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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Name of small business issuer in its charter)
Connecticut 06-1559137
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
900 Bedford Street
Stamford, Connecticut 06901
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(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: $10,954,048
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Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 2000: $17,040,274
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Number of shares of the registrant's Common Stock, par value $2.00 per share,
outstanding as of February 28, 2000: 2,160,952
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<PAGE>
Documents Incorporated by Reference
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Proxy Statement for 2000 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.)
Transition Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
TABLE OF CONTENTS
Part I Page
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Item 1. Description of Business 1
Item 2. Description of Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a vote of Security Holders 9
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 12
Item 7. Financial Statements 23
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
Part III
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Item 9. Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16 (a)
of the Exchange Act 25
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners
and Management 25
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits and Reports on Form 8-K 25
<PAGE>
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, 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. On September 5, 1997 the Bank opened a
branch office in Greenwich, Connecticut. On October 12, 1999 the Bank opened a
branch office in Old Greenwich, Connecticut. On February 10, 1999, the OCC
granted approval for the Bank to establish a second office in Stamford,
Connecticut. The Bank is presently looking for a location in Stamford.
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. If Bancorp determines in the future to
conduct this business through Pinnacle, Pinnacle will file for appropriate
mortgage licenses. It is too early to determine the impact that the Pinnacle
acquisition will have on the business or results of operation of Bancorp.
Bancorp currently conducts business operations at its office located at 900
Bedford Street, Stamford, Connecticut. The Bank conducts business operations at
its office located at 900 Bedford Street, Stamford, Connecticut; a branch office
located at 100 Mason Street, Greenwich, Connecticut; and a branch office located
at 184 Sound Beach Avenue, Old Greenwich, Connecticut. The Bank also operates
mortgage origination
1
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offices at 71 Lewis Street, Greenwich, Connecticut; 125 Wireless Boulevard,
Suite 1, Hauppauge, New York; 1120 Route 22 East, Suite 5, Bridgewater, New
Jersey; and an office that opened on March 6, 2000, at Wiccopee Plaza, Suite D,
East Fishkill, New York.
The Bank is an independent bank engaged in substantially all of the business
operations customarily conducted by independent commercial banks. 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 and access to an ATM (automated teller system). In addition,
the Bank may in the future offer Keogh accounts and other services. The Bank
does not currently accept brokered deposits.
The Bank offers real estate loans to individuals including 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. Loans offered
to small and medium-sized businesses include unsecured and secured loans to
service companies, real estate developers, manufacturers, restaurants,
wholesalers, retailers and professionals doing business in the region.
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, and may not in the future, 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 Greenwich and the southern portion of Stamford,
Connecticut provide the majority of the Bank's deposits. This area is bordered
by the New York State to the west, the Merritt Parkway to the north in Stamford,
the Town of Darien to the east, and Long Island Sound to the south.
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The Bank's loan customers extend beyond Greenwich and the southern portion of
Stamford to include the balance of Stamford and the adjacent towns of Darien and
New Canaan, although the Bank's loan business is not necessarily limited to
these municipalities. 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 Stamford area, the Bank believes
that the service, professional and related businesses which have been attracted
to this area, as well as individuals, represent current and potential customers
of the Bank.
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.
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 City of Stamford and the Town of Greenwich are presently served by
approximately 71 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 or Greenwich. In addition to the banks with branches in
Stamford and Greenwich, there are numerous banks and financial institutions
serving the communities surrounding Stamford and Greenwich, which also draw
customers from Stamford and Greenwich, 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. While
the impact on Bancorp of federal legislation authorizing increased services by
financial holding companies and interstate branching of banks cannot be
determined, Bancorp anticipates that the effectiveness of such legislation will
likely result in increased competition. These events have resulted in increasing
homogeneity in the financial services offered by banks and other financial
institutions. Some of the results to banks and other financial institutions of
these market dynamics and legislative and regulatory changes have been increased
customer awareness of product and service differences among competitors and
increased merger activity.
3
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Bancorp's operations are subject to regulation, supervision and examination by
the Board of Governors of the Federal Reserve Board (the "Federal Reserve
Board") as a bank holding company. 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, Bancorp and its subsidiaries are prohibited from
engaging in or acquiring 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 holding companies will be
permitted to engage in businesses, including securities and investment banking
businesses, which are prohibited to bank holding companies. Bancorp cannot
predict what effect, if any, the creation of financial holding companies may
have on it or its competitive position.
Under the BHC Act, Bancorp will be required to file annually with the Federal
Reserve Board a report of its operations. Bancorp, the Bank and any other
subsidiaries will be 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 will be prohibited from engaging in certain tying arrangements in
connection with any extension of credit or provisions 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 had 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."
4
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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 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,
Federal Reserve Board and FDIC. 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.
5
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The Bank has focused its attention on serving that segment of its market area
historically served by community banks operating in Stamford and Greenwich. 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. The Bank
also believes that by planning to establish a branch in the northern part of
Stamford, it can satisfy the demand for personalized and responsive services.
The Bank's operations are subject to regulation, supervision and examination by
the OCC and the Federal Deposit Insurance Corporation ("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
issued 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 Bank is subject to capital adequacy rules and guidelines issued by the OCC.
Those rules and guidelines require the Bank 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 OCC and the other federal regulatory agencies are required to
implement and enforce these rules in a stringent manner.
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.
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.
6
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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 Greenwich and the
southern portion of Stamford, which are characterized by a very diverse ethnic,
economic and racial cross-section of the population. As the Bank expands further
into Old Greenwich and the northern part of Stamford, 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 Stamford or
Greenwich communities.
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, 1999, the Bancorp had 58 full-time employees and 10 part-time
employees. None of the employees of the Bancorp is covered by a collective
bargaining agreement.
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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 at an initial annual rent of
$108,000, which rent increased by approximately 11%, 10% and 15% in the second,
third and fourth years, respectively, and will increase by approximately 8% in
the fifth year. Thereafter, rent increases 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 70% of the space in the 900 Bedford
Street building. The Bank has sublet portions of the remaining space under
subleases with each having a maturity, which the Bank believes, will coincide
with its future needs for additional space for its operations. The Bank has
entered into subleases covering approximately 3,500 square feet at rents not
less than the rent payable by the Bank with month to month terms. The businesses
of the subtenants of the Bank include a law practice, a mortgage broker and an
internet service business. SEE ALSO, "Item 12. Certain Relationships and Related
Transactions."
The Bank has entered into an agreement for additional parking with a remaining
term of four 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 commenced
on July 1, 1997 at an initial annual rent of $190,000, which rent will increase
by approximately 2.5% each year thereafter. The lease provides for three
five-year renewals after the initial term. The Bank has entered into a sublease
covering approximately 1,000 square feet at a rent not less than the rent
payable by the Bank with month to month terms.
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 will increase by
approximately 10% in the third year and 25% in the fourth year and will remain
constant during the fifth year.
The Bank leases approximately 2,500 square feet of office space at 125 Wireless
Boulevard, Suite 1, Hauppauge, New York. The lease commenced on March 1, 1999 at
an initial annual rent of $43,085, which rent will increase by approximately 4%
each consecutive year. The lease expires January 31, 2004.
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The Bank sub-leases approximately 200 square feet of office space at 1120 Route
22 East, Suite 5, Bridgewater, New Jersey. The lease commenced on February 19,
1999 at an initial annual rent of $7,560. This lease expired on February 18,
2000, but the Bank continues to occupy the office at the monthly rent of $630.
The Bank leases approximately 2,400 square feet of office space at Wiccopee
Plaza, Suite D, East Fishkill, New York. The lease commenced on March 1, 2000 at
an initial annual rent of $24,000. The rent remains constant until February 28,
2003, when the lease expires.
The Bank anticipates leasing a facility for a branch office in the northern
section of Stamford in 2000.
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 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 1999, no matter was submitted to a vote of
shareholders of Bancorp or the Bank.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
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The Bancorp Common Stock is traded on the NASDAQ Small Cap Market under the
Symbol "PNBK." Prior to the effective date of the Reorganization, the Bank
Common Stock was traded on the NASDAQ Small Cap Market, also under the symbol
"PNBK." On December 31, 1999, the last bid price for the Bancorp Common Stock on
NASDAQ Small Cap Market was $12.375.
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The following table sets forth the high and low sales price per share of the
Bank Common Stock up to December 1, 1999 and for Bancorp Common Stock on and
after December 1, 1999 for each quarter of 1999 and 1998 as reported on the
NASDAQ Small Cap Market System.
Quarter Ended High Low
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March 31, 1999 ........ $ 10.37 $ 8.438
June 30, 1999 ......... 9.75 7.875
September 30, 1999..... 10.75 9.125
December 31, 1999...... 13.00 9.875
March 31, 1998 ........ $ 11.62 $ 6.750
June 30, 1998 ......... 12.37 9.750
September 30, 1998..... 10.75 9.000
December 31, 1998...... 9.37 8.125
Holders
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There were approximately 1,018 shareholders of record of Bancorp Common Stock as
of December 31, 1999.
Dividends
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Bancorp has not paid any dividends on the Bancorp Common Stock, and, up to the
effective date of the Reorganization, the Bank did not pay any dividends on the
Bank Common Stock. Bancorp expects that its earnings will be used for operating
capital and that no dividends will be paid in the foreseeable future. The Bank
will be legally able to pay dividends to Bancorp only out of net earnings and
only after certain capitalization levels of the Bank have been achieved or
replenished. 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 the Bancorp's need for capital.
Recent Sales of Unregistered Securities
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During 1999, neither the Bank (prior to the effective date of the
Reorganization) nor Bancorp (from and after the effective date of the
Reorganization) sold any securities that were not registered under the
Securities Act of 1933, except for sales of Bank Common Stock which have been
previously reported in the Bank's Quarterly Reports on Form 10-QSB for the
quarterly periods ended March 31, 1999, June 30, 1999 and September 30, 1999.
