UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002 Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Connecticut 06-1559137
(State of incorporation) (I.R.S. Employer Identification Number)
900 Bedford Street, Stamford, Connecticut 06901
(Address of principal executive offices)
(203) 324-7500
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, $2.00 par value per share, 2,400,525 shares issued and outstanding
as of the close of business October 31, 2002.
Transitional Small Business Disclosure Format (check one):Yes No X
----- -----
Table of Contents
Page
----
Part I FINANCIAL INFORMATION
------
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis or
Plan of Operation 13
Item 3. Controls and Procedures 20
Part II OTHER INFORMATION
-------
Item 6. Exhibits and Reports on Form 8-K 20
CERTIFICATIONS 22
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks ............................................ $ 6,412,472 $ 7,544,242
Federal funds sold ................................................. 4,000,000 12,700,000
Short term investments ............................................. 4,157,721 6,788,569
------------ ------------
Cash and cash equivalents ..................................... 14,570,193 27,032,811
Available for sale securities (at fair value) ...................... 67,775,063 34,717,930
Federal Reserve Bank stock ......................................... 481,050 481,050
Federal Home Loan Bank stock ....................................... 621,300 617,900
Loans receivable (net of allowance for loan losses: 2002 $2,146,454;
2001 $1,894,454) .............................................. 150,192,620 135,680,036
Accrued interest receivable ........................................ 1,266,199 1,079,450
Premises and equipment, net ........................................ 858,997 1,102,428
Deferred tax asset, net ............................................ 553,839 662,296
Goodwill ........................................................... 930,091 930,091
Other assets ....................................................... 249,551 265,465
------------ ------------
Total assets .............................................. $237,498,903 $202,569,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing deposits .............................. $ 18,122,715 $ 16,961,636
Interest bearing deposits ................................. 189,304,984 166,302,303
------------ ------------
Total deposits ....................................... 207,427,699 183,263,939
Securities sold under agreements to repurchase ................ 5,700,000 --
Federal Home Loan Bank borrowings ............................. 4,000,000 --
Capital lease obligation ...................................... 275,197 364,836
Collateralized borrowings ..................................... 374,444 474,444
Accrued expenses and other liabilities ........................ 1,456,847 1,060,222
------------ ------------
Total liabilities .................................... 219,234,187 185,163,441
------------ ------------
Shareholders' equity
Common stock, $2 par value: 5,333,333 shares authorized;
2,400,525 shares issued and outstanding ................... 4,801,050 4,801,050
Additional paid-in capital .................................... 11,484,649 11,484,649
Retained earnings ............................................. 1,520,331 864,202
Accumulated other comprehensive income - net unrealized
gain on available for sale securities, net of tax ......... 458,686 256,115
------------ ------------
Total shareholders' equity ........................... 18,264,716 17,406,016
------------ ------------
Total liabilities and shareholders' equity ........... $237,498,903 $202,569,457
============ ============
See accompanying notes to consolidated financial statements.
3
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest and Dividend Income
Interest and fees on loans ................. $ 2,602,775 $ 2,766,458 $ 7,426,230 $ 8,507,031
Interest and dividends on
investment securities ................... 693,260 487,690 1,667,419 1,577,301
Interest on federal funds sold ............. 50,412 77,319 131,953 444,628
------------ ------------ ------------ ------------
Total interest and dividend income ....... 3,346,447 3,331,467 9,225,602 10,528,960
------------ ------------ ------------ ------------
Interest Expense
Interest on deposits ....................... 1,145,068 1,590,378 3,373,639 5,242,820
Interest on other borrowings ............... 82,606 107 122,892 107
Interest on capital lease obligation ....... 10,101 14,200 33,361 44,919
Interest on collateralized borrowings ...... 5,183 8,572 16,557 29,149
------------ ------------ ------------ ------------
Total interest expense ................... 1,242,958 1,613,257 3,546,449 5,316,995
------------ ------------ ------------ ------------
Net interest income ...................... 2,103,489 1,718,210 5,679,153 5,211,965
Provision for Loan Losses ..................... 84,000 78,000 242,000 180,000
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses ............. 2,019,489 1,640,210 5,437,153 5,031,965
------------ ------------ ------------ ------------
Non-Interest Income
Mortgage brokerage referral fees ........... 846,231 690,743 2,173,502 1,916,082
Loan processing fees ....................... 148,415 115,072 395,469 390,776
Fees and service charges ................... 84,697 61,373 228,491 187,539
Gains and origination fees from loans sold . -- 19,320 249,365 59,464
Loss on impaired investment security ....... -- -- -- (117,678)
Gain (loss) on sale of investment securities 5,542 -- (25,733) --
Other income ............................... 16,323 17,643 56,694 38,118
------------ ------------ ------------ ------------
Total non-interest income ................ 1,101,208 904,151 3,077,788 2,474,301
------------ ------------ ------------ ------------
Non-Interest Expenses
Salaries and benefits ...................... 1,691,463 1,393,808 4,602,020 3,843,830
Occupancy and equipment expenses, net ...... 245,589 242,463 750,474 691,364
Data processing and other outside services . 156,499 156,920 470,279 445,161
Professional services ...................... 83,696 86,045 260,323 266,864
