UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2003 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, 2,400,725 shares issued and outstanding
as of the close of business July 31, 2003.
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 12
Item 3. Controls and Procedures 20
Part II OTHER INFORMATION
-------
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks ............................................ $ 6,221,221 $ 5,385,757
Federal funds sold ................................................. 21,000,000 3,000,000
Short term investments ............................................. 8,217,700 3,348,968
------------ ------------
Cash and cash equivalents ..................................... 35,438,921 11,734,725
Available for sale securities (at fair value) ...................... 76,263,885 60,618,366
Federal Reserve Bank stock ......................................... 691,150 481,050
Federal Home Loan Bank stock ....................................... 1,077,300 621,300
Loans receivable (net of allowance for loan losses: 2003 $2,626,675;
2002 $2,372,454) .............................................. 183,599,561 170,794,939
Accrued interest receivable ........................................ 1,233,828 1,311,453
Premises and equipment, net ........................................ 1,201,083 789,197
Deferred tax asset, net ............................................ 947,900 754,696
Goodwill ........................................................... 930,091 930,091
Other assets ....................................................... 691,169 460,936
------------ ------------
Total assets .............................................. $302,074,888 $248,496,753
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing deposits .............................. $ 24,146,114 $ 25,519,809
Interest bearing deposits ................................. 224,161,275 192,391,451
------------ ------------
Total deposits ....................................... 248,307,389 217,911,260
Securities sold under agreements to repurchase ................ 5,700,000 5,700,000
Federal Home Loan Bank borrowings ............................. 14,000,000 4,000,000
Trust preferred securities .................................... 8,000,000 --
Capital lease obligation ...................................... 175,949 243,231
Collateralized borrowings ..................................... 299,444 349,444
Accrued expenses and other liabilities ........................ 6,778,488 1,747,863
------------ ------------
Total liabilities .................................... 283,261,270 229,951,798
------------ ------------
Shareholders' equity
Common stock, $2 par value: 5,333,333 shares authorized; shares
issued and outstanding: 2003 - 2,400,725; 2002 - 2,400,525 4,801,450 4,801,050
Additional paid-in capital .................................... 11,485,449 11,484,649
Retained earnings ............................................. 2,270,848 1,688,158
Accumulated other comprehensive income - net unrealized
gain on available for sale securities, net of tax ......... 255,871 571,098
------------ ------------
Total shareholders' equity ........................... 18,813,618 18,544,955
------------ ------------
Total liabilities and shareholders' equity ........... $302,074,888 $248,496,753
============ ============
See accompanying notes to consolidated financial statements.
3
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest and Dividend Income
Interest and fees on loans ................. $ 3,040,352 $ 2,438,451 $ 5,938,354 $ 4,823,456
Interest and dividends on
investment securities ................... 484,031 468,547 1,008,246 974,159
Interest on federal funds sold ............. 45,756 39,852 56,756 81,541
----------- ----------- ----------- -----------
Total interest and dividend income ....... 3,570,139 2,946,850 7,003,356 5,879,156
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits ....................... 1,169,853 1,081,217 2,231,746 2,228,571
Interest on Federal Home Loan Bank
borrowings ........................... 79,423 26,106 127,373 26,458
Interest on Trust Preferred Securities ..... 90,890 -- 95,791 --
Interest on other borrowings ............... 35,368 30,414 76,926 48,463
----------- ----------- ----------- -----------
Total interest expense ................... 1,375,534 1,137,737 2,531,836 2,303,492
----------- ----------- ----------- -----------
Net interest income ...................... 2,194,605 1,809,113 4,471,520 3,575,664
Provision for Loan Losses ..................... 90,000 84,000 255,000 158,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses ............. 2,104,605 1,725,113 4,216,520 3,417,664
----------- ----------- ----------- -----------
Non-Interest Income
Mortgage brokerage referral fees ........... 961,489 671,229 1,894,272 1,327,271
Loan processing fees ....................... 225,056 122,257 403,804 247,055
Fees and service charges ................... 87,240 70,949 157,667 143,794
Gains and origination fees from loans sold . -- 249,365 -- 249,365
Gain (loss) on sale of investment securities 182,575 -- 307,739 (31,275)
Other income ............................... 21,468 18,965 56,936 40,370