10
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PATRIOT NATIONAL BANK
Financial Highlights
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<TABLE>
<CAPTION>
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1999 1998 1997 1996 1995
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Operating Data
<S> <C> <C> <C> <C> <C>
Interest and dividend income .. $ 9,732,719 $ 6,765,283 $ 5,130,009 $ 3,940,490 $ 2,630,263
Interest expense .............. 4,739,921 3,074,518 2,347,644 1,723,052 1,326,902
Net interest income ........... 4,992,798 3,690,765 2,782,365 2,217,438 1,303,361
Provision for loan losses ..... 553,000 104,000 248,000 191,747 254,991
Non-interest income ........... 1,221,329 373,808 268,822 281,927 116,428
Non interest expense .......... 5,245,986 3,420,185 2,706,871 2,078,299 1,899,630
Net income (loss) ............. 348,641 626,488 310,416 299,919 (735,832)
Basic income (loss) per share . 0.17 0.48 0.25 0.25 (0.60)
Diluted income (loss) per share 0.16 0.47 0.25 0.24 (0.60)
Balance Sheet Data
Cash and due from banks ....... $ 2,685,031 $ 1,867,353 $ 1,532,055 $ 1,389,183 $ 1,416,706
Federal funds sold ............ 18,900,000 27,700,000 17,000,000 12,000,000 11,000,000
Short term investments ........ 10,976,264 -- -- -- --
Investment securities ......... 33,003,494 13,562,730 9,943,046 6,993,184 6,486,470
Loans, net .................... 107,769,911 57,052,618 44,358,069 31,486,942 22,807,891
Goodwill, net ................. 1,177,948 -- -- -- --
Assets ........................ 177,194,697 102,327,631 75,073,200 53,551,217 43,337,087
Total deposits ................ 162,746,354 89,309,139 68,592,231 47,546,737 37,642,967
Total shareholders' equity .... 13,236,088 12,097,283 5,480,548 5,072,975 4,776,187
</TABLE>
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) Plan of Operation
Not applicable since the Bancorp, as successor to the Bank has had revenues from
operations in each of the last four fiscal years.
(b) Management's Discussion and Analysis of
Financial Condition and Results of Operations
Summary
- -------
Bancorp reported a net income of $348,641 ($0.17 basic income per share and
$0.16 diluted income per share) for 1999, down from 1998 net income of $626,488
($0.48 basic income per share and $0.47 diluted income per share). Net interest
margin was 4.07% in 1999, a decrease of 50 basis points from 1998 net interest
margin of 4.57%. In 1999, return on assets was 0.27%, a decrease of 47 basis
points from 1998 return on assets of 0.74%.
Total assets increased $74.9 million from total assets of $102.3 million at
December 31, 1998 to $177.2 million at December 31, 1999. The net loan portfolio
increased $50.8 million from $57.0 million at December 31, 1998 to $107.8
million at December 31, 1999. Loan growth was funded through the sale of
certificates of deposit and general deposit growth. During 1999, Bancorp
recorded $553,000 in provision for loan losses and net recoveries from loans
charged-off of $21,648. Deposits increased $73.4 million from $89.3 million at
December 31, 1998 to $162.7 million at December 31, 1999. The opening of a new
branch office in Old Greenwich, Connecticut and attractive interest rates for
certificates of deposit were responsible for deposit growth. Equity increased
$1.1 million from $12.1 million at December 31, 1998 to $13.2 million at
December 31, 1999, due to primarily the issuance of stock for the acquisition of
Pinnacle and the generation of net income of $349 thousand.
The opening of the Old Greenwich Office and successful marketing campaigns
designed to attract new customers as well as competitively priced savings and
certificates of deposit contributed to the approximately 82% increase in
deposits. Marketing efforts and referrals from the Board of Directors, Advisory
Board members, professional contacts and loan brokers contributed to the growth
of the Bank's loan portfolio. Although it is not certain and will depend on when
new branches are opened, the Bank anticipates that the growth experienced in
1999 will continue in 2000.
12
<PAGE>
FINANCIAL CONDITION
Assets
- ------
Bancorp's total assets increased $74.9 million from $102.3 million at December
31, 1998 to $177.2 million at December 31, 1999. Cash and cash equivalents
increased approximately $3.0 million at year-end December 31, 1999 caused mainly
by higher short-term investment balances. Federal funds sold were $18.9 million
and short-term investments were $11.0 million at December 31, 1999, compared
with $27.7 million of federal funds sold at December 31, 1998. The growth in
total assets was funded by deposit growth of $73.4 million.
Investments
- -----------
During 1999, the Bancorp purchased approximately $0.5 million of US Treasury
notes; $8.9 million in corporate bonds; $18.3 million in US Agency notes; $10.8
million in Commercial Paper; $170,700 in Federal Reserve Bank stock; and
$307,000 in Federal Home Loan Bank stock. Approximately $1 million of US
Treasury notes matured in 1999. In addition, the Bank sold $5.7 million in US
Treasury notes. At December 31, 1999 the available for sale US Treasury
portfolio totaled $1.0 million; the held to maturity US Treasury portfolio
totaled $0.5 million; the held to maturity corporate bond portfolio totaled
$11.4 million; the available for sale mutual fund was $2 million; the available
for sale US Government Agencies totaled $17.0 million; Federal Reserve Bank
Stock was $410,700; and Federal Home Loan Bank stock was $307,000.
Bancorp's total available for sale ("AFS") investment portfolio increased $10.5
million from $9.5 million at December 31, 1998 to $20.0 million at December 31,
1999. The US Government AFS obligations decreased $6.5 million from $7.5 million
at December 31, 1998 to $1.0 million at December 31, 1999. The proceeds from the
sale of US Government obligations were used to purchase AFS mortgage backed US
agency securities, to achieve higher yields.
Bancorp's total held to maturity ("HTM") investment portfolio increased $8.5
million from $3.8 at December 31, 1998 to $12.3 million at December 31, 1999.
The corporate bond portfolio increased $9.0 million from $2.8 million at
December 31, 1998 to $11.8 million at December 31, 1999. This was done to
achieve higher yields on excess available cash.
During 1999, Bancorp purchased $170,700 in Federal Reserve Bank stock and
$307,000 in Federal Home Loan Bank stock. Federal Reserve stock was purchased to
comply with Federal Reserve regulations. Federal Home Loan Bank stock was
purchased as a membership requirement. The Bank became a member of the Federal
Home Loan Bank to, at a future date, strengthen lending capabilities and expand
services.
13
<PAGE>
The following table present the maturity distribution of investment securities
at December 31, 1999, and the weighted average yield of such securities. The
weighted average yields were calculated based on the amortized cost and
effective yields to maturity of each security.
<TABLE>
<CAPTION>
Over One Over Five Weighted
One Year Through Though Over Ten Average
or Less Five Years Ten Years Years No Maturity Total Yield
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Available for sale
1999
Mortgage backed securities $ -- $ -- $ -- $ -- $ 17,325,754 $17,325,754 6.44%
U. S. Government obligations 550,520 499,290 -- -- -- 1,049,810 4.97%
Marketable equity securities -- -- -- -- 2,032,067 2,032,067 6.25%
-----------------------------------------------------------------------------------------
Total $ 550,520 $ 499,290 $ -- -- $ 19,357,821 $20,407,631 6.34%
=========================================================================================
Weighted average yield 5.47% 4.42% 6.42% 6.34%
=========================================================================================
Held to maturity
1999
US Government obligations -- $ 498,650 $ -- $ -- $ -- $ 498,650 5.51%
Corporate bonds -- 4,682,011 6,164,124 956,700 -- 11,802,835 5.73%
-----------------------------------------------------------------------------------------
Total -- $5,180,661 $ 6,164,124 $ 956,700 $12,301,485 5.72%
=========================================================================================
Weighted average yield 5.72% 5.70% 5.92% 5.72%
=========================================================================================
</TABLE>
14
<PAGE>
The following table presents a summary of investments for any issuer that
exceeds 10% of shareholders' equity at December 31, 1999.
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
U. S. government obligations ................. $ 1,548,460 $ 1,531,195
Franklin U. S. Government Fund ............... 2,032,067 1,906,757
U. S. Government agency mortgage
backed securities........................... 17,325,754 17,041,507
Loans
- -----
Bancorp's net loan portfolio increased $50.8 million from $57.0 million at
December 31, 1998 to $107.8 million at December 31, 1999. Loan growth was funded
through the sale of certificates of deposit and general deposit growth. At
December 31, 1999, the net loan to deposit ratio was 66.22% and the net loan to
asset ratio was 60.82%. At December 31, 1998, the net loan to deposit ratio was
63.88%, and the net loan to asset ratio was 55.75%.
During 1999, the Federal Reserve Bank increased the Federal Funds Rate and
Discount Rate. Subsequently, most banks increased their prime-lending rate.
Despite rising interest rates, there was significant loan activity especially in
commercial real estate loans, residential real estate loans, construction loans
and home equity lines of credit. Management believes that the strong loan demand
experienced in 1999 will continue throughout 2000.
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, 1999, 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 $ 8,769 $ 43,015 $ 2,505 $ 54,289
Residential real estate 872 2,386 3,541 6,799
Construction loans 8,827 5,046 0 13,873
Commercial loans 4,739 4,834 1,513 11,086
Consumer installment 1,052 527 1 1,580
Other loans 320 377 21,009 21,706
- --------------------------------------------------------------------------------
Total $ 24,579 $ 56,185 $ 28,569 $109,333
================================================================================
Fixed rate loans $ 9,560 $ 34,177 $ 5,925 $ 49,662
Variable rate loans 15,019 22,008 22,644 59,671
- --------------------------------------------------------------------------------
Total $ 24,579 $ 56,185 $ 28,569 $109,333
================================================================================
15
<PAGE>
The following table presents loan concentrations at December 31, 1999:
Category Percentage Dollars Outstanding
- --------------------------------------------------------------------------------
(Thousands of dollars)
Construction ..................... 12.69% $13,873
Retail Store ..................... 5.35% $ 5,847
Limousine Service ................ 2.65% $ 2,898
Restaurant ....................... 2.59% $ 2,829
Allowance for Loan Losses
- -------------------------
The provision for loan losses is a charge against income and an addition to the
allowance for loan losses. Management's judgement in determining the adequacy of
the allowance is based on an evaluation of individual loans, the risk
characteristics and size of the loan portfolio, an assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of loans and other relevant factors.
