U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Name of small business issuer in its charter)
Connecticut 06-1559137
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
900 Bedford Street
Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (203) 324-7500
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $2.00 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year: $ 16,718,538
-------------
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 2003 based on the last sale price as reported on
the NASDAQ Small Cap Market: $12,943,401.
Number of shares of the registrant's Common Stock, par value $2.00 per share,
outstanding as of February 28, 2003: 2,400,725
---------
Documents Incorporated by Reference
-----------------------------------
Proxy Statement for 2003 Annual Incorporated into Part III of this
Meeting of Shareholders. (A definitive Form 10-KSB
proxy statement will be filed with the
Securities and Exchange Commission
within 120 days after the close of the
fiscal year covered by this Form 10-KSB.)
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
Table of Contents
Page
----
Part I
------
Item 1. Description of Business 1
Item 2. Description of Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
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Item 5. Market for Common Equity and Related
Shareholder Matters 9
Item 6. Management's Discussion and Analysis or
Plan of Operation 11
Item 7. Financial Statements 26
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
--------
Item 9. Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16 (a)
of the Exchange Act 27
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 27
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 27
Item 14. Controls and Procedures 29
CERTIFICATIONS 32
PART I
Item 1. Description of Business
-----------------------
Patriot National Bancorp, Inc. ("Bancorp"), a Connecticut corporation, was
organized in 1999 for the purpose of becoming a one-bank holding company (the
"Reorganization") for Patriot National Bank, a national banking association
headquartered in Stamford, Fairfield County, Connecticut (the "Bank"). Following
receipt of regulatory and shareholder approvals, the Reorganization became
effective as of the opening of business on December 1, 1999. Upon consummation
of the Reorganization, each outstanding share of Common Stock, par value $2.00
per share, of the Bank ("Bank Common Stock"), was converted into the right to
receive one share of Common Stock, par value $2.00 per share, of Bancorp
("Bancorp Common Stock"), and each outstanding option or warrant to purchase
Bank Common Stock became an option or warrant to purchase an equal number of
shares of Bancorp Common Stock.
As of the date hereof, the only business of Bancorp is its ownership of all of
the issued and outstanding capital stock of the Bank. Except as specifically
noted otherwise herein, the balance of the description of Bancorp's business is
a description of the Bank's business.
The Bank was granted preliminary approval by the Comptroller of the Currency
(the "OCC") on March 5, 1993 and received its charter and commenced operations
as a national bank on August 31, 1994. The Bank opened branch offices in
Greenwich and Old Greenwich, Connecticut on September 5, 1997 and October 12,
1999, respectively. On August 21, 2001 the Bank opened a branch office in
Norwalk, Connecticut.
On June 30, 1999, the Bank through its wholly-owned subsidiary, PinPat
Acquisition Corporation, acquired all of the outstanding capital stock of
Pinnacle Financial Corp., a Connecticut corporation, Pinnacle Financial Corp., a
New Jersey corporation, and Pinnacle Financial Corp., a New York corporation
(collectively, "Pinnacle"), a residential mortgage broker. Pinnacle surrendered
its mortgage licenses and the mortgage brokerage business of Pinnacle is now
conducted through a division of the Bank. During 2002, Pinnacle had a
significant impact on the business and results of operations of Bancorp.
The Bank conducts business at its main office located at 900 Bedford Street,
Stamford, Connecticut and at branch offices located at 100 Mason Street,
Greenwich, Connecticut, 184 Sound Beach Avenue, Old Greenwich, Connecticut, and
16 River Street, Norwalk, Connecticut. The Bank also operates mortgage
origination offices at 71 Lewis Street, Greenwich, Connecticut and 20 Broad
Hollow Road, Melville, New York.
The Bank offers a broad range of consumer and commercial banking services with
an emphasis on serving the needs of individuals, small and medium-sized
businesses and professionals. The Bank offers consumer and commercial deposit
accounts that include: checking accounts, interest-bearing "NOW" accounts,
insured money market accounts, time certificates of deposit, savings accounts
and IRA's (Individual Retirement Accounts). Other services include money orders,
traveler's checks, ATM's (automated teller machines), internet banking and debit
cards.
In addition, the Bank may in the future offer Keogh accounts and other financial
services. The Bank does not currently accept brokered deposits.
The Bank offers commercial real estate and construction loans to area businesses
and developers. Real estate loans made to individuals include home mortgages,
home improvement loans, bridge loans and home equity lines of credit. Other
personal loans include lines of credit, installment loans and credit cards.
Commercial loans offered to small and medium-sized businesses include secured
and unsecured loans to service companies, real estate developers, manufacturers,
restaurants, wholesalers, retailers and professionals doing business in the
region. The Bank offers residential mortgages through its mortgage brokerage
division Pinnacle Financial. Pinnacle solicits and processes conventional
mortgage loan applications from consumers on behalf of permanent investors and
originates loans for sale.
The Bank competes with all institutions in its market area. Most have greater
financial resources and capitalization, which gives them higher lending limits
and the ability to conduct larger advertising campaigns to attract business.
Generally the larger institutions offer services such as trust and international
banking which the Bank is not equipped to offer directly. When the need arises,
arrangements are made with correspondent institutions to provide such services.
To attract business in this competitive environment, the Bank relies on local
promotional activities and personal contact by officers, directors and
shareholders and on its ability to offer personalized services.
The Bank does not offer trust services. If the Bank desires in the future to
offer trust services, prior approval of the OCC will be required.
The customer base of the Bank is diversified so that there is not a
concentration of either loans or deposits within a single industry, a group of
industries, a single person or groups of people. The Bank is not dependent on
one or a few major customers for either its deposit or lending activities, the
loss of any one of which would have a material adverse effect on the business of
the Bank.
Residents and businesses in Stamford, Greenwich and Norwalk, Connecticut provide
the majority of the Bank's deposits. The Bank has focused its attention on
serving the segment of its market area historically served by community banks.
The Bank competes in its market by providing a high level of personalized and
responsive banking service for which the Bank believes there is a need. This
area is bordered by New York State to the west and north, the Town of Westport
to the east, and Long Island Sound to the south.
The Bank's loan customers extend beyond Stamford, Greenwich and Norwalk to
include the adjacent towns in Fairfield County, Connecticut, and towns in
Westchester County, New York, although the Bank's loan business is not
necessarily limited to these areas. The Bank's mortgage brokerage business is
concentrated in the areas surrounding its loan origination offices. While the
Bank does not currently hold or intend to attract significant deposit or loan
business from major corporations with headquarters in the Fairfield County area,
the Bank believes that the service, professional and related businesses which
have been attracted to this area, as well as the individuals that reside in this
area, represent current and potential customers of the Bank.
2
In the normal course of business and subject to applicable government
regulations, the Bank invests a portion of its assets in investment securities,
which may include certain debt and equity securities, including government
securities. An objective of the Bank's investment policy is to seek to optimize
its return on assets while limiting its exposure to interest rate movements and
to maintain adequate levels of liquidity.
The Bank's employees perform most routine day-to-day banking transactions at the
Bank. However, the Bank has entered into a number of arrangements with third
parties for banking services such as correspondent banking, check clearing, data
processing services, credit card processing and armored carrier service.
The Cities of Stamford and Norwalk and the Town of Greenwich are presently
served by approximately 115 branches of commercial banks and savings banks, most
of which are offices of banks which have headquarters outside of the area or are
subsidiaries of bank or financial holding companies whose headquarters are
outside of Stamford, Greenwich or Norwalk. In addition to banks with branches in
the same areas as the Bank, there are numerous banks and financial institutions
serving the communities surrounding these areas, which also draw customers from
Stamford, Greenwich and Norwalk, posing significant competition to the Bank for
deposits and loans. Competition can also be expected from out-of-state financial
institutions, which may establish or acquire offices in the Bank's service area
and from other local financial institutions which may be formed in the future.
Many of such banks and financial institutions are well established and well
capitalized.
In recent years, intense market demands, economic pressures and significant
legislative and regulatory actions have eroded banking industry classifications
which were once clearly defined and have increased competition among banks, as
well as other financial institutions. This increase in competition has caused
banks and other financial service institutions to diversify their services and
become more cost effective as a result of competition with one another and with
new types of financial service companies, including non-bank competitors. The
impact on Bancorp of federal legislation authorizing increased services by
financial holding companies and interstate branching of banks has resulted in
increased competition. These events have resulted in increasing homogeneity in
the financial services offered by banks and other financial institutions. The
impact on banks and other financial institutions of these market dynamics and
legislative and regulatory changes has been increased customer awareness of
product and service differences among competitors and increased merger activity.
As a bank holding company, Bancorp's operations are subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
Board (the "Federal Reserve Board"). The Federal Reserve Board has established
capital adequacy guidelines for bank holding companies that are similar to the
OCC's capital guidelines applicable to the Bank. The Bank Holding Company Act of
1956, as amended (the "BHC Act"), limits the types of companies that a bank
holding company may acquire or organize and the activities in which it or they
may engage. In general, bank holding companies and their subsidiaries are only
permitted to engage in or acquire direct control of any company engaged in
banking or in a business so closely related to banking as to be a proper
incident thereto. Federal legislation enacted in 1999 authorizes certain
entities to register as financial holding companies. Registered financial
3
holding companies are permitted to engage in businesses, including securities
and investment banking businesses, which are prohibited to bank holding
companies. While the creation of financial holding companies is evolving, to
date, there has been no significant impact on Bancorp.
Under the BHC Act, Bancorp is required to file annually with the Federal Reserve
Board a report of its operations. Bancorp, the Bank and any other subsidiaries
are subject to examination by the Federal Reserve Board. In addition, Bancorp
will be required to obtain the prior approval of the Federal Reserve Board to
acquire, with certain exceptions, more than 5% of the outstanding voting stock
of any bank or bank holding company, to acquire all or substantially all of the
assets of a bank or to merge or consolidate with another bank holding company.
Moreover, Bancorp, the Bank and any other subsidiaries are prohibited from
engaging in certain tying arrangements in connection with any extension of
credit or provision of any property or services. The Bank is also subject to
certain restrictions imposed by the Federal Reserve Act on issuing any extension
of credit to Bancorp or any of its subsidiaries or making any investments in the
stock or other securities thereof and on the taking of such stock or securities
as collateral for loans to any borrower. If Bancorp wants to engage in
businesses permitted to financial holding companies but not to bank holding
companies, it would need to register with the Federal Reserve Board as a
financial holding company.
The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that bank holding company's net income for the past year is sufficient to cover
both the cash dividend and a rate of earnings retention that is consistent with
the bank holding company's capital needs, asset quality and overall financial
condition. The Federal Reserve Board has also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board pursuant to applicable law, the
Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the bank holding company's bank subsidiary is classified as
"undercapitalized."
A bank holding company is required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities, if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of its consolidated
retained earnings. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
("Riegle-Neal Act") was enacted to ease restrictions on interstate banking.
Effective September 29, 1995, the Riegle-Neal Act allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all or the assets of, a bank located in a state other than such
holding company's
4
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve Board may not approve the acquisition of a bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Riegle-Neal Act
also prohibits the Federal Reserve Board from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent that such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% statewide concentration
limits contained in the Riegle-Neal Act.
Bancorp is subject to capital adequacy rules and guidelines issued by the OCC,
the Federal Reserve Board and the Federal Deposit Insurance Corporation
("FDIC"), and the Bank is subject to capital adequacy rules and guidelines
issued by the OCC. These substantially identical rules and guidelines require
Bancorp to maintain certain minimum ratios of capital to adjusted total assets
and/or risk-weighted assets. Under the provisions of the Federal Deposit
Insurance Corporation Improvements Act of 1991, the Federal regulatory agencies
are required to implement and enforce these rules in a stringent manner. Bancorp
is also subject to applicable provisions of Connecticut law insofar as they do
not conflict with or are not otherwise preempted by Federal banking law.
Bancorp is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance with the Exchange
Act, files periodic reports, proxy statements and other information with the
SEC.
The Bank's operations are subject to regulation, supervision and examination by
the OCC and the FDIC.
Federal and state banking regulations regulate, among other things, the scope of
the business of a bank, a bank holding company or a financial holding company,
the investments a bank may make, deposit reserves a bank must maintain, the
nature and amount of collateral for certain loans a bank makes, the
establishment of branches and the activities of a bank with respect to mergers
and acquisitions. The Bank is a member of the Federal Reserve System and is
subject to applicable provisions of the Federal Reserve Act and regulations
thereunder. The Bank is subject to the federal regulations promulgated pursuant
to the Financial Institutions Supervisory Act to prevent banks from engaging in
unsafe and unsound practices, as well as various other federal and state laws
and consumer protection laws. The Bank is also subject to the comprehensive
provisions of the National Bank Act.
The OCC regulates the number and locations of the branch offices of a national
bank. The OCC may only permit a national bank to maintain branches in locations
and under the conditions imposed by state law upon state banks. At this time,
applicable Connecticut banking laws do not impose any material restrictions on
the establishment of branches by Connecticut banks throughout Connecticut.
5
The earnings and growth of Bancorp, the Bank and the banking industry are
affected by the monetary and fiscal policies of the United States Government and
its agencies, particularly the Federal Reserve Board. The Open Market Committee
of the Federal Reserve Board implements national monetary policy to curb
inflation and combat recession. The Federal Reserve Board uses its power to
adjust interest rates in United States Government securities, the Discount Rate
and deposit reserve retention rates. The actions of the Federal Reserve Board
influence the growth of bank loans, investments and deposits. They also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
In addition to other laws and regulations, Bancorp and the Bank are subject to
the Community Reinvestment Act ("CRA"), which requires the Federal bank
regulatory agencies, when considering certain applications involving Bancorp or
the Bank, to consider Bancorp's and the Bank's record of helping to meet the
credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA was originally enacted because of concern over unfair
treatment of prospective borrowers by banks and over unwarranted geographic
differences in lending patterns. Existing banks have sought to comply with CRA
in various ways, including the use of more flexible lending criteria for certain
types of loans and borrowers (consistent with the requirement to conduct safe
and sound operations), while other banks have increased their efforts to make
loans to help meet identified credit needs within the consumer community, such
as those for home mortgages, home improvements and small business loans. For
example, this may include participation in various government insured lending
programs, such as Federal Housing Administration insured or Veterans
Administration guaranteed mortgage loans, Small Business Administration loans,
and participation in other types of lending programs such as high loan-to-value
ratio conventional mortgage loans with private mortgage insurance. To date, the
market area from which the Bank draws much of its business is Stamford,
Greenwich and Norwalk, which are characterized by a very diverse ethnic,
economic and racial cross-section of the population. As the Bank expands
further, the market areas served by the Bank will continue to evolve. Bancorp
and the Bank have not and will not adopt any policies or practices, which
discourage credit applications from, or unlawfully discriminate against,
individuals or segments of the communities served by the Bank.