----------- ----------- ----------- -----------
Total non-interest income ................ 1,477,828 1,132,765 2,820,418 1,976,580
----------- ----------- ----------- -----------
Non-Interest Expenses
Salaries and benefits ...................... 1,944,294 1,502,206 3,831,882 2,910,557
Occupancy and equipment expenses, net ...... 328,284 242,816 598,708 504,885
Data processing and other outside services . 166,269 143,246 358,506 313,780
Professional services ...................... 87,577 105,790 177,242 176,627
Advertising and promotional expenses ....... 85,952 98,442 155,274 155,438
Forms, printing and supplies ............... 58,358 41,925 102,436 78,828
Other operating expenses ................... 335,474 272,735 638,155 493,629
----------- ----------- ----------- -----------
Total non-interest expenses .............. 3,006,208 2,407,160 5,862,203 4,633,744
----------- ----------- ----------- -----------
Income before income taxes ............... 576,225 450,718 1,174,735 760,500
----------- ----------- ----------- -----------
Provision for Income Taxes .................... 227,000 163,000 460,000 274,000
----------- ----------- ----------- -----------
Net income ............................... $ 349,225 $ 287,718 $ 714,735 $ 486,500
=========== =========== =========== ===========
Basic income per share ................... $ 0.15 $ 0.12 $ 0.30 $ 0.20
=========== =========== =========== ===========
Diluted income per share ................. $ 0.14 $ 0.12 $ 0.29 $ 0.20
=========== =========== =========== ===========
Dividends per share ...................... $ 0.030 $ 0.025 $ 0.055 $ 0.045
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income..................................... $ 349,225 $ 287,718 $ 714,735 $ 486,500
Unrealized holding (losses) gains on securities:
Unrealized holding (losses) gains arising
during the period, net of taxes............. (130,739) 249,073 (315,227) 96,626
----------- ----------- ----------- -----------
Comprehensive income........................ $ 218,486 $ 536,791 $ 399,508 $ 583,126
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------------------------
Cash Flows from Operating Activities
Net income ......................................................... $ 714,735 $ 486,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of investment premiums and discounts, net 239,259 (9,737)
Originations of loans held for sale ................................ -- (208,000)
Proceeds from sales of loans held for sale ......................... -- 208,000
Gain on sale of loans .............................................. -- (249,365)
Provision for loan losses .......................................... 255,000 158,000
(Gain) loss on sale of investment securities ....................... (307,739) 31,275
Depreciation and amortization ...................................... 177,520 213,885
Loss on disposal of bank premises and equipment .................... 2,037 --
Changes in assets and liabilities:
Increase in deferred loan fees ................................. 81,310 164,343
Decrease (increase) in accrued interest receivable ............. 77,625 (65,373)
Increase in other assets ....................................... (230,233) (19,757)
Decrease in accrued expenses and other liabilities ............. (72,669) (61,722)
------------ ------------
Net cash provided by operating activities ...................... 936,845 648,049
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities ......................... (35,642,429) (37,015,836)
Proceeds from sales of available for sale securities ............... 7,094,321 10,369,844
Principal repayments on available for sale securities .............. 11,353,924 2,922,141
Proceeds from maturities of available for sale securities .......... 6,200,000 1,000,000
Purchase of Federal Home Loan Bank Stock ........................... (456,000) (3,400)
Purchase of Federal Reserve Bank Stock ............................. (210,100) --
Net increase in loans .............................................. (13,140,932) (3,896,104)
Proceeds from sale of loan receivable .............................. -- 1,549,365
Purchases of bank premises and equipment ........................... (598,343) (56,614)
Proceeds from sale of bank premises and equipment .................. 6,900 --
------------ ------------
Net cash used in investing activities .......................... (25,392,659) (25,130,604)
------------ ------------
Cash Flows from Financing Activities
Net (decrease) increase in demand, savings and money market deposits (468,360) 13,434,970
Net increase (decrease) in time certificates of deposits ........... 30,864,489 (4,208,025)
Increase in FHLB borrowings ........................................ 10,000,000 4,000,000
Proceeds from issuance of trust preferred securities ............... 7,760,000 --
Debt issuance costs ................................................ 240,000 --
Increase in securities sold under agreements to repurchase ......... -- 5,700,000
Principal payments on capital lease obligation ..................... (67,282) (58,739)
Decrease in collateralized borrowings .............................. (50,000) (75,000)
