premium was defined as transaction value less tangible book value divided by core deposits. Core deposits were defined as total deposits less time deposits greater than $100,000. Northeast Capital & Advisory then compared the transaction multiples implied in the merger with the corresponding acquisition transaction multiples for the selected acquisition transactions. Stock market and historical financial information for each selected transaction was based on publicly available information as of the date of each respective transaction. A summary of the implied multiples and premiums is provided in the tables below:
Implied Transaction Multiples per Share | Selected Acquisition Multiples | ||||||||||||||
Minimum | Median | Average | Maximum | ||||||||||||
Price to LTM Diluted EPS | NM | 14.68 | x | 22.13 | x | 27.01 | x | 49.11 | x | ||||||
Adjusted Price to 8% TBV | 119.56 | % | 79.57 | % | 138.83 | % | 145.17 | % | 215.27 | % | |||||
Price to TBV | 115.98 | % | 85.54 | % | 123.94 | % | 138.07 | % | 191.89 | % | |||||
Core Deposit Premium | 2.47 | % | 0.46 | % | 4.87 | % | 5.98 | % | 14.16 | % | |||||
Price to Deposits | 12.97 | % | 7.34 | % | 15.31 | % | 14.95 | % | 22.10 | % |
Southern Connecticut Bancorp Discounted Cash Flow Analysis.Northeast Capital & Advisory performed a discounted cash flow analysis to estimate a range of implied merger consideration values for Southern Connecticut Bancorp. In this analysis, Northeast Capital & Advisory assumed discount rates ranging from 10.0% to 14.0% to derive: (i) the present value of the estimated free cash flows that Southern Connecticut Bancorp could generate over the five-year period beginning September 1, 2010 and ending August 31, 2015, including certain expenses and Synergies forecasted by Naugatuck Valley Financial’s management as a result of the merger, and assuming excess capital generated at time zero after a target tangible equity to tangible asset ratio of 8.0% and (ii) the present value of Southern Connecticut Bancorp’s terminal value calculated in year five. Terminal values for Southern Connecticut Bancorp were calculated based on a long term return on equity of 12.5% and long term growth rates ranging between 2.0% to 6.0%, resulting in terminal values of 6.9 to 13.8x estimated Southern Connecticut Bancorp earnings for the twelve month period beginning September 1, 2015. In performing this analysis, Northeast Capital & Advisory used Naugatuck Valley Financial and Southern Connecticut Bancorp managements’ standalone earnings estimates for Southern Connecticut Bancorp for the five-year period. Certain data was adjusted to account for certain restructuring charges anticipated by Naugatuck Valley Financial’s management to result from the merger and Naugatuck Valley Financial’s management’s assumptions of the Synergies resulting from the merger. Based on these assumptions, Northeast Capital & Advisory derived a range of implied merger consideration between $5.17 and $8.08, as compared to the merger consideration of $6.75 per share.
The discounted cash flow analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made, including earnings growth rates, terminal values, and discount rates. The analysis did not purport to be indicative of the actual values or expected values of Southern Connecticut Bancorp.
Pro Forma Merger Analysis.Northeast Capital & Advisory analyzed the estimated financial impact of the merger on Southern Connecticut Bancorp’s shareholders who accept an exchange of common shares at the 0.675 shares of Naugatuck Valley Financial for each Southern Connecticut Bancorp share. To compute the pro forma impact, Northeast Capital & Advisory used the assumptions generated by Naugatuck Valley Financial’s second step conversion underwriter, along with Naugatuck Valley Financial management’s estimates of deal costs, Synergies, and earnings of the combined entity, and further assumed the second step conversion offering would be consummated at the estimated midpoint. Based on these assumptions which Southern Connecticut Bancorp, Naugatuck Valley Financial, and Naugatuck Valley Financial’s underwriter consented to our using the following accretion results:
Southern Connecticut 6/30/2010 | Pro Forma Post Conversion And Merger | Accretion | |||||||
TVB/Share | $ | 5.82 | $ | 10.38 | 78.35 | % | |||
BV/Share | 5.82 | 10.81 | 85.74 | % | |||||
YTD Earnings/Share | 0.01 | 0.09 | 800.00 | % | |||||
Dividend/Share | 0.00 | 0.14 | NM |
51
Table of Contents
Other Analyses.Northeast Capital & Advisory reviewed the relative financial and market performance of Naugatuck Valley Financial and Southern Connecticut Bancorp to a variety of relevant industry peer groups and indices. Northeast Capital & Advisory also reviewed earnings estimates, balance sheet composition, historical stock performance and other financial data for Naugatuck Valley Financial and Southern Connecticut Bancorp.
The foregoing summary does not purport to be a complete description of the analyses performed by Northeast Capital & Advisory or its presentations to Southern Connecticut Bancorp’s board of directors. The preparation of financial analyses and a fairness opinion is a complex process and is not necessarily susceptible to partial analyses or summary description. Northeast Capital & Advisory believes that its analyses (and the summary set forth above) must be considered as a whole and that selecting portions of such analyses and other factors considered by Northeast Capital & Advisory, without considering all of such analyses and factors, could create an incomplete and/or misleading view of the processes and judgments underlying the analyses performed and conclusions reached by Northeast Capital & Advisory and its opinion. Northeast Capital & Advisory did not attempt to assign specific weights to any particular analyses, but rather made qualitative judgments as to the significance and relevance of each analysis. In its analysis, Northeast Capital & Advisory made numerous assumptions with respect to industry performance, general business, financial and economic conditions and other matters, many of which are beyond the control of Northeast Capital & Advisory. Because these assumptions are inherently subject to uncertainty, Northeast Capital & Advisory does not assume any responsibility or liability if future results are materially different from such assumptions. Any estimates contained in Northeast Capital & Advisory’s analyses are not necessarily indicative of actual results or values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies may actually be sold. Because such estimates are inherently subject to uncertainty, Northeast Capital & Advisory does not assume any responsibility or liability for their accuracy.
As part of its investment banking business, Northeast Capital & Advisory is engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The Southern Connecticut Bancorp Board of Directors selected Northeast Capital & Advisory as its financial advisor because of its reputation as a recognized investment banking firm with substantial expertise in transactions similar to the merger. As compensation for its services in connection with the merger, Northeast Capital & Advisory received fairness opinion fees aggregating approximately $50,000. In addition, Southern Connecticut Bancorp has agreed to reimburse Northeast Capital & Advisory for reasonable out-of-pocket expenses and to indemnify Northeast Capital & Advisory against certain liabilities that may arise out of its engagement, including liabilities under the federal securities laws. In the past, Northeast Capital & Advisory has not provided investment banking and financial advisory services to Southern Connecticut Bancorp, nor received any compensation. Northeast Capital & Advisory has never provided investment banking or financial advisory services to Naugatuck Valley Financial.
Financial Forecasts Provided to Southern Connecticut Bancorp’s Financial Advisor
Southern Connecticut Bancorp does not, as a matter of course, publicly disclose financial projections or forecasts of future revenues or earnings. However, senior management did provide non-public financial projections to Southern Connecticut Bancorp’s financial advisor, Northeast Capital & Advisory, in connection with its financial and valuation analyses. These internal projections were not prepared with a view to public disclosure or compliance with GAAP, the published guidelines of the Securities Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information.
The internal financial forecasts described below are forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from such estimates and should be read with caution. Although presented with numerical specificity, these estimates are based upon a variety of assumptions and estimates as to future events made by Southern Connecticut Bancorp’s management that Southern Connecticut Bancorp’s management believed were reasonable at the time the internal projections were prepared. None of the assumptions may be realized, and as historical performance suggests, they are inherently subject to significant business, economic, and competitive uncertainties and contingencies, all of which are difficult to predict and
52
Table of Contents
many of which are beyond the control of Southern Connecticut Bancorp. The inclusion of this information, which was provided by Southern Connecticut Bancorp management on September 14, 2010, should not be regarded as an indication that Northeast Capital & Advisory considered, or now consider, it to be a reliable prediction of future results and the internal projections should not be relied upon as such. Southern Connecticut Bancorp does not intend to update or otherwise revise the internal projections to reflect circumstances existing after the date when prepared or to reflect the occurrences of future events even in the event that any or all of the assumptions underlying the internal projections are shown to be in error.
The internal financial forecasts provided by Southern Connecticut Bancorp were prepared in late 2009 and early 2010 and projected net interest income of approximately $5.8 million, non-interest income of approximately $666,900 and total net income of approximately $553,500 for 2010. The internal financial forecasts also projected total assets and deposits of approximately $165.8 million and $147.3 million, respectively, at year end 2010. On September 14, 2010, Southern Connecticut Bancorp verbally advised Northeast Capital & Advisory that projected income for 2011 would not be materially different than previously projected income for 2010. In addition to the aforementioned inherent uncertainties associated with forecasted information of any type, the internal projections do not take into account any matters contemplated by, and the expenses incurred with, the merger agreement and therefore shareholders are cautioned not to place undue reliance on this information.
In the context of reverse diligence efforts as it pertains to Naugatuck Valley Financial, Southern Connecticut Bancorp and its financial advisor were provided with Naugatuck Valley Financial’s internal 2010 budget and related assumptions on February 13, 2010. Year to date internal financial statements and certain other reports as of August 31, 2010 were also provided to Northeast Capital & Advisory by Naugatuck Valley Financial on September 15, 2010. Naugatuck Valley Financial does not, as a matter of course, publicly disclose projections of future revenues or earnings. Furthermore, the internal projections were not prepared with a view to compliance with published guidelines of the Securities Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The internal projections reflected management’s assessment, at that time, of Naugatuck Valley Financial’s prospects given its current operating environment. Naugatuck Valley Financial does not intend to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the internal projections are shown to be in error.
Northeast Capital & Advisory relied upon the 2010 internal projections in connection with its financial analyses. The internal 2010 budget projected $18.5 million of net interest income, $3.0 million in non-interest income and net income of $2.8 million. Asset growth was projected to be $20 million from levels achieved at year end 2009. In addition, deposit growth was also projected to be $20 million with investments and borrowings projected to remain flat.
Accounting Treatment
New Naugatuck Valley Financial will account for the merger under the “acquisition” method of accounting in accordance with U.S. generally accepted accounting principles. Using the purchase method of accounting, the assets and liabilities of Southern Connecticut Bancorp will be recorded by new Naugatuck Valley Financial at their respective fair values at the time of the completion of the merger. The excess of new Naugatuck Valley Financial’s purchase price over the net fair value of the assets acquired and liabilities assumed will then be allocated to identified intangible assets, with any remaining unallocated cost recorded as goodwill.
Tax Consequences of the Merger
General. The following summary discusses the material anticipated U.S. federal income tax consequences of the merger applicable to a holder of shares of Southern Connecticut Bancorp common stock who surrenders all of his or her common stock for shares of new Naugatuck Valley Financial common stock and/or cash in the merger. This discussion is based upon the Internal Revenue Code, Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service (“IRS”), and other applicable authorities, all as in effect on the date of this document and all of which are subject to change or differing interpretations (possibly with retroactive effect). This discussion is limited to U.S. residents and citizens who hold their shares as capital assets for U.S. federal income tax purposes (generally, assets held for investment). No attempt has been made to comment on all U.S. federal income tax consequences of the merger and related transactions that may be relevant to holders of shares of Southern Connecticut Bancorp common stock. This discussion also does not address all of the tax consequences that may be relevant to a particular person or the tax consequences that may be relevant to persons subject to special treatment under U.S. federal income tax laws (including, among others, tax-exempt organizations, dealers in
53
Table of Contents
securities or foreign currencies, banks, insurance companies, financial institutions or persons who hold their shares of Southern Connecticut Bancorp common stock as part of a hedge, straddle, constructive sale or conversion transaction, persons whose functional currency is not the U.S. dollar, holders that exercise objecting stockholders’ rights of appraisal, persons that are, or hold their shares of Southern Connecticut Bancorp common stock through, partnerships or other pass- through entities, or persons who acquired their shares of Southern Connecticut Bancorp common stock through the exercise of an employee stock option or otherwise as compensation). In addition, this discussion does not address any aspects of state, local, non-U.S. taxation or U.S. federal taxation other than income taxation. No ruling has been requested from the IRS regarding the U.S. federal income tax consequences of the merger. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.
The tax consequences of the merger to individual Southern Connecticut Bancorp stockholders may vary depending upon their particular circumstances. Therefore, Southern Connecticut Bancorp stockholders are urged to consult their tax advisors as to the U.S. federal income tax consequences of the merger in their particular circumstances, as well as the effects of state, local, non-U.S. tax laws and U.S. tax laws other than income tax laws.
Opinion Conditions. It is a condition to the obligations of Naugatuck Valley Financial and Southern Connecticut Bancorp that Naugatuck Valley Financial receive an opinion by Kilpatrick Stockton LLP and that Southern Connecticut Bancorp receive an opinion by Day Pitney LLP to the effect that the merger will constitute a “reorganization” for U.S. federal income tax purposes within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. Naugatuck Valley Financial and Southern Connecticut Bancorp both expect to be able to obtain the tax opinions if, as expected:
• | Naugatuck Valley Financial and Southern Connecticut Bancorp are able to deliver customary representations to Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s respective tax counsel; and |
• | there is no adverse change in U.S. federal income tax law. |
Although the merger agreement allows both Naugatuck Valley Financial and Southern Connecticut Bancorp to waive the condition that tax opinions be delivered by Kilpatrick Stockton LLP and Day Pitney LLP, neither party currently anticipates doing so. However, if this condition were waived, both Naugatuck Valley Financial and Southern Connecticut Bancorp would re-solicit the approval of its stockholders prior to completing the merger.
In addition, in connection with the filing of the registration statement of which this proxy statement/prospectus forms a part, Kilpatrick Stockton LLP and Day Pitney LLP have delivered their opinions to Naugatuck Valley Financial and Southern Connecticut Bancorp, respectively, that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. Copies of these opinions have been filed as exhibits to the registration statement. Such opinions have been rendered on the basis of facts, representations and assumptions set forth or referred to in such opinions and factual representations contained in certificates of officers of Naugatuck Valley Financial and Southern Connecticut Bancorp, all of which must continue to be true and accurate in all material respects as of the effective time of the merger.
If any of the representations or assumptions upon which the opinions are based are inconsistent with the actual facts, the tax consequences of the merger could be adversely affected. The determination by tax counsel as to whether the proposed merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code will depend upon the facts and law existing at the effective time of the proposed merger. The following discussion assumes that the merger will constitute a “reorganization” for U.S. federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code.
Exchange Solely for New Naugatuck Valley Financial Common Stock. No gain or loss will be recognized by a Southern Connecticut Bancorp stockholder who receives solely shares of new Naugatuck Valley Financial common stock (except for cash received in lieu of fractional shares, as discussed below) in exchange for all of his or her shares of Southern Connecticut Bancorp common stock. The tax basis of the shares of new Naugatuck Valley Financial common stock received by a Southern Connecticut Bancorp stockholder in such exchange will be equal (except for the basis attributable to any fractional shares of new Naugatuck Valley Financial common stock, as discussed below) to the basis of the Southern Connecticut Bancorp common stock surrendered in exchange for the new Naugatuck Valley Financial common stock. The holding period of the new Naugatuck Valley Financial common stock received will include the holding period of shares of Southern Connecticut Bancorp common stock surrendered in exchange for the new Naugatuck Valley Financial common stock, provided that such shares were held as capital assets of the Southern Connecticut Bancorp stockholder at the effective time of the merger.
54
Table of Contents
Exchange Solely for Cash. A Southern Connecticut Bancorp stockholder who receives solely cash in exchange for all of his or her shares of Southern Connecticut Bancorp common stock (and is not treated as constructively owning new Naugatuck Valley Financial common stock after the merger under the circumstances referred to below under“—Possible Dividend Treatment”) will recognize gain or loss for federal income tax purposes equal to the difference between the cash received and such stockholder’s tax basis in the Southern Connecticut Bancorp common stock surrendered in exchange for the cash. Such gain or loss will be a capital gain or loss, provided that such shares were held as capital assets of the Southern Connecticut Bancorp stockholder at the effective time of the merger. Such gain or loss will be long-term capital gain or loss if the Southern Connecticut Bancorp stockholder’s holding period is more than one year. The Internal Revenue Code contains limitations on the extent to which a taxpayer may deduct capital losses from ordinary income.
Exchange for New Naugatuck Valley Financial Common Stock and Cash. A Southern Connecticut Bancorp stockholder who receives a combination of new Naugatuck Valley Financial common stock and cash in exchange for his or her Southern Connecticut Bancorp common stock will not be permitted to recognize any loss for federal income tax purposes. Such a stockholder will recognize gain, if any, equal to the lesser of (1) the amount of cash received, or (2) the amount of gain “realized” in the transaction. The amount of gain a Southern Connecticut Bancorp stockholder “realizes” will equal the amount by which (a) the cash plus the fair market value at the effective time of the merger of new Naugatuck Valley Financial common stock received exceeds (b) the stockholders’ basis in the Southern Connecticut Bancorp common stock to be surrendered in the exchange for the cash and new Naugatuck Valley Financial common stock. Any recognized gain could be taxed as a capital gain or a dividend, as described below. The tax basis of the shares of new Naugatuck Valley Financial common stock received by such Southern Connecticut Bancorp stockholder will be the same as the basis of the shares of Southern Connecticut Bancorp common stock surrendered in exchange for the shares of new Naugatuck Valley Financial common stock, adjusted as provided in Section 358(a) of the Internal Revenue Code for the cash received in exchange for such shares of Southern Connecticut Bancorp common stock. The holding period for shares of new Naugatuck Valley Financial common stock received by such Southern Connecticut Bancorp stockholder will include such stockholder’s holding period for the Southern Connecticut Bancorp common stock surrendered in exchange for the new Naugatuck Valley Financial common stock, provided that such shares were held as capital assets of the stockholder at the effective time of the merger.
A Southern Connecticut Bancorp stockholder’s federal income tax consequences will also depend on whether his or her shares of Southern Connecticut Bancorp common stock were purchased at different times at different prices. If they were, the Southern Connecticut Bancorp stockholder could realize gain with respect to some of the shares of Southern Connecticut Bancorp common stock and loss with respect to other shares. Such Southern Connecticut Bancorp stockholder would have to recognize such gain to the extent such stockholder receives cash with respect to those shares in which the stockholder’s adjusted tax basis is less than the amount of cash plus the fair market value at the effective time of the merger of the new Naugatuck Valley Financial common stock received, but could not recognize loss with respect to those shares in which the Southern Connecticut Bancorp stockholder’s adjusted tax basis is greater than the amount of cash plus the fair market value at the effective time of the merger of the new Naugatuck Valley Financial common stock received. Any disallowed loss would be included in the adjusted basis of the new Naugatuck Valley Financial common stock. Such a Southern Connecticut Bancorp stockholder is urged to consult his or her own tax advisor regarding the tax consequences of the merger to that stockholder.
Possible Dividend Treatment.In certain circumstances, a Southern Connecticut Bancorp stockholder who receives solely cash or a combination of cash and new Naugatuck Valley Financial common stock in the merger may receive ordinary income, rather than capital gain, treatment on all or a portion of the gain recognized by that stockholder if the receipt of cash “has the effect of the distribution of a dividend.” The determination of whether a cash payment has such effect is based on a comparison of the Southern Connecticut Bancorp stockholder’s proportionate interest in new Naugatuck Valley Financial after the merger with the proportionate interest the stockholder would have had if the stockholder had received solely new Naugatuck Valley Financial common stock in the merger. This could happen because of your purchase (or the purchase by a family member) of additional new Naugatuck Valley Financial stock or a repurchase of shares by new Naugatuck Valley Financial. For purposes of this comparison, the Southern Connecticut Bancorp stockholder may be deemed to constructively own shares of new Naugatuck Valley Financial common stock held by certain members of the stockholder’s family or certain entities in which the stockholder has an ownership or beneficial interest and certain stock options may be aggregated with the stockholder’s shares of new Naugatuck Valley Financial common stock. The amount of the cash payment that may be treated as a dividend is limited to the stockholder’s ratable share of the accumulated earnings and profits of Southern Connecticut Bancorp at the effective time of the merger. Any gain that is not treated as a dividend will be taxed as a capital gain, provided that the stockholder’s shares were held as capital assets at the effective time of the merger. Because the determination of
55
Table of Contents
whether a cash payment will be treated as having the effect of a dividend depends primarily upon the facts and circumstances of each Southern Connecticut Bancorp stockholder, stockholders are urged to consult their own tax advisors regarding the tax treatment of any cash received in the merger.
Cash in Lieu of Fractional Shares. A Southern Connecticut Bancorp stockholder who holds Southern Connecticut Bancorp common stock as a capital asset and who receives in the merger, in exchange for such stock, solely new Naugatuck Valley Financial common stock and cash in lieu of a fractional share interest in new Naugatuck Valley Financial common stock will be treated as having received such cash in full payment for such fractional share of stock and as capital gain or loss, notwithstanding the dividend rules discussed above.
Backup Withholding. Unless an exemption applies under the backup withholding rules of Section 3406 of the Internal Revenue Code, the exchange agent shall be required to withhold, and will withhold, 28% of any cash payments to which a Southern Connecticut Bancorp stockholder is entitled pursuant to the merger, unless the Southern Connecticut Bancorp stockholder signs the substitute Internal Revenue Service Form W-9 enclosed with the letter of transmittal sent by the exchange agent. Unless an applicable exemption exists and is proved in a manner satisfactory to the exchange agent, this completed form provides the information, including the Southern Connecticut Bancorp stockholder’s taxpayer identification number, and certification necessary to avoid backup withholding.
Tax Treatment of the Entities.No gain or loss will be recognized by new Naugatuck Valley Financial or Southern Connecticut Bancorp as a result of the merger.
Regulatory Matters Relating to the Merger
The merger cannot be completed unless it is first approved by the Office of Thrift Supervision and the Connecticut Department of Banking. New Naugatuck Valley Financial must also receive the prior approval, or a waiver thereof, of the Federal Reserve Board. New Naugatuck Valley Financial received a waiver from the Federal Reserve Board on , 2010, and the conditional approval of the Connecticut Department of Banking and the Office of Thrift Supervision on , 2010, and , 2010, respectively.
In addition, a period of 15 to 30 days must expire following approval by the Office of Thrift Supervision before completion of the merger is allowed, within which period the United States Department of Justice may file objections to the merger under the federal antitrust laws. While Naugatuck Valley Financial and Southern Connecticut Bancorp believe that the likelihood of objection by the Department of Justice is remote in this case, there can be no assurance that the Department of Justice will not initiate proceedings to block the merger, or that the Attorney General of the State of Connecticut will not challenge the merger, or if any proceeding is instituted or challenge is made, as to the result of the challenge.
The merger cannot proceed in the absence of the requisite regulatory approvals. See“—Conditions to Completing of the Merger” and“—Terminating the Merger Agreement.” There can be no assurance that the requisite regulatory approvals will be obtained, and if obtained, there can be no assurance as to the date of any approval. There can also be no assurance that any regulatory approvals will not contain a condition or requirement that causes the approvals to fail to satisfy the condition set forth in the merger agreement and described under“—Conditions to Completing the Merger.”
Interests of Certain Persons in the Merger
Share Ownership.On the record date for the annual meeting, Southern Connecticut Bancorp’s directors and officers beneficially owned, in the aggregate, 439,975 shares of Southern Connecticut Bancorp’s common stock (including shares that may be acquired upon the exercise of stock options), representing approximately 15.33% of the outstanding shares of Southern Connecticut Bancorp common stock.
As described below, certain of Southern Connecticut Bancorp’s officers and directors have interests in the merger that are in addition to, or different from, the interests of Southern Connecticut Bancorp’s stockholders generally. Southern Connecticut Bancorp’s board of directors was aware of these conflicts of interest and took them into account in approving the merger.
56
Table of Contents
Treatment of Southern Connecticut Bancorp Stock Options, Restricted Stock and Warrants.Each option to purchase shares of Southern Connecticut Bancorp common stock outstanding and unexercised immediately prior to the effective time of the merger will be cancelled and all rights under such option will be extinguished in exchange for a cash payment equal to $6.75 less the exercise price per share of the stock option, multiplied by the number of shares of Southern Connecticut Bancorp common stock subject to the stock option, less any required tax withholding. As of , 2010, Southern Connecticut Bancorp’s directors and executive officers hold, in the aggregate, fully vested options to acquire shares with a weighted average exercise price of $ . Upon completion of the merger, Southern Connecticut Bancorp’s directors and executive officers will receive approximately $ in exchange for these options.
At the effective time, each share of restricted stock outstanding, to the extent not already vested, shall vest and shall represent a right to receive the same merger consideration provided to other Southern Connecticut Bancorp stockholders, less any required tax withholdings. As of , 2010, Southern Connecticut Bancorp’s directors and executive officers hold, in the aggregate, shares of unvested restricted stock for which they will receive merger consideration of approximately $ .
At the effective time, each warrant to acquire shares of Southern Connecticut Bancorp common stock that is then outstanding and unexercised, whether or not then vested, shall be canceled without payment in exchange.
Employment Agreement and Change in Control Agreement Severance Payments. John H. Howland, President and Chief Operating Officer of Southern Connecticut Bancorp, and Stephen V. Ciancarelli, Senior Vice President and Chief Financial Officer of Southern Connecticut Bancorp, and Rosemaire Romano, First Vice President, Director of Human Resources and Corporate Secretary of Southern Connecticut Bancorp are each currently parties to employment agreements with Southern Connecticut Bancorp and The Bank of Southern Connecticut. Under each of these agreements, the executive is entitled to a severance payment equal to two times the sum of his or her current base salary and the prior year’s bonus upon completion of the merger and the termination of the employee’s employment. It is expected that the employment of John H. Howland, Stephen V. Ciancarelli and Rosemarie Romano will terminate upon completion of the merger. In connection with the termination of employment, Mr. Howland, Mr. Ciancarelli and Ms. Romano will receive from Southern Connecticut Bancorp lump sum payments of $ , $ and $ .
Proposed Employment Agreements. Matthew Proto, Sr., Senior Vice President and Chief Lending Officer of The Bank of Southern Connecticut, and Sunil Pallan, Senior Vice President and Chief Credit Officer of The Bank of Southern Connecticut, have entered into employment agreements, to be effective upon completion of the merger, with Naugatuck Valley Savings and Loan. The agreements have terms of two years and provide for annual base salaries of $160,000 and $140,000 for Mr. Proto and Mr. Pallan, respectively. In addition to base salary, the agreements provide for, among other things, the executive’s participation in bonus, incentive, stock-based incentive and benefit programs offered by Naugatuck Valley Savings and Loan. Under the employment agreements, if, outside of a change in control, the employee terminates his employment with good reason as defined in the agreement or if Naugatuck Valley Savings and Loan terminates the employee without cause as defined in the agreement, then Naugatuck Valley Savings and Loan must pay a severance benefit equal to two times the employee’s base salary. If, within two years following a change in control, Naugatuck Valley Savings and Loan or its successors terminate the employee without cause or if the employee terminates employment for good reason, then Naugatuck Valley Savings and Loan must pay a severance benefit equal to two times the employee’s base salary. If Naugatuck Valley Savings and Loan terminates the employee for cause, no severance benefits are due. For a period of one year following the employee’s termination of employment for good reason or without cause, the employee may not solicit employees or customers of Naugatuck Valley Savings and Loan.
The agreements will provide for the reduction of change in control payments to the executive to the extent necessary to ensure he will not receive “excess parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended, which would otherwise result in the imposition of a 20% excise tax under Section 4999 of the Internal Revenue Code and non-deductibility by Naugatuck Valley Savings and Loan making such payments.
Appointment of Directors to the New Naugatuck Valley Financial Board of Directors. New Naugatuck Valley Financial will appoint two of Southern Connecticut Bancorp’s directors to the boards of directors of new Naugatuck Valley Financial and Naugatuck Valley Savings and Loan. These directors will be Elmer F. Laydon and Alphonse F. Spadaro, Jr.
Advisory Board.Under the merger agreement, Naugatuck Valley Savings and Loan has agreed to invite each director of Southern Connecticut Bancorp (other than the directors to be added to new Naugatuck Valley Financial’s and Naugatuck
57
Table of Contents
Valley Savings and Loan’s boards of directors) to serve on an advisory board. Naugatuck Valley Savings and Loan will maintain the advisory board for a minimum period of one year. The advisory board will meet monthly and each advisory director will receive $400 per meeting attended.
Continued Director and Officer Liability Coverage. For a period of six years following the effective time of the merger, new Naugatuck Valley Financial has agreed to indemnify and hold harmless the current and former officers and directors of Southern Connecticut Bancorp and its subsidiaries against any costs or expenses incurred in connection with any claim, action, suit, proceeding or investigation that is a result of matters that existed or occurred at or before the effective time of the merger to the same extent as Southern Connecticut Bancorp currently provides for indemnification of its officers and directors. For a period of three years following the effective time of the merger, new Naugatuck Valley Financial has also agreed to provide coverage to the officers and directors of Southern Connecticut Bancorp immediately prior to the effective time of the merger under the directors’ and officers’ liability insurance policy currently maintained by Southern Connecticut Bancorp or under a policy with comparable coverage, subject to a premium cap of 200% of Southern Connecticut Bancorp’s current annual premium.
Employee Matters
Each person who is an employee of The Bank of Southern Connecticut as of the closing of the merger (whose employment is not specifically terminated upon the closing) will become an employee of Naugatuck Valley Savings and Loan. Former employees of The Bank of Southern Connecticut who continue to work for Naugatuck Valley Savings and Loan (“continuing employees”) will be treated as new employees of Naugatuck Valley Savings and Loan for purposes of participation in the Naugatuck Valley Savings and Loan 401(k) Plan and the employee stock ownership plan. Continuing employees will receive credit for past service with The Bank of Southern Connecticut for purposes of vesting and participation eligibility, but not for accrual of benefits, in Naugatuck Valley Savings and Loan’s 401(k) Plan. Continuing employees will not be eligible to participate in Naugatuck Valley Savings and Loan’s employee stock ownership plan until the first day of the second plan year following the closing of the merger. In addition, Naugatuck Valley Savings and Loan will make available employer-provided health and other employee welfare benefit plans to each continuing employee on the same basis as it provides such coverage to similarly situated Naugatuck Valley Savings and Loan employees except that any pre-existing condition, eligibility waiting period or other limitations or exclusions otherwise applicable under such plans to new employees will not apply to a continuing employee or their covered dependents who were covered under a similar The Bank of Southern Connecticut plan at the effective time of the merger.
Before the closing of the merger, Southern Connecticut Bancorp will, at the request and discretion of Naugatuck Valley Financial, amend The Bank of Southern Connecticut 401(k) plan to cause The Bank of Southern Connecticut to no longer be a participating employer in the 401(k) plan or to terminate The Bank of Southern Connecticut 401(k) plan. If The Bank of Southern Connecticut 401(k) is terminated, participants may (i) elect to receive distributions from The Bank of Southern Connecticut 401(k), (ii) transfer benefits to an IRA or (iii) roll distributions (but not plan loans) into the Naugatuck Valley Savings and Loan 401(k) plan.
Each employee of The Bank of Southern Connecticut who is involuntarily terminated (other than for cause) within 12 months of the merger and who is not covered by an employment agreement, change in control agreement or other severance arrangement will receive a severance payment equal to two weeks of base compensation, as defined in the merger agreement, for each year of service at The Bank of Southern Connecticut, with a minimum payment equal to four weeks of base pay for The Bank of Southern Connecticut employees who have at least one full year of service and a maximum payment equal to 12 weeks of base pay.
Time of Completion
Unless the parties agree otherwise and unless the merger agreement has otherwise been terminated, the closing of the merger will take place on a date designated by new Naugatuck Valley Financial that is concurrent with or as soon as practicable following satisfaction or waiver of the conditions to the merger contained in the merger agreement. See“—Conditions to Completing the Merger.” On the closing date, new Naugatuck Valley Financial will file a certificate of merger with the Connecticut Secretary of State and the Maryland State Department of Assessments and Taxation merging Southern Connecticut Bancorp into new Naugatuck Valley Financial. The merger will become effective at the time stated in the certificate of merger.
58
Table of Contents
New Naugatuck Valley Financial and Southern Connecticut Bancorp are working hard to complete the merger quickly. It is currently expected that the merger will be completed in the quarter of 2010. However, because completion of the merger is subject to regulatory approvals and other conditions, the parties cannot be certain of the actual timing.
Conditions to Completing the Merger
New Naugatuck Valley Financial’s and Southern Connecticut Bancorp’s obligations to consummate the merger are conditioned on the following:
• | approval of the merger agreement by Southern Connecticut Bancorp stockholders; |
• | receipt of all required regulatory approvals for the merger and the conversion of Naugatuck Valley Savings and Loan without any materially adverse conditions and the expiration of all statutory waiting periods; |
• | no party to the merger being subject to any legal order, decree or injunction that prohibits consummating any part of the transaction, no governmental entity having instituted any proceeding for the purpose of blocking the transaction, and the absence of any statute, rule or regulation that prohibits completion of any part of the transaction; |
• | the registration statement of which this proxy statement/prospectus forms a part being declared effective by the Securities and Exchange Commission, the absence of any pending or threatened proceeding by the Securities and Exchange Commission to suspend the effectiveness of the registration statement and the receipt of all required state “blue sky” approvals; |
• | receipt by each party of all consents and approvals from third parties (other than those required from government agencies) required to complete the merger, unless failure to obtain those consents or approvals would not have a material adverse effect on Naugatuck Valley Financial after giving effect to the merger; |
• | receipt by each party of opinions from their respective legal counsel to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; |
• | the other party having performed in all material respects its obligations under the merger agreement, the other party’s representations and warranties being true and correct as of the date of the merger agreement and as of the closing date, and receipt of a certificate signed by the other party’s chief executive officer and chief financial officer to that effect; and |
• | no material adverse effect occurring with respect to Southern Connecticut Bancorp. |
The merger cannot be completed, and you will not receive any new Naugatuck Valley Financial shares or cash, unless and until the new Naugatuck Valley Financial conversion and offering are completed. The offering is scheduled to terminate on[DATE1], 2010. The offering may be extended until[DATE2], 2010, unless the Office of Thrift Supervision approves a later date.