Bancorp does not anticipate that compliance with applicable federal and state
banking laws will have a material adverse effect on its business or the business
of the Bank. Neither Bancorp nor the Bank has any material patents, trademarks,
licenses, franchises, concessions and royalty agreements or labor contracts,
other than the charter granted to the Bank by the OCC. The Bank has, however,
registered the trademark "Patriot" and the corresponding logo with the State of
Connecticut Trademark Office. Compliance by Bancorp and the Bank with federal,
state and local provisions which have been enacted or adopted regulating or
otherwise relating to the discharge of material into the environment is not
expected to have a material effect upon the capital expenditures, earnings or
competitive position of the Bancorp. As of December 31, 2002, the Bancorp had 69
full-time employees and nine part-time employees. None of the employees of the
Bancorp is covered by a collective bargaining agreement.
6
Item 2. Description of Properties
-------------------------
The Bank leases approximately 12,000 square feet of office space located at 900
Bedford Street, Stamford, Connecticut, which is used for its main office and as
the corporate offices of Bancorp. Such space is adequate for Bancorp's and the
Bank's current needs. The entire building is being leased by the Bank for a term
of ten years, which commenced on September 1, 1994. Rent increases for the
remainder of the term will be based on increases in the consumer price index.
The Bank's lease also provides the Bank with a right of first refusal to
purchase the building in the event the owner of the property receives an offer
to purchase the building from a third party which it wishes to accept, on the
same terms and conditions of such offer, subject to the terms of the lease. The
Bank currently occupies approximately 90% of the space in the 900 Bedford Street
building. The Bank has sublet the remaining space under a sublease having a
maturity which coincides with the Bank's lease maturity. The business of the
subtenant of the Bank is a law practice. See also, "Item 12. Certain
Relationships and Related Transactions."
The Bank has entered into an agreement for additional parking with a remaining
term of two years at an annual rent of $18,000. See also, "Item 12. Certain
Relationships and Related Transactions."
The Bank leases approximately 5,000 square feet of office space on the first
floor located at 100 Mason Street, Greenwich, Connecticut. The lease has been
extended for a five-year term commencing July 1, 2002 at an initial annual rent
of $246,000, which rent will increase by approximately 3% each consecutive year.
The lease provides for two additional five-year renewals at the Bank's option.
The Bank leases approximately 1,300 square feet of office space at 184 Sound
Beach Avenue, Old Greenwich, Connecticut. The lease commenced on December 31,
1998 at an initial annual rent of $34,800, which rent has increased by
approximately 10% in the third year and will increase by approximately 25% in
the fourth year and will remain constant during the fifth year.
The Bank leases approximately 1,700 square feet of office space at 16 River
Street, Norwalk, Connecticut. The lease commenced on January 1, 2001 with a
five-year term at an initial annual rent of $27,648 with annual increases of
approximately 2.4% through the fifth year of the lease.
The Bank leases approximately 1,200 square feet of office space at 20 Broad
Hollow Road, Melville, New York. The lease commenced on April 1, 2002 at an
initial annual rent of $23,400 with a three-year term, which rent will increase
by approximately 5% each consecutive year. The lease provides for a three-year
renewal after the initial term at the Bank's option.
The Bank leases approximately 1,250 square feet of office space at 365 Westport
Avenue, Norwalk Connecticut for the purpose of establishing a second branch
location in Norwalk; it is anticipated that this branch will open in the
beginning of the second quarter of 2003. The lease commenced on January 1, 2003
with a five-year term at an annual rent of $36,240, which rent will increase
based on increases in the Consumer Price Index. The lease provides for three
five-year renewals after the initial term at the Bank's option.
7
The Bank leases approximately 3,032 square feet of office space at 845 High
Ridge Road, Stamford Connecticut for the purpose of establishing a second
Stamford office; it is anticipated that this branch will open at the end of the
second quarter of 2003. The lease commences on April 1, 2003 at an annual rent
of $100,056 for an initial term of ten years, which rent will increase by
approximately 3% during the third year; during years four through ten, increases
will be based on increases in the Consumer Price Index. The lease provides for a
ten-year renewal after the initial term at the option of the Bank.
The Bank is in the process of finalizing negotiations for the lease of office
space in Wilton, Connecticut for the purpose of establishing a branch office; it
is anticipated that a Wilton location will open for business in the beginning of
the third quarter of 2003.
All leased properties described above are in good condition.
Item 3. Legal Proceedings
-----------------
Neither Bancorp nor the Bank has any pending legal proceedings, other than
ordinary routine litigation incidental to its business, to which Bancorp or the
Bank is a party or any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
During the fourth quarter of 2002, no matter was submitted to a vote of
shareholders.
8
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
--------------------------------------------------------
Market Information
------------------
The Bancorp Common Stock is traded on the NASDAQ Small Cap Market under the
Symbol "PNBK." On December 31, 2002, the last sale price for the Bancorp Common
Stock on NASDAQ Small Cap Market was $9.40.
The following table sets forth the high and low sales price and dividends per
share of the Bancorp Common Stock for the last two fiscal years for each quarter
as reported on the NASDAQ Small Cap Market.
2002 2001
--------------------------- ----------------------------
Sales Price Cash Sales Price Cash
----------------- Dividends ------------------ Dividends
Quarter Ended High Low Declared High Low Declared
------------- --------------------------- ----------------------------
March 31 $ 8.50 $ 8.10 $ .020 $ 10.00 $ 7.50 $ --
June 30 8.50 8.00 .025 9.65 7.70 .020
September 30 8.80 8.05 .025 9.25 7.67 .020
December 31 10.66 8.30 .025 8.64 7.70 .020
Holders
-------
There were approximately 906 shareholders of record of Bancorp Common Stock as
of December 31, 2002.
Dividends
---------
2001 marked the first year in which Bancorp paid a dividend on the Bancorp
Common Stock; during the second quarter of 2002 the quarterly dividend was
increased by 25%. Bancorp's ability to pay future dividends on its Common Stock
depends on the Bank's ability to pay dividends to Bancorp. In accordance with
OCC rules and regulations, the Bank may continue to pay dividends only if the
total amount of all dividends that will be paid, including the proposed
dividend, by the Bank in any calendar year does not exceed the total of the
Bank's retained net income of that year to date, combined with the retained net
income of the preceding two years, unless the proposed dividend is approved by
the OCC. In addition, the OCC and/or the FDIC may impose further restrictions on
dividends. Future dividends depend on many factors, including management's
estimates of future earnings and Bancorp's need for capital.
Recent Sales of Unregistered Securities
---------------------------------------
During the fourth quarter of 2002 Bancorp did not have any sales of unregistered
securities.
9
Securities Authorized for Issuance under Equity Compensation Plans
------------------------------------------------------------------
The following table presents information as of December 31, 2002 for equity
compensation plans maintained by Bancorp.
Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under equity
Number of securities to be compensation plans
issued upon exercise of Weighted-average exercise (excluding securities
outstanding options, price of outstanding reflected in column (a))
warrants and rights options, warrants and rights (c)
(a) (b)
Equity compensation plans
approved by security holders ........ 110,000 $ 10.13 --
Equity compensation plans not
approved by security holders ........ -- -- --
Total ................... 110,000 $ 10.13 --
10
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Patriot National Bancorp, Inc
Financial Highlights
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------------
Operating Data
Interest and dividend income $ 12,604,718 $ 13,722,943 $ 14,694,135 $ 9,732,719 $ 6,765,283
Interest expense ........... 4,764,693 6,866,960 8,017,615 4,739,921 3,074,518
Net interest income ........ 7,840,025 6,855,983 6,676,520 4,992,798 3,690,765
Provision for loan losses .. 468,000 250,000 325,900 553,000 104,000
Noninterest income ......... 4,113,820 3,509,955 2,685,296 1,221,329 373,808
Noninterest expense ........ 9,812,838 8,675,551 7,693,345 5,245,986 3,420,185
Net income ................. 1,052,007 876,387 767,171 348,641 626,488
Basic income per share ..... 0.44 0.37 0.34 0.17 0.48
Diluted income per share ... 0.43 0.36 0.33 0.16 0.47
Dividends per share ........ 0.095 0.060 -- -- --
Balance Sheet Data
Cash and due from banks .... 5,385,757 7,544,242 3,656,071 2,685,031 1,867,353
Federal funds sold ......... 3,000,000 12,700,000 29,500,000 18,900,000 27,700,000
Short term investments ..... 3,348,968 6,788,569 -- 10,976,264 --
Investment securities ...... 61,720,716 35,816,880 34,073,832 33,003,494 13,562,730
Loans, net ................. 170,794,939 135,680,036 126,411,265 107,769,911 57,052,618
Goodwill ................... 930,091 930,091 1,054,027 1,177,948 --
Total assets ............... 248,496,753 202,569,457 197,628,127 177,194,697 102,327,631
Total deposits ............. 217,911,260 183,263,939 179,666,098 162,746,354 89,309,139
Total borrowings ........... 10,292,675 839,280 945,270 888,687 644,605
Total shareholders' equity . 18,544,955 17,406,016 16,427,436 13,236,088 12,097,283
(a) Plan of Operation
Not applicable since Bancorp has 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
11
Summary
Several milestones were achieved during 2002 as Bancorp, for the third
consecutive year, reported record earnings, which were $1,052,000 ($0.44 basic
income per share and $0.43 diluted income per share) for 2002 compared to
$876,000 ($0.37 basic income per share and $0.36 diluted income per share) for
2001. Total assets also ended the year at a record high of $248.5 million, an
increase of $46.0 million from December 31, 2001.
The net interest margin for the year ended December 31, 2002 increased $984,000
or 14.4% to $7.8 million as compared to $6.9 million for the year ended December
31, 2001.
Total assets increased by 22.7% during the year as total loans increased from
$135.7 million at December 31, 2001 to $170.8 million at December 31, 2002. The
available for sale securities portfolio increased $25.9 million or 74.6% to
$60.6 million from $34.7 million at December 31, 2001; $8.3 million of the
increase resulted from a leveraging strategy in which purchases of mortgage
backed securities were funded by securities sold under repurchase agreements and
Federal Home Loan Bank advances. Construction and real estate loans increased by
$38.0 million; while commercial and home equity loans decreased $1.6 million and
$1.0 million, respectively. Loan growth was funded through growth in total
deposits. Deposits increased $34.6 million to $217.9 million at December 31,
2002; interest bearing deposits increased $26.1 million, or 15.7%, and
non-interest bearing deposits increased $8.6 million or 50.4%. Borrowings
increased $9.5 million due to the leveraging strategy previously mentioned.
Shareholders' equity increased $1.1 million due to the increase in retained
earnings from net income net of dividend payments, and the increase in other
comprehensive income from unrealized gains on the available for sale securities
portfolio.
FINANCIAL CONDITION
Assets
Bancorp's total assets increased $45.9 million from $202.6 million at December
31, 2001 to $248.5 million at December 31, 2002. The growth in total assets was
funded primarily by deposit and borrowings growth of $34.6 million and $9.5
million, respectively, as well as net income after dividend payments.
12
Investments
The following table is a summary of Bancorp's investment portfolio at December
31 for the years shown.
2002 2001 2000
---------------------------------------
U. S. Government Obligations ...... $ -- $ -- $ 998,501
U. S. Government Agency Obligations 9,129,414 -- --
Mortgage backed securities ........ 38,461,159 10,243,418 14,191,090
Corporate bonds ................... 383,797 11,880,156 11,798,222
Marketable equity securities ...... 12,643,996 12,594,356 6,017,219
Federal Reserve Bank stock ........ 481,050 481,050 475,200
Federal Home Loan Bank stock ...... 621,300 617,900 593,600
---------------------------------------
Total Investments ................. $61,720,716 $35,816,880 $34,073,832
=======================================
The available for sale portfolio increased $25.9 million to $60.6 million due to
purchases of U. S. Government Agency Obligations and agency mortgage backed
securities partially offset by the sale of $11.4 million of corporate bonds. A
portion of the increase in the mortgage backed securities portfolio was funded
through an increase in borrowings as a leveraging strategy. The Bank is a member
of the Federal Home Loan Bank of Boston to provide additional sources of
liquidity.
The following table presents the maturity distribution of available for sale
investment securities at December 31, 2002 and the weighted average yield of
such securities. The weighted average yields were calculated on the amortized
cost and effective yields to maturity of each security.
Over one Over five Weighted
One year through through Over ten Average
or less five years ten years years No maturity Total Yield
U. S. Government agency
obligations .......... $ -- $ 8,019,920 $ 1,004,606 $-- $ -- $ 9,024,526 4.46%
Mortgage backed securities . -- -- -- -- 37,756,793 37,756,793 5.29%
Corporate bonds ............ 283,853 -- -- -- -- 283,853 6.26%
Marketable equity securities -- -- -- -- 12,632,068 12,632,068 2.52%
------------------------------------------------------------------------------------------
Total $ 283,853 $ 8,019,920 $ 1,004,606 $-- $ 50,388,861 $59,697,240 4.59%
------------------------------------------------------------------------------------------
Weighted average yield 6.26% 4.39% 5.00% --% 4.60% 4.59%
==========================================================================================
13
The following table presents a summary of investments for any issuer that
exceeds 10% of shareholders' equity at December 31, 2002.
Amortized Fair
Cost Value
---------------------------------------------------------------------------
Available for sale securities:
-----------------------------
Franklin U. S. Government Fund .................. $ 2,032,068 $ 2,043,996
U.S. Government agency obligations .............. 9,024,526 9,129,414
U.S. Government agency mortgage backed securities 37,756,793 38,461,159
Short term investments:
-----------------------
Merrill Lynch Premier Institutional Fund ........ 3,348,968 3,348,968
Loans
The following table is a summary of Bancorp's loan portfolio at December 31 for
the years shown.
