UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002 Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Connecticut 06-1559137
(State of incorporation) (I.R.S. Employer Identification Number)
900 Bedford Street, Stamford, Connecticut 06901
(Address of principal executive offices)
(203) 324-7500
------------------
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, $2.00 par value per share, 2,400,525 shares issued and outstanding
as of the close of business July 31, 2002.
Transitional Small Business Disclosure Format (check one):Yes No X
----- -----
Table of Contents
Page
----
Part I FINANCIAL INFORMATION
------
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis or
Plan of Operation 13
Part II OTHER INFORMATION
-------
Item 4. Submission of matters to a vote of security holders 19
Item 6. Exhibits and reports on Form 8-K 20
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
------- ---------------------------------
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
-------------------------------------
(Unaudited)
ASSETS
Cash and due from banks ............................................ $ 10,960,941 $ 7,544,242
Federal funds sold ................................................. 7,500,000 12,700,000
Short term investments ............................................. 2,786,500 6,788,569
------------ ------------
Cash and cash equivalents ..................................... 21,247,441 27,032,811
Available for sale securities (at fair value) ...................... 57,560,390 34,717,930
Federal Reserve Bank stock ......................................... 481,050 481,050
Federal Home Loan Bank stock ....................................... 621,300 617,900
Loans receivable (net of allowance for loan losses: 2002 $2,062,454;
2001 $1,894,454) .............................................. 137,953,798 135,680,036
Accrued interest receivable ........................................ 1,144,823 1,079,450
Premises and equipment, net ........................................ 945,157 1,102,428
Deferred tax asset, net ............................................ 618,774 662,296
Goodwill ........................................................... 930,091 930,091
Other assets ....................................................... 285,223 265,465
------------ ------------
Total assets .............................................. $221,788,047 $202,569,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing deposits .............................. $ 18,450,586 $ 16,961,636
Interest bearing deposits ................................. 174,040,298 166,302,303
------------ ------------
Total deposits ....................................... 192,490,884 183,263,939
Securities sold under agreements to repurchase ................ 5,700,000 --
Federal Home Loan Bank borrowings ............................. 4,000,000 --
Capital lease obligation ...................................... 306,097 364,836
Collateralized borrowings ..................................... 399,444 474,444
Accrued expenses and other liabilities ........................ 1,010,504 1,060,222
------------ ------------
Total liabilities .................................... 203,906,929 185,163,441
------------ ------------
Shareholders' equity
Common stock, $2 par value: 5,333,333 shares authorized;
2,400,525 shares issued and outstanding ................... 4,801,050 4,801,050
Additional paid-in capital .................................... 11,484,649 11,484,649
Retained earnings ............................................. 1,242,678 864,202
Accumulated other comprehensive income - net unrealized
gain on available for sale securities, net of tax ......... 352,741 256,115
------------ ------------
Total shareholders' equity ........................... 17,881,118 17,406,016
------------ ------------
Total liabilities and shareholders' equity ........... $221,788,047 $202,569,457
============ ============
See accompanying notes to consolidated financial statements.
