U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10 K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
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Connecticut
(State or other jurisdiction of incorporation or organization)
900 Bedford Street
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06-1559137
(IRS Employer Identification Number) |
Stamford, Connecticut
(Address of principal executive offices)
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06901
(Zip Code) |
Registrants telephone number, including area code: (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 $0.01 per
share
Indicate by check mark if the registrant in a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act of 1933. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 of 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Check whether the registrant (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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o
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Non-accelerated filer þ (Do not check if a smaller reporting
company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).
Yes o No þ
Aggregate market value of the voting stock held by nonaffiliates of the registrant as of June
30, 2010 based on the last sale price as reported on the NASDAQ Global Market: $6,415,115.
Number of shares of the registrants Common Stock, par value $0.01 per share, outstanding as of
February 28, 2011: 38,362,727.
Documents Incorporated by Reference
Proxy Statement for 2010 Annual Meeting of Shareholders. (A definitive 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-K.)
Incorporated into Part III of this Form 10-K.
Patriot National Bancorp, Inc.
2010 Form 10-K Annual Report
TABLE OF CONTENTS
Safe Harbor Statement Under Private Securities Litigation Reform Act of 1995
Certain statements contained in Bancorps public reports, including this report, and in particular
in Managements 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 Bancorps interest earning assets and the interest paid on its interest bearing liabilities, (2)
the timing of repricing of Bancorps 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 Bank and the conduct of its business, (5) changes in competition
among financial service companies, including possible further encroachment of non-banks on services
traditionally provided by banks, (6) the ability of competitors that are larger than Bancorp to
provide products and services which it is impracticable for Bancorp to provide, (7) the state of
the economy and real estate values in Bancorps market areas, and the consequent affect on the
quality of Bancorps loans, (8) recent governmental initiatives are expected to have a profound
effect on the financial services industry and could dramatically change the competitive environment
of the Company; (9) other legislative or regulatory changes, including those related to residential
mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (FDIC)
premiums may adversely affect the Company; (10) the state of the economy in the greater New York
metropolitan area and its particular effect on the Companys customers, vendors and communities and
other such factors, including risk factors, as may be described in Bancorps other 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.
1
PART I
General
Patriot National Bancorp, Inc. (Bancorp or Company), a Connecticut corporation, was organized in
1999 for the purpose of becoming a one-bank holding company (the Reorganization) for Patriot
National Bank, a national banking association headquartered in Stamford, Fairfield County,
Connecticut (the Bank). Following receipt of regulatory and shareholder approvals, the
Reorganization became effective as of the opening of business on December 1, 1999. Upon
consummation of the Reorganization, each outstanding share of Common Stock, par value $2.00 per
share, of the Bank (Bank Common Stock), was converted into the right to receive one share of
Common Stock, par value $2.00 per share, of Bancorp (Bancorp Common Stock), and each outstanding
option or warrant to purchase Bank Common Stock became an option or warrant to purchase an equal
number of shares of Bancorp Common Stock.
The Bank was granted preliminary approval by the Comptroller of the Currency (the OCC) on March
5, 1993. It received its charter and commenced operations as a national bank on August 31, 1994.
Since then, the Bank has opened fifteen branch offices in Connecticut. The Bank also expanded into
New York State through the purchase of a small branch office in New York City and the opening of
branch offices in Bedford and Scarsdale, both located in Westchester County, New York.
On March 11, 2003, Bancorp formed Patriot National Statutory Trust I (the Trust) for the sole
purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
issued by Bancorp. Bancorp primarily invested the funds from the issuance of the debt in the Bank,
which in turn used the proceeds to fund general operations of the Bank.
On November 17, 2006 the Bank acquired a small branch office and related deposits at 45 West End
Avenue, New York, New York, from Millennium bcpbank, a national bank headquartered in Newark, New
Jersey. The Bank assumed the existing lease and operates from the branch at 45 West End Avenue. The
acquisition permitted the Bank to establish two additional branches in New York State.
On April 1, 2008, the Bank acquired a 20% interest in a de novo insurance agency. The impact on
the Banks operations in 2008, 2009 and 2010 has been minimal.
On October 15, 2010, pursuant to a Securities Purchase Agreement (the Securities Purchase
Agreement), the Company issued and sold to PNBK Holdings LLC (Holdings), an investment limited
liability company controlled by Michael Carrazza, 33,600,000 shares of its common stock at a
purchase price of $1.50 per share for an aggregate purchase price of $50,400,000. The shares sold
to Holdings represent 87.6% of the Companys currently issued and outstanding common stock. The
par value of the common stock changed to $0.01 per share. Also in connection with that sale,
certain directors and officers of both the Company and the Bank resigned and were replaced with
nominees of Holdings and Michael Carrazza became Chairman of the Board of the Company.
2
Pursuant to the Securities Purchase Agreement, the Company may pay one or more special stock dividends
(a Special Dividend) to stockholders in the form of Company common stock. The amount of that Special Dividend
would be based upon the net recoveries received by the Bank during the period beginning after June 30, 2009 and
ending on June 30, 2011 from the charged off portion of loans on the Banks books on or prior to June 30, 2009, and
would be determined by cash collections of those loans during that period, net of all fees and expenses.
As of December 31, 2010, the majority of loans related to the Special Dividend have been resolved and net recoveries
have not materialized to a level beyond the costs of administering the Special Dividend at this time. Accordingly,
the Company will evaluate the total amount of net recoveries as of June 30, 2011 and determine if, in the aggregate,
net recoveries, if any, are material to consider the Special Dividend at such time. Payment of the Special Dividend,
if any, is also subject to consent from the Bancorps regulators.
The Special Dividend, if paid, would be paid to stockholders of record of the Company (excluding Holdings)
on a record date established by the Board of Directors of the Company. The amount of the Special Dividend
would equal the first $1,000,000 of net recoveries plus 50% of the net recoveries in excess of $1,000,000.
The Special Dividend would be paid in shares of common stock valued at the greater of $1.50 or 75% of the
Companys book value per share on the last day of the calendar quarter in which the recovery was realized.
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 and the Trust. Except as specifically noted otherwise
herein, the balance of the description of Bancorps business is a description of the Banks
business.
Commercial Banking
The Bank conducts business at its main office located at 900 Bedford Street in Stamford,
Connecticut and at other Connecticut branch offices located in Darien, Fairfield, Greenwich,
Milford, Norwalk, Old Greenwich, Stamford, Southport, Stratford, Trumbull, Westport and Wilton.
In New York State, the Bank conducts business at branch offices located at: 45 West End Avenue in
New York City, 432 Old Post Road in Bedford and 495 Central Park Avenue in Scarsdale. The Bank
also operates a loan origination office at 1177 Summer Street in Stamford, Connecticut.
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, IRAs
(Individual Retirement Accounts) and HSAs (Health Savings Accounts). Other services include
internet banking, bill paying, remote deposit capture, debit cards, money orders, travelers checks
and ATMs (automated teller machines). The Bank is a member of CDARS (Certificates of Deposit
Account Registry Service) whereby customers can obtain complete FDIC insurance coverage by placing
large deposits into smaller-denomination CDs in multiple institutions. The single bank FDIC limits
have been permanently increased to $250,000 per eligible account. In addition, the Bank may in the
future offer other financial services.
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The Bank offers commercial loans to small and medium-sized businesses including secured and
unsecured loans to service companies, real estate developers, manufacturers, restaurants,
wholesalers, retailers and professionals doing business in the region. Other personal loans
include lines of credit, installment loans, overdraft protection and credit cards. Real estate
loans made to individuals include home mortgages, home improvement loans, bridge loans and home equity loans and lines of credit. Other loans offered include commercial real estate and
construction loans to area businesses and developers. In addition to offering residential real
estate mortgage loans for its own portfolio, the Bank also solicits and processes mortgage loan
applications from consumers on behalf of permanent investors and originates loans for sale to
generate fee income.
Competition
The Bank competes with a variety of financial institutions in its market area. Many have greater
financial resources and capitalization, which gives them higher legal lending limits as well as the
ability to conduct larger advertising campaigns to attract business. Generally the larger
institutions offer additional 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. In the future, if the Bank desires to offer trust services,
prior approval of the OCC will be required. 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 distinguish itself by offering personalized services.
The customer base of the Bank generally is diversified so that there is not a concentration of
either loans or deposits within a single industry, a group of industries, a single person or groups
of people. The Bank is not dependent on one or a few major customers for either its deposit or
lending activities, the loss of any one of which would have a material adverse effect on the
business of the Bank.
Residents and businesses in Stamford, Greenwich, Norwalk, Wilton, Darien, Southport, Fairfield,
Trumbull, Westport, Milford and Stratford, Connecticut provide the majority of the Banks deposits.
The Bank has expanded its footprint by establishing branch offices in the Westchester County, New
York towns of Bedford and Scarsdale, as well as a branch in New York City. The Bank has focused
its attention on serving the segments of its market area historically served by community banks.
The Bank competes in its market by providing a high level of personalized and responsive banking
service for which the Bank believes there is a need.
The Banks loan customers extend beyond the towns and cities in which the Bank has branch offices
that include nearby towns in Fairfield and New Haven Counties in Connecticut, and Westchester
County, New York City and Long Island in New York, although the Banks loan business is not
necessarily limited to these areas. The Banks plans for future lending contemplate the
diversification of the portfolio away from its historical emphasis on construction lending. While
the Bank does not currently hold or intend to attract significant deposit or loan business from
major corporations with headquarters in the Fairfield County area, the Bank believes that the
service, professional and related businesses which have been attracted to this area, as well as the
individuals that reside in this area, represent current and potential customers of the Bank.
4
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 Banks investment policy is to
maintain a balance of high quality diversified investments to minimize risk while limiting its
exposure to interest rate movements and credit risk, as well as maintaining adequate levels of
liquidity. The Banks investment portfolio is comprised primarily of government agency issues.
The Banks employees perform most routine day-to-day banking transactions at the Bank. 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
car carrier service.
The cities of Stamford and Norwalk and the towns of Greenwich, Wilton, Darien, Southport, Milford,
Fairfield, Trumbull, Westport and Stratford are presently served by over 284 branches of commercial
and savings banks along with 22 in the New York towns of Bedford and Scarsdale. Most of these
branches are offices of banks, which have headquarters outside of the states or areas served by the
Bank or are subsidiaries of bank or financial holding companies whose headquarters are outside of
the areas served by the Bank. In addition to banks with branches in the same areas as the Bank,
there are numerous banks and financial institutions serving the communities surrounding these
areas, which also draw customers from the cities and towns mentioned above and pose significant
competition to the Bank for deposits and loans. Many of those 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 including non-bank
competitors. This increase in competition has caused banks and other financial service
institutions to diversify their services and become more cost effective. The impact on Bancorp of
federal legislation authorizing increased services by financial holding companies and interstate
branching of banks has also resulted in increased competition. These events have resulted in
increasing homogeneity in the financial services offered by banks and other financial institutions.
The impact on banks and other financial institutions of these market dynamics and legislative and
regulatory changes has been increased customer awareness of product and service differences among
competitors and increased merger activity.
Supervision and Regulation
As a bank holding company, Bancorps operations are subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve Board (the Federal Reserve Board).
The Federal Reserve Board has established capital adequacy guidelines for bank holding companies
that are similar to the OCCs capital guidelines applicable to the Bank. The Bank Holding Company
Act of 1956, as amended (the BHC Act), limits the types of companies that a bank holding company
may acquire or organize and the activities in which it or they may engage. In general, bank
holding companies and their subsidiaries are only permitted to engage in, or acquire direct control
of, any company engaged in banking or in a business so closely related to banking as to be a proper
incident thereto. Federal legislation enacted in 1999 authorizes certain entities to register as
financial holding companies. Registered financial holding companies are permitted to engage in
businesses, including securities and investment banking businesses, which are prohibited to bank holding companies. The creation of financial
holding companies to date has had no significant impact on Bancorp.
5
Under the BHC Act, Bancorp is required to file annually with the Federal Reserve Board a report of
its operations. Bancorp, the Bank and any other subsidiaries are subject to examination by the
Federal Reserve Board. In addition, Bancorp will be required to obtain the prior approval of the
Federal Reserve Board to acquire, with certain exceptions, more than 5% of the outstanding voting
stock of any bank or bank holding company, to acquire all or substantially all of the assets of a
bank or to merge or consolidate with another bank holding company. Moreover, Bancorp, the Bank and
any other subsidiaries are prohibited from engaging in certain tying arrangements in connection
with any extension of credit or provision of any property or services. The Bank is also subject to
certain restrictions imposed by the Federal Reserve Act on issuing any extension of credit to
Bancorp or any of its subsidiaries or making any investments in the stock or other securities
thereof and on the taking of such stock or securities as collateral for loans to any borrower. If
Bancorp wants to engage in businesses permitted to financial holding companies but not to bank
holding companies, it would need to register with the Federal Reserve Board as a financial holding
company.
The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses its view that a bank holding company should pay cash dividends
only to the extent that the bank holding companys 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 companys 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 its bank subsidiary
is classified as undercapitalized.
A bank holding company is required to give the Federal Reserve Board prior written notice of any
purchase or redemption of its outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of its consolidated retained
earnings. The Federal Reserve Board may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice or would violate any law,
regulation, Federal Reserve Board order, or any condition imposed by, or written agreement with,
the Federal Reserve Board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, (Riegle-Neal Act) was
enacted to ease restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal
Act allows the Federal Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or substantially all
of the assets of, a bank located in a state other than such holding companys 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 banks 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. The Riegle-Neal Act also allows banks to establish branch offices in other
than the banks home state if the target state has opted in to interstate branching.
6
Bancorp is subject to capital adequacy rules and guidelines issued by the OCC, the Federal Reserve
Board and the Federal Deposit Insurance Corporation (FDIC), and the Bank is subject to capital
adequacy rules and guidelines issued by the OCC. These substantially identical rules and
guidelines require Bancorp to maintain certain minimum ratios of capital to adjusted total assets
and/or risk-weighted assets. Under the provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991, the Federal regulatory agencies are required to implement and enforce
these rules in a stringent manner. Bancorp is also subject to applicable provisions of Connecticut
law insofar as they do not conflict with, or are not otherwise preempted by Federal banking law.
Bancorp is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the Exchange Act), and, in accordance with the Exchange Act, files periodic reports, proxy
statements and other information with the Securities and Exchange Commission (the SEC). The
Banks operations are subject to regulation, supervision and examination by the OCC and the FDIC.
