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 September 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, 2,401,125 shares issued and outstanding
as of the close of business October 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 22
Part II OTHER INFORMATION
-------
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks ............................................. $ 4,929,673 $ 5,385,757
Federal funds sold .................................................. 5,000,000 3,000,000
Short term investments .............................................. 1,838,648 3,348,968
------------- -------------
Cash and cash equivalents ..................................... 11,768,321 11,734,725
Available for sale securities (at fair value) ....................... 91,478,828 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 $2,837,675;
2002 $2,372,454) .............................................. 207,559,155 170,794,939
Accrued interest receivable ......................................... 1,510,740 1,311,453
Premises and equipment, net ......................................... 1,328,110 789,197
Deferred tax asset, net ............................................. 1,157,291 754,696
Goodwill ............................................................ 930,091 930,091
Other assets ........................................................ 716,907 460,936
------------- -------------
Total assets ............................................. $ 318,217,893 $ 248,496,753
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing deposits ............................. $ 27,302,298 $ 25,519,809
Interest bearing deposits ................................ 238,450,822 192,391,451
------------- -------------
Total deposits ...................................... 265,753,120 217,911,260
Securities sold under agreements to repurchase ................ 5,700,000 5,700,000
Federal Home Loan Bank borrowings ............................. 17,000,000 4,000,000
Trust preferred securities .................................... 8,000,000 --
Capital lease obligation ...................................... 140,556 243,231
Collateralized borrowings ..................................... 274,444 349,444
Accrued expenses and other liabilities ........................ 2,629,477 1,747,863
------------- -------------
Total liabilities ................................... 299,497,597 229,951,798
------------- -------------
Shareholders' equity
Common stock, $2 par value: 5,333,333 shares authorized; shares
issued and outstanding: 2003 - 2,401,125; 2002 - 2,400,525 4,802,250 4,801,050
Additional paid-in capital .................................... 11,489,109 11,484,649
Retained earnings ............................................. 2,514,705 1,688,158
Accumulated other comprehensive income - net unrealized
(loss) gain on available for sale securities, net of tax . (85,768) 571,098
------------- -------------
Total shareholders' equity .......................... 18,720,296 18,544,955
------------- -------------
Total liabilities and shareholders' equity .......... $ 318,217,893 $ 248,496,753
============= =============
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,
2003 2002 2003 2002
-----------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans ................. $ 3,331,853 $ 2,602,775 $ 9,270,207 $ 7,426,230
Interest and dividends on
investment securities ................... 620,077 693,260 1,628,323 1,667,419
Interest on federal funds sold ............. 20,993 50,412 77,748 131,953
----------- ----------- ----------- -----------
Total interest and dividend income ...... 3,972,923 3,346,447 10,976,278 9,225,602
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits ....................... 1,285,471 1,145,068 3,517,217 3,373,639
Interest on Federal Home Loan Bank
borrowings ........................... 95,943 49,016 223,315 75,474
Interest on Trust Preferred Securities ..... 86,115 -- 181,906 --
Interest on other borrowings ............... 26,932 48,874 103,857 97,336
----------- ----------- ----------- -----------
Total interest expense .................. 1,494,461 1,242,958 4,026,295 3,546,449
----------- ----------- ----------- -----------
Net interest income ..................... 2,478,462 2,103,489 6,949,983 5,679,153
Provision for Loan Losses ..................... 211,000 84,000 466,000 242,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses ............ 2,267,462 2,019,489 6,483,983 5,437,153
----------- ----------- ----------- -----------
Non-Interest Income
Mortgage brokerage referral fees ........... 831,581 846,231 2,725,854 2,173,502
Loan processing fees ....................... 149,362 148,415 552,764 395,469
Fees and service charges ................... 106,026 84,697 263,693 228,491
Gains and origination fees from loans sold . -- -- -- 249,365
Gain (loss) on sale of investment securities -- 5,542 307,739 (25,733)
Other income ............................... 24,041 16,323 81,381 56,694
----------- ----------- ----------- -----------
Total non-interest income ............... 1,111,010 1,101,208 3,931,431 3,077,788
----------- ----------- ----------- -----------
Non-Interest Expenses
Salaries and benefits ...................... 1,850,282 1,691,463 5,682,164 4,602,020
Occupancy and equipment expenses, net ...... 351,185 245,589 949,893 750,474
Data processing and other outside services . 176,904 156,499 535,409 470,279
Professional services ...................... 66,426 83,696 243,668 260,323
Advertising and promotional expenses ....... 87,229 104,184 242,503 259,623
Other operating expenses ................... 332,556 294,600 1,073,152 867,056
----------- ----------- ----------- -----------
Total non-interest expenses ............. 2,864,582 2,576,031 8,726,789 7,209,775