3
PATRIOT NATIONAL BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest and Dividend Income
Interest and fees on loans ...................... $ 2,438,451 $ 2,826,483 $ 4,823,456 $ 5,740,573
Interest and dividends on
investment securities ........................ 468,547 545,250 974,159 1,089,611
Interest on federal funds sold .................. 39,852 84,471 81,541 367,309
----------- ----------- ----------- -----------
Total interest and dividend income ............ 2,946,850 3,456,204 5,879,156 7,197,493
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits ............................ 1,081,217 1,685,381 2,228,571 3,652,442
Interest on other borrowings .................... 39,934 -- 40,286 --
Interest on capital lease obligation ............ 11,132 14,925 23,261 30,719
Interest on collateralized borrowings ........... 5,454 9,463 11,374 20,577
----------- ----------- ----------- -----------
Total interest expense ........................ 1,137,737 1,709,769 2,303,492 3,703,738
----------- ----------- ----------- -----------
Net interest income ........................... 1,809,113 1,746,435 3,575,664 3,493,755
Provision for Loan Losses .......................... 84,000 58,500 158,000 102,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses .................. 1,725,113 1,687,935 3,417,664 3,391,755
----------- ----------- ----------- -----------
Non-Interest Income
Mortgage brokerage referral fees ................ 671,229 764,009 1,327,271 1,225,339
Loan processing fees ............................ 122,257 137,936 247,055 275,704
Fees and service charges ........................ 70,949 61,707 143,794 126,166
Gains and origination fees from loans sold ...... 249,365 24,510 249,365 40,144
Loss on impaired investment security ............ -- (117,678) -- (117,678)
Loss on sale of investment securities ........... -- -- (31,275) --
Other income .................................... 18,965 2,155 40,370 20,475
----------- ----------- ----------- -----------
Total non-interest income ..................... 1,132,765 872,639 1,976,580 1,570,150
7Non-Interest Expenses
Salaries and benefits ........................... 1,502,206 1,344,595 2,910,557 2,450,022
Occupancy and equipment expenses, net ........... 242,816 232,482 504,885 448,901
Data processing and other outside services ...... 143,246 160,492 313,780 288,241
Professional services ........................... 105,790 85,498 176,627 180,819
Advertising and promotional expenses ............ 98,442 70,078 155,438 126,804
Forms, printing and supplies .................... 41,925 39,090 78,828 77,965
Regulatory assessments .......................... 24,324 22,889 48,648 46,587
Directors' fees and expenses .................... 50,900 17,000 75,100 30,900
Other operating expenses ........................ 197,511 259,554 369,881 481,387
----------- ----------- ----------- -----------
Total non-interest expenses ................... 2,407,160 2,231,678 4,633,744 4,131,626
----------- ----------- ----------- -----------
Income before income taxes .................... 450,718 328,896 760,500 830,279
----------- ----------- ----------- -----------
Provision for Income Taxes ......................... 163,000 120,751 274,000 314,557
----------- ----------- ----------- -----------
Net income .................................... $ 287,718 $ 208,145 $ 86,500 $ 515,722
=========== =========== =========== ===========
Basic income per share ........................ $ 0.120 $ 0.090 $ 0.200 $ 0.210
=========== =========== =========== ===========
Diluted income per share ...................... $ 0.120 $ 0.090 $ 0.200 $ 0.210
=========== =========== =========== ===========
Dividends per share ........................... $ 0.025 $ 0.020 $ 0.045 $ 0.020
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
4
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income ..................................... $ 287,718 $ 208,145 $ 486,500 $ 515,722
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period, net of taxes ............. 249,073 (37,503) 96,626 90,950
----------- ----------- ----------- -----------
Comprehensive income ........................ $ 536,791 $ 170,642 $ 583,126 $ 606,672
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------------------------
Cash Flows from Operating Activities
Net income ......................................................... $ 486,500 $ 515,722
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion of investment premiums and discounts, net (9,737) (6,726)
Originations of loans held for sale ................................ (208,000) (20,509,950)
Proceeds from sales of loans held for sale ......................... 208,000 20,509,950
Gain on sale of loans .............................................. (249,365) --
Provision for loan losses .......................................... 158,000 102,000
Loss on impaired investment security ............................... -- 117,678
Loss on sale of investment securities .............................. 31,275 --
Depreciation and amortization ...................................... 213,885 213,082
Changes in assets and liabilities:
Increase in deferred loan fees ................................. 164,343 61,362
(Increase) decrease in accrued interest receivable ............. (65,373) 24,052
Increase in other assets ....................................... (19,757) (100,087)
(Decrease) increase in accrued expenses and other liabilities .. (61,722) 19,576
------------ ------------
Net cash provided by operating activities ...................... 648,049 946,659
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities ......................... (37,015,836) (10,115,072)
Proceeds from sales of available for sale securities ............... 10,369,844 6,000,000
Principal repayments on available for sale securities .............. 2,922,141 1,953,830
Proceeds from maturities of available for sale securities .......... 1,000,000 499,290
Proceeds from maturities of held to maturity securities ............ -- 500,000
Purchase of Federal Reserve Bank Stock ............................. -- (5,850)
Purchase of Federal Home Loan Bank Stock ........................... (3,400) (24,300)