Dividends paid on common stock ..................................... (120,037) (96,021)
Proceeds from issuance of common stock ............................. 1,200 --
------------ ------------
Net cash provided by financing activities ...................... 48,160,010 18,697,185
------------ ------------
Net increase (decrease) in cash and cash equivalents ........... 23,704,196 (5,785,370)
6
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------------------------
Cash and cash equivalents
Beginning ....................................................... 11,734,725 27,032,811
------------ ------------
Ending .......................................................... $ 35,438,921 $ 21,247,441
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest .................................................... $ 2,447,679 $ 2,317,295
============ ============
Income Taxes ................................................ $ 607,703 $ 347,146
============ ============
Supplemental disclosure of noncash investing and financing activities:
Unrealized holding (loss) gain on available for sale
securities arising during the period ........................ $ (508,431) $ 140,147
============ ============
Liabilities for securities purchased but not settled ............ $ 5,091,286 $ --
============ ============
Accrued dividends declared on common stock ...................... $ 72,022 $ 60,013
============ ============
See accompanying notes to consolidated financial statements.
7
Notes to Consolidated Financial Statements
(1) The Consolidated Balance Sheet at December 31, 2002 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, 2002.
The information furnished reflects, in the opinion of management, all
normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods presented. The results of operations for
the three and six months ended June 30, 2003 are not necessarily indicative
of the results of operations that may be expected for all of 2003.
(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 six months ended June
30, 2003 and 2002.
Quarter ended June 30, 2003
Net Income Shares Amount
------------------------------------
Basic Income Per Share
Income available to common shareholders $ 349,225 2,400,725 $ 0.15
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 35,137 (0.01)
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 349,225 2,435,862 $ 0.14
========= ========= ========
8
Quarter ended June 30, 2002
Net Income Shares Amount
------------------------------------
Basic Income Per Share
Income available to common shareholders $ 287,718 2,400,525 $ 0.12
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 25,398 --
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 287,718 2,425,923 $ 0.12
========= ========= ========
Six months ended June 30, 2003
Net Income Shares Amount
------------------------------------
Basic Income Per Share
Income available to common shareholders $ 714,735 2,400,725 $ 0.30
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 35,986 (0.01)
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 714,735 2,436,711 $ 0.29
========= ========= ========
Six months ended June 30, 2002
Net Income Shares Amount
------------------------------------
Basic Income Per Share
Income available to common shareholders $ 486,500 2,400,525 $ 0.20
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 25,114 --
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 486,500 2,425,639 $ 0.20
========= ========= ========
(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 six
months ended June 30, 2003 and 2002 is as follows (in thousands):
Quarter ended June 30, 2003
Mortgage Consolidated
Bank Broker Totals
------------------------------------
Net interest income ..... $ 2,195 $ -- $ 2,195
Non-interest income ..... 303 1,175 1,478
Non-interest expense .... 2,071 935 3,006
Provision for loan losses 90 -- 90
Income before taxes ..... 336 240 576
Assets .................. 301,067 1,008 302,075
Quarter ended June 30, 2002
Mortgage Consolidated
Bank Broker Totals
------------------------------------
Net interest income ..... $ 1,809 $ -- $ 1,809
Non-interest income ..... 317 816 1,133
Non-interest expense .... 1,774 633 2,407
Provision for loan losses 84 -- 84
Income before taxes ..... 268 183 451
Assets .................. 220,734 1,054 221,788
Quarter ended June 30, 2003
Mortgage Consolidated
Bank Broker Totals
------------------------------------
Net interest income ..... $ 4,472 $ -- $ 4,472
Non-interest income ..... 546 2,274 2,820
Non-interest expense .... 4,042 1,820 5,862
Provision for loan losses 255 -- 255
Income before taxes ..... 721 454 1,175
Assets .................. 301,067 1,008 302,075
Quarter ended June 30, 2002
Mortgage Consolidated
Bank Broker Totals
------------------------------------
Net interest income ..... $ 3,576 $ -- $ 3,576
Non-interest income ..... 357 1,620 1,977
Non-interest expense .... 3,364 1,270 4,634
Provision for loan losses 158 -- 158
Income before taxes ..... 411 350 761
Assets .................. 220,734 1,054 221,788
(5) Certain 2002 amounts have been reclassified to conform with the 2003
presentation. Such reclassifications had no effect on net income.