Based upon this evaluation, management believes the allowance for loan losses of
$1,360,183, at December 31, 1999, which represents 1.24% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb losses
on existing loans which may become uncollectible. At December 31, 1998, the
allowance for loan losses was $785,536 or 1.35% of gross loans outstanding.
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 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. Interest income on impaired loans is only
recorded subsequent to the recovery of the principal balance.
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 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.
16
<PAGE>
Analysis of Allowance for Loan Losses
- -------------------------------------
(Thousands of dollars) 1999 1998
------------------------------------------------------------------------
Balance at beginning of period ........... $ 785 $ 745
------- -------
Charge-offs .............................. (19) (64)
Recoveries ............................... 41 0
------- -------
Net recoveries (charge-offs) ............. 22 (64)
------- -------
Additions charged to operations .......... 553 104
------- -------
Balance at end of period ................. $ 1,360 $ 785
======= =======
Ratio of net recoveries (charge-offs)
during the period to average loans
outstanding during the period ............ 0.03% (0.12%)
======= =======
Allocation of the Allowance for Loan Losses
- -------------------------------------------
Percent of loans in each
Balance at end of each Amounts category to total loans
period applicable to 1999 1998 1999 1998
- --------------------------------------------------------------------------------
(Thousands of dollars)
Real Estate:
Commercial ................ $ 0 $ 0 49.65% 57.10%
Construction .............. 0 0 12.69% 9.88%
Residential ............... 0 0 6.22% 2.38%
Commercial .................. 5 0 10.14% 14.33%
Consumer Installment ........ 0 0 1.45% 2.03%
Consumer Home Equity ........ 0 0 19.85% 14.28%
Unallocated ................. 1,355 785 N/A N/A
------ ------ ------ ------
$1,360 $ 785 100.00% 100.00%
====== ====== ====== ======
17
<PAGE>
Non-Accrual, Past Due and Restructured Loans
- --------------------------------------------
The following table presents non-accruing and past due loans as of December 31,
1999 and 1998.
1999 1998
- -----------------------------------------------------------------------
(Thousands of dollars)
Loans delinquent over 90
days still accruing ................. $ 475 $ 732
Non-accruing loans ...................... 91 64
------ ------
$ 566 $ 796
====== ======
% of Total Loans ...................... .52% 1.37%
% of Total Assets ...................... .32% .78%
Additional income on non-accrual
loans if recognized on an
accrual basis (in dollars) ............ $8,911 $4,553
There were no loans in any of the above years considered as "troubled debt
restructurings."
Potential Problem Loans
- -----------------------
At December 31, 1999, 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
- --------
Total deposits increased $73.4 million from $89.3 million at December 31, 1998
to $162.7 million at December 31, 1999. Interest bearing deposits (primarily
time certificates of deposit) increased $69.2 million to $150.1 million, and
non-interest bearing deposits increased $4.2 million to $12.6 million at
December 31, 1999. The opening of a new branch office in Old Greenwich,
Connecticut and attractive interest rates for certificates of deposit announced
in a newspaper marketing campaign were responsible for deposit growth.
18
<PAGE>
As of December 31, 1999, the Bank's maturities of time deposits were:
$100,000 or Less than
greater $100,000 Totals
- --------------------------------------------------------------------------------
(Thousands of dollars)
Three months or less ........... $ 14,733 $ 16,563 $ 31,296
Three to six months ............ 4,897 11,885 16,782
Six months to one year ......... 2,785 6,982 9,767
Over one year .................. 12,367 33,714 46,081
-------- -------- --------
$ 34,782 $ 69,144 $103,926
======== ======== ========
Other
- -----
The increases in accrued interest receivable is due to the increases in
investment securities and loans.
The goodwill represents the excess of the purchase price over the value of net
assets acquired related to the Pinnacle acquisition
The collateralized borrowings represent the portion of loans transferred to
other institutions under participation agreements that were not recognized as
sales.
19
<PAGE>
The following table presents average balance sheets (daily averages), interest
income, interest expense, and the corresponing yields earned and rates paid.
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential and Rate Volume Analysis
(Thousands of dollars) (1)
<CAPTION>
1999 1998
-------------------------- ------------------------- 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
--------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans (2).................... $ 79,523 $ 7,277 9.15% $ 52,153 $ 5,265 10.10% $ 2,546 $ (534) $ 2,012
Short term investments....... 2,108 139 6.59% -- -- -- 139 0 139
Investment securities (4).... 25,231 1,513 6.00% 11,160 655 5.87% 843 15 858
Federal funds sold........... 15,955 804 5.04% 17,515 845 4.82% (78) 37 (41)
--------------------------- ------------------------- --------------------------
Total interest earning assets 122,817 9,733 7.92% 80,828 6,765 8.37% 3,450 (482) 2,968
--------------------------- ------------------------- --------------------------
Cash and due from banks...... 3,349 2,792
Premises and equipment, net.. 897 923
Allowance for loan losses.... (991) (738)
Other........................ 2,197 1,286
----------- ---------
Total Assets................. $ 128,269 $ 85,091
=========== =========
Interest Bearing Liabilities:
Time certificates............ $ 58,445 $ 3,037 5.20% $ 27,562 $ 1,421 5.16% $ 1,605 $ 11 $ 1,616
Savings deposits............. 34,132 1,346 3.94% 28,940 1,271 4.39% 213 (138) 75
Money Market Deposits........ 1,398 55 3.93% 2,719 82 3.02% (33) 6 (27)
NOW accounts................. 9,957 217 2.18% 9,864 208 2.11% 2 7 9
Collateralized borrowings.... 14 2 14.29% -- -- -- 2 0 2
Capital lease obligation..... 604 83 13.74% 678 93 13.72% (10) 0 (10)
--------------------------- ------------------------- --------------------------
Total Interest Bearing
Liabilities.................. 104,550 4,740 4.53% 69,763 3,075 4.41% 1,779 (114) 1,665
--------------------------- ------------------------- --------------------------
Demand deposits.............. 10,240 7,429
Accrued expenses and
other liabilities........... 414 1,203
Shareholders' equity......... 13,065 6,696
----------- ---------
Total liabilities and equity. $ 128,269 $ 85,091
=========== =========
Net interest income.......... $ 4,993 $ 3,690 $ 1,671 $ (368) $ 1,303
========= ======== ==========================
Interest margin.............. 4.07% 4.57%
======= ========
Interest spread.............. 3.39% 3.96%
======= ========
</TABLE>
(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 effect of
unrealized gain or (loss) on available-for-sale securities.
20
<PAGE>
RESULTS OF OPERATIONS
For the year ended December 31, 1999, Bancorp earned $348,641 ($0.17 basic
income per share and $0.16 diluted income per share income per share) as
compared to 1998 when Bancorp earned $626,488 ($0.48 basic net and $0.47 diluted
income per share income per share). Interest income increased $2.9 million to
$9.7 million in 1999 as compared to 1998 when interest income was $6.8 million.
Non-interest income increased $0.8 million to $1.2 million for 1999, as compared
to 1998 when non-interest income was $0.4 million, primarily due to mortgage
brokerage fees generated by Pinnacle. Interest expense increased $1.6 million to
$4.7 million at for 1999 as compared to $3.1 million in 1998, due to the growth
in deposits, primarily certificates of deposit. Non-interest expense increased
$1.8 million to $5.2 million for 1999 as compared to $3.4 million in 1998.
The following are measurements of Bancorp's earnings in relation to assets,
equity and earnings per share. These ratios present Bancorp's historical results
for 1999 and 1998:
1999 1998
- --------------------------------------------------------------
Return on average assets ........... .27% .74%
Return on average equity ........... 2.67% 9.36%
Average equity to average assets.... 10.19% 7.87%
Basic income per share ............. $ 0.17 $0.48
Diluted income per share ........... $ 0.16 $0.47
Interest income and expense
- ---------------------------
Bancorp's interest income for the year ended December 31, 1999 increased $2.9
million to $9.7 million as compared to the year ended December 31, 1998 when
interest income was $6.8 million. The increase in net interest income was
primarily the result of higher average balances on loans and securities.
Interest income increased despite an overall decrease in average income yields
of 45 basis points. The average yield on loans decreased 95 basis points; the
average yield on securities, including short-term investments, increased 16
basis points; and the average yield on Federal funds sold increased 22 basis
points in 1999. Bancorp's cost of funds increased 12 basis points to 4.53%.
Interest expense increased $1.6 million to $4.7 million at December 31, 1999 as
compared to $3.0 million in 1999. Specifically, in 1999, Bancorp's yield on time
certificates of deposit increased 4 basis points; savings deposit rates
decreased 45 basis points; money market deposit yields increased 91 basis
points; and NOW account yields increased 7 basis points. Bancorp has maintained
loan and deposit interest rates that are competitive within its market. (See
Distribution of Assets, Liabilities and Shareholders' Equity Interest Rates and
Interest Differential and Rate Volume Analysis table.)
21
<PAGE>
Non-interest income
- -------------------
Non-interest income increased $0.8 million from $0.4 million for 1998 to $1.2
million for 1999. The increase in other non-interest income is attributed to the
acquisition of Pinnacle in June 1999, which offers mortgage brokerage services
and generated approximately $864 thousand in mortgage brokerage fee revenue in
1999.
Non-interest expenses
- ---------------------
During 1999, Bancorp incurred higher operating expenses in salaries and
benefits, occupancy and equipment, professional services, advertising and
promotional expenses, forms printing and supplies, regulatory assessments,
insurance and other operating expenses. Total non-interest expenses increased
$1.8 million from $3.4 million for 1998 to $5.2 million for 1999. Additional
staff to support growth, the acquisition of Pinnacle and the opening of a branch
in Old Greenwich were the primary reasons that salaries and benefits increased
$1.1 million to $2.7 million in 1999. Occupancy and equipment expense increased
$43,000 to $601,000 in 1999. The increase occurred primarily because of Pinnacle
rental expense and an overall increase in building maintenance costs.
Professional services increased $99,000 to $310,000 in 1999 due to the formation
of a holding company and Y2K preparation expenses. Data processing and other
outside service expenses decreased $37,000 to $246,000 in 1999. The decrease is
attributed to a reduction in outside services. Bancorp did more promotion during
1999, which caused advertising and marketing expenses to increase $197,000 to
$357,000. Directors' fees for services rendered decreased $32,000 to $98,000
during 1999 due to fewer meetings being held in 1999. Increases in forms,
printing and supplies, regulatory assessments and other operating expenses are
due to the overall growth of Bancorp, and the new mortgage broker operations.