Net increase in loans .............................................. (3,896,104) (7,075,027)
Proceeds from sale of loan receivable .............................. 1,549,365 --
Purchases of bank premises and equipment ........................... (56,614) (243,140)
------------ ------------
Net cash used in investing activities .......................... (25,130,604) (8,510,269)
------------ ------------
Cash Flows from Financing Activities
Net increase in demand, savings and money market deposits .......... 13,434,970 14,020,453
Net decrease in time certificates of deposits ...................... (4,208,025) (28,496,878)
Increase in FHLB borrowings ........................................ 4,000,000 --
Increase in securities sold under agreements to repurchase ......... 5,700,000 --
Principal payments on capital lease obligation ..................... (58,739) (51,283)
Decrease in collateralized borrowings .............................. (75,000) --
Dividends paid on common stock ..................................... (96,021) --
Proceeds from issuance of common stock ............................. -- 1,179
------------ ------------
Net cash provided by financing activities ...................... 18,697,185 (14,526,529)
------------ ------------
Net decrease in cash and cash equivalents ...................... (5,785,370) (22,090,139)
6
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------------------------
Cash and cash equivalents
Beginning .......................................................... 27,032,811 33,065,071
------------ ------------
Ending ............................................................. $ 21,247,441 $ 10,974,932
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest ....................................................... $ 2,317,295 $ 3,700,114
============ ============
Income Taxes ................................................... $ 347,146 $ 645,700
============ ============
Supplemental disclosure of noncash investing and financing activities:
Transfer of held to maturity securities to
available for sale securities .................................. $ -- $ 11,796,300
============ ============
Unrealized holding gain on available for sale
securities arising during the period ........................... $ 140,147 $ 152,209
============ ============
Dividends declared on common stock ................................. $ 60,013 $ 48,007
============ ============
See accompanying notes to consolidated financial statements.
7
Notes to Consolidated Financial Statements
(1) The Consolidated Balance Sheet at December 31, 2001 has been derived from
the audited financial statements of Patriot National Bancorp, Inc.
("Bancorp") at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements.
(2) The accompanying unaudited financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted. The accompanying consolidated
financial statements and related notes should be read in conjunction with
the audited financial statements of Bancorp and notes thereto for the
year ended December 31, 2001.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented. The
results of operations for the three and six months ended June 30, 2002
are not necessarily indicative of the results of operations that may be
expected for all of 2002.
(3) Bancorp is required to present basic income per share and diluted income
per share in its income statements. Basic income per share amounts are
computed by dividing net income by the weighted average number of common
shares outstanding. Diluted income per share assumes exercise of all
potential common stock in weighted average shares outstanding, unless the
effect is antidilutive. Bancorp is also required to provide a
reconciliation of the numerator and denominator used in the computation
of both basic and diluted income per share. The following is information
about the computation of income per share for the three and six months
ended June 30, 2002 and 2001.
Quarter ended June 30, 2002
Net Income Shares Amount
-----------------------------------
Basic Income Per Share
Income available to common shareholders $ 287,718 2,400,525 $ 0.12
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 25,398 -
-----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 287,718 2,425,923 $ 0.12
===================================
8
Quarter ended June 30, 2001
Net Income Shares Amount
-----------------------------------
Basic Income Per Share
Income available to common shareholders $ 208,145 2,400,525 $ 0.09
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 24,621 -
-----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 208,145 2,425,146 0.09
===================================
Six months ended June 30, 2002
Net Income Shares Amount
-----------------------------------
Basic Income Per Share
Income available to common shareholders $ 486,500 2,400,525 $ 0.20
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 25,114 -
-----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 486,500 2,425,639 $ 0.20
===================================
Six months ended June 30, 2001
Net Income Shares Amount
-----------------------------------
Basic Income Per Share
Income available to common shareholders $ 515,722 2,400,450 $ 0.21
Effect of Dilutive Securities
Warrants/Stock Options outstanding - 27,112 -
-----------------------------------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions $ 515,722 2,427,562 $ 0.21
===================================
(4) Bancorp has two reportable segments, the commercial bank and the mortgage
broker. The commercial bank provides its commercial customers with
products such as commercial mortgage and construction loans, working
capital loans, equipment loans and other business financing arrangements,
and provides its consumer customers with residential mortgage loans, home
equity loans and other consumer installment loans. The commercial bank
segment also attracts deposits from both consumer and commercial
customers, and invests such deposits in loans, investments and working
capital. The commercial bank's revenues are generated primarily from net
interest income from its lending, investment and deposit activities.