10
(6) 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 Six Months Ended
June 30, 2003 June 30, 2003
Before Tax Tax Net of Tax Before Tax Tax Net of Tax
Amount Effect Amount Amount Effect Amount
--------- --------- --------- --------- --------- ---------
Unrealized holding loss
arising during the period ..... $ (28,295) $ 10,752 $ (17,543) $(200,692) $ 76,263 $(124,429)
Reclassification adjustment
for gains recognized in income (182,575) 69,379 (113,196) (307,739) 116,941 (190,798)
--------- --------- --------- --------- --------- ---------
Unrealized holding loss on
available for sale securities,
net of taxes .................. $(210,870) $ 80,131 $(130,739) $(508,431) $ 193,204 $(315,227)
========= ========= ========= ========= ========= =========
Three Months Ended Six Months Ended
June 30, 2002 June 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 ..... $ 395,375 $(146,302) $ 249,073 $ 108,872 $ (33,810) $ 75,062
Reclassification adjustment
for losses recognized in income -- -- -- 31,275 (9,711) 21,564
--------- --------- --------- --------- --------- ---------
Unrealized holding gain on
available for sale securities,
net of taxe ................... $ 395,375 $(146,302) $ 249,073 $ 140,147 $ (43,521) $ 96,626
========= ========= ========= ========= ========= =========
(7) At the end of the first quarter of 2003, Bancorp created a statutory trust
of which Bancorp owns 100% of the capital stock. The trust issued $8.0
million in preferred securities to investors at an initial rate of 4.41%,
which rate may adjust quarterly based on changes to LIBOR. The duration of
the trust is 35 years with early redemption at par at the Company's option
after five years, or earlier in the event of certain regulatory or tax
changes. The proceeds from the issuance of the preferred securities were
used to purchase junior subordinated debt from Bancorp. Bancorp primarily
invested the funds from the issuance of the debt in the Bank, which in turn
used the proceeds to fund general operations of the Bank. The securities
qualify for up to 25% of Bancorp's Tier 1 Capital with the remainder
qualifying as Tier 2 Capital.
(8) During the three months ended June 30, 2003 the Bank entered into $10
million in borrowing transactions with the Federal Home Loan Bank as part
of a leveraging strategy; these advances have original terms of three
months to four years with interest rates ranging from 1.30% to 2.96%
(9) Bancorp has executed a ten-year lease renewal for its main office location
which lease currently expires August 2004 and a ten-year lease for a new
branch location scheduled to open in the beginning of the fourth quarter of
2003. The future minimum rental commitments under these leases total $2.6
million.
11
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 $349,000 ($0.15 basic income per share and $0.14
diluted income per share) for the quarter ended June 30, 2003, compared to net
income of $288,000 ($0.12 basic income per share and $0.12 diluted income per
share) for the quarter ended June 30, 2002. For the six-month period ended June
30, 2003, net income was $715,000 ($0.30 basic income per share and $0.29
diluted income per share) as compared to net income of $487,000 ($0.20 basic
income per share and $0.20 diluted income per share) for the six months ended
June 30, 2002.