The provision for income taxes of $66,000 for 1999 represents the tax expense
recognized for both federal and state income taxes, net of the tax benefit
recognized for the remaining net operating loss carryforwards utilized in 1999.
The deferred tax benefit recognized in 1998 relates primarily to the recognition
of a portion of the tax benefits of available net operating loss carryforwards,
net of minimum state tax expense.
Management believes additional branch offices will contribute significantly to
the future 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 its
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.
22
<PAGE>
LIQUIDITY
Bancorp's liquidity position was 29.65% and 44.28% at December 31, 1999 and
1998, respectively. The liquidity ratio is defined as the percentage of liquid
assets to net deposits. 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, loan demand and
to meet other anticipated cash requirements.
CAPITAL
The following table illustrates Bancorp's regulatory capital ratios:
Dec. 31, 1999 Dec. 31,1998
------------- ------------
Leverage Capital ...................... 7.21% 12.39%
Tier 1 Risk-Based Capital ............. 8.91% 18.21%
Total Risk-Based Capital .............. 9.90% 19.40%
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, Bancorp believes that it is considered to be "well capitalized"
under leverage capital and tier 1 risk-based capital regulations. The total
risk-based capital of Bancorp is 9.90% which, is .10% below applicable
regulations to be considered "well capitalized." 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%.
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 continue to significantly affect Bancorp's
earnings in future periods.
23
<PAGE>
Year 2000 Issue
- ---------------
The Year 2000 arrived without incident and all Bancorp systems, including the
Bank's core processing systems worked properly. Throughout the year the Bancorp
will continue to monitor all of its systems to ensure date-sensitive information
is processed properly.
"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995
- ------------------------------------------------------------------------------
Certain statements contained in Bancorp's public reports, including this report,
and in particular in this "Management's Discussion and Analysis of Financial
Condition and Results of Operation," may be forward looking and subject to a
variety of risks and uncertainties. These factors include, but are not limited
to, (1) changes in prevailing interest rates which would affect the interest
earned on Bancorp's interest earning assets and the interest paid on its
interest bearing liabilities, (2) the timing of repricing of Bancorp's interest
earning assets and interest bearing liabilities, (3) the effect of changes in
governmental monetary policy, (4) the effect of changes in regulations
applicable to Bancorp and the conduct of its business, (5) changes in
competition among financial service companies, including possible further
encroachment of non-banks on services traditionally provided by banks and the
impact of recently enacted federal legislation, (6) the ability of competitors
which are larger than Bancorp to provide products and services which it is
impracticable for Bancorp to provide, (7) the 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, 1999 and December
31, 1998 and the related consolidated statements of income, shareholders' equity
and cash flows for the years ended December 31, 1999 and December 31, 1998,
together with the report thereon of McGladrey & Pullen, LLP dated February 18,
2000 are included as part of this Form 10-KSB in the "Financial Report"
following page 28 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
<PAGE>
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 2000 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 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.
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) Form of 1994 Warrant to Purchase Common Stock (incorporated by
reference to Exhibit 10(a)(1) to Bancorp's Current Report on Form
8-K dated December 1, 1999 (Commission File No. 000-29599))
25
<PAGE>
10(a)(2) Form of 1998 Warrant to Purchase Common Stock (incorporated by
reference to Exhibit 10(a)(2) to Bancorp's Current Report on Form
8-K dated December 1, 1999 (Commission File No. 000-29599))
10(a)(3) 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(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
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated December 1, 1999 was filed by Bancorp with
the SEC. This report responded to items 5 and 7(c) of the Form 8-K.
26
<PAGE>
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/ Philip W. Wolford
--------------------------
Name: Philip W. Wolford
Title: President
Date: March 29, 2000
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/ Philip W. Wolford March 29, 2000
- ------------------------------------ --------------
Philip W. Wolford, President Date
and Director (Principal Executive
and Financial Officer)
/s/ Ronald M. Moskwa March 29, 2000
- ------------------------------------ --------------
Ronald M. Moskwa Date
Vice President & Controller
/s/ Herbert A. Bregman March 29, 2000
- ------------------------------------ --------------
Herbert A. Bregman Date
Director
- ------------------------------------ --------------
Angelo DeCaro Date
CEO and Director
/s/ Fred A. DeCaro, Jr. March 29, 2000
- ------------------------------------ --------------
Fred A. DeCaro, Jr. Date
Director
27
<PAGE>
FORM 10 KSB -- SIGNATURES CONTINUED,
/s/ John A. Geoghegan March 29, 2000
- ------------------------------------ --------------
John A. Geoghegan Date
Director
/s/ L. Morris Glucksman March 29, 2000
- ------------------------------------ --------------
L. Morris Glucksman Date
Director
/s/ Michael Intrieri March 29, 2000
- ------------------------------------ --------------
Michael F. Intrieri Date
Director
/s/ Richard Naclerio March 29, 2000
- ------------------------------------ --------------
Richard Naclerio Date
Director
- ------------------------------------ --------------
Paul C. Settelmeyer Date
Director
/s/ Salvatore Travato March 29, 2000
- ------------------------------------ --------------
Salvatore Travato Date
Director
28
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
Financial Report
December 31, 1999 and 1998
<PAGE>
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 7-38
- --------------------------------------------------------------------------------
<PAGE>
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, 1999 and 1998,
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 generally accepted auditing
standards. 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, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
New Haven, Connecticut
February 18, 2000
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------------------------------
<S> <C> <C>
Cash and due from banks (Note 2) .................................... $ 2,685,031 $ 1,867,353
Federal funds sold .................................................. 18,900,000 27,700,000
Short-term investments - commercial paper ........................... 10,976,264 --
------------- -------------
Cash and cash equivalents ............................. 32,561,295 29,567,353
Available for sale securities (at fair value) (Note 3) .............. 19,984,309 9,479,428
Held to maturity securities (fair value: 1999 $11,906,293;
1998 $3,826,834) (Note 4) ........................................ 12,301,485 3,843,302
Federal Reserve Bank stock .......................................... 410,700 240,000
Federal Home Loan Bank stock ........................................ 307,000 --
Loans receivable (net of allowance for loan losses: 1999 $1,360,183;
1998 $785,536) (Note 5) .......................................... 107,769,911 57,052,618
Accrued interest receivable ......................................... 980,777 587,733
Premises and equipment, net (Notes 6 and 8) ......................... 953,656 881,964
Other real estate owned ............................................. -- 40,467
Deferred tax asset, net (Note 9) .................................... 562,928 353,300
Goodwill (net of accumulated amortization of $58,180
in 1999) (Note 17) ............................................... 1,177,948 --
Other assets (net of accumulated amortization: 1999 $17,285;
1998 $134,694) ................................................... 184,688 281,466
------------- -------------
Total assets .......................................... $ 177,194,697 $ 102,327,631
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Noninterest bearing deposits .................................. $ 12,630,926 $ 8,442,262
Interest bearing deposits ..................................... 150,115,428 80,866,877
------------- -------------
Total deposits ........................................ 162,746,354 89,309,139
Capital lease obligation (Note 8) ................................ 563,687 644,605
Collateralized borrowings ........................................ 325,000 --
Accrued expenses and other liabilities ........................... 323,568 276,604
------------- -------------
Total liabilities ..................................... 163,958,609 90,230,348
------------- -------------
Commitments and contingencies (Notes 8, 10, and 12)
Shareholders' equity (Notes 10 and 13)
Common stock, $2 par value; 5,333,333 shares authorized; shares
issued and outstanding: 1999 2,160,952; 1998 1,996,931 ....... 4,321,904 3,993,862
Additional paid-in capital ....................................... 9,807,957 9,047,262
Accumulated deficit .............................................. (635,331) (983,972)
Accumulated other comprehensive income - net unrealized
(loss) gain on available for sale securities .................. (258,442) 40,131
------------- -------------
Total shareholders' equity ............................ 13,236,088 12,097,283
------------- -------------
Total liabilities and shareholders' equity ............ $ 177,194,697 $ 102,327,631
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest and Dividend Income
Interest and fees on loans ................................... $ 7,276,659 $ 5,264,774
Interest and dividends on investment securities .............. 1,651,565 655,016
Interest on federal funds sold ............................... 804,495 845,493
----------- -----------
Total interest and dividend income ................ 9,732,719 6,765,283
----------- -----------
Interest Expense
Interest on deposits (Note 7) ................................ 4,654,515 2,981,557
Interest on capital lease obligation ......................... 83,082 92,961
Interest expense on collateralized borrowings ................ 2,324 --
----------- -----------
Total interest expense ............................ 4,739,921 3,074,518
----------- -----------
Net interest income ............................... 4,992,798 3,690,765
Provision for Loan Losses (Note 5) .............................. 553,000 104,000
----------- -----------
Net interest income after provision for loan losses 4,439,798 3,586,765
----------- -----------
Noninterest Income
Mortgage brokerage referral fees ............................. 933,074 --
Fees and service charges ..................................... 162,534 154,120
Gains and origination fees from loans sold ................... 48,841 64,870
Other income ................................................. 76,880 154,818
----------- -----------
Total noninterest income .......................... 1,221,329 373,808
----------- -----------
Noninterest Expenses
Salaries and benefits ........................................ 2,699,266 1,581,189
Occupancy and equipment expense, net ......................... 601,309 558,147
Professional services ........................................ 309,605 211,420
Data processing and other outside services ................... 245,645 283,133
Advertising and promotional expenses ......................... 357,323 160,238
Directors fees and expenses .................................. 97,734 129,992
Forms, printing and supplies ................................. 189,512 120,400
Regulatory assessments ....................................... 51,800 39,314
Insurance .................................................... 33,603 22,377
Other operating expenses ..................................... 660,189 313,975
----------- -----------
Total noninterest expenses ........................ 5,245,986 3,420,185
----------- -----------
Income before income taxes ........................ 415,141 540,388
(Provision) Benefit for Income Taxes (Note 9) ................... (66,500) 86,100
----------- -----------
Net income ........................................ $ 348,641 $ 626,488
=========== ===========
Basic income per share (Note 10) .................. $ 0.17 $ 0.48
=========== ===========
Diluted income per share (Note 10) ................ $ 0.16 $ 0.47
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Number of Common Paid-in Accumulated Comprehensive
Shares Stock Capital Deficit Income Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ..................... 1,233,413 $2,466,826 $4,594,339 $(1,610,460) $ 29,843 $ 5,480,548
------------
Comprehensive Income:
Net income .................................. -- -- -- 626,488 -- 626,488
Unrealized holding gain on available for sale
securities, net of taxes (Note 15) ....... -- -- -- -- 10,288 10,288
------------
Total comprehensive income ....... 636,776
------------
Issuance of common stock (Note 10) ............. 763,518 1,527,036 4,398,597 -- -- 5,925,633
Issuance of stock warrants ..................... -- -- 54,326 -- -- 54,326
--------- ---------- ---------- ----------- --------- ------------
Balance, December 31, 1998 ..................... 1,996,931 3,993,862 9,047,262 (983,972) 40,131 12,097,283
------------
Comprehensive Income:
Net income .................................. -- -- -- 348,641 -- 348,641
Unrealized holding loss on available for sale
securities, net of taxes (Note 15) ....... -- -- -- -- (298,573) (298,573)
------------
Total comprehensive income ....... 50,068
------------
Issuance of common stock (Note 10) ............. 164,021 328,042 760,695 -- -- 1,088,737
--------- ---------- ---------- ----------- --------- ------------
Balance, December 31, 1999 ..................... 2,160,952 $4,321,904 $9,807,957 $ (635,331) $(258,442) $ 13,236,088
========= ========== ========== =========== ========= ============
</TABLE>
See Notes to Consolidated Financial Statements .