Conduct of Business Before the Merger
Southern Connecticut Bancorp has agreed that, until completion of the merger and unless permitted by Naugatuck Valley Financial, neither it nor its subsidiaries will:
General Business
• | conduct its business other than in the regular, ordinary and usual course consistent with past practice; |
• | fail to use reasonable efforts to maintain and preserve intact its business organization, properties, leases, employees and advantageous business relationships and retain the services of its officers and key employees; |
• | take any action that would adversely affect or delay its ability to perform its obligations under the merger agreement or to consummate the transactions contemplated by the merger agreement; |
59
Table of Contents
Indebtedness
• | incur, modify, extend or renegotiate any indebtedness or become responsible for the obligations of any person or entity, other than (a) the creation of deposit liabilities in the ordinary course of business consistent with past practice; and (b) advances from the Federal Home Loan Bank of Boston with a maturity of not more than one year; |
• | prepay any such indebtedness so as to cause itself to incur a prepayment penalty thereunder; |
• | purchase or renew any brokered certificates of deposits such that the balance of such funds exceeds the balance at December 31, 2009; |
Capital Stock
• | adjust, split, combine or reclassify its capital stock; |
• | pay any cash or stock dividends or make any other distribution on its capital stock; |
• | grant any stock options, restricted stock or stock appreciation rights or any limited rights under Southern Connecticut Bancorp employee plans or grant any third party a right to acquire any of its shares of capital stock; |
• | issue any additional shares of capital stock or any securities convertible or exercisable for any shares of its capital stock, except pursuant to the exercise of outstanding options or warrants to purchase Southern Connecticut Bancorp common stock; |
• | redeem, purchase or otherwise acquire any shares of its capital stock; |
Dispositions
• | dispose of any of its material assets or cancel or release any indebtedness, other than in the ordinary course of business or pursuant to commitments existing as of the date of the merger agreement; |
Investments
• | except pursuant to contracts or agreements in force at the date of or permitted by the merger agreement, make any equity investment other than pursuant to commitments existing as of the date of the merger agreement; |
Contracts
• | enter into, renew, amend or terminate any contract or agreement, or make any change in any of its leases or contracts, other than with respect to those involving the payment of less than $25,000 per annum, and contracts or agreements specifically allowed by the merger agreement; |
Loans
• | make, renegotiate, renew, increase, extend, modify or purchase any loans, advances, credit enhancements or extensions, or make any related commitment, except (i) in conformity with existing lending practices in amounts, individually or in the aggregate to one borrower, not to exceed $500,000 for real estate loans with a loan-to-value ratio of 80% or less and $250,000 for all other loans, (ii) in conformity with existing lending practices in amounts, individually or in the aggregate to one borrower, greater than $500,000 for loans secured by real estate with a loan-to-value ratio of 80% or less and greater than $250,000 for all other loans, subject to Naugatuck Valley Financial non-objection, or (iii) existing loans or advances as to which Southern Connecticut Bancorp has a binding obligation to make such loans or advances; |
• | make or increase any loan or extension of credit or commit to make or increase any such loan or extension of credit to any director or executive officer of Southern Connecticut Bancorp or The Bank of Southern Connecticut, except for loans or extensions of credit on terms made available to the general public and other than renewals of existing loans or commitments to loan; |
Employees
• | increase the compensation, bonus or other fringe benefits of any of its employees or directors, except in the ordinary course of business consistent with past practice and current accruals; |
60
Table of Contents
• | pay any bonus, pension, retirement allowance or contribution not required by any existing plan or agreement to any employees or directors; |
• | become a party to, amend (other than amendments required by applicable law) or commit to any benefit plan or employment agreement; |
• | voluntarily accelerate the vesting or the lapsing of any restrictions with respect to any stock options or other stock-based compensation; |
• | elect any new senior executive officer or director; |
• | hire any employee with an annual total compensation in excess of $40,000; |
Settling Claims
• | settle any claim (i) against it for more than $25,000 or (ii) which would impose any material restrictions on its operations; |
Governing Documents
• | amend its articles of incorporation or bylaws; |
Investment in Debt Securities
• | make any material change to its investment securities portfolio or interest rate risk position, through purchases, sales or otherwise, or in the manner in which the portfolio is classified; |
• | make any investment in any debt security, including mortgage-backed and mortgage-related securities, other than U.S. government and U.S. government agency securities with final maturities greater than one year; |
Capital Expenditures
• | make any capital expenditures other than pursuant to binding commitments and other than expenditures necessary to maintain existing assets in good repair or to make payment of necessary taxes; |
Branches
• | establish or commit to establish any new branch or other office or file an application to relocate or terminate the operation of an existing banking office; |
Accounting
• | change its method of accounting, except as required by changes in generally accepted accounting principles or regulatory guidelines; |
Merger Agreement
• | take any action that is intended or expected to result in any of its representations and warranties under the merger agreement being or becoming untrue in any material respect or in the conditions to the merger not being satisfied or in a violation of a provision of the merger agreement; or |
Other Agreements
• | agree to take, commit to take any or adopt any resolutions in support of any of the foregoing actions. |
Naugatuck Valley Financial has agreed that, until the completion of the merger and unless permitted by Southern Connecticut Bancorp, it will not:
• | take any action that would adversely affect or delay its ability to perform its obligations under the merger agreement or to consummate the transactions contemplated by the merger agreement; |
61
Table of Contents
• | take any action that is intended or expected to result in any of its representations and warranties under the merger agreement being or becoming untrue in any material respect or in the conditions to the merger not being satisfied or in a violation of a provision of the merger agreement; |
• | knowingly take any action that would prevent or impede the merger from qualifying as a reorganization under Section 368 of the Internal Revenue Code; or |
• | agree to take, commit to take or adopt any resolutions in support of any of the foregoing actions. |
Covenants of Southern Connecticut Bancorp and Naugatuck Valley Financial in the Merger Agreement
Agreement Not to Solicit Other Proposals. Southern Connecticut Bancorp has agreed not to solicit, initiate, encourage or facilitate any acquisition proposal by a third party, to participate in discussions or negotiations regarding an acquisition proposal or to enter into any agreement requiring it to abandon or terminate the merger agreement with new Naugatuck Valley Financial. An acquisition proposal includes a proposal with respect to any of the following:
• | any merger, consolidation, share exchange, business combination, or other similar transaction involving Southern Connecticut Bancorp or its subsidiaries; |
• | any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 25% or more of the assets of Southern Connecticut Bancorp; |
• | any tender offer or exchange offer for 25% or more of the outstanding shares of capital stock of Southern Connecticut Bancorp; and |
• | any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. |
Despite the agreement of Southern Connecticut Bancorp not to solicit other acquisition proposals, the board of directors of Southern Connecticut Bancorp may generally negotiate or have discussions with, or provide information to, a third party who makes an unsolicited, written, bona fide acquisition proposal, provided that the Southern Connecticut Bancorp board of directors:
• | after consultation with and based upon advice from outside legal counsel, in good faith deems such action to be necessary for the proper discharge of its fiduciary duties to Southern Connecticut Bancorp stockholders under applicable law; and |
• | after consultation with its outside legal counsel and a financial advisor other than Naugatuck Valley Financial’s financial advisor for the conversion (Stifel, Nicolaus & Company, Inc.), determines in good faith that the transaction presented by such unsolicited acquisition proposal, taking into account all legal, financial and regulatory aspects of the proposal and the entity making the proposal, is a more favorable transaction than the transaction contemplated by the merger agreement with Naugatuck Valley Financial, is not conditioned on obtaining financing and is for 100% of the outstanding shares of Southern Connecticut Bancorp (a “superior proposal”). |
If Southern Connecticut Bancorp receives an acquisition proposal or any inquiry that could reasonably be expected to lead to an acquisition proposal, Southern Connecticut Bancorp must immediately notify Naugatuck Valley Financial and provide Naugatuck Valley Financial with information about the third party and its proposal.
Certain Other Covenants. The merger agreement also contains other agreements relating to the conduct of Naugatuck Valley Financial and Southern Connecticut Bancorp before consummation of the merger, including the following:
• | Southern Connecticut Bancorp will give Naugatuck Valley Financial reasonable access during normal business hours to Southern Connecticut Bancorp’s property, books, records and personnel and furnish all information Naugatuck Valley Financial may reasonably request; |
• | Southern Connecticut Bancorp will promptly provide Naugatuck Valley Financial with a copy of all documents filed with its banking regulators, each management report provided to its board of directors and each public press release; |
• | Southern Connecticut Bancorp will meet with Naugatuck Valley Financial on a regular basis to discuss and plan for the conversion of Southern Connecticut Bancorp data processing and related electronic information systems; |
62
Table of Contents
• | Southern Connecticut Bancorp will invite a non-voting designee of Naugatuck Valley Financial to attend all regular and special board of directors meetings of Southern Connecticut Bancorp or The Bank of Southern Connecticut, except that Naugatuck Valley Financial’s designee will not attend portions of any meeting during which there is being discussed: (a) matters involving the merger; (b) information or material that Southern Connecticut Bancorp or The Bank of Southern Connecticut must keep confidential under applicable laws or regulations; (c) pending or threatened litigation or investigations material to the merger; or (d) matters involving an acquisition proposal; |
• | Naugatuck Valley Financial and Southern Connecticut Bancorp will use their reasonable best efforts to submit all necessary applications, notices, and other filings with any governmental entity, the approval of which is required to complete the merger and related transactions including the conversion of Naugatuck Valley Financial; |
• | Naugatuck Valley Financial and Southern Connecticut Bancorp will use their reasonable best efforts to obtain all third party consents necessary to consummate the merger; |
• | Southern Connecticut Bancorp will take any necessary action to exempt Naugatuck Valley Financial and this transaction from any anti-takeover provisions contained in Southern Connecticut Bancorp’s articles of incorporation or bylaws or federal or state law; |
• | Naugatuck Valley Financial and Southern Connecticut Bancorp will use all reasonable efforts to take all actions necessary to consummate the merger and the transactions contemplated by the merger agreement; |
• | Naugatuck Valley Financial will file a registration statement, of which this proxy statement/prospectus forms a part, with the Securities and Exchange Commission registering the shares of new Naugatuck Valley Financial common stock to be issued in the merger to Southern Connecticut Bancorp stockholders; |
• | Naugatuck Valley Financial and Southern Connecticut Bancorp will issue a joint press release announcing the merger and will consult with one another prior to issuing any press release or otherwise making public statements with respect to the merger; |
• | Southern Connecticut Bancorp will take all actions necessary to call and give notice of a meeting of its stockholders to vote on the merger agreement and mail the proxy statement and convene the meeting as promptly as practicable after the filing of all regulatory applications and notices. The Southern Connecticut Bancorp board of directors will recommend at the stockholder meeting that the stockholders vote to approve the merger and will use its reasonable best efforts to solicit stockholder approval, unless it determines that such actions would not comply with its fiduciary obligations to Southern Connecticut Bancorp stockholders; |
• | Naugatuck Valley Financial and Southern Connecticut Bancorp will notify each other of any material contract defaults and any events that would reasonably be likely to result in a material adverse effect on the other. They also will notify each other of any communication from a third party regarding the need to obtain that party’s consent in connection with the merger. |
Representations and Warranties Made by Naugatuck Valley Financial and Southern Connecticut Bancorp in the Merger Agreement
Naugatuck Valley Financial and Southern Connecticut Bancorp have made certain customary representations and warranties to each other in the merger agreement relating to their businesses. For information on these representations and warranties, please refer to the merger agreement attached asAppendix A. The representations and warranties must be true in all material respects through the completion of the merger unless the change does not have a material negative impact on the parties’ business, financial condition or results of operations. See“—Conditions to Completing the Merger.”
The representations and warranties contained in the merger agreement were made only for purposes of such agreement and are made as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed to by the contracting parties, including being qualified by disclosures between the parties. These representations and warranties may have been made for the purpose of allocating risk between the parties to the agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors as statements of factual information.
63
Table of Contents
Terminating the Merger Agreement
The merger agreement may be terminated at any time prior to the completion of the merger, either before or after approval of the merger agreement by Southern Connecticut Bancorp stockholders, as follows:
• | by the written mutual consent of Naugatuck Valley Financial and Southern Connecticut Bancorp; |
• | by either party, if the stockholders of Southern Connecticut Bancorp fail to approve the merger agreement (provided that Southern Connecticut Bancorp will only be entitled to terminate for this reason if it has complied with its obligations under the merger agreement with respect to its stockholder meeting); |
• | by either party, if a required regulatory approval, consent or waiver is denied, any governmental entity has communicated to either party that the approval, consent or waiver is forthcoming or any governmental entity prohibits the consummation of the merger or the transactions contemplated by the merger agreement; |
• | by either party, if the merger is not consummated by March 30, 2011, unless failure to complete the merger by that time is due to a misrepresentation, breach of a warranty or failure to fulfill a covenant by the party seeking to terminate the agreement; |
• | by either party, if the other party makes a misrepresentation, breaches a warranty or fails to fulfill a covenant that has not been cured within 30 days following written notice to the party in default; or |
• | by Naugatuck Valley Financial, if Southern Connecticut Bancorp materially breaches its agreements regarding the solicitation of other acquisition proposals or the submission of the merger agreement to stockholders, or if the board of directors of Southern Connecticut Bancorp does not recommend approval of the merger in the proxy statement–prospectus or withdraws or revises its recommendation in a manner adverse to new Naugatuck Valley Financial. |
Termination Fee
If Naugatuck Valley Financial terminates the merger agreement as a result of a material breach by Southern Connecticut Bancorp of its agreements regarding the solicitation of other acquisition proposals or of its obligation to call a stockholder meeting and recommend approval of the merger, then Southern Connecticut Bancorp must pay Naugatuck Valley Financial $900,000.
If either party terminates the merger agreement as a result of the failure of Southern Connecticut Bancorp’s stockholders to approve the merger or if Naugatuck Valley Financial terminates the merger agreement because of a material breach by Southern Connecticut Bancorp, and, in either case, an acquisition proposal from a third party has been publicly announced, disclosed or communicated, then Southern Connecticut Bancorp must pay Naugatuck Valley Financial $450,000. If within 12 months after such termination, Southern Connecticut Bancorp consummates or enters into any agreement with respect to an acquisition proposal, then it must pay an additional $450,000. In no case shall Southern Connecticut Bancorp be obligated to pay termination fees in excess of $900,000.
The merger agreement also provides that if the merger agreement is terminated by either party because either (i) the merger has not been consummated by March 30, 2011 because the conversion has not been consummated by that date or (ii) a required regulatory approval has been denied or a governmental authority blocks the merger, then:
• | in the case of termination under clause (i) above: |
• | Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $900,000 if the failure to not consummate the conversion results from Naugatuck Valley Financial’s election not to consummate the conversion after having received the approval, consent or waiver of each governmental entity and satisfied all other conditions precedent required to consummate the conversion; or |
• | Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $350,000 if the failure to not consummate the conversion results from any other reason; and |
• | in the case of termination under clause (ii) above, Naugatuck Valley Financial must pay Southern Connecticut Bancorp a termination fee of $350,000. |
64
Table of Contents
Expenses
Each of new Naugatuck Valley Financial and Southern Connecticut Bancorp will pay its own costs and expenses incurred in connection with the merger.
Changing the Terms of the Merger Agreement
Before the completion of the merger, Naugatuck Valley Financial and Southern Connecticut Bancorp may agree to waive, amend or modify any provision of the merger agreement. However, after the vote by Southern Connecticut Bancorp stockholders, Naugatuck Valley Financial and Southern Connecticut Bancorp can make no amendment or modification that would reduce the amount or alter the kind of consideration to be received by Southern Connecticut Bancorp’s stockholders under the terms of the merger.
65
Table of Contents
Proposal 4 and Southern Connecticut Bancorp’s
Proposal 2—Adjournment of the Special Meeting
If there are not sufficient votes to constitute a quorum or to approve the plan of conversion or the merger agreement at the time of the special meetings of Naugatuck Valley Financial or Southern Connecticut Bancorp, the plan of conversion or the merger agreement may not be approved unless the respective special meeting is adjourned to a later date or dates in order to permit further solicitation of proxies. In order to allow proxies that have been received by Naugatuck Valley Financial or Southern Connecticut Bancorp at the time of their respective special meetings to be voted for an adjournment, if necessary, Naugatuck Valley Financial and Southern Connecticut Bancorp have submitted the question of adjournment to their respective shareholders as a separate matter for their consideration. The boards of directors of Naugatuck Valley Financial and Southern Connecticut Bancorp recommend that shareholders vote “FOR” the adjournment proposal. If it is necessary to adjourn the special meeting, no notice of the adjourned special meeting is required to be given to shareholders (unless the adjournment is for more than 30 days or if a new record date is fixed), other than an announcement at the special meeting of the hour, date and place to which the special meeting is adjourned.
The board of directors of Naugatuck Valley Financial recommends that you vote “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion or the proposal to approve the merger agreement.
The board of directors of Southern Connecticut Bancorp recommends that you vote “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.
66
Table of Contents
[same as offering prospectus]
[same as offering prospectus]
67
Table of Contents
[same as offering prospectus]
68
Table of Contents
[same as offering prospectus]
69
Table of Contents
[same as offering prospectus]
70
Table of Contents
Business of Naugatuck Valley Financial
[same as offering prospectus]
71
Table of Contents
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of Naugatuck Valley Financial
[same as offering prospectus]
72
Table of Contents
Business of Southern Connecticut Bancorp
[same as offering prospectus]
73
Table of Contents
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of Southern Connecticut Bancorp
[same as offering prospectus]
74
Table of Contents
[same as offering prospectus]
75
Table of Contents
Stock Ownership of Naugatuck Valley Financial
Common Stock
[same as offering prospectus]
76
Table of Contents
Stock Ownership of Southern Connecticut Bancorp
Common Stock
The following table sets forth certain information concerning the security ownership of Southern Connecticut Bancorp’s common stock as of , 2010 of Southern Connecticut Bancorp’s directors and named executive officers. Except as otherwise indicated, all shares are owned directly, and the named person possesses sole voting and sole investment power with respect to all such shares. No shares are pledged as collateral. Shares not outstanding but deemed beneficially owned because a person or member of a group has a right to acquire them within 60 days after , 2010 are treated as outstanding only when determining the amount and percent owned by such person or group.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | ||||
Directors | ||||||
Elmer F. Laydon, Chairman of Southern Connecticut Bancorp, the Bank and SCB | 182,365 | (2) | 6.61 | % | ||
President Elmer F. Laydon Construction Corp. 69 Wheeler Street New Haven, CT 06512 | ||||||
Alfred J. Ranieri, Jr., M.D., Director of Southern Connecticut Bancorp and the Bank | 63,080 | (3) | 2.32 | % | ||
1455 Chapel Street New Haven, CT 06511 | ||||||
Carl R. Borrelli, Director of Southern Connecticut Bancorp, the Bank and SCB | 69,694 | (4) | 2.56 | % | ||
Treasurer All-Brite Electric, Inc. 4 Industry Drive, Ext. P.O. Box 26004 West Haven, CT 06516 | ||||||
Alphonse F. Spadaro, Jr., Vice Chairman of Southern Connecticut Bancorp, the Bank and SCB | 37,776 | (5) | 1.39 | % | ||
Managing Principal Levitsky & Berney, PC 100 Bradley Road Woodbridge, CT 06525 | ||||||
Joshua H. Sandman, Ph.D., Director of Southern Connecticut Bancorp and the Bank | 34,338 | (6) | 1.26 | % | ||
Vice President Deitsch Plastic Co., Inc. 14 Farwell Street West Haven, CT 06516 | ||||||
James S. Browstein, Esq., Director of Southern Connecticut Bancorp, the Bank and SCB | 10,448 | (7) | * | % | ||
Kantrovitz & Brownstein, P.C. One Bradley Road, Suite 305 Woodbridge, CT 06525 | ||||||
Non-Director Executive Officers | ||||||
John H. Howland | 39,274 | (8) | 1.45 | % | ||
President & Chief Operating Officer of Southern Connecticut Bancorp and the Bank 215 Church Street New Haven, CT 06510 | ||||||
Stephen V. Ciancarelli | 3,000 | * | % | |||
Senior Vice President & Chief Financial Officer of Southern Connecticut Bancorp, the Bank and SCB 215 Church Street New Haven, CT 06510 | ||||||
All Southern Connecticut Bancorp directors and the executive officers, as a group (8 persons) | 439,975 | (9) | 15.33 | % |
* | Less than 1% |
(1) | Percentages are based on a total of[2,695,902] shares of Common Stock outstanding on , 2010. For holders of options and warrants exercisable within 60 days after , 2010, the number of shares so exercisable by each holder has been added to the denominator for purposes of calculating such shareholder’s percentage ownership. |
77
Table of Contents
(2) | Includes 15,039 shares of stock that may be acquired within 60 days by the exercise of warrants and 47,345 shares that may be acquired within 60 days by the exercise of options. |
(3) | Includes 6,497 shares of stock that may be acquired within 60 days by the exercise of warrants and 18,538 shares that may be acquired within 60 days by the exercise of options. |
(4) | Includes 5,967 shares of stock held by Mr. Borrelli’s spouse, 115 shares held by Mr. Borrelli’s daughter, 3,725 shares held by one of Mr. Borrelli’s sons, 1,650 shares held by another of Mr. Borrelli’s sons, and 4,986 shares held by certain of Mr. Borrelli’s grandchildren. Also includes 2,900 shares that may be acquired within 60 days by the exercise of warrants and 21,276 shares that may be acquired within 60 days by the exercise of options. |
(5) | Includes 4,573 shares of stock that may be acquired within 60 days by the exercise of warrants and 14,203 shares that may be acquired within 60 days by the exercise of options. |
(6) | Includes an aggregate of 8,142 shares of stock held by Mr. Sandman’s children, as well as 4,273 shares of stock held by the Sandman Family Trust, LLC, of which Mr. Sandman and his spouse are principals. Also includes 6,497 shares that may be acquired within 60 days by the exercise of warrants and 14,938 shares that may be acquired within 60 days by the exercise of options. |
(7) | Includes 1,207 shares of stock held in trust by Mr. Brownstein’s spouse for the benefit of his son. Also, includes 1,733 shares of stock that may be acquired within 60 days by the exercise of warrants. |
(8) | Includes 20,000 shares of stock that may be acquired within 60 days by the exercise of options. |
(9) | Includes 37,239 shares of stock that may be acquired within 60 days by the exercise of warrants and 136,300 shares that may be acquired within 60 days by the exercise of options. |
The following table sets forth certain information concerning those persons known to Southern Connecticut Bancorp who own more than five percent of Southern Connecticut Bancorp’s Common Stock as of , 2010:
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | ||||
DellaCamera Capital Master Fund, Ltd. | 259,400 | (2) | 9.62 | % | ||
200 Park Avenue, Suite 3300 New York, NY 10166 | ||||||
Wellington Management Company, LLP | 142,275 | (3) | 5.28 | % | ||
75 State Street Boston, MA 02109 | ||||||
Joseph Stilwell | 136,391 | (4) | 5.06 | % | ||
26 Broadway, 23rd Floor New York, NY 10004 |
(1) | Percent of class beneficially owned is based on an aggregate of[2,695,902] shares of Southern Connecticut Bancorp’s Common Stock outstanding as of , 2010. |
(2) | Information with respect to DellaCamera Capital Master Fund, Ltd. is derived from the Schedule 13D/A dated June 20, 2007 filed by DellaCamera Capital Master Fund, Ltd. (“DellaCamera”) with the SEC on June 27, 2007. DellaCamera is a private investment fund whose investment objective is to achieve returns for investors through different market cycles while preserving investors capital. DellaCamera is the direct owner of the 259,400 shares of Southern Connecticut Bancorp’s Common stock. |
(3) | Information with respect to Wellington Management Company, LLP is derived from the Schedule 13G/A dated December 31, 2009 filed by Wellington Management Company, LLP (“Wellington”) with the SEC on February 12, 2010. Wellington is an investment advisor which may be deemed to beneficially own the 142,275 shares of Southern Connecticut Bancorp’s Common Stock held of record by clients of Wellington, which clients are entitled to receive or have the power to direct the receipt of dividends from or the proceeds from the sale of such shares. Wellington has shared voting power over 142,275 shares. |
(4) | Information with respect to Joseph Stilwell (“Mr. Stilwell”) is derived from the Schedule 13G dated February 25, 2010 filed by Mr. Stilwell with the SEC on March 5, 2010, with respect to the 136,391 shares of Southern Connecticut Bancorp’s Common Stock deemed to be beneficially owned by Mr. Stilwell, including shares of Common Stock held in the names of Stilwell Associates, L.P., Stilwell Partners, L.P., Stilwell Offshore Ltd., and Stilwell Associates Insurance Fund of The S.A.L.I. Multi-Series Fund L.P. (“Stilwell SALI Fund”), in Mr. Stilwell’s capacities as the general partner of Stilwell Partners, L.P., and as the managing and sole member of Stilwell Value LLC, which is the general partner of Stilwell Associates, L.P., and as the managing and sole member of Stilwell Management LLC, which has a managing agreement with Stilwell Offshore Ltd., of which Mr. Stilwell is also a director, and as the managing and sole member of Stilwell Advisors LLC, which is the general partner of Stilwell SALI Fund. |
78
Table of Contents
Subscriptions by Executive Officers and Directors
[same as offering prospectus]
79
Table of Contents
[same as offering prospectus]
[same as offering prospectus]
80
Table of Contents
Comparison of Shareholders’ Rights for
Naugatuck Valley Financial Shareholders
[same as offering prospectus]
81
Table of Contents
Comparison of Shareholders’ Rights for
Southern Connecticut Bancorp Shareholders
As a result of the merger, current holders of Southern Connecticut Bancorp common stock will become shareholders of new Naugatuck Valley Financial. There are certain differences in shareholder rights arising from distinctions between the certificate of incorporation and bylaws of Southern Connecticut Bancorp and the articles of incorporation and bylaws of new Naugatuck Valley Financial and from distinctions between laws with respect to Connecticut law and Maryland law.
In some instances, the rights of shareholders of new Naugatuck Valley Financial will be less than the rights shareholders of Southern Connecticut Bancorp currently have. The decrease in shareholder rights under the Maryland articles of incorporation and bylaws are not mandated by Maryland law but have been chosen by management as being in the best interest of new Naugatuck Valley Financial. In some instances, the differences in shareholder rights may increase management rights. In other instances, the provisions in new Naugatuck Valley Financial’s articles of incorporation and bylaws described below may make it more difficult to pursue a takeover attempt that management opposes. These provisions will also make the removal of the board of directors or management, or the appointment of new directors, more difficult. We believe that the provisions described below are prudent and will enhance our ability to remain an independent financial institution and reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our board of directors. These provisions also will assist us in the orderly deployment of the conversion proceeds into productive assets and allow us to implement our business plan during the initial period after the conversion. We believe these provisions are in the best interests of new Naugatuck Valley Financial and its shareholders.
The following discussion is not intended to be a complete statement of the differences affecting the rights of shareholders, but rather summarizes the more significant differences and certain important similarities. The discussion herein is qualified in its entirety by reference to the articles of incorporation and bylaws of new Naugatuck Valley Financial and Maryland law.
Authorized Capital Stock.
New Naugatuck Valley Financial. The authorized capital stock of new Naugatuck Valley Financial will consist of 25,000,000 shares of common stock, par value $0.01 per share and 1,000,000 shares of preferred stock, par value $0.01 per share.
Southern Connecticut Bancorp.The authorized capital stock of Southern Connecticut Bancorp consists of 5,000,000 shares of common stock, par value $0.01 per share, and 500,000 shares of preferred stock, no par value.
Southern Connecticut Bancorp’s certificate of incorporation and new Naugatuck Valley Financial’s articles of incorporation both authorize the board of directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, dividend rights, conversion and redemption rates and liquidation preferences. Although neither board of directors has any intention at the present time of doing so, it could issue a series of preferred stock that could, depending on its terms, impede a merger, tender offer or other takeover attempt.
Preemptive Rights.Neither the articles of incorporation and bylaws of new Naugatuck Valley Financial nor the certificate of incorporation and bylaws of Southern Connecticut Bancorp provide for preemptive rights to shareholders in connection with the issuance of capital stock.
Voting Rights.Neither the articles of incorporation of new Naugatuck Valley Financial nor the certificate of incorporation of Southern Connecticut Bancorp permits cumulative voting in the election of directors. Cumulative voting entitles you to a number of votes equaling the number of shares you hold multiplied by the number of directors to be elected. Cumulative voting allows you to cast all your votes for a single nominee or apportion your votes among any two or more nominees. For example, when three directors are to be elected, cumulative voting allows a holder of 100 shares to cast 300 votes for a single nominee, apportion 100 votes for each nominee, or apportion 300 votes in any other manner.
Payment of Dividends.The ability of Naugatuck Valley Savings and Loan to pay dividends on its capital stock is restricted by Office of Thrift Supervision regulations and by tax considerations related to savings associations. Naugatuck Valley Savings and Loan will continue to be subject to these restrictions after the conversion, and such restrictions will indirectly affect new Naugatuck Valley Financial because dividends from Naugatuck Valley Savings and Loan will be a primary source of funds for the payment of dividends to the shareholders of new Naugatuck Valley Financial.
82
Table of Contents
Both Maryland and Connecticut law generally provide that, unless otherwise restricted in a corporation’s articles of incorporation, a corporation’s board of directors may authorize and a corporation may pay dividends to shareholders. However, a distribution generally may not be made if, after giving effect thereto, the corporation would not be able to pay its debts as they become due in the usual course of business or the corporation’s total assets would be less than its total liabilities.
Board of Directors.
New Naugatuck Valley Financial.The number of directors of New Naugatuck Valley Financial will be fixed from time to time by vote of the board of directors; provided, however, that the number of directors will never be less than one.
The articles of incorporation of new Naugatuck Valley Financial require the board of directors to be divided into three classes as nearly equal in number as possible and that the members of each class be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. Under the bylaws of new Naugatuck Valley Financial, any vacancy occurring in the board of directors, however caused, may be filled by an affirmative vote of the majority of the directors then in office, whether or not a quorum is present. Any director of new Naugatuck Valley Financial so chosen shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until his or her successor shall have been elected and qualified.
The bylaws of new Naugatuck Valley Financial provide that to be eligible to serve on the board of directors a person must not: (1) be under indictment for, or ever have been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) be a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) have been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit, or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.
Pursuant to the bylaws of new Naugatuck Valley Financial no person 70 years of age is eligible for election, reelection, appointment, or reappointment to the board of directors. In addition, no director shall serve as such beyond the annual meeting following the director becoming 70.
Under the bylaws of new Naugatuck Valley Financial, directors may be removed only for cause by the vote of the holders of a majority of the shares of stock entitled to vote in an election of directors.
Southern Connecticut Bancorp.Under the certificate of incorporation of Southern Connecticut Bancorp, the board of directors will consist of not less than three (3) nor more than twelve (12) members.
The certificate of incorporation of Southern Connecticut Bancorp requires the board of directors to be divided into three classes as nearly equal in number as possible and that the members of each class be elected for a term of three years or until their successors are elected and qualified, with one class being elected annually. Under the certificate of incorporation of Southern Connecticut Bancorp, any vacancy occurring in the board of directors, including a vacancy resulting from an increase in the number of directors, may be filled by an affirmative vote of the majority of the directors then in office, whether or not a quorum is present.
Under the certificate of incorporation of Southern Connecticut Bancorp, shareholders may remove a director only for cause by the vote of two-thirds of the shares of stock entitled to vote at a meeting.
Limitations on Liability.
New Naugatuck Valley Financial. The articles of incorporation of new Naugatuck Valley Financial provide that, to the fullest extent permitted under Maryland law, the directors and officers of new Naugatuck Valley Financial shall have no personal liability to new Naugatuck Valley Financial or its shareholders for money damages except (1) to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received; (2) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (3) to the extent otherwise provided by the Maryland General Corporation Law.
83
Table of Contents
Southern Connecticut Bancorp.The certificate of incorporation of Southern Connecticut Bancorp provides that the personal liability of any directors to Southern Connecticut Bancorp or its shareholders for monetary damages for breach of duty as a director shall be limited to an amount equal to the compensation received by the director for serving Southern Connecticut Bancorp as a director during the year of the violation if such breach did not: (1) involve a knowing and culpable violation of law by the director; (2) enable the director or an associate, as defined in Section 33-840 of the Connecticut General Statutes, to receive an improper personal economic gain; (3) show a lack of good faith and a conscious disregard for the duty of the director to Southern Connecticut Bancorp under circumstances in which the director was aware that his or her conduct or omission created an unjustifiable risk of serious injury to Southern Connecticut Bancorp; (4) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director’s duty to Southern Connecticut Bancorp; or (5) create liability under Section 33-757 of the Connecticut General Statutes.
Indemnification of Directors, Officers, Employees and Agents.
New Naugatuck Valley Financial. The articles of incorporation of new Naugatuck Valley Financial provides that it will indemnify its directors and officers, whether serving it or at its request any other entity, to the fullest extent required or permitted under Maryland law. Such indemnification includes the advancement of expenses. The articles of incorporation of new Naugatuck Valley Financial also provides that new Naugatuck Valley Financial will indemnify its employees and agents and any director, officer, employee or agent of any other entity to such extent as shall be authorized by the board of directors and be permitted by law.
Southern Connecticut Bancorp.The certificate of incorporation of Southern Connecticut Bancorp provides that it will indemnify its directors to the fullest extent permitted by law for liability, as defined in Section 33-770(5) of the Connecticut General Statutes, to any person for any action taken, or any failure to take any action, as a director, except liability that (1) involved a knowing and culpable violation of law by the director, (2) enabled the director or an associate (as defined in Section 33-840 of the Connecticut General Statutes to receive an improper personal gain, (3) showed a lack of good faith and conscious disregard for the duty of the director to Southern Connecticut Bancorp under circumstances in which the director was aware that his conduct or omission created an unjustifiable risk of serious injury to Southern Connecticut Bancorp, (4) constituted a sustained and unexcused pattern of inattention that amounted to an abdication of the director’s duty to Southern Connecticut Bancorp, or (5) created liability under section 33-757 of the Connecticut General Statutes.
Special Meetings of Shareholders.
New Naugatuck Valley Financial. The bylaws of new Naugatuck Valley Financial provide that special meetings of shareholders may be called by the Chairman, President, a majority of the board of directors or the holders of not less than a majority of the outstanding capital stock of Naugatuck Valley Financial entitled to vote at the meeting.
Southern Connecticut Bancorp.The bylaws of Southern Connecticut Bancorp provide that special meetings of the shareholders may be called for any purpose at any time by the board of directors or by shareholders holding at least 10% of all votes entitled to be cast on any issue proposed to be considered at the proposed special meeting, provided such shareholders sign, date, and deliver to Southern Connecticut Bancorp’s secretary one or more written demands for the meeting describing the purpose or purposes for which the meeting is to be held.
Shareholder Nominations and Proposals.
New Naugatuck Valley Financial. The bylaws of new Naugatuck Valley Financial provide an advance notice procedure for shareholders to nominate directors or bring other business before an annual or special meeting of shareholders of new Naugatuck Valley Financial. A person may not be nominated for election as a director unless that person is nominated by or at the direction of the new Naugatuck Valley Financial board of directors or by a shareholder who has given appropriate notice to new Naugatuck Valley Financial before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given new Naugatuck Valley Financial appropriate notice of its intention to bring that business before the meeting. New Naugatuck Valley Financial’s secretary must receive notice of the nomination or proposal not less than 90 days before the annual meeting; provided, however, that if less than 100 days’ notice of prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder who desires to raise new business must
84
Table of Contents
provide certain information to new Naugatuck Valley Financial concerning the nature of the new business, the shareholder, the shareholder’s ownership in new Naugatuck Valley Financial and the shareholder’s interest in the business matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide new Naugatuck Valley Financial with certain information concerning the nominee and the proposing shareholder.