The mortgage broker solicits and processes conventional mortgage loan
applications from consumers on behalf of permanent investors and
originates loans for sale. Revenues are generated from loan brokerage and
application processing fees received from permanent investors and gains
and origination fees from loans sold.
9
Information about reportable segments and a reconciliation of such
information to the consolidated financial statements for the three and
six months ended June 30, 2002 and 2001 is as follows (in thousands):
Quarter ended June 30, 2002
Mortgage Consolidated
Bank Broker Totals
--------------------------------------
Net interest income ..... $ 1,809 $ -- $ 1,809
Non-interest income ..... 317 816 1,133
Non-interest expense .... 1,774 633 2,407
Provision for loan losses 84 -- 84
Income before taxes ..... 268 183 451
Assets .................. 220,791 997 221,788
Quarter ended June 30, 2001
Mortgage Consolidated
Bank Broker Totals
--------------------------------------
Net interest income ..... $ 1,746 $ -- $ 1,746
Non-interest income ..... (74) 947 873
Non-interest expense .... 1,553 679 2,232
Provision for loan losses 58 -- 58
Income before taxes ..... 61 268 329
Assets .................. 182,576 1,152 183,728
Six months ended June 30, 2002
Mortgage Consolidated
Bank Broker Totals
--------------------------------------
Net interest income ..... $ 3,576 $ -- $ 3,576
Non-interest income ..... 357 1,620 1,977
Non-interest expense .... 3,364 1,270 4,634
Provision for loan losses 158 -- 158
Income before taxes ..... 411 350 761
Assets .................. 220,791 997 221,788
Six months ended June 30, 2001
Mortgage Consolidated
Bank Broker Totals
--------------------------------------
Net interest income ..... $ 3,494 $ -- $ 3,494
Non-interest income ..... 11 1,559 1,570
Non-interest expense .... 2,922 1,210 4,132
Provision for loan losses 102 -- 102
Income before taxes ..... 481 349 830
Assets .................. 182,576 1,152 183,728
(5) Certain 2001 amounts have been reclassified to conform with the 2002
presentation. Such reclassifications had no effect on net income.
10
(6) In June 2001, the Financial Accounting Standards Board issued SFAS No.
142 "Goodwill and Other Intangible Assets." SFAS No. 142 no longer
permits the amortization of goodwill and indefinite-lived intangible
assets. Instead, these assets must be reviewed annually (or more
frequently under prescribed conditions) for impairment in accordance with
this statement. This impairment test uses a fair value approach rather
than the undiscounted cash flows approach previously required by SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the
reporting unit level, as defined in SFAS No. 142. Step one identifies
potential impairments by comparing the fair value of the reporting unit
to its carrying amount. Step two, which is only performed if there is a
potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied
value of that goodwill, an impairment loss is recognized in an amount
equal to that excess.
Bancorpadopted the provisions of SFAS No. 142 effective January 1, 2002
and, as a result, goodwill is no longer amortized, and is evaluated for
impairment under SFAS No. 142. Based on Bancorp's initial goodwill
impairment test, no impairment losses have been recognized related to
goodwill upon the adoption of SFAS No. 142. Bancorp will perform the
required annual impairment reviews as of October 31 of each year. In
addition, the following represents the effect of adopting SFAS No. 142 on
Bancorp's net income and earnings per share for all periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------- ---------------------------
Reported net income ......... $ 287,718 $ 208,145 $ 486,500 $ 515,722
Add goodwill amortization.... -- 31,003 -- 61,930
----------- ----------- ----------- -----------
Adjusted net income ......... $ 287,718 $ 239,148 $ 486,500 $ 577,652
=========== =========== =========== ===========
Basic earnings per share
Reported net income ....... $ 0.12 $ 0.09 $ 0.20 $ 0.21
Goodwill amortization ..... -- 0.01 -- 0.03
----------- ----------- ----------- -----------
Adjusted net income ....... $ 0.12 $ 0.10 $ 0.20 $ 0.24
=========== =========== =========== ===========
Diluted earnings per share
Reported net income ....... $ 0.12 $ 0.09 $ 0.20 $ 0.21
Goodwill amortization ..... -- 0.01 -- 0.03
----------- ----------- ----------- -----------