2002 2001 2000
-------------------------------------------------
Real Estate
Commercial ........... $ 65,967,205 $ 60,481,789 $ 57,297,310
Residential .......... 27,012,024 7,501,504 5,041,776
Construction ......... 39,208,651 26,215,265 22,969,904
Commercial .............. 13,021,909 14,649,112 12,841,040
Consumer installment .... 1,757,321 1,231,672 1,652,587
Consumer home equity .... 26,812,092 27,770,723 28,468,453
-------------------------------------------------
Total Loans ............. 173,779,202 137,850,065 128,271,070
Net deferred fees ....... (611,809) (275,575) (214,988)
Allowance for loan losses (2,372,454) (1,894,454) (1,644,817)
-------------------------------------------------
Loans, net .............. $ 170,794,939 $ 135,680,036 $ 126,411,265
=================================================
Bancorp's net loan portfolio increased $35.1 million from $135.7 million at
December 31, 2001 to $170.8 million at December 31, 2002. Loan growth was funded
through an increase in deposit accounts. At December 31, 2002, the net loan to
deposit ratio was 78.4% and the net loan to asset ratio was 68.7%. At December
31, 2001, the net loan to deposit ratio was 74.0%, and the net loan to asset
ratio was 67.0%.
During an historic environment of lower interest rates, loan activity remained
moderate to strong and the volume of new loans exceeded principal reductions and
payoffs.
14
Maturities and Sensitivities of Loans to Changes in Interest Rates
------------------------------------------------------------------
The following table presents the maturities of loans in Bancorp's portfolio at
December 31, 2002, by type of loan:
Due after
Due in one year
one year through Due after
(thousands of dollars) or less five years five years Total
---------------------------------------------------------------------------
Commercial real estate $ 13,944 $ 47,115 $ 4,909 $ 65,968
Residential real estate 2,782 1,537 22,693 27,012
Construction loans .... 20,376 18,833 -- 39,209
Commercial loans ...... 4,026 6,679 2,317 13,022
Consumer installment .. 1,547 210 -- 1,757
Consumer home equity .. 64 272 26,475 26,811
---------------------------------------------------------------------------
Total ............. $ 42,739 $ 74,646 $ 56,394 $173,779
===========================================================================
Fixed rate loans ...... $ 9,083 $ 38,894 $ 2,170 $ 50,147
Variable rate loans ... 33,656 35,752 54,224 123,632
---------------------------------------------------------------------------
Total ............. $ 42,739 $ 74,646 $ 56,394 $173,779
===========================================================================
The following table presents loan concentrations at December 31, 2002:
Dollars
Category Percentage Outstanding
-----------------------------------------------------------------------------
(thousands of dollars)
Construction ........................ 22.6% $39,209
Commercial Retail ............... 5.7% 9,878
Restaurant .......................... 2.4% 4,282
Commercial Residential .............. 2.4% 4,241
Limousine Service ................... 1.6% 2,761
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.
15
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 and
reviewed by the board of directors and loan committee on a monthly basis,
subject to oversight by the board of directors through its members who serve on
the loan committee. 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.
Loans, including impaired loans, are charged against the allowance for loan
losses when management believes that the uncollectibility of principal is
confirmed. Any subsequent recoveries are credited to the allowance for loan
losses when received. In connection with the determination of the allowance for
loan losses, management obtains appraisals for significant properties, when
considered necessary.
The unallocated portion of the allowance reflects management's estimate of
probable but undetected losses inherent in the portfolio; such estimates are
influenced by uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, difficulty in identifying triggering events that correlate perfectly
to subsequent loss rates, and risk factors that have not yet manifested
themselves in loss allocation factors.
Based upon this evaluation, management believes the allowance for loan losses of
$2.4 million, at December 31, 2002, which represents 1.37% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb losses
on existing loans. At December 31, 2001, the allowance for loan losses was $1.9
million or 1.38% of gross loans outstanding.
16
The accrual of interest income on loans is discontinued whenever reasonable
doubt exists as to its collectibility and generally is discontinued when loans
are past due 90 days as to either principal or interest. When the accrual of
interest income is discontinued, all previously accrued and uncollected interest
is reversed against interest income. The accrual of interest on loans past due
90 days or more, including impaired loans, may be continued if the loan is well
secured, and it is believed all principal and accrued interest income due on the
loan will be realized, and the loan is in the process of collection. A
non-accrual loan is restored to an accrual status when it is no longer
delinquent and collectibility of interest and principal is no longer in doubt.
Management considers all non-accrual loans and restructured loans to be
impaired. In most cases, loan payments that are past due less than 90 days,
based on contractual terms, are considered minor collection delays and the
related loans are not considered to be impaired. Bancorp considers consumer
installment loans to be pools of smaller balance homogeneous loans, which are
collectively evaluated for impairment.
Analysis of Allowance for Loan Losses
-------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------
(thousands of dollars)
Balance at beginning of period ...... $ 1,894 $ 1,645 $ 1,360 $ 785 $ 745
------------------------------------------------------------
Charge-offs ......................... -- (2) (44) (19) (64)
Recoveries .......................... 10 1 3 41 --
------------------------------------------------------------
Net recoveries (charge-offs) ........ 10 (1) (41) 22 (64)
------------------------------------------------------------
Additions charged to operations ..... 468 250 326 553 104
------------------------------------------------------------
Balance at end of period ............ $ 2,372 $ 1,894 $ 1,645 $ 1,360 $ 785
============================================================
Ratio of net recoveries (charge-offs)
during the period to average loans
outstanding during the period ....... 0.01% (0.00%) (0.03%) 0.03% (0.12%)
============================================================
Allocation of the Allowance for Loan Losses
-------------------------------------------
Percent of loans in each
Balance at end of each Amounts (thousands of dollars) category to total loans
Period applicable to 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
----------------------------------------- -----------------------------------------------
Real Estate:
Commercial ....... $ 893 $ 833 $ 700 $ 622 $ 448 37.97% 43.88% 44.67% 49.65% 57.10%
Construction ..... 726 348 270 154 78 22.56% 19.02% 17.91% 12.69% 9.88%
Residential ...... 276 153 34 76 18 15.54% 5.44% 3.93% 6.22% 2.38%
Commercial ......... 129 142 185 79 113 7.49% 10.63% 10.01% 10.14% 14.33%
Consumer installment 11 14 12 12 16 1.01% 0.89% 1.29% 1.45% 2.03%
Consumer home equity 283 296 312 267 112 15.43% 20.14% 22.19% 19.85% 14.28%
Unallocated ........ 54 108 132 150 -- N/A N/A N/A N/A N/A
---------------------------------------- -----------------------------------------------
Total .............. $2,372 $1,894 $1,645 $1,360 $ 785 100.00% 100.00% 100.00% 100.00% 100.00%
======================================== ===============================================
17
Non-Accrual, Past Due and Restructured Loans
--------------------------------------------
The following table is a summary of non-accrual and past due loans at the end of
each of the last five years.
2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------
(thousands of dollars)
Loans delinquent over 90
days still accruing ............. $1,172 $1,300 $ 507 $ 475 $ 732
Non-accruing loans ............... 201 1,654 1,759 91 64
----------------------------------------------
$1,373 $2,954 $2,266 $ 566 $ 796
==============================================
% of Total Loans ................. 0.79% 2.14% 1.77% 0.52% 1.37%
% of Total Assets ................ 0.56% 1.46% 1.15% 0.32% 0.78%
Additional income on non-accrual
loans if recognized on an accrual
basis ........................... $ 67 $ 159 $ 115 $ 9 $ 5
There were no loans in either 2002 or 2001 considered as "troubled debt
restructurings."
Potential Problem Loans
-----------------------
The $201,000 of non-accruing loans at December 31, 2002 are comprised of loans
that are well collateralized and in process of collection.
At December 31, 2002, Bancorp had no loans other than those described above, as
to which management has significant doubts as to the ability of the borrower to
comply with the present repayment terms.
Deposits
The following table is a summary of Bancorp's deposits at December 31 for each
of the years shown.
2002 2001 2000
--------------------------------------------
Non-interest bearing .................. $ 25,519,809 $ 16,961,636 $ 16,899,057
--------------------------------------------
Interest bearing
Time certificates, less than $100,000 57,202,908 53,081,137 71,240,470
Time certificates, $100,000 or more . 28,681,345 25,376,629 31,873,302
Money market ........................ 56,973,507 10,255,056 849,067
Savings ............................. 26,847,780 31,258,415 31,164,493
NOW ................................. 22,685,911 46,331,066 27,639,709
--------------------------------------------
Total interest bearing .............. 192,391,451 166,302,303 162,767,041
--------------------------------------------
Total deposits ........................ $217,911,260 $183,263,939 $179,666,098
============================================
18
Total deposits increased $34.6 million to $217.9 million at December 31, 2002.
Non-interest bearing deposits increased $8.6 million to $25.5 million at
December 31, 2002. Interest bearing deposits increased $26.1 million. Increases
in money market fund products of $46.7 million, certificates of deposit and NOW
accounts of $7.4 million and $1.6 million, respectively, were partially offset
by decreases in Super NOW accounts, formerly priced at a premium interest rate,
and Savings accounts of $23.7 million and $4.4 million, respectively, and
attorney escrow accounts of $1.5 million. The outflow of funds from NOW and
Savings accounts is due in part to a shift of funds into the premium money
market fund products and longer term certificates of deposit. The Bank continues
to offer attractive interest rates in the very competitive Fairfield County
marketplace in order to attract additional deposits to fund loan growth.
As of December 31, 2002, the Bank's maturities of time deposits were:
$100,000 or Less than
greater $100,000 Totals
----------------------------------------------------------------------
(thousands of dollars)
Three months or less .......... $ 7,278 $12,365 $19,643
Three to six months ........... 2,976 10,821 13,797
Six months to one year ........ 2,781 10,877 13,658
Over one year ................. 15,646 23,140 38,786
---------------------------------
Total ......................... $28,681 $57,203 $85,884
=================================
Borrowings
Borrowings increased $9.4 million net of principal repayments on capital leases
and collateralized borrowings. $9.7 million in additional borrowing transactions
were recorded as part of a leveraging strategy. Borrowings include short term
borrowings under securities sold under repurchase agreements and Federal Home
Loan Bank advances.
The following table sets forth the borrowing amounts along with the respective
interest rates and maturities:
Securities sold under repurchase agreements:
Average
Amount Maturity Rate amount outstanding
--------------------------------------------------------------
$2,900,000 05/21/2003 1.490% $1,771,781
2,800,000 05/23/2003 2.690% 1,710,685
---------------------------------------------------------
$5,700,000 2.080% $3,482,466
=========================================================
The amounts of short term borrowings outstanding at December 31, 2002 are
representative of the amounts of short term borrowings outstanding at any month
end during 2002.
19
Federal Home Loan Bank advances:
Average
Amount Maturity Rate amount outstanding
--------------------------------------------------------------
$2,000,000 05/13/2005 4.480% $1,284,788
2,000,000 05/14/2007 5.110% 1,284,788
---------------------------------------------------------
$4,000,000 4.795% $2,569,576
=========================================================
Other
The decrease in accrued interest receivable is due to lower effective interest
rates at December 31, 2002 as compared to those in effect at December 31, 2001.
The increase in accrued expenses and other liabilities is due primarily to
increases in accruals for incentive compensation arrangements and higher accrual
balances at year end for income taxes and dividends payable.
20
The following table presents average balance sheets (daily averages), interest
income, interest expense and the corresponding yields earned and rates paid:
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential and Rate Volume Variance Analysis
(thousands of dollars) (1)
2002 2001
------------------------------- --------------------------
Fluctuations in Interest
Interest Interest Income/Expense (3)
Average Income/ Average Average Income/ Average Due to change in:
Balance Expense Rate Balance Expense Rate Volume Rate Total
------------------------------- -------------------------- -------------------------
Interest earning assets:
Loans (2) ................... $ 145,162 $ 10,135 6.98% $ 132,687 $ 11,136 8.39% $ 983 $ (1,984) $ (1,001)
Short term investments ...... 7,443 138 1.85% 3,306 86 2.60% 83 (31) 52
Investments (4) ............. 51,572 2,177 4.22% 36,025 2,024 5.62% 735 (582) 153
Federal funds sold .......... 9,404 155 1.65% 10,662 477 4.47% (51) (271) (322)
------------------------------- ----------------------------- -----------------------------
Total interest earning assets 213,581 12,605 5.90% 182,680 13,723 7.51% 1,750 (2,868) (1,118)
------------------------------- ----------------------------- -----------------------------
Cash and due from banks ..... 5,961 4,772
Premises and equipment, net . 924 954
Allowance for loan losses ... (2,061) (1,745)
Other ....................... 4,088 3,178
--------- ---------
Total Assets ................ $ 222,493 $ 189,839
========= =========
Interest bearing liabilities:
Time certificates ........... $ 79,691 $ 2,827 3.55% 81,042 $ 4,177 5.15% $ (69) $ (1,281) $ (1,350)
Savings accounts ............ 30,191 563 1.86% 33,170 929 2.80% (77) (289) (366)
Money market accounts ....... 37,394 786 2.10% 3,539 101 2.85% 719 (34) 685
NOW accounts ................ 17,140 118 0.69% 13,330 168 1.26% 39 (89) (50)
Super NOW accounts .......... 12,588 204 1.62% 23,950 1,398 5.84% (473) (721) (1,194)
Securities sold under
agreements to repurchase
and other borrowings ..... 3,482 79 2.27% 3 -- -- 79 -- 79
FHLB advances ............... 2,570 125 4.86% -- -- -- 125 -- 125
Collateralized borrowings ... 412 21 5.10% 474 36 7.59% (4) (11) (15)
Capital lease obligation .... 300 42 14.00% 415 58 13.98% (16) -- (16)
------------------------------- ----------------------------- -----------------------------
Total interest
bearing liabilities ... 183,768 4,765 2.59% 155,923 6,867 4.40% 323 (2,425) (2,102)
------------------------------- ----------------------------- -----------------------------
Demand deposits ............. 19,522 15,800
Accrued expenses and
other liabilities ...... 1,114 931
Shareholders' equity ........ 18,089 17,185
--------- ---------
Total liabilities and equity $ 222,493 $ 189,839
========= =========
Net interest income ......... $ 7,840 $ 6,856 $ 1,427 $ (443) $ 984
========= ======== ============================
Interest margin ............. 3.67% 3.75%
======== =======
Interest Spread ............. 3.31% 3.11%
======== =======
(1) The rate volume analysis reflects the changes in net interest income
arising from changes in interest rates and from asset and liability volume,
including mix. The change in interest attributable to volume includes
changes in interest attributable to mix.
(2) Includes non-accruing loans.
(3) Favorable/ (unfavorable) fluctuations.
(4) Yields are calculated at historical cost and excludes the effects of
unrealized gain or loss on available for sale securities.