Southern Connecticut Bancorp.The bylaws of Southern Connecticut Bancorp provide an advance notice procedure for shareholders to nominate directors or bring other business before an annual or special meeting of shareholders of Southern Connecticut Bancorp.For shareholder proposals to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice in writing to Southern Connecticut Bancorp’s Secretary.To be timely, a shareholder’s notice must be delivered to Southern Connecticut Bancorp’s Secretary not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year’s annual meeting (or not earlier than the ninetieth (90th) day prior to a special meeting nor later than the sixtieth (60th) day prior to such special meeting); provided, however, that in the event that the date of an annual meeting is more than thirty (30) days before or more than sixty (60) days after such an anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) days prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by Southern Connecticut Bancorp. A shareholder who desires to raise new business must provide certain information to Southern Connecticut Bancorp concerning the nature of the new business, the shareholder, the shareholder’s ownership in Southern Connecticut Bancorp and the shareholder’s interest in the business matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide Southern Connecticut Bancorp with certain information concerning the nominee and the proposing shareholder.
Shareholder Action Without a Meeting.
New Naugatuck Valley Financial. Under Maryland law, action may be taken by shareholders of new Naugatuck Valley Financial without a meeting if all shareholders entitled to vote on the action give written consent to taking such action without a meeting. Similarly, the bylaws of Naugatuck Valley Financial provide that action may be taken by shareholders without a meeting if all shareholders entitled to vote on the matter consent to the taking of such action without a meeting.
Southern Connecticut Bancorp.Under Connecticut law, action may be taken by shareholders of Southern Connecticut Bancorp without a meeting if all shareholders entitled to vote on the action give written consent to taking such action without a meeting. However, the bylaws of Southern Connecticut Bancorp provide that no action may be taken by shareholders on written consent without a meeting.
Shareholder’s Right to Examine Books and Records.
New Naugatuck Valley Financial. Under Maryland law, a shareholder who has been a shareholder of record for at least six months or who holds, or is authorized in writing by holders of, at least 5% of the outstanding shares of any class or series of stock of a corporation has the right, for any proper purpose and upon at least 20 days’ written notice, to inspect in person or by agent, the corporation’s books of account and its stock ledger. In addition, under Maryland law, any shareholder or his agent, upon at least seven days’ written notice, may inspect and copy during usual business hours, the corporation’s bylaws, minutes of the proceedings of shareholders’ annual statements of affairs and voting trust agreements.
Southern Connecticut Bancorp.Under Connecticut law, any shareholder, upon at least five (5) days written notice, has the right to inspect, during regular business hours and at a reasonable location determined by the corporation, the corporation’s certificate of incorporation, bylaws, minutes, shareholder communications within the last three years, directors’ and officers’ names and business addresses, most recent annual report, accounting records and shareholder record; provided, however, that such shareholder demand to inspect must be made in good faith and for a proper purpose.
Limitations on Voting Rights.
New Naugatuck Valley Financial. The articles of incorporation of new Naugatuck Valley Financial provide that in no event will any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in
85
Table of Contents
excess of 10% of the then-outstanding shares of common stock, be entitled, or permitted to any vote in respect of the shares held in excess of the limit. This limitation does not apply to any director or officer acting solely in their capacities as directors and officers, or any employee benefit plans of new Naugatuck Valley Financial or any subsidiary or a trustee of a plan.
In addition, Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the offering, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of new Naugatuck Valley Financial’s equity securities without the prior written approval of the Office of Thrift Supervision. Where any person acquires beneficial ownership of more than 10% of a class of our equity securities without the prior written approval of the Office of Thrift Supervision, the securities beneficially owned by such person in excess of 10% may not be voted by any person or counted as voting shares in connection with any matter submitted to the shareholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the shareholders for a vote.
Southern Connecticut Bancorp.The certificate of incorporation of Southern Connecticut Bancorp provides that no person or group of persons acting in concert, may acquire 10% or more of any class of the issued and outstanding stock of Southern Connecticut Bancorp, unless (i) such acquisition has been approved prior to its consummation by the affirmative vote of at least two-thirds of the board of directors or at least two-thirds of the holders of the outstanding stock of Southern Connecticut Bancorp entitled to vote at a duly constituted meeting of shareholders called for such purpose, and (ii) all applicable federal and Connecticut state regulatory requirements are met. In the event that the above requirements are not met, the amount beneficially owned by such acquiror in excess of 10% of the then-outstanding shares of common stock, will no longer be entitled to vote on any matter or to take other shareholder action or be counted in determining the total number of outstanding shares for purposes of any matter involving shareholder action.
Business Combinations with Interested Shareholders.
New Naugatuck Valley Financial. Under Maryland law, “business combinations” between new Naugatuck Valley Financial and an interested shareholder or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested shareholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested shareholder as: (1) any person who beneficially owns 10% or more of the voting power of new Naugatuck Valley Financial’s voting stock after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock; or (2) an affiliate or associate of new Naugatuck Valley Financial at any time after the date on which new Naugatuck Valley Financial had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of new Naugatuck Valley Financial A person is not an interested shareholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between new Naugatuck Valley Financial and an interested shareholder generally must be recommended by the board of directors of new Naugatuck Valley Financial and approved by the affirmative vote of at least: (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of new Naugatuck Valley Financial and (2) two-thirds of the votes entitled to be cast by holders of voting stock of new Naugatuck Valley Financial other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested shareholder. These super-majority vote requirements do not apply if new Naugatuck Valley Financial’s common shareholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested shareholder for its shares.
Southern Connecticut Bancorp.Under Connecticut law, a proposed consolidation, merger, liquidation, dissolution, share exchange, sale, lease, mortgage pledge, reclassification of securities, or transfer must be approved by the board of directors and then be approved by the affirmative vote of at least 80% of the outstanding shares entitled to be cast, and by
86
Table of Contents
two-thirds of the outstanding shares entitled to be cast, other than stock held by the interested shareholder who is or whose affiliate is a party to the business combination. However, the stockholder vote requirement does not apply in the event certain statutory fair price provisions are met.
In addition, unless the transaction is approved in advance by the majority vote of the non-employee directors, of which there must be at least two, a Connecticut corporation is prohibited from engaging in any business combination with any of interested shareholders, a holder of 10% or more of the target corporation’s stock, for a period of five (5) years following the interested shareholder’s acquisition of sufficient shares to become an interested shareholder.
In addition, the Connecticut Tender Offer Act prevents a person from making a tender offer involving a target company in Connecticut, or from purchasing any equity securities of a target company pursuant to a tender offer, unless the offer is “effective” under the Connecticut Tender Offer Act or is exempted by Connecticut’s Banking Commissioner. Before an offer can become “effective,” the offeror must file a registration statement with the Connecticut’s Banking Commissioner, or a Schedule 14D-1 with the SEC, as applicable. The offeror must also deliver a copy of the registration statement of Schedule 14D-1 to the target company’s principal executive offices, and publicly disclose the material terms of the proposed offer “not later than the date of filing the registration statement.”
Dissenters’ Rights of Appraisal.
New Naugatuck Valley Financial. Under Maryland law, shareholders of new Naugatuck Valley Financial have the right to dissent from any plan of merger or consolidation to which new Naugatuck Valley Financial is a party, and to demand payment for the fair value of their shares unless the articles of incorporation provide otherwise. Pursuant to new Naugatuck Valley Financial’s articles of incorporation, holders of new Naugatuck Valley Financial common stock are not entitled to exercise the rights of an objecting shareholder.
Southern Connecticut Bancorp.Under Connecticut law, when shareholder approval is required for a merger, a shareholder is entitled to assert appraisal rights and demand payment for the fair value of their shares. Appraisal rights are not available for holders of shares listed on the New York Stock Exchange or the American Stock Exchange or designated as a National Market System security. The certificate of incorporation of Southern Connecticut Bancorp does not limit dissenters’ rights of appraisal.
Amendment of Governing Instruments.
New Naugatuck Valley Financial. The articles of incorporation of new Naugatuck Valley Financial generally may be amended by the holders of a majority of the shares entitled to vote, provided that any amendment of Section C of Article Sixth (limitation on common stock voting rights), Section B of Article Seventh (classification of board of directors), Sections F and J of Article Eighth (amendment of bylaws and elimination of director and officer liability) and Article Tenth (amendment of certain provisions of the Articles), must be approved by the affirmative vote of the holders of at least 75% of the outstanding shares entitled to vote, except that the board of directors may amend the articles of incorporation without any action by the shareholders to the fullest extent allowed under Maryland law.
The bylaws of new Naugatuck Valley Financial may be amended by the affirmative vote of a majority of the directors or by the vote of the holders of not less than 75% of the votes entitled to be cast by holders of the capital stock of new Naugatuck Valley Financial entitled to vote generally in the election of directors (considered for this purpose as one class) at a meeting of the shareholders called for that purpose at which a quorum is present (provided that notice of such proposed amendment is included in the notice of such meeting).
Southern Connecticut Bancorp.The certificate of incorporation of Southern Connecticut Bancorp may be amended or repealed upon approval of at least a majority of the shares entitled to be cast on the matter, except for a modification or repeal of Article IX or a change in the quorum and voting requirements of Article V, both of which require the approval of two-thirds of the votes cast in favor of the matter.
The bylaws of Southern Connecticut Bancorp may be amended or repealed by the affirmative vote of at least a majority of the board of directors, subject to the right of the shareholders to amend any provision of the bylaws upon approval of at least a majority of the shares cast on the matter.
87
Table of Contents
Restrictions on Acquisition of New Naugatuck Valley Financial
[same as offering prospectus]
88
Table of Contents
Description of New Naugatuck Valley Financial Capital Stock
[same as offering prospectus]
The transfer agent and registrar for the common stock of Naugatuck Valley Financial will be Registrar and Transfer Company, Cranford, New Jersey.
In connection with the conversion and offering, we will register our common stock with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934, as amended, and will not deregister our common stock for a period of at least three years following the conversion and offering. As a result of registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of that statute will apply.
The legality of our common stock has been passed upon for us by Kilpatrick Stockton LLP, Washington, D.C. The federal income tax consequences of the conversion have been opined upon by Kilpatrick Stockton LLP. Whittlesey & Hadley, P.C. has provided an opinion to us regarding the Connecticut income tax consequences of the conversion. Kilpatrick Stockton LLP also will be passing on certain tax matters for Naugatuck Valley Financial in connection with the merger. Day Pitney LLP will be passing on certain tax matters for Southern Connecticut Bancorp in connection with the merger.
The consolidated financial statements of Naugatuck Valley Financial and subsidiaries as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, have been included herein in reliance upon the report of Whittlesey & Hadley, P.C., independent registered public accounting firm, which is included herein and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Southern Connecticut Bancorp and subsidiaries as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein and are included in reliance upon such report and upon the authority of said firm as experts in accounting and auditing.
FinPro has consented to the summary in this proxy statement/prospectus report to us setting forth its opinion as to our estimated pro forma market value and to the use of its name and statements with respect to it appearing in this proxy statement/prospectus.
89
Table of Contents
Submission of Business Proposals and Shareholder Nominations
Naugatuck Valley Financial
If the conversion is completed as expected, Naugatuck Valley Financial will no longer exist. Naugatuck Valley Financial will not hold an annual meeting of stockholders in 2011 if the conversion is completed as expected.
If the conversion is not completed, Naugatuck Valley Financial will hold its annual meeting of stockholders in 2011. Naugatuck Valley Financial must receive proposals that stockholders seek to include in the proxy statement for the Naugatuck Valley Financial’s next annual meeting no later than December 31, 2010. If next year’s annual meeting is held on a date more than 30 calendar days from May 28, 2011, a stockholder proposal must be received by a reasonable time before Naugatuck Valley Financial begins to print and mail its proxy solicitation material for such annual meeting. Any stockholder proposals will be subject to the requirements of the proxy rules adopted by the Securities and Exchange Commission. Naugatuck Valley Financial’s bylaws provide that in order for a stockholder to make nominations for the election of directors or proposals for business to be brought before the annual meeting, a stockholder must deliver notice of such nominations and/or proposals to the Secretary not less than 30 days before the date of the annual meeting; provided that if less than 40 days’ notice or prior public disclosure of the date of the annual meeting is given to stockholders, such notice must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed to stockholders or prior public disclosure of the meeting date was made. A copy of the Bylaws may be obtained from Naugatuck Valley Financial.
If the conversion is completed as expected, new Naugatuck Valley Financial will hold its first annual meeting of stockholders as a public company in 2011. Under new Naugatuck Valley Financial’s bylaws a person may not be nominated for election as a director unless that person is nominated by or at the direction of the new Naugatuck Valley Financial board of directors or by a shareholder who has given appropriate notice to new Naugatuck Valley Financial before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given new Naugatuck Valley Financial appropriate notice of its intention to bring that business before the meeting. New Naugatuck Valley Financial’s secretary must receive notice of the nomination or proposal not less than 90 days before the annual meeting; provided, however, that if less than 100 days’ notice of prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made.
Southern Connecticut Bancorp
Southern Connecticut Bancorp intends to hold a 2011 annual meeting of stockholders only if the merger agreement is terminated. Shareholders may make nominations of individuals for election to the board at Southern Connecticut Bancorp’s annual meeting of shareholders in 2011. Such nominations shall be made in writing and shall be delivered or mailed and received by the Corporate Secretary of Southern Connecticut Bancorp not less than 60 or more than 90 calendar days prior to Southern Connecticut Bancorp’s 2011 annual meeting, which, if the merger agreement is terminated, is expected to be held on June 21, 2011.
Any proposal intended to be presented by a shareholder at Southern Connecticut Bancorp’s 2011 annual meeting which is not a nomination to the Board must be presented to Southern Connecticut Bancorp in writing, and must be delivered to the Corporate Secretary of Southern Connecticut Bancorp not less than 60 nor more than 90 calendar days prior to Southern Connecticut Bancorp’s 2011 annual meeting, which is expected to be held on June 21, 2011.
90
Table of Contents
Southern Connecticut Bancorp must receive proposals that shareholders seek to include in the proxy statement for the 2011 annual meeting no later than December 27, 2010. If the 2011 annual meeting is held on a date more than 30 calendar days from June 21, 2011, a shareholder proposal must be received by a reasonable time before Southern Connecticut Bancorp begins to print and mail its proxy solicitation for such annual meeting. Any shareholder proposals will be subject to the requirements of the proxy rules adopted by the Securities and Exchange Commission.
If you and others who share your address own your shares in street name, your broker or other holder of record may be sending only one Annual Report and proxy statement to your address. This practice, known as “householding,” is designed to reduce our printing and postage costs. However, if a shareholder residing at such an address wishes to receive a separate Annual Report or proxy statement in the future, he or she should contact the broker or other holder of record. If you own your shares in street name and are receiving multiple copies of our Annual Report and proxy statement, you can request householding by contacting your broker or other holder of record.
Where You Can Find More Information
New Naugatuck Valley Financial has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, that registers the common stock to be issued in exchange for shares of Naugatuck Valley Financial common stock and the common stock to be issued in the merger. This proxy statement/prospectus forms a part of the registration statement. The registration statement, including the exhibits, contains additional relevant information about new Naugatuck Valley Financial’s common stock. The rules and regulations of the Securities and Exchange Commission allow us to omit certain information included in the registration statement from this proxy statement/prospectus. In addition, Naugatuck Valley Financial and Southern Connecticut Bancorp file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy these documents and the registration statement at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Securities and Exchange Commission’s public reference rooms. The registration statement and the filings made by Naugatuck Valley Financial and Southern Connecticut Bancorp also are available to the public from commercial document retrieval services and at the Internet World Wide Web site maintained by the Securities and Exchange Commission at “http://www.sec.gov.”
Naugatuck Valley Mutual Holding Company has filed an application for approval of the plan of conversion with the Office of Thrift Supervision. This proxy statement/prospectus omits certain information contained in the application. The application may be inspected, without charge, at the offices of the Office of Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at the offices of the Regional Director of the Office of Thrift Supervision at the Northeast Regional Office of the Office of Thrift Supervision, Harborside Financial Center Plaza Five, Suite 1600, Jersey City, New Jersey 07311.
A copy of the plan of conversion is available without charge from Naugatuck Valley Savings and Loan.
The appraisal report of FinPro, Inc. has been filed as an exhibit to our registration statement and to our application to the Office of Thrift Supervision. Portions of the appraisal report were filed electronically with the Securities and Exchange Commission and are available on its Web site as described above. The entire appraisal report is available at the public reference room of the Securities and Exchange Commission and the offices of the Office of Thrift Supervision as described above.
91
Table of Contents
Index to Consolidated Financial Statements
The financial statements to be included in the proxy statement/prospectus will be identical to those included in the offering prospectus included in this Registration Statement.
92
Table of Contents
DATED AS OF FEBRUARY 22, 2010,
AS AMENDED AS OF SEPTEMBER 17, 2010,
BY AND AMONG
NAUGATUCK VALLEY FINANCIAL CORPORATION,
NEWCO (as defined herein)
AND
SOUTHERN CONNECTICUT BANCORP, INC.
Table of Contents
TABLE OF CONTENTS
Page No. | ||||
Introductory Statement | 1 | |||
ARTICLE I - DEFINITIONS | 2 | |||
ARTICLE II - | THE MERGER | 6 | ||
2.1 | The Merger | 6 | ||
2.2 | Closing | 6 | ||
2.3 | Effective Time | 6 | ||
2.4 | Effects of the Merger | 7 | ||
2.5 | Effect on Outstanding Shares of SSE Common Stock | 7 | ||
2.6 | Election and Proration Procedures | 7 | ||
2.7 | Exchange Procedures | 9 | ||
2.8 | Effect on Outstanding Shares of Newco Common Stock | 11 | ||
2.9 | Directors of Surviving Corporation After Effective Time | 11 | ||
2.10 | Articles of Incorporation and Bylaws | 11 | ||
2.11 | Treatment of Stock Options, Restricted Stock and Warrants | 11 | ||
2.12 | Bank Merger | 11 | ||
2.13 | The Conversion | 12 | ||
2.14 | Alternative Structure | 12 | ||
2.15 | Absence of Control | 12 | ||
2.16 | No Appraisal Rights | 12 | ||
ARTICLE III - REPRESENTATIONSAND WARRANTIES | 12 | |||
3.1 | Disclosure Letters | 12 | ||
3.2 | Representations and Warranties of SSE | 12 | ||
3.3 | Representations and Warranties of NVSL | 24 | ||
ARTICLE IV - CONDUCT PENDINGTHE MERGER | 29 | |||
4.1 | Forbearances by SSE | 29 | ||
4.2 | Forbearances by NVSL | 31 | ||
ARTICLE V - COVENANTS | 32 | |||
5.1 | Acquisition Proposals | 32 | ||
5.2 | Advice of Changes | 33 | ||
5.3 | Access and Information | 33 | ||
5.4 | Applications; Consents | 34 | ||
5.5 | Antitakeover Provisions | 34 | ||
5.6 | Additional Agreements | 34 | ||
5.7 | Publicity | 34 | ||
5.8 | Stockholder Meeting | 34 | ||
5.9 | Registration of Newco Common Stock | 35 | ||
5.10 | Notification of Certain Matters | 36 | ||
5.11 | Employee Benefit Matters | 36 | ||
5.12 | Indemnification | 38 | ||
5.13 | Conversion from Mutual to Stock Form | 38 | ||
5.14 | Accountant’s Comfort Letter | 39 | ||
5.15 | Cooperation | 40 | ||
5.16 | Advisory Board of Directors | 40 | ||
5.17 | Formation of Newco; Accession | 40 | ||
5.18 | Availability of Funds | 40 | ||
5.19 | Directorship | 40 |
i
Table of Contents
Page No. | ||||
5.20 | Subordination, Non-Disturbance and Attornment Agreements | 40 | ||
ARTICLE VI - CONDITIONSTO CONSUMMATION | 41 | |||
6.1 | Conditions to Each Party’s Obligations | 41 | ||
6.2 | Conditions to the Obligations of NVSL | 41 | ||
6.3 | Conditions to the Obligations of SSE | 42 | ||
ARTICLE VII - TERMINATION | 42 | |||
7.1 | Termination | 42 | ||
7.2 | Termination Fee | 43 | ||
7.3 | Breach; Remedies | 44 | ||
ARTICLE VIII -CERTAIN OTHER MATTERS | 44 | |||
8.1 | Interpretation | 44 | ||
8.2 | Survival | 44 | ||
8.3 | Waiver; Amendment | 44 | ||
8.4 | Counterparts | 44 | ||
8.5 | Governing Law | 44 | ||
8.6 | Expenses | 44 | ||
8.7 | Notices | 44 | ||
8.8 | Entire Agreement; etc. | 45 | ||
8.9 | Successors and Assigns; Assignment | 45 | ||
8.10 | Specific Performance | 45 |
EXHIBITS
Exhibit A | Form of Voting Agreement | |
Exhibit B | Form of Employment Agreement with Matthew L. Proto, Sr. | |
Exhibit C | Form of Employment Agreement with Sunil Pallan | |
Exhibit D | Plan of Bank Merger |
ii
Table of Contents
Agreement and Plan of Merger
This is anAgreement and Plan of Merger, dated as of the 22nd day of February, 2010 (“Agreement”), by and among Naugatuck Valley Financial Corporation, a federally chartered corporation (“NVSL”), Southern Connecticut Bancorp, Inc., a Connecticut corporation (“SSE”), and, from and after its accession to this Agreement in accordance withSection 5.17, Newco.
Introductory Statement
The Board of Directors of NVSL and SSE have determined that this Agreement and the business combination and related transactions contemplated hereby are advisable and in the best interests of their respective corporations and stockholders.
In connection with the Merger, it is intended that NVSL MHC (as hereinafter defined) will reorganize and convert from the mutual holding company form of organization to the stock holding company form of organization pursuant to certain transactions (the “Conversion”) as the result of which, inter alia, NVSL Bank will become a wholly owned subsidiary of Newco, and that in connection with such Conversion, Newco will conduct a subscription offering of its common stock, and if necessary a community and/or syndicated community offering, and exchange of its common stock for shares of NVSL common stock held by persons other than NVSL MHC, all pursuant to a plan of conversion and subject to regulatory review and amendment in connection with such review as provided therein (the “Plan of Conversion”).
The parties hereto intend that the Merger (as defined herein) shall qualify as a reorganization under the provisions of Section 368(a) of the IRC (as defined herein) for federal income tax purposes.
The parties hereto desire to make certain representations, warranties and agreements in connection with the business combination and related transactions provided for herein and to prescribe various conditions to such transactions.
As a condition and inducement to NVSL’s willingness to enter into this Agreement, each of the members of the Board of Directors of SSE have entered into an agreement dated as of the date hereof, in the form ofExhibit A hereto, pursuant to which he (or she) will vote his (or her) shares of SSE Common Stock in favor of this Agreement and the transactions contemplated hereby.
As a further condition and inducement to NVSL’s willingness to enter into this Agreement, NVSL Bank (as defined herein) has entered into an employment agreement with Matthew L. Proto, Sr., Senior Vice President of SSE Bank (as defined herein), in the form ofExhibit B hereto, and an employment agreement with Sunil Pallan, Senior Vice President and Chief Credit Officer of SSE Bank, in the form ofExhibit C hereto, which employment agreements will be effective upon the consummation of the Merger.
1
Table of Contents
In consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Agreement and prescribe the terms and conditions hereof and the manner and basis of carrying it into effect, which shall be as follows:
ARTICLE I
DEFINITIONS
The following terms are defined in this Agreement in the Section indicated:
Defined Term | Location of Definition | |
Bank Merger | 2.11 | |
Banking Laws of Connecticut | 3.2(b)(iv) | |
Base Compensation | 5.11(d) | |
CBCA | 2.1 | |
Cash Consideration | 2.5(a) | |
Cash Election | 2.6(b) | |
Cash Election Shares | 2.6(b) | |
Cause | 5.11(d) | |
Certificate(s) | 2.6(c) | |
Certificate of Merger | 2.3 | |
Change in Recommendation | 5.8 | |
Closing | 2.2 | |
Closing Date | 2.2 | |
Confidentiality Agreement | 5.1(a) | |
Continuing Employee | 5.11(a) | |
Conversion | Preamble | |
Disclosure Letter | 3.1 | |
Effective Time | 2.3 | |
Election Deadline | 2.6(c) | |
Election Form | 2.6(a) | |
Exchange Agent | 2.6(c) | |
Exchange Ratio | 2.5(a) | |
Financial Statement Review | 5.15 | |
Indemnified Party | 5.12(a) | |
Initial Offering Price | 2.13 | |
Intellectual Property | 3.2(p) | |
Letter of Transmittal | 2.7(a) | |
Mailing Date | 2.6(a) | |
Maximum Insurance Amount | 5.12(c) | |
Merger | 2.1 | |
Merger Consideration | 2.5(a) | |
Mixed Election | 2.6(b) | |
Newco | 5.18 | |
Non-Election | 2.6(b) | |
Non-Election Shares | 2.6(b) | |
NVSL | Preamble | |
NVSL Bank | 2.12 | |
NVSL Common Stock | 3.3(c)(i) | |
NVSL Employee Plan | 3.2(s)(i) | |
NVSL Option | 3.2(c)(ii) | |
NVSL Preferred Stock | 3.3(c)(i) | |
NVSL’s Reports | 3.3(g) |
2
Table of Contents
Defined Term | Location of Definition | |
Plan of Conversion | Preamble | |
Proxy Statement | 5.9(a) | |
Representative | 2.6(b) | |
Shortfall Number | 2.6(e)(ii) | |
SSE | Preamble | |
SSE Bank | 2.12 | |
SSE Employee Plans | 3.2(r)(i) | |
SSE Option | 2.11(a) | |
SSE Option Plans | 2.11(a) | |
SSE Pension Plan | 3.2(r)(iii) | |
SSE Qualified Plan | 3.2(r)(iv) | |
SSE’s Reports | 3.2(g) | |
SSE Warrant | 2.11(c) | |
SSE Warrant Plans | 2.11(c) | |
Stock Consideration | 2.5(a) | |
Stock Conversion Number | 2.6(d) | |
Stock Election | 2.6(b) | |
Stock Election Number | 2.6(b) | |
Stock Election Shares | 2.6(b) | |
Stockholder Meeting | 5.8 | |
Surviving Corporation | 2.1 |
In addition, for purposes of this Agreement:
“Acquisition Proposal” means any proposal or offer with respect to any of the following (other than the transactions contemplated hereunder): (i) any merger, consolidation, share exchange, business combination, or other similar transaction involving SSE or any of its Subsidiaries; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 25% or more of SSE’s consolidated assets in a single transaction or series of transactions; (iii) any tender offer or exchange offer for 25% or more of the outstanding shares of SSE’s capital stock or the filing of a registration statement under the Securities Act of 1933, as amended, in connection therewith; or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in an any of the foregoing.
“Agreement” means this Agreement, as amended or modified from time to time in accordance with Section 8.3 hereof.
“Banking Commissioner” means the Banking Commissioner of the State of Connecticut.
“BHCA” means the Bank Holding Company Act of 1956, as amended.
“Conversion Proxy/Prospectus” means, collectively, the prospectus of Newco in connection with the Offering that meets the requirements of the Securities Act, applicable state securities laws and banking laws and regulations and the proxy statement of NVSL that meets the requirement of the Exchange Act. The Conversion Proxy/Prospectus may be combined with the Proxy Statement delivered to stockholders of SSE in connection with the solicitation of proxies for their approval of this Agreement and the transactions contemplated hereby and the offering of the Newco Common Stock to them as Merger Consideration.
“Conversion Registration Statement” means the registration statement, together with all amendments, filed by Newco with the SEC under the Securities Act for the purpose of registering the shares of Newco Common Stock to be offered and issued in connection with the Offering. The Conversion Registration Statement and the Merger Registration Statement may be separate registration statements or may be combined in one
3
Table of Contents
registration statement that shall register the shares of Newco Common Stock to be offered for sale and issued in connection with the Offering and to be offered and issued to holders of SSE Common Stock in connection with the Merger.
“CRA” means the Community Reinvestment Act, as amended.
“Environmental Law” means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, directive, executive or administrative order, judgment, decree, injunction, or agreement with any Governmental Entity relating to (i) the protection, preservation or restoration of the environment (which includes, without limitation, air, water vapor, surface water, groundwater, drinking water supply, soil, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety as it relates to Hazardous Materials, or (ii) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of, Hazardous Materials, in each case as amended and as now in effect. The term Environmental Law includes, without limitation, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970 as it relates to Hazardous Materials, the Federal Hazardous Substances Transportation Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act, the Endangered Species Act, the National Environmental Policy Act, the Rivers and Harbors Appropriation Act or any so-called “Superfund” or “Superlien” law, each as amended and as now in effect.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate” means any entity that is considered one employer with SSE under Section 4001(b)(1) of ERISA or Section 414 of the IRC.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Excluded Shares” shall consist of shares held directly or indirectly by NVSL (other than shares held in a fiduciary capacity or in satisfaction of a debt previously contracted).
“FDIA” means the Federal Deposit Insurance Act, as amended.
“FDIC” means the Federal Deposit Insurance Corporation.
“NVSL MHC” means Naugatuck Valley Mutual Holding Company, a federally chartered mutual holding company and majority shareholder of NVSL.
“FRB” means the Board of Governors of the Federal Reserve System.
“GAAP” means generally accepted accounting principles in the United States.
“Government Regulator” means any federal or state governmental authority charged with the supervision or regulation of depository institutions or depository institution holding companies or engaged in the insurance of bank deposits.
“Governmental Entity” means any court, administrative agency or commission or other governmental authority or instrumentality.
4
Table of Contents
“Hazardous Material” means any substance (whether solid, liquid or gas) which is or could be detrimental to human health or safety or to the environment, currently or hereafter listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any substance containing any such substance as a component. Hazardous Material includes, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance, oil or petroleum, or any derivative or by-product thereof, radon, radioactive material, asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl.
“HOLA” means the Home Owners’ Loan Act, as amended.
“IRC” means the Internal Revenue Code of 1986, as amended.
“IRS” means the Internal Revenue Service.
“knowledge” means, with respect to a party hereto, actual knowledge of the members of the Board of Directors of that party or any officer of that party with the title ranking not less than senior vice president.
“Lien” means any charge, mortgage, pledge, security interest, claim, lien or encumbrance.
“Loan” means a loan, lease, advance, credit enhancement, guarantee or other extension of credit.
“Loan Property” means any property in which the applicable party (or a subsidiary of it) holds a security interest and, where required by the context, includes the owner or operator of such property, but only with respect to such property.
“Material Adverse Effect” means an effect which is material and adverse to the business, financial condition or results of operations of SSE or NVSL, as the context may dictate, and its Subsidiaries taken as a whole;provided, however, that any such effect resulting from any (i) changes in laws, rules or regulations or generally accepted accounting principles or regulatory accounting requirements or interpretations thereof that apply to both NVSL and SSE, or to financial and/or depository institutions generally, (ii) changes in economic conditions affecting financial institutions generally, including but not limited to, changes in the general level of market interest rates, (iii) actions and omissions of NVSL or SSE taken with the prior written consent of the other or (iv) direct effects of compliance with this Agreement on the operating performance of the parties, including expenses incurred by the parties in consummating the transactions contemplated by this Agreement, shall not be considered in determining if a Material Adverse Effect has occurred.
“Merger Registration Statement” means the registration statement on Form S-4, together with all amendments, filed with the SEC under the Securities Act for the purpose of registering the shares of Newco Common Stock to be offered to holders of SSE Common Stock issued in connection with the Merger. The Conversion Registration Statement and the Merger Registration Statement may be separate registration statements or may be combined in one registration statement that shall register the shares of Newco Common Stock to be offered for sale and issued in connection with the Offering and to be offered and issued to holders of SSE Common Stock in connection with the Merger.
“Newco Common Stock” means the common stock, par value $.01 per share, of Newco.
“Offering” means (i) the offering of shares of Newco Common Stock in a subscription offering and, if necessary, a community offering and/or a syndicated community offering and (ii) the exchange of Newco Common Stock for shares of NVSL common stock, all as part of the Conversion.
“OTS” means the Office of Thrift Supervision.
5
Table of Contents
“Participation Facility” means any facility in which the applicable party (or a Subsidiary of it) participates in the management (including all property held as trustee or in any other fiduciary capacity) and, where required by the context, includes the owner or operator of such property, but only with respect to such property.
“person” means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization or other entity.
“SEC” means the United States Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Subsidiary” means a corporation, partnership, joint venture or other entity in which SSE or NVSL, as the case may be, has, directly or indirectly, an equity interest representing 50% or more of any class of the capital stock thereof or other equity interests therein.
“Superior Proposal” means an unsolicited, bona fide written offer made by a third party to consummate an Acquisition Proposal that (i) SSE’s Board of Directors determines in good faith, after consulting with its outside legal counsel and a financial advisor other than NVSL’s financial advisor with regard to the Conversion, would, if consummated, result in a transaction that is more favorable to the stockholders of SSE than the transactions contemplated hereby (taking into account (x) all legal, financial, regulatory and other aspects of the proposal and the entity making the proposal and (y) any adjustments to the terms and conditions of this Agreement proposed by NVSL in response to the proposal), (ii) is not conditioned on obtaining financing (and with respect to which NVSL has received written evidence of such person’s ability to fully finance its Acquisition Proposal) and (iii) is for 100% of the outstanding shares of SSE Common Stock.
“SSE Common Stock” means the common stock, par value $0.01 per share, of SSE.
“Taxes” means all income, franchise, gross receipts, real and personal property, real property transfer and gains, wage and employment Taxes.
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, SSE will merge with and into Newco (the “Merger”) at the Effective Time. At the Effective Time, the separate corporate existence of SSE shall cease. Newco shall be the surviving corporation (hereinafter sometimes referred to in such capacity as the “Surviving Corporation”) in the Merger and shall continue to be governed by the Connecticut Business Corporation Act (the“CBCA”) and its name and separate corporate existence, with all of its rights, privileges, immunities, powers and franchises, shall continue unaffected by the Merger. Notwithstanding the foregoing, if Newco is incorporated in a jurisdiction other than Connecticut, then the Surviving Corporation shall continue to be governed by the general business corporation law of such other jurisdiction.
2.2 Closing. The closing of the Merger (the “Closing”) will take place by the electronic (PDF), facsimile or overnight courier exchange of executed documents or at a location and at a time as agreed to by the parties hereto on the date designated by NVSL that is concurrent with or as soon as practicable following satisfaction or waiver of the conditions to Closing set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing), or such later date as the parties may otherwise agree (the “Closing Date”).
