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 March 31, 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 April 30, 2003.
Transitional Small Business Disclosure Format (check one): Yes No X
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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 19
Part II OTHER INFORMATION
-------
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
CERTIFICATIONS 22
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks.................................................... $ 3,243,644 $ 5,385,757
Federal funds sold ........................................................ 11,200,000 3,000,000
Short term investments .................................................... 10,118,640 3,348,968
------------ ------------
Cash and cash equivalents ............................................ 24,562,284 11,734,725
Available for sale securities (at fair value) ............................. 49,538,270 60,618,366
Federal Reserve Bank stock ................................................ 481,050 481,050
Federal Home Loan Bank stock .............................................. 1,077,300 621,300
Loans receivable (net of allowance for loan losses: 2003 $2,536,675;
2002 $2,372,454) ..................................................... 177,292,052 170,794,939
Accrued interest receivable ............................................... 1,229,637 1,311,453
Premises and equipment, net ............................................... 879,365 789,197
Deferred tax asset, net ................................................... 867,769 754,696
Goodwill .................................................................. 930,091 930,091
Other assets .............................................................. 774,162 460,936
------------ ------------
Total assets...................................................... $ 257,631,980 $248,496,753
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing deposits ..................................... $ 22,909,178 $ 25,519,809
Interest bearing deposits ........................................ 196,141,472 192,391,451
------------ ------------
Total deposits .............................................. 219,050,650 217,911,260
Securities sold under agreements to repurchase ....................... 5,700,000 5,700,000
Federal Home Loan Bank borrowings .................................... 4,000,000 4,000,000
Trust preferred securities ........................................... 8,000,000 --
Capital lease obligation ............................................. 210,161 243,231
Collateralized borrowings ............................................ 324,444 349,444
Accrued expenses and other liabilities ............................... 1,679,566 1,747,863
------------ ------------
Total liabilities ........................................... 238,964,821 229,951,798
------------ ------------
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 .................................................... 1,993,650 1,688,158
Accumulated other comprehensive income - net unrealized
gain on available for sale securities, net of tax ................ 386,610 571,098
------------ ------------
Total shareholders' equity .................................. 18,667,159 18,544,955
------------ ------------
Total liabilities and shareholders' equity................... $ 257,631,980 $248,496,753
============ ============
See accompanying notes to consolidated financial statements.
3
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------------------
Interest and Dividend Income
Interest and fees on loans ............................ $ 2,898,001 $ 2,385,004
Interest and dividends on investment securities ....... 524,215 505,614
Interest on federal funds sold ........................ 11,000 41,687
----------- -----------
Total interest and dividend income ................ 3,433,216 2,932,305
----------- -----------
Interest Expense
Interest on deposits .................................. 1,061,893 1,147,354
Interest on securities sold under agreements
to repurchase ..................................... 29,632 --
Interest on Federal Home Loan Bank borrowings ......... 47,950 352
Interest on trust preferred securities ................ 4,901 --
Interest on capital lease obligation .................. 7,930 12,129
Interest on collateralized borrowings ................. 3,995 5,920
----------- -----------
Total interest expense ............................ 1,156,301 1,165,755
----------- -----------
Net interest income ............................... 2,276,915 1,766,550
Provision for Loan Losses .................................. 165,000 74,000
----------- -----------
Net interest income after provision for loan losses 2,111,915 1,692,550
----------- -----------
Non-Interest Income
Mortgage brokerage referral fees ...................... 932,783 656,042
Loan processing fees .................................. 178,346 124,798
Fees and service charges .............................. 70,427 72,845
Gain (loss) on sale of investment securities .......... 125,165 (31,275)
Other income .......................................... 35,870 21,406
----------- -----------
Total non-interest income ......................... 1,342,591 843,816
----------- -----------
Non-Interest Expenses
Salaries and benefits ................................. 1,887,589 1,408,351
Occupancy and equipment expense, net .................. 270,424 262,069
Data processing and other outside services ............ 192,236 170,532
Professional services ................................. 89,667 70,838
Advertising and promotional expenses .................. 69,322 56,996
Forms, printing and supplies .......................... 44,078 36,902
Regulatory assessments ................................ 27,125 24,324
Directors' fees and expenses .......................... 29,162 24,200
Other non-interest expenses ........................... 246,393 172,371
----------- -----------
Total non-interest expenses ....................... 2,855,996 2,226,583
----------- -----------
Income before income taxes ........................ 598,510 309,783
Provision for Income Taxes ................................. 233,000 111,000
----------- -----------
Net income ........................................ $ 365,510 $ 198,783
=========== ===========
Basic income per share ............................ $ 0.15 $ 0.08
=========== ===========
Diluted income per share .......................... $ 0.15 $ 0.08
=========== ===========
Dividends per share ............................... $ 0.025 $ 0.020
=========== ===========
See accompanying notes to consolidated financial statements
4
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------------------------
Net income:........................................................ $ 365,510 $ 198,783
Unrealized holding losses on securities:
Unrealized holding losses arising
during the period, net of taxes ............................... (184,488) (152,447)
--------- ---------
Comprehensive income .......................................... $ 181,022 $ 46,336
========= =========
See accompanying notes to consolidated financial statements.