21
RESULTS OF OPERATIONS
For the year ended December 31, 2002, Bancorp earned $1,052,000 ($0.44 basic
income per share and $0.43 diluted income per share) an increase of 20.0% as
compared to 2001 when Bancorp earned $876,000 ($0.37 basic income per share and
$0.36 diluted income per share). Despite an increase in average earning assets,
interest income decreased $1.1 million to $12.6 million in 2002 as compared to
2001 when interest income was $13.7 million. This decrease is due mainly to
decreases in interest rates on variable rate loans and investments due to
Federal Reserve Bank rate reductions throughout 2001 and in effect for all of
2002, as well as one rate reduction at the end of 2002; offset partially by an
increase in loan volume and the size of the available for sales securities
portfolio.
Noninterest income increased $604,000 or 17.2% to $4.1 million for 2002. A
favorable interest rate environment for borrowers and an increase in the volume
of loan refinancings resulted in an increase in mortgage brokerage and referral
fees and loan processing fees of $297,000 as compared to the previous year. The
sale of a non-accrual loan resulted in a gain of $249,000 for the year ended
December 31, 2002 as compared to gains and origination fees from loans sold of
$71,000 for the year ended December 31, 2001.
Interest expense decreased $2.1 million or 30.6% to $4.8 million in 2002
compared to $6.9 million in 2001. The decrease in interest expense is due to the
general low interest rate environment partially offset by the increase in total
deposits.
Noninterest expenses for 2002 totaled $9.8 million which represents an increase
of $1.1 million or 13.1% over the prior year. The higher operating costs were
primarily the result of increased bonus and sales and incentive compensation
programs, as well as higher commissions paid to loan originators and the full
year impact in 2002 of the Norwalk branch office which opened in August 2001.
The following are measurements of Bancorp's earnings in relation to assets,
equity and earnings per share.
2002 2001 2000
----------------------------------
Return on average assets ............. .47% .46% .42%
Return on average equity ............. 5.82% 5.10% 5.20%
Dividend payout ratio ................ 21.59% 16.21% --
Average equity to average assets ..... 8.13% 9.05% 8.12%
Basic income per share ............... $ 0.44 $ 0.37 $ 0.34
Diluted income per share ............. $ 0.43 $ 0.36 $ 0.33
Interest income and expense
Bancorp's net interest margin increased $984,000 or 14.4%, to $7.8 million in
2002 from $6.9 million in 2001. Despite an increase in average earning assets of
$30.9 million, or 16.9%, lower short term interest rates reduced Bancorp's
interest income 8.2% from $13.7 million in
22
2001 to $12.6 million in 2002. Average loans outstanding increased $12.5 million
led by growth in construction and real estate loans which reflects the strength
of the local real estate market. An increase in average investments resulted in
an increase in interest income on available for sale securities of $205,000
despite a reduction in the investment yield. Low short-term interest rates
resulted in a decrease of 2.82% in the rate earned on Federal Funds Sold; this
combined with a reduction of $1.3 million in average balances resulted in a
decrease in interest on Federal Funds Sold of $322,000. Total average interest
bearing liabilities increased by $27.8 million; average certificates of deposit
decreased by $1.4 million; average Super NOW accounts decreased $11.4 million;
average NOW accounts increased $3.8 million and average money market deposits
increased $33.9 million. Interest expense decreased from $6.9 million in 2001 to
$4.8 million in 2002. Interest expense on certificates of deposit decreased $1.4
million as a result of lower average outstanding balances and a decrease in the
cost of funds for that portfolio from 5.15% in 2001 to 3.55% in 2002. Interest
on Super NOW accounts decreased $1.2 million due to a decrease in the average
outstanding balances of $11.4 million and a decrease in the interest rate paid
on the product.
Noninterest income
Noninterest income increased $604,000 from $3.5 million in 2001 to $4.1 million
in 2002. The increase is due primarily to the favorable interest rate
environment for borrowers and an increase in the volume of residential mortgage
loan refinancings which resulted in an increase of $297,000 in mortgage
brokerage and loan processing fees. Included in the results for 2002 is a gain
of $249,000 resulting from the sale of a non-accrual loan. Included in
noninterest income for 2001 is a charge to earnings of $118,000 representing a
write down made for the permanent impairment of a debt security due to the
deterioration in the financial condition of the issuer; management has closely
monitored the status and performance of the issuer. Subsequent to December 31,
2002 the issuer announced a tender offer at a price of 100.00% of par for the
above notes under a comprehensive refinancing plan; during the first quarter of
2003 Bancorp received the proceeds from the tender offer.
Noninterest expenses
Noninterest expenses increased $1.1 million in 2002 from $8.7 million in 2001 to
$9.8 million in 2002. Salaries and benefits increased $1.1 million due primarily
to increases in performance related bonus and sales incentive compensation, as
well as higher commissions and incentive compensation as a direct result of
higher residential loan originations. Higher staffing levels and incentive
compensation also impacted salaries, payroll taxes and health care costs.
Occupancy and equipment expenses increased $69,000 from $935,000 in 2001 to
$1,004,000 in 2002; this increase is due primarily to increases in maintenance
and repairs as well as the costs associated with establishing the branch office
in Norwalk, Connecticut which opened in August 2001 and was operational for a
full year in 2002.
The provision for income taxes of $621,000 in 2002 and $564,000 for 2001
represents the tax expense recognized for both federal and state income tax. The
effective tax rates for 2002 and 2001 are 37.1% and 39.2%, respectively.
Fluctuations in effective tax rates are due to the cessation of the amortization
of nondeductible goodwill for book purposes, as well as the
23
increase in dividend income from money market preferred instruments which are
partially tax exempt.
Management believes that additional branch offices including the announced
branches in Norwalk, Stamford and Wilton, Connecticut, if opened, will
contribute to the future growth and earnings of Bancorp. While the opening of
these new branches will result in increased operating expenses, the openings
will be strategically planned to maintain profitable operations.
Management regularly reviews loan and deposit rates and attempts to price
Bancorp's products competitively. With the assistance of its investment
advisors, Bancorp tracks its mix of asset/liability maturities and strives to
maintain a reasonable match. Performance ratios are reviewed monthly by
management and the Board and are used to set strategies.
LIQUIDITY
Bancorp's liquidity position was 29.1% and 30.5% at December 31, 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 balance sheets are considered liquid assets: cash and due from
banks, federal funds sold, short-term investments, available-for-sale securities
and held-to-maturity securities maturing in one year or less. 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 potential fluctuations in deposit accounts and loan demand
and to meet other anticipated cash requirements.
CAPITAL
The following table illustrates the Bank's regulatory capital ratios:
December 31,
2002 2001 2000
----------------------------
Leverage Capital .................... 6.98% 8.11% 7.73%
Tier 1 Risk-Based Capital ........... 9.11% 9.57% 10.01%
Total Risk-Based Capital ............ 10.36% 10.69% 11.10%
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 believes that it is considered to be "well capitalized"
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's actual and required ratios are not substantially
different from those shown above.
At the end of the first quarter of 2003, Bancorp created a statutory trust of
which Bancorp will own 100% of the capital stock. The trust issued $8.0 million
in preferred securities to investors, the proceeds of which were used to
purchase junior subordinated debt from Bancorp. Bancorp
24
primarily invested the funds from the issuance of the debt in the Bank, which in
turn will use the proceeds to fund general operations of the Bank. The
securities will qualify for up to 25% of Bancorp's total Tier 1 Capital with the
remainder qualifying as Tier 2 Capital.
MARKET RISK
Market risk is defined as the sensitivity of income to fluctuations in interest
rates, foreign exchange rates, equity prices, commodity prices and other
market-driven rates or prices. Based upon the nature of Bancorp's business,
market risk is primarily limited to interest rate risk, which is the impact that
changing interest rates have on current and future earnings.
Bancorp's goal is to maximize long term profitability while minimizing its
exposure to interest rate fluctuations. The first priority is to structure and
price Bancorp's assets and liabilities to maintain an acceptable interest rate
spread while reducing the net effect of changes in interest rates. In order to
accomplish this, the focus is on maintaining a proper balance between the timing
and volume of assets and liabilities re-pricing within the balance sheet. One
method of achieving this balance is to originate variable rate loans for the
portfolio and purchase short term investments to offset the increasing short
term re-pricing of the liability side of the balance sheet. In fact, a number of
the interest bearing deposit products have no contractual maturity. Customers
may withdraw funds from their accounts at any time and deposit balances may
therefore run off unexpectedly due to changing market conditions.
The exposure to interest rate risk is monitored by the Asset and Liability
Management Committee ("ALCO") consisting of senior management personnel. ALCO
reviews the interrelationships within the balance sheet to maximize net interest
income within acceptable levels of risk. ALCO reports to the Board of Directors
on a monthly basis regarding its activities.
Impact of Inflation and Changing Prices
Bancorp's financial statements have been prepared in terms of historical
dollars, without considering changes in 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 effect of 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 or Plan 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
25
changes in governmental monetary policy, (4) the effect of changes in
regulations applicable to Bancorp and the Bank 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 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 effect 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 the Bancorp's filings
with the SEC.
Although Bancorp believes that it offers the loan and deposit products and has
the resources needed for continued success, future revenues and interest spreads
and yields cannot be reliably predicted. These trends may cause Bancorp to
adjust its operations in the future. Because of the foregoing and other factors,
recent trends should not be considered reliable indicators of future financial
results or stock prices.
Item 7. Financial Statements
--------------------
The consolidated balance sheets of Bancorp as of December 31, 2002 and December
31, 2001 and the related consolidated statements of income, shareholders' equity
and cash flows for the years ended December 31, 2002 and December 31, 2001,
together with the report thereon of McGladrey & Pullen, LLP dated February 25,
2003, are included as part of this Form 10-KSB in the "Financial Report"
following page 35 hereof.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
Not applicable.
26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------
The information required by Items 401 and 405 of Regulation S-B is incorporated
into this Form 10-KSB by reference to Bancorp's definitive proxy statement (the
"Definitive Proxy Statement") for its 2003 Annual Meeting of Shareholders.
Item 10. Executive Compensation
----------------------
The information required by Item 402 of Regulation S-B is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by Item 201(d) and Item 403 of Regulation S-B is
incorporated into this Form 10-KSB by reference to the Definitive Proxy
Statement.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The information required by Item 404 of Regulation S-B is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
2 Agreement and Plan of Reorganization dated as of June 28, 1999
between Bancorp and the Bank (incorporated by reference to Exhibit 2
to Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
3(i) Certificate of Incorporation of Bancorp, (incorporated by reference
to Exhibit 3(i) to Bancorp's Current Report on Form 8-K dated
December 1, 1999 (Commission File No. 000-29599)).
3(ii) By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to
Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
10(a)(1) 2001 Stock Appreciation Rights Plan of Bancorp (incorporated by
reference to Exhibit 10(a)(1) to Bancorp's Annual Report on Form
10-KSB for the year ended December 31, 2001 (Commission File No.
000-29599)).
27
Exhibit No. Description
10(a)(2) Lease dated February 1, 1995 between 999 Bedford Street Corporation
and the Bank (incorporated by reference to Exhibit 10(a)(3) to
Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
10(a)(3) Employment Agreement, dated as of October 23, 2000, as amended by a
First Amendment, dated as of March 21, 2001, among the Bank, Bancorp
and Charles F. Howell (incorporated by reference to Exhibit 10(a)(4)
to Bancorp's Annual Report on Form 10-KSB for the year ended
December 31, 2000 (Commission File No. 000-29599)).
10(a)(4) Second Amendment to Employment Agreement among Patriot National
Bank, Bancorp and Charles F. Howell, dated May 9, 2002.
10(a)(5) Employment Agreement dated as of September 19, 2001 among Patriot
National Bank, Bancorp and Robert F. O'Connell (incorporated by
reference to Exhibit 10 to Bancorp's Quarterly Report on Form 10-QSB
for the Quarter ended March 31, 2002 (Commission File No.
000-29599)).
10(a)(6) Change of Control Agreement, dated as of May 1, 2001 between Robert
F. O'Connell and Patriot National Bank (incorporated by reference to
Exhibit 10(a)(4) to Bancorp's Annual Report on Form 10-KSB for the
year ended December 31, 2001 (Commission File No. 000-29599)).
10(a)(7) Employment Agreement dated as of January 1, 2003 between Patriot
National Bank and Todd Brown.
10(a)(8) Employment Agreement dated as of January 1, 2003 between Patriot
National Bank and Marcus Zavattaro.
10(c) 1999 Stock Option Plan of the Bank (incorporated by reference to
Exhibit 10(c) to Bancorp's Current Report on Form 8-K dated December
1, 1999 (Commission File No. 000-29599)).
21 Subsidiaries of Bancorp (Incorporated by reference to Exhibit 21 to
Bancorp's Annual Report on Form 10-KSB for the year ended December
31, 1999 (Commission File No. 000-29599)).
23 Consent of McGladrey & Pullen, LLP.
99 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
28
(b) Reports on Form 8-K
Bancorp filed no reports on Form 8-K during the fourth quarter of 2002.
14. 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" mean 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 it 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.
29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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/ Angelo De Caro
-----------------------------------------
Name: Angelo De Caro
Title: Chairman & Chief Executive Officer
Date: March 26, 2003
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in capacities and on the dates
indicated.
/s/ Angelo De Caro March 28, 2003
----------------------------------------- --------------
Angelo De Caro, Chairman, Chief Executive Date
Officer and Director
/s/ Robert F. O'Connell March 28, 2003
----------------------------------------- --------------
Robert F. O'Connell Date
Senior Executive Vice President,
Chief Financial Officer and Director
/s/ Michael A. Capodanno March 28, 2003
----------------------------------------- --------------
Michael A. Capodanno Date
Vice President & Controller
/s/ Fred A. DeCaro, Jr. March 28, 2003
----------------------------------------- --------------
Fred A. DeCaro, Jr. Date
Director
/s/ John J. Ferguson March 28, 2003
----------------------------------------- --------------
John J. Ferguson Date
Director
30
Form 10 KSB - Signatures continued
/s/ John A. Geoghegan March 27, 2003
----------------------------------------- --------------
John A. Geoghegan Date
Director
/s/ L. Morris Glucksman March 28, 2003
----------------------------------------- --------------
L. Morris Glucksman Date
Director
/s/ Charles F. Howell March 28, 2003
----------------------------------------- --------------
Charles F. Howell Date
Director
/s/ Michael Intrieri March 28, 2003
----------------------------------------- --------------
Michael Intrieri Date
Director
/s/ Richard Naclerio March 28, 2003
----------------------------------------- --------------
Richard Naclerio Date
Director
/s/ Paul Settelmeyer March 28, 2003
----------------------------------------- --------------
Paul Settelmeyer Date
Director
/s/ Philip Wolford March 28, 2003
----------------------------------------- --------------
Philip Wolford Date
Director
31
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14
I, Angelo De Caro, certify that:
1. I have reviewed this annual report on Form 10-KSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
(c) presented in this annual 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
(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
32
6. The registrants other certifying officer and I have indicated in this annual
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)
March 28, 2003
33
CERTIFICATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14
I, Robert F. O'Connell, certify that:
1. I have reviewed this annual report on Form 10-KSB of Patriot National
Bancorp, Inc;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
(c) presented in this annual 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
(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
34
6. The registrants other certifying officer and I have indicated in this annual
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)
March 28, 2003
35
PATRIOT NATIONAL BANCORP, INC.