2.3 Effective Time. In connection with the Closing, Newco and SSE shall duly execute and deliver a certificate of merger (the “Certificate of Merger”) to the Connecticut Secretary of State for filing pursuant to the CBCA. The parties will make all other filings or recordings required under the CBCA. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Connecticut Secretary of State or
6
Table of Contents
at such later date or time as NVSL and SSE agree and specify in the Certificate of Merger (the date and time the Merger becomes effective being the “Effective Time”). Notwithstanding the foregoing, if Newco is incorporated in a jurisdiction other than Connecticut, then Newco and SSE shall duly execute and deliver an appropriate document with the Secretary of State of such other jurisdiction in accordance with the general business corporation law of such other jurisdiction.
2.4 Effects of the Merger. The Merger will have the effects set forth in the CBCA (or as set forth in the general business corporation law of Newco’s jurisdiction of incorporation, if other than Connecticut). Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, Newco shall possess all of the properties, rights, privileges, powers and franchises of SSE and be subject to all of the debts, liabilities and obligations of SSE.
2.5 Effect on Outstanding Shares of SSE Common Stock.
(a) Subject to the provisions of Section 2.6 hereof, by virtue of the Merger, automatically and without any action on the part of the holder thereof, each share of SSE Common Stock issued and outstanding at the Effective Time, other than Excluded Shares, shall become and be converted into, at the election of the holder as provided in and subject to the limitations set forth in this Agreement, the right to receive (i) $6.75 in cash, without interest (the “Cash Consideration”), (ii) the number of shares of Newco Common Stock equal to the Exchange Ratio (as defined below) (the “Stock Consideration”), or (iii) a combination of the Cash Consideration and the Stock Consideration. The Cash Consideration and the Stock Consideration are referred to herein collectively as the “Merger Consideration.” The “Exchange Ratio” shall equal the result obtained by dividing the Cash Consideration by the Initial Offering Price (as defined in Section 2.13).
(b) Notwithstanding any other provision of this Agreement, no fraction of a share of Newco Common Stock and no certificates or scrip therefor will be issued in the Merger; instead, Newco shall pay to each holder of SSE Common Stock who would otherwise be entitled to a fraction of a share of Newco Common Stock an amount in cash, rounded to the nearest cent, determined by multiplying such fraction by the Initial Offering Price.
(c) If, between the date of this Agreement and the Effective Time, the outstanding shares of Newco Common Stock shall have been changed into a different number of shares or into a different class by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio shall be adjusted appropriately to provide the holders of SSE Common Stock the same economic effect as contemplated by this Agreement before such event.
(d) As of the Effective Time, each Excluded Share shall be canceled and retired and shall cease to exist, and no exchange or payment shall be made with respect thereto.
2.6 Election and Proration Procedures.
(a) An election form in such form as SSE and Newco shall mutually agree (an “Election Form”) shall be mailed on the Mailing Date (as defined below) to each holder of record of shares of SSE Common Stock as of a record date for eligibility to vote on the Merger. The “Mailing Date” shall be the date on which proxy materials relating to the Merger are mailed to holders of shares of SSE Common Stock. Newco shall make available Election Forms as may be reasonably requested by all persons who become holders of SSE Common Stock after the record date for eligibility to vote on the Merger and before the Election Deadline (as defined herein), and SSE shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein.
(b) Each Election Form shall entitle the holder of shares of SSE Common Stock (or the beneficial owner through appropriate and customary documentation and instructions) to (i) elect to receive the Cash Consideration for each of such holder’s shares (a “Cash Election”), (ii) elect to receive the Stock Consideration
7
Table of Contents
for each of such holder’s shares (a “Stock Election”), (iii) elect to receive the Cash Consideration with respect to some of such holder’s shares and the Stock Consideration with respect to such holder’s remaining shares (a “Mixed Election”) or (iv) make no election or to indicate that such holder has no preference as to the receipt of the Cash Consideration or the Stock Consideration (a “Non-Election”). Holders of record of shares of SSE Common Stock who hold such shares as nominees, trustees or in other representative capacities (a “Representative”) may submit multiple Election Forms, provided that such Representative certifies that each such Election Form covers all the shares of SSE Common Stock held by that Representative for a particular beneficial owner. Shares of SSE Common Stock as to which a Cash Election has been made (including pursuant to a Mixed Election) are referred to herein as “Cash Election Shares.” Shares of SSE Common Stock as to which a Stock Election has been made (including pursuant to a Mixed Election) are referred to herein as “Stock Election Shares.” Shares of SSE Common Stock as to which no election has been made are referred to as “Non-Election Shares.” The aggregate number of shares of SSE Common Stock with respect to which a Stock Election has been made is referred to herein as the “Stock Election Number.”
(c) To be effective, a properly completed Election Form must be received by the transfer agent for Newco Common Stock (the “Exchange Agent”) on or before 5:00 p.m., New York City time, on the date reasonably determined by Newco that is as close as possible to the fifth business day prior to the date on which the Effective Time is expected to occur (the “Election Deadline”). An election shall have been properly made only if the Exchange Agent shall have actually received a properly completed Election Form by the Election Deadline. An Election Form shall be deemed properly completed only if accompanied by one or more certificates theretofore representing SSE Common Stock (“Certificate(s)”) (or customary affidavits and, if required by Newco pursuant toSection 2.7(i), indemnification regarding the loss or destruction of such Certificates or the guaranteed delivery of such Certificates) representing all shares of SSE Common Stock covered by such Election Form, together with duly executed transmittal materials included with the Election Form. Any holder of SSE Common Stock may at any time before the Election Deadline change his or her election by written notice received by the Exchange Agent before the Election Deadline accompanied by a properly completed and signed revised Election Form. Any holder of SSE Common Stock may, at any time before the Election Deadline, revoke his or her election by written notice received by the Exchange Agent before the Election Deadline or by withdrawal before the Election Deadline of his or her Certificates, or of the guarantee of delivery of such Certificates, previously deposited with the Exchange Agent. All elections shall be revoked automatically if the Exchange Agent is notified in writing by Newco and SSE that this Agreement has been terminated. If a stockholder either (i) does not submit a properly completed Election Form by the Election Deadline or (ii) revokes its Election Form before the Election Deadline and does not submit a new properly executed Election Form prior to the Election Deadline, the shares of SSE Common Stock held by such stockholder shall be designated Non-Election Shares. Newco shall cause the Certificates representing SSE Common Stock described in clause (ii) to be promptly returned without charge to the person submitting the Election Form upon written request to that effect from the person who submitted the Election Form. Subject to the terms of this Agreement and of the Election Form, the Exchange Agent shall have reasonable discretion to determine whether any election, revocation or change has been properly or timely made and to disregard immaterial defects in any Election Form, and any good faith decisions of the Exchange Agent regarding such matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this Agreement, 60% of the total number of shares of SSE Common Stock outstanding immediately before the Effective Time (the “Stock Conversion Number”) shall be converted into the Stock Consideration and the remaining outstanding shares of SSE Common Stock (excluding shares of SSE Common Stock to be canceled as provided in Section 2.5(d)) shall be converted into the Cash Consideration.
8
Table of Contents
(e) Within five business days after the later to occur of the Election Deadline or the Effective Time, Newco shall cause the Exchange Agent to effect the allocation among holders of SSE Common Stock of rights to receive the Cash Consideration and the Stock Consideration as follows:
(i) If the Stock Election Number exceeds the Stock Conversion Number, then all Cash Election Shares and all Non-Election Shares shall be converted into the right to receive the Cash Consideration, and each holder of Stock Election Shares will be entitled to receive (A) the Stock Consideration in respect of the number of Stock Election Shares held by such holder multiplied by a fraction, the numerator of which is the Stock Conversion Number and the denominator of which is the Stock Election Number and (B) the Cash Consideration in respect of the remaining number of such holder’s Stock Election Shares;
(ii) If the Stock Election Number is less than the Stock Conversion Number (the amount by which the Stock Conversion Number exceeds the Stock Election Number being referred to herein as the “Shortfall Number”), then all Stock Election Shares shall be converted into the right to receive the Stock Consideration and the Non-Election Shares and Cash Election Shares shall be treated in the following manner:
(A) if the Shortfall Number is less than or equal to the number of Non-Election Shares, then all Cash Election Shares shall be converted into the right to receive the Cash Consideration and each holder of Non-Election Shares shall receive (1) the Stock Consideration in respect of the number of Non-Election Shares held by such holder multiplied by a fraction, the numerator of which is the Shortfall Number and the denominator of which is the total number of Non-Election Shares and (2) the Cash Consideration in respect of the remaining number of such holder’s Non-Election Shares; or
(B) if the Shortfall Number exceeds the number of Non-Election Shares, then all Non-Election Shares shall be converted into the right to receive the Stock Consideration, and each holder of Cash Election Shares shall receive (1) the Stock Consideration in respect of the number of Cash Election Shares held by such holder multiplied by a fraction, the numerator of which is the amount by which the Shortfall Number exceeds the number of Non-Election Shares and the denominator of which is the total number of Cash Election Shares and (2) the Cash Consideration in respect of the remaining number of such holder’s Cash Election Shares.
For purposes of the foregoing calculations, Excluded Shares shall be deemed Cash Election Shares.
2.7 Exchange Procedures.
(a) Appropriate transmittal materials (the “Letter of Transmittal”) in a form satisfactory to Newco and SSE shall be mailed as soon as practicable after the Effective Time to each holder of record of SSE Common Stock as of the Effective Time who did not previously submit a completed Election Form. A Letter of Transmittal will be deemed properly completed only if accompanied by Certificates representing all shares of SSE Common Stock to be converted thereby or other acceptable documentation.
(b) At and after the Effective Time, each Certificate (except as specifically set forth inSection 2.5) shall represent only the right to receive the Merger Consideration.
(c) Prior to the Effective Time, Newco shall (i) reserve for issuance with its transfer agent and registrar a sufficient number of shares of Newco Common Stock to pay for the aggregate Stock Consideration and (ii) deposit, or cause to be deposited, with the Exchange Agent, for the benefit of the holders of shares of SSE Common Stock, for exchange in accordance with thisSection 2.7, an amount of cash sufficient to pay the aggregate Cash Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and contain any other provisions as Newco may reasonably determine and (iii) include instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon the proper surrender
9
Table of Contents
of the Certificates to the Exchange Agent, together with a properly completed and duly executed Letter of Transmittal, the holder of such Certificates shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Newco Common Stock that such holder has the right to receive pursuant toSection 2.5, if any, and a check in the amount equal to the cash that such holder has the right to receive pursuant toSection 2.5, if any (including any cash in lieu of fractional shares, if any, that such holder has the right to receive pursuant toSection 2.5, and any dividends or other distributions to which such holder is entitled pursuant toSection 2.5). Certificates so surrendered shall forthwith be canceled. As soon as practicable following receipt of the properly completed Letter of Transmittal and any necessary accompanying documentation, the Exchange Agent shall distribute Newco Common Stock and cash as provided herein. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of Newco Common Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares for the account of the persons entitled thereto. If there is a transfer of ownership of any shares of SSE Common Stock not registered in the transfer records of SSE, the Merger Consideration shall be issued to the transferee thereof if the Certificates representing such SSE Common Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of Newco and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.
(e) No dividends or other distributions declared or made after the Effective Time with respect to Newco Common Stock issued pursuant to this Agreement shall be remitted to any person entitled to receive shares of Newco Common Stock hereunder until such person surrenders his or her Certificates in accordance with thisSection 2.7. Upon the surrender of such person’s Certificates, such person shall be entitled to receive any dividends or other distributions, without interest thereon, which subsequent to the Effective Time had become payable but not paid with respect to shares of Newco Common Stock represented by such person’s Certificates.
(f) The stock transfer books of SSE shall be closed immediately upon the Effective Time and from and after the Effective Time there shall be no transfers on the stock transfer records of SSE of any shares of SSE Common Stock. If, after the Effective Time, Certificates are presented to Newco, they shall be canceled and exchanged for the Merger Consideration deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in thisSection 2.7.
(g) Any portion of the aggregate amount of cash to be paid pursuant toSection 2.5, any dividends or other distributions to be paid pursuant to thisSection 2.7 or any proceeds from any investments thereof that remains unclaimed by the holders of SSE Common Stock for six (6) months after the Effective Time shall be repaid by the Exchange Agent to Newco upon the written request of Newco. After such request is made, any holder of SSE Common Stock who has not theretofore complied with thisSection 2.7 shall look only to Newco for the Merger Consideration deliverable in respect of each share of SSE Common Stock such stockholder holds, as determined pursuant toSection 2.5 of this Agreement, without any interest thereon. If outstanding Certificates are not surrendered prior to the date on which such payments would otherwise escheat to or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by any abandoned property, escheat or other applicable laws, become the property of Newco (and, to the extent not in its possession, shall be paid over to it), free and clear of all claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, neither the Exchange Agent nor any party to this Agreement (or any affiliate thereof) shall be liable to any former holder of SSE Common Stock for any amount delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.
(h) Newco and the Exchange Agent shall be entitled to rely upon SSE’s stock transfer books to establish the identity of those persons entitled to receive the Merger Consideration, which books shall be conclusive with respect thereto. If a dispute with respect to ownership of stock represented by any Certificate, Newco and the Exchange Agent shall be entitled to deposit any Merger Consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto.
10
Table of Contents
(i) If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Exchange Agent or Newco, the posting by such person of a bond in such amount as the Exchange Agent may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant toSection 2.5.
2.8 Effect on Outstanding Shares of Newco Common Stock. At the Effective Time, each share of Newco Common Stock issued and outstanding immediately prior to the Effective Time shall be converted and exchanged for one share of the Surviving Corporation.
2.9 Directors of Surviving Corporation After Effective Time. Immediately after the Effective Time, until their respective successors are duly elected or appointed and qualified, the directors of the Surviving Corporation shall consist of the directors of Newco serving immediately prior to the Effective Time.
2.10 Certificate of Incorporation and Bylaws. The certificate of incorporation of Newco, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law. The bylaws of Newco, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law.
2.11 Treatment of Stock Options, Restricted Stock and Warrants.
(a) As soon as practicable after the date of this Agreement, SSE’s Board of Directors shall adopt such resolutions or take such other actions as are required to cancel each outstanding option to acquire shares of SSE Common Stock (an “SSE Option”) granted pursuant to the SSE 2001 Stock Option Plan, the SSE 2002 Stock Option Plan and the SSE 2005 Stock Option and Award Plan (collectively, the “SSE Option Plans”) as of the Effective Time, whether or not then vested, in exchange for a cash payment by SSE in an amount equal to the product of (i) the number of shares of SSE Common Stock subject to the SSE Option at the Effective Time and (ii) the amount by which the Cash Consideration exceeds the exercise price per share of the SSE Option, net of any amount which must be withheld to satisfy applicable federal and state income and employment taxes. If the exercise price per share of a SSE Option equals or exceeds the Cash Consideration, then at the Effective Time such SSE option shall be canceled without any payment made in exchange therefor. At the Effective Time the SSE Option Plans shall be deemed terminated.
(b) At the Effective Time, each share of restricted stock outstanding as of the Effective Time and issued pursuant to the SSE Option Plans, to the extent not already vested, shall vest and shall represent the right to receive the Merger Consideration pursuant toSection 2.5 above.
(c) At the Effective Time, each warrant to acquire shares of SSE Common Stock (an “SSE Warrant”) granted pursuant to the 2001 Warrant Plan and the 2001 Supplemental Warrant Plan (collectively, the “SSE Warrant Plans”) that is then outstanding and unexercised, whether or not then vested, shall be canceled, without any payment made in exchange therefor. At the Effective Time the SSE Warrant Plans shall be deemed terminated.
2.12 Bank Merger. Concurrently with or as soon as practicable after the execution and delivery of this Agreement, Naugatuck Valley Savings and Loan (“NVSL Bank”), a wholly owned subsidiary of NVSL, and The Bank of Southern Connecticut (“SSE Bank”), a wholly owned subsidiary of SSE, shall enter into the Plan of Bank Merger, in the form attached hereto asExhibit D, pursuant to which SSE Bank will merge with and into NVSL Bank (the “Bank Merger”). The parties intend that the Bank Merger will become effective simultaneously with or immediately following the Effective Time.
11
Table of Contents
2.13 The Conversion. Contemporaneous with the adoption of this Agreement, the Boards of Directors of NVSL MHC, NVSL and NVSL Bank are adopting the Plan of Conversion to reorganize and convert from the mutual holding company form of organization to the stock holding company form of organization. Newco is being organized to become the parent of NVSL Bank and to offer for sale shares of common stock as prescribed in the Plan of Conversion and to exchange its common stock for shares of NVSL common stock held by persons other than NVSL MHC. The per share price of the shares of Newco Common Stock to be issued in the Conversion is referred to as the “Initial Offering Price.” The Initial Offering Price is expected to be $10.00. The shares of Newco Common Stock to be issued in connection with the Merger may be either shares unsubscribed for in the Conversion subscription or community offerings, or to the extent such shares are unavailable, authorized but unissued shares of Newco Common Stock, which shares shall be issued immediately following completion of the Conversion.
2.14 Alternative Structure. Notwithstanding anything to the contrary contained in this Agreement, prior to the Effective Time, NVSL may specify that the structure of the transactions contemplated by this Agreement and the Plan of Conversion be revised and the parties shall enter into such alternative transactions as NVSL may reasonably determine to effect the purposes of this Agreement;provided, however, that such revised structure shall not (i) alter or change the amount or kind of the Merger Consideration, (ii) adversely effect the intended federal income tax consequences of the Merger to the holders of SSE Common Stock, or (iii) adversely impede or delay the receipt of any regulatory approval referred to in, or the consummation of the transactions contemplated by, this Agreement. In the event that NVSL elects to make such a revision, the parties agree to execute appropriate documents to reflect the revised structure.
2.15 Absence of Control. Subject to any specific provisions of this Agreement, it is the intent of the parties hereto that NVSL by reason of this Agreement shall not be deemed (until consummation of the transactions contemplated hereby) to control, directly or indirectly, SSE or to exercise, directly or indirectly, a controlling influence over the management or policies of SSE.
2.16 No Appraisal Rights. Holder of SSE Common Stock do not have appraisal rights in connection with the Merger in accordance with Section 33-856 of the CBCA.
ARTICLE III
REPRESENTATIONSAND WARRANTIES
3.1 Disclosure Letters. Prior to the execution and delivery of this Agreement, NVSL and SSE have each delivered to the other a letter (each, its “Disclosure Letter”) setting forth, among other things, facts, circumstances and events the disclosure of which is required or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more of their respective representations and warranties (and making specific reference to the Section of this Agreement to which they relate).
3.2 Representations and Warranties of SSE. SSE represents and warrants to NVSL that, except as disclosed in SSE’s Disclosure Letter:
(a)Organization and Qualification. SSE is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut and is registered with the FRB as a bank holding company. SSE has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. SSE is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on SSE. SSE engages only in activities (and holds properties only of the types) permitted to bank holding companies by the BHCA and the rules and regulations of the FRB promulgated thereunder.
12
Table of Contents
(b)Subsidiaries.
(i) SSE’s Disclosure Letter sets forth with respect to each of SSE’s direct and indirect Subsidiaries its name, its jurisdiction of incorporation, SSE’s percentage ownership, the number of shares of stock owned or controlled by SSE and the name and number of shares held by any other person who owns any stock of the Subsidiary. SSE owns of record and beneficially all the capital stock of each of its Subsidiaries free and clear of any Liens. There are no contracts, commitments, agreements or understandings relating to SSE’s right to vote or dispose of any equity securities of its Subsidiaries. SSE’s ownership interest in each of its Subsidiaries is in compliance with all applicable laws, rules and regulations relating to equity investments by bank holding companies or Connecticut state banks.
(ii) Each of SSE’s Subsidiaries is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on such Subsidiary.
(iii) The outstanding shares of capital stock of each Subsidiary have been validly authorized and are validly issued, fully paid and nonassessable. No shares of capital stock of any Subsidiary of SSE are or may be required to be issued by virtue of any options, warrants or other rights, no securities exist that are convertible into or exchangeable for shares of such capital stock or any other debt or equity security of any Subsidiary, and there are no contracts, commitments, agreements or understandings of any kind for the issuance of additional shares of capital stock or other debt or equity security of any Subsidiary or options, warrants or other rights with respect to such securities.
(iv) No Subsidiary of SSE other than SSE Bank is an “insured depository institution” as defined in the FDIA and the applicable regulations thereunder. SSE Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law. SSE Bank is a member in good standing of the Federal Home Loan Bank of Boston. SSE Bank engages only in activities (and holds properties only of the types) permitted by Connecticut General Statutes 36a-1et seq. and the regulations promulgated thereunder (the “Banking Laws of Connecticut”) and the rules and regulations of the Banking Commissioner promulgated thereunder.
(c)Capital Structure.
(i) The authorized capital stock of SSE consists of:
(A) 5,000,000 shares of SSE Common Stock; and
(B) 500,000 shares of preferred stock, no par value.
(ii) As of the date of this Agreement:
(A) 2,695,902 shares of SSE Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and were issued in full compliance with all applicable laws and not in violation of any preemptive rights;
(B) no shares of SSE preferred stock are issued and outstanding;
(C) 257,971 shares of SSE Common Stock are reserved for issuance pursuant to outstanding SSE Options;
(D) 77,184 shares of SSE Common Stock are reserved for issuance pursuant to outstanding SSE Warrants; and
13
Table of Contents
(E) no shares of SSE Common Stock are held in treasury by SSE or otherwise directly or indirectly owned by SSE.
(iii) Set forth in SSE’s Disclosure Letter is a complete and accurate list of all outstanding SSE Options and SSE Warrants, including the names of the optionees and warrant holders, dates of grant, exercise prices, dates of vesting, dates of termination, shares subject to each grant or warrant and whether stock appreciation, limited or other similar rights were granted in connection with such options or warrants.
(iv) No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which stockholders of SSE may vote are issued or outstanding.
(v) Except as set forth in thisSection 3.2(c), as of the date of this Agreement, (A) no shares of capital stock or other voting securities of SSE are issued, reserved for issuance or outstanding and (B) neither SSE nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, rights, convertible securities, commitments or agreements of any character obligating SSE or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of SSE or obligating SSE or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right, convertible security, commitment or agreement. As of the date hereof, there are no outstanding contractual obligations of SSE or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of SSE or any of its Subsidiaries.
(d)Authority. SSE has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of SSE’s Board of Directors, and no other corporate proceedings on the part of SSE are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement other than (i) the approval and adoption of this Agreement by the affirmative vote of the majority of the votes entitled to be cast on this Agreement by holders of SSE Common Stock and (ii) the approval of the Bank Merger by the board of directors of SSE Bank and by SSE, in its capacity as sole stockholder of SSE Bank. This Agreement has been duly and validly executed and delivered by SSE and constitutes a valid and binding obligation of SSE, enforceable against SSE in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity.
(e)No Violations. The execution, delivery and performance of this Agreement by SSE do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming all required governmental approvals have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which SSE or any of its Subsidiaries (or any of their respective properties) is subject, (ii) violate the articles of incorporation or bylaws of SSE or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or a default under (or an event which, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of SSE or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which SSE or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject.
(f)Consents and Approvals. No consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained in connection with the execution and delivery by SSE of this Agreement or the consummation by SSE of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger, except for filings of applications and notices with, receipt of approvals or nonobjections from, and expiration of the related waiting period required by, federal and state banking authorities. As of the date hereof, SSE has no knowledge of any reason pertaining to SSE why any
14
Table of Contents
of the approvals referred to in this Section 3.2(f) should not be obtained without the imposition of any material condition or restriction described in Section 6.1(b).
(g)Governmental Filings. SSE and each of its Subsidiaries has filed all reports, schedules, registration statements, definitive proxy statements and other documents that it has been required to file since December 31, 2005 with the SEC, the FRB, the FDIC, the Banking Commissioner or any other Governmental Regulator (collectively, “SSE’s Reports”). SSE has made available to NVSL an accurate and complete copy of (i) each of SSE’s Reports and (ii) each communication mailed by SSE to its stockholders since December 31, 2005 and prior to the date hereof. No administrative actions have been taken or, to the knowledge of SSE, threatened or orders issued in connection with any of SSE’s Reports. As of their respective dates, all of SSE’s Reports complied in all material respects with all laws or regulations under which it was filed (or was amended so as to be in compliance promptly following discovery of such noncompliance). Any financial statement (including, in each case, any notes thereto) contained in any of SSE’s Reports fairly presented in all material respects the financial position of SSE on a consolidated basis, SSE alone or each of SSE’s Subsidiaries alone as the case may be, and was prepared in all material respects in accordance with GAAP or applicable regulations.
(h)Financial Statements. SSE’s Disclosure Letter contains copies of (i) the consolidated balance sheet of SSE and its Subsidiaries as of December 31, 2008 and 2007 and related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2008 together with the notes thereto accompanied by the audit report of SSE’s independent registered public accounting firm and (ii) the unaudited consolidated balance sheet of SSE and its Subsidiaries as of September 30, 2009 and the related unaudited consolidated statements of operations, shareholders’ equity and cash flows for the nine months ended September 30, 2009. Such financial statements were prepared from the books and records of SSE and its Subsidiaries, fairly present the consolidated financial position of SSE and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations, retained earnings and cash flows of SSE and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby;provided, however, that the unaudited financial statements for interim periods are subject to normal year-end adjustments (which will not be material individually or in the aggregate). The books and records of SSE and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions.
(i)Undisclosed Liabilities. Neither SSE nor any of its Subsidiaries has incurred any debt, liability or obligation of any nature whatsoever (whether accrued, contingent, absolute or otherwise and whether due or to become due) other than liabilities reflected on or reserved against in the audited consolidated balance sheet of SSE as of December 31, 2008, except for (i) liabilities incurred since December 31, 2008 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on SSE and (ii) liabilities incurred for legal, accounting, financial advising fees and out-of-pocket expenses in connection with the transactions contemplated by this Agreement.
(j)Absence of Certain Changes or Events. Since December 31, 2008:
(i) SSE and its Subsidiaries have conducted their respective businesses only in the ordinary and usual course of such businesses consistent with their past practices;
(ii) there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on SSE;
(iii) SSE has not declared, paid or set aside any dividends or distributions with respect to the SSE Common Stock other than as expressly permitted by this Agreement;
15
Table of Contents
(iv) except for supplies or equipment purchased in the ordinary course of business, neither SSE nor any of its Subsidiaries have made any capital expenditures exceeding individually or in the aggregate $15,000;
(v) there has not been any write-down by SSE Bank in excess of $15,000 with respect to any individual Loan or other real estate owned or $30,000 in the aggregate;
(vi) there has not been any sale, assignment or transfer of any assets by SSE or any of its Subsidiaries in excess of $15,000 other than in the ordinary course of business or pursuant to a contract or agreement disclosed in SSE’s Disclosure Letter;
(vii) there has been no increase in the salary, compensation, pension or other benefits payable or to become payable by SSE or any of its Subsidiaries to any of their respective directors, officers or employees, other than in conformity with the policies and practices of such entity in the usual and ordinary course of its business;
(viii) neither SSE nor any of its Subsidiaries has paid or made any accrual or arrangement for payment of bonuses or special compensation of any kind or any severance or termination pay to any of their directors, officers or employees other than as expressly permitted by this Agreement;
(ix) neither SSE nor any of its Subsidiaries has entered into or amended any employment, deferred compensation, consulting, severance, termination or indemnification agreement with any current or former director or officer; and
(x) there has been no change in any accounting principles, practices or methods of SSE or any of its Subsidiaries.
(k)Litigation.There are no suits, actions or legal, administrative or arbitration proceedings pending or, to the knowledge of SSE, threatened against or affecting SSE or any of its Subsidiaries or any property or asset of SSE or any of its Subsidiaries that (i) is seeking damages or declaratory relief against SSE or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against SSE or any of its Subsidiaries that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on SSE.
(l)Absence of Regulatory Actions. Since June 30, 2006, neither SSE nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been subject to any action, proceeding, order or directive by any Government Regulator, or has adopted any board resolutions at the request of any Government Regulator, or has been advised by any Government Regulator that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. There are no unresolved violations, criticisms or exceptions by any Government Regulator with respect to any report or statement relating to any examinations of SSE or its Subsidiaries.
(m)Compliance with Laws. SSE and each of its Subsidiaries conducts its business in compliance with all statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable to it or the employees conducting such business, except where noncompliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on SSE. SSE and each of its Subsidiaries has all permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required in order to permit it to carry on its business as it is presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the knowledge of SSE, threatened. Neither SSE nor any of its
16
Table of Contents
Subsidiaries has been given written notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on SSE.
(n)Taxes. All federal, state, local and foreign Tax returns required to be filed by or on behalf of SSE or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by SSE or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on SSE’s balance sheet (in accordance with GAAP). There is no audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of SSE or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where SSE or any of its Subsidiaries do not file Tax returns that SSE or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to SSE or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on SSE’s balance sheet (in accordance with GAAP). SSE and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any Tax due that is currently in effect. SSE and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and SSE and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements. Neither SSE nor any of its Subsidiaries is a party to any agreement, contract, arrangement or plan that has resulted or would result, individually or in the aggregate, in connection with this Agreement in the payment of any “excess parachute payments” within the meaning of Section 280G of the IRC and neither SSE nor any of its Subsidiaries has made any payments and is not a party to any agreement, and does not maintain any plan, program or arrangement, that could require it to make any payments that would not be fully deductible by reason of Section 162(m) of the IRC.
(o)Agreements.
(i) SSE and its Subsidiaries are not bound by any material contract (as defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC), to be performed after the date hereof that has not been filed with SSE’s Reports.
(ii) SSE has previously delivered to NVSL, and SSE’s Disclosure Letter lists, any contract, arrangement, commitment or understanding (whether written or oral) to which SSE or any of its Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of SSE or any of its Subsidiaries the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving SSE or any of its Subsidiaries of the nature contemplated by this Agreement;
(B) with respect to the employment of any directors, officers, employees or consultants;
(C) any of the benefits of which will be increased, or the vesting or payment of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement (including any stock option plan, phantom stock or stock appreciation rights plan, restricted stock plan or stock purchase plan);
(D) containing covenants that limit the ability of SSE or any of its Subsidiaries to compete in any line of business or with any person, or that involve any restriction on the geographic area in which, or method by which, SSE (including any successor thereof) or any of its Subsidiaries may carry on its business (other than as may be required by law or any regulatory agency);
17
Table of Contents
(E) pursuant to which SSE or any of its Subsidiaries may become obligated to invest in or contribute capital to any entity;
(F) that relates to borrowings of money (or guarantees thereof) by SSE or any of its Subsidiaries in excess of $50,000;
(G) which is a lease or license with respect to any property, real or personal, whether as landlord, tenant, licensor or licensee, involving a liability or obligation as obligor in excess of $25,000 on an annual basis; or
(H) the termination of which would require payment by SSE or any of its Subsidiaries in excess of $25,000.
(ii) Neither SSE nor any of its Subsidiaries is in default under (and no event has occurred which, with due notice or lapse of time or both, would constitute a default under) or is in violation of any provision of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or other agreement to which it is a party or by which it is bound or to which any of its respective properties or assets is subject and, to the knowledge of SSE, no other party to any such agreement (excluding any loan or extension of credit made by SSE or any of its Subsidiaries) is in default in any respect thereunder.
(iii) SSE’s Disclosure Letter lists each agency or brokerage contract pursuant to which SSE or any of its Subsidiaries is authorized to represent an insurer or place insurance through another agency. Neither SSE nor any of its Subsidiaries have received written notice of termination of any existing agency or brokerage contract and, to the knowledge of SSE, no insurer or agency has threatened to terminate or is contemplating terminating its agency or brokerage contract with SSE or any of its Subsidiaries. There exists no dispute between SSE or any of its Subsidiaries and any insurer or agency with respect to either SSE’s or any of its Subsidiaries or the insurer’s or agency’s performance under the agency or brokerage contract between SSE or any of its Subsidiaries and the insurer or agency.
(p)Intellectual Property. SSE and each of its Subsidiaries owns or possesses valid and binding licenses and other rights to use (in the manner and the geographic areas in which they are currently used) without payment all patents, copyrights, trade secrets, trade names, service marks and trademarks material to its business. SSE’s Disclosure Letter sets forth a complete and correct list of all material trademarks, trade names, service marks and copyrights owned by or licensed to SSE or any of its Subsidiaries for use in its business, and all licenses and other agreements relating thereto and all agreements relating to third party intellectual property that SSE or any of its Subsidiaries is licensed or authorized to use in its business, including without limitation any software licenses but excluding any so-called “shrink-wrap” license agreements and other similar computer software licensed in the ordinary course of business and/or otherwise resident on desktop computers (collectively, the “Intellectual Property”). With respect to each item of Intellectual Property owned by SSE or any of its Subsidiaries, the owner possesses all right, title and interest in and to the item, free and clear of any Lien. With respect to each item of Intellectual Property that SSE or any of its Subsidiaries is licensed or authorized to use, the license, sublicense or agreement covering such item is legal, valid, binding, enforceable and in full force and effect. Neither SSE nor any of its Subsidiaries has received any charge, complaint, claim, demand or notice alleging any interference, infringement, misappropriation or violation with or of any intellectual property rights of a third party (including any claims that SSE or any of its Subsidiaries must license or refrain from using any intellectual property rights of a third party). To the knowledge of SSE, neither SSE nor any of its Subsidiaries has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of third parties and no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of SSE or any of its Subsidiaries.
(q)Labor Matters. SSE and its Subsidiaries are in material compliance with all applicable laws respecting employment, retention of independent contractors, employment practices, terms and conditions of
18
Table of Contents
employment, and wages and hours. Neither SSE nor any of its Subsidiaries is or has ever been a party to, or is or has ever been bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization with respect to its employees, nor is SSE or any of its Subsidiaries the subject of any proceeding asserting that it has committed an unfair labor practice or seeking to compel it or any such Subsidiary to bargain with any labor organization as to wages and conditions of employment nor, to the knowledge of SSE, has any such proceeding been threatened, nor is there any strike, other labor dispute or organizational effort involving SSE or any of its Subsidiaries pending or, to the knowledge of SSE, threatened.
(r)Employee Benefit Plans.
(i) SSE’s Disclosure Letter contains a complete and accurate list of all pension, retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, group insurance, severance and other benefit plans, contracts, agreements and arrangements, including, but not limited to, “employee benefit plans,” as defined in Section 3(3) of ERISA, incentive and welfare policies, contracts, plans and arrangements and all trust agreements related thereto with respect to any present or former directors, officers or other employees of SSE or any of its Subsidiaries (hereinafter referred to collectively as the “SSE Employee Plans”). SSE has previously delivered or made available to NVSL true and complete copies of each agreement, plan and other documents referenced in SSE’s Disclosure Letter, along with, where applicable, copies of the IRS Form 5500 or 5500-C for the most recently completed year. There has been no announcement or commitment by SSE or any of its Subsidiaries to create an additional SSE Employee Plan, or to amend any SSE Employee Plan, except for amendments required by applicable law which do not materially increase the cost of such SSE Employee Plan.