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-----------------------------
Cash Flows from Operating Activities
Net income ......................................................... $ 365,510 $ 198,783
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of investment premiums and discounts, net 94,816 (15,529)
Originations of loans held for sale ................................ -- (208,000)
Proceeds from sales of loans held for sale ......................... -- 208,000
Provision for loan losses .......................................... 165,000 74,000
(Gain) loss on sale of investment securities ....................... (125,165) 31,275
Depreciation and amortization ...................................... 86,386 106,611
Loss on disposal of bank premises and equipment .................... 2,037 --
Changes in assets and liabilities:
Decrease in deferred loan fees ................................. (10,283) (2,026)
Decrease in accrued interest receivable ........................ 81,816 104,398
Increase in other assets ....................................... (313,226) (234,167)
Decrease in accrued expenses and other liabilities ............. (68,297) (86,568)
------------ ------------
Net cash provided by operating activities ...................... 278,594 176,777
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities ......................... -- (10,059,531)
Proceeds from sales of available for sale securities ............... 3,840,709 10,369,844
Principal repayments on available for sale securities .............. 4,972,173 1,428,113
Proceeds from maturities of available for sale securities .......... 2,000,000 1,000,000
Purchase of Federal Home Loan Bank Stock ........................... (456,000) (3,400)
Net (increase) decrease in loans ................................... (6,651,830) 4,562,766
Purchases of bank premises and equipment ........................... (185,489) (39,021)
Proceeds from sale of bank premises and equipment .................. 6,900 --
------------ ------------
Net cash provided by investing activities ...................... 3,526,463 7,258,771
------------ ------------
Cash Flows from Financing Activities
Net decrease in demand, savings and money market deposits .......... (3,180,504) (2,057,291)
Net increase in time certificates of deposits ...................... 4,319,894 622,017
Increase in FHLB borrowings ........................................ -- 1,965,000
Proceeds from issuance of trust preferred securities ............... 8,000,000 --
Principal payments on capital lease obligation ..................... (33,070) (28,871)
Decrease in collateralized borrowings .............................. (25,000) (50,000)
Dividends paid on common stock ..................................... (60,018) (48,011)
Proceeds from issuance of common stock ............................. 1,200 --
------------ ------------
Net cash provided by financing activities ...................... 9,022,502 402,844
------------ ------------
Net increase in cash and cash equivalents ...................... 12,827,559 7,838,392
6
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------------------------
Cash and cash equivalents
Beginning .............................................................. 11,734,725 27,032,811
------------ ------------
Ending ................................................................. $ 24,562,284 $ 34,871,203
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest............................................................ $ 1,151,523 $ 1,199,407
============ ============
Income Taxes........................................................ $ 60,014 $ 52,995
============ ============
Supplemental disclosure of noncash investing and financing activities:
Unrealized holding loss on available for sale
securities arising during the period................................ $ (297,561) $ (255,229)
============ ============
Accrued dividends declared on common stock.............................. $ 60,018 $ 48,011
============ ============
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
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented. The
results of operations for the three months ended March 31, 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 months ended March 31, 2003 and 2002.