Federal and state banking regulations govern, 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 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
as such, is subject to applicable provisions of the Federal Reserve Act and regulations there
under. The Bank is subject to the federal regulations promulgated pursuant to the Financial
Institutions Supervisory Act to prevent banks from engaging in unsafe and unsound practices, as
well as various other federal and state laws and consumer protection laws. The Bank is also
subject to the comprehensive provisions of the National Bank Act.
The OCC regulates the number and locations of the branch offices of a national bank. The OCC may
only permit a national bank to maintain branches in locations and under the conditions imposed by
state law upon state banks. At this time, applicable Connecticut banking laws do not impose any
material restrictions on the establishment of branches by Connecticut banks throughout Connecticut.
New York State law is similar; however, the Bank cannot establish a branch in a town with a
population of less than 50,000 if another bank is headquartered in the town.
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.
7
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 Bancorps and the Banks 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; some banks have made 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. Compliance may also 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 in the towns and cities in which the Bank has branch offices, which are
characterized by a very diverse ethnic, economic and racial cross-section of the population. As
the Bank expands further, the market areas served by the Bank will continue to evolve. Bancorp and
the Bank have not and will not adopt any policies or practices, which discourage credit
applications from, or unlawfully discriminate against, individuals or segments of the communities
served by the Bank.
On October 26, 2001, the United and Strengthening America by Providing Tools Required to Intercept
and Obstruct Terrorism Act of 2001, or the USA Patriot Act, was enacted to further strengthen
domestic security following the September 11, 2001 attacks. This Act amends various federal
banking laws, particularly the Bank Secrecy Act, with the intent to curtail money laundering and
other activities that might be undertaken to finance terrorist actions. The Act also requires that
financial institutions in the United States enhance already established anti-money laundering
policies, procedures and audit functions and ensure that controls are reasonably designed to detect
instances of money laundering through certain correspondent or private banking accounts.
Verification of customer identification, maintenance of said verification records and cross
checking names of new customers against government lists of known or suspected terrorists is also
required. The Patriot Act was reauthorized and modified with the enactment of The USA Patriot Act
Improvement and Reauthorization Act of 2005.
8
On July 20, 2002, the Sarbanes-Oxley Act of 2002 was enacted, the primary purpose of which is to
protect investors through improved corporate governance and responsibilities of, and disclosures
by, public companies. The Act contains provisions for the limitations of services that external
auditors may provide as well as requirements for the credentials of Audit Committee members. In
addition, the principal executive and principal financial officers are required to certify in
quarterly and annual reports that they have reviewed the report; and based on the officers
knowledge, the reports accurately present the financial condition and results of operations of the
company and contain no untrue statement or omission of material fact. The officers also certify
their responsibility for establishing and maintaining a system of internal controls, which insure
that all material information is made known to the officers; this certification also includes the
evaluation of the effectiveness of disclosure controls and procedures and their impact upon financial reporting. Section 404 of the Act entitled Management
Assessment of Internal Controls, requires that each annual report include an internal control
report which states that it is the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting, as well as an
assessment by management of the effectiveness of the internal control structure and procedures for
financial reporting. This section further requires that the external auditors attest to, and
report on, the Companys internal controls over financial reporting.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act
(EESA) which includes the Troubled Asset Relief Program (TARP). The legislation was in
response to the financial crises affecting the banking system and financial markets. The TARP gave
the United States Department of the Treasury (the Treasury) authority to deploy up to $700
billion into the financial system with an objective of improving liquidity in the capital markets.
This was initially done by infusing billions of dollars into financial and insurance institutions
as well as U.S. automakers. Since 2008, the U.S. Department of the Treasury has established
several programs under the TARP, including the Financial Stability Program, to further stabilize
the financial system, restore the flow of credit to consumers and businesses and tackle the
foreclosure crisis to keep millions of Americans in their homes. Since this program began, many
banks, large and small have accessed the program. However, due to constraints attendant to
participation, many banks have repaid capital received from the government. The Bank did not
participate in the TARP program, which is now closed to new entrants.
Temporary Liquidity Guarantee Program
On November 21, 2008, the FDIC adopted the Final Rule implementing the Temporary Liquidity
Guarantee Program (TLGP) inaugurated October 14, 2008. The TLGP consists of two basic
components: (1) the Debt Guarantee Program which guarantees newly issued senior unsecured debt of
banks, thrifts, and certain holding companies and (2) the Transaction Account Guarantee Program
which guarantees certain non-interest bearing deposit transaction accounts, such as business
payroll accounts, regardless of dollar amount. The purpose of the TLGP was to provide an
initiative to counter the system-wide crisis in the nations financial sector by promoting
financial stability by preserving confidence in the banking system and encourages liquidity in
order to ease lending to creditworthy businesses and consumers.
9
Patriot National Bank participated in the FDIC Transaction Account Guarantee Program which
guaranteed full coverage on certain noninterest-bearing deposit transaction accounts, such as
business accounts, until the expiration date of the program on December 31, 2010. Effective
December 31, 2010 through December 31, 2012, The Board of Directors of the FDIC implemented a new
final rule under section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that
provides temporary unlimited coverage in addition to, and separate from, the coverage of at least
$250,000 available to depositors under the FDICs general rules. The term noninterest-bearing
transaction account includes a traditional checking account or demand deposit account on which the
Bank pays no interest. It also includes Interest on Lawyer Trust Accounts (IOLTAs). It does not
include other accounts, such as Traditional checking or demand deposit accounts that may earn
interest, NOW accounts or money market deposit accounts. Bancorp did not participate in the Debt
Guarantee portion of the TLGP.
Helping Families Save Their Homes Act of 2009
The Helping Families Save Their Homes Act of 2009 became effective May 20, 2009. This act was a
step towards stabilizing and reforming the United States financial and housing markets by helping
American homeowners and increasing the flow of credit. It expands the reach of the Making Home
Affordable Program (a TARP initiative) with an emphasis on reducing foreclosures. The act also
contains provisions to help restore and support the flow of credit by increasing the borrowing
authority of the FDIC and the National Credit Union Administration as well as extending the
temporary increase in deposit insurance. The increase in deposit insurance may add confidence in
depositors and allow depository institutions to better maintain this source of funding.
Real Estate Settlement Procedures Act
The U.S. Department of Housing and Urban Development (HUD) issued a final rule effective January
1, 2010 that implements significant changes to the Real Estate Settlement Procedures Act (RESPA).
The new rules require a standard form of Good Faith Estimate to disclose key terms and closing
costs, including items such as the loan term, fixed or adjustable interest rate, prepayment
penalty, total closing cost and cost of homeowners insurance. Additionally, changes to the
settlement statement are also required and will allow borrowers to compare their final closing
costs and loan terms against their good faith estimate. There are also limitations on third-party
costs and a 30 day window from the date of closing to correct any errors or violations and
reimburse the borrower for any overcharges.
Regulation E, Electronic Fund Transfers
The Board of Governors of the FRB amended Regulation E, Electronic Fund Transfers. The final rules,
announced November 12, 2009, prohibit affected financial institutions from charging consumers fees
for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions,
unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
The mandatory compliance date was July 1, 2010.
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.
10
Recent Legislative Developments
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act) was signed into
law on July 21, 2010. The Act is a significant piece of legislation that will have major effects
on the financial services industry, including the organization, financial condition and operations
of banks and bank holding companies. Management is currently evaluating the impact of the Act;
however, uncertainty remains as to its operational impact, which could have a material adverse
impact on Bancorps business, results of operations and financial condition. Many of the
provisions of the Act are aimed at financial institutions that are significantly larger than
Bancorp and the Bank. Notwithstanding this, there are many other provisions that Bancorp and the
Bank are subject to and will have to comply with, including any new rules applicable to Bancorp and
the Bank promulgated by the Bureau of Consumer Financial Protection, a new regulatory body dedicated to consumer protection. As rules and regulations are promulgated by the
agencies responsible for implementing and enforcing the Act, Bancorp and the Bank will have to
address each to ensure compliance with applicable provisions of the Act and compliance costs are
expected to increase.
In February 2009 the Bank entered into a formal written agreement (the Agreement) with the Office
of the Comptroller of the Currency. Under the terms of the Agreement, the Bank has appointed a
Compliance Committee of outside directors and the Chief Executive Officer. The Committee must
report quarterly to the Board of Directors and to the OCC on the Banks progress in complying with
the Agreement. The Agreement requires the Bank to review, adopt and implement a number of policies
and programs related to credit and operational issues. The Agreement further provides for certain
asset growth restrictions for a limited period of time together with limitations on the acceptance
of certain brokered deposits and the extension of credit to borrowers whose loans are criticized.
The Bank may pay dividends during the term of the Agreement only with prior written permission from
the OCC. The Agreement also requires that the Bank develop and implement a three-year capital
plan. The Bank has taken or put into process many of the steps required by the Agreement, and does
not anticipate that the restrictions included within the Agreement will impair its current business
plan.
In June 2010 the company entered into a formal written agreement (the Reserve Bank Agreement)
with the Federal Reserve Bank of New York (the Reserve Bank). Under the terms of the Reserve
Bank Agreement, the Board of Directors of the Company are required to take appropriate steps to
fully utilize the Companys financial and managerial resources to serve as a source of strength to
the Bank including taking steps to insure that the Bank complies with the Agreement with the OCC.
The Reserve Bank Agreement requires the Company to submit, adopt and implement a capital plan that
is acceptable to the Reserve Bank. The Company must also report to the Reserve Bank quarterly on
the Companys progress in complying with the Reserve Bank Agreement. The Agreement further
provides for certain restrictions on the payment or receipt of dividends, distributions of interest
or principal on subordinate debentures or trust preferred securities and the Companys ability to
incur debt or to purchase or redeem its stock without the prior written approval of the Reserve
Bank. The Company has taken or put into process many of the steps required by the Reserve Bank
Agreement, and does not anticipate that the restrictions included within the Reserve Bank Agreement
will impair its current business plan.
11
Available Information
Our website address is http://www.pnbdirectonline.com; however, information found on, or
that can be accessed through, our website is not incorporated by reference into this Form 10-K.
Bancorp makes available free of charge on our website (under the links entitled For Investors,
then SEC filings and then Documents), our annual report on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we
electronically file such reports with or furnish it to the SEC. Because Bancorp is an electronic
filer, such reports are filed with the SEC and are also available on their website
(http://www.sec.gov). The public may also read and copy any materials filed with the SEC at the
SECs Public Reference Room, 100 F Street, NE, Washington, DC 20549. Information about the Public
Reference Room can be obtained by calling 1-800-SEC-0330.
Employees
As of December 31, 2010, Bancorp had 148 full-time employees and 9 part-time employees. None of
the employees of Bancorp is covered by a collective bargaining agreement.
12
The risks involved in Bancorps construction and commercial real estate loan portfolios are
material.
Although Bancorps commercial real estate and construction loan portfolios have been, by design,
significantly reduced in the past year, they still constitute material portions of the Banks
assets and generally have more risk than residential mortgage loans. Both commercial real estate
and construction loans often involve larger loan balances concentrated with single borrowers or
groups of related borrowers as compared to single-family residential loans. Construction loans are
secured by the property under construction, the value of which is uncertain prior to completion.
Thus, it is more difficult to evaluate accurately the total loan funds required to complete a
project and the related loan-to-value ratios. Speculative construction loans involve additional
risk because the builder does not have a contract for the sale of the property at the time of
construction.
Because the repayment of commercial real estate and construction loans depends on the successful
management and operation of the borrowers properties or related businesses, repayments of such
loans can be affected by adverse conditions in the real estate market or local economy as have been
experienced in Bancorps market area. The downturn in the real estate market within Bancorps
market area has, and may continue to, adversely impact the value of properties securing these loans
and the ability to sell foreclosed properties efficiently.
Real estate lending in Bancorps core Fairfield County, Connecticut market involves risks related
to a decline in value of commercial and residential real estate.
The market value of real estate can fluctuate significantly in a relatively short period of time as
a result of market conditions in the geographic area in which the real estate is located. A
significant portion of Bancorps total loan portfolio is secured by real estate located in
Fairfield County, Connecticut and Westchester, County New York, areas historically of high
affluence that have been materially impacted by the financial troubles experienced by large
financial service companies on Wall Street and other companies in recent years. Credit markets
have become tight and underwriting standards more stringent, and the inability of purchasers of
real estate to obtain financing will continue to impact the real estate market. Therefore, these
loans may be subject to changes in grade, classification, accrual status, foreclosure, or loss
which could have an effect on the adequacy of the allowance for loan losses.
Bancorps business is subject to various lending and other economic risks that could adversely
impact Bancorps results of operations and financial condition.
Changes in economic conditions, particularly a continued economic slowdown in Fairfield County,
Connecticut and the New York metropolitan area, could hurt Bancorps financial performance. A
further deterioration in economic conditions, in particular an economic slowdown within Fairfield
County, Connecticut and/or the New York metropolitan area, could result in the following
consequences, any of which may hurt the business of Bancorp materially: loan delinquencies may
increase; problem assets and foreclosures may increase; demand for the Banks products and services
may decline; and assets and collateral associated with the Banks loans, especially real estate,
may decline in value, thereby reducing a customers borrowing power. During the years 2007 through
2009, the general economic conditions and specific business conditions in the United States including Fairfield County, Connecticut deteriorated
resulting in increases in loan delinquencies, problem assets and foreclosures and declines in the
value and collateral associated with the Banks loans. During 2010, the economic climate improved
marginally resulting in decreases in the Banks non-performing assets. A prolonged period of
economic recession or worsening of these adverse economic conditions may have a materially adverse
effect on our results of operations and financial condition.
13
Bancorp is Subject to a Formal Agreement with the OCC and the Federal Reserve Bank of New York.
The Bank is subject to a formal agreement with the OCC entered into in February 2009. The
agreement provides for, among other things, the enhancement and implementation of certain programs
to reduce the Banks credit risk, commercial real estate loan concentration and the level of
criticized assets, along with the augmentation of a profit plan and three-year capital program.
Additionally, the agreement provides for certain asset growth restrictions for a limited period of
time. The Bank does not anticipate that these restrictions will impair its current business plan.
However, failure to comply with the provisions of the agreement could result in more severe
enforcement actions and further restrictions.