4
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income .......................................................... $ 348,641 $ 626,488
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization and accretion of investment discounts and
premiums, net .............................................. 17,244 31,929
Gains on sales of investments .................................. (4,378) (26,907)
Originations of loans held for sale ............................ (2,014,950) (2,957,550)
Proceeds from sales of loans held for sale ..................... 2,033,235 2,973,148
Principal payments on loans held for sale ...................... -- 5,005
Gains on sales of loans ........................................ (18,285) (15,788)
Provision for loan losses ...................................... 553,000 104,000
Gain on sale of other real estate owned ........................ (32,238) --
Depreciation and amortization .................................. 282,954 216,979
Loss on disposal of bank premises and equipment ................ 1,439 514
Deferred income taxes .......................................... (18,000) (90,000)
Consulting fees paid by issuance of common stock ............... 27,035 36,234
Professional services paid by issuance of stock warrants ....... -- 54,326
Directors fees paid by issuance of common stock ................ 48,232 47,483
Changes in assets and liabilities:
Decrease in deferred loan fees .............................. (59,034) (35,307)
Increase in accrued interest receivable ..................... (393,044) (70,437)
Decrease (increase) in other assets ......................... 76,527 (97,183)
Increase (decrease) in accrued expenses and other liabilities 66,936 (354)
------------ ------------
Net cash provided by operating activities ................ 915,314 802,580
------------ ------------
Cash Flows from Investing Activities
Purchases of available for sale securities .......................... (18,870,640) (7,306,369)
Proceeds from sales of available for sale securities ................ 5,771,438 2,786,955
Proceeds from maturities of available for sale securities ........... 1,050,000 500,000
Principal repayments on available for sale securities ............... 1,049,086 --
Purchases of held to maturity securities ............................ (8,966,022) (2,848,369)
Proceeds from maturities of held to maturity securities ............. 500,000 3,260,000
Proceeds from sale of loan receivable ............................... 50,000 --
Net increase in loans ............................................... (51,261,259) (12,674,365)
Purchase of Federal Reserve Bank stock .............................. (170,700) --
Purchase of Federal Home Loan Bank stock ............................ (307,000) --
Purchases of premises and equipment ................................. (277,654) (85,065)
Proceeds from sales of other real estate owned ...................... 72,705 120,000
Purchase of mortgage company ........................................ (255,719) --
------------ ------------
Net cash used in investing activities .................... (71,615,765) (16,247,213)
------------ ------------
</TABLE>
5
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Cash Flows from Financing Activities
Net increase in demand, savings and money market deposits . 7,108,932 6,794,325
Net increase in time certificates of deposits ............. 66,328,283 13,922,583
Principal payments on capital lease obligation ............ (80,918) (63,038)
Net increase in collateralized borrowings ................. 325,000
Proceeds from issuance of common stock .................... 13,096 5,826,061
------------ ------------
Net cash provided by financing activities ...... 73,694,393 26,479,931
------------ ------------
Net increase in cash and cash equivalents ...... 2,993,942 11,035,298
Cash and cash equivalents
Beginning ................................................. 29,567,353 18,532,055
------------ ------------
Ending .................................................... $ 32,561,295 $ 29,567,353
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest ............................................... $ 4,739,921 $ 3,074,518
============ ============
Income taxes ........................................... $ 98,000 $ 4,429
============ ============
Supplemental Disclosure of Noncash Investing and Financing
Activities
Transfer of loans to other real estate owned ........... $ -- $ 40,467
============ ============
Transfer of loans held for sale to loans ............... $ -- $ 129,344
============ ============
Accrued prior year director fees settled in common stock $ 19,965 $ 15,855
============ ============
Purchase of Mortgage Company (Note 17)
Purchase price ....................................... 1,130,409 --
Direct acquisition costs ............................. 105,719 --
------------ ------------
$ 1,236,128 $ --
============ ============
Fair Value of Assets Acquired:
Goodwill .......................................... $ 1,236,128 $
============ ============
Source of Funds:
Cash .............................................. 255,719 --
Issuance of common stock .......................... 980,409 --
------------ ------------
$ 1,236,128 $ --
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 and two branch offices in Greenwich, 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, New York and New Jersey through its mortgage
brokerage division, Pinnacle Financial (see Note 17).
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, and have been prepared in accordance with
generally accepted accounting principles 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.
7
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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. This security
classification may be modified after acquisition only under certain specified
conditions. The classification of those securities and the related accounting
policies are as follows:
Held to maturity securities
---------------------------
Securities classified as held to maturity are those debt securities the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost, adjusted for
amortization of premium and accretion of discount, computed using the
interest method, over the period to maturity. The sale of a 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 the purposes of classification and disclosure.
Available for sale securities
-----------------------------
Securities classified as available for sale are those debt securities that
the Company intends to hold for an indefinite period of time but not
necessarily to maturity and equity securities not classified as held for
trading. Any decision to sell a security classified as available for sale
would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Available for sale securities are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Amortization
of premiums and accretion of discounts, computed by the interest method
over the period to maturity, are recognized in interest income. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Trading Securities
------------------
Trading securities, if any, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are recognized in
the statement of income.
8
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Declines in the fair value of individual held to maturity or available for sale
securities below their amortized cost, that are determined by management to be
other than temporary, result in write-downs of the individual securities to
their fair value. The related losses from the write-downs are included in
earnings as realized losses.
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 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 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.
9
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 collectibility of
principal is unlikely. 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
particularly 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 Bank's allowance for loan losses. Such agencies have the
authority to require the Bank 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 or
more 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
10
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
delinquent and collectibility of interest and principal is no longer in doubt.
Interest income on impaired loans is only recorded subsequent to the recovery of
the principal balance.
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 funding of loans by 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 (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Other real estate owned
- -----------------------
Other real estate owned 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.
11
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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
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 5 to 10 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.
Goodwill
- --------
Goodwill represents the cost of acquired assets in excess of values ascribed to
net tangible assets related to the acquisition of Pinnacle Financial Group (see
Note 17) and is being amortized on a straight line basis over ten years.
Impairment of long-lived assets
- -------------------------------
Long-lived assets, including premises and equipment and goodwill, 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.
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
12
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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.
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 the 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 14 contains details regarding related party transactions.
Earnings per share
- ------------------
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which superseded APB Opinion No. 15, requires the presentation of
earnings per share by all entities that have common stock or potential common
stock, such as stock options, outstanding which trade in a public market. The
Company is required to present basic earnings per share and diluted earnings per
share in its consolidated statements of income. Basic per share amounts are
computed by dividing net income by the weighted-average number of common shares
outstanding. Diluted per share amounts assume exercise of all potential common
stock instruments in weighted-average shares outstanding, unless the effect is
antidilutive. In addition, for those entities with complex capital structures,
the statement also requires a reconciliation of the numerator and denominator
used in the computation of both basic and diluted per share amounts to be
disclosed.
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 the consolidated balance sheets, such items, along with net income,
are components of comprehensive income.
13
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Fair values of financial instruments
- ------------------------------------
The following methods and assumptions were used by the Bank 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
value 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 loan's 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.
Loans held for sale
-------------------
Fair value is based on quoted secondary market rates.
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
by 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.
14
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Collateralized borrowings
-------------------------
The fair value of the collateralized borrowings is estimated using a
discounted cash flow calculation that applies current interest rates for
borrowings of similar maturity to a schedule of maturities of such
borrowings.
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.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its respective transaction
accounts and non personal time deposits. At December 31, 1999, the Bank was
required to have cash and liquid assets of approximately $326,000 to meet these
requirements. In addition, the Bank 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, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage backed securities ................... $ 17,325,754 $ -- $ (284,247) $ 17,041,507
U.S. Government obligations .................. 1,049,810 -- (13,765) 1,036,045
Marketable equity securities ................. 2,032,067 -- (125,310) 1,906,757
------------ ------------ ------------ ------------
$ 20,407,631 $ -- $ (423,322) $ 19,984,309
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations .................. $ 7,380,475 $ 81,236 $ -- $ 7,461,711
Marketable equity securities ................. 2,032,067 -- (14,350) 2,017,717
------------ ------------ ------------ ------------
$ 9,412,542 $ 81,236 $ (14,350) $ 9,479,428
============ ============ ============ ============
</TABLE>
15
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The amortized cost and fair value of available for sale debt securities at
December 31, 1999 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:
Within 1 year ....................... $ 550,520 $ 545,545
After 1 but within 5 years .......... 499,290 490,500
----------- -----------
1,049,810 1,036,045
Mortgage backed securities .......... 17,325,754 17,041,507
----------- -----------
$18,375,564 $18,077,552
=========== ===========
During 1999 and 1998, proceeds from the sales of available for sale securities
were $5,771,438 and $2,786,955, respectively, and gross gains of $4,378 and
$26,907, respectively, were realized on these sales.