----------- ----------- ----------- -----------
Income before income taxes .............. 513,890 544,666 1,688,625 1,305,166
----------- ----------- ----------- -----------
Provision for Income Taxes .................... 198,000 207,000 658,000 481,000
----------- ----------- ----------- -----------
Net income .............................. $ 315,890 $ 337,666 $ 1,030,625 $ 824,166
=========== =========== =========== ===========
Basic income per share .................. $ 0.13 $ 0.14 $ 0.43 $ 0.34
=========== =========== =========== ===========
Diluted income per share ................ $ 0.13 $ 0.14 $ 0.42 $ 0.34
=========== =========== =========== ===========
Dividends per share ..................... $ 0.030 $ 0.025 $ 0.085 $ 0.070
=========== =========== =========== ===========
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,
2003 2002 2003 2002
-----------------------------------------------------------
Net income ..................................... $ 315,890 $ 337,666 $ 1,030,625 $ 824,166
Unrealized holding (losses) gains on securities:
Unrealized holding (losses) gains arising
during the period, net of taxes.............. (341,639) 105,946 (656,866) 202,571
----------- ----------- ----------- -----------
Comprehensive (loss) income.................. $ (25,749) $ 443,612 $ 373,759 $ 1,026,737
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------------------------
Cash Flows from Operating Activities
Net income ......................................................... $ 1,030,625 $ 824,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of investment premiums and discounts, net 445,000 38,807
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 .......................................... 466,000 242,000
(Gain) loss on sale of investment securities ....................... (307,739) 25,733
Depreciation and amortization ...................................... 291,144 309,360
Loss on disposal of bank premises and equipment .................... 2,037 --
Changes in assets and liabilities:
Increase in deferred loan fees ................................ 197,518 171,509
Increase in accrued interest receivable ....................... (199,287) (186,749)
(Increase) decrease in other assets ........................... (15,971) 15,914
Increases in accrued expenses and other liabilities ........... 869,594 384,622
------------ ------------
Net cash provided by operating activities ..................... 2,778,921 1,575,997
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities ......................... (66,825,874) (55,062,997)
Proceeds from sales of available for sale securities ............... 7,094,321 11,375,386
Principal repayments on available for sale securities .............. 19,474,368 5,876,966
Proceeds from maturities of available for sale securities .......... 8,200,000 5,000,000
Purchase of Federal Home Loan Bank Stock ........................... (456,000) (3,400)
Purchase of Federal Reserve Bank Stock ............................. (210,100) --
Net increase in loans .............................................. (37,427,734) (16,226,093)
Proceeds from sale of loan receivable .............................. -- 1,549,365
Purchases of bank premises and equipment ........................... (838,992) (65,929)
Proceeds from sale of bank premises and equipment .................. 6,900 --
------------ ------------
Net cash used in investing activities ......................... (70,983,111) (47,556,702)
------------ ------------
Cash Flows from Financing Activities
Net increase in demand, savings and money market deposits .......... 13,130,440 21,228,748
Net increase in time certificates of deposits ...................... 34,711,420 2,935,011
Increase in FHLB borrowings ........................................ 13,000,000 4,000,000
Proceeds from issuance of trust preferred securities ............... 8,000,000 --
Debt issuance costs ................................................ (240,000) --
Increase in securities sold under agreements to repurchase ......... -- 5,700,000
Principal payments on capital lease obligation ..................... (102,675) (89,638)
Decrease in collateralized borrowings .............................. (75,000) (100,000)
Dividends paid on common stock ..................................... (192,059) (156,034)
Proceeds from issuance of common stock ............................. 5,660 --
------------ ------------
Net cash provided by financing activities ..................... 68,237,786 33,518,087
------------ ------------
Net increase (decrease) in cash and cash equivalents .......... 33,596 (12,462,618)
6
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Nine Months Ended
September 30,
2003 2002
--------------------------------
Cash and cash equivalents
Beginning ...................................................... 11,734,725 27,032,811
------------ ------------
Ending ......................................................... $ 11,768,321 $ 14,570,193
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest .................................................. $ 3,530,981 $ 3,563,632
============ ============
Income Taxes .............................................. $ 818,876 $ 554,360
============ ============
Supplemental disclosure of noncash investing and financing activities:
Unrealized holding (loss) gain on available for sale
securities arising during the period ...................... $ (1,059,461) $ 311,028
============ ============
Accrued dividends declared on common stock ..................... $ 72,034 $ 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 nine months ended September 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 nine months
ended September 30, 2003 and 2002.