In June 2010 the Company entered into a formal written agreement (the Reserve Bank Agreement)
with the Federal Reserve Bank of New York (the Reserve Bank). Under the terms of the Reserve
Bank Agreement, the Board of Directors of the Company are required to take appropriate steps to
fully utilize the Companys financial and managerial resources to serve as a source of strength to
the Bank including taking steps to insure that the Bank complies with the agreement with the OCC.
The Reserve Bank Agreement requires the Company to submit, adopt and implement a capital plan that
is acceptable to the Reserve Bank. The Company must also report to the Reserve Bank quarterly on
the Companys progress in complying with the Reserve Bank Agreement. The Agreement further
provides for certain restrictions on the payment or receipt of dividends, distributions of interest
or principal on subordinate debentures or trust preferred securities and the Companys ability to
incur debt or to purchase or redeem its stock without the prior written approval of the Reserve
Bank. The Company has taken or put into process many of the steps required by the Reserve Bank
Agreement, and does not anticipate that the restrictions included within the Reserve Bank Agreement
will impair its current business plan.
Bancorps allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for loan losses to provide for
loan defaults and non-performance. The allowance for loan losses is based on an evaluation of the
risks associated with the Banks loans receivable as well as the Banks prior loss experience.
Deterioration in general economic conditions and unforeseen risks affecting customers will have an
adverse effect on borrowers capacity to repay timely their obligations before risk grades could
reflect those changing conditions.
14
The recent adverse changes in economic and market conditions in the Banks market areas increase
the risk that the allowance will become inadequate if borrowers continue to experience economic and
other conditions adverse to their incomes and businesses. Maintaining the adequacy of the Banks
allowance for loan losses may require that the Bank make significant and unanticipated increases in
the provision for loan losses, which would materially affect the results of operations and capital adequacy. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates that may be beyond
the Banks control and these losses may exceed current estimates. The current economic environment
is uncertain and may result in additional risk of loan losses.
Federal regulatory agencies, as an integral part of their examination process, review the Banks
loans and assess the adequacy of the allowance for loan losses. The regulatory agencies may
require us to change classifications or grades on loans, increase the allowance for loan losses
with additional provisions for loan losses and to recognize further loan charge-offs based upon
their judgments, which may differ from ours. Any increase in the allowance for loan losses required
by these regulatory agencies could have a negative effect on our results of operations and
financial condition. During 2008 and 2009, the Bank significantly increased its allowance for loan
losses based on managements evaluation of the current economic crisis and its impact on the real
estate market in the Banks market area. During 2010, the Banks allowance for loan losses
remained comparatively constant based on managements current assessment. While management
believes that the allowance for loan losses is currently adequate to cover inherent losses, further
loan deterioration could occur and therefore management cannot assure shareholders that there will
not be a need to increase the allowance for loan losses or that the regulators will not require
management to increase this allowance. Either of these occurrences could materially and adversely
affect Bancorps earnings and profitability.
Bancorp is subject to certain risks with respect to liquidity.
Liquidity refers to our ability to generate sufficient cash flows to support our operations and
to fulfill our obligations, including commitments to originate loans, to repay our wholesale
borrowings and other liabilities, and to satisfy the withdrawal of deposits by our customers.
Our primary sources of liquidity are the deposits we acquire organically through our branch
network, borrowed funds, primarily in the form of wholesale borrowings; the cash flows generated
through the repayment of loans and securities; and the cash flows from the sale of loans and
securities. In addition, and depending on current market conditions, we may have the ability to
access the capital markets from time to time.
Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans
and mortgage-related securities are strongly influenced by such external factors as the direction
of interest rates, whether actual or perceived; local and national economic conditions; and
competition for deposits and loans in the markets we serve. Furthermore, changes to the
underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our liquidity. A
decline in available funding could adversely impact our ability to originate loans, invest in
securities, and meet our expenses, or to fulfill such obligations as repaying our borrowings or
meeting deposit withdrawal demands.
15
Bancorps business is subject to interest rate risk and variations in interest rates may negatively
affect Bancorps financial performance.
Bancorp is unable to predict fluctuations of market interest rates, which are affected by many
factors including: inflation, recession, a rise in unemployment, a tightening money supply,
domestic and international disorder and instability in domestic and foreign financial markets.
Changes in the interest rate environment may reduce Bancorps profits. Bancorp realizes income
from the differential or spread between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. Net interest spreads are affected by the difference between the maturities and
repricing characteristics of interest-earning assets and interest-bearing liabilities. Bancorp is
vulnerable to a decrease in interest rates because its interest-earning assets generally have
shorter durations than its interest-bearing liabilities. As a result, material and prolonged
decreases in interest rates would decrease Bancorps net interest income. In contrast, an increase
in the general level of interest rates may adversely affect the ability of some borrowers to pay
the interest on and principal of their obligations. Like most financial institutions, Bancorp is
affected by changes in interest rates, which are currently at record low levels, and by other
economic factors beyond Bancorps control. Although Bancorp has implemented strategies which are
designed to reduce the potential effects of changes in interest rates on operations, these
strategies may not always be successful. Accordingly, changes in levels of market interest rates
could materially and adversely affect Bancorps net interest spread, asset quality, levels of
prepayments and cash flow as well as the market value of its securities portfolio and overall
profitability.
Mortgage brokerage activity is also affected by interest rate fluctuations. Generally, increases
in interest rates often lead to decreases in home refinancing activity, thus reducing the number of
mortgage loans that Bancorp originates.
Bancorps investment portfolio includes securities which are sensitive to interest rates and
variations in interest rates may adversely impact Bancorps profitability.
Bancorps security portfolio is classified as available-for-sale, and is comprised of debt and
mortgage-backed securities which are insured or guaranteed by U.S. government agencies and auction
rate preferred equity securities. These securities are sensitive to interest rate fluctuations.
Unrealized gains or losses in the available-for-sale portfolio for securities, other than those for
which other-than-temporary impairment charges have been recorded, are reported as a separate
component of shareholders equity. As a result, future interest rate fluctuations may impact
shareholders equity, causing material fluctuations from quarter to quarter. The inability to hold
its securities until maturity, or until payments are received on mortgage-backed securities, or
until market conditions are favorable for a sale, could adversely affect Bancorps earnings and
profitability.
16
Bancorp is dependent on its management team and the loss of its senior executive officers or other
key employees could impair its relationship with its customers and adversely affect its business
and financial results.
Bancorps success is dependent upon the continued services and skills of its management team. The
unexpected loss of services of one or more of these key personnel, without experienced and suitable
replacements could have an adverse impact on Bancorps business because of their skills, knowledge
of Bancorps market, years of industry experience and the difficulty of promptly finding qualified
replacement personnel.
Bancorps success also depends, in part, on its continued ability to attract and retain experienced
commercial lenders and residential mortgage originators, as well as other management personnel. The
loss of the services of several of such key personnel could adversely affect Bancorps growth and
prospects to the extent it is unable to quickly replace such personnel. Competition for commercial
lenders and residential mortgage originators is strong within the commercial banking and mortgage
banking industries, and Bancorp may not be successful in retaining or attracting personnel.
A breach of information security could negatively affect Bancorps earnings.
Bancorp increasingly depends upon data processing, communications and information exchange on a
variety of computing platforms and networks, and over the internet to conduct its business.
Bancorp cannot be certain that all of its systems are entirely free from vulnerability to attack,
despite safeguards it has instituted. In addition, Bancorp relies on the services of a variety of
vendors to meet its data processing and communication needs. If information security is breached,
information can be lost or misappropriated; this could result in financial loss or costs to Bancorp
or damages to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would have an adverse effect on Bancorps results of operations and
financial condition. In addition, the Banks reputation could be harmed, which also could
materially adversely affect Bancorps financial condition and results of operation.
We are subject to environmental liability risk associated with our lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course
of business, we may foreclose on, and take title to, properties securing certain loans. In doing
so, there is a risk that hazardous or toxic substances could be found on these properties. If
hazardous or toxic substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. In addition, we own and operate certain properties that may be
subject to similar environmental liability risks.
Environmental laws may require us to incur substantial expenses and may materially reduce the
affected propertys value or limit our ability to use or sell the affected property. In addition,
future laws or more stringent interpretations or enforcement policies with respect to existing laws
may increase our exposure to environmental liability. Although we have policies and procedures
requiring the performance of an environmental site assessment before initiating any foreclosure
action on real property, these assessments may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial condition and results of
operations.
17
Our business may be adversely impacted by acts of war or terrorism.
Acts of war or terrorism could have a significant adverse impact on our ability to conduct our
business. Such events could affect the ability of our borrowers to repay their loans, could impair
the value of the collateral securing our loans, and could cause significant property damage, thus
increasing our expenses and/or reducing our revenues. In addition, such events could affect the
ability of our depositors to maintain their deposits with the Bank. Although we have established
disaster recovery policies and procedures, the occurrence of any such event could have a material
adverse effect on our business which, in turn, could have a material adverse effect on our
financial condition and results of operations.
We rely on the dividends we receive from our subsidiary.
Bancorp is a separate and distinct legal entity from the Bank, and all of the revenues Bancorp
receives consist of dividends from the Bank. These dividends are the primary funding source for the
interest and principal payments on our debt. Various federal and state laws and regulations limit
the amount of dividends that a bank may pay to its parent company. In addition, our right to
participate in a distribution of assets upon the liquidation or reorganization of a subsidiary may
be subject to the prior claims of the subsidiarys creditors. If the Bank is unable to pay
dividends to Bancorp, we may not be able to pay our obligations. The inability to receive dividends
from the Bank could therefore have a material adverse effect on our business, our financial
condition, and our results of operations, as well as our ability to maintain or increase the
current level of cash dividends paid to our shareholders. Beginning in the second quarter of 2009,
the Company began deferring interest payments on the subordinated debentures as permitted under the
terms of the debentures. The deferral in the fourth quarter of 2010 represented the seventh
consecutive quarter of deferral. The Company continues to accrue and charge interest to
operations. The Company may only defer the payment of interest for 20 consecutive quarters, until
March 2014, and all accrued interest must be paid prior to or at completion of the deferral period.
The price of our common stock may fluctuate.
The market price of our common stock could be subject to significant fluctuations due to changes in
sentiment in the market regarding our operations or business prospects. Among other factors, these
risks may be affected by:
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operating results that vary from the expectations of our management or of
securities analysts and investors; |
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developments in our business or in the financial services sector generally; |
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regulatory or legislative changes affecting our industry generally or our
business and operations; |
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operating and securities price performance of companies that investors
consider to be comparable to us; |
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changes in estimates or recommendations by securities analysts or rating
agencies; |
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announcements of strategic developments, acquisitions, dispositions,
financings, and other material events by us or our competitors; and |
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changes or volatility in global financial markets and economies, general
market conditions, interest or foreign exchange rates, stock, commodity, credit, or asset
valuations. |
18
Furthermore, given recent and ongoing market and economic conditions, the market price of our
common stock may be subject to further significant market fluctuations. The recession that began
in the second half of 2007 has continued to have an adverse impact on real estate values; in
addition, foreclosure filings are increasing and unemployment remains atypically high. These
factors have negatively affected the credit performance of mortgage and other loans, and resulted
in significant write-downs of asset values by financial institutions. The resulting economic
pressure on property owners and other borrowers, and the lack of confidence in the financial
markets in general, has adversely affected, and may continue to adversely affect, our business and
results of operations.
In addition, stock markets around the world have experienced significant price and trading volume
volatility, with shares of financial services firms being adversely impacted, in particular.
While the U.S. and other governments continue to take action to restore confidence in the
financial markets and to promote job creation and economic growth, continued or further market
and economic turmoil could occur in the near or long term, which could negatively affect our
business, financial condition and results of operations, and volatility in the price and trading
volume of our common stock.
Difficult market conditions have adversely affected Bancorps industry.
Bancorp is exposed to downturns in the U.S. economy, and particularly the local markets in which it
operates in Connecticut and New York. Declines in the housing market with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of mortgage and construction loans and resulted in significant write-downs of asset
values by financial institutions, including government-sponsored enterprises as well as major
commercial and investment banks. These write-downs have caused many financial institutions to seek
additional capital, to merge with larger and stronger institutions and, in some cases, to fail.
Many lenders and institutional investors have reduced or ceased providing funding to borrowers,
including other financial institutions. This market turmoil and the tightening of credit have led
to an increased level of commercial and consumer delinquencies, lack of consumer confidence,
increased market volatility and generally widespread reductions in business activity. The
resulting economic pressure on consumers and lack of confidence in the financial markets has
adversely affected Bancorps business, financial condition and results of operations. A worsening
of these conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and other financial institutions. In particular:
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Economic conditions may continue to affect market confidence levels and may cause
adverse changes in payment patterns, causing increases in delinquencies, which could affect
our charge-offs and provision for loan losses. |
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The ability to assess the creditworthiness of the Banks customers or to estimate the
values of collateral for loans may be impaired if the models and approaches we use become
less predictive of future behaviors, valuations, assumptions or estimates due to the
unpredictable economic climate. |
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Increasing consolidation of financial services companies as a result of current market
conditions could have unexpected adverse effects upon our ability to compete effectively. |
We may be required to pay significantly higher FDIC premiums, special assessments, or taxes that
could adversely affect our earnings.
Market developments have significantly depleted the insurance fund of the FDIC and reduced the
ratio of reserves to insured deposits. As a result, we may be required to pay significantly higher
premiums or additional special assessments or taxes that could adversely affect our earnings. We
are generally unable to control the amount of premiums that we are required to pay for FDIC
insurance. If there are additional bank or financial institution failures, we may be required to
pay even higher FDIC premiums than the higher levels imposed in 2010. These increases and any
future increases or required prepayments in FDIC insurance premiums or taxes may materially
adversely affect our results of operations.
We are subject to risks associated with taxation.
The amount of income taxes we are required to pay on our earnings is based on federal and state
legislation and regulations. We provide for current and deferred taxes in our financial statements,
based on our results of operations, business activity, legal structure, interpretation of tax
statutes, assessment of risk of adjustment upon audit, and application of financial accounting
standards. We may take tax return filing positions for which the final determination of tax is
uncertain. Our net income and earnings per share may be reduced if a federal, state, or local
authority assesses additional taxes that have not been provided for in our consolidated financial
statements. There can be no assurance that we will achieve our anticipated effective tax rate
either due to a change to tax law, a change in regulatory or judicial guidance, or an audit
assessment which denies previously recognized tax benefits.