Advertising and promotional expenses ....... 104,184 80,270 259,623 207,074
Forms, printing and supplies ............... 36,404 37,739 115,232 115,704
Regulatory assessments ..................... 24,774 22,032 73,422 68,619
Directors' fees and expenses ............... 22,927 13,900 98,027 44,800
Other operating expenses ................... 210,495 237,902 580,375 719,289
------------ ------------ ------------ ------------
Total non-interest expenses .............. 2,576,031 2,271,079 7,209,775 6,402,705
------------ ------------ ------------ ------------
Income before income taxes ............... 544,666 273,282 1,305,166 1,103,561
------------ ------------ ------------ ------------
Provision for Income Taxes .................... 207,000 102,069 481,000 416,626
------------ ------------ ------------ ------------
Net income ............................... $ 337,666 $ 171,213 $ 824,166 $ 686,935
============ ============ ============ ============
Basic income per share ................... $ 0.140 $ 0.070 $ 0.340 $ 0.290
============ ============ ============ ============
Diluted income per share ................. $ 0.140 $ 0.070 $ 0.340 $ 0.280
============ ============ ============ ============
Dividends per share ...................... $ 0.025 $ 0.020 $ 0.070 $ 0.040
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------------
Net income ................................. $ 337,666 $ 171,213 $ 824,166 $ 686,935
Unrealized holding gains on securities:
Unrealized holding gains arising
during the period, net of taxes ......... 105,946 270,415 202,571 361,365
------------ ------------ ------------ ------------
Comprehensive income .................... $ 443,612 $ 441,628 $ 1,026,737 $ 1,048,300
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
------------------------------
Cash Flows from Operating Activities
Net income ......................................................... $ 824,166 $ 686,935
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of investment premiums and discounts, net 38,807 (10,078)
Originations of loans held for sale ................................ (208,000) (24,810,110)
Proceeds from sales of loans held for sale ......................... 208,000 24,810,110
Gain on sale of loans .............................................. (249,365) --
Provision for loan losses .......................................... 242,000 180,000
Loss on impaired investment security ............................... -- 117,678
Loss on sale of investment securities .............................. 25,733 --
Depreciation and amortization ...................................... 309,360 337,542
Changes in assets and liabilities:
Increase in deferred loan fees ................................. 171,509 60,321
(Increase) decrease in accrued interest receivable ............. (186,749) 25,383
Decrease (increase) in other assets ............................ 15,914 (89,686)
Increase in accrued expenses and other liabilities ............. 384,622 338,220
------------ ------------
Net cash provided by operating activities ...................... 1,575,997 1,646,315
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities ......................... (55,062,997) (13,984,034)
Proceeds from sales of available for sale securities ............... 11,375,386 6,000,000
Principal repayments on available for sale securities .............. 5,876,966 2,973,325
Proceeds from maturities of available for sale securities .......... 5,000,000 499,290
Proceeds from maturities of held to maturity securities ............ -- 500,000
Purchase of Federal Reserve Bank Stock ............................. -- (5,850)
Purchase of Federal Home Loan Bank Stock ........................... (3,400) (24,300)
Net increase in loans .............................................. (16,226,093) (6,392,546)
Proceeds from sale of loan receivable .............................. 1,549,365 --
Purchases of bank premises and equipment ........................... (65,929) (314,886)
------------ ------------
Net cash used in investing activities .......................... (47,556,702) (10,749,001)
------------ ------------
Cash Flows from Financing Activities
Net increase in demand, savings and money market deposits .......... 21,228,748 22,136,171
Net increase (decrease) in time certificates of deposits ........... 2,935,011 (22,806,276)
Increase in FHLB borrowings ........................................ 4,000,000 --
Increase in securities sold under agreements to repurchase ......... 5,700,000 --
Principal payments on capital lease obligation ..................... (89,638) (78,082)
Decrease in collateralized borrowings .............................. (100,000) --
Dividends paid on common stock ..................................... (156,034) (48,004)
Proceeds from issuance of common stock ............................. -- 1,179
------------ ------------
Net cash provided by (used in) financing activities ............ 33,518,087 (795,012)
------------ ------------
Net decrease in cash and cash equivalents ...................... (12,462,618) (9,897,698)
6
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---------------------------
Cash and cash equivalents
Beginning ....................................................... 27,032,811 33,065,071
----------- -----------
Ending .......................................................... $14,570,193 $23,167,373
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest .................................................... $ 3,563,632 $ 5,307,395
=========== ===========
Income Taxes ................................................ $ 554,360 $ 732,748
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Transfer of held to maturity securities to
available for sale securities ............................... $ -- $11,796,300
=========== ===========
Unrealized holding gain on available for sale
securities arising during the period ........................ $ 311,028 $ 604,938
=========== ===========
Dividends declared on common stock .............................. $ 60,013 $ 48,010
=========== ===========
See accompanying notes to consolidated financial statements.