Adjusted net income ...... $ 0.12 $ 0.10 $ 0.20 $ 0.24
=========== =========== =========== ===========
11
(7) Other comprehensive income which is comprised solely of the change in
unrealized gains and losses on available for sale securities is as
follows:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
Before Tax Tax Net of Tax Before Tax Tax Net of Tax
Amount Effect Amount Amount Effect Amount
--------------------------------------------------------------------------------
Unrealized holding gain
arising during the period ....... $ 395,375 $(146,302) $ 249,073 $ 108,872 $ (33,810) $ 75,062
Reclassification adjustment
for losses recognized in income.. -- -- -- 31,275 (9,711) 21,564
--------- --------- --------- --------- --------- ---------
Unrealized holding gain on
available for sale securities,
net of taxes .................... $ 395,375 $(146,302) $ 249,073 $ 140,147 $ (43,521) $ 96,626
========= ========= ========= ========= ========= =========
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
Before Tax Tax Net of Tax Before Tax Tax Net of Tax
Amount Effect Amount Amount Effect Amount
--------------------------------------------------------------------------------
Unrealized holding loss
arising during the period ....... $(334,614) $ 134,725 $(199,889) $(119,617) $ 48,142 $ (71,475)
Adjustment for unrealized
losses of held to maturity
securities transferred to
available for sale securities ... 154,147 (62,061) 92,086 154,147 (62,039) 92,108
Reclassification adjustment for
losses recognized in income ..... 117,679 (47,379) 70,300 117,679 (47,362) 70,317
--------- --------- --------- --------- --------- ---------
Unrealized holding (loss) gain
on available for sale securities,
net of taxes .................... $ (62,788) $ 25,285 $ (37,503) $ 152,209 $ (61,259) $ 90,950
========= ========= ========= ========= ========= =========
(8) During the six months ended June 30, 2002 the Bank entered into the
following borrowing transactions:
Amount Rate Maturity
------ ---- --------
Securities sold under agreements to repurchase:
$2,900,000 1.92% 08/23/2002
$2,800,000 2.69% 05/23/2003
Federal Home Loan Bank Advances:
$2,000,000 4.48% 05/13/2005
$2,000,000 5.11% 05/14/2004
12
Item 2. Management's Discussion and Analysis or Plan of Operation
(a) Plan of Operation
Not applicable since Bancorp had revenues from operations in each of the last
two fiscal years.
(b) Management's Discussion and Analysis of
Financial Condition and Results of Operations
SUMMARY
Bancorp had net income of $288,000 ($0.12 basic income per share and $0.12
diluted income per share) for the quarter ended June 30, 2002, compared to net
income of $208,000 ($0.09 basic income per share and $0.09 diluted income per
share) for the quarter ended June 30, 2001. For the six-month period ended June
30, 2002, net income was $487,000 as compared to $516,000 for the same period
last year.
Total assets increased $19.2 million from $202.6 million at December 31, 2001 to
$221.8 million at June 30, 2002. Cash and cash equivalents decreased $5.8
million to $21.2 million at June 30, 2002 from $27.0 million at December 31,
2001. The available for sale securities portfolio increased $22.9 million to
$57.6 million at June 30, 2002 from $34.7 million at December 31, 2001. The net
loan portfolio increased $2.3 million from $135.7 million at December 31, 2001
to $138.0 million at June 30, 2002. Deposits increased $9.2 million to $192.5
million at June 30, 2002 from $183.3 million at December 31, 2001. Total
shareholders' equity increased $0.5 million to $17.9 million at June 30, 2002
from $17.4 million at December 31, 2001.
FINANCIAL CONDITION
Assets
------
Bancorp's total assets increased $19.2 million from $202.6 million at December
31, 2001 to $221.8 million at June 30, 2002. Cash and cash equivalents decreased
$5.8 million to $21.2 million at June 30, 2002. Cash and due from banks
increased $3.4 million, federal funds sold decreased $5.2 million and short term
investments decreased $4.0 million. This net decrease along with the increase in
deposits and borrowings funded the increases in available for sale securities
and loans. Available for sale securities increased $22.8 million; $9.7 million
of this increase represents an interest rate leveraging strategy which was
funded by Federal Home Loan Bank borrowings and securities sold under agreements
to repurchase.