Risks associated with changes in technology.
Financial products and services have become increasingly technology-driven. Our ability to meet the
needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability
to keep pace with technological advances and to invest in new technology as it becomes available.
Many of our competitors have greater resources to invest in technology than we do and may be better
equipped to market new technology-driven products and services. The ability to keep pace with
technological change is important, and the failure to do so on our part could have a material
adverse impact on our business and therefore on our financial condition and results of operations.
20
Strong competition within Bancorps market area may limit the growth and profitability of the
Company.
Competition in the banking and financial services industry is intense. The Fairfield County,
Connecticut and the New York City metropolitan areas have a high concentration of financial
institutions including large money center and regional banks, community banks and credit unions.
Some of Bancorps competitors offer products and services that the Bank currently does not offer,
such as private banking and trust services. Many of these competitors have substantially greater
resources and lending limits than Bancorp and may offer certain services that Bancorp does not or
cannot provide. Price competition for loans and deposits might result in the Bank earning less on
its loans and paying more for deposits, which reduces net interest income. Bancorp expects
competition to increase in the future as a result of legislative, regulatory and technological
changes. Bancorps profitability depends upon its continued ability to successfully compete in its
market area.
Government regulation may have an adverse effect on Bancorps profitability and growth.
Bancorp is subject to extensive regulation, supervision and examination by the Office of the
Comptroller of the Currency as the Banks chartering authority, by the FDIC, as insurer of its
deposits, and by the Federal Reserve Board as regulator of Bancorp. Changes in state and federal
banking laws and regulations or in federal monetary policies could adversely affect the Banks
ability to maintain profitability and continue to grow and, in light of recent economic conditions,
such changes are expected but cannot be predicted. For example, new legislation or regulation
could limit the manner in which Bancorp may conduct its business, including the Banks ability to
obtain financing, attract deposits, make loans and achieve satisfactory interest spreads. One
proposal that was passed implemented a new federal agency devoted to the rights of consumers that
would regulate banks on a parallel track with banking regulatory authorities. The laws,
regulations, interpretations and enforcement policies that apply to Bancorp have been subject to
significant, and sometimes retroactively applied, changes in recent years, and are likely to change
significantly in the future.
Legislation proposing significant structural reforms to the financial services industry considered
in the U.S. Congress, including, among other things, has created the Consumer Financial Protection
Agency, which gives broad authority to regulate financial service providers and financial products.
In addition, the Federal Reserve Bank has passed guidance on incentive compensation at the banking
organizations it regulates and the United States Department of the Treasury and the federal banking
regulators have issued statements calling for higher capital and liquidity requirements for banking
organizations. Complying with any new legislative or regulatory requirements, and any programs
established thereunder by federal and state governments to address the current economic crisis,
could have an adverse impact on our results of operations and our ability to fill positions with
the most qualified candidates available.
21
Changing regulation of corporate governance and public disclosure.
Laws, regulations and standards relating to corporate governance and public disclosure, SEC
regulations and NASDAQ rules, have added to the responsibilities that companies, such as Bancorp,
have. These laws, regulations and standards are subject to varying interpretations, and as a
result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies, which could make compliance more difficult and result in higher costs. Bancorp is committed to maintaining high standards of corporate governance and public
disclosure. As a result, Bancorps efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. Bancorps reputation may be harmed if it does not continue to comply with
these laws, regulations and standards.
The earnings of financial institutions are significantly affected by general business and economic
conditions.
As a financial institution, Bancorps operations and profitability are impacted by general business
and economic conditions in the United States and abroad. These conditions include short-term and
long-term interest rates, inflation, money supply, political issues, legislative and regulatory
changes and the strength of the U.S. economy and the local economies in which we operate, all of
which are beyond Bancorps control. In recent years, the banking world has experienced
unprecedented upheaval, including the failure of some of the leading financial institutions in the
world. Further deterioration in economic conditions could result in an increase in loan
delinquencies and non-performing assets, decreases in loan collateral values and a decrease in
demand for the Banks products and services, among other things, any of which could have a material
adverse impact on Bancorps results of operations and financial condition and for which Bancorp
cannot currently predict or implement plans to combat.
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Item 1B. |
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Unresolved Staff Comments |
None.
Patriot National Bancorp Inc.s corporate headquarters and main branch banking office is located at
900 Bedford Street in Stamford, Connecticut. The building is leased by the Bank, as are its
eighteen other branch banking offices, one loan origination office and additional administrative
and operational office space. The Bank also leases space at its main office for additional
parking. Lease commencement dates for office locations range from April 2003 to May 2008 and lease
expiration dates fall between August 2011 and January 2022. Most of the leases contain rent
escalation provisions, as well as renewal options for one or more periods.
The Bank has sublet and licensed excess space in two of its locations to an attorney. See also
Item 12. Certain Relationships and Related Transactions. For additional information regarding
the Banks lease obligations, see Note 9 to the Consolidated Financial Statements.
All leased properties are in good condition.
|
|
|
Item 3. |
|
Legal Proceedings |
Neither Bancorp nor the Bank has any pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which Bancorp or the Bank is a party or any of its
property is subject.
On October 9, 2009, a complaint captioned PNBK Holdings LLC v. Patriot National Bancorp, Inc. and
Patriot National Bank was filed in the United States District Court, Southern District of New York
(the Federal Litigation). PNBK Holdings LLC is a Delaware entity formed as the investment
vehicle for an investor group led by Michael A. Carrazza (collectively, Carrazza). Carrazza also
filed a complaint with the State of Connecticut Superior Court Stamford Judicial District on
October 9, 2009 captioned PNBK Holdings LLC and Michael A. Carrazza v. Patriot National Bancorp,
Inc. and Patriot National Bank (the Connecticut Litigation). The complaint filed by Carrazza
alleged, among other things, breach of the Letter of Intent, including a breach by Bancorp of the
Letter of Intents exclusivity provision and Bancorps failure to enter into a definitive
Securities Purchase Agreement (SPA). On December 16, 2009, Bancorp and Carrazza executed the
SPA. As part of the execution of the SPA, the Federal Litigation was withdrawn with prejudice and
the Connecticut Litigation was held in abeyance, pending the closing
of the transaction. On October 15, 2010, the transaction closed and,
as a result, the Connecticut Litigation was subsequently withdrawn.
There are no outstanding claims or liabilities relating to these
proceedings.
23
PART II
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|
|
Item 5. |
|
Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Market Information
Bancorp Common Stock is traded on the NASDAQ Global Market under the Symbol PNBK. On December
31, 2010, the last sale price for Bancorp Common Stock on the NASDAQ Global Market was $2.10.
The following table sets forth the high and low sales price and dividends per share of Bancorp
Common Stock for the last two fiscal years for each quarter as reported on the NASDAQ Global
Market.
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|
2010 |
|
|
2009 |
|
|
|
|
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|
|
|
|
|
|
Cash |
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|
|
|
|
|
|
|
|
|
Cash |
|
|
|
Sales Price |
|
|
Dividends |
|
|
Sales Price |
|
|
Dividends |
|
Quarter Ended |
|
High |
|
|
Low |
|
|
Declared |
|
|
High |
|
|
Low |
|
|
Declared |
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
March 31 |
|
$ |
2.15 |
|
|
$ |
1.41 |
|
|
$ |
|
|
|
$ |
7.74 |
|
|
$ |
2.13 |
|
|
$ |
|
|
June 30 |
|
|
3.00 |
|
|
|
1.50 |
|
|
|
|
|
|
|
5.04 |
|
|
|
2.04 |
|
|
|
|
|
September 30 |
|
|
2.45 |
|
|
|
1.56 |
|
|
|
|
|
|
|
4.50 |
|
|
|
1.85 |
|
|
|
|
|
December 31 |
|
|
2.40 |
|
|
|
1.85 |
|
|
|
|
|
|
|
2.45 |
|
|
|
1.40 |
|
|
|
|
|
Holders
There were approximately 587 shareholders of record of Bancorp Common Stock as of December 31,
2010. This number does not reflect the number of persons or entities holding stock in nominee name
through banks, brokerage firms or other nominees.
Dividends
Bancorps ability to pay dividends is dependent on the Banks ability to pay dividends to Bancorp.
Pursuant to the February 9, 2009 Agreement between the Bank and the Office of the Comptroller of
the Currency, the Bank can pay dividends to Bancorp only pursuant to a dividend policy requiring
compliance with the Banks OCC-approved capital program, in compliance with applicable law and with
the prior written determination of no supervisory objection by the Assistant Deputy Comptroller.
In addition to the Agreement, certain other restrictions exist regarding the ability of the Bank to
transfer funds to Bancorp in the form of cash dividends, loans or advances. The approval of the
Comptroller of the Currency is required to pay dividends in excess of the Banks earnings retained
in the current year plus retained net earnings for the preceding two years. As of December 31,
2010, the Bank had no retained earnings available for distribution to Bancorp as dividends. The
Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum
regulatory requirements. The Federal Reserve Bank has imposed further dividend restrictions on
Bancorp.
24
Recent Sales of Unregistered Securities
During the fourth quarter of 2010, Bancorp did not have any sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of 2010 there were no shares of Bancorp stock repurchased through the
Stock Repurchase Program. For additional information regarding the Companys stock repurchase
program, see Note 13 to the Consolidated Financial Statements.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2010, Bancorp did not have any securities authorized for issuance under equity
compensation plans.
25
Performance Graph
The performance graph compares the yearly percentage change in Bancorps cumulative total
shareholder return on its common stock over the last five fiscal years to the cumulative total
return of the S&P 500 Index and the NASDAQ Bank Index. Total shareholder return is measured by
dividing the sum of the cumulative amount of dividends for the measurement period (assuming
dividend reinvestment) and the difference between Bancorps share price at the end and the
beginning of the measurement period, by the share price at the beginning of the measurement period.
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|
Period Ending |
|
Index |
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
|
12/31/10 |
|
|
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|
Patriot National
Bancorp, Inc |
|
|
100.00 |
|
|
|
143.75 |
|
|
|
86.79 |
|
|
|
37.23 |
|
|
|
8.42 |
|
|
|
11.41 |
|
S & P 500 |
|
|
100.00 |
|
|
|
117.03 |
|
|
|
121.16 |
|
|
|
74.53 |
|
|
|
92.01 |
|
|
|
103.77 |
|
NASDAQ Bank Index |
|
|
100.00 |
|
|
|
106.20 |
|
|
|
82.76 |
|
|
|
62.96 |
|
|
|
51.31 |
|
|
|
57.41 |
|
26
|
|
|
Item 6. |
|
Selected Financial Data |
|
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At or for the year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
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|
|
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|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
$ |
35,608,891 |
|
|
$ |
42,968,080 |
|
|
$ |
55,750,246 |
|
|
$ |
51,862,157 |
|
|
$ |
38,009,526 |
|
Interest expense |
|
|
13,474,543 |
|
|
|
24,359,828 |
|
|
|
28,539,067 |
|
|
|
27,767,310 |
|
|
|
18,069,648 |
|
Net interest income |
|
|
22,134,348 |
|
|
|
18,608,252 |
|
|
|
27,211,179 |
|
|
|
24,094,847 |
|
|
|
19,939,878 |
|
Provision for loan losses |
|
|
7,714,000 |
|
|
|
13,089,000 |
|
|
|
11,289,772 |
|
|
|
75,000 |
|
|
|
1,040,000 |
|
Non-interest income (loss) |
|
|
2,354,240 |
|
|
|
2,946,480 |
|
|
|
(149,108 |
) |
|
|
2,233,915 |
|
|
|
2,359,149 |
|
Non-interest expense |
|
|
31,948,533 |
|
|
|
30,131,588 |
|
|
|
25,947,905 |
|
|
|
22,038,836 |
|
|
|
17,576,872 |
|
Provision (benefit) for income taxes |
|
|
225,000 |
|
|
|
2,213,750 |
|
|
|
(3,064,000 |
) |
|
|
1,537,000 |
|
|
|
1,267,000 |
|
Net (loss) income |
|
|
(15,398,945 |
) |
|
|
(23,879,606 |
) |
|
|
(7,111,606 |
) |
|
|
2,677,926 |
|
|
|
2,415,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share |
|
|
(1.30 |
) |
|
|
(5.02 |
) |
|
|
(1.50 |
) |
|
|
0.56 |
|
|
|
0.67 |
|
Diluted (loss) income per share |
|
|
(1.30 |
) |
|
|
(5.02 |
) |
|
|
(1.50 |
) |
|
|
0.56 |
|
|
|
0.66 |
|
Dividends per share |
|
|
|
|
|
|
|
|
|
|
0.180 |
|
|
|
0.180 |
|
|
|
0.175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
136,324,258 |
|
|
|
97,535,593 |
|
|
|
4,286,233 |
|
|
|
2,760,246 |
|
|
|
3,868,670 |
|
Federal funds sold |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
|
|
20,000,000 |
|
|
|
11,000,000 |
|
|
|
27,000,000 |
|
Short-term investments |
|
|
453,400 |
|
|
|
263,839 |
|
|
|
316,518 |
|
|
|
251,668 |
|
|
|
24,605,869 |
|
Investment securities |
|
|
49,765,000 |
|
|
|
55,177,931 |
|
|
|
58,401,177 |
|
|
|
71,857,840 |
|
|
|
70,222,035 |
|
Loans, net |
|
|
534,531,213 |
|
|
|
645,205,943 |
|
|
|
788,568,687 |
|
|
|
685,885,990 |
|
|
|
506,884,155 |
|
Total assets |
|
|
784,324,854 |
|
|
|
866,416,921 |
|
|
|
913,358,978 |
|
|
|
807,530,254 |
|
|
|
645,982,795 |
|
Total deposits |
|
|
646,808,829 |
|
|
|
761,334,292 |
|
|
|
784,821,351 |
|
|
|
672,399,409 |
|
|
|
561,451,664 |
|
Total borrowings |
|
|
65,248,000 |
|
|
|
65,248,000 |
|
|
|
65,248,000 |
|
|
|
62,748,000 |
|
|
|
16,248,000 |
|
Total shareholders equity |
|
|
67,172,188 |
|
|
|
35,861,310 |
|
|
|
58,774,144 |
|
|
|
66,835,367 |
|
|
|
64,283,345 |
|
27
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and
Results of Operation |
Critical Accounting Policies
Bancorps significant accounting policies are described in Note 1 to the Consolidated Financial
Statements included in this 2010 Annual Report on Form 10-K. The preparation of financial
statements in accordance with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and to disclose contingent assets and liabilities. Actual results could differ from
those estimates. Management has identified accounting for the allowance for loan losses, the
analysis and valuation of its investment securities, and the valuation of deferred tax assets, as
Bancorps most critical accounting policies and estimates in that they are important to the
portrayal of Bancorps financial condition and results. They require managements most subjective
and complex judgment as a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to
loans that are considered impaired. For such impaired loans, an allowance is established when the
discounted cash flows (or collateral value if the loan is collateral dependent or observable market
price) of the impaired loan is lower than the carrying value of that loan. The general component
covers all other loans, segregated generally by loan type, and is based on historical loss
experience with adjustments for qualitative factors which are made after an assessment of internal
or external influences on credit quality that are not fully reflected in the historical loss data.