NOTE 4. HELD TO MATURITY SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of held to maturity securities at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations .............. $ 498,650 $ -- $ (3,500) $ 495,150
Corporate bonds .......................... 11,802,835 9,147 (400,839) 11,411,143
------------ ------------ ------------ ------------
$ 12,301,485 $ 9,147 $ (404,339) $ 11,906,293
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations .............. $ 1,000,840 $ 11,191 $ -- $ 1,012,031
Corporate bonds .......................... 2,842,462 1,727 (29,386) 2,814,803
------------ ------------ ------------ ------------
$ 3,843,302 $ 12,918 $ (29,386) $ 3,826,834
============ ============ ============ ============
</TABLE>
16
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The amortized cost and fair value of held to maturity debt securities at
December 31, 1999 by contractual maturity are shown below:
Amortized Fair
Cost Value
------------------------------
Maturity:
Within 1 year ........................... $ -- $ --
After 1 but within 5 years .............. 5,180,661 5,015,374
After 5 but within 10 years.............. 6,164,124 5,953,719
After 10 years........................... 956,700 937,200
----------- -----------
$12,301,485 $11,906,293
=========== ===========
There were no sales of held to maturity securities during 1999 or 1998, and
there were no securities transferred among the held to maturity, available for
sale or trading categories.
NOTE 5. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
A summary of the Company's loan portfolio at December 31, 1999 and 1998 is as
follows:
1999 1998
------------------------------
Real estate:
Commercial ................................. $ 54,289,002 $ 33,179,464
Residential ................................ 6,799,133 1,380,416
Construction, net of undisbursed portion of
$8,099,481 in 1999 and $1,508,615 in 1998 13,872,519 5,737,601
Commercial .................................... 11,086,324 8,326,749
Consumer installment .......................... 1,580,219 1,179,789
Consumer home equity .......................... 21,705,929 8,296,201
------------- -------------
Total loans ........................ 109,333,126 58,100,220
Net deferred loan fees ........................ (203,032) (262,066)
Allowance for loan losses ..................... (1,360,183) (785,536)
------------- -------------
Loans receivable, net .............. $ 107,769,911 $ 57,052,618
============= =============
The changes in the allowance for loan losses for the years ended December 31,
1999 and December 31, 1998 are as follows:
1999 1998
---------------------------
Balance, beginning of year ....................... $ 785,536 $ 745,499
Provision for loan losses ..................... 553,000 104,000
Recoveries of loans previously charged off .... 40,770 264
Loans charged off ............................. (19,123) (64,227)
----------- -----------
Balance, end of year ............................. $ 1,360,183 $ 785,536
=========== ===========
17
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the unpaid principal balances of loans delinquent
90 days or more were $565,788 and $796,076, respectively, and the unpaid
principal balances of loans placed on nonaccrual status were $91,076 and
$63,917, respectively.
The following information relates to impaired loans as of and for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Loans receivable for which there is a related allowance
for credit losses .................................................. $ -- $ --
=======================
Loans receivable for which there is no related
allowance for credit losses determined:
based on discounted cash flows .................................. $ -- $ 63,917
based on the fair value of collateral ........................... 91,076 --
----------------------
$ 91,076 $ 63,917
=======================
Allowance for credit losses related to impaired loans ................. $ -- $ --
=======================
Average recorded investment in impaired loans ......................... $ 81,923 $300,483
=======================
</TABLE>
Interest income on impaired loans recognized on the cash basis was approximately
$3,000 and $23,000 in 1999 and 1998, respectively. 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 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 credit worthiness of each customer
and, in most cases, extends credit of up to 75 percent of the market value of
the collateral at the date of the credit extension depending on the Company's
evaluation of the borrowers' credit worthiness and type of collateral. The
market value of collateral is monitored on an ongoing basis and additional
collateral is obtained when
18
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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.
NOTE 6. PREMISES AND EQUIPMENT
At December 31, 1999 and 1998, premises and equipment consisted of the
following:
1999 1998
---------------------------
Premises under capital lease ..................... $ 783,000 $ 783,000
Leasehold improvements ........................... 516,811 370,173
Furniture and equipment .......................... 508,774 383,656
----------- -----------
1,808,585 1,536,829
Less accumulated depreciation and amortization ... (854,929) (654,865)
----------- -----------
$ 953,656 $ 881,964
=========== ===========
For the years ended December 31, 1999 and 1998, depreciation and amortization
expense related to premises and equipment totaled $204,524 and $185,690,
respectively.
NOTE 7. DEPOSITS
At December 31, 1999 and 1998, deposits consisted of the following:
1999 1998
-----------------------------
Noninterest bearing .......................... $ 12,630,926 $ 8,442,262
------------ ------------
Interest bearing:
Time certificates, less than $100,000 ..... 69,144,236 28,205,513
Time certificates, $100,000 or more ....... 34,781,816 9,392,256
Money market .............................. 624,763 1,859,136
Savings ................................... 35,962,257 31,546,866
NOW ....................................... 9,602,356 9,863,106
------------ ------------
Total interest bearing ................. 150,115,428 80,866,877
------------ ------------
Total deposits .................... $162,746,354 $ 89,309,139
============ ============
Interest expense on certificates of deposit in denominations of $100,000 or more
was $842,230 and $310,942 for the years ended December 31, 1999 and 1998,
respectively.
19
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Contractual maturities of time certificates of deposit as of December 31, 1999
are summarized below:
Due within:
1 year ..................................... $ 57,844,592
1-2 years .................................. 45,298,783
2-3 years .................................. 408,788
3-4 years .................................. 315,569
4-5 years .................................. 58,320
------------
$103,926,052
============
NOTE 8. COMMITMENTS AND CONTINGENCIES
Capital lease
- -------------
The Company leases the premises for 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 $417,600 and $339,300 as of December 31, 1999 and
1998, respectively, are included in premises and equipment.
The Company is obligated under the lease to pay executory costs including
insurance, property taxes, maintenance and other related expenses.
At December 31, 1999, future minimum lease payments, by years and in the
aggregate, under this capital lease are as follows:
Years Ending
December 31, Amount
------------ ---------
2000............................................ $ 164,000
2001............................................ 164,000
2002............................................ 164,000
2003............................................ 164,000
2004 and thereafter ............................ 109,333
---------
765,333
Less amount representing interest .............. (201,646)
---------
Present value of future minimum lease payments -
capital lease obligation .................... $ 563,687
=========
20
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Operating leases
- ----------------
The Company subleases excess office space in its premises to various tenants
under cancelable and noncancelable operating leases with terms ranging from
monthly to five years. Future minimum lease payments receivable for
noncancelable leases by year, and in the aggregate, at December 31, 1999 are as
follows:
Years Ending
December 31, Amount
------------- --------
2000 $ 65,944
2001 24,869
2002 22,269
2003 22,269
--------
$135,351
========
For the years ended December 31, 1999 and 1998, rental income under both
cancelable and noncancelable leases totaled $99,218 and $72,931, respectively.
The Company also has noncancelable operating leases for its two bank branch
offices in Greenwich, Connecticut and for two mortgage brokerage offices in New
York and New Jersey. 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.
As described in Note 18, the Company expects to open a new mortgage brokerage
office in 2000, and subsequent to December 31, 1999, the Company entered into a
noncancelable lease for such office space.
Future minimum rental commitments under the terms of these leases, by year and
in the aggregate, are as follows:
Years Ending
December 31, Amount
------------ ------
2000 $ 351,144
2001 365,706
2002 272,138
2003 139,894
2004 and thereafter 16,910
----------
$1,145,792
==========
21
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Total rental expense charged to operations for cancelable and noncancelable
operating leases was $264,770 and $218,750 for the years ended December 31, 1999
and 1998, respectively.
Employment Agreements
- ---------------------
In conjunction with the acquisition of Pinnacle Financial Group on June 30, 1999
(see Note 17), the Company entered into employment agreements with two officers
who were the principal shareholders of Pinnacle. The agreements provide for,
among other things, stipulated base salaries that increase in 2000, and may
increase or decrease in years thereafter based on the achievement of certain
financial results by the mortgage brokerage division. In addition, the
agreements provide for annual bonuses based on the achievement of certain
financial results by the mortgage brokerage division, and for reimbursement of
expenses incurred incidental to their duties as officers. The agreements
terminate on December 31, 2002, however automatically renew, unless either the
Company or the officers elect not to renew in writing, for additional one year
periods upon the same terms and conditions, except that the base salaries will
increase by 10% for each one year extended term.
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.
NOTE 9. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1999 and 1998 are as follows:
1999 1998
------------------------
Current
Federal ..................................... $ 73,500 $ --
State ....................................... 11,000 3,900
-------- --------
Total ............................... 84,500 3,900
-------- --------
Deferred
Federal ..................................... (14,100) (68,800)
State ....................................... (3,900) (21,200)
-------- --------
Total ............................... (18,000) (90,000)
-------- --------
Income tax expense (benefit) ........ $ 66,500 $(86,100)
======== ========
22
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
A reconciliation of the anticipated income tax provision (benefit) (computed by
applying the statutory Federal income tax rate (34%) to the income before income
taxes) to the income tax provision (benefit) as reported in the statements of
income for the years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Provision for income taxes at statutory Federal rate $ 141,100 $ 183,700
State taxes, net of Federal benefit ................. 21,500 35,300
Decrease in deferred tax valuation allowance ........ (134,400) (325,000)
Change in state tax rates ........................... 3,400 12,100
Nondeductible expenses .............................. 29,000 9,600
Other ............................................... 5,900 (1,800)
--------- ---------
Total provision (benefit) for income taxes $ 66,500 $ (86,100)
========= =========
</TABLE>
At December 31, 1999 and 1998, the components of gross deferred tax assets and
gross deferred tax liabilities are as follows:
1999 1998
-----------------------
Deferred tax assets:
Allowance for loan losses ...................... $ 529,793 $ 311,200
Investment securities .......................... 164,880 --
Net operating loss carryforwards ............... -- 285,700
Start-up costs ................................. -- 41,700
Asset under capital lease ...................... 77,232 79,600
Premises and equipment ......................... 17,231 16,800
Other .......................................... 33,627 28,200
--------- ---------
Gross deferred tax assets ................... 822,763 763,200
Less valuation allowance .......................... -- (134,400)
--------- ---------
Deferred tax assets - net of valuation allowance 822,763 628,800
--------- ---------
Deferred tax liabilities:
Tax bad debt reserve ........................... 259,312 248,200
Investment securities .......................... -- 26,500
Other .......................................... 523 800
--------- ---------
Gross deferred tax liabilities ................. 259,835 275,500
--------- ---------
Net deferred tax asset ................. $ 562,928 $ 353,300
========= =========
The net changes in the valuation allowance for 1999 and 1998 were decreases of
$134,400 and $325,000, respectively, to recognize deferred tax assets at amounts
considered by management more likely than not to be realized.