Total assets increased $53.6 million from $248.5 million at December 31, 2002 to
$302.1 million at June 30, 2003. Cash and cash equivalents increased $23.7
million to $35.4 million at June 30, 2003 from $11.7 million at December 31,
2002. The available for sale securities portfolio increased $15.7 million to
$76.3 million at June 30, 2003 from $60.6 million at December 31, 2002. The net
loan portfolio increased $12.8 million from $170.8 million at December 31, 2002
to $183.6 million at June 30, 2003. Deposits increased $30.4 million to $248.3
million at June 30, 2003 from $217.9 million at December 31, 2002. Borrowings
and other liabilities increased $22.9 million to $34.9 million at June 30, 2003
from $12.0 million at December 31, 2002. Total shareholders' equity increased
$269,000 to $18.8 million at June 30, 2003 from $18.5 million at December 31,
2002.
FINANCIAL CONDITION
Assets
------
Bancorp's total assets increased $53.6 million from $248.5 million at December
31, 2002 to $302.1 million at June 30, 2003. Cash and cash equivalents increased
$23.7 million to $35.4 million at June 30, 2003. Cash and due from banks
increased $0.8 million; federal funds sold increased $18.0 million and short
term investments increased $4.9 million. The increases in federal funds sold and
short term investments is due primarily to increases in deposits largely as a
result of the opening of two new branch offices during the second quarter of
2003. Available for sale securities increased $15.7 million, net of principal
12
repayments on mortgage backed securities; this increase represents the
investment of funds from the closing of the trust preferred securities offering
at the end of the first quarter of 2003 and an interest rate leveraging strategy
which was funded by Federal Home Loan Bank borrowings during the second quarter
of 2003.
Loans
-----
Bancorp's net loan portfolio increased $12.8 million from $170.8 million at
December 31, 2002 to $183.6 million at June 30, 2003. Increases in construction
loans of $8.5 million, commercial real estate loans of $5.7 million, commercial
loans of $1.7 million, and consumer loans of $0.4 million were partially offset
by decreases in residential real estate loans of $3.5 million. At June 30, 2003,
the net loan to deposit ratio was 73.9% and the net loan to total assets ratio
was 60.8%. At December 31, 2002, the net loan to deposit ratio was 78.4% and the
net loan to total assets ratio was 68.7%. Based on loan applications in process
management anticipates strong loan growth during the remainder of 2003.
Critical Accounting Policies
----------------------------
In the ordinary course of business, Bancorp has made a number of estimates and
assumptions relating to reporting results of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes the following discussion addresses Bancorp's only critical
accounting policy, which is the policy that is most important to the portrayal
of Bancorp's financial results and requires management's most difficult,
subjective and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Allowance for Loan Losses
-------------------------
The allowance for loan losses, a material estimate susceptible to significant
change in the near-term, is established as losses are estimated to have occurred
through a provision for loan losses charged against operations and is maintained
at a level that management considers adequate to absorb losses in the loan
portfolio. Management's judgment in determining the adequacy of the allowance is
inherently subjective and is based on the evaluation of individual loans, the
known and inherent risk characteristics and size of the loan portfolios, the
assessment of current economic and real estate market conditions, estimates of
the current value of underlying collateral, past loan loss experience, review of
regulatory authority examination reports and evaluations of specific loans and
other relevant factors.
13
The allowance for loan losses is maintained at a level that management believes
is adequate to absorb probable losses on existing loans based on an evaluation
of the collectibility of loans and prior loan loss experience. A risk rating
system is utilized to measure the adequacy of the allowance for loan losses.
Under this system, each loan is assigned a risk rating between one and nine,
which has a corresponding loan loss factor assigned, with one being the least
risk and nine reflecting the most risk or a complete loss. Risk ratings are
assigned by the originating loan officer or loan committee at the initiation of
the transactions and are reviewed and changed, when necessary, during the life
of the loan. Loan loss reserve factors are multiplied against the balances in
each risk rating category to arrive at the appropriate level for the allowance
for loan losses. Loans assigned a risk rating of six or above are monitored more
closely by the credit administration officers. Loan quality control is
continually monitored by management subject to oversight by the board of
directors through its members who serve on the loan committee, and the adequacy
of the allowance for loan losses is presented to and reviewed by the board of
directors on a quarterly basis. The methodology for determining the adequacy of
the allowance for loan losses is consistently applied; however, revisions may be
made to the methodology and assumptions based on historical information related
to charge-off and recovery experience and management's evaluation of the current
loan portfolio.