Quarter ended March 31, 2003
Net Income Shares Amount
---------------------------------
Basic Income Per Share
Income available to common shareholders $ 365,510 2,400,725 $ 0.15
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 36,834 --
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 365,510 2,437,559 $ 0.15
========= ========= ========
8
Quarter ended March 31, 2002
Net Income Shares Amount
---------------------------------
Basic Income Per Share
Income available to common shareholders $ 198,783 2,400,525 $ 0.08
Effect of Dilutive Securities
Warrants/Stock Options outstanding .... -- 24,831 --
--------- --------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions .............. $ 198,783 2,425,356 $ 0.08
========= ========= ========
(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.
Information about reportable segments and a reconciliation of such
information to the consolidated financial statements for the three
months ended March 31, 2003 and 2002 is as follows (in thousands):
Quarter ended March 31, 2003
Mortgage Consolidated
Bank Broker Totals
---------------------------------
Net interest income ......... $ 2,277 $ -- $ 2,277
Non-interest income ......... 243 1,100 1,343
Non-interest expense ........ 1,970 886 2,856
Provision for loan losses ... 165 -- 165
Income before taxes ......... 385 214 599
Assets ...................... 256,550 1,082 257,632
9
Quarter ended March 31, 2002
Mortgage Consolidated
Bank Broker Totals
---------------------------------
Net interest income ......... $ 1,767 $ -- $ 1,767
Non-interest income ......... 40 804 844
Non-interest expense ........ 1,590 637 2,227
Provision for loan losses ... 74 -- 74
Income before taxes ......... 143 167 310
Assets ...................... 201,904 1,028 202,932
(5) Certain 2002 amounts have been reclassified to conform with the 2003
presentation. Such reclassifications had no effect on net income.
(6) Other comprehensive income which is comprised solely of the change in
unrealized gains and losses on available for sale securities is as
follows:
2003
------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
------------------------------------
Unrealized holding loss arising
during the period ......................................... $(172,396) $ 65,510 $(106,886)
Less reclassification adjustment
for gains recognized in income ............................ (125,165) 47,563 (77,602)
--------- --------- ---------
Unrealized holding loss on available
for sale securities, net of taxes ........................ $(297,561) $ 113,073 $(184,488)
========= ========= =========
2002
------------------------------------
Before-Tax Net-of-Tax
Amount Taxes Amount
------------------------------------
Unrealized holding loss arising
during the period ....................................... $(286,503) $ 115,375 $(171,128)
Add reclassification adjustment
for losses recognized in income ......................... 31,275 (12,594) 18,681
--------- --------- ---------
Unrealized holding loss on available
for sale securities, net of taxes ....................... $(255,228) $ 102,781 $(152,447)
========= ========= =========
10
(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.
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 $366,000 ($0.15 basic income per share and $0.15
diluted income per share) for the quarter ended March 31, 2003, compared to net
income of $199,000 ($0.08 basic income per share and $0.08 diluted income per
share) for the quarter ended March 31, 2002.
Total assets increased $9.1 million from $248.5 million at December 31, 2002 to
$257.6 million at March 31, 2003. Cash and cash equivalents increased $12.8
million to $24.5 million at March 31, 2003 from $11.7 million at December 31,
2002. The available for sale securities portfolio decreased $11.1 million to
$49.5 million at March 31, 2003 from $60.6 million at December 31, 2002. The net
loan portfolio increased $6.5 million from $170.8 million at December 31, 2002
to $177.3 million at March 31, 2003. Deposits increased $1.1 million to $219.0
million at March 31, 2003 from $217.9 million at December 31, 2002. Total
shareholders' equity increased $122,000 to $18.7 million at March 31, 2003 from
$18.5 million at December 31, 2002.
FINANCIAL CONDITION
Assets
Bancorp's total assets increased $9.1 million from $248.5 million at December
31, 2002 to $257.6 million at March 31, 2003. Cash and cash equivalents
increased $12.8 million to $24.5 million at March 31, 2003. Cash and due from
banks decreased $2.1 million; federal funds sold increased $8.2 million and
short term investments increased $6.8 million. The increases in federal funds
sold and short term investments is due primarily to the closing at the end of
March of the trust preferred securities offering of $8.0 million; these funds
were reinvested in mortgage backed securities in the beginning of April.