(ii) There is no pending or, to the knowledge of SSE, threatened litigation, administrative action or proceeding relating to any SSE Employee Plan. All of the SSE Employee Plans comply in all material respects with all applicable requirements of ERISA, the IRC and other applicable laws. There has occurred no “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the IRC) with respect to the SSE Employee Plans that is likely to result in the imposition of any penalties or Taxes upon SSE or any of its Subsidiaries under Section 502(i) of ERISA or Section 4975 of the IRC.
(iii) No liability to the Pension Benefit Guarantee Corporation has been or is expected by SSE or any of its Subsidiaries to be incurred with respect to any SSE Employee Plan which is subject to Title IV of ERISA (“SSE Pension Plan”), or with respect to any “single-employer plan” (as defined in Section 4001(a) of ERISA) currently or formerly maintained by SSE or any ERISA Affiliate. No SSE Pension Plan had an “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, as of the last day of the end of the most recent plan year ending prior to the date hereof; the fair market value of the assets of each SSE Pension Plan exceeds the present value of the “benefit liabilities” (as defined in Section 4001(a)(16) of ERISA) under such SSE Pension Plan as of the end of the most recent plan year with respect to the respective SSE Pension Plan ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such SSE Pension Plan as of the date hereof; and no notice of a “reportable event” (as defined in Section 4043 of ERISA) for which the 30-day reporting requirement has not been waived has been required to be filed for any SSE Pension Plan within the 12-month period ending on the date hereof. Neither SSE nor any of its Subsidiaries has provided, or is required to provide, security to any SSE Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the IRC. Neither SSE, its Subsidiaries, nor any ERISA Affiliate has contributed to any “multiemployer plan,” as defined in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Each SSE Employee Plan that is an “employee pension benefit plan” (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the IRC (a “SSE Qualified Plan”) has received a favorable determination letter from the IRS, and, to the knowledge of SSE, there are no circumstances likely to result in revocation of any such favorable determination letter. Each SSE Qualified Plan that is an “employee stock ownership plan” (as defined in Section 4975(e)(7) of the IRC) has satisfied all of the
19
Table of Contents
applicable requirements of Sections 409 and 4975(e)(7) of the IRC and the regulations thereunder in all material respects and any assets of any such SSE Qualified Plan that, as of the end of the plan year, are not allocated to participants’ individual accounts are pledged as security for, and may be applied to satisfy, any securities acquisition indebtedness.
(v) With respect to each SSE Employee Plan that is a “multiple employer plan” (as defined in Section 4063 of ERISA): (A) none of SSE or any of its Subsidiaries, nor any of their respective ERISA Affiliates, has received any notification, nor has any actual knowledge, that if SSE or any of its Subsidiaries or any of their respective ERISA Affiliates were to experience a withdrawal or partial withdrawal from such plan it would incur withdrawal liability that would be reasonably likely to have a Material Adverse Effect on SSE; and (B) none of SSE or any of its Subsidiaries, nor any of their respective ERISA Affiliates, has received any notification, nor has any reason to believe, that any SSE Employee Plan is in reorganization, has been terminated, is insolvent, or may be in reorganization, become insolvent or be terminated.
(vi) Neither SSE nor any of its Subsidiaries has any obligations for post-retirement or post-employment benefits under any SSE Employee Plan that cannot be amended or terminated upon 60 days’ notice or less without incurring any liability thereunder, except for coverage required by Part 6 of Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of which is borne by the insured individuals.
(vii) All contributions required to be made with respect to any SSE Employee Plan by applicable law or regulation or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any SSE Employee Plan, for any period through the date hereof have been timely made or paid in full, or to the extent not required to be made or paid on or before the date hereof, have been fully reflected in the financial statements of SSE. Each SSE Employee Plan that is an employee welfare benefit plan under Section 3(1) of ERISA either (A) is funded through an insurance company contract and is not a “welfare benefit fund” within the meaning of Section 419 of the IRC or (B) is unfunded.
(s)Properties.
(i) A list and description of all real property owned or leased by SSE or a Subsidiary of SSE is set forth in SSE’s Disclosure Letter. SSE and each of its Subsidiaries has good and marketable title to all real property owned by it (including any property acquired in a judicial foreclosure proceeding or by way of a deed in lieu of foreclosure or similar transfer), in each case free and clear of any Liens except (i) liens for Taxes not yet due and payable and (ii) such easements, restrictions and encumbrances, if any, as are not material in character, amount or extent, and do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby. Each lease pursuant to which SSE or any of its Subsidiaries as lessee, leases real or personal property is valid and in full force and effect and neither SSE nor any of its Subsidiaries, nor, to SSE’s knowledge, any other party to any such lease, is in default or in violation of any material provisions of any such lease. Attached as an exhibit to SSE’s Disclosure Letter is a complete and correct copy of each such real property lease and personal property lease. All real property owned or leased by SSE or any of its Subsidiaries are in all material respects in a good state of maintenance and repair (normal wear and tear excepted), conform with all applicable ordinances, regulations and zoning laws and are considered by SSE to be adequate for the current business of SSE and its Subsidiaries. To the knowledge of SSE, none of the buildings, structures or other improvements located on any real property owned or leased by SSE or any of its Subsidiaries encroaches upon or over any adjoining parcel or real estate or any easement or right-of-way.
(ii) SSE and each of its Subsidiaries has good and marketable title to all tangible personal property owned by it, free and clear of all Liens except such Liens, if any, that are not material in character, amount or extent, and that do not materially detract from the value, or materially interfere with the present use of the properties subject thereto or affected thereby. With respect to personal property used in the business of SSE and its Subsidiaries that is leased rather than owned, neither SSE nor any of its Subsidiaries is in default under the terms of any such lease.
20
Table of Contents
(t)Fairness Opinion. SSE has received the opinions of Stifel, Nicolaus & Company, Incorporated and Northeast Capital & Advisory, Inc. to the effect that, as of the respective date of such opinions and subject to the assumptions and qualifications set forth therein, the Merger Consideration to be paid to SSE’s stockholders by NVSL in connection with the Merger pursuant to this Agreement is fair, from a financial point of view, to such SSE stockholders.
(u)Fees. Other than for financial advisory services performed for SSE by Stifel, Nicolaus & Company, Incorporated pursuant to an agreement dated April 22, 2009 and by Northeast Capital & Advisory, Inc. pursuant to an agreement dated February 3, 2010, true and complete copies of which are attached as exhibits to SSE’s Disclosure Letter, neither SSE nor any of its Subsidiaries, nor any of their respective officers, directors, employees or agents, has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder’s fees, and no broker or finder has acted directly or indirectly for SSE or any of its Subsidiaries in connection with this Agreement or the transactions contemplated hereby.
(v)Environmental Matters.
(i) Each of SSE and its Subsidiaries, the Participation Facilities, and, to the knowledge of SSE, the Loan Properties are, and have been, in substantial compliance with all Environmental Laws.
(ii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the knowledge of SSE, threatened, before any court, governmental agency or board or other forum against SSE or any of its Subsidiaries or any Participation Facility (A) for alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at or on a site owned, leased or operated by SSE or any of its Subsidiaries or any Participation Facility.
(iii) To the knowledge of SSE, there is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or threatened before any court, governmental agency or board or other forum relating to or against any Loan Property (or SSE or any of its Subsidiaries in respect of such Loan Property) (A) relating to alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at a Loan Property.
(iv) Neither SSE nor any of its Subsidiaries has received any notice, demand letter, executive or administrative order, directive or request for information from any Governmental Entity or any third party indicating that it may be in violation of, or liable under, any Environmental Law.
(v) There are no underground storage tanks at any properties owned or operated by SSE or any of its Subsidiaries or any Participation Facility. Neither SSE nor any of its Subsidiaries nor, to the knowledge of SSE, any other person or entity, has closed or removed any underground storage tanks from any properties owned or operated by SSE or any of its Subsidiaries or any Participation Facility.
(vi) During the period of (A) SSE’s or its Subsidiary’s ownership or operation of any of their respective current properties or (B) SSE’s or its Subsidiary’s participation in the management of any Participation Facility, there has been no release of Hazardous Materials in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they are regulated under any Environmental Law. To the knowledge of SSE, prior to the period of (A) SSE’s or its Subsidiary’s ownership or operation of any of their respective current properties or (B) SSE’s or its Subsidiary’s participation in the management of any Participation Facility, there was no contamination by or release of Hazardous Material in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they are regulated under any Environmental Law.
21
Table of Contents
(w)Loan Portfolio; Allowance for Loan Losses.
(i) With respect to each Loan owned by SSE or its Subsidiaries in whole or in part:
(A) The note and the related security documents are each legal, valid and binding obligations of the maker or obligor thereof, enforceable against such maker or obligor in accordance with their terms;
(B) neither SSE nor any of its Subsidiaries, nor any prior holder of a Loan, has modified the note or any of the related security documents in any material respect or satisfied, canceled or subordinated the note or any of the related security documents except as otherwise disclosed by documents in the applicable Loan file;
(C) SSE or a Subsidiary of SSE is the sole holder of legal and beneficial title to each Loan (or SSE’s or its Subsidiary’s applicable participation interest, as applicable), except as otherwise referenced on the books and records of SSE or a Subsidiary of SSE;
(D) the original note and the related security documents are included in the Loan files, and copies of any documents in the Loan files are true and correct copies of the documents they purport to be and have not been suspended, amended, modified, canceled or otherwise changed except as otherwise disclosed by documents in the applicable Loan file; and
(E) with respect to a Loan held in the form of a participation, the participation documentation is legal, valid, binding and enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors’ rights and to general equity principles.
(ii) Neither the terms of any Loan, any of the documentation for any Loan, the manner in which any Loans have been administered and serviced, nor SSE’s practices of approving or rejecting Loan applications, violate in any material respect any federal, state, or local law, rule or regulation applicable thereto, including, without limitation, the Truth In Lending Act, Regulations O and Z of the Federal Reserve Board, the CRA, the Equal Credit Opportunity Act, and any state laws, rules and regulations relating to consumer protection, installment sales and usury.
(iii) The allowance for loan losses reflected in SSE’s balance sheet at December 31, 2008 was, and the allowance for loan losses shown on the balance sheets in SSE’s Reports for periods ending after such date, in the opinion of management, was or will be adequate, as of the dates thereof.
(x)Anti-takeover Provisions Inapplicable. SSE and its Subsidiaries have taken all actions required to exempt NVSL, the Agreement, the Plan of Bank Merger, the Merger and the Bank Merger from any provisions of an antitakeover nature contained in their organizational documents, and the provisions of any federal or state “anti-takeover,” “fair price,” “moratorium,” “control share acquisition” or similar laws or regulations.
(y)Material Interests of Certain Persons. Except for deposit and loan relationships entered into in the ordinary course of business, no current or former officer or director of SSE, or any family member or affiliate of any such person, has any material interest, directly or indirectly, in any contract or property (real or personal), tangible or intangible, used in or pertaining to the business of SSE or any of its Subsidiaries.
(z)Insurance. In the opinion of management, SSE and its Subsidiaries are presently insured for amounts deemed reasonable by management against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured. SSE’s Disclosure Letter contains a list of all policies of insurance carried and owned by SSE or any of SSE’s Subsidiaries showing the name of the insurance company and agent, the nature of the coverage, the policy limit, the annual premiums and the expiration date. All of the insurance policies and bonds maintained by SSE and its Subsidiaries are in full force and effect, SSE and its Subsidiaries are not in default thereunder, all premiums and other payments due under any such policy have been paid and all material claims thereunder have been filed in due and timely fashion.
22
Table of Contents
(aa)Investment Securities; Derivatives.
(i) Except for restrictions that exist for securities that are classified as “held to maturity,” none of the investment securities held by SSE or any of its Subsidiaries is subject to any restriction (contractual or statutory) that would materially impair the ability of the entity holding such investment freely to dispose of such investment at any time.
(ii) Neither SSE nor any of its Subsidiaries is a party to or has agreed to enter into an exchange-traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is a derivative contract (including various combinations thereof) or owns securities that (A) are referred to generically as “structured notes,” “high risk mortgage derivatives,” “capped floating rate notes” or “capped floating rate mortgage derivatives” or (B) are likely to have changes in value as a result of interest or exchange rate changes that significantly exceed normal changes in value attributable to interest or exchange rate changes.
(bb)Indemnification. Except as provided in the articles of incorporation or bylaws of SSE and the similar organizational documents of its Subsidiaries, neither SSE nor any of its Subsidiaries is a party to any agreement that provides for the indemnification of any of its present or former directors, officers or employees, or other persons who serve or served as a director, officer or employee of another corporation, partnership or other enterprise at the request of SSE and, to the knowledge of SSE, there are no claims for which any such person would be entitled to indemnification under the articles of incorporation or bylaws of SSE or the similar organizational documents of any of its Subsidiaries, under any applicable law or regulation or under any indemnification agreement.
(cc)Corporate Documents and Records. SSE’s Disclosure Letter includes a complete and correct copy of the certificate of incorporation, bylaws and similar organizational documents of SSE and each of SSE’s Subsidiaries, as in effect as of the date of this Agreement. Neither SSE nor any of SSE’s Subsidiaries is in violation of its certificate of incorporation, bylaws or similar organizational documents. The minute books of SSE and each of SSE’s Subsidiaries constitute a complete and correct record of all actions taken by their respective boards of directors (and each committee thereof) and their stockholders. SSE and each of its Subsidiaries maintains accounting records that fairly and accurately reflect, in all material respects, its transactions, and accounting controls exist sufficient to provide reasonable assurances that such transactions are, in all material respects, (i) executed in accordance with management’s general or specific authorization and (ii) recorded as necessary to permit the preparation of financial statements in accordance with GAAP.
(dd)SSE Information. The information regarding SSE and its Subsidiaries included in the Proxy Statement, the Registration Statement, any filings or approvals under applicable state securities laws or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or under Rule 14a-12 under the Exchange Act, and all amendments and supplements thereto, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the provision of the Exchange Act and the rules and regulations thereunder. The information supplied, or to be supplied, by SSE for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects.
(ee)CRA, Anti-Money Laundering, OFAC and Customer Information Security. SSE Bank has received a rating of “Satisfactory” in its most recent examination or interim review with respect to the CRA. SSE does not have knowledge of any facts or circumstances that would cause SSE Bank or any other Subsidiary of SSE: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal or SSE Bank regulators of lower than “satisfactory”; or (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of
23
Table of Contents
the Treasury’s Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (iii) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and sate privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach-Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by SSE Bank. To the knowledge of SSE, no non-public customer information has been disclosed to or accessed by an unauthorized third party in a manner which would cause either SSE or of its Subsidiaries to undertake any remedial action. The board of directors of SSE Bank (or where appropriate of any other Subsidiary of SSE) has adopted, and SSE Bank (or such other Subsidiary of SSE) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and SSE Bank (or such other Subsidiary of SSE) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.
3.3 Representations and Warranties of NVSL. NVSL represents and warrants to SSE that, except as set forth in NVSL’s Disclosure Letter:
(a)Organization and Qualification. NVSL is a corporation duly organized and validly existing under the laws of the United States of America and is registered with the OTS as a savings and loan holding company. NVSL has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it. NVSL is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on NVSL.
(b)Subsidiaries. NVSL owns of record and beneficially all the capital stock of NVSL Bank free and clear of any Liens. NVSL Bank is a federally chartered savings bank duly organized and validly existing under the laws of the United States, has all requisite corporate power and authority to own, lease and operate its properties and to conduct the business currently being conducted by it and is duly qualified or licensed as a foreign corporation to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on NVSL. NVSL Bank’s deposits are insured by the FDIC to the fullest extent permitted by law. NVSL Bank is a member in good standing of the Federal Home Loan Bank of Boston. NVSL Bank engages only in activities (and holds properties only of the types) permitted by the HOLA and the rules and regulations of the OTS promulgated thereunder.
(c)Capital Structure.
(i) The authorized capital stock of NVSL consists of:
(A) 25,000,000 shares of common stock, par value $0.01 per share (the “NVSL Common Stock”); and
(B) 1,000,000 shares of preferred stock, par value $0.01 per share (the “NVSL Preferred Stock”).
(ii) As of the date of this Agreement:
(A) 7,022,866 shares of NVSL Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and were issued in full compliance with all applicable laws and not in violation of any preemptive rights;
(B) no shares of NVSL Preferred Stock are issued and outstanding;
24
Table of Contents
(C) 353,430 shares of NVSL Common Stock are reserved for issuance pursuant to outstanding options to acquire NVSL Common Stock (the “NVSL Options”); and
(D) 581,509 shares of NVSL Common Stock are held in treasury by NVSL or otherwise directly or indirectly owned by NVSL.
(iii) No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which stockholders of NVSL may vote are issued or outstanding.
(v) Except as set forth in thisSection 3.3(c), as of the date of this Agreement, (A) no shares of capital stock or other voting securities of NVSL are issued, reserved for issuance or outstanding and (B) neither NVSL nor any of its Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, rights, convertible securities, commitments or agreements of any character obligating NVSL or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of capital stock of NVSL or obligating NVSL or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right, convertible security, commitment or agreement. As of the date hereof, there are no outstanding contractual obligations of NVSL or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of NVSL or any of its Subsidiaries.
(d)Authority. NVSL has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate actions on the part of NVSL’s Board of Directors, and no other corporate proceedings on the part of NVSL are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by NVSL and constitutes a valid and binding obligation of NVSL, enforceable against NVSL in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights and remedies generally and to general principles of equity, whether applied in a court of law or a court of equity.
(e)No Violations. The execution, delivery and performance of this Agreement by NVSL do not, and the consummation of the transactions contemplated by this Agreement will not, (i) assuming all required governmental approvals have been obtained and the applicable waiting periods have expired, violate any law, rule or regulation or any judgment, decree, order, governmental permit or license to which NVSL or any of its Subsidiaries (or any of their respective properties) is subject, (ii) violate the charter or bylaws of NVSL or the similar organizational documents of any of its Subsidiaries or (iii) constitute a breach or violation of, or a default under (or an event which, with due notice or lapse of time or both, would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of NVSL or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which NVSL or any of its Subsidiaries is a party, or to which any of their respective properties or assets may be subject except, in the case of (iii), for any such breaches, violations or defaults that would not, individually or in the aggregate, have a Material Adverse Effect on NVSL.
(f)Consents and Approvals. No consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are required to be made or obtained in connection with the execution and delivery by NVSL of this Agreement or the consummation by NVSL of the Merger and the other transactions contemplated by this Agreement, including the Bank Merger, except for filings of applications and notices with, receipt of approvals or nonobjections from, and expiration of the related waiting period required by, federal and state banking authorities. As of the date hereof, NVSL knows of no reason pertaining to NVSL why any of the approvals referred to in thisSection 3.3(e) should not be obtained without the imposition of any material condition or restriction described inSection 6.1(b).
25
Table of Contents
(g)Governmental Filings. NVSL and each of its Subsidiaries has filed all reports, schedules, registration statements definitive proxy statements and other documents that it has been required to file since December 31, 2005 with the SEC, the OTS, the FDIC or any other Governmental Regulator (collectively, “NVSL’s Reports”). No administrative actions have been taken or, to the knowledge of NVSL, threatened or orders issued in connection with any of NVSL’s Reports. As of their respective dates, each of NVSL’s Reports complied in all material respects with all laws or regulations under which it was filed (or was amended so as to be in compliance promptly following discovery of such noncompliance). Any financial statement (including in each case, any notes thereto) contained in any of NVSL’s Reports fairly presented in all material respects the financial position of NVSL on a consolidated basis, NVSL alone or each of NVSL’s Subsidiaries alone, as the case may be, and was prepared in all material respects in accordance with GAAP or applicable regulations.
(h)Financial Statements. The (i) consolidated statements of financial condition of NVSL and its Subsidiaries as of December 31, 2008 and 2007 and related consolidated statements of income, cash flows and changes in stockholders’ equity for each of the two years in the two-year period ended December 31, 2008, together with the notes thereto, accompanied by the audit report of NVSL’s independent public auditors and (ii) the unaudited consolidated statements of financial condition of NVSL and its Subsidiaries as of September 30, 2009 and the related unaudited consolidated statements of income, cash flows and shareholders’ equity for the nine months ended September 30, 2009 were prepared from the books and records of NVSL and its Subsidiaries and fairly present the consolidated financial position of NVSL and its Subsidiaries in each case at and as of the dates indicated and the consolidated results of operations, retained earnings and cash flows of NVSL and its Subsidiaries for the periods indicated, and, except as otherwise set forth in the notes thereto, were prepared in accordance with GAAP consistently applied throughout the periods covered thereby;provided, however, that the unaudited financial statements for interim periods are subject to normal year-end adjustments (which will not be material individually or in the aggregate). The books and records of NVSL and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other legal and accounting requirements and reflect only actual transactions.
(i)Undisclosed Liabilities. Neither NVSL nor any of its Subsidiaries has incurred any debt, liability or obligation of any nature whatsoever (whether accrued, contingent, absolute or otherwise and whether due or to become due) other than liabilities reflected on or reserved against in the audited consolidated balance sheet of NVSL as of December 31, 2008, except for (i) liabilities incurred since December 31, 2008 in the ordinary course of business consistent with past practice that, either alone or when combined with all similar liabilities, have not had, and would not reasonably be expected to have, a Material Adverse Effect on NVSL and (ii) liabilities incurred for legal, accounting, financial advising fees and out-of-pocket expenses in connection with the transactions contemplated by this Agreement.
(j)Absence of Certain Changes or Events. Since December 31, 2008, (i) NVSL and its Subsidiaries have conducted their respective businesses only in the ordinary and usual course of such businesses consistent with their past practices; and (ii) there has not been any event or occurrence that has had, or is reasonably expected to have, a Material Adverse Effect on NVSL.
(k)Compliance with Laws. NVSL and each of its Subsidiaries conducts its business in compliance with all statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable to it or the employees conducting such business, except where noncompliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on NVSL. NVSL and each of its Subsidiaries has all permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities that are required in order to permit it to carry on its business as it is presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect, and no suspension or cancellation of any of them is, to the knowledge of NVSL, threatened. Neither NVSL nor any of its Subsidiaries has been given written notice or been charged with any violation of, any law, ordinance, regulation, order, writ, rule, decree or condition to approval of any Governmental Entity which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on NVSL.
26
Table of Contents
(l)Taxes. All federal, state, local and foreign Tax returns required to be filed by or on behalf of NVSL or any of its Subsidiaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired, and all such filed returns are complete and accurate in all material respects. All Taxes shown on such returns, all Taxes required to be shown on returns for which extensions have been granted and all other Taxes required to be paid by NVSL or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on NVSL’s balance sheet (in accordance with GAAP). There is no audit examination, deficiency assessment, tax investigation or refund litigation with respect to any Taxes of NVSL or any of its Subsidiaries, and no claim has been made in writing by any authority in a jurisdiction where NVSL or any of its Subsidiaries do not file Tax returns that NVSL or any such Subsidiary is subject to taxation in that jurisdiction. All Taxes, interest, additions and penalties due with respect to completed and settled examinations or concluded litigation relating to NVSL or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on NVSL’s balance sheet (in accordance with GAAP). NVSL and its Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any Tax due that is currently in effect. NVSL and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and NVSL and each of its Subsidiaries has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and local information reporting requirements.
(m)Litigation.There are no suits, actions or legal, administrative or arbitration proceedings pending or, to the knowledge of NVSL, threatened against or affecting NVSL or any of its Subsidiaries or any property or asset of NVSL or any of its Subsidiaries that (i) is seeking damages or declaratory relief against NVSL or any of its Subsidiaries or (ii) challenge the validity or propriety of the transactions contemplated by this Agreement. There are no judgments, decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator outstanding against NVSL or any of its Subsidiaries that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on NVSL.
(n)Absence of Regulatory Actions. Since December 31, 2005, neither NVSL nor any of its Subsidiaries has been a party to any cease and desist order, written agreement or memorandum of understanding with, or any commitment letter or similar undertaking to, or has been subject to any action, proceeding, order or directive by any Government Regulator, or has adopted any board resolutions at the request of any Government Regulator, or has been advised in writing by any Government Regulator that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such action, proceeding, order, directive, written agreement, memorandum of understanding, commitment letter, board resolutions or similar undertaking. There are no unresolved violations, criticisms or exceptions by any Government Regulator with respect to any report or statement relating to any examinations of NVSL or its Subsidiaries.
(o)NVSL Information. The information regarding Newco and NVSL and its Subsidiaries to be supplied by Newco and NVSL for inclusion in the Proxy Statement, the Registration Statement, any filings or approvals under applicable state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act or under Rule 14a-12 under the Exchange Act will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement will comply as to form in all material respects with the provision of the Securities Act and the rules and regulation thereunder. The information supplied, or to be supplied, by NVSL for inclusion in applications to Governmental Entities to obtain all permits, consents, approvals and authorizations necessary or advisable to consummate the transactions contemplated by this Agreement shall be accurate in all material respects.
(p)Environmental Matters.
(i) Each of NVSL and its Subsidiaries, the Participation Facilities, and, to the knowledge of NVSL, the Loan Properties are, and have been, in substantial compliance with all Environmental Laws.
27
Table of Contents
(ii) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the knowledge of NVSL, threatened, before any court, governmental agency or board or other forum against NVSL or any of its Subsidiaries or any Participation Facility (A) for alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at or on a site owned, leased or operated by NVSL or any of its Subsidiaries or any Participation Facility.
(iii) To the knowledge of NVSL, there is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or threatened before any court, governmental agency or board or other forum relating to or against any Loan Property (or NVSL or any of its Subsidiaries in respect of such Loan Property) (A) relating to alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (B) relating to the presence of or release into the environment of any Hazardous Material, whether or not occurring at a Loan Property.
(iv) Neither NVSL nor any of its Subsidiaries has received any notice, demand letter, executive or administrative order, directive or request for information from any Governmental Entity or any third party indicating that it may be in violation of, or liable under, any Environmental Law.
(v) There are no underground storage tanks at any properties owned or operated by NVSL or any of its Subsidiaries or any Participation Facility. Neither NVSL nor any of its Subsidiaries nor, to the knowledge of NVSL, any other person or entity, has closed or removed any underground storage tanks from any properties owned or operated by NVSL or any of its Subsidiaries or any Participation Facility.
(vi) During the period of (A) NVSL’s or its Subsidiary’s ownership or operation of any of their respective current properties or (B) NVSL’s or its Subsidiary’s participation in the management of any Participation Facility, there has been no release of Hazardous Materials in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they are regulated under any Environmental Law. To the knowledge of NVSL, prior to the period of (A) NVSL’s or its Subsidiary’s ownership or operation of any of their respective current properties or (B) NVSL’s or its Subsidiary’s participation in the management of any Participation Facility, there was no contamination by or release of Hazardous Material in, on, under or affecting such properties except for releases of Hazardous Materials in quantities below the level at which they are regulated under any Environmental Law.
(q)CRA, Anti-Money Laundering, OFAC and Customer Information Security. NVSL Bank has received a rating of “Satisfactory” in its most recent examination or interim review with respect to the CRA. NVSL does not have knowledge of any facts or circumstances that would cause NVSL Bank or any other Subsidiary of NVSL: (i) to be deemed not to be in satisfactory compliance in any material respect with the CRA, and the regulations promulgated thereunder, or to be assigned a rating for CRA purposes by federal or state bank regulators of lower than “satisfactory”; or (ii) to be deemed to be operating in violation in any material respect of the Bank Secrecy Act, the USA PATRIOT Act, any order issued with respect to anti-money laundering by the U.S. Department of the Treasury’s Office of Foreign Assets Control, or any other applicable anti-money laundering statute, rule or regulation; or (iii) to be deemed not to be in satisfactory compliance in any material respect with the applicable privacy of customer information requirements contained in any federal and sate privacy laws and regulations, including without limitation, in Title V of the Gramm-Leach-Bliley Act of 1999 and the regulations promulgated thereunder, as well as the provisions of the information security program adopted by NVSL Bank. To the knowledge of NVSL, no non-public customer information has been disclosed to or accessed by an unauthorized third party in a manner which would cause either NVSL or of its Subsidiaries to undertake any remedial action. The board of directors of NVSL Bank (or where appropriate of any other Subsidiary of NVSL) has adopted, and NVSL Bank (or such other Subsidiary of NVSL) has implemented, an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that comply with Section 326 of the USA PATRIOT Act and such anti-money laundering program
28
Table of Contents
meets the requirements in all material respects of Section 352 of the USA PATRIOT Act and the regulations thereunder, and NVSL Bank (or such other Subsidiary of NVSL) has complied in all material respects with any requirements to file reports and other necessary documents as required by the USA PATRIOT Act and the regulations thereunder.
(r)Employee Benefit Plans.
(i) NVSL’s Disclosure Letter contains a complete and accurate list of all pension, retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, group insurance, severance and other benefit plans, contracts, agreements and arrangements, including, but not limited to, “employee benefit plans,” as defined in Section 3(3) of ERISA, incentive and welfare policies, contracts, plans and arrangements and all trust agreements related thereto with respect to any present or former directors, officers or other employees of NVSL or any of its Subsidiaries (hereinafter referred to collectively as the “NVSL Employee Plans”). NVSL has previously delivered or made available to SSE true and complete copies of each agreement, plan and other documents referenced in NVSL’s Disclosure Letter, along with, where applicable, copies of the IRS Form 5500 or 5500-C for the most recently completed year. Each NVSL Employee Plan that is an “employee pension benefit plan” (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the IRC has received a favorable determination letter from the IRS, and NVSL and its Subsidiaries are not aware of any circumstances likely to result in revocation of any such favorable determination letter.
(ii) There is no pending or, to the knowledge of NVSL, threatened litigation, administrative action or proceeding relating to any NVSL Employee Plan. All of the NVSL Employee Plans comply in all material respects with all applicable requirements of ERISA, the IRC and other applicable laws. There has occurred no “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the IRC) with respect to the NVSL Employee Plans that is likely to result in the imposition of any penalties or Taxes upon NVSL or any of its Subsidiaries under Section 502(i) of ERISA or Section 4975 of the IRC.
(iii) Neither NVSL, any of its Subsidiaries nor any of its ERISA Affiliates maintains or has maintained during the least ten years a NVSL Employee Plan which is subject to Title IV of ERISA or which is subject to the minimum funding requirements of Section 412 of the IRC. Neither NVSL, any of its Subsidiaries nor any of its ERISA Affiliates has contributed to any “multi-employer plan,” as defined in Section 3(37) of ERISA, on or after September 26, 1980.
ARTICLE IV
CONDUCT PENDINGTHE MERGER
4.1 Forbearances by SSE. Except as expressly contemplated or permitted by this Agreement or disclosed in SSE’s Disclosure Letter, and except to the extent required by law or regulation or any Governmental Entity during the period from the date of this Agreement to the Effective Time, SSE shall not, nor shall SSE permit any of its Subsidiaries to, without the prior written consent of NVSL:
(a) conduct its business other than in the regular, ordinary and usual course consistent with past practice; fail to use reasonable efforts to maintain and preserve intact its business organization, properties, leases, employees and advantageous business relationships and retain the services of its officers and key employees; or take any action that would adversely affect or delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby;
(b) (i) incur, modify, extend or renegotiate any indebtedness for borrowed money, or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, other than (A) the creation of deposit liabilities in the ordinary course of business consistent with past practice and (B) advances from the Federal Home Loan Bank of Boston with a maturity of not more than one year;
29
Table of Contents
(ii) prepay any indebtedness or other similar arrangements so as to cause SSE to incur any prepayment penalty thereunder; or
(iii) purchase or renew any brokered certificates of deposit such that the balance of such funds exceeds the balance at December 31, 2009;
(c) (i) adjust, split, combine or reclassify any capital stock;
(ii) make, declare or pay any dividend, or make any other distribution on its capital stock;
(iii) grant any stock options, restricted stock or stock appreciation rights or any limited rights under the SSE Employee Plans or grant any individual, corporation or other entity any right to acquire any shares of its capital stock;
(iv) issue any additional shares of capital stock or any securities or obligations convertible or exercisable for any shares of its capital stock except pursuant to the exercise of stock options or warrants outstanding as of the date hereof; or
(v) directly or indirectly redeem, purchase or otherwise acquire any shares of its capital stock;
(d) sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties or assets to any individual, corporation or other entity other than a Subsidiary, or cancel, release or assign any indebtedness to any such person or any claims held by any such person, except in the ordinary course of business consistent with past practice or pursuant to contracts or agreements in force at the date of this Agreement;
(e) except pursuant to contracts or agreements in force at the date of or permitted by this Agreement, make any equity investment, either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other individual, corporation or other entity;
(f) enter into, renew, amend or terminate any contract or agreement, or make any change in any of its leases or contracts, other than with respect to those involving aggregate payments of less than, or the provision of goods or services with a market value of less than, $25,000 per annum and other than contracts or agreements covered by Section 4.1(g);
(g) make, renegotiate, renew, increase, extend, modify or purchase any loan, lease (credit equivalent), advance, credit enhancement or other extension of credit, or make any commitment in respect of any of the foregoing, except (i) in conformity with existing lending practices in amounts, individually or in the aggregate to one borrower, not to exceed $500,000 for real estate loans with a loan-to-value ratio of 80% or less and $250,000 for all other loans, (ii) in conformity with existing lending practices in amounts, individually or in the aggregate to one borrower, greater than $500,000 for loans secured by real estate with a loan-to-value ratio of 80% or less and greater than $250,000 for all other loans but only if SSE provides to NVSL three business days’ advance notice of SSE’s decision to make such a loan and NVSL does not reasonably object to the making of such loan within such three business days, or (iii) loans or advances as to which SSE has a binding obligation to make such loans or advances as of the date hereof;
(h) except for loans or extensions of credit made on terms generally available to the public, make or increase any loan or other extension of credit, or commit to make or increase any such loan or extension of credit, to any director or executive officer of SSE or SSE Bank, or any entity controlled, directly or indirectly, by any of the foregoing, other than renewals of existing loans or commitments to loan;
(i) (i) increase in any manner the compensation, bonuses or other fringe benefits of any of its employees or directors other than in the ordinary course of business consistent with past practice and current accruals and pursuant to policies currently in effect, or pay any bonus, pension, retirement allowance or contribution not required by any existing plan or agreement to any such employees or directors;
30
Table of Contents
(ii) become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee or director;
(iii) voluntarily accelerate the vesting of, or the lapsing of restrictions with respect to, any stock options or other stock-based compensation; or
(iv) elect to any senior executive office any person who is not a member of its senior executive officer team as of the date of this Agreement or elect to its Board of Directors any person who is not a member of its Board of Directors as of the date of this Agreement, or hire any employee with annual compensation in excess of $40,000;
(j) settle any claim, action or proceeding (i) involving payment by it of money damages in excess of $25,000 or (ii) which would impose any material restriction on its operations or the operations of any of its Subsidiaries;
(k) amend its articles of incorporation or bylaws, or similar governing documents;
(l) restructure or materially change its investment securities portfolio or its interest rate risk position, through purchases, sales or otherwise, or in the manner in which the portfolio is classified;
(m) make any investment in any debt security, including mortgage-backed and mortgage-related securities, other than U.S. government and U.S. government agency securities with final maturities greater than one year;
(n) make any capital expenditures other than pursuant to binding commitments existing on the date hereof and other than expenditures necessary to maintain existing assets in good repair or to make payment of necessary Taxes;
(o) establish or commit to the establishment of any new branch or other office facilities or file any application to relocate or terminate the operation of any banking office;
(p) take any action that is intended or expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;
(q) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or regulatory guidelines; or
(r) agree to take, make any commitment to take, or adopt any resolutions of its board of directors in support of, any of the actions prohibited by thisSection 4.1.