7
Notes to Consolidated Financial Statements
(1) The Consolidated Balance Sheet at December 31, 2001 has been derived from
the audited financial statements of Patriot National Bancorp, Inc.
("Bancorp") at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements.
(2) The accompanying unaudited financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted. The accompanying consolidated
financial statements and related notes should be read in conjunction with
the audited financial statements of Bancorp and notes thereto for the
year ended December 31, 2001.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented. The
results of operations for the three and nine months ended September 30,
2002 are not necessarily indicative of the results of operations that may
be expected for all of 2002.
(3) Bancorp is required to present basic income per share and diluted income
per share in its income statements. Basic income per share amounts are
computed by dividing net income by the weighted average number of common
shares outstanding. Diluted income per share assumes exercise of all
potential common stock in weighted average shares outstanding, unless the
effect is antidilutive. Bancorp is also required to provide a
reconciliation of the numerator and denominator used in the computation
of both basic and diluted income per share. The following is information
about the computation of income per share for the three and nine months
ended September 30, 2002 and 2001.
Quarter ended September 30, 2002
Net Income Shares Amount
----------------------------------
Basic Income Per Share
Income available to common shareholders $ 337,666 2,400,525 $ 0.14
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 25,152 --
----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 337,666 2,425,677 $ 0.14
==================================
8
Quarter ended September 30, 2001
Net Income Shares Amount
----------------------------------
Basic Income Per Share
Income available to common shareholders $ 171,213 2,400,525 $ 0.07
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 25,970 --
----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 171,213 2,426,495 $ 0.07
==================================
Nine months ended September 30, 2002
Net Income Shares Amount
----------------------------------
Basic Income Per Share
Income available to common shareholders $ 824,166 2,400,525 $ 0.34
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 25,127 --
----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 824,166 2,425,652 $ 0.34
==================================
Nine months ended September 30, 2001
Net Income Shares Amount
----------------------------------
Basic Income Per Share
Income available to common shareholders $ 686,935 2,400,476 $ 0.29
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 26,731 --
----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 686,935 2,427,207 $ 0.28
==================================
(4) Bancorp has two reportable segments, the commercial bank and the mortgage
broker. The commercial bank provides its commercial customers with
products such as commercial mortgage and construction loans, working
capital loans, equipment loans and other business financing arrangements,
and provides its consumer customers with residential mortgage loans, home
equity loans and other consumer installment loans. The commercial bank
segment also attracts deposits from both consumer and commercial
customers, and invests such deposits in loans, investments and working
capital. The commercial bank's revenues are generated primarily from net
interest income from its lending, investment and deposit activities.
The mortgage broker solicits and processes conventional mortgage loan
applications from consumers on behalf of permanent investors and
originates loans for sale. Revenues are generated from loan brokerage and
application processing fees received from permanent investors and gains
and origination fees from loans sold.