Quarter ended September 30, 2003
Net Income Shares Amount
------------------------------------------
Basic Income Per Share
Income available to common shareholders $ 315,890 2,400,855 $ 0.13
Effect of Dilutive Securities
Warrants/Stock Options outstanding -- 47,568 --
------------------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 315,890 2,448,423 $ 0.13
===========================================
8
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
=========================================
Nine months ended September 30, 2003
Net Income Shares Amount
------------------------------------------
Basic Income Per Share
Income available to common shareholders $1,030,625 2,400,769 $ 0.43
Effect of Dilutive Securities
Warrants/Stock Options outstanding -- 39,846 (0.01)
-----------------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $1,030,625 2,440,615 $ 0.42
=========================================
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
=========================================
(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, 2003 and 2002 is as follows (in
thousands):
Quarter ended September 30, 2003
--------------------------------
Mortgage Consolidated
Bank Broker Totals
-----------------------------------
Net interest income ..... $ 2,478 $ -- $ 2,478
Non-interest income ..... 149 962 1,111
Non-interest expense .... 2,125 740 2,865
Provision for loan losses 211 -- 211
Income before taxes ..... 292 222 514
Assets at period end .... 317,215 1,003 318,218
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 at period end .... 236,423 1,076 237,499
Nine months ended September 30, 2003
------------------------------------
Mortgage Consolidated
Bank Broker Totals
-----------------------------------
Net interest income ..... $ 6,950 $ -- $ 6,950
Non-interest income ..... 695 3,236 3,931
Non-interest expense .... 6,167 2,560 8,727
Provision for loan losses 466 -- 466
Income before taxes ..... 1,013 676 1,689
Assets at period end .... 317,215 1,003 318,218
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 at period end .... 236,423 1,076 237,499
(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 Nine Months Ended
September 30, 2003 September 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 .... $ (551,030) $ 209,391 $ (341,639) $ (751,722) $ 285,654 $ (466,068)
Reclassification adjustment
for gains recognized in income -- -- -- (307,739) 116,941 (190,798)
--------------------------------------------------------------------------------------------
Unrealized holding loss on
available for sale securities,
net of taxes ................. $ (551,030) $ 209,391 $ (341,639) $(1,059,461) $ 402,595 $ (656,866)
============================================================================================
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
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 (gains) losses
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
============================================================================================
(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 variable rate preferred securities to investors with a current
rate of 4.29%; the 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
Patriot National Bank (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 nine months ended September 30, 2003 the Bank entered into an
additional $13 million in borrowing transactions with the Federal Home
Loan Bank; $10 million of the borrowings was used as part of a leveraging
strategy; the additional $3 million was used to fund loan demand.
Outstanding borrowings at September 30, 2003 have original terms of six
months to five years with interest rates ranging from 1.27% to 5.11%.
(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 which opened November 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 $316,000 ($0.13 basic income per share and $0.13
diluted income per share) for the quarter ended September 30, 2003, compared to
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. For the nine-month period
ended September 30, 2003, net income was $1,031,000 ($0.43 basic income per
share and $0.42 diluted income per share) as compared to net income of $824,000
($0.34 basic income per share and $0.34 diluted income per share) for the nine
months ended September 30, 2002.
Total assets increased $69.7 million from $248.5 million at December 31, 2002 to
$318.2 million at September 30, 2003. Cash and cash equivalents remained largely
unchanged at September 30, 2003 as compared to December 31, 2002. The available
for sale securities portfolio increased $30.9 million to $91.5 million at
September 30, 2003 from $60.6 million at December 31, 2002. The net loan
portfolio increased $36.8 million from $170.8 million at December 31, 2002 to
$207.6 million at September 30, 2003. Deposits increased $47.9 million to $265.8
million at September 30, 2003 from $217.9 million at December 31, 2002.