In addition, a risk rating system is utilized to evaluate the general component of the allowance
for loan losses. Under this system, management assigns risk ratings between one and nine to
commercial and industrial loans, construction loans and commercial real estate loans. Risk ratings
are assigned based upon the recommendations of the credit analyst and the originating loan officer
and confirmed by the Loan Committee at the initiation of the transactions and are reviewed and
changed, when necessary, during the life of the loan. Loans assigned a risk rating of six or above
are monitored more closely by the credit administration officers and the Loan Committee.
28
The Company provides for loan losses based on the consistent application of our documented allowance for loan loss methodology. Loan losses are charged to the allowance for loans losses and
recoveries are credited to it. Additions to the allowance for loan losses are provided by charges
against income based on various factors which, in our judgment, deserve current recognition in
estimating probable losses. Loan losses are charged-off in the period the loans, or portion
thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including
a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral,
less cost to sell, for collateral dependent loans. The Company regularly reviews the loan
portfolio and makes adjustments for loan losses in order to maintain the allowance for loan losses
in accordance with U.S. generally accepted accounting principles. The allowance for loan losses
consists primarily of the following two components:
|
(1) |
|
Allowances are established for impaired loans (generally defined by the Company as
non-accrual loans). The amount of impairment provided for as an allowance is represented
by the deficiency, if any, between the present value of expected future cash flows
discounted at the original loans effective interest rate or the underlying collateral
value, and loans classified as troubled debt restructurings less estimated costs to sell,
if the loan is collateral dependent, and the carrying value of the loan. Impaired loans
that have no impairment losses are not considered for general valuation allowances
described below. |
|
(2) |
|
General allowances are established for loan losses on a portfolio basis for loans that
do not meet the definition of impaired. The portfolio is grouped into similar risk
characteristics, primarily loan type, loan-to-value, if collateral dependent, and internal
risk ratings. Management applies an estimated loss rate to each loan group. The loss
rates applied are based on the Companys cumulative prior three year loss experience
adjusted, as appropriate, for the environmental factors discussed below. This evaluation
is inherently subjective, as it requires material estimates that may be susceptible to
significant revisions based upon changes in economic and real estate market conditions.
Actual loan losses may be more or less than the allowance for loan losses management has
established, which could have an effect on the Companys financial results. |
The adjustments to the Companys loss experience are based on Managements evaluation of several
environmental factors, including:
|
|
|
Changes in local, regional, national and international economic and business conditions
and developments that affect the collectability of the portfolio, including the condition
of various market segments; |
|
|
|
Changes in the nature and volume of the portfolio and in the terms of the loans; |
|
|
|
Changes in the experience, ability, and depth of lending management and other relevant
staff; |
|
|
|
Changes in the volume and severity of past due loans, the volume of nonaccrual loans,
and the volume and severity of adversely classified or graded loans; |
|
|
|
Changes in the quality of the loan review system; |
|
|
|
Changes in the value of the underlying collateral for collateral-dependent loans; |
|
|
|
The existence and effect of any concentrations of credit, and changes in the level of
such concentrations; and |
|
|
|
The effect of other external factors such as competition and legal and regulatory
requirements on the level of estimated credit losses in the existing portfolio. |
29
In evaluating the estimated loss factors to be utilized for each loan group, management also
reviews actual loss history over an extended period of time as reported by the OCC and FDIC for
institutions both in the Companys market area and nationally for periods that are believed to have
experienced similar economic conditions.
In underwriting a loan secured by real property, we require an appraisal of the property by an
independent licensed appraiser approved by the Companys Board of Directors. For loans in excess
of $2.5 million, the appraisal is subject to review by an independent third party hired by the
Company. Management reviews and inspects properties before disbursement of funds during the term
of a construction loan. Generally, Management obtains updated appraisals when a loan is deemed
impaired and if a construction loan, within 120 days prior to the scheduled maturity date. These
appraisals may be more limited than those prepared for the underwriting of a new loan. All
appraisals are also reviewed internally by the internal loan review function.
Management evaluates the allowance for loan losses based on the combined total of the impaired and
general components. Generally, when the loan portfolio increases, absent other factors, the
allowance for loan loss methodology results in a higher dollar amount of estimated probable losses.
Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss
methodology results in a lower dollar amount of estimated probable losses.
Each quarter management evaluates the allowance for loan losses and adjust the allowance as
appropriate through a provision for loan losses. While the Company uses the best information
available to make evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the information used in making the evaluations. In addition, as an
integral part of their examination process, the Office of the Comptroller of the Currency will
periodically review the allowance for loan losses. The OCC may require the Company to adjust the
allowance based on their analysis of information available to them at the time of their
examination.
Fair Value Measurements
Bancorp uses fair value measurements to record fair value adjustments to certain assets and to
determine fair value disclosures. Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value is best determined based upon quoted market prices. However, in
certain instances, there are no quoted market prices for certain assets or liabilities. 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 rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the asset or liability.
30
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement date under current
market conditions. If there has been a significant decrease in the volume and level of activity
for the asset or liability, a change in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances, determining the price at which willing market
participants would transact at the measurement date under current market conditions depends on the
facts and circumstances and requires the use of significant judgment.
The Companys fair value measurements are classified into a fair value hierarchy based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. The three categories within the hierarchy are as follows:
|
|
|
Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
|
|
|
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (such as interest rates,
volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means. |
|
|
|
Level 3 Inputs Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
The assets or liabilitys fair value measurement level within the fair value hierarchy is based on
the lower level of any input that is significant to the fair value measurement. Valuation
techniques used need to maximize the use of observable inputs and minimize the use of unobservable
inputs.
Bancorp performs a quarterly analysis of those securities that are in an unrealized loss position
to determine if those losses qualify as other-than-temporary impairments. This analysis considers
the following criteria in its determination: the ability of the issuer to meet its obligations,
the impairment due to a deterioration in credit, managements plans and ability to maintain its
investment in the security, the length of time and the amount by which the security has been in a
loss position, the interest rate environment, the general economic environment and prospects or
projections for improvement or deterioration.
Management has made the determination that none of the Banks investment securities are
other-than-temporarily impaired at December 31, 2010, and no impairment charges were recorded
during the year ended December 31, 2010.
31
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 carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
The Company recognizes a benefit from its tax positions only if it is more-likely-than-not that the
tax position will be sustained on examination by taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all relevant information.
The periods subject to examination for the Companys Federal returns are the tax years 2005 through
2010. The periods subject to examination for the Companys significant state return, which is
Connecticut, are the tax years 2007 through 2010. The Company believes that its income tax filing
positions and deductions will be sustained upon examination and does not anticipate any adjustments
that will result in a material change in its financial statements. As a result, no reserve for
uncertain income tax positions has been recorded.
The Companys policy for recording interest and penalties related to uncertain tax positions is to
record such items as part of its provision for federal and state income taxes.
Recent Economic Developments
There have been significant and historical disruptions in the financial system during the past few
years and many lenders and financial institutions have reduced or ceased to provide funding to
borrowers, including other lending institutions. The availability of credit, confidence in the
entire financial sector, and volatility in financial markets has been adversely affected. The
Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to
compensate for weaknesses in short-term borrowing markets and other capital markets.
In response to the financial crises affecting the overall banking system and financial markets, on
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA), was enacted. Under the
EESA, the United States Treasury Department (the Treasury) has the authority to, among other
things, purchase mortgages, mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.
32
The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC-insured financial
institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Based on the Banks current capital classification, a higher
level of FDIC insurance premiums is assessed. In addition, the Bank paid a special assessment of
$453,500 in the second quarter of 2009. Special assessments were levied on all financial
institutions.
The EESA includes a permanent provision in the amount of deposits insured by the FDIC to $250,000.
On November 21, 2008, the FDIC adopted the Final Rule implementing the Temporary Liquidity
Guarantee Program (TLGP) inaugurated October 14, 2008. The TLGP consists of two basic
components: (1) the Debt Guarantee Program which guarantees newly issued senior unsecured debt of
banks, thrifts, and certain holding companies and (2) the Transaction Account Guarantee Program
which guarantees certain non-interest bearing deposit transaction accounts, such as business
payroll accounts, regardless of dollar amount. The purpose of the TLGP was to provide an
initiative to counter the system wide crisis in the nations financial sector by promoting
financial stability by preserving confidence in the banking system and encourages liquidity in
order to ease lending to creditworthy business and consumers.
Patriot National Bank participated in the FDIC Transaction Account Guarantee Program which
guaranteed full coverage on certain noninterest-bearing deposit transaction accounts, such as
business accounts, until the expiration date of the program on December 31, 2010. Effective
December 31, 2010 through December 31, 2012, The Board of Directors of the FDIC implemented a new
final rule under section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that
provides temporary unlimited coverage in addition to, and separate from, the coverage of at least
$250,000 available to depositors under the FDICs general rules. The term noninterest-bearing
transaction account includes a traditional checking account or demand deposit account on which the
Bank pays no interest. It also includes Interest on Lawyer Trust Accounts (IOLTAs). It does not
include other accounts, such as Traditional checking or demand deposit accounts that may earn
interest, NOW accounts or money market deposit accounts. The Company did not participate in the
Debt Guarantee portion of the TLGP.
Summary
In a year of continued economic slowdown and financial disruption, Bancorp reported a net loss of
$15.4 million ($1.30 loss per share) for 2010 compared to a net loss of $23.9 million ($5.02 loss
per share) for 2009. This is primarily the result of an 19% increase in the net interest income
and a $5.4 million decrease in the loan loss provision. Total assets ended the year at $784.3
million, which represents a decrease of $82.1 million. Management strategically planned for a
reduction in assets in 2010 to shrink the exposures in certain loan concentrations and to maintain
regulatory capital.
Net interest income for the year ended December 31, 2010 increased $3.5 million, or 19%, to $22.1
million as compared to $18.6 million for the year ended December 31, 2009. This is the result of a
significant reduction in the cost of funds on deposits, in conjunction with the collection of $1.8
million of interest on past due non-performing loans after scheduled principal payments, if any,
have been satisfied.
33
Total assets decreased by 9% during the year as the loan portfolio decreased $110.7 million from
$645.2 million at December 31, 2009 to $534.5 million at December 31, 2010. The available-for-sale
securities portfolio decreased by $8.3 million, or 17%, to $40.6 million at December 31, 2010 as
compared to $48.8 million at December 31, 2009. Total deposits decreased $114.5 million from
$761.3 million at December 31, 2009 to $646.8 million at December 31, 2010. This is reflective of
managements pricing strategy to lower the cost of funds and reduce the reliance on higher cost
funding products. FHLB advances are unchanged from December 31, 2009. Shareholders equity
increased $31.3 million from $35.9 million at December 31, 2009 as compared to $67.2 million at
December 31, 2010. This is primarily a result of the capital infusion of $46.2 million less the
net loss of $15.4 million.
FINANCIAL CONDITION
Assets
Bancorps total assets decreased $82.1 million, or 9%, from $866.4 million at December 31, 2009 to
$784.3 million at December 31, 2010 as the Bank reduced its concentration in high risk loan
products as construction loans were reduced by $90.6 million. Cash and due from banks increased
$38.8 million compared to December 31, 2009. This increase is part of managements strategy to
strengthen the Companys liquidity position.
Investments
The following table is a summary of Bancorps investment portfolio at fair value at December 31 for
the years shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government Agency obligations |
|
$ |
|
|
|
$ |
5,108,500 |
|
|
$ |
10,102,248 |
|
U. S. Government Agency
mortgage-backed securities |
|
|
37,471,878 |
|
|
|
40,503,458 |
|
|
|
37,998,569 |
|
Auction Rate preferred equity securities |
|
|
3,092,822 |
|
|
|
3,218,023 |
|
|
|
3,878,860 |
|
Federal Reserve Bank stock |
|
|
1,192,000 |
|
|
|
1,839,650 |
|
|
|
1,913,200 |
|
Federal Home Loan Bank stock |
|
|
4,508,300 |
|
|
|
4,508,300 |
|
|
|
4,508,300 |
|
Other investments |
|
|
3,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
49,765,000 |
|
|
$ |
55,177,931 |
|
|
$ |
58,401,177 |
|
|
|
|
|
|
|
|
|
|
|
Total investments decreased $5.4 million, or 10%, primarily as a result of the $15.0 million in
proceeds from calls of government agency obligations, $8.8 million in principal payments on
mortgage-backed securities, $0.6 million from proceeds from sales of Federal Reserve Bank stock,
which were partially offset by $15.2 million in purchases of government agency bonds and
mortgage-backed securities and $3.5 million in purchases of other investments.