9
Information about reportable segments and a reconciliation of such
information to the consolidated financial statements for the three and
nine months ended September 30, 2002 and 2001 is as follows (in
thousands):
Quarter ended September 30, 2002
Mortgage Consolidated
Bank Broker Totals
-------------------------------------
Net interest income ..... $ 2,103 $ -- $ 2,103
Non-interest income ..... 69 1,032 1,101
Non-interest expense .... 1,779 797 2,576
Provision for loan losses 84 -- 84
Income before taxes ..... 310 235 545
Assets .................. 236,473 1,026 237,499
Quarter ended September 30, 2001
Mortgage Consolidated
Bank Broker Totals
-------------------------------------
Net interest income ..... $ 1,718 $ -- $ 1,718
Non-interest income ..... 60 844 904
Non-interest expense .... 1,594 677 2,271
Provision for loan losses 78 -- 78
Income before taxes ..... 106 167 273
Assets .................. 197,159 1,061 198,220
Nine months ended September 30, 2002
Mortgage Consolidated
Bank Broker Totals
-------------------------------------
Net interest income ..... $ 5,679 $ -- $ 5,679
Non-interest income ..... 426 2,652 3,078
Non-interest expense .... 5,143 2,067 7,210
Provision for loan losses 242 -- 242
Income before taxes ..... 720 585 1,305
Assets .................. 236,473 1,026 237,499
Nine months ended September 30, 2001
Mortgage Consolidated
Bank Broker Totals
-------------------------------------
Net interest income ..... $ 5,212 $ -- $ 5,212
Non-interest income ..... 71 2,403 2,474
Non-interest expense .... 4,515 1,888 6,403
Provision for loan losses 180 -- 180
Income before taxes ..... 588 515 1,103
Assets .................. 197,159 1,061 198,220
(5) Certain 2001 amounts have been reclassified to conform with the 2002
presentation. Such reclassifications had no effect on net income.
10
(6) In June 2001, the Financial Accounting Standards Board issued SFAS No.
142 "Goodwill and Other Intangible Assets." SFAS No. 142 no longer
permits the amortization of goodwill and indefinite-lived intangible
assets. Instead, these assets must be reviewed annually (or more
frequently under prescribed conditions) for impairment in accordance with
this statement. This impairment test uses a fair value approach rather
than the undiscounted cash flows approach previously required by SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the
reporting unit level, as defined in SFAS No. 142. Step one identifies
potential impairments by comparing the fair value of the reporting unit
to its carrying amount. Step two, which is only performed if there is a
potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied
value of that goodwill, an impairment loss is recognized in an amount
equal to that excess.
Bancorp adopted the provisions of SFAS No. 142 effective January 1, 2002
and, as a result, goodwill is no longer amortized, and is evaluated for
impairment under SFAS No. 142. Based on Bancorp's initial goodwill
impairment test, no impairment losses have been recognized related to
goodwill upon the adoption of SFAS No. 142. Bancorp will perform the
required annual impairment reviews as of October 31 of each year. In
addition, the following represents the effect of adopting SFAS No. 142 on
Bancorp's net income and earnings per share for all periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------- ---------------------------
Reported net income ...... $ 337,666 $ 171,213 $ 824,166 $ 686,935
Add goodwill amortization -- 31,003 -- 92,933
----------- ----------- ----------- -----------
Adjusted net income ...... $ 337,666 $ 202,216 $ 824,166 $ 779,868
=========== =========== =========== ===========
Basic earnings per share
Reported net income .... $ 0.14 $ 0.07 $ 0.34 $ 0.29
Goodwill amortization .. -- 0.01 -- 0.04
----------- ----------- ----------- -----------
Adjusted net income .... $ 0.14 $ 0.08 $ 0.34 $ 0.33
=========== =========== =========== ===========
Diluted earnings per share
Reported net income .... $ 0.14 $ 0.07 $ 0.34 $ 0.28
Goodwill amortization .. -- 0.01 -- 0.04
----------- ----------- ----------- -----------
Adjusted net income ... $ 0.14 $ 0.08 $ 0.34 $ 0.32
=========== =========== =========== ===========
11
(7) Other comprehensive income which is comprised solely of the change in
unrealized gains and losses on available for sale securities is as
follows:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
Before Tax Tax Net of Tax Before Tax Tax Net of Tax
Amount Effect Amount Amount Effect Amount
------------------------------------------------------------------------------------
Unrealized holding gain
arising during the period ......... $ 176,422 $ (67,040) $ 109,382 $ 285,295 $ (99,484) $ 185,811
Reclassification adjustment for
(losses) gains recognized in income (5,542) 2,106 (3,436) 25,733 (8,973) 16,760
------------------------------------------------------------------------------------
Unrealized holding gain on
available for sale securities,
net of taxes ...................... $ 170,880 $ (64,934) $ 105,946 $ 311,028 $(108,457) $ 202,571
===================================================================================
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
Before Tax Tax Net of Tax Before Tax Tax Net of Tax
Amount Effect Amount Amount Effect Amount
------------------------------------------------------------------------------------
Unrealized holding gain
arising during the period ......... $ 452,728 $(182,313) $ 270,415 $ 333,112 $(134,109) $ 199,003
Adjustment for unrealized
losses of held to maturity
securities transferred to
available for sale securities ..... -- -- -- 154,147 (62,075) 92,072
Reclassification adjustment for
losses recognized in income ....... -- -- -- 117,679 (47,389) 70,290
------------------------------------------------------------------------------------
Unrealized holding gain on
available for sale securities,
net of taxes ...................... $ 452,728 $(182,313) $ 270,415 $ 604,938 $(243,573) $ 361,365
===================================================================================
(8) During the nine months ended September 30, 2002 the Bank entered into
borrowing transactions with the following existing terms:
Amount Rate Maturity
------ ---- --------
Securities sold under agreements to repurchase:
$2,900,000 1.84% 11/21/2002
$2,800,000 2.69% 05/23/2003
Federal Home Loan Bank Advances:
$2,000,000 4.48% 05/13/2005
$2,000,000 5.11% 05/14/2007
12
Item 2. Management's Discussion and Analysis or Plan of Operation
(a) Plan of Operation
Not applicable since Bancorp had revenues from operations in each of the last
two fiscal years.