Borrowings and other liabilities increased $21.7 million to $33.7 million at
September 30, 2003 from $12.0 million at December 31, 2002. Total shareholders'
equity increased $175,000 to $18.7 million at September 30, 2003 from $18.5
million at December 31, 2002.
FINANCIAL CONDITION
Assets
------
Bancorp's total assets increased $69.7 million from $248.5 million at December
31, 2002 to $318.2 million at September 30, 2003. Cash and cash equivalents
remained largely unchanged at September 30, 2003 as compared to December 31,
2002. Cash and due from banks decreased $0.5 million; federal funds sold
increased $2.0 million and short term investments decreased $1.5 million.
12
Investments
-----------
The following table is a summary of Bancorp's available for sale securities
portfolio, at fair value, at the dates shown:
September 30, December 31
2003 2002
------------------------------------------------------------------------------
U. S. Government Agency Obligations $ 11,966,075 $ 9,129,414
Mortgage Backed Securities 67,512,753 38,461,159
Corporate Bonds -- 383,797
Marketable equity securities 12,000,000 12,643,996
-------------- -------------
Total Investments $ 91,478,828 $ 60,618,366
======+======= =============
Available for sale securities increased $30.9 million from $60.6 million at
December 31, 2002 to $91.5 million at September 30, 2003. 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, an interest rate
leveraging strategy which was funded by Federal Home Loan Bank borrowings during
the second quarter of 2003, and the reinvestment of funds from investment
maturities, principal repayments and sales of investments in 2003.
During the three and nine months ended September 30, 2003 unrealized holding
losses on the available for sale securities portfolio totaled $551,000 and
$1,059,000, respectively. These unrealized losses were the result of volatility
in market rates and yield curve changes that impacted the market prices of
government agency bonds and mortgage backed securities. Management does not
believe these unrealized losses are other than temporary, and Bancorp has the
ability to hold these securities to maturity if necessary. As a result,
management believes that these unrealized losses will not have a negative impact
on future earnings and capital.
13
Loans
-----
The following table is a summary of Bancorp's loan portfolio at the dates shown:
September 30, December 31
2003 2002
------------------------------------------------------------------------------
Real Estate
Commercial $ 91,122,891 $ 65,967,205
Residential 17,629,187 27,012,024
Construction 59,607,199 39,208,651
Commercial 15,326,391 13,021,909
Consumer installment 1,985,919 1,757,321
Consumer home equity 25,534,570 26,812,092
-------------- --------------
Total Loans 211,206,157 173,779,202
Net deferred fees (809,327) (611,809)
Allowance for loan losses (2,837,675) (2,372,454)
-------------- --------------
Total Loans $ 207,559,155 $ 170,794,939
============== ==============
Bancorp's net loan portfolio increased $36.8 million from $170.8 million at
December 31, 2002 to $207.6 million at September 30, 2003. Increases in
commercial real estate loans of $25.1 million, construction loans of $20.4
million and commercial loans of $2.3 million were partially offset by decreases
in residential real estate and home equity loans of $9.4 million and $1.3
million, respectively. Refinance transactions have resulted in a decrease in the
residential real estate loan portfolio of $9.4 million. A favorable interest
rate environment for borrowers combined with a strong real estate market
continues to contribute to the overall growth in the loan portfolio.
At September 30, 2003, the net loan to deposit ratio was 78.1% and the net loan
to total assets ratio was 65.2%. 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 and anticipated repayments, management anticipates
maintaining the current level of the loan portfolio through the end 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.
Bancorp believes the following discussion addresses Bancorp's only critical
accounting policy, which is the policy that is most important to the portrayal
of Bancorp's financial 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.
14
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.
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
$2.8 million at September 30, 2003, which represents 1.35% 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.
15
Analysis of Allowance for Loan Losses
-------------------------------------
September 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 ............ 466 242
-----------------------
Balance at end of period ................... $ 2,838 $ 2,146
=======================
Ratio of net (charge-offs) recoveries
during the period to average loans
outstanding during the period .... (0.00%) 0.01%
=======================
Non-Accrual, Past Due and Restructured Loans
--------------------------------------------
The following table presents non-accruing and past due loans:
September 30, December 31,
(Thousands of dollars) 2003 2002
-------------------------------------------------------------------------------
Loans delinquent over 90
days still accruing $ 315 $1,172
Non-accruing loans .......... 150 201
-----------------------
Total ....................... $ 465 $1,373
=======================
% of Total Loans ............ 0.22% 0.79%
% of Total Assets ........... 0.15% 0.56%
Potential Problem Loans
-----------------------
At September 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.