FINANCIAL REPORT
December 31, 2002 and 2001
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of shareholders' equity 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-35
--------------------------------------------------------------------------------
McGLADREY & PULLEN
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Patriot National Bancorp, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of Patriot National
Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Patriot National
Bancorp, Inc. and Subsidiary as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 11 to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill as prescribed in
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/s/ McGLADREY & PULLEN, LLP
New Haven, Connecticut
February 25, 2003, except for Note 20
as to which the date is March 27, 2003
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
-----------------------------
ASSETS
Cash and due from banks (Note 2) .................................... $ 5,385,757 $ 7,544,242
Federal funds sold .................................................. 3,000,000 12,700,000
Short-term investment ............................................... 3,348,968 6,788,569
------------ ------------
Cash and cash equivalents ........................................... 11,734,725 27,032,811
Available for sale securities (at fair value) (Note 3) .............. 60,618,366 34,717,930
Federal Reserve Bank stock .......................................... 481,050 481,050
Federal Home Loan Bank stock (Note 8) ............................... 621,300 617,900
Loans receivable (net of allowance for loan losses: 2002 $2,372,454;
2001 $1,894,454) (Note 5) ........................................ 170,794,939 135,680,036
Accrued interest receivable ......................................... 1,311,453 1,079,450
Premises and equipment, net (Notes 6 and 9) ......................... 789,197 1,102,428
Deferred tax asset (Note 10) ........................................ 754,696 662,296
Goodwill (Note 11) .................................................. 930,091 930,091
Other assets ........................................................ 460,936 265,465
------------ ------------
Total assets ................................................ $248,496,753 $202,569,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Noninterest bearing deposits ..................................... $ 25,519,809 $ 16,961,636
Interest bearing deposits ........................................ 192,391,451 166,302,303
------------ ------------
Total deposits .............................................. 217,911,260 183,263,939
Securities sold under agreements to repurchase (Note 8) ............. 5,700,000 --
Federal Home Loan Bank borrowings (Note 8) .......................... 4,000,000 --
Capital lease obligation (Note 9) ................................... 243,231 364,836
Collateralized borrowings ........................................... 349,444 474,444
Accrued expenses and other liabilities .............................. 1,747,863 1,060,222
------------ ------------
Total liabilities ................................................... 229,951,798 185,163,441
------------ ------------
Commitments and Contingencies (Notes 8, 9, 12 and 14)
Shareholders' equity (Notes 12 and 15)
Common stock, $2 par value: 5,333,333 shares authorized; shares
issued and outstanding: 2002 2,400,525; 2001 2,400,525 .......... 4,801,050 4,801,050
Additional paid-in capital .......................................... 11,484,649 11,484,649
Retained earnings ................................................... 1,688,158 864,202
Accumulated other comprehensive income - net unrealized
gain on available for sale securities ............................ 571,098 256,115
------------ ------------
Total shareholders' equity .................................. 18,544,955 17,406,016
------------ ------------
Total liabilities and shareholders' equity .................. $248,496,753 $202,569,457
============ ============
See Notes to Consolidated Financial Statements.
2
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
-----------------------------
Interest and Dividend Income
Interest and fees on loans ......................................... $ 10,134,768 $ 11,136,375
Interest and dividends on investment securities .................... 2,315,412 2,110,012
Interest on Federal funds sold ..................................... 154,538 476,556
------------ ------------
Total interest and dividend income 12,604,718 13,722,943
------------ ------------
Interest Expense
Interest on deposits (Note 7) ...................................... 4,497,409 6,772,517
Interest on securities sold under agreements to repurchase and other 79,147 107
Interest on Federal Home Loan Bank borrowings ...................... 124,489 --
Interest on capital lease obligation ............................... 42,395 58,012
Interest on collateralized borrowings .............................. 21,253 36,324
------------ ------------
Total interest expense ...................................... 4,764,693 6,866,960
------------ ------------
Net interest income ......................................... 7,840,025 6,855,983
Provision for Loan Losses (Note 5) .................................. 468,000 250,000
------------ ------------
Net interest income after provision for loan losses .............. 7,372,025 6,605,983
------------ ------------
Noninterest Income
Mortgage brokerage referral fees ................................... 2,936,735 2,667,307
Loan origination and processing fees ............................... 567,686 540,499
Fees and service charges ........................................... 311,729 263,915
Gains and origination fees from loans sold ......................... 249,365 70,790
Loss on impaired investment security (Note 3) ...................... -- (117,679)
Loss on sale of investment securities .............................. (25,733) --
Other income ....................................................... 74,038 85,123
------------ ------------
Total noninterest income .................................... 4,113,820 3,509,955
------------ ------------
Noninterest Expenses
Salaries and benefits (Note 13) .................................... 6,418,855 5,282,441
Occupancy and equipment expense, net ............................... 1,004,297 935,436
Data processing and other outside services ......................... 623,877 618,408
Professional services .............................................. 302,000 322,897
Advertising and promotional expenses ............................... 265,845 251,666
Forms, printing and supplies ....................................... 139,492 146,933
Regulatory assessments ............................................. 98,636 90,241
Directors' fees and expenses ....................................... 126,159 65,800
Other operating expenses ........................................... 833,677 961,729
------------ ------------
Total noninterest expenses .................................. 9,812,838 8,675,551
------------ ------------
Income before income taxes .................................. 1,673,007 1,440,387
Provision for Income Taxes (Note 10) ................................ 621,000 564,000
------------ ------------
Net income .................................................. $ 1,052,007 $ 876,387
============ ============
Basic income per share (Notes 11 and 12) .................... $ 0.44 $ 0.37
============ ============
Diluted income per share (Notes 11 and 12) .................. $ 0.43 $ 0.36
============ ============
Dividends per share ......................................... $ 0.095 $ 0.060
============ ============
See Notes to Consolidated Financial Statements.
3
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
Accumulated
Additional Other
Number of Common Paid-in Retained Comprehensive
Shares Stock Capital Earnings Income Total
--------------------------------------------------------------------------------
Balance at January 1, 2001 ............. 2,400,375 $ 4,800,750 $ 11,483,770 $ 131,840 $ 11,076 $ 16,427,436
------------
Comprehensive income
Net income ............................. -- -- -- 876,387 -- 876,387
Unrealized holding gain on available for
sale securities, net of taxes (Note 17) -- -- -- -- 245,039 245,039
------------
Total comprehensive income ..... 1,121,426
------------
Dividends .............................. -- -- -- (144,025) -- (144,025)
Issuance of common stock ............... 150 300 879 1,179
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 ........... 2,400,525 4,801,050 11,484,649 864,202 256,115 17,406,016
------------
Comprehensive income
Net income ............................. -- -- -- 1,052,007 -- 1,052,007
Unrealized holding gain on available for
sale securities, net of taxes (Note 17) -- -- -- -- 314,983 314,983
------------
Total comprehensive income ..... 1,366,990
------------
Dividends .............................. -- -- -- (228,051) -- (228,051)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 ............. 2,400,525 $ 4,801,050 $ 11,484,649 $ 1,688,158 $ 571,098 $ 18,544,955
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
4
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
----------------------------
Cash Flows from Operating Activities
Net income ................................................................. $ 1,052,007 $ 876,387
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and accretion of net investment premiums and discounts, net 138,158 (13,522)
Originations of loans held for sale 208,000 25,117,910
Proceeds from sales of loans held for sale ............................. (208,000) (25,117,910)
Gains on sales of loans ................................................ (249,365) (11,326)
Provision for loan losses .............................................. 468,000 250,000
Loss on impaired investment security ................................... -- 117,679
Loss on sales of investment securities ................................. 25,733 --
Depreciation and amortization of premises and equipment ................ 405,040 357,706
Loss on disposal of bank premises and equipment ........................ -- 1,710
Deferred income taxes .................................................. (269,753) (176,215)
Amortization of goodwill ............................................... -- 123,936
Change in assets and liabilities:
Increase in deferred loan fees ....................................... 336,234 60,587
(Increase) decrease in accrued interest receivable ................... (232,003) 149,470
Increase in other assets ............................................. (195,471) (20,435)
Increase in accrued expenses and other liabilities ................... 675,637 422,888
------------ ------------
Net cash provided by operating activities .......................... 2,154,217 2,138,865
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities .............................. (55,062,998) (15,600,000)
Proceeds from sales of available for sale securities .................... 11,375,386 9,046,223
Proceeds from maturities of available for sale securities ............... 7,000,000 499,290
Principal repayments on available for sale securities ................... 11,115,621 4,147,618
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)
Proceeds from sale of loan receivable ................................... 1,549,365 286,509
Net increase in loans ................................................... (37,219,137) (9,854,541)
Purchases of premises and equipment ..................................... (91,809) (563,090)
------------ ------------
Net cash used in investing activities .............................. (61,336,972) (11,568,141)
------------ ------------
5
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
----------------------------
Cash Flows from Financing Activities
Net increase in demand, savings and money market deposits .............. $ 27,220,834 $ 28,253,847
Net increase (decrease) in time certificates of deposit ................ 7,426,487 (24,656,006)
Increase in securities sold under repurchase agreements ................ 5,700,000 --
Increase in FHLB borrowings ............................................ 4,000,000 --
Principal payments on capital lease obligation ......................... (121,605) (105,990)
Decrease in collateralized borrowings (125,000) --
Proceeds from issuance of common stock ................................. -- 1,179
Dividends paid on common stock ......................................... (216,047) (96,014)
------------ ------------
Net cash provided by financing activities ......................... 43,884,669 3,397,016
------------ ------------
Net decrease in cash and cash equivalents ......................... (15,298,086) (6,032,260)
Cash and cash equivalents
Beginning .............................................................. 27,032,811 33,065,071
------------ ------------
Ending ................................................................. $ 11,734,725 $ 27,032,811
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest ............................................................. $ 4,782,645 $ 6,853,985
============ ============
Income taxes ......................................................... $ 808,809 $ 714,218
============ ============
Supplemental Disclosure of Noncash Investing and Financing
Activities
Transfer of held to maturity securities to available for sale $ -- $ 11,796,300
securities ============ ============
Unrealized holding gains on available for sale securities
arising during the period ........................................... $ 492,336 $ 410,186
============ ============
Accrued dividends declared on common stock ............................. $ 60,015 $ 48,011
============ ============
See Notes to Consolidated Financial Statements.
6
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Patriot National Bancorp, Inc. (the "Company"), a Connecticut corporation, is a
bank holding company that was organized in 1999. On December 1, 1999, all the
issued and outstanding shares of Patriot National Bank (the "Bank") were
converted into Company common stock and the Bank became a wholly owned
subsidiary of the Company. The Bank is a nationally chartered commercial bank
whose deposits are insured under the Bank Insurance Fund, which is administered
by the Federal Deposit Insurance Corporation. The Bank provides a full range of
banking services to commercial and consumer customers through its main office in
Stamford, Connecticut, two branch offices in Greenwich, Connecticut and one
branch office in Norwalk, Connecticut. The Bank's customers are concentrated in
Fairfield County, Connecticut and Westchester County, New York. The Bank also
conducts mortgage brokerage operations in Connecticut and New York through its
mortgage brokerage division, Pinnacle Financial.
Principles of consolidation and basis of financial statement presentation
-------------------------------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, the Bank, and the Bank's wholly owned subsidiary,
PinPat Acquisition Corporation (currently inactive); and have been prepared in
accordance with accounting principles generally accepted in the United States of
America and general practices within the banking industry. All significant
intercompany balances and transactions have been eliminated. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities, as of the balance sheet date
and revenues and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses and the valuation of deferred tax assets.
The following is a summary of the Company's significant accounting policies.
Cash and cash equivalents
-------------------------
Cash and due from banks, Federal funds sold and short-term investments are
recognized as cash equivalents in the consolidated financial statements. Federal
funds sold generally mature in one day. For purposes of reporting cash flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash flows from loans
and deposits are reported net. The Company maintains amounts due from banks and
Federal funds sold which, at times, may exceed Federally insured limits. The
Company has not experienced any losses from such concentrations. The short-term
investment represents an investment in a money market mutual fund of a single
issuer.
7
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Investments in debt and marketable equity securities
----------------------------------------------------
Management determines the appropriate classification of securities at the date
individual investment securities are acquired, and the appropriateness of such
classification is reassessed at each balance sheet date.
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
"Trading" securities, if any, are carried at fair value with unrealized gains
and losses recognized in earnings. Securities not classified as held to maturity
or trading, including equity securities with readily determinable fair values,
are classified as "available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
The sale of a held to maturity security within three months of its maturity date
or after collection of at least 85% of the principal outstanding at the time the
security was acquired is considered a maturity for purposes of classification
and disclosure.
Loans held for sale
-------------------
Loans held for sale are those loans the Company has the intent to sell in the
foreseeable future, and are carried at the lower of aggregate cost or market
value, taking into consideration all open positions. Gains and losses on sales
of loans are recognized at the trade dates, and are determined by the difference
between the sales proceeds and the carrying value of the loans. Loans are sold
with servicing released.
Loans receivable
----------------
Loans receivable are stated at their current unpaid principal balances and are
net of the allowance for loan losses and net deferred loan origination fees. The
Company has the ability and intent to hold its loans for the foreseeable future
or until maturity or payoff.
A loan is classified as a restructured loan when certain concessions have been
made to the original contractual terms, such as reductions in interest rates or
deferral of interest or principal payments, due to the borrower's financial
condition.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The amount of impairment, if
any, and any
8
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
subsequent changes are recorded as adjustments to the allowance for loan losses.
A loan is impaired when it is probable the Company will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement.
Management considers all nonaccrual loans and restructured loans to be impaired.