34
The following table presents the maturity distribution of available-for-sale investment securities
at December 31, 2010 and the weighted average yield of the amortized cost of such securities. The
weighted average yields were calculated on the amortized cost and effective yields to maturity of
each security. 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. As mortgage-backed securities are not due at a single maturity date, they are included
in the No maturity category in the following maturity summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over one |
|
|
Over five |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
One year |
|
|
through |
|
|
through |
|
|
Over ten |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
or less |
|
|
five years |
|
|
ten years |
|
|
years |
|
|
No maturity |
|
|
Total |
|
|
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government Agency
mortgage-backed
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
36,572,430 |
|
|
$ |
36,572,430 |
|
|
|
3.69 |
% |
Money market preferred
equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,899,720 |
|
|
|
1,899,720 |
|
|
|
4.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38,472,150 |
|
|
$ |
38,472,150 |
|
|
|
3.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.73 |
% |
|
|
3.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a summary of investments for any issuer that exceeds 10% of
shareholders equity at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government Agency mortgage-backed securities |
|
$ |
36,572,430 |
|
|
$ |
37,471,878 |
|
35
Loans
The following table is a summary of Bancorps loan portfolio at December 31 for each of the years
shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
228,842,489 |
|
|
$ |
230,225,306 |
|
|
$ |
262,570,339 |
|
|
$ |
233,121,685 |
|
|
$ |
166,799,341 |
|
Residential |
|
|
187,058,318 |
|
|
|
195,571,225 |
|
|
|
170,449,780 |
|
|
|
110,154,838 |
|
|
|
91,077,687 |
|
Construction |
|
|
63,889,083 |
|
|
|
154,457,082 |
|
|
|
257,117,081 |
|
|
|
254,296,326 |
|
|
|
173,840,322 |
|
Construction to permanent |
|
|
10,331,043 |
|
|
|
15,989,976 |
|
|
|
35,625,992 |
|
|
|
37,701,509 |
|
|
|
29,988,131 |
|
Commercial |
|
|
14,573,790 |
|
|
|
19,298,505 |
|
|
|
33,860,527 |
|
|
|
27,494,531 |
|
|
|
23,997,640 |
|
Consumer home equity |
|
|
42,884,962 |
|
|
|
44,309,265 |
|
|
|
45,022,128 |
|
|
|
29,154,498 |
|
|
|
26,933,277 |
|
Consumer and overdrafts |
|
|
1,932,763 |
|
|
|
1,155,059 |
|
|
|
993,707 |
|
|
|
1,270,360 |
|
|
|
1,251,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
549,512,448 |
|
|
|
661,006,418 |
|
|
|
805,639,554 |
|
|
|
693,193,747 |
|
|
|
513,887,698 |
|
Premiums on purchased loans |
|
|
242,426 |
|
|
|
131,993 |
|
|
|
158,072 |
|
|
|
195,805 |
|
|
|
292,543 |
|
Net deferred costs (fees) |
|
|
150,440 |
|
|
|
(138,350 |
) |
|
|
(981,869 |
) |
|
|
(1,830,942 |
) |
|
|
(1,665,654 |
) |
Allowance for loan losses |
|
|
(15,374,101 |
) |
|
|
(15,794,118 |
) |
|
|
(16,247,070 |
) |
|
|
(5,672,620 |
) |
|
|
(5,630,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
534,531,213 |
|
|
$ |
645,205,943 |
|
|
$ |
788,568,687 |
|
|
$ |
685,885,990 |
|
|
$ |
506,884,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bancorps net loan portfolio decreased $110.7 million, or 17%, to $534.5 million at December 31,
2010 from $645.2 million at December 31, 2009. The decline in the loan portfolio was primarily as
a result of a continued moratorium on new construction loans, a contraction of commercial real
estate loans and the continued payoff on the remainder of the loan portfolio. Significant
decreases in the portfolio include a $90.6 million decrease in construction loans, a $1.4 million
decrease in commercial real estate loans, a $5.7 million decrease in construction to permanent
loans, a $4.7 million decrease in commercial loans and an $8.5 million decrease in residential real
estate loans because of refinances due to a lower rate environment. The decline in the loan
portfolio in 2010 reflects the implementation of managements strategic decision to reduce its
concentration in speculative construction and commercial real estate lending. The decline in the
portfolio is also reflective of the weakened demand for real estate based financing in Fairfield
and New Haven Counties in Connecticut and the metropolitan New York area where the Bank primarily
conducts its lending business.
At December 31, 2010, the net loan to deposit ratio was 83% and the net loan to asset ratio was
68%. At December 31, 2009, the net loan to deposit ratio was 85%, and the net loan to asset ratio
was 74%.
36
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturities of loans in Bancorps portfolio at December 31, 2010,
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 |
|
$ |
39,902 |
|
|
$ |
42,987 |
|
|
$ |
145,953 |
|
|
$ |
228,842 |
|
Residential real estate |
|
|
3,616 |
|
|
|
622 |
|
|
|
182,820 |
|
|
|
187,058 |
|
Construction loans |
|
|
63,889 |
|
|
|
|
|
|
|
|
|
|
|
63,889 |
|
Construction to permanent loans |
|
|
|
|
|
|
|
|
|
|
10,331 |
|
|
|
10,331 |
|
Commercial loans |
|
|
5,916 |
|
|
|
4,385 |
|
|
|
4,273 |
|
|
|
14,574 |
|
Consumer home equity |
|
|
1,093 |
|
|
|
55 |
|
|
|
41,737 |
|
|
|
42,885 |
|
Consumer and overdrafts |
|
|
1,792 |
|
|
|
141 |
|
|
|
|
|
|
|
1,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
116,208 |
|
|
$ |
48,190 |
|
|
$ |
385,114 |
|
|
$ |
549,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans |
|
$ |
26,602 |
|
|
$ |
22,958 |
|
|
$ |
13,139 |
|
|
$ |
62,699 |
|
Variable rate loans |
|
|
89,606 |
|
|
|
25,232 |
|
|
|
371,975 |
|
|
|
486,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
116,208 |
|
|
$ |
48,190 |
|
|
$ |
385,114 |
|
|
$ |
549,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Concentrations
The Bank has no concentrations of loans other than those disclosed in the above summary loan
portfolio table. Commercial real estate plus construction represents 55.2% of total loans, down
from 60.6% at December 31, 2009.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance for loan losses
decreased slightly by $420,000 from December 31, 2009 to December 31, 2010 due to net charge-offs
of $8.1 million after provisions of $7.7 million.
37
Based on the significant reduction in the loan portfolio and managements most recent evaluation of
the adequacy of the allowance for loan losses, the provision for loan losses charged to operations
for the year ended December 31, 2010 of $7.7 million represents a decrease of $5.4 million when
compared to the provision of $13.1 million for the year ended December 31, 2009.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due for
payment unless the loan is well-secured and in process of collection. Consumer installment loans
are typically charged off no later than 180 days past due. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an
earlier date if collection of principal or interest is considered doubtful. All interest accrued
but not collected for loans that are placed on nonaccrual status or charged off is reversed against
interest income. The interest on these loans is accounted for on the cash-basis method until
qualifying for return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
Management considers all non-accrual loans and troubled debt restructurings to be impaired. In
most cases, loan payments that are past due less than 90 days, based on contractual terms, are
considered collection delays and the related loans are not considered to be impaired. The Bank
considers consumer installment loans to be pools of smaller balance homogeneous loans, which are
collectively evaluated for impairment.
38
Analysis of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
15,794 |
|
|
$ |
16,247 |
|
|
$ |
5,673 |
|
|
$ |
5,630 |
|
|
$ |
4,588 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
(2,560 |
) |
|
|
(2,380 |
) |
|
|
(708 |
) |
|
|
(32 |
) |
|
|
(1 |
) |
Residential real estate |
|
|
(600 |
) |
|
|
(356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
(4,726 |
) |
|
|
(9,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
(396 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer home equity |
|
|
(46 |
) |
|
|
(1,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
(42 |
) |
|
|
(51 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(8,370 |
) |
|
|
(13,730 |
) |
|
|
(716 |
) |
|
|
(32 |
) |
|
|
(1 |
) |
Recoveries |
|
|
236 |
|
|
|
188 |
|
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(8,134 |
) |
|
|
(13,542 |
) |
|
|
(715 |
) |
|
|
(32 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions charged to operations |
|
|
7,714 |
|
|
|
13,089 |
|
|
|
11,289 |
|
|
|
75 |
|
|
|
1,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
15,374 |
|
|
$ |
15,794 |
|
|
$ |
16,247 |
|
|
$ |
5,673 |
|
|
$ |
5,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net (charge-offs) recoveries
during the period to average loans
outstanding during the period |
|
|
(1.32 |
%) |
|
|
(1.81 |
%) |
|
|
(0.09 |
%) |
|
|
(0.00 |
%) |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of ALLL / Gross Loans |
|
|
2.80 |
% |
|
|
2.39 |
% |
|
|
2.02 |
% |
|
|
0.82 |
% |
|
|
1.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of loans in each |
|
Balance at end of each |
|
Amounts (thousands of dollars) |
|
|
category to total loans |
|
period applicable to: |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
7,633 |
|
|
$ |
5,752 |
|
|
$ |
4,843 |
|
|
$ |
1,963 |
|
|
$ |
1,943 |
|
|
|
41.64 |
% |
|
|
34.83 |
% |
|
|
32.59 |
% |
|
|
33.63 |
% |
|
|
32.46 |
% |
Residential |
|
|
2,364 |
|
|
|
1,575 |
|
|
|
1,417 |
|
|
|
296 |
|
|
|
245 |
|
|
|
34.04 |
% |
|
|
29.59 |
% |
|
|
21.16 |
% |
|
|
15.89 |
% |
|
|
17.72 |
% |
Construction |
|
|
3,478 |
|
|
|
6,557 |
|
|
|
8,654 |
|
|
|
2,644 |
|
|
|
2,557 |
|
|
|
11.63 |
% |
|
|
23.37 |
% |
|
|
31.91 |
% |
|
|
36.68 |
% |
|
|
33.83 |
% |
Construction to permanent |
|
|
492 |
|
|
|
93 |
|
|
|
264 |
|
|
|
391 |
|
|
|
441 |
|
|
|
1.88 |
% |
|
|
2.42 |
% |
|
|
4.42 |
% |
|
|
5.44 |
% |
|
|
5.84 |
% |
Commercial |
|
|
441 |
|
|
|
521 |
|
|
|
471 |
|
|
|
271 |
|
|
|
290 |
|
|
|
2.65 |
% |
|
|
2.92 |
% |
|
|
4.20 |
% |
|
|
3.97 |
% |
|
|
4.67 |
% |
Consumer installment |
|
|
80 |
|
|
|
47 |
|
|
|
28 |
|
|
|
30 |
|
|
|
31 |
|
|
|
0.35 |
% |
|
|
0.17 |
% |
|
|
0.12 |
% |
|
|
0.18 |
% |
|
|
0.24 |
% |
Consumer home equity |
|
|
498 |
|
|
|
703 |
|
|
|
336 |
|
|
|
77 |
|
|
|
72 |
|
|
|
7.81 |
% |
|
|
6.70 |
% |
|
|
5.59 |
% |
|
|
4.21 |
% |
|
|
5.24 |
% |
Unallocated |
|
|
388 |
|
|
|
546 |
|
|
|
234 |
|
|
|
1 |
|
|
|
51 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,374 |
|
|
$ |
15,794 |
|
|
$ |
16,247 |
|
|
$ |
5,673 |
|
|
$ |
5,630 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Non-Accrual, Past Due and Restructured Loans
The following table is a summary of non-accrual and past due loans at the end of each of the last
five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(thousands of dollars) |
|
|
Loans delinquent over 90
days still accruing |
|
$ |
3,374 |
|
|
$ |
3,571 |
|
|
$ |
337 |
|
|
$ |
112 |
|
|
$ |
1,897 |
|
Non-accrual loans |
|
|
89,150 |
|
|
|
113,537 |
|
|
|
80,156 |
|
|
|
3,832 |
|
|
|
2,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,524 |
|
|
$ |
117,108 |
|
|
$ |
80,493 |
|
|
$ |
3,944 |
|
|
$ |
4,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
16.83 |
% |
|
|
17.72 |
% |
|
|
10.21 |
% |
|
|
0.57 |
% |
|
|
0.93 |
% |
% of Total Assets |
|
|
11.80 |
% |
|
|
13.52 |
% |
|
|
8.81 |
% |
|
|
0.49 |
% |
|
|
0.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional income on non-accrual
loans if recognized on an accrual
basis |
|
$ |
6,618 |
|
|
$ |
5,312 |
|
|
$ |
2,854 |
|
|
$ |
168 |
|
|
$ |
141 |
|
Included in non-accruing loans were loans that were current within 30 days as to payments of $31.5
million and $20.9 million as of December 31, 2010 and 2009, respectively.
During 2010, 2009 and 2008, interest income collected and recognized on impaired loans was
$1,806,759, $424,745 and $352,014, respectively.
At December 31, 2010, there were 19 loans totaling $38.0 million that were considered as troubled
debt restructurings, all of which are considered impaired loans, as compared to nine loans totaling
$11.5 million at December 31, 2009, all of which are included in non-accrual and impaired loans.
Loan modifications, which resulted in these loans being considered troubled debt restructurings,
are primarily in the form of rate concessions or term extensions. There were no commitments to
advance additional funds under modified terms for these loans.
Increases in troubled debt restructurings are attributable to the state of the economy, which has
severely impacted the real estate market and placed unprecedented stress on credit markets.
Residents of Fairfield County, many of whom are associated with the financial services industry,
have been affected by the impact of the economy on employment and real estate values.
40
The Companys most recent impairment analysis resulted in identification of $100.7 million of
impaired loans for which specific reserves of $6.0 million were required. The $100.7 million of
impaired loans at December 31, 2010 is comprised of exposure to 44 borrowers. All impaired loans
except one were collateral dependent and secured by residential or commercial real estate
located within the Banks market area. In all cases, the Bank has obtained current appraisal
reports from independent licensed appraisal firms and reduced those values for estimated selling
expenses to determine estimated impairment. Based on the Banks analysis for loan impairment,
specific reserves totaling $6.0 million have been established for collateral dependent loans. As
of December 31, 2010 there were no impairments related to loans measured based on discounted cash
flow. Of the $100.7 million of impaired loans at December 31, 2010, 14 borrowers with aggregate
balances of $31.5 million continue to make loan payments and these loans are under 30 days past due
as to payments. Another 4 loans totaling $12.7 million are over 30 days but under 90 days past due
as to payments. In addition to the impaired loans of
$100.7 million, there are $59.5 million of
loans for which management has a concern as to the ability of the borrower to comply with the
present repayment terms. These borrowers continue to make payments and these loans are less than
90 days past due at year end. This exposure is comprised of 37 borrowers that are categorized as
substandard accruing.
The non-performing loans decreased from $113.5 million at December 31, 2009 to $89.2 million at
December 31, 2010. The primary reason for the 21% decline was the workout/repayment of
non-accruing loans. Additionally, the riskiest portion of the non-accruing loans was charged-off
in conjunction with our monthly impairment analysis. The non-performing loans peaked at $137.9
million at September 30, 2009 and have been steadily declining since. The focus of the Banks
attention continues to be on the workout effort.