Any request by SSE or response thereto by NVSL shall be made in accordance with the notice provisions ofSection 8.7 and shall note that it is a request pursuant to thisSection 4.1.
4.2 Forbearances by NVSL. Except as expressly contemplated or permitted by this Agreement, and except to the extent required by law or regulation or any Governmental Entity, during the period from the date of this Agreement to the Effective Time, NVSL shall not, nor shall NVSL permit any of its Subsidiaries to, without the prior written consent of SSE, which shall not unreasonably be withheld:
(a) take any action that would adversely affect or delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby;
31
Table of Contents
(b) take any action that is intended to or expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VI not being satisfied or in a violation of any provision of this Agreement;
(c) knowingly take any action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the IRC; or
(d) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by thisSection 4.2.
ARTICLE V
COVENANTS
5.1 Acquisition Proposals.
(a) Except as permitted by this Agreement, SSE shall not, and shall not authorize or permit any of its Subsidiaries or any of its Subsidiaries’ officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative retained by SSE or any of its Subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage (including by way of furnishing non-public information), or take any other action to facilitate, any inquiries, discussions or the making of any proposal that constitutes or could reasonably be expected to lead to an Acquisition Proposal, (ii) participate in any discussions or negotiations, or otherwise communicate in any way with any person (other than NVSL), regarding an Acquisition Proposal or (iii) enter into or consummate any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the transactions contemplated hereby. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any officer, director or employee of SSE or any of the Subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative retained by SSE or any of its Subsidiaries shall be deemed to be a breach of thisSection 5.1 by SSE. Notwithstanding the foregoing, SSE may, in response to Superior Proposal that has not been withdrawn and that did not otherwise result from a breach of thisSection 5.1, (A) furnish non-public information with respect to SSE to the person who made such Superior Proposal pursuant to a confidentiality agreement on terms no more favorable to such person than the confidentiality agreement between NVSL and SSE, dated June 11, 2009 (the “Confidentiality Agreement”) and (B) participate in discussions or negotiations with such person regarding such Superior Proposal, if and so long as SSE’s Board of Directors determines in good faith, after consultation with and based upon the advice of its outside legal counsel, that failing to take such action would constitute a breach of its fiduciary duties under applicable law.
(b) SSE will notify NVSL immediately orally (within one day) and in writing (within three days) of receipt of any Acquisition Proposal, any request for non-public information that could reasonably be expected to lead to an Acquisition Proposal, or any inquiry with respect to or that could reasonably be expected to lead to an Acquisition Proposal, including, in each case, the identity of the person making such Acquisition Proposal, request or inquiry and the terms and conditions thereof, and shall provide to NVSL any written materials received by SSE or any of its Subsidiaries in connection therewith. SSE will keep NVSL informed of any developments with respect to any such Acquisition Proposal, request or inquiry immediately upon the occurrence thereof.
(c) SSE will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted prior to the date of this Agreement with respect to any of the foregoing. SSE will take the necessary steps to inform the appropriate individuals or entities referred to in the first sentence ofSection 5.1(a) of the obligations undertaken in thisSection 5.1. SSE will promptly request each person (other than NVSL) that has executed a confidentiality agreement in the 12 months prior to the date hereof in connection with its consideration of a business combination with SSE or any of its Subsidiaries to return or destroy all confidential information previously furnished to such person by or on behalf of SSE or any of its Subsidiaries.
32
Table of Contents
SSE shall not release any third party from, or waive any provisions of, any confidentiality agreements or standstill agreement to which it or any of its Subsidiaries is a party.
5.2 Advice of Changes. Prior to the Closing, each party shall promptly advise the other party orally and in writing to the extent that it has knowledge of (i) any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply in any material respect with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement;provided,however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.
5.3 Access and Information.
(a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, SSE shall (and shall cause SSE’s Subsidiaries to) afford NVSL and its representatives (including, without limitation, officers and employees of NVSL and its affiliates and counsel, accountants and other professionals retained by NVSL) such reasonable access during normal business hours throughout the period prior to the Effective Time to the books, records (including, without limitation, tax returns and work papers of independent auditors), contracts, properties, personnel and to such other information relating to SSE and SSE’s Subsidiaries as NVSL may reasonably request;provided, however, that no investigation pursuant to thisSection 5.3 shall affect or be deemed to modify any representation or warranty made by SSE in this Agreement andprovided, further, that such access shall be subject to permissions from such Governmental Entities as may be required. Neither SSE nor any of its Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of its customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties will make appropriate and reasonable substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply.
(b) From the date hereof until the Effective Time, SSE shall, and shall cause SSE’s Subsidiaries to, promptly provide NVSL with (i) a copy of each report filed with a Government Regulator, (ii) a copy of each periodic report to its senior management and all materials relating to its business or operations furnished to its Board of Directors, (iii) a copy of each press release made available to the public and (iv) all other information concerning its business, properties and personnel as NVSL may reasonably request.
(c) NVSL will not, and will cause its representatives not to, use any information obtained pursuant to thisSection 5.3 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. Subject to the requirements of applicable law and the Confidentiality Agreement, NVSL will keep confidential, and will cause its representatives to keep confidential, all information and documents obtained pursuant to thisSection 5.3 unless such information (i) was already known to NVSL or an affiliate of NVSL, other than pursuant to a confidentiality agreement or other confidential relationship, (ii) becomes available to NVSL or an affiliate of NVSL from other sources not known by such party to be bound by a confidentiality agreement or other obligation of secrecy, (iii) is disclosed with the prior written approval of SSE or (iv) is or becomes readily ascertainable from published information or trade sources.
(d) From and after the date hereof, representatives of NVSL and SSE shall meet on a regular basis to discuss and plan for the conversion of SSE’s and its Subsidiaries’ data processing and related electronic informational systems to those used by NVSL and its Subsidiaries with the goal of conducting such conversion simultaneously with the consummation of the Bank Merger.
(e) SSE shall give notice, and shall cause SSE Bank to give notice, to a designee of NVSL, and shall invite such person to attend all regular and special meetings of the Board of Directors of SSE and SSE Bank. Such designees shall have no right to vote and shall not attend sessions of board and committees during which
33
Table of Contents
there is being discussed (i) matters involving this Agreement, (ii) information or material that SSE or SSE Bank is required or obligated to maintain as confidential under applicable laws or regulations or policies or procedures of SSE or SSE Bank, (iii) pending or threatened litigation or investigations if, in the opinion of counsel to SSE, the presence of such designees would or might adversely affect the confidential nature of or any privilege relating to the matters being discussed, or (iv) matters involving an Acquisition Proposal.
5.4 Applications; Consents.
(a) The parties hereto shall cooperate with each other and shall use their reasonable best efforts to prepare and file as soon as practicable after the date hereof all necessary applications, notices and filings to obtain all permits, consents, approvals and authorizations of all Governmental Entities that are necessary or advisable to consummate the transactions contemplated by this Agreement, including the Conversion. SSE and NVSL shall furnish each other with all information concerning themselves, their respective subsidiaries, and their respective subsidiaries’ directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with any application, notice or filing made by or on behalf of NVSL, SSE or any of their respective subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement and the Plan of Bank Merger. NVSL and SSE shall have the right to review in advance, and to the extent practicable each will consult with the other on, all the information relating to NVSL and SSE, as the case may be, and any of their respective subsidiaries, that appears in any filing made with, or written materials submitted to, any Governmental Entity pursuant to thisSection 5.4(a).
(b) As soon as practicable after the date hereof, each of the parties hereto shall, and they shall cause their respective subsidiaries to, use its best efforts to obtain any consent, authorization or approval of any third party that is required to be obtained in connection with the transactions contemplated by this Agreement and the Plan of Bank Merger.
5.5 Antitakeover Provisions. SSE and its Subsidiaries shall take all steps required by any relevant federal or state law or regulation or under any relevant agreement or other document to exempt or continue to exempt NVSL, NVSL Bank, the Agreement, the Plan of Bank Merger and the Merger from any provisions of an antitakeover nature in SSE’s or its Subsidiaries’ articles of incorporation and bylaws, or similar organizational documents, and the provisions of any federal or state antitakeover laws.
5.6 Additional Agreements. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including the Conversion, as expeditiously as possible, including using efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable Governmental Entities, effecting all necessary registrations, applications and filings (including, without limitation, filings under any applicable state securities laws) and obtaining any required contractual consents and regulatory approvals.
5.7 Publicity. The initial press release announcing this Agreement shall be a joint press release. Thereafter, SSE and NVSL shall consult with each other prior to issuing any press releases or otherwise making public statements (including any written communications to stockholders) with respect to the Merger and any other transaction contemplated hereby and in making any filings with any Governmental Entity or with any national securities exchange or market;provided, however, that nothing in thisSection 5.7 shall be deemed to prohibit any party from making any disclosure which its counsel deems necessary in order to satisfy such party’s disclosure obligations imposed by law.
5.8 Stockholder Meeting. SSE will submit to its stockholders this Agreement and any other matters required to be approved or adopted by stockholders in order to carry out the intentions of this Agreement. In furtherance of that obligation, SSE will take, in accordance with applicable law and its articles of incorporation and bylaws, all action necessary to call and give notice of a meeting of its stockholders (the “Stockholder
34
Table of Contents
Meeting”) for the purpose of considering and voting on approval and adoption of this Agreement and the transactions provided for in this Agreement and mail the Proxy Statement as promptly as possible, and convene and hold the Stockholder Meeting as promptly as possible after the mailing date of the Proxy Statement, after SSE has been notified that NVSL has filed all applications to Governmental Entities to obtain all approvals, consents and waivers required to permit the consummation of the transactions contemplated by this Agreement. SSE’s Board of Directors will use all reasonable best efforts to obtain from SSE’s stockholders a vote approving this Agreement. Except as provided in this Agreement, (i) SSE’s Board of Directors shall recommend to SSE’s stockholders approval of this Agreement, (ii) the Proxy Statement shall include a statement to the effect that SSE’s Board of Directors has recommended that SSE’s stockholders vote in favor of the approval of this Agreement and (iii) neither SSE’s Board of Directors nor any committee thereof shall withdraw, amend or modify, or propose or resolve to withdraw, amend or modify, the recommendation of SSE’s Board of Directors that SSE’s stockholders vote in favor of approval of this Agreement or make any statement in connection with the Stockholder Meeting inconsistent with such recommendation (collectively, a “Change in Recommendation”). Notwithstanding the foregoing, if (x) SSE has complied in all material respects with its obligations underSection 5.1, (y) SSE (1) has received an unsolicited bona fide written Acquisition Proposal from a third party that SSE’s Board of Directors concludes in good faith constitutes a Superior Proposal after giving effect to all of the adjustments that may be offered by NVSL pursuant to clause (3) below, (2) has notified NVSL, at least five business days in advance, of it is intention to effect a Change in Recommendation, specifying the material terms and conditions of any such Superior Proposal and furnishing to NVSL a copy of the relevant proposed transaction documents, if such exist, with the person making such Superior Proposal and (3) during the period of not less than five business days following SSE’s delivery of the notice referred to in clause (2) above and prior to effecting such Change in Recommendation, has negotiated, and has used reasonable best efforts to cause its financial and legal advisors to negotiate, with NVSL in good faith (to the extent that NVSL desires to negotiate) to make such adjustments in the terms and conditions of this Agreement so that such Acquisition Proposal ceases to constitute a Superior Proposal and (z) SSE’s Board of Directors, after consultation with and based on the advice of counsel, determines in good faith that it would result in a violation of its fiduciary duties under applicable law to recommend this Agreement, then in submitting the Agreement to stockholders at the Stockholder Meeting it may submit the Agreement without recommendation, or following submission of the Agreement to stockholders it may withdraw, amend or modify its recommendation, in which case the Board of Directors may communicate the basis for its lack of a recommendation, or the withdrawal, amendment or modification of its recommendation, to the stockholders in the Proxy Statement or an appropriate amendment or supplement thereto to the extent required by law.
5.9 Registration of Newco Common Stock.
(a) As promptly as reasonably practicable following the date hereof, Newco shall prepare and file with the SEC the Merger Registration Statement. The Merger Registration Statement shall contain proxy materials relating to the matters to be submitted to the SSE stockholders at the Stockholders Meeting, which may be combined with the Conversion Proxy/Prospectus (such proxy statement, and any amendments or supplements thereto, the “Proxy Statement”). SSE will furnish to Newco the information required to be included in the Merger Registration Statement and the Conversion Registration Statement with respect to its business and affairs and shall have the right to review and consult with Newco and approve the form of, and any characterizations of such information included in, the Merger Registration Statement and the Conversion Registration Statement prior to its being filed with the SEC. Newco shall use reasonable best efforts to have the Merger Registration Statement declared effective by the SEC and to keep the Merger Registration Statement effective as long as is necessary to consummate the Merger and the transactions contemplated hereby. SSE will use reasonable best efforts to cause the Proxy Statement to be mailed to SSE’s stockholders as promptly as practicable after the Merger Registration Statement is declared effective under the Securities Act. Newco will advise SSE, promptly after it receives notice thereof, of the time when the Merger Registration Statement has become effective, the issuance of any stop order, the suspension of the qualification of the Newco Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement or the Merger Registration Statement. If at any time prior to the Effective Time any information relating to Newco or SSE, or any of their respective affiliates, officers or directors, should be
35
Table of Contents
discovered by Newco or SSE which should be set forth in an amendment or supplement to any of the Merger Registration Statement or the Proxy Statement so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate amendment or supplement describing such information shall be promptly filed by Newco with the SEC and disseminated by SSE to the stockholders of SSE.
(b) Newco shall also take any action required to be taken under any applicable state securities laws in connection with the Merger and each of SSE and Newco shall furnish all information concerning it and the holders of SSE Common Stock as may be reasonably requested in connection with any such action.
(c) Newco shall use its best efforts to cause the Newco Common Stock to be issued by Newco in exchange for the shares of SSE Common Stock to be approved for issuance on the Nasdaq Global Market, subject to official notice of issuance, as promptly as practicable after the date hereof, and in any event prior to the Effective Time.
5.10 Notification of Certain Matters. Each party shall give prompt notice to the other of: (i) any event or notice of, or other communication relating to, a default or event that, with notice or lapse of time or both, would become a default, received by it or any of its Subsidiaries subsequent to the date of this Agreement and prior to the Effective Time, under any contract material to the financial condition, properties, businesses or results of operations of each party and its Subsidiaries taken as a whole to which each party or any Subsidiary is a party or is subject; and (ii) any event, condition, change or occurrence which individually or in the aggregate has, or which, so far as reasonably can be foreseen at the time of its occurrence, is reasonably likely to result in a Material Adverse Effect. Each of SSE and NVSL shall give prompt notice to the other party of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with any of the transactions contemplated by this Agreement.
5.11 Employee Benefit Matters.
(a) All persons who are employees of SSE Bank immediately prior to the Effective Time and whose employment is not specifically terminated at or prior to the Effective Time (a “Continuing Employee”) shall, at the Effective Time, become employees of NVSL Bank;provided, however, that in no event shall any of SSE Bank’s employees be officers of NVSL Bank, or have or exercise any power or duty conferred upon such an officer, unless and until duly elected or appointed to such position in accordance with the bylaws of NVSL Bank. All of the Continuing Employees shall be employed at the will of NVSL Bank and no contractual right to employment shall inure to such employees because of this Agreement.
(b) Each Continuing Employee shall be treated as a new employee of NVSL Bank for purposes of participation in NVSL Bank’s 401(k) plan and NVSL Bank’s employee stock ownership plan. Continuing Employees who become participants in an NVSL Bank or NVSL compensation and benefit plan (including without limitation NVSL Bank’s 401(k) plan) shall, for purposes of determining eligibility for and for any applicable vesting periods of such employee benefits only (and not for benefit accrual purposes except for vacation or as otherwise specifically set forth herein), be given credit for meeting eligibility and vesting requirements in such plans for service as an employee of SSE or any predecessor thereto before the Effective Time;provided, however, that Continuing Employees shall not be eligible to participate in NVSL Bank’s employee stock ownership plan until the first day of the second plan year following the Effective Time. This Agreement shall not be construed to limit the ability of NVSL or NVSL Bank to terminate the employment of any employee or to review employee benefits programs from time to time and to make such changes as they deem appropriate. As of the Effective Time, NVSL Bank shall make available employer-provided health and other employee welfare benefit plans to each Continuing Employee on the same basis as it provides such coverage to similarly situated NVSL Bank’s employees except that any pre-existing condition, eligibility waiting period or other limitations or exclusions otherwise applicable under such plans to new employees shall not apply
36
Table of Contents
to a Continuing Employee or their covered dependents who were covered under a similar SSE plan at the Effective Time of the Merger, and those Continuing Employees and their dependents will receive credit for deductibles, co-insurance amounts and other limitations for their expenses incurred under a similar SSE Employee Plan. Before the Closing Date, SSE shall, at the request and discretion of NVSL Bank, amend SSE’s 401(k) plan to cause SSE to no longer be a participating employer in the SSE 401(k) plan or to terminate the SSE 401(k) plan as of the Effective Time. Continuing Employees who become participants in the NVSL Bank 401(k) plan shall be permitted to roll over distributions (excluding loans) from the SSE 401(k) plan to the NVSL Bank 401(k) plan or to individual retirement accounts.
(c) NVSL shall honor all obligations under the employment agreements, consulting agreements and change-in-control agreements as set forth in SSE’s Disclosure Letter, in each case except to the extent superseded by agreements entered into in connection with entering into this Agreement.
(d) All employees of SSE, except any employee who is a party to an employment agreement, change in control agreement or other severance arrangement, who are involuntarily terminated in connection with the Merger at or before the Effective Time or who are involuntarily terminated within six (6) months following the Closing Date (other than for Cause) shall receive a severance payment equal to two (2) weeks of “base compensation” for each year of service, with a minimum payment equal to four weeks base compensation (for those who have at least one (1) full year of service at the time of the termination of employment), and up to a maximum of twelve (12) weeks of base compensation. “Cause” shall mean a good faith finding by NVSL Bank of:
(i) a conviction of the employee of, or a plea of guilty ornolo contendere by the employee to, any felony;
(ii) a material violation by the employee of federal or state laws or any other laws involving moral turpitude, as determined by a court or other governmental body of competent jurisdiction;
(iii) willful misconduct or gross negligence by the employee;
(iv) a material violation by the employee of any employment policy or procedure, as currently existing or as may be implemented in the future and provided to the employee; or
(vi) fraud, embezzlement, theft or material dishonesty by the employee against NVSL Bank or any customer or vendor thereof.
“Base compensation” shall mean:
(i) For salaried employees, the employee’s annual base salary at the rate in effect on his or her termination date or, if greater, the rate in effect on the date immediately preceding the Closing Date.
(ii) For employees whose compensation is determined in whole or in part on the basis of commission income, the employee’s annual base salary at the rate in effect on his or her termination date (or, if greater, the rate in effect on the date immediately preceding the Closing Date), if any, plus the commissions earned by the employee in the twelve (12) full calendar months preceding his or her termination date (or, if greater, the commissions earned in the twelve (12) full calendar months immediately preceding the Closing Date).
(iii) For hourly employees, the employee’s total hourly wages for the twelve (12) calendar months preceding his or her termination date or, if greater, the twelve (12) full calendar months preceding the Closing Date.
37
Table of Contents
5.12 Indemnification.
(a) From and after the Effective Time through the sixth anniversary of the Effective Time, Newco agrees to indemnify and hold harmless each present and former director and officer of SSE and its Subsidiaries and each officer or employee of SSE and its Subsidiaries that is serving or has served as a director or officer of another entity expressly at SSE’s request or direction (each, an “Indemnified Party”), against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, amounts paid in settlement, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement), whether asserted or claimed prior to, at or after the Effective Time, as they are from time to time incurred, in each case to the fullest extent such person would have been indemnified or have the right to advancement of expenses pursuant to SSE’s articles of incorporation and bylaws as in effect on the date of this Agreement.
(b) Any Indemnified Party wishing to claim indemnification underSection 5.12(a), upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Newco thereof, but the failure to so notify shall not relieve Newco of any liability it may have hereunder to such Indemnified Party if such failure does not materially and substantially prejudice Newco.
(c) Newco shall use its reasonable best efforts to maintain SSE’s existing directors’ and officers’ liability insurance policy (or provide a policy providing comparable coverage and amounts on terms no less favorable to the persons currently covered by SSE’s existing policy, including Newco’s existing policy if it meets the foregoing standard) covering persons who are currently covered by such insurance for a period of three years after the Effective Time;provided,however, that in no event shall NVSL be obligated to expend, in order to maintain or provide insurance coverage pursuant to thisSection 5.12(c), an amount per annum in excess of 200% of the amount of the annual premiums paid by SSE as of the date hereof for such insurance (“Maximum Insurance Amount”);provided further, that if the amount of the annual premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Insurance Amount, Newco shall obtain the most advantageous coverage obtainable for an annual premium equal to the Maximum Insurance Amount.
(d) In the event Newco or any of its successors or assigns (i) consolidates with or merges into any other person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) liquidates, dissolves, transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, to the extent necessary, proper provision shall be made so that such successor and assign of Newco and its successors and assigns assume the obligations set forth in thisSection 5.12.
(e) The provisions of thisSection 5.12 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her representatives.
5.13 Conversion from Mutual to Stock Form. Commencing promptly after the date of this Agreement, NVSL MHC, NVSL, NVSL Bank and Newco will use reasonable best efforts to, and will take all reasonable steps necessary, to effect promptly the Conversion. In addition, without limiting the generality of the foregoing, NVSL MHC, NVSL and NVSL Bank shall cause the following to be done:
(a) NVSL MHC will (i) as promptly as practicable after the Conversion Registration Statement is declared effective by the SEC, and the requisite approvals from the Regulatory Authorities have been obtained, take all steps necessary to duly call, give notice of, convene and hold the Special Meeting of Members (as defined in the Plan of Conversion) for the purpose of approving the Plan of Conversion, and for such other purposes as may be, in the reasonable judgment of NVSL MHC, necessary or desirable, (ii) recommend to the Voting Members (as defined in the Plan of Conversion) the approval of the aforementioned matters to be submitted by it to the Voting Members, and (iii) cooperate and consult with SSE with respect to each of the foregoing matters.
38
Table of Contents
(b) NVSL will (i) as promptly as practicable after the Conversion Registration Statement is declared effective by the SEC, and the requisite approvals from the Regulatory Authorities have been obtained, take all steps necessary to duly call, give notice of, convene and hold the Meeting of Stockholders (as defined in the Plan of Conversion) for the purpose of approving the Plan of Conversion, and for such other purposes as may be, in the reasonable judgment of NVSL, necessary or desirable, (ii) recommend to the holders of NVSL common stock the approval of the aforementioned matters to be submitted by it to the holders of NVSL common stock, and (iii) cooperate and consult with SSE with respect to each of the foregoing matters.
(c) NVSL MHC, NVSL, NVSL Bank and Newco will use reasonable best efforts to prepare and file all regulatory applications required to be filed in connection with the Conversion.
(d) NVSL and Newco shall prepare as promptly as practicable, and SSE shall cooperate in the preparation of, the Conversion Proxy/Prospectus. Such Conversion Proxy/Prospectus shall be incorporated into the Conversion Registration Statement. Newco shall file the Conversion Registration Statement with the SEC as promptly as practicable. Newco shall use its reasonable best efforts to have the Conversion Registration Statement declared effective under the Securities Act as promptly as practicable after such filing.
(e) SSE shall provide Newco with any information concerning it that Newco may reasonably request in connection with the Conversion Proxy/Prospectus, and Newco shall notify SSE promptly of the receipt of any comments of the SEC, the OTS and any other Government Regulator with respect to the Conversion Proxy/Prospectus and of any requests by the SEC, the OTS or any other Government Regulator for any amendment or supplement thereto or for additional information, and shall promptly provide to SSE copies of all correspondence between Newco or any representative of Newco and the SEC, the OTS or any other Government Regulator. Newco shall give SSE and its counsel the opportunity to review and comment on the Conversion Proxy/Prospectus prior to its being filed with the SEC, the OTS and any Government Regulator and shall give SSE and its counsel the opportunity to review and comment on all amendments and supplements to the Conversion Proxy/Prospectus and all responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the SEC, the OTS and any Government Regulator. Each of Newco and SSE agrees to use all reasonable efforts, after consultation with the other party hereto, to respond promptly to all such comments of and requests by the SEC, the OTS and any Government Regulator and to cause the Conversion Proxy/Prospectus and all required amendments and supplements thereto to be mailed to the Participants and the holders of NVSL common stock at the earliest practicable time.
(f) Each party hereto shall promptly notify the other if at any time it becomes aware that the Conversion Proxy/Prospectus or the Conversion Registration Statement contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. In such event, the parties shall cooperate in the preparation of a supplement or amendment to such Conversion Proxy/Prospectus, which corrects such misstatement or omission, and Newco shall file an amended Conversion Registration Statement with the SEC.
(g) If any shares of Newco Common Stock that are offered for sale in the subscription offering that is conducted as part of the Offering remain unsold, then, at Newco’s discretion, such shares may be issued to SSE’s stockholders as part of the Merger Consideration if necessary to complete the Conversion.
5.14 Accountant’s Comfort Letter. SSE shall use its reasonable best efforts to cause to be delivered to Newco’s Conversion financial advisor a letter from its independent public accountants addressed to Newco’s Conversion financial advisor, dated a date within two business days before the date on which the Conversion Registration Statement shall become effective, in form and substance reasonably satisfactory to Newco’s Conversion financial advisor and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Conversion Registration Statement.
39
Table of Contents
5.15 Cooperation. SSE agrees that it shall, and shall cause SSE Bank and the other SSE Subsidiaries, to: (i) make any accounting adjustments or entries to its books of account and other financial records; (ii) sell or transfer any investment securities held by it; (iii) charge-off any Loan; (iv) create any new reserve account or make additional provisions to any other existing reserve account; (v) make changes in any accounting method; (vi) accelerate, defer or accrue any anticipated obligation, expense or income item; and (vii) make any other adjustments which would affect the financial reporting of the Surviving Corporation, on a consolidated basis after the Effective Time, in each case as NVSL shall reasonably request provided, however, that neither SSE nor SSE Bank shall be obligated to take any such requested action until immediately prior to the Closing and at such time as all conditions precedent to SSE’s obligations under this Agreement (except for the completion of actions to be taken at the Closing) have been satisfied, and that no such adjustment which SSE or SSE Bank would not have been required to make but for the provisions of thisSection 5.14 in and of itself shall result in a breach of any warranty or representation made herein, of SSE Common Stock, or delay the Closing or NVSL’s receipt of the Regulatory Approvals.
5.16 Advisory Board of Directors.NVSL Bank shall establish an advisory board for the purpose of advising NVSL Bank on its operations in the area served by SSE Bank’s offices and generating additional business contacts for NVSL Bank in such area. NVSL Bank shall maintain the advisory board for a minimum of one (1) year following the Effective Date. Thereafter, NVSL Bank may disband the advisory board at any time in its sole discretion. Except for the director of SSE that may serve as a director of both Newco and NVSL Bank as contemplated bySection 5.19 hereof, each other director of SSE as of the Effective Time shall be invited to serve on the advisory board. The advisory board shall meet monthly and each advisory director shall receive $400 per meeting attended. Such advisory board shall comply with the regulations of the OTS.
5.17. Formation of Newco; Accession. As promptly as reasonably practicable after the date of this Agreement, NVSL shall incorporate a newly formed holding company (“Newco”). Newco will be a corporation duly organized and in good standing or legal existence, as appropriate, under the laws of the jurisdiction in which it is organized with full corporate power and authority to own or lease all of its properties and assets and to carry on its business as then conducted and shall be duly licensed or qualified to do business and be in good standing or legal existence, as appropriate, in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such licensing or qualification. Promptly following the organization of Newco, the board of directors of Newco shall approve this Agreement and the transactions contemplated hereby, and NVSL shall cause Newco to execute and deliver an appropriate instrument of accession to this Agreement, whereupon Newco shall become a party to, and be bound by, this Agreement.
5.18 Availability of Funds. Newco will have available to it at the Effective Time, sources of capital sufficient to pay the aggregate Cash Consideration.
5.19 Directorship. Provided that Elmer F. Laydon and Alphonse F. Spadaro, Jr. are serving as directors of SSE at the Effective Time, Newco and NVSL Bank shall invite Messrs. Laydon and Spadaro to serve on both the board of directors of Newco (as of the Effective Time) and NVSL Bank (as of the effective time of the Bank Merger). If Mr. Laydon or Mr. Spadaro does not accept the invitation to serve on the board of directors of both Newco and NVSL Bank, neither Newco nor NVSL Bank is obligated to select and invite another individual. Newco and NVSL Bank shall take all necessary action, including adopting amendments to their respective bylaws, to permit Messrs. Laydon and Spadaro to serve as directors of Newco for a period of three (3) years from the Effective Time and as directors of NVSL Bank for a period of three (3) years from the effective time of the Bank Merger.
5.20 Subordination, Non-Disturbance and Attornment Agreements. Before the Closing Date, with respect to each leased real property that serves as a banking office of SSE or SSE Bank, SSE, SSE Bank or other Subsidiary of SSE, as appropriate, shall use its reasonable best efforts to obtain and record a Subordination, Non-Disturbance and Attornment Agreement with respect to each such leased real property.
40
Table of Contents
ARTICLE VI
CONDITIONSTO CONSUMMATION
6.1 Conditions to Each Party’s Obligations. The respective obligations of each party to effect the Merger shall be subject to the satisfaction of the following conditions:
(a)Stockholder Approval. This Agreement shall have been approved by the requisite vote of SSE’s stockholders in accordance with applicable laws and regulations.
(b)Regulatory Approvals. All approvals, consents or waivers of any Governmental Entity required to permit consummation of the Conversion and the Merger and the other transactions contemplated by this Agreement shall have been obtained and shall remain in full force and effect, and all statutory waiting periods shall have expired;provided, however, that none of such approvals, consents or waivers shall contain any condition or requirement that would so materially and adversely impact the economic or business benefits to NVSL of the transactions contemplated hereby that, had such condition or requirement been known, NVSL would not, in its reasonable judgment, have entered into this Agreement.
(c)No Injunctions or Restraints; Illegality. No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger or the Bank Merger and no Governmental Entity shall have instituted any proceeding for the purpose of enjoining or prohibiting the consummation of the Merger or the Bank Merger or any transactions contemplated by this Agreement. No statute, rule or regulation shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits or makes illegal consummation of the Merger.
(d)Third Party Consents. The parties shall have obtained the consent or approval of each person (other than the governmental approvals or consents referred to inSection 6.1(b)) whose consent or approval shall be required to consummate the transactions contemplated by this Agreement, except those for which failure to obtain such consents and approvals would not, individually or in the aggregate, have a Material Adverse Effect on NVSL (after giving effect to the consummation of the transactions contemplated hereby).
(e)Tax Opinions. Newco and SSE shall have received opinions of Kilpatrick Stockton LLP and Day Pitney LLP, respectively, dated as of the Closing Date, in form and substance customary in transactions of the type contemplated hereby, and reasonably satisfactory to Newco and SSE, as the case may be, substantially to the effect that on the basis of the facts, representations and assumptions set forth in such opinions which are consistent with the state of facts existing at the Effective Time, (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the IRC and (ii) Newco and SSE will each be a party to that reorganization within the meaning of Section 368(b) of the IRC. Such opinions may be based on, in addition to the review of such matters of fact and law as counsel considers appropriate, representations contained in certificates of officers of Newco, SSE and others.
(f)Registration Statement; Blue Sky Laws. The Merger Registration Statement shall have been declared effective by the SEC and no proceedings shall be pending or threatened by the SEC to suspend the effectiveness of the Merger Registration Statement, and Newco shall have received all required approvals by state securities or “blue sky” authorities with respect to the transactions contemplated by this Agreement.
(g)Consummation of Conversion.The Conversion shall have been consummated.
6.2 Conditions to the Obligations of NVSL. The obligations of NVSL to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by NVSL:
(a)SSE’s Representations and Warranties. Each of the representations and warranties of SSE contained in this Agreement and in any certificate or other writing delivered by SSE pursuant hereto shall be true and correct in all material respects at and as of the Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.
41
Table of Contents
(b)Performance of SSE’s Obligations. SSE shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time.
(c)Officers’ Certificate. NVSL shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of SSE to the effect that the conditions set forth inSections 6.2(a) and(b) have been satisfied.
(d)No Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to SSE.
6.3 Conditions to the Obligations of SSE. The obligations of SSE to effect the Merger shall be further subject to the satisfaction of the following additional conditions, any one or more of which may be waived by SSE:
(a)NVSL’s Representations and Warranties. Each of the representations and warranties of NVSL contained in this Agreement and in any certificate or other writing delivered by NVSL pursuant hereto shall be true and correct in all material respects at and as of the Closing Date as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date need only be true and correct as of such date.
(b)Performance of NVSL’s Obligations. NVSL shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time.
(c)Officers’ Certificate. SSE shall have received a certificate signed by the chief executive officer and the chief financial or principal accounting officer of NVSL to the effect that the conditions set forth inSections 6.3(a) and(b) have been satisfied.