Based upon this evaluation, management believes the allowance for loan losses of
$2.6 million at June 30, 2003, 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, 2002, the
allowance for loan losses was $2.4 million or 1.37% of gross loans outstanding.
Analysis of Allowance for Loan Losses
-------------------------------------
June 30,
(Thousands of dollars) 2003 2002
----------------------------------------------------------------------
Balance at beginning of period ............ $ 2,373 $ 1,894
------- -------
Charge-offs ............................... (1) --
Recoveries ................................ -- 10
------- -------
Net (charge-offs) recoveries .............. (1) 10
------- -------
Provision charged to operations ........... 255 158
------- -------
Balance at end of period .................. $ 2,627 $ 2,062
======= =======
Ratio of net (charge-offs) recoveries
during the period to average loans
outstanding during the period .... (0.00%) 0.01%
======= =======
14
Non-Accrual, Past Due and Restructured Loans
--------------------------------------------
The following table presents non-accruing and past due loans:
June 30, December 31,
(Thousands of dollars) 2003 2002
--------------------------------------------------------
Loans delinquent over 90
days still accruing $ 385 $1,172
Non-accruing loans ......... 150 201
------ ------
Total ...................... $ 535 $1,373
====== ======
% of Total Loans ........... 0.29% 0.79%
% of Total Assets .......... 0.18% 0.56%
Potential Problem Loans
-----------------------
At June 30, 2003, 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 $30.4 million from $217.9 million at December 31, 2002
to $248.3 million at June 30, 2003. Noninterest bearing deposits decreased $1.4
million due primarily to fluctuations in personal demand deposit accounts.
Although the balances in demand accounts decreased in the period end comparison,
the trend in the average balances shows an overall increase in balances.
Interest bearing deposits increased $31.8 million. Money market fund accounts
and certificates of deposit increased $2.2 million and $30.9 million,
respectively; savings accounts decreased $1.5 million. Increases in certificates
of deposit are due primarily to two new branch opening promotions.
Trust Preferred Securities
--------------------------
As indicated in Note 7, Bancorp created a statutory trust which issued $8.0
million in preferred securities to investors. Management elected to create the
trust for the reason that it provides an inexpensive means of raising new
capital to support core growth and leverage without diluting the rights of
existing shareholders. In addition to the favorable regulatory treatment of
these securities, there are favorable tax reasons that support this decision.
The proceeds of the trust will be used to fund general operations of the Bank.
15
Borrowings
----------
During the second quarter Bancorp executed a leveraging strategy by purchasing
$10 million in mortgage backed securities which was funded by $10 million in
Federal Home Loan Bank borrowings.
Other Liabilities
-----------------
At the end of the second quarter, Bancorp purchased mortgage backed securities
which settled in July; this transaction of $5.1 million was recorded on the
basis of the trade date method of accounting and as such is reflected in other
liabilities.
RESULTS OF OPERATIONS
Interest and dividend income and expense
----------------------------------------
Bancorp's interest and dividend income increased $623,000 or 21.2% for the
quarter ended June 30, 2003 as compared to the same period in 2002. Interest and
fees on loans increased 24.7% or $602,000 from $2.4 million for the quarter
ended June 30, 2002 to $3.0 million for the quarter ended June 30, 2003. For the
six months ended June 30, 2003, interest and dividend income was $7.0 million
which represents an increase of $1.1 million or 19.1% compared to interest and
dividend income of $5.9 million for the same period last year. These increases
are the result of the increase in the investment and loan portfolios despite a
decrease in the interest rate environment.