23
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 10. SHAREHOLDERS' EQUITY
Common Stock
- ------------
On September 25, 1998, the Bank commenced an offering of up to 1,537,612 shares
of its common stock, at $7.86 per share, to existing shareholders, whereby each
shareholder was granted the right to purchase one share of stock for each share
owned as of May 28, 1998. In addition, each shareholder was granted the right to
purchase additional shares of stock not subscribed by existing shareholders
under their initial rights described above. The common stock offering was
completed on November 30, 1998, at which time the Bank received subscriptions
for a total of 751,856 shares, with gross proceeds received of $5,909,588. The
net proceeds of the offering were $5,826,061, after deducting total stock
issuance costs of $83,527 which were charged to additional paid-in capital. In
early 1999, 1,285 additional shares were issued relating to the offering at an
aggregate price of $10,096.
During 1999 and 1998, 7,601 and 7,412 shares of common stock, respectively, at
an aggregate price of $68,197 and $63,338, respectively, were issued to Bank
directors for meeting fees. In addition, during 1999 and 1998, 2,950 and 4,250
shares of common stock, respectively, at an aggregate price of $27,035 and
$36,234, respectively, were issued to former Bank directors for consulting fees.
As described in Note 17, on June 30, 1999, the Bank issued 151,685 shares of
common stock at an aggregate price of $980,409, in conjunction with the
acquisition of the net assets of a mortgage brokerage company. Also, during
1999, 500 shares of common stock were issued through the exercise of stock
warrants at an aggregate price of $3,000.
24
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Income Per Share
- ----------------
The following is information about the computation of income per share for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999
-------------------------------------------
Net Per Share
Income Shares Amount
-------------------------------------------
<S> <C> <C> <C>
Basic Income Per Share
Income available to common shareholders .... $ 348,641 2,080,590 $ 0.17
Effect of Dilutive Securities
Warrants and stock options outstanding ..... -- 41,614 (0.01)
--------- --------- ---------
Diluted Income Per Share
Income available to common stockholders plus
--------- --------- ---------
assumed conversions ..................... $ 348,641 2,122,204 $ 0.16
========= ========= =========
<CAPTION>
1998
-------------------------------------------
Net Per Share
Income Shares Amount
-------------------------------------------
<S> <C> <C> <C>
Basic Income Per Share
Income available to common shareholders .... $ 626,488 1,304,776 $ 0.48
Effect of Dilutive Securities
Warrants outstanding ....................... -- 33,761 (0.01)
--------- --------- ---------
Diluted Income Per Share
Income available to common stockholders plus
--------- --------- ---------
assumed conversions ..................... $ 626,488 1,338,537 $ 0.47
========= ========= =========
</TABLE>
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 are currently exercisable and expire on July 6, 2001. The
obligations related to such warrants were assumed by the Company. The Company
has reserved 123,180 shares of its common stock for issuance upon exercise of
these warrants.
25
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
With respect to the 28,680 warrants issued in 1998, warrants to purchase 6,666
shares of common stock were issued to officers and directors of the Bank, and
warrants to purchase 22,014 shares of common stock were issued to other
individuals. The cost of the 22,014 warrants issued to non-officers and
non-directors was $54,326, which was recorded as a charge to operations and a
credit to additional paid-in capital.
A summary of the status of the warrants at December 31, 1999 and 1998, and
changes during the years ended on those dates, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
Weighted- Weighted-
Number Average Average
of Exercise Number of Exercise
Shares Price Shares Price
---------------------- -----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ...... 123,680 $ 7.86 95,000 $ 6.00
Granted ............................... -- 28,680 14.00
Exercised ............................. (500) 6.00 -- --
--------- --------
Outstanding at end of year ............ 123,180 7.86 123,680 7.86
========= =========
Exercisable at end of year ............ 123,180 7.86 28,680 14.00
========= =========
Weighted-average fair value per warrant
of warrants granted during the year $ -- $ 2.46
========= =========
</TABLE>
The weighted average remaining contractual life for the warrants outstanding at
December 31, 1999 is 3.9 years.
Stock options
- -------------
On August 17, 1999, the Bank adopted a stock option plan for employees and
directors, under which both incentive and non-qualified stock options may be
granted, and subsequently the Company assumed all obligations related to such
options. For incentive stock options granted to employees, the exercise price
shall be greater than or equal to the market value of the Company's stock on the
date of grant. One-third of such options vest at the date of grant, and
one-third vest on each of the first and second anniversaries of the grant date,
and expire if unexercised ten years after the grant date. However, for incentive
stock options granted to shareholders who own 10% or more of the Company's
stock, the exercise price must be greater than or equal to 110% of the market
value of the Company's stock on the date of grant, and such options expire if
unexercised five years, or less if stipulated by the Board of Directors, after
the grant date. Generally, any options that are not exercisable upon the
termination of employment expire upon such
26
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
termination. The Plan also provides for the grant of 110,000 non-qualified and
incentive stock options to certain directors of the Company in 1999, with an
exercise price equal to the market value of the Company's stock on the date of
grant, which was $10.11 per share. Such options were immediately exercisable and
expire if unexercised ten years after the date of grant. The Company has
reserved 130,000 shares of common stock for issuance under this plan. No options
shall be granted under the Plan after August 17, 2000.
A summary of the status of the stock options at December 31, 1999 is as follows:
Weighted-
Number Average
of Exercise
Shares Price
--------- ------------
Outstanding at beginning of year ................ -- $ --
Granted ......................................... 110,000 10.11
-------
Outstanding at end of year ...................... 110,000 10.11
=======
Exercisable at end of year ...................... 110,000 10.11
=======
Weighted-average fair value per option
of options granted during the year ........... $ 5.55
=======
The weighted average remaining contractual life for the options outstanding at
December 31, 1999 is 9.4 years.
SFAS No. 123, "Accounting for Stock-Based Compensation," established a fair
value based method of expense recognition for stock-based compensation plans and
encouraged, but did not require, entities to adopt that method in place of
existing generally accepted accounting principles. As permitted by SFAS No. 123,
the Company has elected to continue under existing generally accepted accounting
principles and to account for the warrants and options granted to employees,
including directors, under APB Opinion No. 25, and accordingly, no compensation
cost has been recognized in the consolidated statements of income for the grants
of these warrants and options. Had compensation cost for issuance of such
warrants and options been recognized based on the fair values of awards on the
grant dates, in accordance with the method described in SFAS No. 123, reported
net income and per share amounts for 1999 and 1998 would have been reduced to
the pro forma amounts shown below:
27
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
---------- -----------
Net income (loss):
As reported ........................... $ 348,641 $ 626,488
========== ===========
Pro forma ............................. $ (23,651) $ 610,261
========== ===========
Basic income (loss) per share:
As reported ........................... $ 0.17 $ 0.48
========== ===========
Pro forma ............................. $ (0.01) $ 0.47
========== ===========
Diluted income (loss) per share:
As reported ........................... $ 0.16 $ 0.47
========== ===========
Pro forma ............................. $ (0.01) $ 0.46
========== ===========
The fair value of warrants and options issued in 1999 and 1998 was estimated at
the grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 1998
----------------
Dividend rate -- --
Risk free interest rate ................. 5.80% 5.35%
Weighted average expected lives, in years 10 3
NOTE 10. 401(K) SAVINGS PLAN
During 1997, the Bank adopted the Patriot National Bank 401(k) Savings Plan (the
"Plan") under Section 401(k) of the Internal Revenue Code. The 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 Plan,
participants can contribute up to the maximum amount allowed, subject to Federal
limitations. The Bank may make discretionary matching contributions to the Plan.
Participants are immediately vested in their contribution and Bank
contributions. The Bank contributed $13,800 and $4,511 to the Plan in 1999 and
1998, respectively.
28
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12. 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.
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, 1999 and 1998:
1999 1998
-----------------------------
Commitments to extend credit:
Future loan commitments ................. $17,279,500 $ 5,139,000
Unused lines of credit .................. 14,057,211 6,479,448
Undisbursed construction loans .......... 8,099,481 1,508,615
Financial standby letters of credit ........ -- 5,000
----------- -----------
$39,436,192 $13,132,063
=========== ===========
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
29
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 13. 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 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,
1999, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1999, 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. However, at December 31,
1999, the Bank's ratio of total capital to risk-weighted assets has decreased to
a level that would classify the Bank as adequately capitalized under the
regulatory framework for prompt corrective action.
30
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios at December 31, 1999 and 1998 were
(dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital (to Risk Weighted Assets) $13,551 9.90% $10,950 8.00% $13,688 10.00%
Tier I Capital (to Risk Weighted Assets) 12,191 8.91% 5,473 4.00% 8,209 6.00%
Tier I Capital (to Average Assets) .... 12,191 7.21% 6,763 4.00% 8,454 5.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Total Capital (to Risk Weighted Assets) $12,812 19.40% $ 5,283 8.00% $ 6,604 10.00%
Tier I Capital (to Risk Weighted Assets) 12,026 18.21% 2,641 4.00% 3,962 6.00%
Tier I Capital (to Average Assets) ..... 12,026 12.39% 3,882 4.00% 4,853 5.00%
</TABLE>
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.