ARTICLE VII
TERMINATION
7.1 Termination. This Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time, by action taken or authorized by the Board of Directors of the terminating party, either before or after any requisite stockholder approval:
(a) by the mutual written consent of NVSL and SSE; or
(b) by either NVSL or SSE, in the event of the failure of SSE’s stockholders to approve the Agreement at the Stockholder Meeting;provided,however, that SSE shall only be entitled to terminate the Agreement pursuant to this clause if it has complied in all material respects with its obligations underSection 5.8; or
(c) by either NVSL or SSE, if (i) any approval, consent or waiver of a Governmental Entity required to permit consummation of the transactions contemplated by this Agreement shall have been denied, (ii) any such Governmental Entity has communicated to NVSL or SSE that any such approval, consent or waiver shall not be forthcoming, or (iii) any Governmental Entity of competent jurisdiction shall have issued a final, unappealable order enjoining or otherwise prohibiting consummation of the transactions contemplated by this Agreement; or
(d) by either NVSL or SSE, in the event that the Merger is not consummated by March 30, 2011, unless the failure to so consummate by such time is due to the failure of the party seeking to terminate this Agreement or perform or observe the covenants and agreements of such party set forth herein; or
(e) by either NVSL or SSE (provided that the party seeking termination is not then in material breach of any representation, warranty, covenant or other agreement contained herein), in the event of a breach of any covenant or agreement on the part of the other party set forth in this Agreement, or if any representation or warranty of the other party shall have become untrue, in either case such that the conditions set forth inSections 6.2(a) or(b) orSections 6.3(a)or(b), as the case may be, would not be satisfied and such breach or untrue
42
Table of Contents
representation or warranty has not been or cannot be cured within thirty (30) days following written notice to the party committing such breach or making such untrue representation or warranty; or
(f) by NVSL, (i) if SSE shall have materially breached its obligations underSection 5.1 orSection 5.8 or (ii) if the Board of Directors of SSE does not publicly recommend in the Proxy Statement that stockholders approve and adopt this Agreement or if, after recommending in the Proxy Statement that stockholders approve and adopt this Agreement, the Board of Directors of SSE withdraws, qualifies or revises such recommendation or takes any action in any respect materially adverse to NVSL.
7.2 Termination Fee.
(a) SSE shall pay to NVSL a fee if this Agreement is terminated as follows:
(i) if this Agreement is terminated by NVSL pursuant toSection 7.1(f), so long as at the time of such termination NVSL is not in material breach of any representation, warranty or material covenant contained herein, SSE shall make payment to NVSL of a termination fee in the amount of $900,000; and
(ii) if this Agreement is terminated by (A) either party pursuant toSection 7.1(b) or (B) by NVSL pursuant toSection 7.1(e) because of SSE’s breach of any representation, warranty, covenant or agreement under this Agreement, and in the case of (A) or (B) an Acquisition Proposal with respect to SSE shall have been publicly announced or otherwise communicated or made known to SSE’s Board of Directors (or any person shall have publicly announced, communicated or made known to SSE’s Board of Directors an intention to make an Acquisition Proposal) at any time after the date of this Agreement and on or before the date of the Stockholders Meeting, in the case of clause (A), or the date of termination, in the case of clause (B), then SSE shall pay (x) $450,000 to NVSL on the second business day following such termination and (y) if within 12 months after such termination SSE enters into a definitive agreement with respect to, or consummates, an Acquisition Proposal, then SSE shall pay $450,000 on the date of such execution or consummation. Notwithstanding anything to the contrary contained herein, SSE shall not be obligated to pay aggregate termination fees in excess of $900,000 pursuant to thisSection 7.2(a).
(b) If this Agreement is terminated by either party pursuant to either (x)Section 7.1(d) because the condition set forth inSection 6.1(g) shall not have been satisfied or (y)Section 7.1(c), then in order to reimburse SSE for its expenses, including the fees and expenses of lawyers, accountants and investment bankers, in connection with the termination of the transactions contemplated by this Agreement:
(i) in the case of termination under clause (x):
(A) NVSL Shall pay to SSE a termination fee of $900,000 if the failure to satisfy the condition set forth inSection 6.1(g) results from NVSL MHC’s election not to consummate the Conversion after having received the approval, consent or waiver of each Governmental Entity and satisfied all other conditions precedent required to consummate the Conversion; or
(B) NVSL shall pay to SSE a termination fee of $350,000 if the failure to satisfy the condition set forth inSection 6.1(g) results from any other reason; and
(ii) in the case of termination under clause (y), NVSL shall pay to SSE a termination fee of $350,000.
(iii) Notwithstanding anything to the contrary contained herein, NVSL shall not be obligated to pay a termination fee pursuant to bothSection 7.2(b)(i)(B) andSection 7.2(b)(ii) and aggregate termination fees in excess of $900,000 pursuant to thisSection 7.2(b).
(c) Any fee payable pursuant to thisSection 7.2 shall be made by wire transfer of immediately available funds within two days after notice of demand for payment.
(d) The parties acknowledge that the agreements contained inSection 7.2(a) and (b) are an integral part of the transactions contemplated by this Agreement, that without such agreements the parties would not have entered into this Agreement and that such amounts do not constitute a penalty. If either party fails to pay
43
Table of Contents
the amounts due by them underSection 7.2(a) or (b) within the time periods specified, such party shall pay the costs and expenses (including reasonable legal fees and expenses) incurred by the other party in connection with any action, including the filing of any lawsuit, taken to collect payment of such amounts, together with interest on the amount of any such unpaid amounts at the prime lending rate prevailing during such period as published inThe Wall Street Journal, calculated on a daily basis from the date such amounts were required to be paid until the date of actual payment.
7.3 Effect of Termination. In the event of termination of this Agreement by either NVSL or SSE as provided inSection 7.1, this Agreement shall forthwith become void and, subject toSection 7.2, have no effect, and there shall be no liability on the part of any party hereto or their respective officers and directors, except that (i) Sections 5.3(c),7.2and8.6, shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, no party shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement.
ARTICLE VIII
CERTAIN OTHER MATTERS
8.1 Interpretation. When a reference is made in this Agreement to Sections or Exhibits such reference shall be to a Section of, or Exhibit to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for ease of reference only and shall not affect the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed followed by the words “without limitation.” Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Any reference to gender in this Agreement shall be deemed to include any other gender.
8.2 Survival. Only those agreements and covenants of the parties that are by their terms applicable in whole or in part after the Effective Time, includingSection 5.12 of this Agreement, shall survive the Effective Time. All other representations, warranties, agreements and covenants shall be deemed to be conditions of the Agreement and shall not survive the Effective Time.
8.3 Waiver; Amendment. Prior to the Effective Time, any provision of this Agreement may be: (i) waived in writing by the party benefited by the provision or (ii) amended or modified at any time (including the structure of the transaction) by an agreement in writing between the parties hereto except that, after the vote by the stockholders of SSE, no amendment or modification may be made that would reduce the amount or alter or change the kind of consideration to be received by holders of SSE Common Stock or that would contravene any provision of the CBCA or the applicable state and federal banking laws, rules and regulations.
8.4 Counterparts. This Agreement may be executed in counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same instrument.
8.5 Governing Law. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Connecticut, without regard to conflicts of laws principles (except to the extent mandatory provisions of federal law are applicable).
8.6 Expenses. Each party hereto will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby except as set forth in Section 7.2(b).
8.7 Notices. All notices, requests, acknowledgments and other communications hereunder to a party shall be in writing and shall be deemed to have been duly given when delivered by hand, overnight courier or facsimile transmission to such party at its address or facsimile number set forth below or such other address or facsimile transmission as such party may specify by notice (in accordance with this provision) to the other party hereto.
44
Table of Contents
If to NVSL, to:
Naugatuck Valley Financial Corporation
333 Church Street
Naugatuck, Connecticut 06770
Facsimile: (203) 720-5016
Attention: John C. Roman
With copies to:
Kilpatrick Stockton LLP
Suite 900, 607 14th Street, NW
Washington, DC 20005
Facsimile: (202) 204-5630
Attention: Paul M. Aguggia, Esq.
Victor L. Cangelosi, Esq.
Sean P. Kehoe, Esq.
If to SSE, to:
Southern Connecticut Bancorp, Inc.
215 Church Street
New Haven, Connecticut 06511
Facsimile: (203) 787-5056
Attention: John H. Howland
With copies to:
Day Pitney LLP
242 Trumbull Street
Hartford CT 06103-1212
Facsimile (860) 881 2523
Attention: Robert M. Taylor III, Esq.
8.8 Entire Agreement; etc. This Agreement, together with the Disclosure Letters, represents the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. All terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Except forSection 5.12, which confers rights on the parties described therein, nothing in this Agreement is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement.
8.9 Successors and Assigns; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement may not be assigned by either party hereto without the written consent of the other party.
8.10 Specific Performance. Each of the parties hereto acknowledges that the other party would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Each of the parties hereto therefore agrees that, without the necessity of proving actual damages or posting bond or other security, the other party shall be entitled to temporary or permanent injunction or injunctions to prevent breaches of such performance and to enforce specifically the terms and provisions of this Agreement in addition to any other remedy to which they may be entitled, at law or in equity.
[Signature page follows]
45
Table of Contents
In Witness Whereof, the parties hereto have caused this Agreement and Plan of Merger to be executed by their duly authorized officers as of the date first above written.
Naugatuck Valley Financial Corporation | ||
By: | /S/ JOHN C. ROMAN | |
President and Chief Executive Officer |
Southern Connecticut Bancorp, Inc. | ||
By: | /S/ JOHN H. HOWLAND | |
President and Chief Operating Officer |
Acceded to as of June 8, 2010 |
Naugatuck Valley Financial Corporation (a Maryland corporation) |
(Newco) |
By: | /S/ JOHN C. ROMAN | |
President and Chief Executive Officer |
46
Table of Contents
September 17, 2010
Board of Directors
Naugatuck Valley Financial Corporation
333 Church Street
Naugatuck, CT 06770
Members of the Board:
Naugatuck Valley Financial Corporation (“NVSL”), and Southern Connecticut Bancorp, Inc. (“SSE”) have entered into a First Amendment dated September 17, 2010, to the Agreement and Plan of Merger, dated as of February 22, 2010 (collectively, the “Agreement”), pursuant to which SSE will be merged with and into Newco (as defined in the Agreement, hereafter referred to as “new Naugatuck Valley Financial”). You have requested our opinion as to the fairness, from a financial point of view to holders of NVSL common stock, of the consideration to be paid to shareholders of SSE pursuant to the Agreement.
In connection with the merger, it is intended that NVSL will reorganize and convert from the mutual holding company form of organization to the stock holding company form of organization pursuant to certain transactions (the “Conversion”) as the result of which, inter alia, Naugatuck Valley Savings and Loan will become a wholly owned subsidiary of new Naugatuck Valley Financial, and that in connection with such Conversion, new Naugatuck Valley Financial will conduct a subscription offering of its common stock, and if necessary a community and/or syndicated community offering, and exchange of its common stock for shares of NVSL common stock held by persons other than Naugatuck Valley Mutual Holding Company, all pursuant to a plan of conversion and subject to regulatory review and amendment in connection with such review as provided therein.
Under the terms of the Agreement, each share of SSE common stock, $0.01 par value, issued and outstanding immediately prior to the merger (“SSE Shares”) will be converted into, at the election of the holder, the right to receive either (a) shares of common stock of new Naugatuck Valley Financial, the exchange ratio to be determined based upon the conversion appraisal of new Naugatuck Valley Financial and with a market value of $6.75 per share of SSE (“Stock Consideration”) or (b) $6.75 in cash, without interest (“Cash Consideration”), subject to proration so that 60% of the total number of SSE Shares shall be converted into the Stock Consideration and the remaining SSE Shares shall be converted into the Cash Consideration. The aggregate of the Cash Consideration and Stock Consideration payable and/or issuable pursuant to the Agreement is referred to herein as the “Merger Consideration”. The terms and conditions of the merger are more fully set forth in the Agreement.
Ostrowski & Company, Inc., (“O&Co”) as part of its financial advisory business, is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions. We have acted as NVSL’s financial advisor in connection with the merger and will receive a fee for our services, a portion of which is contingent upon consummation of the merger, and NVSL has agreed to indemnify us against certain liabilities in connection with our engagement.
In arriving at our opinion, we have reviewed, analyzed and relied upon material bearing upon the financial and operating condition of NVSL and SSE. In connection with this opinion, we have reviewed, among other things: (i) the Agreement; (ii) certain publicly available financial statements and other historical financial information of NVSL; (iii) certain publicly available financial statements and other historical financial information of SSE; (iv) internal SSE financial projections for the year ending December 31, 2010 prepared by and reviewed with management of SSE; (v) internal financial projections for NVSL for the year ending December 31, 2010 prepared by and reviewed with management of NVSL; (vi) the publicly reported historical price and trading activity for NVSL’s and SSE’s common stock, including a comparison of certain financial and stock market information for NVSL and SSE with similar publicly available information for certain other financial institutions deemed comparable or otherwise relevant; (vii) the financial terms of certain recent business combinations in the banking industry that we deemed comparable or otherwise relevant; and, (viii) such other studies and analyses and financial, economic and market criteria we considered appropriate. We also discussed with members of senior management of NVSL the business, financial condition, regulatory matters, results of operations and prospects of NVSL and held similar discussion with certain members of senior management of SSE regarding the business, financial condition, regulatory matters, results of operations and prospects of SSE.
B-1
Table of Contents
In performing our review, we have relied upon the accuracy and completeness of all of the financial and other information that was provided to us or discussed with us by NVSL or SSE or that was otherwise publicly available and reviewed by us and have assumed such accuracy and completeness for purposes of arriving at our opinion. We have further relied on the assurances of management of NVSL and SSE as to the reasonableness and achievability of the financial and operating forecasts and projections (and assumptions and bases therefore) and that they are not aware of any facts or circumstances that would make any of the information provided to us inaccurate or misleading. We have not been asked to and have not undertaken an independent verification of any of such information and we do not assume any responsibility or liability for the accuracy or completeness thereof. We did not make an independent evaluation or appraisal of the specific assets and liabilities (contingent or otherwise) of NVSL or SSE.
In connection with rendering our opinion, we have assumed that there has been no change material to our analysis in NVSL’s or SSE’s assets, financial condition, results of operation, business or prospects since the date of the most recent financial statements made available to us. We have also assumed in all respects material to our analysis that NVSL and SSE will remain as going concerns for all periods relevant to our analyses, that all of the representations and warranties contained in the Agreement and all related agreements are true and correct, that each party to the Agreement will perform all of the covenants required to be performed by such party under the Agreement, that the conditions precedent in the Agreement are not waived and that the merger will qualify as a tax-free reorganization for federal income tax purposes. We have also assumed that in the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the merger, no restrictions, amendments or modifications will be imposed that will have a material adverse effect on the future results of operations or financial condition of the combined entity or the contemplated benefits of the merger. Finally, with your consent, we have relied upon the advice NVSL has received from its legal, accounting and tax advisors as to all legal, accounting and tax matters related to the merger and the other transactions contemplated by the Agreement.
We have considered such financial and other factors as we have deemed appropriate under the circumstances, including, among others, the following: (i) the historical and current financial position and results of operations of NVSL and SSE; (ii) the assets and liabilities of NVSL and SSE; and (iii) the nature and terms of certain other merger transactions involving financial institutions. We have also taken into account our assessment of general economic, market and financial conditions and our experience in other transactions, as well as our experience in valuation of financial institutions and knowledge of the financial services industry generally. Our opinion is necessarily based on conditions as they exist and can be evaluated on the date hereof and the information made available to us through the date hereof. Events occurring after the date hereof could materially affect this opinion. We have not undertaken to update, revise, reaffirm or withdraw this opinion or otherwise comment upon events occurring after the date hereof.
Our opinion is directed at the Board of Directors of NVSL in connection with its consideration of the merger and does not constitute a recommendation to any holder of NVSL common stock as to how such holder should vote at any meeting called to consider and vote upon the merger. Our opinion is directed only to the fairness of the Merger Consideration to holders of NVSL common stock from a financial point of view and does not address the underlying business decision of NVSL to engage in the merger, the relative merits of the merger as compared to any other alternative business strategies that might exist for NVSL or the effects of any other transaction in which NVSL might engage.
Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Merger Consideration to be paid to shareholders of SSE is fair, from a financial point of view, to holders of NVSL common stock.
Very truly yours,
/s/ Ostrowski & Company, Inc.
B-2
Table of Contents
80 State Street * Albany, NY 12207 (518) 426-0100 * FAX (518) 426-0104 |
September 17, 2010
The Board of Directors
Southern Connecticut Bancorp, Inc.
215 Church Street
New Haven, CT 06510
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of view, to Southern Connecticut Bancorp, Inc. (“SSE”) of the Merger Consideration, offered pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated February 22, 2010 and as amended on September 17, 2010 among SSE, the Naugatuck Valley Financial Corporation (“NVSL”), and Newco.
Pursuant to the Agreement, NVSL MHC will reorganize and convert from the mutual holding company form of organization to the stock holding company form of organization pursuant to a yet to be adopted Plan of Conversion (the “Conversion”). Pursuant to the Conversion and subject to the satisfaction of certain conditions outlined in the Agreement, SSE shall be merged with and into Newco with the surviving entity being Newco (the “Merger”).
Under the terms of, and subject to certain conditions as defined in the Merger Agreement, upon the consummation of the Merger, each issued and outstanding share of common stock, $0.01 par value, of SSE, immediately prior to the merger, other than certain shares specified in the Merger Agreement, will be converted into the right at the election of the holder to receive (i) $6.75 in cash without interest, (the “Cash Consideration”), (ii) the number of shares of Newco Common Stock equal to the Exchange Ratio, (the “Stock Consideration”), or (iii) a combination of the Cash Consideration and the Stock Consideration, subject to the procedures set forth in the Merger Agreement (collectively, the “Merger Consideration”). The terms and conditions of the Merger are more fully set forth in the Merger Agreement.
Northeast Capital & Advisory, Inc., as part of its investment banking business, is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.
In connection with this opinion, we have reviewed, among other things, the Merger Agreement and certain of the exhibits and schedules thereto; certain publicly available financial statements for the three years ended December 31, 2008 of SSE and NVSL that we deemed relevant; certain interim reports of SSE and NVSL, and certain other communications from SSE to their shareholders; internal financial budgets and projections for SSE and NVSL for the years ending December 31, 2009 and 2010 prepared by and reviewed with the respective managements; and the views of senior management of SSE and NVSL, based on limited discussions with members of senior management, regarding their respective business, financial condition, results of operation and future prospects, the pro forma financial impact of the Merger on NVSL, based on assumptions relating to transaction expenses, purchase accounting adjustments and cost savings determined by senior management of NVSL (including the timing, amount and achievability thereof); the publicly reported historical price and trading activity for SSE’s and NVSL’s common stock; the financial terms of certain recent business combinations in the
C-1
Table of Contents
banking industry, to the extent publicly available; the current market environment generally and the banking environment in particular; and such other information, financial studies, and analyses and investigations, and financial, economic, and market criteria as we considered relevant.
In conducting our review and arriving at our opinion, we relied upon the accuracy and completeness of all the financial, accounting, legal, tax, and other information that was available to us from public sources, that was provided to us by SSE and NVSL or their respective representatives or that was otherwise reviewed by us and have assumed such accuracy and completeness for purposes of rendering this opinion. We have not assumed any responsibility for independently verifying any of such information. We have further relied upon the assurances of the respective managements of SSE and NVSL as to the completeness, reasonableness and achievability of the financial and operating forecasts and projections (and the assumptions and bases therefore) provided to us, and we have assumed that such forecasts and projections reflect the best currently available estimates and judgments of such managements and that such forecasts and projections will be realized in the amounts and in the time periods currently estimated by such managements. We express no opinion as to such financial projections and estimates or the assumptions upon which they are based. We are not experts in the independent verification of the adequacy of allowances for loan and lease losses and we have assumed, with your consent, that the individual and aggregate allowance for loan losses for SSE and NVSL are adequate to cover any such losses. In rendering our opinion, we have not made or obtained any evaluations or appraisals of the property of SSE or NVSL, nor have we reviewed any credit files. We have also assumed that there has been no material change in SSE’s or NVSL’s assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to us. We have assumed that the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes and that SSE and NVSL will remain in all material respects as going concerns for all periods relevant to our analyses, that all of the representations and warranties contained in the Merger Agreement and all related agreements are true and correct, except as would not have a material adverse effect on the party making the representations and warranties, that each party to the agreements will perform all covenants required to be performed, and that no material conditions in the Merger Agreement are waived. Finally, with your consent, we have relied upon the advice SSE received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the Merger and the other transactions contemplated by the Merger Agreement.
In conducting our analysis and arriving at our opinion as expressed herein, we have considered such financial and other factors as we have deemed appropriate in the circumstances. We have also taken into account our assessment of general economic, market, financial, and other conditions, as in effect on, and the information made available to us as of, the date hereof. Events occurring after the date hereof could materially affect this opinion. We are expressing no opinion herein as to the prices at which SSE’s common stock may trade at any time. Furthermore, we are not expressing any opinion herein with respect to, the pending appraisal range of NVSL to be determined by an independent appraiser in the Conversion. Northeast Capital has not considered and is not expressing any opinion herein as to the price at which NVSL or its successor entities will trade following consummation of the Conversion and the Merger. In rendering our opinion, we have assumed that in the course of obtaining the necessary approvals or other consents for the Merger, no conditions or restrictions, including any divestiture requirements or onerous financing obligations or other requirements, will be imposed that would have a material adverse effect on the contemplated benefits of the Merger to either SSE or NVSL.
Our opinion is directed only to the fairness, from a financial point of view, of the Merger Consideration to holders of SSE Common Stock, and does not address the underlying business decision of SSE to engage in the Merger nor the relative merits of the Merger as compared to any other alternative business strategies that might exist for SSE or the effect of any other transaction in which SSE might engage. Our opinion is not to be quoted or referenced, in whole or in part, in any document, nor shall this opinion be used for any other purpose, without Northeast Capital’s prior written consent.
Northeast Capital will receive a fee for rendering this opinion that is not contingent upon consummation of the Merger. We will not receive any other compensation which is contingent upon consummation of the Merger.
C-2
Table of Contents
Our opinion is directed to the Board of Directors of SSE in connection with its consideration of the Merger and does not constitute a recommendation to any shareholder of SSE as to how such shareholder should vote at any SSE meeting held in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that as of the date hereof, the Merger Consideration of the Merger as provided and described in the Merger Agreement is fair to the holders of SSE Common Stock from a financial point of view.
Very truly yours,
NORTHEAST CAPITAL & ADVISORY, INC.
C-3
Table of Contents
THE FOLLOWING PAGES CONSTITUTE THE 401(K) PROSPECTUS SUPPLEMENT OF NAUGATUCK VALLEY FINANCIAL CORPORATION. SUCH PROSPECTUS SUPPLEMENT WILL “WRAP AROUND” THE PROSPECTUS OF NAUGATUCK VALLEY FINANCIAL CORPORATION.
Table of Contents
INTERESTS IN
NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE SAVINGS PLAN
AND
OFFERING OF 331,000 SHARES OF
NAUGATUCK VALLEY FINANCIAL CORPORATION
COMMON STOCK ($0.01 PAR VALUE)
This prospectus supplement relates to the offer and sale to participants in the Naugatuck Valley Savings and Loan Employee Savings Plan (the “401(k) Plan”) of participation interests and shares of common stock of Naugatuck Valley Financial Corporation, a new Maryland corporation. Naugatuck Valley Financial Corporation is offering common stock in connection with the conversion of Naugatuck Valley Savings and Loan from the mutual holding company form of organization to the stock form.
401(k) Plan participants may direct the trustee for the Naugatuck Valley Financial Stock Fund, to use up to 100% of current account balances (not invested in Naugatuck Valley common stock) as of , 2010 to purchase shares of Naugatuck Valley Financial common stock through the Naugatuck Valley Financial Stock Fund. Based upon the value of the 401(k) Plan assets as of June 1, 2010, the Naugatuck Valley Financial Stock Fund trustee may purchase up to 331,000 shares of Naugatuck Valley Financial common stock at a purchase price of $10.00 per share. This prospectus supplement relates to the election of 401(k) Plan participants to direct the Plan trustee to invest up to 100% of their 401(k) Plan account balances in Naugatuck Valley Financial common stock.
The Naugatuck Valley Financial Corporation prospectus dated , 2010, which we have attached to this prospectus supplement, includes detailed information regarding the offering of shares of Naugatuck Valley Financial common stock and the financial condition, results of operations and business of Naugatuck Valley Financial. This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the prospectus and keep it for future reference.
Please refer to “Risk Factors�� beginning on page of the prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any other state or federal agency or any state securities commission, has approved or disapproved these securities. Any representation to the contrary is a criminal offense.
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and sales by Naugatuck Valley Financial of interests or shares of common stock under the 401(k) Plan in the offering. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the 401(k) Plan.
You should rely only on the information contained in this prospectus supplement and the attached prospectus. Neither Naugatuck Valley Financial Corporation, Naugatuck Valley Savings and Loan nor the 401(k) Plan have authorized anyone to provide you with information that is different.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of Naugatuck Valley Savings and Loan or the 401(k) Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.
The date of this Prospectus Supplement is , 2010.
Table of Contents
Page | ||
1 | ||
1 | ||
Election to Purchase Naugatuck Valley Financial Common Stock in Stock Offering | 1 | |
2 | ||
2 | ||
2 | ||
2 | ||
3 | ||
Nature of a Participant’s Interest in Naugatuck Valley Financial Common Stock | 3 | |
Voting and Tender Rights of Naugatuck Valley Financial Common Stock | 3 | |
4 | ||
4 | ||
4 | ||
4 | ||
4 | ||
6 | ||
8 | ||
8 | ||
10 | ||
10 | ||
10 | ||
10 | ||
10 | ||
10 | ||
10 | ||
11 | ||
12 | ||
13 |
i
Table of Contents
The securities offered in connection with this prospectus supplement are participation interests in the 401(k) Plan. Naugatuck Valley Financial is offering common stock in connection with the conversion of Naugatuck Valley Savings and Loan from the mutual holding company form of organization to the stock form. At a purchase price of $10.00 per share, the Plan trustee may acquire up to 331,000 shares of Naugatuck Valley Financial common stock in the stock offering. Certain subscription rights and purchase limitations also govern your investment in the Naugatuck Valley Financial Stock Fund in connection with the stock offering.See “The Conversion and Offering—Subscription Offering and Subscription Rights” and“—Limitations on Purchases of Shares” in the prospectus attached to this prospectus supplement for further discussion of these subscription rights and purchase limitations.
The shares of common stock currently held in the 401(k) Plan will automatically be exchanged for shares of Naugatuck Valley Financial Corporation, a new Maryland corporation, pursuant to an exchange ratio as more fully described in the prospectus attached to this prospectus supplement.See “The Conversion and Offering—Share Exchange Ratio for Current Shareholders.” Any new shares you purchase in the stock offering will be added to the shares that you receive in the exchange described above. All of these shares will be maintained in the Naugatuck Valley Financial Stock Fund.
This prospectus supplement contains information regarding the 401(k) Plan. The attached prospectus contains information regarding the stock offering and the financial condition, results of operations and business of Naugatuck Valley Financial. The address of the principal executive office of Naugatuck Valley Savings and Loan is 333 Church Street, Naugatuck, Connecticut 06770. The telephone number of Naugatuck Valley Savings and Loan is (203) 720-5000.
Election to Purchase Naugatuck Valley Financial common stock in Stock Offering
In connection with the stock offering of Naugatuck Valley Savings and Loan, you may direct the trustee of the 401(k) Plan to transfer up to 100% of your account balance, excluding your current investment in the Naugatuck Valley Financial Stock Fund, in the 401(k) Plan to the Naugatuck Valley Financial Stock Fund. The Plan trustee will subscribe for Naugatuck Valley Financial common stock offered for sale in connection with the stock offering in accordance with each participant’s direction.
All plan participants are eligible to direct a transfer of funds to the Naugatuck Valley Financial Stock Fund. However, transfer directions are subject to subscription rights, purchase priorities and purchase limitations. If you are eligible to order shares in the subscription offering, your order will be filled in the following order of priority:
1. | Persons with deposits in Naugatuck Valley Savings and Loan with balances of $50 or more (“qualifying deposits”) as of the close of business on December 31, 2008 (“eligible account holders”). |
2. | Persons with qualifying deposits in Naugatuck Valley Savings and Loan as of the close of business on March 31, 2010 who are not eligible account holders, excluding our officers, directors and their associates (“supplemental eligible account holders”). |
3. | Depositors of Naugatuck Valley Savings and Loan as of the close of business on , 2010, who are not eligible or supplemental eligible account holders (“other members”). |
The limitations on the total amount of Naugatuck Valley Financial common stock that you may purchase in the stock offering, as described in the prospectus (see “The Conversion and Offering—Limitations on Purchases of Shares”) will be calculated based on the aggregate amount that you subscribed for: (1) through your 401(k) Plan accounts; and (2) through your sources of funds outside of the 401(k) Plan by placing an order in the stock offering using a Stock Order Form. Whether you place an order through the 401(k) Plan, outside the plan or both,
1
Table of Contents
the number of shares of Naugatuck Valley Financial common stock, if any, that you receive will be determined based on the total number of subscriptions, your purchase priority and the allocation priorities set forth in the prospectus. If, as a result of the calculation, you are allocated insufficient shares to fill all of your orders, available shares will be allocated as described in “The Conversion and Offering—Subscription Offering and Subscription Rights” in the prospectus. Available shares will be allocated between your 401(k) Plan order and your order outside of the 401(k) Plan. If you so elect, the shares of Naugatuck Valley Financial common stock you were unable to subscribe for through the 401(k) Plan will be purchased by the Plan trustee on the open market immediately following the completion of the stock offering. If you elect to direct the Plan trustee to purchase shares in the open market, you will not be able to direct the Plan trustee as to the timing or price to be paid for the common stock. The Plan trustee has sole discretion regarding the manner in which it will fill open market purchases.
Value of Participation Interests
As of June 1, 2010, the market value of the 401(k) Plan assets (less those assets already invested in Naugatuck Valley Financial common stock) equaled approximately $3,310,000. The plan administrator has informed each participant of the value of his or her beneficial interest in the 401(k) Plan. The value of 401(k) Plan assets represents past contributions made to the 401(k) Plan on your behalf, plus or minus earnings or losses on the contributions, less previous withdrawals and loans.Participants will be able to use up to 100% of their 401(k) Plan account balances (which are not already invested in Naugatuck Valley Financial common stock) to purchase shares in the stock offering through the Naugatuck Valley Financial Stock Fund.
To facilitate your investment in the Naugatuck Valley Financial Stock Fund in connection with the stock offering, you must complete, sign and submit theblue form included with this prospectus supplement (the “Investment Form”). To invest in the Naugatuck Valley Financial Stock Fund you must direct the Plan trustee to transfer a percentage of your beneficial interest in the assets of the 401(k) Plan to the Naugatuck Valley Financial Stock Fund (in multiples of not less than 1%). If you do not wish to invest in the Naugatuck Valley Financial Stock Fund at this time, you do not need to take any action. The minimum investment in the Naugatuck Valley Financial Stock Fund during the stock offering is $ and the maximum investment is $ , for orders placed through the 401(k) Plan, plus orders placed outside the 401(k) Plan.
Your Investment Form must be received byKathy McPaddenin the Human Resources Department by 12:00 noon on , 2010. Current Naugatuck Valley Savings and Loan employees should return their forms through inter-office mail. Former Naugatuck Valley Savings and Loan employees should return their forms using the business reply envelope that has been provided.
If you have any questions regarding the Naugatuck Valley Financial Stock Fund or completing the Investment Form, please contact at ( ) .
Questions about the stock offering or about the prospectus should be directed to the Stock Information Center, toll-free at ( ) .
Irrevocability of Transfer Direction
Once you have submitted your Investment Form toKathy McPadden, you cannot change your direction to transfer amounts credited to your account in the 401(k) Plan to the Naugatuck Valley Financial Stock Fund. Following the closing of the stock offering and the initial purchase of shares in the Naugatuck Valley Financial Stock Fund, you may change your investment directions in accordance with the terms of the 401(k) Plan.
2
Table of Contents
Purchase Price of Naugatuck Valley Financial common stock
The trustee will use the funds transferred to the Naugatuck Valley Financial Stock Fund to purchase shares of Naugatuck Valley Financial common stock in the stock offering. The Naugatuck Valley Financial Stock Fund trustee will pay $10.00 per share, which is the same price for shares of Naugatuck Valley Financial common stock as all other persons who purchase shares of Naugatuck Valley Financial common stock in the stock offering. If there is not enough common stock available in the stock offering to fill all subscriptions, the common stock will be allocated as described in “The Conversion and Offering – Subscription Offering and Subscription Rights” and the trustee may not be able to purchase all of the common stock you requested.If you elect, the Plan trustee will purchase shares on your behalf after the completion of the stock offering in the open market, to fulfill the shares remaining from your initial request. If you elect to direct the Plan trustee to purchase shares in the open market you will not be able to direct the Plan trustee as to the timing or price to be paid for the common stock. The Plan trustee has sole discretion regarding the manner in which it will fill open market purchases. The Plan trustee may make such purchases at prices higher or lower than the $10.00 offering price and, therefore, you may receive more or less shares than initially requested.
Nature of a Participant’s Interest in Naugatuck Valley Financial common stock
The trustee will hold Naugatuck Valley Financial common stock in the name of the 401(k) Plan. The trustee will credit shares of Naugatuck Valley Financial common stock acquired at your direction to your account under the 401(k) Plan. Therefore, the investment designations of other 401(k) Plan participants will not affect earnings on your 401(k) Plan account.
Voting and Tender Rights of Naugatuck Valley Financial common stock
The Plan trustee generally will exercise voting and tender rights attributable to all Naugatuck Valley Financial common stock held by the Naugatuck Valley Financial Stock Fund as directed by participants with interests in the Naugatuck Valley Financial Stock Fund. With respect to each matter as to which holders of Naugatuck Valley Financial common stock have a right to vote, you will have voting instruction rights that reflect your proportionate interest in the Naugatuck Valley Financial Stock Fund. The number of shares of Naugatuck Valley Financial common stock held in the Naugatuck Valley Financial Stock Fund voted for and against each matter will be proportionate to the number of voting instruction rights exercised. If there is a tender offer for Naugatuck Valley Financial common stock, the 401(k) Plan allots each participant a number of tender instruction rights reflecting the participant’s proportionate interest in the Naugatuck Valley Financial Stock Fund. The percentage of shares of Naugatuck Valley Financial common stock held in the Naugatuck Valley Financial Stock Fund that will be tendered will be the same as the percentage of the total number of tender instruction rights exercised in favor of the tender offer. The remaining shares of Naugatuck Valley Financial common stock held in the Naugatuck Valley Financial Stock Fund will not be tendered. The 401(k) Plan provides that participants will exercise their voting instruction rights and tender instruction rights on a confidential basis.
3
Table of Contents
DESCRIPTION OF THE 401(k) PLAN
Naugatuck Valley Savings and Loan adopted the 401(k) Plan effective May 1, 1997 and amended and restated the plan in its entirety effective April 1, 2009. Naugatuck Valley Savings and Loan intends for the 401(k) Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended, or “ERISA.” Naugatuck Valley Savings and Loan may change the 401(k) Plan from time to time in the future to ensure continued compliance with these laws. Naugatuck Valley Savings and Loan may also amend the 401(k) Plan from time to time in the future to add, modify, or eliminate certain features of the plan, as it sees fit. Federal law provides you with various rights and protections as a participant in the 401(k) Plan, which is governed by ERISA. However, the Pension Benefit Guaranty Corporation does not guarantee your benefits under the 401(k) Plan.