13
Loans
-----
Bancorp's net loan portfolio increased $2.3 million from $135.7 million at
December 31, 2001 to $138.0 million at June 30, 2002. Increases in commercial
real estate loans and residential loans of $2.8 million and $4.4 million,
respectively, were partially offset by decreases in commercial loans of $2.9
million, construction loans of $1.2 million, home equity loans of $0.6 million
and consumer loans of $0.2 million. At June 30, 2002, the net loan to deposit
ratio was 71.7% and the net loan to total assets ratio was 62.2%. At December
31, 2001, the net loan to deposit ratio was 74.0% and the net loan to total
assets was 67.0%. Based on loan applications in process and Bancorp's hiring of
additional loan officers, management anticipates moderate loan demand during the
second half of 2002.
Allowance for Loan Losses
-------------------------
The provision for loan losses is a charge against income and an addition to the
allowance for loan losses. Management's judgement in determining the adequacy of
the allowance is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and other relevant factors.
Based upon this evaluation, management believes the allowance for loan losses of
$2.1 million at June 30, 2002, which represents 1.48% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb losses
on existing loans which may become uncollectible. At December 31, 2001, the
allowance for loan losses was $1.9 million or 1.38% of gross loans outstanding.
Analysis of Allowance for Loan Losses
June 30,
(Thousands of dollars) 2002 2001
-----------------------------------------------------------------------------
Balance at beginning of period $1,894 $1,645
---------------------------------
Charge-offs 0 (2)
Recoveries 10 1
---------------------------------
Net recoveries (charge-offs) 10 (1)
---------------------------------
Provision charged to operations 158 102
---------------------------------
Balance at end of period $2,062 $1,746
=================================
Ratio of net recoveries (charge-offs)
during the period to average loans
outstanding during the period. 0.01% 0.00%
=================================
14
Non-Accrual, Past Due and Restructured Loans
The following table presents non-accruing and past due loans:
June 30, December 31,
(Thousands of dollars) 2002 2001
-----------------------------------------------------------------------------
Loans delinquent over 90
days still accruing $ 60 $1,300
Non-accruing loans 354 1,654
---------------------------------
Total $ 414 $2,954
=================================
% of Total Loans 0.30% 2.14%
% of Total Assets 0.19% 1.46%
The decrease in non-accruing loans is due to the sale of a $1.3 million
residential real estate loan for which the bank realized a gain of $249,000.
Potential Problem Loans
-----------------------
At June 30 2002, Bancorp had no loans other than those disclosed in the table
above, as to which management has significant doubts as to the ability of the
borrower to comply with the present repayment terms.
Deposits
--------
Total deposits increased $9.2 million from $183.3 million at December 31, 2001
to $192.5 million at June 30, 2002. Non-interest bearing deposits increased $1.5
million due to higher levels of both commercial and personal demand deposit
accounts. Interest bearing deposits increased $7.7 million. NOW and Money market
fund accounts increased $3.4 million and $27.5 million, respectively. The
increase in Money market fund deposits is due to competitive pricing; much of
this increase was funded by funds shifted from other accounts. Super NOW
accounts, formerly priced at a premium rate, decreased $18.1 million;
certificates of deposit decreased $4.2 million and savings accounts decreased
$0.9 million; some of these decreases were transfers that resulted in the
increase in the money market fund product.
RESULTS OF OPERATIONS
Interest and dividend income and expense
----------------------------------------
Bancorp's interest and dividend income decreased 14.7% or $509,000 for the
quarter ended June 30, 2002 from the comparable period in 2001. The decrease in
interest income is due to a much lower interest rate environment this quarter as
compared to the same period last year. For the six months ended June 30, 2002,
interest and dividend income was $5.9 million which represents a decrease of
$1.3 million compared to interest and
15
dividend income of $7.2 million for the same period last year. The decrease in
interest income for the six months ended June 30, 2002 is also due to the lower
interest rate environment.
Bancorp's interest expense decreased 33.5% or $572,000 for the quarter ended
June 30, 2002 compared to the same period in 2001. The decrease in interest
expense is due to the lower interest rate environment cited earlier. For the six
months ended June 30, 2002, interest expense decreased $1.4 million or 37.8% to
$2.3 million as compared to $3.7 million for the six months ended June 30, 2001.