In most cases, loan payments that are past due less than 90 days, based on
contractual terms, are considered minor collection delays, and the related loans
are not considered to be impaired. The Company considers consumer installment
loans to be pools of smaller balance homogeneous loans, which are collectively
evaluated for impairment.
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 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. Loans, including impaired loans, are charged against the
allowance for loan losses when management believes that the uncollectibility of
principal is confirmed. Any subsequent recoveries are credited to the allowance
for loan losses when received. In connection with the determination of the
allowance for loan losses, management obtains appraisals for significant
properties, when considered necessary.
The Company's real estate loans are collateralized by real estate located
principally in Connecticut and New York, and accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio is
susceptible to changes in real estate market conditions.
Management believes the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies have
the authority to require the Company to recognize additions to the allowance or
charge-offs based on the agencies' judgments about information available to them
at the time of their examination.
Interest and fees on loans
--------------------------
Interest on loans is accrued and included in operating income based on
contractual rates applied to principal amounts outstanding. The accrual of
interest income is discontinued whenever reasonable doubt exists as to its
collectibility and generally is discontinued when loans are past due 90 days as
to either principal or interest. When the accrual of interest income is
discontinued, all previously accrued and uncollected interest is reversed
against interest income. The accrual of interest on loans past due 90 days
9
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
or more, including impaired loans, may be continued if the loan is well secured,
and it is believed all principal and accrued interest income due on the loan
will be realized, and the loan is in the process of collection. A nonaccrual
loan is restored to an accrual status when it is no longer delinquent and
collectibility of interest and principal is no longer in doubt.
Loan origination fees, net of direct loan origination costs, are deferred and
amortized as an adjustment to the loan's yield generally over the contractual
life of the loan, utilizing the interest method.
Loan brokerage activities
-------------------------
The Company receives loan brokerage fees for soliciting and processing
conventional loan applications on behalf of permanent investors. Brokerage fee
income is recognized upon closing of loans for permanent investors.
Transfers of financial assets
-----------------------------
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right to pledge or exchange the transferred assets and no
condition both constrains the transferee from taking advantage of that right and
provides more than a trivial benefit for the transferor, and (3) the transferor
does not maintain effective control over the transferred assets through either
(a) an agreement that both entitles and obligates the transferor to repurchase
or redeem the assets before maturity or (b) the ability to unilaterally cause
the holder to return specific assets, other than through a cleanup call.
Other real estate owned
-----------------------
Other real estate owned, if any, consists of properties acquired through, or in
lieu of, loan foreclosure or other proceedings and is initially recorded at fair
value at the date of foreclosure, which establishes a new cost basis. After
foreclosure, the properties are held for sale and are carried at the lower of
cost or fair value less estimated costs of disposal. Any write-down to fair
value at the time of acquisition is charged to the allowance for loan losses.
Properties are evaluated regularly to ensure the recorded amounts are supported
by current fair values, and valuation allowances are recorded as necessary to
reduce the carrying amount to fair value less estimated cost of disposal.
Revenue and expense from the operation of other real estate owned and valuation
allowances are included in operations. Costs relating to the development and
improvement of the property are capitalized, subject to the limit of fair value
of the collateral. Gains or losses are included in operations upon disposal.
Premises and equipment
----------------------
Premises and equipment are stated at cost for purchased assets, and at the lower
of fair value or the net present value of the minimum lease payments required
over the term of the lease for assets under capital leases, net of accumulated
depreciation and amortization. Leasehold improvements are capitalized and
10
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
amortized over the shorter of the terms of the related leases or the estimated
economic lives of the improvements. Depreciation is charged to operations using
the straight-line method over the estimated useful lives of the related assets
which range from three to ten years. Amortization of premises under capital
leases is charged to operations using the straight-line method over the life of
the lease. Gains and losses on dispositions are recognized upon realization.
Maintenance and repairs are expensed as incurred and improvements are
capitalized.
Impairment of assets
--------------------
Long-lived assets, which are held and used by the Company, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If impairment is indicated
by that review, the asset is written down to its estimated fair value through a
charge to noninterest expense.
Goodwill
--------
Goodwill represents the cost in excess of net assets of businesses acquired and
was being amortized on a straight-line basis over ten years through December 31,
2001. Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") was adopted January 1, 2002, and accordingly
amortization of goodwill was discontinued and such goodwill is tested for
impairment annually, or more frequently under prescribed conditions.
Collateralized borrowings
-------------------------
Collateralized borrowings represent the portion of loans transferred to other
institutions under loan participation agreements. Such transfers were not
recognized as sales due to recourse provisions and/or restrictions on the
participant's right to transfer their portion of the loan.
Income taxes
------------
The Company recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
11
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Related party transactions
--------------------------
Directors and officers of the Company and the Bank and their affiliates have
been customers of and have had transactions with the Bank, and it is expected
that such persons will continue to have such transactions in the future.
Management believes that all deposit accounts, loans, services and commitments
comprising such transactions were made in the ordinary course of business, and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other customers
who are not directors or officers. In the opinion of management, the
transactions with related parties did not involve more than normal risks of
collectibility or favored treatment or terms, or present other unfavorable
features. Note 16 contains details regarding related party transactions.
Earnings per share
------------------
Basic earnings per share represents income available to common stockholders and
is computed by dividing net income by the weighted-average number of common
shares outstanding. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate to
outstanding stock options and warrants, and are determined using the treasury
stock method.
Stock compensation plans
------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan, and stock warrants issued, have no intrinsic value
at the grant date, and under Opinion No. 25 no compensation cost is recognized
for them. During 2002, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123." The Company has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, provides pro forma disclosures
of net income and earnings per share and other disclosures, as if the fair value
based method of accounting had been applied. There is no proforma disclosure
required for 2002 and 2001.
Comprehensive income
--------------------
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the shareholders' equity
section of
12
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
the consolidated balance sheets, such items, along with net income, are
components of comprehensive income.
Fair values of financial instruments
------------------------------------
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and due from banks, federal funds sold, short-term investments
and accrued interest receivable
The carrying amount is a reasonable estimate of fair value.
Securities
Fair values, excluding restricted Federal Reserve Bank stock and
Federal Home Loan Bank stock, are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities. The carrying values of the Federal Reserve Bank
stock and Federal Home Loan Bank stock approximate fair value based on
the redemption provisions of the related stock.
Loans receivable
For variable rate loans which reprice frequently, and have no
significant changes in credit risk, fair value is based on the loans'
carrying value. The fair value of fixed rate loans is estimated by
discounting the future cash flows using the year end rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Deposits
The fair value of demand deposits, regular savings and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is
estimated using a discounted cash flow calculation that applies
interest rates currently being offered for deposits of similar
remaining maturities to a schedule of aggregated expected maturities
on such deposits.
Borrowings
For variable rate borrowings which reprice frequently, and short-term
borrowings, fair value is based on carrying value. The fair value of
fixed rate borrowings is estimated by discounting the future cash
flows using current interest rates for similar available borrowings
with the same remaining maturities.
13
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Off-balance-sheet instruments
Fair values for the Company's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing.
Reclassifications
-----------------
Certain 2001 financial statement amounts have been reclassified to conform with
the 2002 presentations. Such reclassifications had no effect on 2001 net income.
Note 2. Restrictions on Cash and Due From Banks
The Company is required to maintain reserves against its respective transaction
accounts and non personal time deposits. At December 31, 2002, the Bank was
required to have cash and liquid assets of approximately $1,053,000 to meet
these requirements. In addition, the Company is required to maintain $25,000 in
the Federal Reserve Bank for clearing purposes.
Note 3. Available for Sale Securities
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of available for sale securities at December 31, 2002
and 2001 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---- --------------------------------------------------------
U.S. Government agency obligations ............ $ 9,024,526 $ 104,888 $ -- $ 9,129,414
Mortgage-backed securities .................... 37,756,793 705,573 (1,207) 38,461,159
Corporate bonds ............................... 283,853 99,944 -- 383,797
Marketable equity securities .................. 12,632,068 11,928 -- 12,643,996
--------------------------------------------------------
$ 59,697,240 $ 922,333 $ (1,207) $ 60,618,366
========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
---- --------------------------------------------------------
Mortgage-backed securities .................... $ 9,981,222 $ 262,196 $ -- $ 10,243,418
Corporate bonds ............................... 11,675,851 213,049 (8,744) 11,880,156
Marketable equity securities .................. 12,632,067 -- (37,711) 12,594,356
--------------------------------------------------------
$ 34,289,140 $ 475,245 $ (46,455) $ 34,717,930
========================================================
14
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
At December 31, 2002, available for sale securities with a carrying value of
$8,368,347 were pledged to secure obligations under repurchase agreements and
municipal deposits. There were no securities pledged at December 31, 2001.
The amortized cost and fair value of available for sale debt securities at
December 31, 2002 by contractual maturity are presented below. Actual maturities
of mortgage-backed securities may differ from contractual maturities because the
mortgages underlying the securities may be called or repaid without any
penalties. Because mortgage-backed securities are not due at a single maturity
date, they are not included in the maturity categories in the following maturity
summary.
Amortized Fair
Cost Value
--------------------------
Maturity:
1-5 years .................... $ 8,303,773 $ 8,495,399
5-10 years ................... 1,004,606 1,017,812
Mortgage-backed securities ... 37,756,793 38,461,159
--------------------------
Total ............................ $47,065,172 $47,974,370
==========================
During 2002, proceeds from sales of available for sale securities were
$11,375,386 and there were $25,733 in losses realized on those sales. During
2001, proceeds from sales of available for sale securities were $9,046,223 and
there were no gains or losses realized on those sales. Also during 2001, due to
the significant deterioration in the creditworthiness of the issuer, the Company
recognized an impairment loss of $117,679 on an available for sale corporate
bond, which loss was considered other than temporary. There were no such losses
recognized during 2002.
Note 4. Held to Maturity Securities
During 2001, the Company transferred all of its held to maturity securities,
which had a carrying value of $11,796,300, to the available for sale category.
At the time of the transfer, the Company recognized an unrealized loss of
$154,147 as an adjustment to other comprehensive income. The transfer of these
securities was made based on a change in the Company's overall investment
strategies and for liquidity purposes.
There were no sales of held to maturity securities during 2001.
15
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Note 5.
Loans Receivable and Allowance for Loan Losses
A summary of the Company's loan portfolio at December 31, 2002 and 2001 is as
follows:
2002 2001
-----------------------------
Real estate:
Commercial ................................. $ 65,967,205 $ 60,481,789
Residential ................................ 27,012,024 7,501,504
Construction, net of undisbursed portion of
$29,592,692 in 2002 and $7,183,318 in 2001 39,208,651 26,215,265
Commercial ..................................... 13,021,909 14,649,112
Consumer installment ........................... 1,757,321 1,231,672
Consumer home equity ........................... 26,812,092 27,770,723
------------ ------------
Total loans ......................... 173,779,202 137,850,065
Net deferred loan fees ......................... (611,809) (275,575)
Allowance for loan losses ...................... (2,372,454) (1,894,454)
------------ ------------
Loans receivable, net ............... $ 170,794,939 $ 135,680,036
============== ==============
The changes in the allowance for loan losses for the years ended December 31,
2002 and 2001 are as follows:
2002 2001
------------------------
Balance, beginning of year ................... $ 1,894,454 $ 1,644,817
Provision for loan losses ................ 468,000 250,000
Recoveries of loans previously charged-off 10,000 1,412
Loans charged-off ........................ -- (1,775)
---------- ----------
Balance, end of year ......................... $ 2,372,454 $ 1,894,454
=========== ===========
At December 31, 2002 and 2001, the unpaid principal balances of loans delinquent
90 days or more were $1,372,705 and $2,953,870, respectively, and the unpaid
principal balances of loans placed on nonaccrual status were $200,957 and
$1,653,946, respectively.
16
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The following information relates to impaired loans as of and for the years
ended December 31, 2002 and 2001:
2002 2001
------------------------
Loans receivable for which there is a related allowance for credit
losses .............................................................. $ -- $1,653,946
========== ==========
Loans receivable for which there is no related allowance for credit
losses .............................................................. $ 200,957 --
========== ==========
Allowance for credit losses related to impaired loans ................... $ -- $ 118,092
========== ==========
Average recorded investment in impaired loans ........................... $ 903,634 $1,567,075
========== ==========
There was no interest income on impaired loans collected or recognized in 2002
and 2001. The Company has no commitments to lend additional funds to borrowers
whose loans are impaired.
The Company's lending activities are conducted principally in the Fairfield
County section of Connecticut and Westchester County section of New York. The
Company grants commercial real estate loans, commercial business loans and a
variety of consumer loans. In addition, the Company grants loans for the
construction of residential homes, residential developments and for land
development projects. All residential and commercial mortgage loans are
collateralized by first or second mortgages on real estate. The ability and
willingness of borrowers to satisfy their loan obligations is dependent in large
part upon the status of the regional economy and regional real estate market.
Accordingly, the ultimate collectibility of a substantial portion of the loan
portfolio and the recovery of a substantial portion of any resulting real estate
acquired is susceptible to changes in market conditions.
The Company has established credit policies applicable to each type of lending
activity in which it engages, evaluates the creditworthiness of each customer
and, in most cases, extends credit of up to 75% of the market value of the
collateral at the date of the credit extension depending on the Company's
evaluation of the borrowers' creditworthiness and type of collateral. The market
value of collateral is monitored on an ongoing basis and additional collateral
is obtained when warranted. Real estate is the primary form of collateral. Other
important forms of collateral are accounts receivable, inventory, other business
assets, marketable securities and time deposits. While collateral provides
assurance as a secondary source of repayment, the Company ordinarily requires
the primary source of repayment to be based on the borrower's ability to
generate continuing cash flows.
17
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Note 6. Premises and Equipment
At December 31, 2002 and 2001, premises and equipment consisted of the
following:
2002 2001
--------------------------
Premises under capital lease ........................... $ 783,000 $ 783,000
Leasehold improvements ................................. 880,169 831,814
Furniture, equipment and software ...................... 1,034,782 992,388
------------ ------------
2,697,951 2,607,202
Less accumulated depreciation and amortization ......... (1,908,754) (1,504,774)
------------ ------------
$ 789,197 $ 1,102,428
============ ============
For the years ended December 31, 2002 and 2001, depreciation and amortization
expense related to premises and equipment totaled $405,040 and $357,706,
respectively.