Bancorp's interest expense increased 20.9% or $238,000 for the quarter ended
June 30, 2003 as compared to the same period in 2002. Increases in interest
bearing deposits accounts resulted in an increase of 8.2% or $89,000 in interest
expense for the quarter ended June 30, 2003 compared to the same period last
year. Increases in borrowing transactions resulted in an increase of $149,000 in
interest expense for the quarter ended June 30, 2003 as compared to the same
period in 2002. For the six months ended June 30, 2003, total interest expense
increased $228,000 or 9.9% to $2.5 million as compared to $2.3 million for the
six months ended June 30, 2002. Included in interest expense for the three and
six months ended June 30, 2003 is $91,000 and $96,000, respectively, due to the
closing of an offering of trust preferred securities at the end of the first
quarter of 2003. These increases in interest expenses are due to higher levels
of interest bearing liabilities partially offset by a lower interest rate
environment.
Non-interest income
-------------------
Non-interest income increased 30.5% or $345,000 to $1.5 million for the quarter
ended June 30, 2003 as compared to $1.1 million for the comparable period last
year. The continued favorable interest rate environment for borrowers has
resulted in the
16
maintenance of an historical high level of mortgage brokerage and referral fee
income. Mortgage brokerage and referral fees increased 43.2% or $290,000 to
$961,000 for the quarter ended June 30, 2003 as compared to $671,000 for the
same period last year. Loan processing fees increased 84.1% or $103,000 to
$225,000 for the quarter ended June 30, 2003 compared to $122,000 for the same
period in 2002. During the second quarter of 2003 Bancorp recorded gains on
sales of investment securities of $183,000. Included in the results for the
quarter ended June 30, 2002 is a gain of $249,000 from the sale of a
nonperforming loan.
For the six months ended June 30, 2003, non-interest income increased $844,000
or 42.3% to $2.8 million as compared to $2.0 million for the same period in
2002. Mortgage brokerage and referral fees increased $567,000 or 42.7% to $1.9
million for the six months ended June 30, 2003 from $1.3 million for the six
months ended June 30, 2002. Loan processing fees increased 63.5% or $157,000
from $247,000 for the six months ended June 30, 2002 to $404,000 for the six
months ended June 30, 2003. The favorable interest rate environment for
borrowers cited earlier resulted in the increases in mortgage brokerage and
referral fees and loan processing fees. Included in the results for the six
months ended June 30, 2003 are gains on sales of investment securities of
$308,000, some of which is attributable to a gain of $117,000 on an investment
security for which Bancorp recorded a write-down in 2001 made for the impairment
of a debt security due to the deterioration in the financial condition of the
issuer; in March 2003 Bancorp received the proceeds from a tender offer made by
the issuer at a price of 100% of par for the above security under a
comprehensive refinancing plan. Included in the results for the six months ended
June 30, 2002 is a gain of $249,000 from the sale of a nonperforming loan.
Non-interest expenses
---------------------
Non-interest expenses increased 24.9% or $599,000 to $3.0 million for the
quarter ended June 30, 2003 from $2.4 million for the quarter ended June 30,
2002. Salaries and benefits expense increased 29.4%, or $442,000, to $1.9
million for the quarter ended June 30, 2003 from $1.5 million for the quarter
ended June 31, 2002, due primarily to higher levels of commissions and
production related incentive compensation accruals, as well as to staffing
additions made for the opening of two new branch offices. Occupancy and
equipment expense, net increased $85,000 or 35% to $328,000 for the quarter
ended June 30, 2003 from $243,000 for the quarter ended June 30, 2002 due
primarily to the establishment of additional branch locations. Other
non-interest expenses increased $62,000 or 23.0% to $335,000 for the quarter
ended June 30, 2003 from $273,000 for the quarter ended June 30, 2002; this
increase is due to increases in loan processing expenses as a result of
increased loan volumes due to the low interest rate environment.
For the six months ended June 30, 2003, non-interest expenses increased $1.2
million or 26.5% to $5.9 million from $4.6 million for the same period last year
for similar reasons cited above. Salary and benefits expense increased $921,000;
occupancy and equipment
17
expense, net increased $94,000. Other non-interest expenses increased $145,000;
$115,000 of this increase is due to increases in loan processing expenses.
Bancorp has received regulatory approval to establish an additional branch
location which will result in additional capital expenditures as well as
increases in salaries and benefits and occupancy and equipment expenses.