Premises and Equipment
----------------------
The opening of two new branches combined with the renovation of a third new
branch, which opened in November, has resulted in an increase of $539,000 in
premises and equipment, net from $789,000 at December 31, 2002 to $1.3 million
at September 30, 2003.
16
Deposits
--------
The following table is a summary of Bancorp's deposits at the dates shown:
September 30, December 31
2003 2002
------------------------------------------------------------------------------
Non-interest bearing ................... $ 27,302,298 $ 25,519,809
------------ ------------
Interest bearing
Time certificates, less than $100,000 79,304,242 57,202,908
Time certificates, $100,000 or more . 41,291,431 28,681,345
Money market ........................ 67,560,241 56,973,507
Savings ............................. 23,764,157 26,847,780
NOW ................................. 26,530,751 22,685,911
------------ ------------
Total interest bearing ................. 238,450,822 192,391,451
------------ ------------
Total Deposits ......................... $265,753,120 $217,911,260
============ ============
Total deposits increased $47.9 million from $217.9 million at December 31, 2002
to $265.8 million at September 30, 2003. Noninterest bearing deposits increased
$1.8 million due primarily to increases in commercial demand deposit accounts.
Interest bearing deposits increased $46.0 million. Certificates of deposit
increased $34.7 million; money market fund accounts and NOW accounts increased
$10.6 million and $3.8 million, respectively; savings accounts decreased $3.1
million. Increases in certificates of deposit are due primarily to bank wide
promotional campaigns associated with two new branch openings. Due to the
uncertainty in short term interest rates, many depositors have been keeping
funds liquid which has resulted in an increase in money market fund accounts.
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.
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. During the third quarter, the Bank borrowed
an additional $3 million from the Federal Home Loan Bank to fund loan demand.
17
RESULTS OF OPERATIONS
Interest and dividend income and expense
----------------------------------------
Bancorp's interest and dividend income increased $626,000 or 18.7% for the
quarter ended September 30, 2003 as compared to the same period in 2002.
Interest and fees on loans increased 28.0% or $729,000 from $2.6 million for the
quarter ended September 30, 2002 to $3.3 million for the quarter ended September
30, 2003. For the nine months ended September 30, 2003, interest and dividend
income was $11.0 million which represents an increase of $1.8 million or 19.0%
compared to interest and dividend income of $9.2 million for the same period
last year. These increases are the result of the increase in the investment and
loan portfolios, net of decreases in the yields on interest earning assets.
Bancorp's interest expense increased 20.2% or $252,000 for the quarter ended
September 30, 2003 as compared to the same period in 2002. Increases in interest
bearing deposits accounts resulted in an increase of 12.3% or $140,000 in
interest expense for the quarter ended September 30, 2003 compared to the same
period last year. Increases in outstanding borrowings resulted in an increase of
$111,000 in interest expense for the quarter ended September 30, 2003 as
compared to the same period in 2002. For the nine months ended September 30,
2003, total interest expense increased $480,000 or 13.5% to $4.0 million as
compared to $3.5 million for the nine months ended September 30, 2002. These
increases in interest expenses are due to higher levels of interest bearing
liabilities partially offset by lower interest rates on interest bearing
liabilities. Included in interest expense for the three and nine months ended
September 30, 2003 is $86,000 and $182,000, respectively from trust preferred
securities obligations incurred at the end of the first quarter of 2003.
Non-interest income
-------------------
Non-interest income increased $10,000 or 0.9% to $1.1 million for the quarter
ended September 30, 2003 as compared to the comparable period last year. The
continued favorable interest rate environment for borrowers has resulted in the
maintenance of an historical high level of mortgage brokerage and referral fee
income. Mortgage brokerage and referral fees decreased slightly by 1.7% or
$15,000 to $831,000 for the quarter ended September 30, 2003 as compared to
$846,000 for the same period last year. This decrease was due primarily to an
increase in long term interest rates during the third quarter.