Loans delinquent over 90 days and still accruing aggregating $3.4 million are comprised of three
loans which matured and are in the process of being renewed or awaiting payoff. All were current
as to loan payments, but past the loans maturity dates.
All potential problem loans are reviewed by a board-level committee.
Based upon the overall assessment and evaluation of the loan portfolio, management believes the
allowance for loan losses of $15.4 million, at December 31, 2010, which represents 2.80% of gross
loans outstanding, is adequate under prevailing economic conditions, to absorb existing losses in
the loan portfolio. At December 31, 2009, the allowance for loan losses was $15.8 million, or
2.39%, of gross loans outstanding. The loan portfolio was reduced by
$110.7 million, or 17.2%.
Included were payoffs of $52.1 million of speculative construction loans and net charge-offs were
$8.1 million.
41
Other Real Estate Owned
The following table is a summary of Bancorps other real estate owned as of December 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Residential construction |
|
$ |
15,774,187 |
|
|
$ |
13,524,597 |
|
Commercial |
|
|
|
|
|
|
4,934,896 |
|
Land |
|
|
634,600 |
|
|
|
614,500 |
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
16,408,787 |
|
|
$ |
19,073,993 |
|
|
|
|
|
|
|
|
The balance of other real estate owned at December 31, 2010 and 2009 is comprised of seven and nine
properties, respectively, all of which were obtained through loan foreclosure proceedings. During
the year ended December 31, 2010, the Bank sold seven and acquired five properties.
Deferred Taxes
The determination of the amount of deferred income tax assets which are more likely than not to be
realized is primarily dependent on projections of future earnings, which are subject to uncertainty
and estimates that may change given economic conditions and other factors. A valuation allowance
related to deferred tax assets is required when it is considered more likely than not that all or
part of the benefit related to such assets will not be realized. Management has reviewed the
deferred tax position of Bancorp at December 31, 2010. The deferred tax position has been affected
by several significant transactions in the past several years. These transactions include
increased provision for loan losses, the levels of non-accrual loans and other-than-temporary
impairment write-offs of certain investments. As a result, the Company is in a cumulative net loss
position at December 31, 2010, and under the applicable accounting guidance, has concluded that it
is not more-likely-than-not that the Company will be able to realize its deferred tax assets and
accordingly has established a full valuation allowance totaling $18.5 million against its deferred
tax asset at December 31, 2010. The valuation allowance is analyzed quarterly for changes
affecting the deferred tax asset. If, in the future, the Company generates taxable income on a
sustained basis, managements conclusion regarding the need for a deferred tax asset valuation
allowance could change, resulting in the reversal of all or a portion of the deferred tax asset
valuation allowance.
At December 31, 2010, the deferred tax liability was approximately $795,000. The change in this
balance as compared to the year ended December 31, 2009 was the result of a $6.3 million increase
to the full valuation allowance of $18.5 million in 2010. At December 31, 2009, the deferred tax
liability was $503,000.
42
Deposits
The following table is a summary of Bancorps deposits at December 31 for each of the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
51,058,373 |
|
|
$ |
49,755,521 |
|
|
$ |
50,194,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
deposit, less than $100,00 |
|
|
251,296,558 |
|
|
|
305,719,484 |
|
|
|
405,298,436 |
|
Certificates of deposit, $100,000 or
more |
|
|
175,431,252 |
|
|
|
202,493,307 |
|
|
|
195,502,087 |
|
Money markets |
|
|
92,683,478 |
|
|
|
112,017,987 |
|
|
|
68,241,790 |
|
Savings |
|
|
57,041,943 |
|
|
|
69,766,296 |
|
|
|
46,040,086 |
|
NOW |
|
|
19,297,225 |
|
|
|
21,581,697 |
|
|
|
19,544,552 |
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing |
|
|
595,750,456 |
|
|
|
711,578,771 |
|
|
|
734,626,951 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
646,808,829 |
|
|
$ |
761,334,292 |
|
|
$ |
784,821,351 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits decreased $114.5 million, or 15%, to $646.8 million at December 31, 2010. Interest
bearing deposits decreased $115.8 million, or 16%, to $595.8 million while non-interest bearing
deposits increased $1.3 million, or 3%, to $51.1 million at December 31, 2010.
Certificates of deposit decreased by $81.5 million, which represents a decrease of 16% when
compared to last year. Certificates of deposit less than $100,000 and certificates of deposit
greater than $100,000 decreased by $54.4 million, or 18%, and $27.1 million, or 13%, respectively.
This is a result of management intentionally allowing higher rate certificates of deposit to
mature. Savings accounts decreased $12.7 million, or 18%, as compared to last year and money
market fund accounts decreased $19.3 million, or 17%. This is a result of the lower interest paid
on these products. NOW accounts decreased $2.3 million, or 11%. Demand deposits increased $1.3
million, or 3%. The significant decrease in deposits is a result of managements strategy to
reduce the overall cost of funds.
43
As of December 31, 2010, the Banks maturities of time deposits were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
$100,000 or |
|
|
|
|
|
|
$100,000 |
|
|
greater |
|
|
Totals |
|
|
|
(thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less |
|
$ |
66,177 |
|
|
$ |
46,969 |
|
|
$ |
113,146 |
|
Four to six months |
|
|
58,635 |
|
|
|
42,347 |
|
|
|
100,982 |
|
Seven months to one year |
|
|
58,081 |
|
|
|
34,815 |
|
|
|
92,896 |
|
Over one year |
|
|
68,404 |
|
|
|
51,300 |
|
|
|
119,704 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
251,297 |
|
|
$ |
175,431 |
|
|
$ |
426,728 |
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Borrowings remain unchanged at $65.2 million at December 31, 2010 as compared to December 31, 2009.
Borrowings are comprised of $50 million in Federal Home Loan Bank Advances, $8.2 million in junior
subordinated debentures and $7 million in securities sold under repurchase agreements.
The Bank had no short-term borrowings from the Federal Home Loan Bank outstanding at December 31,
2010 and 2009. In addition, at December 31, 2010, the Bank has advances of $50.0 million from the
Federal Home Loan Bank with maturities greater than one year.
Shareholders Equity
Shareholders equity increased $31.3 million to $67.2 million at December 31, 2010 from $35.9
million at December 31, 2009. This is primarily a result of the capital infusion of $46.2 million
less the net loss of $15.4 million.
Other
The aggregate cash surrender value of the bank-owned life insurance increased $489,000 at December
31, 2010 to $20,348,332 due to income earned of $547,000 for the year ended December 31, 2010.
This was offset by the payment of a death benefit claim during 2010.
The decrease in accrued interest receivable is due to lower outstanding balances in loans and
investment securities at year end.
The decrease in premises and equipment is due to amortization associated with leasehold
improvements, furniture and fixtures, and equipment.
44
The following table presents average balance sheets (daily averages), interest income, interest
expense and the corresponding yields earned and rates paid:
Distribution of Assets, Liabilities and Shareholders Equity
Interest Rates and Interest Differential and Rate Volume Variance Analysis (1)
(thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 vs. 2009 Fluctuations |
|
|
2009 vs. 2008 Fluctuations |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest Income /Expense
(3) |
|
|
Interest Income/Expense (3) |
|
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Due to Change in: |
|
|
Due to Change in: |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2) |
|
$ |
617,403 |
|
|
$ |
33,616 |
|
|
|
5.44 |
% |
|
$ |
750,127 |
|
|
$ |
41,121 |
|
|
|
5.48 |
% |
|
$ |
771,174 |
|
|
$ |
52,484 |
|
|
|
6.81 |
% |
|
$ |
(7,208 |
) |
|
$ |
(297 |
) |
|
$ |
(7,505 |
) |
|
$ |
(1,393 |
) |
|
$ |
(9,970 |
) |
|
$ |
(11,363 |
) |
Federal funds sold and
other cash equivalents |
|
|
81,400 |
|
|
|
202 |
|
|
|
0.25 |
% |
|
|
104,668 |
|
|
|
218 |
|
|
|
0.21 |
% |
|
|
12,435 |
|
|
|
325 |
|
|
|
2.61 |
% |
|
|
(44 |
) |
|
|
28 |
|
|
|
(16 |
) |
|
|
435 |
|
|
|
(542 |
) |
|
|
(107 |
) |
Investments (4) |
|
|
62,223 |
|
|
|
1,791 |
|
|
|
2.88 |
% |
|
|
44,070 |
|
|
|
1,629 |
|
|
|
3.70 |
% |
|
|
63,199 |
|
|
|
2,941 |
|
|
|
4.65 |
% |
|
|
575 |
|
|
|
(413 |
) |
|
|
162 |
|
|
|
(783 |
) |
|
|
(529 |
) |
|
|
(1,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
|
$ |
761,026 |
|
|
$ |
35,609 |
|
|
|
4.68 |
% |
|
$ |
898,865 |
|
|
$ |
42,968 |
|
|
|
4.78 |
% |
|
$ |
846,808 |
|
|
$ |
55,750 |
|
|
|
6.58 |
% |
|
|
(6,677 |
) |
|
|
(682 |
) |
|
|
(7,359 |
) |
|
|
(1,741 |
) |
|
|
(11,041 |
) |
|
|
(12,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
20,964 |
|
|
|
|
|
|
|
|
|
|
|
22,639 |
|
|
|
|
|
|
|
|
|
|
|
5,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(15,579 |
) |
|
|
|
|
|
|
|
|
|
|
(16,689 |
) |
|
|
|
|
|
|
|
|
|
|
(7,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
49,413 |
|
|
|
|
|
|
|
|
|
|
|
43,447 |
|
|
|
|
|
|
|
|
|
|
|
37,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
815,824 |
|
|
|
|
|
|
|
|
|
|
$ |
948,262 |
|
|
|
|
|
|
|
|
|
|
$ |
882,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates |
|
$ |
465,182 |
|
|
$ |
9,723 |
|
|
|
2.09 |
% |
|
$ |
592,724 |
|
|
$ |
18,828 |
|
|
|
3.18 |
% |
|
$ |
568,717 |
|
|
$ |
23,561 |
|
|
|
4.14 |
% |
|
$ |
(3,511 |
) |
|
$ |
(5,594 |
) |
|
$ |
(9,105 |
) |
|
$ |
953 |
|
|
$ |
(5,686 |
) |
|
$ |
(4,733 |
) |
Savings accounts |
|
|
59,270 |
|
|
|
489 |
|
|
|
0.83 |
% |
|
|
59,103 |
|
|
|
1,120 |
|
|
|
1.89 |
% |
|
|
40,252 |
|
|
|
992 |
|
|
|
2.46 |
% |
|
|
3 |
|
|
|
(634 |
) |
|
|
(631 |
) |
|
|
392 |
|
|
|
(264 |
) |
|
|
128 |
|
Money market accounts |
|
|
109,302 |
|
|
|
892 |
|
|
|
0.82 |
% |
|
|
106,091 |
|
|
|
1,917 |
|
|
|
1.81 |
% |
|
|
54,321 |
|
|
|
1,229 |
|
|
|
2.26 |
% |
|
|
56 |
|
|
|
(1,081 |
) |
|
|
(1,025 |
) |
|
|
973 |
|
|
|
(285 |
) |
|
|
688 |
|
NOW accounts |
|
|
21,618 |
|
|
|
75 |
|
|
|
0.35 |
% |
|
|
21,582 |
|
|
|
156 |
|
|
|
0.72 |
% |
|
|
21,044 |
|
|
|
186 |
|
|
|
0.88 |
% |
|
|
|
|
|
|
(81 |
) |
|
|
(81 |
) |
|
|
5 |
|
|
|
(35 |
) |
|
|
(30 |
) |
FHLB advances |
|
|
50,000 |
|
|
|
1,699 |
|
|
|
3.40 |
% |
|
|
50,003 |
|
|
|
1,699 |
|
|
|
3.40 |
% |
|
|
57,716 |
|
|
|
1,726 |
|
|
|
2.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215 |
) |
|
|
188 |
|
|
|
(27 |
) |
Subordinated debt |
|
|
8,248 |
|
|
|
288 |
|
|
|
3.49 |
% |
|
|
8,248 |
|
|
|
331 |
|
|
|
4.01 |
% |
|
|
8,248 |
|
|
|
536 |
|
|
|
6.50 |
% |
|
|
|
|
|
|
(43 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
(205 |
) |
Other borrowings |
|
|
7,000 |
|
|
|
309 |
|
|
|
4.41 |
% |
|
|
7,000 |
|
|
|
309 |
|
|
|
4.41 |
% |
|
|
7,005 |
|
|
|
309 |
|
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
$ |
720,620 |
|
|
$ |
13,475 |
|
|
|
1.87 |
% |
|
$ |
844,751 |
|
|
$ |
24,360 |
|
|
|
2.88 |
% |
|
$ |
757,304 |
|
|
$ |
28,539 |
|
|
|
3.77 |
% |
|
|
(3,452 |
) |
|
|
(7,433 |
) |
|
|
(10,885 |
) |
|
|
2,108 |
|
|
|
(6,287 |
) |
|
|
(4,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
49,572 |
|
|
|
|
|
|
|
|
|
|
|
47,810 |
|
|
|
|
|
|
|
|
|
|
|
53,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and
other liabilities |
|
|
4,984 |
|
|
|
|
|
|
|
|
|
|
|
3,810 |
|
|
|
|
|
|
|
|
|
|
|
4,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
40,648 |
|
|
|
|
|
|
|
|
|
|
|
51,891 |
|
|
|
|
|
|
|
|
|
|
|
67,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
815,824 |
|
|
|
|
|
|
|
|
|
|
$ |
948,262 |
|
|
|
|
|
|
|
|
|
|
$ |
882,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
22,134 |
|
|
|
|
|
|
|
|
|
|
$ |
18,608 |
|
|
|
|
|
|
|
|
|
|
$ |
27,211 |
|
|
|
|
|
|
$ |
(3,225 |
) |
|
$ |
6,751 |
|
|
$ |
3,526 |
|
|
$ |
(3,849 |
) |
|
$ |
(4,754 |
) |
|
$ |
(8,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest margin |
|
|
|
|
|
|
|
|
|
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
2.07 |
% |
|
|
|
|
|
|
|
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread |
|
|
|
|
|
|
|
|
|
|
2.81 |
% |
|
|
|
|
|
|
|
|
|
|
1.90 |
% |
|
|
|
|
|
|
|
|
|
|
2.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The rate volume analysis reflects the changes in net interest income arising from
changes in interest rates and from asset and liability volume, including mix. The change in
interest attributable to volume includes changes in interest attributable to mix. |
|
(2) |
|
Includes non-accruing loans |
|
(3) |
|
Favorable/(unfavorable) fluctuations. |
|
(4) |
|
Yields are calculated at historical cost and excludes the effects of unrealized
gains or losses on available-for-sale securities. |
45
RESULTS OF OPERATIONS
Comparison of Results of Operations for the years 2010 and 2009
For the year ended December 31, 2010, Bancorp recorded a loss of $15.4 million ($1.30 loss per
share), as compared to 2009 when Bancorp reported a net loss of $23.9 million ($5.02 loss per
share). For the year ended December 31, 2010, Bancorp had a pre-tax loss of $15.2 million with a
tax provision of $225,000 as compared to a pre-tax loss of $21.7 million with a tax provision of
$2.2 million for the year ended December 31, 2009.