Management anticipates that this branch will open in the beginning of the fourth
quarter of 2003.
Income Taxes
------------
Bancorp recorded income tax expense of $227,000 for the quarter ended June 30,
2003 as compared to $163,000 for the quarter ended June 30, 2002. For the six
months ended June 30, 2003, income tax expense was $460,000 as compared to
$274,000 for the same period last year. These changes are related primarily to
the change in pre-tax income as well as to an increase in the Connecticut tax
rate. The effective tax rates for the quarters ended June 30, 2003 and June 30,
2002 were 39.3% and 36.2%, respectively; the effective tax rates for the six
months ended June 30, 2003 and June 30, 2002 were 39.1% and 36.0%, respectively.
LIQUIDITY
Bancorp's liquidity ratio was 37.0% and 35.5% at June 30, 2003 and 2002,
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.
CAPITAL
The following table illustrates Bancorp's regulatory capital ratios at June 30,
2003 and December 31, 2002 respectively:
June 30, 2003 December 31, 2002
------------- -----------------
Leverage Capital ............ 8.61% 6.99%
Tier 1 Risk-based Capital.... 11.25% 9.13%
Total Risk-based Capital..... 13.34% 10.39%
18
The following table illustrates the Bank's regulatory capital ratios at June 30,
2003 and December 31, 2002 respectively:
June 30, 2003 December 31, 2002
------------- -----------------
Leverage Capital ........ 8.96% 6.98%
Tier 1 Risk-based Capital 11.71% 9.11%
Total Risk-based Capital 12.95% 10.36%
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, both Bancorp and the Bank are considered to be "well capitalized"
at June 30, 2003 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%.
The increase in capital ratios is due primarily to the formation in the first
quarter of 2003 of a statutory trust as indicated in Note 7.
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 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,
19
(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 the effectiveness of Bancorp's disclosure controls and
procedures performed by Bancorp's management, with the participation of
Bancorp's Chief Executive Officer and its Chief Financial Officer as of the end
of the period covered by this report, Bancorp's Chief Executive Officer and
Chief Financial Officer concluded that Bancorp's disclosure controls 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 Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by Bancorp in the
reports that it files or submits under the Securities Exchange Act is
accumulated and communicated to Bancorp's management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in Bancorp's internal control over financial reporting
identified in connection with the evaluation described in the preceding
paragraph that occurred during Bancorp's fiscal quarter ended June 30, 2003 that
has materially affected, or is reasonably likely to materially affect, Bancorp's
internal control over financial reporting.
20
PART II - OTHER INFORMATION.
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders (the "Annual Meeting") of Patriot
National Bancorp, Inc was held on June 17, 2003.
(b) Not applicable pursuant to Instruction 3 to Item 4 of Part II of
Form10-QSB.
(c) The following is a brief description of the matters voted upon at the
Annual Meeting and the number of votes cast for, against or withheld
as well as the number of abstentions to each such matter:
(i) The election of eleven directors for the ensuing year:
Withheld
Authority to
For Vote For
Angelo De Caro 21,712,119 635,899
Fred A. DeCaro, Jr. 21,539,096 988,922
John J. Ferguson 21,737,419 610,599
John A. Geoghegan 21,737,419 610,599
L. Morris Glucksman 21,711,019 636,999
Charles F. Howell 21,713,219 634,799
Michael Intrieri 21,675,357 672,661
Richard Naclerio 21,734,119 613,899
Robert F. O'Connell 21,713,219 634,799
Paul C. Settelmeyer 21,675,952 671,066
Philip W. Wolford 21,711,624 636,394
(ii) The consideration of a proposal to ratify the appointment of
McGladrey & Pullen, LLP as independent auditors for Bancorp for
the year ending December 31, 2003.
For Against Abstain
2,026,983 2,955 1,700
(d) Not applicable.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No. Description
--- -----------
31(1) Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32 Section 1350 Certification
(b) The issuer filed no reports on Form 8-K during the second quarter
of 2003.
22
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)
August 13, 2003
23