For the nine months ended September 30, 2003, non-interest income increased
$854,000 or 27.7% to $3.9 million as compared to $3.1 million for the same
period in 2002. Mortgage brokerage and referral fees increased $552,000 or 25.4%
to $2.7 million for the nine months ended September 30, 2003 from $2.2 million
for the nine months ended September 30, 2002. Loan processing fees increased
39.8% or $157,000 from $395,000 for the nine months ended September 30, 2002 to
$553,000 for the nine months ended September 30, 2003. The favorable interest
rate environment for borrowers cited earlier resulted in the increases in
18
mortgage brokerage and referral fees and loan processing fees. Included in the
results for the nine months ended September 30, 2003 are gains on sales of
investment securities of $308,000. A portion of the gains 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 nine months ended September 30, 2002 is a gain of
$249,000 from the sale of a nonperforming loan.
Non-interest expenses
---------------------
Non-interest expenses increased 11.2% or $289,000 to $2.9 million for the
quarter ended September 30, 2003 from $2.6 million for the quarter ended
September 30, 2002. Salaries and benefits expense increased 9.4%, or $159,000,
to $1.9 million for the quarter ended September 30, 2003 from $1.7 million for
the quarter ended September 30, 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 $106,000 or 43% to $351,000 for the quarter
ended September 30, 2003 from $246,000 for the quarter ended September 30, 2002
due primarily to the establishment of additional branch locations. Other
non-interest expenses increased $38,000 or 12.9% to $333,000 for the quarter
ended September 30, 2003 from $295,000 for the quarter ended September 30, 2002.
For the nine months ended September 30, 2003, non-interest expenses increased
$1.5 million or 21.0% to $8.7 million from $7.2 million for the same period last
year for similar reasons cited above. Salary and benefits expense increased $1.1
million; occupancy and equipment expense, net increased $199,000. Other
non-interest expenses increased $206,000; $122,000 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. This
new branch office opened November 4, 2003.
19
Income Taxes
------------
Bancorp recorded income tax expense of $198,000 for the quarter ended September
30, 2003 as compared to $207,000 for the quarter ended September 30, 2002. For
the nine months ended September 30, 2003, income tax expense was $658,000 as
compared to $481,000 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 September
30, 2003 and September 30, 2002 were 38.5% and 38.0%, respectively; the
effective tax rates for the nine months ended September 30, 2003 and September
30, 2002 were 39.0% and 36.8%, respectively.
LIQUIDITY
Bancorp's liquidity ratio was 32.5% and 34.7% at September 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 September
30, 2003 and December 31, 2002 respectively:
September 30, 2003 December 31, 2002
------------------ -----------------
Leverage Capital ................... 7.84% 6.99%
Tier 1 Risk-based Capital........... 10.43% 9.13%
Total Risk-based Capital ........... 12.40% 10.39%
The following table illustrates the Bank's regulatory capital ratios at
September 30, 2003 and December 31, 2002 respectively:
September 30, 2003 December 31, 2002
------------------ -----------------
Leverage Capital ................... 8.19% 6.98%
Tier 1 Risk-based Capital........... 10.89% 9.11%
Total Risk-based Capital ........... 12.11% 10.36%
Capital adequacy is one of the most important factors used to determine the
safety and
20
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 September
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, (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.
21
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 September 30, 2003
that has materially affected, or is reasonably likely to materially affect,
Bancorp's internal control over financial reporting.
22
PART II - OTHER INFORMATION.
---------------------------
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) On September 9, 2003, Bancorp issued 400 shares of its Common Stock
to a former director as part of a consulting arrangement with
Patriot National Bank. The obligation under this agreement was
assumed by Bancorp at the time the Bank became a wholly owned
subsidiary of Bancorp.
Bancorp claims an exemption from registration for the issuance of
these shares under Rule 504 under the Securities Act of 1933, on the
basis that the aggregate price for these shares is less than
$1,000,000.
(d) Not applicable
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) During the quarter ended September 30, 2003, Bancorp filed one
Current Report on Form 8-K dated July 17, 2003 (filed July 17, 2003)
responding to Items 7 and 12 and relating to a press release
announcing certain information concerning Bancorp's results of
operations for the quarter ended June 30, 2003 and its financial
condition at June 30, 2003.
23
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 13, 2003
24
EXHIBIT INDEX
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