Reference to Full Text of the Plan. The following portions of this prospectus supplement summarize the material provisions of the 401(k) Plan. Naugatuck Valley Savings and Loan qualifies this summary in its entirety by reference to the full text of the 401(k) Plan. You may obtain copies of the 401(k) Plan document including any amendments to the plan and a summary plan description, by contacting Kathy McPadden at (203) 720-5000. You should carefully read the 401(k) Plan documents to understand your rights and obligations under the plan.
If you are an eligible employee who has completed six (6) months of service with Naugatuck Valley Savings and Loan and has attained age of 21 you will become a participant in the 401(k) Plan on the entry date following or coincident with the date you satisfy the 401(k) Plan eligibility requirements.
As of June 1, 2010, 107 of the 117 eligible employees of Naugatuck Valley Savings and Loan participated in the 401(k) Plan.
Contributions Under the 401(k) Plan
Employee Pre-Tax Salary Deferrals. Subject to certain IRS limitations, the 401(k) Plan permits each participant to make pre-tax salary deferrals to the 401(k) Plan each payroll period of up to % of the participant’s compensation. Compensation for 401(k) Plan purposes is generally defined as your total compensation that is subject to income tax and paid to you by the Bank. In addition to 401(k) Plan contributions, you may make “catch up” contributions if you are currently age 50 or will be 50 before the end of the calendar year.
Naugatuck Valley Savings and Loan Matching Contributions. The 401(k) Plan provides that Naugatuck Valley Savings and Loan may make matching contributions on behalf of each participant. Naugatuck Valley Savings and Loan makes matching contributions only to those participants who actively defer a percentage of their compensation into the 401(k) Plan.
Rollover Contributions.Naugatuck Valley Savings and Loan allows employees who receive a distribution from a previous employer’s tax-qualified employee benefit plan to deposit that distribution into a Rollover Contribution account under the 401(k) Plan, provided the rollover contribution satisfies IRS requirements.
Limitation on Employee Salary Deferrals. By law your total deferrals under the 401(k) Plan, together with similar plans, may not exceed $16,500 for 2010. Employees who are age 50 and over may also make additional “catch-up” contributions to the plan, up to a maximum of $5,500 for 2010. The Internal Revenue Service periodically increases these limitations. A participant who exceeds these limitations must include any excess
4
Table of Contents
deferrals in gross income for federal income tax purposes in the year of deferral. In addition, the participant must pay federal income taxes on any excess deferrals when distributed by the 401(k) Plan to the participant, unless the plan distributes the excess deferrals and any related income no later than the first April 15th following the close of the taxable year in which the participant made the excess deferrals. Any income on excess deferrals distributed before such date is treated, for federal income tax purposes, as earned and received by the participant in the taxable year of the distribution.
Limitation on Annual Additions and Benefits. As required by the Internal Revenue Code, the 401(k) Plan provides that the total amount of contributions and forfeitures (annual additions) credited to a participant during any year under all defined contribution plans of Naugatuck Valley Savings and Loan(including the 401(k) Plan and the Naugatuck Valley Savings and Loan Savings Bank Employee Stock Ownership Plan) may not exceed the lesser of 100% of the participant’s annual compensation or $49,000 for 2010.
Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the Internal Revenue Code limit the amount of pre-tax and matching contributions that may be made to the 401(k) Plan in any year on behalf of highly compensated employees, in relation to the amount of pre-tax and matching contributions made by or on behalf of all other employees eligible to participate in the 401(k) Plan. If pre-tax and matching contributions exceed these limitations, the plan must adjust the contribution levels for highly compensated employees.
In general, a highly compensated employee includes any employee who (1) was a five percent owner of the sponsoring employer at any time during the year or the preceding year, or (2) had compensation for the preceding year in excess of $110,000 and, if the sponsoring employer so elects, was in the top 20% of employees by compensation for such year. The preceding dollar amount may be adjusted periodically by the IRS.
Top-Heavy Plan Requirements. If the 401(k) Plan is a “Top-Heavy Plan” for any calendar year, the Bank may be required to make certain minimum contributions to the 401(k) Plan on behalf of non-key employees. In general, the 401(k) Plan will be treated as a Top-Heavy Plan for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of “Key Employees” exceeds 60% of the aggregate balance of the accounts of all employees under the plan. A Key Employee is generally any employee who, at any time during the calendar year or any of the four preceding years, is:
(1) | an officer of the Bank whose annual compensation exceeds $160,000; |
(2) | a 5% owner of the employer, meaning an employee who owns more than 5% of the outstanding stock of Naugatuck Valley Financial, or who owns stock that possesses more than 5% of the total combined voting power of all stock of Naugatuck Valley Financial; or |
(3) | a 1% owner of the employer, meaning an employee who owns more than 1% of the outstanding stock of Naugatuck Valley Financial, or who owns stock that possesses more than 1% of the total combined voting power of all stock of Naugatuck Valley Financial,andwhose annual compensation exceeds $150,000. |
The foregoing dollar amounts are for 2010.
5
Table of Contents
As of June 1, 2010, the assets in the 401(k) Plan Trust are invested in the funds listed below.
Annual Rates of Return as of December 31, | ||||||
Fund Name | 2009 | 2008 | 2007 | |||
Wells Fargo Stable Value | 2.86 | — | — | |||
Fidelity Spartan 500 Index | 26.50 | -37.03 | 5.43 | |||
Davis NY Venture A | 32.06 | -4.03 | 4.97 | |||
Fidelity Contrafund | 29.23 | -37.16 | 19.78 | |||
T. Rowe Price Blue Chip Growth Adv | 42.30 | -42.74 | 12.81 | |||
Eaton Vance Large Cap Value A | 17.01 | -34.47 | 9.99 | |||
Blackrock Equity Dividend | 21.88 | -32.72 | 14.44 | |||
Dreyfus S&P Stars Opportunities | 21.94 | -37.46 | 12.07 | |||
Riversource Mid Cap Value R4 | 39.93 | -44.28 | 10.50 | |||
Eagle Series Trust—Small Cap Growth | 34.21 | -36.48 | 7.07 | |||
Columbia Small Cap Value | 24.44 | -28.23 | -2.63 | |||
Columbia Marisco International Oppportunity | 37.98 | -50.78 | 19.99 | |||
American Europacific Growth R3 | 38.71 | -40.71 | 18.58 | |||
Allianz NFJ International Value | 41.33 | -44.59 | 26.97 | |||
AIM Real Estate Fund | 39.69 | -36.40 | -14.97 | |||
PIMCO Total Return | 13.37 | 4.32 | 8.57 | |||
Oppenheimer Strategic Income | 22.10 | -16.50 | 9.22 | |||
Mainstay Hi-Yield Corporate Bond A | 42.36 | -23.97 | 1.85 | |||
American Funds Cap World Growth & Income | 31.88 | -38.60 | 17.90 | |||
American Century Livestrong Income | 16.13 | -16.79 | 6.91 | |||
American Century Livestrong 2015 | 17.96 | -20.30 | 8.23 | |||
American Century Livestrong 2025 | 20.94 | -25.21 | 8.92 | |||
American Century Livestrong 2035 | 24.00 | -30.75 | 9.99 | |||
American Century Livestrong 2045 | 26.05 | -33.80 | 10.46 |
The following is a brief description of the investment funds available through the 401(k) Plan. Please review the individual fund prospectuses for detailed information on each fund.
Wells Fargo Stable Value.The fund seeks safety of principal and consistency of returns with minimal volatility. The fund invests in investment contracts issued by highly rated companies. These include GIC, Security backed investment contracts, Separate account GICs, and cash equivalents.
Fidelity Spartan 500 Index. The fund seeks a total return which corresponds to that of the S&P 500 Index. The fund invests at least 80% of its assets in common stocks included in the Index. The fund may lend securities to earn income and uses statistical samplings techniques in stock selection.
Davis NY Venture A.The fund seeks capital growth by investing primarily in common stock of US companies with market capitalizations of at least $5 billion.
Fidelity Contrafund.The fund seeks capital appreciation. Fidelity Mgmt & Research invests the fund’s assets in securities of companies whose value they believe is not fully recognized by the public.
T. Rowe Price Blue Chip Growth ADV. The fund seeks to provide long-term capital growth with income as a secondary objective by investing at least 80% of net assets in large and medium sized blue chip growth companies.
6
Table of Contents
Eaton Vance Large Cap Value A.The fund seeks total return. The fund invests primarily in value stocks of large-cap companies. Value stocks are common stocks that, in the opinion of the investment adviser, are inexpensive or undervalued relative to the overall stock market. The fund primarily invests in dividend-paying stocks.
Blackrock Equity Dividend.The fund seeks to provide shareholders long-term total return by investing primarily in a diversified portfolio by dividend paying common stocks which yield more than the S&P 500 composite stock price index.
Dreyfus S&P Stars Opportunities.The portfolio seeks long term capital appreciation by investing at least 75% of it’s total assets in US common stocks and dollar-denominated ADRs that were ranked five-STARS at the time of sale by S&P.
Riversource Mid Cap Value R4.The fund seeks long term growth of capital by investing primarily in mid-cap companies that have a market capitalizations ranging from $300 million to $13.4 billion.
Eagle Series Trust—Small Cap Growth.The fund seeks long term capital appreciation by investing at least 65% of its total assets in equity securities of small capitalization companies that have a total market capitalization of less than $2 billion.
Columbia Small Cap Value.The fund seek long-term capital appreciation. The fund invests at least 80% of net assets in equity securities of companies that have market capitalizations in the range of the companies in the Russell 2000 Value Index at the time of purchase that the Advisor believes are undervalued.
Columbia Marisco International Oppportunity.The fund seeks long term growth potential by investing in companies of any size throughout the world. The fund invests in at least three countries outside the US. The mix of top-down and bottom-up investment style is used.
American Europacific Growth R3.The fund seeks to provide long-term group of capital by investing in companies based outside the US. The fund invests in companies based chiefly in Europe and the Pacific Basic, ranging from small firms to large corporations.
Allianz NFJ International Value.The fund seeks long-term growth of capital and income. The fund will invest in the common stocks of non-US companies with market capitalization of more than $1 billion that are undervalued relative to the market and their industry groups.
AIM Real Estate Fund.The fund seeks high total return through growth of capital and current income. The fund will invest, normal, at least 80% of its assets in securities of real estate and real estate-related companies, including real estate investment trusts (REITS). The principal type of securities purchased by the fund is common stock.
PIMCO Total Return.The fund seeks maximum total return, consistent with preservation of capital and prudent investment management. The fund seeks to achieve its investment objective by investing in a diversified portfolio of fixed income instruments. The average portfolio duration normally varies within a three to six year time frame.
Oppenheimer Strategic Income.The fund seeks a high level of current income by investing in debt securities of issuers in three market sectors, foreign governments and companies, US gov’t securities, and lower rated high yield securities of US and foreign companies.
Mainstay Hi-Yield Corporate Bond A.The fund seeks to invest at least 65% of total assets in corporate debt securities and up to 25% of total assets in equity securities, under normal market conditions.
7
Table of Contents
American Funds Cap World Growth & Income.The fund seeks current income by investing primarily in stocks of well-established companies located around the world.
American Century Livestrong Income.The fund seeks income and capital appreciation by investing in portfolio of underlying American Century fixed income and equity funds. The target mix of income to equity will be 55% to 35% and the remainder will be in cash and cash equivalents. Capital appreciation is a secondary objective.
American Century Livestrong 2015.The fund seeks income and capital appreciation by investing in a blend of equity and fixed income securities as well as cash equivalents. The portfolio will become more conservative as the target year approaches.
American Century Livestrong 2025.The fund seeks income and capital appreciation by investing in a blend of equity and fixed income securities as well as cash equivalents. The portfolio will become more conservative as the target year approaches.
American Century Livestrong 2035.The fund seeks income and capital appreciation by investing in a blend of equity and fixed income securities as well as cash equivalents. The portfolio will become more conservative as the target year approaches.
American Century Livestrong 2045.The fund seeks income and capital appreciation by investing in a blend of equity and fixed income securities as well as cash equivalents. The portfolio will become more conservative as the target year approaches.
Naugatuck Valley Financial Stock Fund. This fund consists of investments in the common stock of Naugatuck Valley Financial common stock.The Naugatuck Valley Financial Stock Fund is a single stock mutual fund and carries more investment risk than a typical mutual fund, which invests in more than one security.
Once you have submitted your Investment Form to Kathy McPadden you may not change your investment directions in the stock offering.
Benefits Under the 401(k) Plan
Vesting. All participants are 100% vested in their pre-tax salary deferrals (including catch up contributions and rollover contributions. This means that participants have a non-forfeitable right to these funds and any earnings on the funds at all times. Plan participants vest 20% per year over a 6-year period in employer matching contributions credited to their accounts. Participants are 0% vested in their matching contributions if they have less than two years of service with the Bank. Participant’s become 100% vested in their employer matching contributions upon termination of employment due to death, disability or retirement.
Withdrawals and Distributions from the 401(k) Plan
Withdrawals Before Termination of Employment. While in active service, participants may take an in-service distribution. In order to qualify for an in-service distribution you must be at least 59 1/2 years old. In addition, in-service distributions can only be made from accounts that are 100% vested Participants may also take a hardship withdrawal from the plan, provided the participant has a hardship event as defined by the IRS regulations and subject to approval by the Naugatuck Valley Savings and Loan Employee Benefits Committee. Plan loans are also permitted, subject to applicable law and IRS regulations. Please see the Plan Administrator for details on the loan policies and procedures.
Distribution Upon Retirement, Death or Disability. If a participant’s accounts are $1,000 or less upon termination of employment, payment will be in the form of a lump sum as of a valuation date as soon thereafter
8
Table of Contents
as administratively possible. If a participant’s accounts exceed $1,000 and are $5,000 or less upon termination of employment, and the participant does not elect to have his/her distribution paid, payment will be in the form of a Direct Rollover to an individual retirement plan designated by the Plan Administrator.
If termination of employment is due to Normal, Postponed Retirement, Death, or Total and Permanent Disability, and a participant’s account exceeds $5,000, distribution of the participant’s accounts will be in the form of a lump sum payment, upon the participant’s attainment of Normal Retirement Date, unless the participant elects (within 30 days of receipt of an election notice) to further defer distribution beyond Normal Retirement Date to a Postponed Retirement Date (subject to an IRS minimum distribution of benefits requirement following attainment of age 70 1/2), or unless the participant elects one of the following optional forms of payment:
• | Lump sum payment as of any valuation date following the date of termination of employment. (Note: lump sums are subject to a mandatory 20% income tax withholding and a statutory 10% additional federal tax if paid before age 55). A participant “Rollover” within 60 days of distribution to an Individual Retirement Account (IRA), or another employer’s plan (if permitted by that plan). |
• | Direct “Rollover” from the Plan to another employer’s plan (if permitted by that plan) for accounts that are lesser or greater than $5,000. |
Distribution Upon Termination for Any Other Reason. If a Participant’s accounts are $1,000 or less upon termination of employment, payment will be in the form of a lump sum as of a valuation date as soon thereafter as administratively possible. If a participant’s accounts exceed $1,000 and are $5,000 or less upon termination of employment, and the participant does not elect to have his/her distribution paid, payment will be in the form of a Direct Rollover to an individual retirement plan designated by the Plan Administrator.
If upon termination of employment, a participant’s accounts exceed $5,000, payment will be deferred to Normal Retirement Date, unless the participant elects one of the following optional forms of payment:
• | Lump sum payment as of any valuation date following the date of termination of employment. (Note: lump sums are subject to a mandatory 20% income tax withholding and a statutory 10% additional federal tax if paid before age 55). A participant “Rollover” is permitted within 60 days of distribution to an Individual Retirement Account (IRA), or another employer’s plan (if permitted by that plan). |
• | Direct “Rollover” from the Plan to another employer’s plan (if permitted by that plan) for accounts which are lesser or greater than $5,000. |
Nonalienation of Benefits. Except with respect to federal income tax withholding, and as provided for under a qualified domestic relations order, benefits payable under the 401(k) Plan will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the 401(k) Plan will be void.
Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your right to withdraw amounts held under the plan before your termination of employment with Naugatuck Valley Savings and Loan. Federal law may also impose an excise tax on withdrawals from the 401(k) Plan before you attain 59 1/2 years of age, regardless of whether the withdrawal occurs during your employment with Naugatuck Valley Savings and Loan or after termination of employment.
9
Table of Contents
ADMINISTRATION OF THE 401(k) PLAN
The board of directors of Naugatuck Valley Savings and Loan has appointed as the trustee for the 401(k) Plan. The trustee receives, holds and invests the contributions to the 401(k) Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the 401(k) Plan and the directions of the plan administrator. The trustee is responsible for the investment of the trust assets, as directed by the plan administrator and the participants.
Reports to 401(k) Plan Participants
The plan administrator furnishes participants quarterly statements that show the balance in their accounts as of the statement date, contributions made to their accounts during that period and any additional adjustments required to reflect earnings or losses.
Naugatuck Valley Savings and Loan currently acts as plan administrator for the 401(k) Plan. The plan administrator: interprets the provisions of the plan; prescribes procedures for filing applications for benefits; prepares and distributes information explaining the plan; maintains plan records, books of account and all other data necessary for the proper administration of the plan; prepares and files all returns and reports required by the U.S. Department of Labor and the IRS and makes all required disclosures to participants, beneficiaries and others under ERISA.
Naugatuck Valley Savings and Loan expects to continue the 401(k) Plan indefinitely. Nevertheless, Naugatuck Valley Savings and Loan may terminate the 401(k) Plan at any time. If Naugatuck Valley Savings and Loan terminates the 401(k) Plan in whole or in part, all affected participants become fully vested in their accounts, regardless of other provisions of the 401(k) Plan. Naugatuck Valley Savings and Loan reserves the right to make, from time to time, changes that do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries. Naugatuck Valley Savings and Loan may amend the plan, however, as necessary or desirable, to comply with ERISA or the Internal Revenue Code.
Merger, Consolidation or Transfer
If the 401(k) Plan merges or consolidates with another plan or transfers the trust assets to another plan, and either the 401(k) Plan or the other plan is subsequently terminated, the 401(k) Plan requires that you receive a benefit immediately after the merger, consolidation or transfer that would equal or exceed the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the 401(k) Plan had terminated at that time.
Federal Income Tax Consequences
The following summarizes only briefly the material federal income tax aspects of the 401(k) Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences of the 401(k) Plan. Statutory provisions change, as do their interpretation, and their application may vary in individual circumstances. Finally, applicable state and local income tax laws may have different tax consequences than the federal income tax laws.401(k) Plan participants should consult a tax advisor with respect to any transaction involving the 401(k) Plan, including any distribution from the 401(k) Plan.
10
Table of Contents
As a “tax-qualified retirement plan,” the Internal Revenue Code affords the 401(k) Plan certain tax advantages, including the following:
(1) | the sponsoring employer may take an immediate tax deduction for the amount contributed to the plan each year; |
(2) | participants pay no current income tax on amounts contributed by the employer on their behalf; and |
(3) | earnings of the plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments. |
Naugatuck Valley Savings and Loan administers the 401(k) Plan to comply in operation with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law. If Naugatuck Valley Savings and Loan should receive an adverse determination letter from the IRS regarding the 401(k) Plan’s tax exempt status, all participants would generally recognize income equal to their vested interests in the 401(k) Plan, the participants would not be permitted to transfer amounts distributed from the 401(k) Plan to an Individual Retirement Account or to another qualified retirement plan, and Naugatuck Valley Savings and Loan would be denied certain tax deductions taken in connection with the 401(k) Plan.
Lump Sum Distribution. A distribution from the 401(k) Plan to a participant or the beneficiary of a participant qualifies as a lump sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 1/2; and consists of the balance credited to the participant under this plan and all other profit sharing plans, if any, maintained by Naugatuck Valley Savings and Loan. The portion of any lump sum distribution included in taxable income for federal income tax purposes consists of the entire amount of the lump sum distribution, less the amount of after-tax contributions, if any, made to any other profit-sharing plans maintained by Naugatuck Valley Savings and Loan, if the distribution includes those amounts.
Naugatuck Valley Financial common stock Included in Lump Sum Distribution. If a lump sum distribution includes Naugatuck Valley Financial common stock, the distribution generally is taxed in the manner described above. The total taxable amount is reduced, however, by the amount of any net unrealized appreciation on Naugatuck Valley Financial common stock; that is, the excess of the value of Naugatuck Valley Financial common stock at the time of the distribution over the cost or other basis of the securities to the trust. The tax basis of Naugatuck Valley Financial common stock, to compute gain or loss on a subsequent sale, equals the value of Naugatuck Valley Financial common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Naugatuck Valley Financial common stock, to the extent of the net unrealized appreciation at the time of distribution, is long-term capital gain, regardless of how long you hold the Naugatuck Valley Financial common stock, or the “holding period.” Any gain on a subsequent sale or other taxable disposition of Naugatuck Valley Financial common stock that exceeds the amount of net unrealized appreciation upon distribution is considered long-term capital gain, regardless of the holding period. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed under IRS regulations.
We have provided you with a brief description of the material federal income tax aspects of the 401(k) Plan that are generally applicable under the Internal Revenue Code. We do not intend this description to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the 401(k) Plan. Accordingly, you should consult a tax advisor concerning the federal, state and local tax consequences of participating in and receiving distributions from the 401(k) Plan.
Any “affiliate” of Naugatuck Valley Financial under Rules 144 and 405 of the Securities Act of 1933, as amended, who receives a distribution of common stock under the 401(k) Plan, may re-offer or resell such shares
11
Table of Contents
only under a registration statement filed under the Securities Act of 1933, as amended, assuming the availability of a registration statement, or under Rule 144 or some other exemption from these registration requirements. An “affiliate” of Naugatuck Valley Savings and Loan is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, Naugatuck Valley Savings and Loan. Generally, a director, principal officer or major shareholder of a corporation is deemed to be an “affiliate” of that corporation.
Any person who may be an “affiliate” of Naugatuck Valley Savings and Loan may wish to consult with counsel before transferring any common stock they own. In addition, participants should consult with counsel regarding the applicability to them of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of Naugatuck Valley Financial common stock acquired under the 401(k) Plan or other sales of Naugatuck Valley Financial common stock.
Persons who arenot deemed to be “affiliates” of Naugatuck Valley Savings and Loan at the time of resale may resell freely any shares of Naugatuck Valley Financial common stock distributed to them under the 401(k) Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, or compliance with the restrictions and conditions contained in the exemptions available under federal law. A person deemed an “affiliate” of Naugatuck Valley Savings and Loan at the time of a proposed resale may publicly resell common stock only under a “re-offer” prospectus or in accordance with the restrictions and conditions contained in Rule 144 of the Securities Act of 1933, as amended, or some other exemption from registration, and may not use this prospectus in connection with any such resale. In general, Rule 144 restricts the amount of common stock that an affiliate may publicly resell in any three-month period to the greater of one percent of Naugatuck Valley Financial common stock then outstanding or the average weekly trading volume reported on the Nasdaq Global Market during the four calendar weeks before the sale. Affiliates may sell only through brokers without solicitation and only at a time when Naugatuck Valley Financial is current in filing all required reports under the Securities Exchange Act of 1934, as amended.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors and persons who beneficially own more than ten percent of public companies such as Naugatuck Valley Financial. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), such person must file a Form 3 reporting initial beneficial ownership with the Securities and Exchange Commission. Such persons must also report periodically certain changes in beneficial ownership involving the allocation or reallocation of assets held in their 401(k) Plan accounts, either on a Form 4 within two days after a transaction, or annually on a Form 5 within 45 days after the close of a company’s fiscal year.
In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Naugatuck Valley Financial of profits realized from the purchase and sale or sale and purchase of its common stock within any six-month period by any officer, director or person who beneficially owns more than ten percent of the common stock.
The SEC has adopted rules that exempt many transactions involving the 401(k) Plan from the “short-swing” profit recovery provisions of Section 16(b). The exemptions generally involve restrictions upon the timing of elections to buy or sell employer securities for the accounts of any officer, director or person who beneficially owns more than ten percent of the common stock.
Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are subject to Section 16(b) may be required, under limited circumstances involving the purchase of common stock within six months of the distribution, to hold the shares of common stock distributed from the 401(k) Plan for six months after the distribution date.
12
Table of Contents
The validity of the issuance of the common stock of Naugatuck Valley Financial will be passed upon by Kilpatrick Stockton LLP, Washington, D.C. Kilpatrick Stockton LLP acted as special counsel for Naugatuck Valley Financial in connection with the stock offering.
13
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution. |
The following table sets forth our anticipated expenses of the offering:
SEC filing fee (1) | $ | 5,400 | |
OTS filing fee | 12,000 | ||
FINRA filing fee (1) | 8,400 | ||
Stock market listing fee | 7,500 | ||
EDGAR, printing, postage and mailing | 250,000 | ||
Legal fees and expenses (2) | 375,000 | ||
Accounting fees and expenses (2) | 125,000 | ||
Appraiser’s fees and expenses (2) | 73,000 | ||
Securities marketing firm expenses (including legal fees) (3) | 220,000 | ||
Conversion agent fees and expenses | 27,500 | ||
Business plan fees and expenses | 35,000 | ||
Transfer agent and registrar fees and expenses | 15,000 | ||
Certificate printing | 5,000 | ||
Proxy solicitor fees and expenses | 18,000 | ||
Miscellaneous | 3,200 | ||
TOTAL | $ | 1,180,000 |
(1) | Based on the registration of $75,581,156 of common stock. |
(2) | Excludes estimated fees and expenses of $650,000 incurred in connection with the Southern Connecticut Bancorp, Inc. merger. |
(3) | In addition, Stifel, Nicolaus & Company, Incorporated will receive a fee equal to 1.0% of the aggregate purchase price of shares sold in the subscription and community offerings, excluding shares purchased by directors, officers and employees of Naugatuck Valley Financial Corporation and members of their immediate families and the employee stock ownership plan. In addition, Stifel, Nicolaus & Company, Incorporated, and other selected dealers will receive aggregate fees currently estimated to be 6.0% of the aggregate price of shares sold in the syndicated community offering, if any. |
Item 14. | Indemnification of Directors and Officers. |
The Articles of Incorporation of Naugatuck Valley Financial Corporation provides as follows:
NINTH:The Corporation shall indemnify (A) its directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or permitted by the general laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures required, and (B) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation’s Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such Bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the Articles of Incorporation of the Corporation shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
Item 15. | Recent Sales of Unregistered Securities. |
None.
II-1
Table of Contents
Item 16. | Exhibits and Financial Statement Schedules. |
The exhibits filed as a part of this Registration Statement are as follows:
(a) | List of Exhibits |
Exhibit | Description | Location | ||
1.1 | Engagement Letter by and between Naugatuck Valley Mutual Holding Company, Naugatuck Valley Financial Corporation, Naugatuck Valley Savings and Loan and Stifel, Nicolaus & Company, Incorporated | Previously filed | ||
1.2 | Draft Agency Agreement | Filed herewith | ||
2.1 | Amended and Restated Plan of Conversion and Reorganization | Filed herewith | ||
2.2 | Agreement and Plan of Merger by and among Naugatuck Valley Financial Corporation, Newco and Southern Connecticut Bancorp, Inc. | Incorporated herein by reference to Exhibit 2.1 to the Naugatuck Valley Financial Corporation (File No. 000-50876) Current Report on Form 8-K filed on February 23, 2010 | ||
2.3 | First Amendment to the Agreement and Plan of Merger by and among Naugatuck Valley Financial Corporation, Newco and Southern Connecticut Bancorp, Inc. | Incorporated herein by reference to Exhibit 2.1 to the Naugatuck Valley Financial Corporation (File No. 000-50876) Current Report on Form 8-K filed on September 17, 2010 | ||
3.1 | Articles of Incorporation of Naugatuck Valley Financial Corporation | Previously filed | ||
3.2 | Bylaws of Naugatuck Valley Financial Corporation | Previously filed | ||
4.0 | Specimen Stock Certificate of Naugatuck Valley Financial Corporation | Previously filed | ||
5.0 | Opinion of Kilpatrick Stockton LLP re: Legality | Filed herewith | ||
8.1 | Opinion of Kilpatrick Stockton LLP re: Federal Tax Matters related to the conversion | Filed herewith | ||
8.2 | Opinion of Kilpatrick Stockton LLP re: Federal Tax Matters related to the merger | Filed herewith | ||
8.3 | Opinion of Whittlesey & Hadley, P.C. re: State Tax Matters | Filed herewith | ||
8.4 | Opinion of Day Pitney LLP re: Federal Tax Matters related to the merger | Filed herewith | ||
10.1 | + Naugatuck Valley Financial Corporation and Naugatuck Valley Savings Employment Agreement with John C. Roman | Incorporated herein by reference to Exhibit 10.1 to the Naugatuck Valley Financial Corporation (File No. 000-50876) Annual Report on Form 10-K, for the fiscal year ended December 31, 2007, filed on March 28, 2008 | ||
10.2 | + Naugatuck Valley Savings Change in Control Agreement with Dominic J. Alegi, Jr. | Incorporated herein by reference to Exhibit 10.2 to the Naugatuck Valley Financial Corporation (File No. 000-50876) Annual Report on Form 10-K, for the fiscal year ended December 31, 2007, filed on March 28, 2008 |
II-2
Table of Contents
Exhibit | Description | Location | ||
10.3 | + Naugatuck Valley Financial Corporation and Naugatuck Valley Savings Deferred Compensation Plan for Directors | Incorporated herein by reference to Exhibit 10.1 to the Naugatuck Valley Financial Corporation (File No. 000-50876) Quarterly Report on Form 10-Q for the three months ended March 31, 2007, filed on May 15, 2007 | ||
10.4 | + Form of Naugatuck Valley Savings Employee Severance Compensation Plan | Incorporated herein by reference to Exhibit 10.8 to the Naugatuck Valley Financial Corporation (File No. 333-116627) Registration Statement on Form S-1, as amended, initially filed on June 18, 2004 | ||
10.5 | + Naugatuck Valley Savings Death Benefit Agreement with John C. Roman, as amended | Incorporated herein by reference to Exhibit 10.9 to the Naugatuck Valley Financial Corporation (File No. 333-116627) Registration Statement on Form S-1, as amended, initially filed on June 18, 2004 | ||
10.6 | + Naugatuck Valley Savings Death Benefit Agreement with Dominic J. Alegi, Jr. | Incorporated herein by reference to Exhibit 10.10 to the Naugatuck Valley Financial Corporation (File No. 333-116627) Registration Statement on Form S-1, as amended, initially filed on June 18, 2004 | ||
10.7 | + Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan | Incorporated herein by reference to Appendix C to the Naugatuck Valley Financial Corporation (File No. 000-50876) Proxy Statement filed on April 1, 2005 | ||
10.8 | + Naugatuck Valley Savings Change in Control Agreement with Mark S. Graveline | Incorporated herein by reference to Exhibit 10.8 to the Naugatuck Valley Financial Corporation (File No. 00-50876) Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 31, 2009 | ||
10.9 | + Naugatuck Valley Savings Employment Agreement with Matthew L. Proto | Previously filed | ||
10.10 | + Naugatuck Valley Savings Employment Agreement with Sunil Pallan | Previously filed | ||
10.11 | + Naugatuck Valley Savings Death Benefit Agreement with Lee R. Schlesinger | Incorporated herein by reference to Exhibit 10.11 to the Naugatuck Valley Financial Corporation (File No. 333-116627) Registration Statement on Form S-1, as amended, initially filed on June 18, 2004 | ||
10.12 | + Form of ESOP Loan Documents | Filed herewith | ||
10.13 | + Valley Incentive Program | Filed herewith | ||
21.0 | Subsidiaries | Previously filed | ||
23.1 | Consent of Kilpatrick Stockton LLP | Contained in Exhibits 5.0 and 8.1 | ||
23.2 | Consent of Day Pitney LLP | Contained in Exhibit 8.4 | ||
23.3 | Consent of Whittlesey & Hadley, P.C. | Filed herewith | ||
23.4 | Consent of McGladrey & Pullen, LLP | Filed herewith |
II-3
Table of Contents
Exhibit | Description | Location | ||
23.5 | Consent of FinPro, Inc. | Previously filed | ||
23.6 | Consent of Ostrowski & Company, Inc. | Filed herewith | ||
23.7 | Consent of Northeast Capital & Advisory, Inc. | Filed herewith | ||
24.0 | Power of Attorney | Previously filed | ||
99.1 | Updated Appraisal Report of FinPro, Inc. (P) | Filed herewith | ||
99.2 | Draft of Marketing Materials | Filed herewith | ||
99.3 | Draft of Subscription Order Form and Instructions | Filed herewith | ||
99.4 | Form of Proxy for Naugatuck Valley Financial Corporation Meeting of Stockholders | Previously filed | ||
99.5 | Consent of Alphonse F. Spadaro to be identified as a proposed director | Previously filed | ||
99.6 | Form of Proxy for Southern Connecticut Bancorp, Inc. | Previously filed | ||
99.7 | Consent of Elmer F. Laydon to be identified as a proposed director | Filed herewith |
+ | Management contract or compensation plan or arrangement. |
(P) | The supporting exhibits and financial schedules are filed in paper format pursuant to Rule 202 and Rule 311 of Regulation S-T. |
(b) | Financial Statement Schedules |
All schedules have been omitted as not applicable or not required under the rules of Regulation S-X.
Item 17. | Undertakings. |
The undersigned registrant hereby undertakes:
(1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
(ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the forgoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
(iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
II-4
Table of Contents
(2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
(4) | That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(5) | That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(6) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: |
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
(ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
(iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
(iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Naugatuck, State of Connecticut, on September 20, 2010.
NAUGATUCK VALLEY FINANCIAL CORPORATION | ||||
Date: September 20, 2010 | By: | /S/ JOHN C. ROMAN | ||
John C. Roman President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name | Title | Date | ||
/S/ JOHN C. ROMAN John C. Roman | President, Chief Executive Officer and Director (principal executive officer) | September 20, 2010 | ||
/S/ LEE R. SCHLESINGER Lee R. Schlesinger | Senior Vice President and Chief Financial Officer (principal accounting and financial officer) | September 20, 2010 | ||
* Carlos S. Batista | Director/Chairman of the Board | September 20, 2010 | ||
* Frederick A. Dlugokecki | Director | September 20, 2010 | ||
* Richard M. Famiglietti | Director | September 20, 2010 | ||
* James A. Mengacci | Director | September 20, 2010 | ||
* Camilo P. Vieira | Director | September 20, 2010 | ||
* Jane H. Walsh | Director | September 20, 2010 |
* | Pursuant to the Power of Attorney filed as Exhibit 24.0 to the Registrant’s Registration Statement on Form S-1, filed on June 11, 2010. |
/S/ JOHN C. ROMAN John C. Roman President, Chief Executive Officer and Director | September 20, 2010 |
II-6