Available for sale securities decreased $11.1 million due to principal
repayments on mortgage backed securities, redemptions and calls on bonds and
money market preferred equities, as well as the sale of a mutual fund
investment.
12
Loans
Bancorp's net loan portfolio increased $6.5 million from $170.8 million at
December 31, 2002 to $177.3 million at March 31, 2003. Increases in commercial
loans of $2.3 million, construction loans of $2.5 million, commercial real
estate of $1.2 million and home equity loans of $1.2 million were partially
offset by decreases in residential real estate loans of $1.1 million. At March
31, 2003, the net loan to deposit ratio was 80.9% and the net loan to total
assets ratio was 68.8%. 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.
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
13
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
$2.5 million at March 31, 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
March 31,
(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 ........... 165 74
------- -------
Balance at end of period .................. $ 2,537 $ 1,978
======= =======
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:
March 31, December 31,
(Thousands of dollars) 2003 2002
-----------------------------------------------------
Loans delinquent over 90
days still accruing $ 846 $1,172
Non-accruing loans ......... 150 201
------ ------
Total ...................... $ 996 $1,373
====== ======
% of Total Loans ........... 0.55% 0.79%
% of Total Assets .......... 0.39% 0.56%
Potential Problem Loans
At March 31, 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 $1.1 million from $217.9 million at December 31, 2002
to $219.0 million at March 31, 2003. Noninterest bearing deposits decreased $2.6
million due primarily to lower levels of volatile commercial demand deposit
accounts. Interest bearing deposits increased $3.7 million. Money market fund
accounts and certificates of deposit increased $2.4 million and $4.3 million,
respectively. NOW accounts and savings accounts decreased $1.4 million and $1.6
million, respectively.
Trust Preferred Securities
As indicated in Note 7, the Company 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.
RESULTS OF OPERATIONS
Interest and dividend income and expense
Bancorp's interest and dividend income increased $501,000 or 17.1% for the
quarter ended March 31, 2003 as compared to the same period in 2002. Interest
and fees on loans
15
increased 21.5% or $513,000 from $2.4 million for the quarter ended March 31,
2002 to $2.9 million for the quarter ended March 31, 2003; this increase is the
result of the increase in the loan portfolio despite a lower interest rate
environment.
Bancorp's interest expense decreased 0.8% or $9,000 for the quarter ended March
31, 2003 as compared to the same period in 2002. Increases in interest bearing
deposits and borrowings were offset by a lower interest rate environment.
Included in interest expense for the three months ended March 31, 2003 was
$48,000 relating to FHLB Advances, $30,000 relating to securities sold under
agreements to repurchase transactions entered into during the second quarter of
2002, and $5,000 relating to the placement of trust preferred securities at the
end of the first quarter of 2003.
Non-interest income
Non-interest income increased 59.1% or $499,000 to $1.3 million for the quarter
ended March 31, 2003 as compared to $844,000 for the comparable period last
year. The continued favorable interest rate environment for borrowers has
resulted in the maintenance of an historical high mortgage brokerage and
referral fees. Mortgage brokerage and referral fees increased 42.2% or $277,000
to $933,000 for the quarter ended March 31, 2003 as compared to $656,000 for the
same period last year. Loan processing fees increased 42.9% or $53,000 to
$178,000 for the quarter ended March 31, 2003 compared to $125,000 for the same
period in 2002. During the first quarter of 2003 Bancorp recorded gains on sales
of investment securities of $125,000 as compared to a loss of $31,000 recorded
in the first quarter of 2002. Included in the results for the first quarter of
2003 is a gain of $117,000 on an investment security for which Bancorp recorded
a write-down in 2001 made for the permanent 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.
Non-interest expenses
Non-interest expenses increased 28.3% or $629,000 to $2.9 million for the
quarter ended March 31, 2003 from $2.2 million for the quarter ended March 31,
2002. Salaries and benefits expense increased 34.0%, or $479,000, to $1.9
million for the quarter ended March 31, 2003 from $1.4 million for the quarter
ended March 31, 2002, due primarily to higher levels of commissions and
production related incentive compensation accruals. Other non-interest expenses
increased $74,000 or 42.9% to $246,000 for the quarter ended March 31, 2003 from
$172,000 for the quarter ended March 31, 2002; $50,000 of this increase is due
to increases in loan processing expenses as a result of increased loan volumes
due to the low interest rate environment.