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. In accordance with OCC Rules and Regulations,
dividends may only be paid by the Bank from net earnings as defined and only
after recapture of organizational and pre-operating expenses from operating
profits. At December 31, 1999, no dividends may be declared by the Bank. The
Bank is also prohibited from paying dividends that would reduce its capital
ratios below minimum regulatory requirements. In addition, 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.
31
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14. RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank 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 1999 and 1998 are as
follows:
1999 1998
---------------------------------
Balance, beginning of year ........... $ 1,922,555 $ 1,990,713
Additional loans ..................... 4,497,841 1,350,000
Repayments ........................... (3,296,346) (725,040)
Other changes ........................ -- (693,118)
----------- -----------
Balance, end of year ................. $ 3,124,050 $ 1,922,555
=========== ===========
Other changes in loans to related parties resulted from loans to directors who
ceased being directors during the year, and existing loans outstanding at the
beginning of the year to individuals who became officers of the Bank.
Related party deposits aggregated approximately $8,814,000 and $2,016,000 as of
December 31, 1999 and 1998, respectively.
The Bank leases office space in its premises to a director of the Bank under a
five-year lease. Rental income under this lease was approximately $35,000 and
$38,000 for the years ended December 31, 1999 and 1998, respectively. Also
during 1999 and 1998, the Bank leased office space to a related individual under
a month-to-month lease, and rental income under this lease was approximately
$6,000 and $5,000 for the years ended December 31, 1999 and 1998, respectively.
In addition, the Bank paid consulting fees of approximately $26,000 and $53,000
to this individual during the years ended December 31, 1999 and 1998,
respectively.
During 1999 and 1998, respectively, the Bank paid legal fees of approximately
$4,600 and $3,500 to attorneys who are directors of the Bank.
During 1999 and 1998, the Bank leased parking space from a corporation, certain
principals of which are officers and directors of the Bank. Total rent paid to
the corporation was $18,000 for the years ended December 31, 1999 and 1998.
32
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
During 1999, the Bank sold a parcel of other real estate owned to a related
individual for $72,705, and a gain of $32,238 was recognized on such sale.
NOTE 15. 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:
<TABLE>
<CAPTION>
1999
-------------------------------------------
Tax
Before-Tax Benefit Net-of-Tax
Amount (Expense) Amount
-------------------------------------------
<S> <C> <C> <C>
Unrealized holding losses arising during
the period ......................................... $(494,586) $ 193,346 $(301,240)
Less reclassification adjustment for gains
recognized in net income ........................... 4,378 (1,711) 2,667
--------- --------- ---------
Unrealized holding loss on available for
sale securities, net of taxes ...................... $(490,208) $ 191,635 $(298,573)
========= ========= =========
<CAPTION>
1998
-------------------------------------------
Tax
Before-Tax Benefit Net-of-Tax
Amount (Expense) Amount
-------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains arising during
the period ......................................... $ 43,830 $ (17,184) $ 26,646
Less reclassification adjustment for gains
recognized in net income ........................... (26,907) 10,549 (16,358)
--------- --------- ---------
Unrealized holding gain on available for
sale securities, net of taxes ...................... $ 16,923 $ (6,635) $ 10,288
========= ========= =========
</TABLE>
33
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
Financial Accounting Standards Board Statement 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, 1999 and
1998. The estimated fair value amounts for 1999 and 1998 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.
34
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
As of December 31, 1999 and 1998, the recorded book balances and estimated fair
values of the Company's financial instruments were (in thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------
Recorded Recorded
Book Fair Book Fair
Balance Value Balance Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks .......... $ 2,685 $ 2,685 $ 1,867 $ 1,867
Federal funds sold ............... 18,900 18,900 27,700 27,700
Commercial paper ................. 10,976 10,976 -- --
Available for sale securities .... 19,984 19,984 9,479 9,479
Held to maturity securities ...... 12,301 11,906 3,843 3,827
Federal Reserve Bank stock ....... 411 411 240 240
Federal Home Loan Bank stock ..... 307 307 -- --
Loans receivable, net ............ 107,770 107,182 57,053 54,723
Accrued interest receivable ...... 981 981 588 588
Financial Liabilities:
Demand deposits .................. 12,631 12,631 8,442 8,442
Savings deposits ................. 35,962 35,962 31,547 31,547
Money market deposits ............ 625 625 1,859 1,859
Negotiable orders of withdrawal... 9,602 9,602 9,863 9,863
Time deposits .................... 103,926 103,909 37,598 37,719
Collateralized borrowings ........ 325 325 -- --
</TABLE>
Unrecognized financial instruments
- ----------------------------------
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1999 and 1998. The estimated fair
value of fee income on letters of credit at December 31, 1999 and 1998 is
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.
35
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 17. BUSINESS COMBINATION
On June 30, 1999, the Bank acquired, through plan of reorganization and merger,
all of the outstanding capital stock of Pinnacle Financial Group ("Pinnacle"), a
mortgage brokerage operation consisting of three separate corporations. Details
of the transaction, which was accounted for as a purchase, are as follows:
A summary of the purchase payments in connection with the acquisition is as
follows:
Cash paid to sellers at closing .............................. $ 150,000
Issuance of 151,685 shares of common stock to sellers ........ 980,409
Acquisition costs ............................................ 105,719
----------
$1,236,128
==========
The entire purchase price was allocated to goodwill as no significant tangible
net assets were acquired.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1999 and 1998, as though the acquisition occurred on January 1,
1998, are as follows:
1999 1998
-------------------------------
Net interest income after provision for
loan losses .............................. $ 4,439,798 $ 3,586,765
Net income ................................. 256,755 913,091
Basic income per share ..................... 0.12 0.64
Diluted income per share ................... 0.12 0.63
With respect to the shares of common stock issued to the sellers, two-thirds of
such shares are currently held in escrow and are subject to forfeiture if the
sellers do not remain employees of the Company at June 30, 2000 and 2001. If any
shares are forfeited, goodwill and additional paid-in capital would be adjusted
accordingly.
NOTE 18. 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 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
36
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
and working capital The commercial bank's revenues are generated primarily from
net interest income from its lending, investment and deposit activities.
The mortgage broker solicits and processes conventional mortgage loan
applications from consumers on behalf of permanent investors, and revenues are
generated from loan brokerage fees received from the permanent investors.
Information about reportable segments, and a reconciliation of such information
to the consolidated financial statements as of and for the year ended December
31, 1999 is as follows (in thousands):
Commercial Mortgage Consolidated
1999 Bank Broker Totals
- ---- ---------------------------------------
Net interest income .............. $ 4,993 $ -- $ 4,993
Noninterest income ............... 357 864 1,221
Noninterest expenses ............. 4,458 788 5,246
Provision for loan losses ........ 553 -- 553
Income before taxes .............. 339 76 415
Assets ........................... 177,195 -- 177,195
The Bank did not have a mortgage broker segment in 1998 as such operations
relate to Pinnacle, a division of the Bank acquired on June 30, 1999.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Management evaluates the performance
of each segment based on profit or loss from operations before income taxes.
Management does not allocate corporate overhead expenses to the mortgage broker
segment, and all such expenses are included in noninterest expenses of the
commercial bank.
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.
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 operates in one geographical area.
37
<PAGE>
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 19. SUBSEQUENT EVENTS
Subsequent to December 31, 1999, the Bank entered into an operating lease for
office space in East Fishkill, New York, and expects to open a mortgage banking
office there late in the first quarter of 2000.
During 1999, the Bank received approval from the OCC to open a new branch office
in Stamford, Connecticut, which the Bank expects to open in 2000.
38
<PAGE>
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) Form of 1994 Warrant to Purchase Common Stock (incorporated by
reference to Exhibit 10(a)(1) to Bancorp's Current Report on Form
8-K dated December 1, 1999 (Commission File No. 000-29599))
10(a)(2) Form of 1998 Warrant to Purchase Common Stock (incorporated by
reference to Exhibit 10(a)(2) to Bancorp's Current Report on Form
8-K dated December 1, 1999 (Commission File No. 000-29599))
10(a)(3) 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(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
27 Financial Data Schedule
Exhibit 21
SUBSIDIARIES OF PATRIOT NATIONAL BANCORP, INC.
Name Jurisidction of Incorporation
---- -----------------------------
Patriot National Bank United States
PinPat Acquisition Corporation Connecticut
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Patriot National Bancorp, Inc. as of December 31, 1999
and 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001098146
<NAME> PATRIOT NATIONAL BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 2,685 1,867
<INT-BEARING-DEPOSITS> 10,976 0
<FED-FUNDS-SOLD> 18,900 27,700
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 19,984 9,479
<INVESTMENTS-CARRYING> 12,301 3,843
<INVESTMENTS-MARKET> 11,906 3,827
<LOANS> 109,130 57,838
<ALLOWANCE> 1,360 785
<TOTAL-ASSETS> 177,195 102,328
<DEPOSITS> 162,746 89,309
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 1,212 921
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 4,322 3,994
<OTHER-SE> 8,914 8,103
<TOTAL-LIABILITIES-AND-EQUITY> 177,195 102,328
<INTEREST-LOAN> 7,277 5,265
<INTEREST-INVEST> 1,652 655
<INTEREST-OTHER> 804 845
<INTEREST-TOTAL> 9,733 6,765
<INTEREST-DEPOSIT> 4,655 2,982
<INTEREST-EXPENSE> 4,740 3,075
<INTEREST-INCOME-NET> 4,993 3,691
<LOAN-LOSSES> 553 104
<SECURITIES-GAINS> 4 27
<EXPENSE-OTHER> 5,246 3,420
<INCOME-PRETAX> 415 540
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 349 626
<EPS-BASIC> 0.17 0.48
<EPS-DILUTED> 0.16 0.47
<YIELD-ACTUAL> 7.92 8.37
<LOANS-NON> 91 64
<LOANS-PAST> 475 732
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 785 745
<CHARGE-OFFS> 19 64
<RECOVERIES> 41 0
<ALLOWANCE-CLOSE> 1,360 785
<ALLOWANCE-DOMESTIC> 5 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,355 785
</TABLE>