The decrease in interest expense for the six months ended June 30, 2002 is also
due to the lower interest rate environment. Included in interest expense for the
three and six months ended June 30, 2002 is $40,000 due to FHLB Advances and
securities sold under agreements to repurchase transactions entered into during
the six months ended June 30, 2002.
Non-interest income
-------------------
Non-interest income increased 29.8% or $260,000 to $1.1 million for the quarter
ended June 30, 2002 as compared to $873,000 for the comparable period last year.
Included in the results for the quarter ended June 30, 2002 is a gain of
$249,000 from the sale of a nonperforming loan. The continued favorable interest
rate environment for borrowers has resulted in the maintenance of historical
high mortgage brokerage and referral fees, however, not as high as last year
when interest rates were dramatically declining. Mortgage broker referral fees
decreased 12.1% or $93,000 to $671,000 for the quarter ended June 30, 2002 as
compared to $764,000 for the same period last year. Included in non-interest
income for the three months ended June 30, 2001 was a charge of $118,000
representing a write down provision made for the permanent impairment of a debt
security due to a deterioration in the financial condition of the issuer;
management continues to monitor the status and performance of the issuer.
For the six months ended June 30, 2002, non-interest income increased $406,000
or 25.9% to $2.0 million as compared to $1.6 million for the same period last
year. Mortgage broker and referral fees increased $102,000 or 8.3% to $1.3
million for the six months ended June 30, 2002 from $1.2 million for the six
months ended June 30, 2001 due to the continued favorable interest rate
environment for borrowers. Included in non-interest income for the six months
ended June 30, 2002 is a gain of $249,000 from the sale of a loan cited earlier.
Fees and service charges increased 14.0%, or $18,000, to $144,000 for the six
months ended June 30, 2002, from $126,000 for the six months ended June 30,
2001; this increase is the result of increases in account and transaction
volumes. Included in non-interest income for the six months ended June 30, 2001
was a charge of $118,000 representing a write down provision made for the
permanent impairment of a debt security.
16
Non-interest expenses
---------------------
Non-interest expenses increased 7.9% or $175,000 to $2.4 million for the quarter
ended June 30, 2002 from $2.2 million for the quarter ended June 30, 2001.
Salaries and benefits expense increased 11.7%, or $158,000, to $1.5 million for
the quarter ended June 30, 2002 from $1.3 million for the quarter ended June 30,
2001, due primarily to staffing additions made during the second half of 2001
for the Norwalk Office and compensation adjustments made during the fourth
quarter of 2001. Occupancy and equipment expense, net increased 4.4% or $10,000
to $243,000 for the quarter ended June 30, 2002 from $232,000 for the quarter
ended June 30, 2001; this increase is a result of increases in depreciation of
leasehold improvements as well as furniture and equipment due primarily to the
Norwalk Branch Office which opened in August 2001. Advertising and promotional
expenses increased 40.1% or $28,000 to $98,000 for the quarter ended June 30,
2002 from $70,000 for the comparable period last year due to an increased level
of promotional campaigns. Directors' fees increased $34,000 from $17,000 for the
quarter ended June 30, 2001 to $51,000 for the quarter ended June 30, 2002 due
to compensation based payments made to directors upon the attainment of certain
years of service and not standing for reelection, per meeting fee increases and
an increase in the number of committee meetings. Other operating expenses
decreased $62,000 or 23.9% to $198,000 for the quarter ended June 30, 2002 from
$260,000 for the quarter ended June 30, 2001; $31,000 of this decrease is due to
the cessation of the amortization of goodwill as required by SFAS No. 142.
For the six months ended June 30, 2002, non-interest expenses increased $502,000
or 12.2% to $4.6 million from $4.1 million for the same period last year for
similar reasons previously cited. Increases in salary and benefits of $461,000,
occupancy and equipment, net of $56,000, directors fees of $44,000, advertising
and promotional expenses of $29,000 and data processing and other outside
services of $26,000 were partially offset by decreases in other operating
expenses of $112,000. Included in the decrease in other non-interest expense is
$62,000 due to the cessation of the amortization of goodwill as required by SFAS
No. 142.