(b) Management's Discussion and Analysis of
Financial Condition and Results of Operations
SUMMARY
Bancorp had net income of $338,000 ($0.14 basic income per share and $0.14
diluted income per share) for the quarter ended September 30, 2002, compared to
net income of $171,000 ($0.07 basic income per share and $0.07 diluted income
per share) for the quarter ended September 30, 2001. For the nine-month period
ended September 30, 2002, net income was $824,000 as compared to $687,000 for
the same period last year.
Total assets increased $34.9 million from $202.6 million at December 31, 2001 to
$237.5 million at September 30, 2002. Cash and cash equivalents decreased $12.4
million to $14.6 million at September 30, 2002 from $27.0 million at December
31, 2001. The available for sale securities portfolio increased $33.1 million to
$67.8 million at September 30, 2002 from $34.7 million at December 31, 2001. The
net loan portfolio increased $14.5 million from $135.7 million at December 31,
2001 to $150.2 million at September 30, 2002. Deposits increased $24.1 million
to $207.4 million at September 30, 2002 from $183.3 million at December 31,
2001. Total shareholders' equity increased $900,000 to $18.3 million at
September 30, 2002 from $17.4 million at December 31, 2001.
FINANCIAL CONDITION
Assets
------
Bancorp's total assets increased $34.9 million from $202.6 million at December
31, 2001 to $237.5 million at September 30, 2002. Cash and cash equivalents
decreased $12.4 million to $14.6 million at September 30, 2002. Cash and due
from banks decreased $1.1 million, federal funds sold decreased $8.7 million and
short term investments decreased $2.6 million. This net decrease along with the
increase in deposits and borrowings funded the increases in available for sale
securities and loans. Available for sale securities increased $33.1 million;
$9.7 million of this increase represents an interest rate leveraging strategy
which was funded by Federal Home Loan Bank borrowings and securities sold under
agreements to repurchase.
13
Loans
-----
Bancorp's net loan portfolio increased $14.5 million from $135.7 million at
December 31, 2001 to $150.2 million at September 30, 2002. Increases in
residential real estate loans of $12.0 million, commercial real estate loans of
$4.3 million, construction loans of $1.7 million and consumer loans of $0.6
million were partially offset by decreases in commercial loans of $2.9 million
and home equity loans of $1.2 million. At September 30, 2002, the net loan to
deposit ratio was 72.4% and the net loan to total assets ratio was 63.2%. At
December 31, 2001, the net loan to deposit ratio was 74.0% and the net loan to
total assets ratio was 67.0%. Based on loan applications in process and
Bancorp's hiring of additional loan officers, management anticipates strong loan
growth during the last quarter of 2002.
Allowance for Loan Losses
-------------------------
The provision for loan losses is a charge against income and an addition to the
allowance for loan losses. Management's judgement in determining the adequacy of
the allowance is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and other relevant factors.
Based upon this evaluation, management believes the allowance for loan losses of
$2.1 million at September 30, 2002, which represents 1.41% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb losses
on existing loans which may become uncollectible. At December 31, 2001, the
allowance for loan losses was $1.9 million or 1.38% of gross loans outstanding.