Note 7. Deposits
At December 31, 2002 and 2001, deposits consisted of the following:
2002 2001
--------------------------
Noninterest bearing ..................... $ 25,519,809 $ 16,961,636
Interest bearing:
Time certificates, less than $100,000 57,202,908 53,081,137
Time certificates, $100,000 or more . 28,681,345 25,376,629
Money market ........................ 56,973,507 10,255,056
Savings ............................. 26,847,780 31,258,415
NOW ................................. 22,685,911 46,331,066
------------ ------------
Total interest bearing ............ $192,391,451 166,302,303
------------ ------------
Total deposits ................. $217,911,260 $183,263,939
============ ============
Interest expense on certificates of deposit in denominations of $100,000 or more
was $985,602 and $1,378,773 for the years ended December 31, 2002 and 2001,
respectively.
18
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Contractual maturities of time certificates of deposit as of December 31, 2002
are summarized below:
Due within:
1 year ............................. $47,098,521
1-2 years .......................... 6,339,784
2-3 years .......................... 8,222,490
3-4 years .......................... 7,950,745
4-5 years .......................... 16,272,713
-----------
$85,884,253
===========
Note 8. Borrowings
Borrowings at December 31, 2002 consist of $5,700,000 of short-term borrowed
funds under securities sold under agreements to repurchase, due in 2003, with
interest rates ranging from 1.49% to 2.69%, and fixed rate Federal Home Loan
Bank advances. Federal Home Loan bank advances in the following table are shown
based on contractual maturity:
Due in:
2005 ......... $ 2,000,000 4.48%
2007 ......... 2,000,000 5.11%
------------
$ 4,000,000
============
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB"). At
December 31, 2002, the Bank has the ability to borrow from the FHLB based on a
certain percentage of the value of the Bank's qualified collateral, as defined
in the FHLB Statement of Products Policy, at the time of the borrowing. In
accordance with an agreement with the FHLB, the qualified collateral must be
free and clear of liens, pledges and encumbrances. In addition, the Company has
a $2,000,000 available line of credit with the FHLB. At December 31, 2002 and
2001, there were no advances outstanding under this line of credit.
The Bank is required to maintain an investment in capital stock of the FHLB in
an amount equal to a percentage of its outstanding mortgage loans and contracts
secured by residential properties, including mortgage-backed securities. No
ready market exists for FHLB stock and it has no quoted market value. For
disclosure purposes, such stock is assumed to have a market value which is equal
to cost since the Bank can redeem the stock with FHLB at cost.
Note 9. Commitments and Contingencies
Capital lease
-------------
The Company leases the Bank's main office under a capital lease which expires in
2004. Premises under capital lease of $783,000 and related accumulated
amortization of $652,500 and $574,200 as of December 31, 2002 and 2001,
respectively, are included in premises and equipment.
19
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The Company is obligated under the lease to pay executory costs including
insurance, property taxes, maintenance and other related expenses.
At December 31, 2002, future minimum lease payments, by years and in the
aggregate, under this capital lease are as follows:
Years Ending
December 31, Amount
----------------------------------------------------- --------
2003 ................................................ $164,000
2004 ................................................ 109,333
--------
273,333
Less amount representing interest ................... 30,102
--------
Present value of future minimum lease
payments-capital lease obligation ............... $243,231
========
Operating leases
----------------
The Company subleases excess office space in its premises to a tenant under a
noncancelable operating lease. Future minimum lease payments receivable for this
lease by year, and in the aggregate, at December 31, 2002 are as follows:
Years Ending
December 31, Amount
---------------------- --------
2003 ................. $22,260
2004 ................. 16,695
-------
$38,955
=======
For the years ended December 31, 2002 and 2001, rental income under both
cancelable and noncancelable leases totaled $22,260 and $29,060, respectively.
The Company also has noncancelable operating leases for certain of its branch
offices and for its mortgage brokerage office in New York. Under these lease
agreements, the Company is required to pay certain executory costs such as
insurance and property taxes. The Company also leases parking space under a
noncancelable operating lease agreement and certain equipment under cancelable
and noncancelable arrangements.
20
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Future minimum rental commitments under the terms of these leases, by year and
in the aggregate, are as follows:
Years Ending
December 31, Amount
---------------------- --------
2003 $ 534,989
2004 494,341
2005 450,636
2006 412,328
2007 274,908
Thereafter 541,212
----------
$2,708,414
==========
Total rental expense charged to operations for cancelable and noncancelable
operating leases was $423,343 and $407,865 for the years ended December 31, 2002
and 2001, respectively.
Employment Agreements
---------------------
President's Agreement
In October 2000, the Company and the Bank entered into a three-year employment
agreement (the "Agreement") with the Bank's President and Chief Executive
Officer. The Agreement provides for, among other things, a stipulated base
salary for the first year of the Agreement, annual increases at each
anniversary, and a discretionary annual bonus to be determined by the Board of
Directors. In addition, the Agreement provides that the Company will grant
shares of the Company's common stock to the President on December 31, 2000, and
annually thereafter through December 31, 2003. The number of shares to be
granted is based on 30% of the President's stipulated base salary for the
preceding annual employment period, as defined, and such shares granted will
vest and be distributed to the President in four annual installments (with any
balance distributed upon termination other than for cause). Compensation cost is
being recognized over the term of the Agreement. Under certain circumstances
defined in the Agreement, this stock grant may be settled in cash. The Agreement
also provides for the grant of options to purchase a minimum of 10,000 shares of
the Company's common stock on December 31, 2000, and annually thereafter through
December 2002, and on December 31, 2003, if the President remains employed by
the Bank. In the event that the Company does not have stock options available to
grant at any of the stipulated dates, which was the case at December 31, 2000,
2001 and 2002, the President may then elect, on a future determination date, as
defined, to be chosen by the President, to receive cash compensation in the
future equal to the difference between the value of the Company's stock at the
time the options would have been granted, and the value of the Company's stock
on the determination date. For the years ended December 31, 2002 and 2001,
approximately $75,000 and $48,400, respectively, was charged to expense related
to the stock and option compensation components of the Agreement.
21
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
In the event of the early termination of the Agreement for any reason other than
cause, the Company would be obligated to compensate the President in one lump
sum payment, an amount equal to the higher of the aggregate salary payments that
would be made to the President under the remaining term of the Agreement, or
eighteen months of the President's stipulated base salary at the time of
termination.
The Agreement also includes change of control provisions that entitles the
President to a lump sum payment of two times the greater of the President's
stipulated base salary at the time of the change in control; total cash
compensation, as defined, for the year preceding the change in control; or the
average total cash compensation, as defined, for the two years preceding the
change in control.
The provisions of the early termination clause apply only to termination of the
Agreement prior to a change of control. Termination of the Agreement following a
change of control shall be governed by the change of control provisions.
Other Employment Agreements
Effective January 1, 2003, the Company entered into one-year employment
agreements with two officers of the Pinnacle Financial division, which replaced
contracts that expired on December 31, 2002. The agreements provide for, among
other things, a minimum and maximum base salary and commission arrangement, as
well as additional compensation based upon the achievement of certain other
financial results, and for reimbursement of expenses incurred incidental to
their duties as officers. The agreements terminate on December 31, 2003.
In 2001, the Company entered into a three-year employment agreement with its
Chief Financial Officer. The agreement provides for, among other things, a
stipulated base salary and discretionary bonuses as determined from time to time
by the Board of Directors. The agreement terminates on September 19, 2004. In
addition, certain officers of the Company have change of control agreements that
entitle such officers to receive one year's compensation (as defined in the
agreements) if a change of control (as defined in the agreements) occurs while
such officers are full time officers of the Bank or within six months following
termination of employment other than for cause (as defined in the agreements) or
by reason of death or disability.
Stock Appreciation Rights Plan
------------------------------
During 2001, the Company adopted the Patriot National Bancorp, Inc. 2001 Stock
Appreciation Rights Plan (the "SAR Plan"). Under the terms of the SAR Plan, the
Company may grant stock appreciation rights to officers of the Company that
entitle the officers to receive, in cash or Company common stock, the
appreciation in the value of the Company's common stock from the date of grant.
Each award vests at the rate of 20% per year from the date of grant. Any
unexercised rights will expire ten years from the date of grant. During 2001,
the Company granted a total of 18,000 stock appreciation rights to three Company
officers, and $2,600 and $3,600, respectively, was charged to operations under
the SAR Plan for the years ended December 31, 2002 and 2001.
22
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Legal Matters
-------------
The Company is involved in various legal proceedings which have arisen in the
normal course of business. Management believes that resolution of these matters
will not have a material effect on the Company's financial condition or results
of operations.
Other
-----
The Company expects to open three new branch offices in 2003. Prior to December
31, 2002, the Company entered into a noncancelable lease for one of these
branches which expires in 2007; subsequent to December 31, 2002, the Company
entered into a noncancelable lease for a second location.
Note 10. Income Taxes
The components of the income tax provision for the years ended December 31, 2002
and 2001 are as follows:
2002 2001
-----------------------
Current
Federal ......................... $ 701,867 $ 582,401
State ........................... 188,886 157,814
--------- ---------
Total .................... 890,753 740,215
--------- ---------
Deferred
Federal ......................... (211,866) (138,401)
State ........................... (57,887) (37,814)
--------- ---------
Total .................... (269,753) (176,215)
--------- ---------
Provision for income taxes $ 621,000 $ 564,000
========= =========
A reconciliation of the anticipated income tax provision (computed by applying
the statutory Federal income tax rate to the income before income taxes) to the
income tax provision as reported in the statements of income for the years ended
December 31, 2002 and 2001 is as follows:
2002 2001
---------------------
Provision for income taxes at statutory Federal rate $ 568,800 $ 489,700
State taxes, net of Federal benefit ................ 86,800 75,300
Dividends received deduction ....................... (69,100) (71,500)
Nondeductible expenses ............................. 9,000 81,200
Other .............................................. 25,500 (10,700)
--------- ---------
Total provision for income taxes ........ $ 621,000 $ 564,000
========= =========
23
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
At December 31, 2002 and 2001, the components of gross deferred tax assets and
gross deferred tax liabilities are as follows:
2002 2001
------------------------
Deferred tax assets:
Allowance for loan losses .... $ 939,729 $ 750,394
Investment securities ........ 46,613 46,613
Asset under capital lease .... 44,654 61,807
Premises and equipment ....... 159,637 75,931
Accrued expenses ............. 14,062 15,844
Other ........................ 15,938 23,103
---------- ----------
Gross deferred tax assets .. 1,220,633 973,692
---------- ----------
Deferred tax liabilities:
Tax bad debt reserve ......... 115,909 138,721
Investment securities ........ 350,028 172,675
---------- ----------
Gross deferred tax liabilities 465,937 311,396
---------- ----------
Deferred tax asset, net $ 754,696 $ 662,296
========== ==========
Note 11. Goodwill
The Company adopted the provisions of SFAS 142 effective January 1, 2002. As a
result, effective January 1, 2002, goodwill is no longer amortized, and is
evaluated for impairment under SFAS 142. Based on the Company's initial goodwill
impairment test, goodwill was not impaired at the date of adoption of SFAS 142,
and based on the Company's annual goodwill impairment test performed in October
2002, goodwill was not impaired for the year ended December 31, 2002. In
addition, no goodwill was acquired during 2002.
24
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
In addition, the following represents the effect of adopting SFAS No. 142 on the
Company's net income and earnings per share for the years ended December 31,
2002 and 2001:
2002 2001
------------------------------
Reported net income ............ $ 1,052,007 $ 876,387
Add goodwill amortization ....... -- 123,936
------------- --------------
Adjusted net income ............ $ 1,052,007 $ 1,000,323
============= ==============
Basic income per share
Reported net income per share $ 0.44 $ 0.37
Goodwill amortization ....... -- 0.05
------------- --------------
Adjusted net income per share $ 0.44 $ 0.42
============= ==============
Diluted income per share
Reported net income per share $ 0.43 $ 0.36
Goodwill amortization ....... -- 0.05
------------- --------------
Adjusted net income per share $ 0.43 $ 0.41
============= ==============
Note 12. Shareholders' Equity
Income Per Share
----------------
The following is information about the computation of income per share for the
years ended December 31, 2002 and 2001.
2002
-------------------------------------
Net Per Share
Income Shares Amount
-------------------------------------
Basic Income Per Share
Income available to common shareholders $1,052,007 2,400,525 $ 0.44
Effect of Dilutive Securities
Warrants and stock options outstanding -- 26,789 (0.01)
---------- ---------- --------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions ........... $1,052,007 2,427,314 $ 0.43
========== ========== ========
25
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
2001
-------------------------------------
Net Per Share
Income Shares Amount
-------------------------------------
Basic Income Per Share
Income available to common shareholders $ 876,387 2,400,488 $ 0.37
Effect of Dilutive Securities
Warrants and stock options outstanding -- 26,013 (0.01)
--------- --------- ---------
Diluted Income Per Share
Income available to common shareholders
plus assumed conversions ........... $ 876,387 2,426,501 $ 0.36
========= ========= ========
Stock warrants
--------------
The Bank issued warrants to certain of the Bank's original organizing group and
certain other individuals to purchase up to 95,000 shares of the Bank's common
stock at the original public offering price of $6 per share. These warrants are
currently exercisable and expire on August 31, 2004. During 1998, the Bank
issued warrants to certain other individuals involved in the organization of the
Bank to purchase up to 28,680 shares of the Bank's common stock at $14 per
share; these warrants expired on July 6, 2001, and none was exercised. The
obligations related to all warrants issued by the Bank were assumed by the
Company. The Company has reserved 91,166 shares of its common stock for issuance
upon exercise of these warrants.
A summary of the status of the warrants at December 31, 2002 and 2001, and
changes during the years ended on those dates, is as follows:
2002 2001
------------------------------- -----------------------------
Weighted- Number Weighted-
Number Average Average
of Exercise of Exercise
Shares Price Shares Price
------------------------------- -----------------------------
Outstanding at beginning of year 91,166 $ 6.00 119,846 $ 7.91
Expired ........................ -- -- (28,680) 14.00
Exercised ...................... -- -- --
-------- --------
Outstanding at end of year ..... 91,166 6.00 91,166 6.00
-------- =========
Exercisable at end of year ..... 91,166 6.00 91,166 6.00
========= =========
The weighted average remaining contractual life for the warrants outstanding at
December 31, 2002 is 1.7 years.