Bancorp has received regulatory approval to establish an additional branch
location which will result in additional capital expenditures as well as an
increase in salaries and benefits and occupancy and equipment expenses.
Management anticipates that the new branch will open either late in 2002 or
early in 2003.
Income Taxes
------------
Bancorp recorded income tax expense of $163,000 for the quarter ended June 30,
2002 as compared to $121,000 for the quarter ended June 30, 2001. For the six
months ended June 30, 2002, income tax expense was $274,000 as compared to
$315,000 for the same period last year. These changes are related primarily to
the changes in pre-tax income.
17
The effective tax rates for the quarters ended June 30, 2002 and June 30, 2001
were 36.2% and 36.7%, respectively; the effective tax rates for the six months
ended June 30, 2002 and June 30, 2001 were 36.0% and 37.9%, respectively.
LIQUIDITY
Bancorp's liquidity ratio was 35.5% and 24.6% at June 30, 2002 and 2001,
respectively. The liquidity ratio is defined as the percentage of liquid assets
to total assets. The following categories of assets as described in the
accompanying consolidated balance sheets are considered liquid assets: cash and
due from banks, federal funds sold, short term investments and available for
sale securities. Liquidity is a measure of Bancorp's ability to generate
adequate cash to meet financial obligations. The principal cash requirements of
a financial institution are to cover downward fluctuations in deposit accounts
and increases in its loan portfolio. Management believes Bancorp's short-term
assets have sufficient liquidity to cover loan demand, potential fluctuations in
deposit accounts, the costs related to opening new branch offices and to meet
other anticipated cash requirements.
CAPITAL
The following table illustrates the Bancorp's regulatory capital ratios at June
30, 2002 and December 31, 2001 respectively:
June 30, 2002 December 31, 2001
------------- -----------------
Leverage Capital 7.94% 8.11%
Tier 1 Risk-based Capital 10.40% 9.57%
Total Risk-based Capital 11.65% 10.69%
Capital adequacy is one of the most important factors used to determine the
safety and soundness of individual banks and the banking system. Based on the
above ratios, the Bank is considered to be "well capitalized" at June 30, 2002
under applicable regulations. To be considered "well-capitalized," an
institution must generally have a leverage capital ratio of at least 5%, a Tier
1 risk-based capital ratio of at least 6% and a total risk-based capital ratio
of at least 10%. Bancorp is also considered to be "well capitalized" under the
regulatory framework specified by the Federal Reserve Bank. Bancorp's actual and
required ratios are not substantially different from those shown above.
18
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.
PART II - OTHER INFORMATION.
---------------------------
Item 4. Submission of Matters to a vote of Security Holders
(a) The Annual Meeting of Shareholders (the "Annual Meeting") of
Patriot National Bancorp, Inc was held on June 18, 2002.
(b) Not applicable pursuant to Instruction 3 to Item 4 of Part II
of Form10-QSB.
(c) The following is a brief description of the matters voted upon
at the Annual
19
Meeting and the number of votes cast for, against or withheld
as well as the number of abstentions to each such matter:
(i) The election of eleven directors for the ensuing year:
Withheld
Authority to
For Vote For
Angelo De Caro 21,282,151 1,209,791
Fred A. DeCaro, Jr. 21,282,151 935,077
John J. Ferguson 21,282,140 1,209,901
John A. Geoghegan 21,282,140 1,209,901
L. Morris Glucksman 21,282,140 1,214,807
Charles F. Howell 21,282,151 1,209,791
Michael Intrieri 21,282,140 1,567,280
Richard Naclerio 21,282,140 1,209,901
Robert F. O'Connell 21,282,151 1,209,791
Paul C. Settelmeyer 21,282,151 1,209,901
Philip W. Wolford 21,282,140 1,212,871
(ii) The consideration of a proposal to ratify the appointment
of McGladrey & Pullen as independent auditors for Bancorp for
the year ending December 31, 2002.
For Against Abstain
2,013,812 29,200 2,555
(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 second
quarter of 2002.
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PATRIOT NATIONAL BANCORP, INC.
(Registrant)
By: /s/ Robert F. O'Connell
---------------------------
Robert F. O'Connell,
Senior Executive Vice President
Chief Financial Officer
(On behalf of the registrant and as
chief financial officer)
August 14, 2002