Analysis of Allowance for Loan Losses
September 30,
(Thousands of dollars) 2002 2001
------------------------------------------------------------------------------
Balance at beginning of period $1,894 $1,645
----------------------------------
Charge-offs 0 (2)
Recoveries 10 1
----------------------------------
Net recoveries (charge-offs) 10 (1)
----------------------------------
Provision charged to operations 242 180
----------------------------------
Balance at end of period $2,146 $1,824
==================================
Ratio of net recoveries (charge-offs)
during the period to average loans
outstanding during the period. 0.01% 0.00%
==================================
14
Non-Accrual, Past Due and Restructured Loans
--------------------------------------------
The following table presents non-accruing and past due loans:
September 30, December 31,
(Thousands of dollars) 2002 2001
---------------------------------------------------------------------
Loans delinquent over 90
days still accruing $ 109 $1,300
Non-accruing loans 337 1,654
----------------------------------
Total $ 446 $2,954
==================================
% of Total Loans 0.29% 2.14%
% of Total Assets 0.19% 1.46%
The decrease in loans delinquent over 90 days and still accruing is due
primarily to the renewal, extension or payoff of the loans so classified. The
decrease in non-accruing loans is due to the sale of a $1.3 million residential
real estate loan for which the Bank realized a gain of $249,000 and the payoff
of another loan in the amount of $204,000 for which the Bank recovered $22,000
in delinquent interest.
Potential Problem Loans
-----------------------
At September 30 2002, Bancorp had no loans other than those disclosed in the
table above, as to which management has significant doubts as to the ability of
the borrower to comply with the present repayment terms.
Deposits
--------
Total deposits increased $24.1 million from $183.3 million at December 31, 2001
to $207.4 million at September 30, 2002. Noninterest bearing deposits increased
$1.1 million due to higher levels of both commercial and personal demand deposit
accounts. Interest bearing deposits increased $23.0 million. Money market fund
accounts and certificates of deposit increased $46.7 million and $2.9 million,
respectively. The increase in money market fund deposits is due to competitive
pricing as well as to an inflow of funds from the stock market and mutual funds;
some of this increase was funded by funds shifted from certificates of deposit
due to the uncertainty in interest rates. Super NOW accounts, formerly priced at
a premium rate, decreased $22.0 million; volatile lawyer trust deposit accounts
decreased $1.6 million and savings accounts decreased $3.0 million; some of
these decreases were transfers that resulted in the increase in the money market
fund product.
15
RESULTS OF OPERATIONS
Interest and dividend income and expense
----------------------------------------
Bancorp's interest and dividend income increased $15,000 or 0.5% for the quarter
ended September 30, 2002 as compared to the same period in 2001. This increase
is due to the growth in interest earning assets which was largely offset by a
lower interest rate environment. For the nine months ended September 30, 2002,
interest and dividend income was $9.2 million which represents a decrease of
$1.3 million compared to interest and dividend income of $10.5 million for the
same period last year. Although interest earning assets increased, interest
income decreased for the nine months ended September 30, 2002 due to the lower
interest rate environment in 2002 as compared to 2001 when interest rates were
declining.
Bancorp's interest expense decreased 23.0% or $370,000 for the quarter ended
September 30, 2002 compared to the same period in 2001. Despite an increase in
interest bearing liabilities, interest expense decreased due to the expiration
of premium priced deposit accounts and a lower interest rate environment cited
earlier. For the nine months ended September 30, 2002, interest expense
decreased $1.8 million or 33.3% to $3.5 million as compared to $5.3 million for
the nine months ended September 30, 2001. The decrease in interest expense for
the nine months ended September 30, 2002 is also due to the lower interest rate
environment despite the increase in interest bearing liabilities. Included in
interest expense for the three and nine months ended September 30, 2002 is
$83,000 and $123,000 respectively, due to FHLB Advances and securities sold
under agreements to repurchase transactions entered into during the second
quarter of 2002.
Non-interest income
-------------------
Non-interest income increased 21.8% or $197,000 to $1.1 million for the quarter
ended September 30, 2002 as compared to $904,000 for the comparable period last
year. The continued favorable interest rate environment for borrowers has
resulted in the maintenance of historical high mortgage brokerage and referral
fees. Mortgage brokerage and referral fees increased 22.5% or $155,000 to
$846,000 for the quarter ended September 30, 2002 as compared to $691,000 for
the same period last year. Loan processing fees increased 29.0% or $33,000 to
$148,000 for the quarter ended September 30, 2002 compared to $115,000 for the
same period in 2001. Increases in deposit accounts and transaction volume
resulted in an increase in fees and service charges of $24,000 or 38.0% to
$85,000 for the quarter ended September 30, 2002 compared to $61,000 for the
same period last year.