16
Bancorp has received regulatory approval to establish three additional branch
locations which will result in additional capital expenditures as well as
increases in salaries and benefits and occupancy and equipment expenses. The
first of the three branches opened in April 2003; management anticipates that
the second branch will open in the second quarter of 2003, and the third branch
in the third quarter of 2003.
Income Taxes
Bancorp recorded income tax expense of $233,000 for the quarter ended March 31,
2003 as compared to $111,000 for the quarter ended March 31, 2002. This change
is related primarily to the change in pre-tax income. The effective tax rates
for the quarters ended March 31, 2003 and March 31, 2002 were 38.9% and 35.8%.
LIQUIDITY
Bancorp's liquidity ratio was 28.8% and 32.8% at March 31, 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 March 31,
2003 and December 31, 2002 respectively:
March 31, 2003 December 31, 2002
-------------- -----------------
Leverage Capital ....................... 9.50% 6.99%
Tier 1 Risk-based Capital .............. 11.92% 9.13%
Total Risk-based Capital ............... 14.14% 10.39%
The following table illustrates the Bank's regulatory capital ratios at March
31, 2003 and December 31, 2002 respectively:
March 31, 2003 December 31, 2002
-------------- -----------------
Leverage Capital ....................... 9.85% 6.98%
Tier 1 Risk-based Capital .............. 12.38% 9.11%
Total Risk-based Capital ............... 13.63% 10.36%
17
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 March 31, 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.
18
Item 3. Controls and Procedures
Based on an evaluation of Bancorp's disclosure controls and procedures performed
by Bancorp's Chief Executive Officer and its Chief Financial Officer within 90
days of the filing of this report, Bancorp's Chief Executive Officer and Chief
Financial Officer concluded that Bancorp's disclosure controls and procedures
have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of Bancorp that are designed to ensure that information required to
be disclosed by Bancorp in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by Bancorp in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to Bancorp's management,
including its principal executive officer or officers and its principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Since the date of the evaluation described above, there were no significant
changes in Bancorp's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
19
PART II - OTHER INFORMATION.
---------------------------
Item 2. Changes in Securities
(a) Not applicable
(b) Not applicable
(c) On January 2, 2003, Bancorp issued 200 shares of its Common Stock upon
exercise of certain warrants that were granted by Patriot National
Bank (the "Bank") in 1994 in connection with its organization to
persons who assisted the Bank in meeting its pre-opening expenses. The
exercise price per share of these warrants is $6.00. The obligations
under these warrants were assumed by Bancorp at the time the Bank
became a wholly owned subsidiary of Bancorp.
The total amount received by Bancorp for these shares was $1,200. No
underwriter was used in connection with the sale of these 200 shares
nor were any underwriting discounts or commissions paid. Bancorp
claims an exemption from registration for the sale of these shares
under Rule 504 under the Securities Act of 1933, on the basis that the
aggregate exercise price for all of the warrants issued to individuals
involved in the organization of the Bank is less than $1,000,000.
(d) Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) No. Description
-- -----------
99 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The issuer filed no reports on Form 8-K during the first quarter of
2003.
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PATRIOT NATIONAL BANCORP, INC.
(Registrant)
By: /s/ Robert F. O'Connell
-----------------------------------
Robert F. O'Connell,
Senior Executive Vice President
Chief Financial Officer
(On behalf of the registrant and as
chief financial officer)
May 14, 2003
21
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14
I, Angelo De Caro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
the registrant's Board of Directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
22
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Angelo De Caro
------------------------------------
Angelo De Caro,
Chairman and Chief Executive Officer
(Principal executive officer)
May 14, 2003
23
CERTIFICATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14
I, Robert F. O'Connell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
the registrant's Board of Directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
24
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Robert F. O'Connell
-------------------------------
Robert F. O'Connell,
Senior Executive Vice President
(Principal financial officer)
May 14, 2003
25