26
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Stock options
-------------
On August 17, 1999, the Bank adopted a stock option plan (the "Plan") for
employees and directors, under which both incentive and non-qualified stock
options could have been granted, and subsequently the Company assumed all
obligations related to such options. The Plan provided for the grant of 110,000
non-qualified and incentive stock options in 1999 to certain directors of the
Company, with an exercise price equal to the market value of the Company's stock
on the date of grant. Such options were immediately exercisable and expire if
unexercised ten years after the date of grant. The Company has reserved 110,000
shares of common stock for issuance under the Plan. No additional options may be
granted under the Plan.
A summary of the status of the stock options at December 31, 2002 and 2001 is as
follows:
2002 2001
------------------------------- ------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------------------------------- ------------------------------
Outstanding at beginning of year 110,000 $ 10.13 110,000 $ 10.13
Granted ........................ -- --
-------- --------
Outstanding at end of year ..... 110,000 10.13 110,000 10.13
======== ========
Exercisable at end of year ..... 110,000 10.13 110,000 10.13
======== ========
The weighted-average remaining contractual life for the options outstanding at
December 31, 2002 is 6.6 years.
Note 13. 401(k) Savings Plan
The Company offers employees participation in the Patriot National Bank 401(k)
Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue
Code. The 401(k) Plan covers substantially all employees who have completed six
months of service, are 21 years of age and who elect to participate. Under the
terms of the 401(k) Plan, participants can contribute up to the maximum amount
allowed, subject to Federal limitations. The Company may make discretionary
matching contributions to the 401(k) Plan. Participants are immediately vested
in their contribution and Company contributions. The Company contributed
approximately $34,000 and $25,000 to the 401(k) Plan in 2002 and 2001,
respectively.
Note 14. Financial Instruments With Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit and involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the balance
sheets. The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
27
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The contractual amounts of commitments to extend credit and standby letters of
credit represent the amounts of potential accounting loss should the contract be
fully drawn upon, the customer default, and the value of any existing collateral
become worthless. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. Management believes that the Company controls the credit risk of these
financial instruments through credit approvals, credit limits, monitoring
procedures and the receipt of collateral as deemed necessary.
Financial instruments whose contract amounts represent credit risk are as
follows at December 31, 2002 and 2001:
2002 2001
---------------------------
Commitments to extend credit:
Future loan commitments ....... $32,714,416 $ 5,142,789
Unused lines of credit ........ 25,127,648 16,221,043
Undisbursed construction loans 29,592,692 7,183,318
Financial standby letters of credit 635,500 144,000
----------- -----------
$88,070,256 $28,691,150
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
to extend credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the borrower. Since these
commitments could expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies,
but may include residential and commercial property, deposits and securities.
Standby letters of credit are written commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. These financial instruments are
recorded in the financial statements when they become payable.
Note 15. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's
28
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
The most recent notification from the Office of the Comptroller of the Currency
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier-I leverage ratios
as set forth in the table. There are no conditions or events since then that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios at December 31, 2002 and 2001 were
(dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
December 31, 2002:
------------------
Total Capital (to Risk Weighted Assets) $19,340 10.36% $14,934 8.00% $18,668 10.00%
Tier I Capital (to Risk Weighted Assets) 17,001 9.11% 7,465 4.00% 11,197 6.00%
Tier I Capital (to Average Assets) ..... 17,001 6.98% 9,743 4.00% 12,178 5.00%
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
December 31, 2001:
------------------
Total Capital (to Risk Weighted Assets) $18,003 10.69% $13,473 8.00% $16,841 10.00%
Tier I Capital (to Risk Weighted Assets) 16,109 9.57% 6,733 4.00% 10,100 6.00%
Tier I Capital (to Average Assets) .... 16,109 8.11% 7,945 4.00% 9,932 5.00%
The Company is also considered to be well capitalized under the regulatory
framework specified by the Federal Reserve Bank ("FRB"). The Company's actual
and required ratios are not substantially different from those shown above.
29
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Restrictions on dividends, loans and advances
---------------------------------------------
The Company's ability to pay dividends is dependent on the Bank's ability to pay
dividends to the Company. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends, loans or advances. The approval of the Comptroller of the Currency is
required to pay dividends in excess of the Bank's earnings retained in the
current year plus retained net earnings for the preceding two years. As of
December 31, 2002, the Bank had retained earnings of approximately $1,895,000,
all of which is available for distribution to the Company as dividends without
prior regulatory approval. The Bank is also prohibited from paying dividends
that would reduce its capital ratios below minimum regulatory requirements, and
the FRB may impose further dividend restrictions on the Company.
Loans or advances to the Company by the Bank are limited to 10% of the Bank's
capital stock and surplus on a secured basis.
Note 16. Related Party Transactions
In the normal course of business, the Company grants loans to executive
officers, directors and members of their immediate families, as defined, and to
entities in which these individuals have more than a 10% equity ownership. Such
loans are transacted at terms, including interest rates, similar to those
available to unrelated customers.
Changes in loans outstanding to such related parties during 2002 and 2001 are as
follows:
2002 2001
---------------------------
Balance, beginning of year .......... $ 3,847,622 $ 4,556,361
Additional loans .................... 4,043,876 832,941
Repayments .......................... (3,914,030) (1,541,680)
Adjustment for former related parties (429,702) --
----------- -----------
Balance, end of year ................ $ 3,547,766 $ 3,847,622
=========== ===========
Related party deposits aggregated approximately $4,002,000 and $7,161,000 as of
December 31, 2002 and 2001, respectively.
The Company leases office space in its premises to a director of the Company
under a five-year lease. Rental income under this lease was approximately
$22,300 for each of the years ended December 31, 2002 and 2001. Also during
2001, the Company leased office space to a related individual under a
month-to-month lease, and rental income under this lease was approximately $500
for the year ended December 31, 2001. In addition, the Company paid consulting
fees of approximately $20,400 to this individual during the year ended December
31, 2001.
During 2002 and 2001, the Company paid legal fees of approximately $21,800 and
$9,900, respectively, to an attorney who is a director of the Company.
30
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
During 2001, the Company leased parking space from a corporation, certain
principals of which were related parties. Total rent paid to the corporation was
$13,500 for the year ended December 31, 2001. During 2001, the corporation's
asset was sold to individuals who are not related parties of the Company.
Note 17. Other Comprehensive Income
Other comprehensive income, which is comprised solely of the change in
unrealized gains and losses on available for sale securities, is as follows:
2002
---------------------------------------------------
Before-Tax Net-of-Tax
Amount Tax Expense Amount
---------------------------------------------------
Unrealized holding gains arising during period $ 466,603 $(168,083) $ 298,520
Add:
Reclassification adjustment for losses
recognized in net income ............... 25,733 (9,270) 16,463
--------- --------- ---------
Unrealized holding gain on available for sale
securities, net of taxes ............... $ 492,336 $(177,353) $ 314,983
========= ========= =========
2001
---------------------------------------------------
Before-Tax Net-of-Tax
Amount Tax Expense Amount
---------------------------------------------------
Unrealized holding gains arising during period $ 138,360 $ (55,707) $ 82,653
Add:
Adjustment for unrealized losses of held to
maturity securities transferred to
available for sale securities .......... 154,147 (62,061) 92,086
Reclassification adjustment for losses
recognized in net income ............... 117,679 (47,379) 70,300
--------- --------- ---------
Unrealized holding gain on available for sale
securities, net of taxes ............... $ 410,186 $(165,147) $ 245,039
========= ========= =========
31
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Note 18. Fair Value of Financial Instruments and Interest Rate Risk
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
("Statement No. 107"), requires disclosure of fair value information about
financial instruments, whether or not recognized in the statements of condition,
for which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rates and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparisons to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction at December 31, 2002 and
2001. The estimated fair value amounts for 2002 and 2001 have been measured as
of their respective year-ends, and have not been reevaluated or updated for
purposes of these consolidated financial statements subsequent to those
respective dates. As such, the fair values of these financial instruments
subsequent to the respective reporting dates may be different from the amounts
reported at each year-end.
The information presented should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only required for
a limited portion of the Company's assets and liabilities. Due to the wide range
of valuation techniques and the degree of subjectivity used in making the
estimate, comparisons between the Company's disclosures and those of other bank
holding companies may not be meaningful.
As of December 31, 2002 and 2001, the recorded book balances and estimated fair
values of the Company's financial instruments were (in thousands):
2002 2001
-------------------------------------------------
Recorded Recorded
Book Book
Balance Fair Value Balance Fair Value
-------------------------------------------------
Financial Assets:
Cash and due from banks ........... $ 5,386 $ 5,386 $ 7,544 $ 7,544
Federal funds sold ................ 3,000 3,000 12,700 12,700
Short-term investments ............ 3,349 3,349 6,789 6,789
Available for sale securities ..... 60,618 60,618 34,718 34,718
Federal Reserve Bank stock ........ 481 481 481 481
Federal Home Loan Bank stock ...... 621 621 618 618
Loans receivable, net ............. 170,795 174,693 135,680 138,541
Accrued interest receivable ....... 1,311 1,311 1,079 1,079
32
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
----------------------------------------------
Recorded Recorded
Book Book
Balance Fair Value Balance Fair Value
----------------------------------------------
Financial Liabilities:
Demand deposits .............................. $25,520 $25,520 $16,962 $16,962
Savings deposits ............................. 26,848 26,848 31,258 31,258
Money market deposits ........................ 56,974 56,974 10,255 10,255
NOW accounts ................................. 22,686 22,686 46,331 46,331
Time deposits ................................ 85,884 88,470 78,458 79,183
Securities sold under agreements to repurchase 5,700 5,700 -- --
FHLB borrowings .............................. 4,000 4,251 -- --
Collateralized borrowings .................... 349 349 474 474
Unrecognized financial instruments
------------ ---------------------
Loan commitments on which the committed interest rate is less than the current
market rate were insignificant at December 31, 2002 and 2001. The estimated fair
value of fee income on letters of credit at December 31, 2002 and 2001 was
insignificant.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
Note 19. Segment Reporting
The Company has two reportable segments, the commercial bank and the mortgage
broker. The commercial bank segment 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.
33
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
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 the 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 as of and for the years ended December
31, 2002 and 2001 is as follows (in thousands):
Commercial Mortgage Consolidated
2002 Bank Broker Totals
---- -----------------------------------------
Net interest income .... $ 7,840 $ -- $ 7,840
Noninterest income ...... 496 3,618 4,114
Noninterest expenses .... 6,934 2,879 9,813
Provision for loan losses 468 -- 468
Income before taxes ..... 934 739 1,673
Assets .................. 247,459 1,038 248,497
Commercial Mortgage Consolidated
2001 Bank Broker Totals
---- -----------------------------------------
Net interest income ..... $ 6,856 $ -- $ 6,856
Noninterest income ...... 190 3,320 3,510
Noninterest expenses .... 6,056 2,620 8,676
Provision for loan losses 250 -- 250
Income before taxes ..... 740 700 1,440
Assets .................. 201,539 1,030 202,569
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Management allocates certain
overhead expenses of the commercial bank to the mortgage broker segment, which
allocations are based on a pre-determined monthly charge agreed to between the
Company and the mortgage broker segment. Management evaluates the performance of
each segment based on profit or loss from operations before income taxes.
Intersegment revenues are accounted for at amounts that assume the revenues were
between unrelated third parties at the current market prices at the time of the
transactions.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
34
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The Company does not have operating segments other than those reported and the
Company does not have a single external customer from which it derives 10% or
more of its revenues and the Company operates in one geographical area.
Note 20. Subsequent Event
In the first quarter of 2003, the Company created a statutory trust of which the
Company owns 100% of the capital stock. On March 27, 2003, the trust issued
$8,000,000 in preferred securities to investors, the proceeds of which were used
to purchase junior subordinated debt from the Company. The Company primarily
invested the funds from the issuance of the debt in the Bank, which in turn will
use the proceeds to fund general operations of the Bank. The securities will
qualify for up to 25% of the Company's total Tier 1 Capital, with the remainder
qualifying as Tier 2 Capital.
35
EXHIBIT INDEX
Exhibit No. Description
2 Agreement and Plan of Reorganization dated as of June 28, 1999
between Bancorp and the Bank (incorporated by reference to Exhibit 2
to Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
3(i) Certificate of Incorporation of Bancorp, (incorporated by reference
to Exhibit 3(i) to Bancorp's Current Report on Form 8-K dated
December 1, 1999 (Commission File No. 000-29599)).
3(ii) By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to
Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
10(a)(1) 2001 Stock Appreciation Rights Plan of Bancorp (incorporated by
reference to Exhibit 10(a)(1) to Bancorp's Annual Report on Form
10-KSB for the year ended December 31, 2001 (Commission File No.
000-29599)).
10(a)(2) Lease dated February 1, 1995 between 999 Bedford Street Corporation
and the Bank (incorporated by reference to Exhibit 10(a)(3) to
Bancorp's Current Report on Form 8-K dated December 1, 1999
(Commission File No. 000-29599)).
10(a)(3) Employment Agreement, dated as of October 23, 2000, as amended by a
First Amendment, dated as of March 21, 2001, among the Bank, Bancorp
and Charles F. Howell (incorporated by reference to Exhibit 10(a)(4)
to Bancorp's Annual Report on Form 10-KSB for the year ended
December 31, 2000 (Commission File No. 000-29599)).
10(a)(4) Second Amendment to Employment Agreement among Patriot National
Bank, Bancorp and Charles F. Howell, dated May 9, 2002.
10(a)(5) Employment Agreement dated as of September 19, 2001 among Patriot
National Bank, Bancorp and Robert F. O'Connell (incorporated by
reference to Exhibit 10 to Bancorp's Quarterly Report on Form 10-QSB
for the Quarter ended March 31, 2002 (Commission File No.
000-29599)).
10(a)(6) Change of Control Agreement, dated as of May 1, 2001 between Robert
F. O'Connell and Patriot National Bank (incorporated by reference to
Exhibit 10(a)(4) to Bancorp's Annual Report on Form 10-KSB for the
year ended December 31, 2001 (Commission File No. 000-29599)).
10(a)(7) Employment Agreement dated as of January 1, 2003 between Patriot
National Bank and Todd Brown.
10(a)(8) Employment Agreement dated as of January 1, 2003 between Patriot
National Bank and Marcus Zavattaro.
10(c) 1999 Stock Option Plan of the Bank (incorporated by reference to
Exhibit 10(c) to Bancorp's Current Report on Form 8-K dated December
1, 1999 (Commission File No. 000-29599)).
21 Subsidiaries of Bancorp (Incorporated by reference to Exhibit 21 to
Bancorp's Annual Report on Form 10-KSB for the year ended December
31, 1999 (Commission File No. 000-29599)).
23 Consent of McGladrey & Pullen, LLP.
99 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.