For the nine months ended September 30, 2002, non-interest income increased
$604,000 or 24.4% to $3.1 million as compared to $2.5 million for the same
period last year.
16
Mortgage broker and referral fees increased $258,000 or 13.4% to $2.2 million
for the nine months ended September 30, 2002 from $1.9 million for the nine
months ended September 30, 2001 due to the continued favorable interest rate
environment for borrowers. Included in non-interest income for the nine months
ended September 30, 2002 is a gain of $249,000 from the sale of a nonperforming
loan. Fees and service charges increased 21.8%, or $40,000, to $228,000 for the
nine months ended September 30, 2002, from $188,000 for the nine months ended
September 30, 2001; this increase is the result of increases in account and
transaction volumes. Included in non-interest income for the nine months ended
September 30, 2001 was a charge of $118,000 representing a write down provision
made for the permanent impairment of a debt security.
Non-interest expenses
---------------------
Non-interest expenses increased 13.4% or $305,000 to $2.6 million for the
quarter ended September 30, 2002 from $2.3 million for the quarter ended
September 30, 2001. Salaries and benefits expense increased 21.4%, or $297,000,
to $1.7 million for the quarter ended September 30, 2002 from $1.4 million for
the quarter ended September 30, 2001, due primarily to higher levels of
commissions and production related incentive compensation accruals. Advertising
and promotional expenses increased 29.8% or $24,000 to $104,000 for the quarter
ended September 30, 2002 from $80,000 for the comparable period last year due to
an increased level of promotional campaigns. Directors' fees increased $9,000
from $14,000 for the quarter ended September 30, 2001 to $23,000 for the quarter
ended September 30, 2002 due to per meeting fee increases and an increase in the
number of committee meetings. Other operating expenses decreased $28,000 or
11.5% to $210,000 for the quarter ended September 30, 2002 from $238,000 for the
quarter ended September 30, 2001; $31,000 of this decrease is due to the
cessation of the amortization of goodwill as required by SFAS No. 142.
For the nine months ended September 30, 2002, non-interest expenses increased
$807,000 or 12.6% to $7.2 million from $6.4 million for the same period last
year for similar reasons previously cited. Salaries and benefits increased
$758,000 or 19.7% to $4.6 million for the nine months ended September 30, 2002
from $3.8 million for the same period last year; this increase is due to higher
levels of production related incentive compensation accruals, staffing additions
made during the second half of 2001 for the Norwalk Office and compensation
adjustments made during the fourth quarter of 2001. Occupancy and equipment
expense, net increased $59,000 to $750,000 for the nine months ended September
30, 2002 from $691,000 for the same period last year; this increase is a result
of increases in depreciation of leasehold improvements as well as furniture and
equipment due primarily to the Norwalk Office which opened in August 2001 and a
payment for a lease buyout for the Hauppauge location which relocated to
Melville. Directors' fees increased $53,000 to $98,000 for the nine months ended
September 30, 2002 from $45,000 for the same period last year due to
compensation payments made to directors upon the attainment of certain years of
service and not standing
17
for reelection, per meeting fee increase and an increase in the number of
committee meetings. Increased levels of promotional campaigns for the nine
months ended September 30, 2002 resulted in an increase of $53,000 to $260,000
in advertising and promotional expenses as compared to $207,000 for the same
period last year. Other operating expenses decreased $139,000 to $580,000 for
the nine months ended September 30, 2002 as compared to $719,000 for the same
period last year. Included in the decrease in other non-interest expense is
$93,000 due to the cessation of the amortization of goodwill as required by SFAS
No. 142.
Bancorp has received regulatory approval to establish an additional branch
location which will result in additional capital expenditures as well as an
increase in salaries and benefits and occupancy and equipment expenses.
Management anticipates that the new branch will open early in 2003. Management
has filed applications for two additional branch locations.
Income Taxes
------------
Bancorp recorded income tax expense of $207,000 for the quarter ended September
30, 2002 as compared to $102,000 for the quarter ended September 30, 2001. For
the nine months ended September 30, 2002, income tax expense was $481,000 as
compared to $417,000 for the same period last year. These changes are related
primarily to the changes in pre-tax income. The effective tax rates for the
quarters ended September 30, 2002 and September 30, 2001 were 38.0% and 37.4%,
respectively; the effective tax rates for the nine months ended September 30,
2002 and September 30, 2001 were 36.8% and 37.7%, respectively.
LIQUIDITY
Bancorp's liquidity ratio was 34.7% and 30.6% at September 30, 2002 and 2001,
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 consolidated balance sheets are considered liquid assets: cash and
due from banks, federal funds sold, short term investments and available for
sale securities. Liquidity is a measure of Bancorp's ability to generate
adequate cash to meet financial obligations. The principal cash requirements of
a financial institution are to cover downward fluctuations in deposit accounts
and increases in its loan portfolio. Management believes Bancorp's short-term
assets have sufficient liquidity to cover loan demand, potential fluctuations in
deposit accounts, the costs related to opening new branch offices and to meet
other anticipated cash requirements.
18
CAPITAL
The following table illustrates the Bank's regulatory capital ratios at
September 30, 2002 and December 31, 2001 respectively:
September 30, 2002 December 31, 2001
------------------ -----------------
Leverage Capital ............. 7.27% 8.11%
Tier 1 Risk-based Capital..... 9.81% 9.57%
Total Risk-based Capital ..... 11.06% 10.69%
Capital adequacy is one of the most important factors used to determine the
safety and soundness of individual banks and the banking system. Based on the
above ratios, the Bank is considered to be "well capitalized" at September 30,
2002 under applicable regulations. To be considered "well-capitalized," an
institution must generally have a leverage capital ratio of at least 5%, a Tier
1 risk-based capital ratio of at least 6% and a total risk-based capital ratio
of at least 10%. Bancorp is also considered to be "well capitalized" under the
regulatory framework specified by the Federal Reserve Bank. Bancorp's actual and
required ratios are not substantially different from those shown above.
IMPACT OF INFLATION AND CHANGING PRICES
Bancorp's consolidated financial statements have been prepared in terms of
historical dollars, without considering changes in the 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 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, inflation
can directly affect the value of loan collateral, in particular, real estate.
Inflation, or disinflation, could significantly affect Bancorp's earnings in
future periods.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in Bancorp's public reports, including this report,
and in particular in this "Management's Discussion and Analysis of Financial
Condition and Results of Operation," may be forward looking and subject to a
variety of risks and uncertainties. These factors include, but are not limited
to, (1) changes in prevailing interest rates which would affect the interest
earned on Bancorp's interest earning assets and the interest paid on its
interest bearing liabilities, (2) the timing of repricing of Bancorp's interest
earning assets and interest bearing liabilities, (3) the effect of changes in
governmental monetary policy, (4) the effect of changes in regulations
applicable to
19
Bancorp and the conduct of its business, (5) changes in competition among
financial service companies, including possible further encroachment of
non-banks on services traditionally provided by banks and the impact of recently
enacted federal legislation, (6) the ability of competitors which are larger
than Bancorp to provide products and services which it is impracticable for
Bancorp to provide, (7) the effects of Bancorp's opening of branches, and (8)
the effect of any decision by Bancorp to engage in any business not historically
permitted to it. Other such factors may be described in Bancorp's future filings
with the SEC.
Item 3. Controls and Procedures
Based on an evaluation of Bancorp's disclosure controls and procedures performed
by Bancorp's Chief Executive Officer and its Chief Financial Officer within 90
days of the filing of this report, Bancorp's Chief Executive Officer and Chief
Financial Officer concluded that Bancorp's disclosure controls and procedures
have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of Bancorp that are designed to ensure that information required to
be disclosed by Bancorp in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by Bancorp in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to Bancorp's management,
including its principal executive officer or officers and its principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Since the date of the evaluation described above, there were no significant
changes in Bancorp's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) No. Description
99 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) The issuer filed no reports on Form 8-K during the third quarter of
2002.
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PATRIOT NATIONAL BANCORP, INC.
(Registrant)
By: /s/ Robert F. O'Connell
---------------------------------
Robert F. O'Connell,
Senior Executive Vice President
Chief Financial Officer
(On behalf of the registrant and
as chief financial officer)
November 14, 2002
21
CERTIFCATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14
I, Angelo De Caro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
the registrant's Board of Directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
22
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrants other certifying officer and I have indicated in this
quarterly report whether there were any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Angelo De Caro
------------------
Angelo De Caro,
Chairman and Chief Executive Officer
(Principal executive officer)
November 14, 2002
23
CERTIFCATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14
I, Robert F. O'Connell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
the registrant's Board of Directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
24
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrants other certifying officer and I have indicated in this
quarterly report whether there were any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Robert F. O'Connell
------------------------
Robert F. O'Connell,
Senior Executive Vice President
(Principal financial officer)
November 14, 2002
25
EXHIBIT INDEX
No. Description
99 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.