Interest and dividend income decreased $7.4 million, or 17%, to $35.6 million in 2010 as compared
to 2009 when interest and dividend income was $43.0 million. The decline in interest income on
loans is primarily the result of a $132.7 million decrease in the average loan portfolio and
average loans outstanding during the year. Interest income on investments increased due to a rise
in the average balance of investments outstanding, but was partially offset by a decline in the
yield on the investment portfolio.
Interest expense decreased $10.9 million, or 45%, to $13.5 million in 2010 compared to $24.4
million in 2009. The decrease in interest expense is primarily a result of decreases in interest
rates paid, in conjunction with a decrease in the average balance of interest bearing liabilities.
The decrease in interest rates was driven primarily by managements plan to reduce the reliance
placed on higher rate certificates of deposit.
Noninterest income was $2.4 million in 2010 as compared to $2.9 million in 2009. The change is due
largely to the gain on the sale of investment securities of $434,000 recorded in 2009; there were
no such sales in 2010.
Noninterest expenses for 2010 totaled $31.9 million, which represents an increase of $1.8 million,
or 6%, over the prior year. The increase in noninterest expenses is primarily a result of a $1.5
million increase in costs relating to other real estate operations and a $1.3 million growth in
salaries and benefit expenses. These were partially offset by a decrease of $1.0 million in
professional fees and other outside services, which essentially pertain to the decrease in capital
raising efforts, regulatory matters and non-performing assets.
The following are measurements relating to Bancorps earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on average assets |
|
|
(1.89 |
%) |
|
|
(2.52 |
%) |
|
|
(0.81 |
%) |
Loss on average equity |
|
|
(37.88 |
%) |
|
|
(46.02 |
%) |
|
|
(10.62 |
%) |
Dividend payout ratio |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Average equity to average assets |
|
|
4.98 |
% |
|
|
5.47 |
% |
|
|
7.59 |
% |
Loss per share |
|
$ |
(1.30 |
) |
|
$ |
(5.02 |
) |
|
$ |
(1.50 |
) |
46
Interest income and expense
Bancorps net interest income increased $3.5 million, or 19%, to $22.1 million in 2010 from $18.6
million in 2009. Bancorps interest income decreased by $7.4 million, or 17%, from $43.0 million
in 2009 to $35.6 million in 2010 due to a decrease in average earning assets of $137.8 million, or
15%. Average loans outstanding decreased $132.7 million, or 18%, and there was a decline in the
yield on loans of four basis points due to the payoffs on loans made in a higher rate environment.
The income on investments increased slightly due to the rise in the average balance of investments
outstanding, but was partially offset by lower yields during 2010. This resulted in an increase in
interest income of approximately $162,000. The average balances of federal funds sold and
short-term investments decreased $23.3 million to $81.4 million for 2010 as compared to $104.7
million for 2009 due to a reduction in excess liquidity on the balance sheet.
Total average interest bearing liabilities decreased by $124.1 million, or 15%. Average balances
of certificates of deposit decreased $127.5 million, or 22%. Average balances in savings accounts
increased slightly by approximately $167,000, which is reflective of Bancorp providing a
competitively priced commercial statement savings product. Average money market accounts increased
$3.2 million, or 3%, which is a result of the growth in the consumer money market product. The
increase in money market accounts is attributable to customers refraining from locking into
long-term rates in the current lower rate environment. The growth is also attributable to
depositors placing funds in FDIC-insured products during uncertain economic times. Total interest
expense decreased $10.9 million, or 45%, from $24.4 million in 2009 to $13.5 million in 2010.
Interest expense on certificates of deposit decreased $9.1 million and the cost of funds for this
portfolio decreased from 3.18% in 2009 to 2.09% in 2010. This is primarily the result of the
maturity of higher rate certificates of deposit due to lower interest rates being paid on current
renewals. The average balances outstanding of FHLB advances resulted in interest expense of $1.7
million, which is the same as 2009, as the cost of funds for these advances remained at 3.40%. The
decrease in the index to which the junior subordinated debt interest rate is tied resulted in a
decline in interest expense of approximately $43,000, or 13%.
Management regularly reviews loan and deposit rates and attempts to price Bancorps products
competitively. 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.
Provision for loan losses
Based on managements most recent evaluation of the adequacy of the allowance for loan losses, the
provision for loan losses charged to operations for the year ended December 31, 2010 of $7.7
million represents a decrease of $5.4 million when compared to the provision of $13.1 million for
the year ended December 31, 2009.
The decreased provision for the current year was based on the lower level of non-accrual and past
due loans, and managements assessment of the impact that changes in the national, regional and
local economic and business conditions have had on the Banks loan portfolio. Additionally, the
total loan portfolio has decreased by 16.9% in 2010. There continues to be major
displacement in the national and global credit markets. The secondary mortgage market continues to
be impacted by economic events. These macro issues have impacted local real estate markets. It
appears the local real estate prices have stabilized and market activity has increased. The Bank
continues to maintain conservative underwriting standards including low loan to value ratio
guidelines.
47
An analysis of the changes in the allowance for loan losses is presented under the discussion
entitled Allowance for Loan Losses.
Non-interest income
Non-interest income declined by $0.6 million from $2.9 million in 2009 to $2.4 million in 2010.
The decrease is primarily due to the gain on the sale of investment securities of approximately
$434,000 recorded in 2009; there were no such sales in 2010. There was also lower revenue from the
Bank-owned life insurance of $178,000, a reduction in mortgage brokerage referral fee income of
$77,000, and a decrease in loan origination and processing fees of $77,000. These were partially
offset by an increase in activity based deposit fees and service charges of $149,000.
Non-interest expenses
Non-interest expenses increased $1.8 million, or 6%, from $30.1 million in 2009 to $31.9 million in
2010. Salaries and benefits increased $1.3 million, or 11%, in 2010 compared to 2009, due
primarily to an increase in headcount resulting from offering permanent positions to contract
employees and a growth in employee benefit costs. Occupancy and equipment expenses decreased
$103,000, or 2%, from $5.7 million in 2009 to $5.6 million in 2010. For the year ended December
31, 2010, data processing increased $83,000, or 6%, to $1.5 million from $1.4 million for the year
ended December 31, 2009. Regulatory assessments decreased $209,000 from $3.2 million for the year
ended December 31, 2009 to $3.0 million for the year ended December 31, 2010. Most of this
decrease is due to a special FDIC assessment fee of $453,500 that was paid in the second quarter of
2009. Professional and other outside services decreased $954,000 from $4.0 million for the year
ended December 31, 2009 to $3.1 million for the year ended December 31, 2010. This is due
primarily to decreases in internal and external audit fees of $194,000, legal fees of $388,000 and
consulting fees of $513,000, as they pertain to the level of non-performing assets, regulatory
matters and capital raising efforts. Other real estate operations expenses increased $1.5 million
to $2.3 million for the year ended December 31, 2010 from $794,000 for the year ended December 31,
2009. This increase is largely due to six write-downs on five OREO properties of $1.1 million, net
losses on the sale of seven OREO properties of $164,000 and carrying costs on the OREO properties
of $245,000.
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 carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
48
During the year ended December 31, 2010, Bancorp established a full valuation allowance against the
net deferred tax asset, which resulted in a $6.3 million increase to the valuation allowance to
$18.5 million. The possibility of further loan losses and higher cost levels associated with
carrying nonperforming assets, coupled with Bancorps losses beginning in the third quarter of
2008, creates sufficient uncertainty regarding the Companys ability to realize these deferred tax
assets. In future periods, if it becomes more likely that these assets can be utilized, Bancorp
may reverse some or all of the valuation allowance. Evidence to substantiate reversing the
allowance would include sustained profitability.
Comparison of Results of Operations for the years 2009 and 2008
For the year ended December 31, 2009, Bancorp recorded a loss of $23.9 million ($5.02 loss per
share), as compared to 2008 when Bancorp reported a net loss of $7.1 million ($1.50 loss per
share). For the year ended December 31, 2009, Bancorp had a pre-tax loss of $21.7 million with a
tax provision of $2.2 million as compared to a pre-tax loss of $10.2 million with a tax benefit of
$3.1 million for the year ended December 31, 2008.
Interest and dividend income decreased $12.8 million, or 23%, to $43.0 million in 2009 as compared
to 2008 when interest and dividend income was $55.8 million. The decline in interest income on
loans is primarily the result of a significant increase in the level of non-accrual loans and lower
rates on loans. Interest income on investments decreased due to decreases in rates and a decline
in the average balance of investments outstanding.
Interest expense decreased $4.2 million, or 15%, to $24.4 million in 2009 compared to $28.5 million
in 2008. The decrease in interest expense is primarily a result of the decrease in interest rates
paid partially offset by an increase in the average balance of interest bearing liabilities. The
decrease in interest rates was driven primarily by the planned reduction in higher rate
certificates of deposit.
Noninterest income was $2.9 million in 2009 as compared to a loss of $149,000 in 2008. The change
is due largely to the impairment charges in 2008 of $1.1 million that were recorded for a FHLMC
auction rate preferred equity security and $2.1 million relating to other auction rate preferred
equity securities.
Noninterest expenses for 2009 totaled $30.1 million, which represents an increase of $4.2 million,
or 16%, over the prior year. The increase in noninterest expenses is a result of a $2.4 million
increase in expenditures relating to professional fees and other outside services, which largely
pertain to the significant increase in non-performing assets, regulatory matters and capital
raising efforts. In addition to these expenses was a $2.4 million increase in FDIC and OCC
regulatory assessments.
49
The following are measurements relating to Bancorps earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) return on average assets |
|
|
(2.52 |
%) |
|
|
(0.81 |
%) |
|
|
0.37 |
% |
(Loss) return on average equity |
|
|
(46.02 |
%) |
|
|
(10.62 |
%) |
|
|
4.07 |
% |
Dividend payout ratio |
|
|
N/A |
|
|
|
N/A |
|
|
|
32.14 |
% |
Average equity to average assets |
|
|
5.47 |
% |
|
|
7.59 |
% |
|
|
9.09 |
% |
Basic and diluted (loss) income per share |
|
$ |
(5.02 |
) |
|
$ |
(1.50 |
) |
|
$ |
0.56 |
|
Interest income and expense
Bancorps net interest income decreased $8.6 million, or 32%, to $18.6 million in 2009 from $27.2
million in 2008. Despite an increase in average earning assets of $52.1 million, or 6%, Bancorps
interest income decreased by $12.8 million, or 23%, from $55.8 million in 2008 to $43.0 million in
2009. Average loans outstanding decreased $21.0 million, or 3%, and there was a decline in the
yield on loans of 133 basis points due to increased non-accrual loans and a lower rate environment.
The income on investments decreased due to lower volume and lower yields during 2009. This
resulted in a decrease in interest income of $1.3 million. The average balances of federal funds
sold and short-term investments increased $92.2 million to $104.7 million for 2009 as compared to
$12.4 million for 2008 due to short-term liquidity receiving a higher yield than what was being
paid in federal funds sold.
Total average interest bearing liabilities increased by $87.4 million, or 12%. Average balances of
certificates of deposit increased $24.0 million, or 4%. Average balances in savings accounts
increased $18.9 million, or 47%, which is reflective of Bancorp providing a competitively priced
commercial statement savings product. Average money market accounts increased $51.8 million, or
95%, which is a result of the significant growth in consumer money market accounts. The increase
in money market accounts is attributable to customers refraining from locking into long-term rates
in the current lower rate environment. The growth is also attributable to depositors placing funds
in FDIC-insured products during these uncertain economic times. The FDIC has also extended the
increased level of insurance from $100,000 to $250,000 until December 31, 2013. Average FHLB
advances decreased $7.7 million, or 13%. Total interest expense decreased $4.2 million, or 15%,
from $28.5 million in 2008 to $24.4 million in 2009. Interest expense on certificates of deposit
decreased $4.7 million and the cost of funds for this portfolio decreased from 4.14% in 2008 to
3.18% in 2009. This is primarily the result of the maturity of higher rate certificates of
deposit. Decreases in the average balances outstanding of FHLB advances resulted in a
corresponding decrease in interest expense of $27,000. The cost of funds for the FHLB advances
increased from 2.99% in 2008 to 3.40% in 2009 due to lower rate advances paying off. The decrease
in the index to which the junior subordinated debt interest rate is tied resulted in a decline in
interest expense of $205,000, or 38%.
Management regularly reviews loan and deposit rates and attempts to price Bancorps products
competitively. 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.
50
Provision for loan losses
The increased provision for the current year was based on the higher level of non-accrual and past
due loans, and managements assessment of the impact of changes in the national, regional and local
economic and business conditions have had on the Banks loan portfolio. There continues to be
major displacement in the national and global credit markets. The secondary mortgage market
continues to be impacted by economic events. These macro issues have impacted local real estate
markets. It appears the local real estate prices have stabilized and market activity has
increased. The Bank continues to maintain conservative underwriting standards including low loan
to value ratio guidelines.
An analysis of the changes in the allowance for loan losses is presented under the discussion
entitled Allowance for Loan Losses.
Non-interest income
Non-interest income improved $3.1 million from a loss of $149,000 in 2008 to $2.9 million of income
in 2009. The increase is due primarily to the fact that impairment charges of $1.1 million were
recorded in 2008 for a FHLMC auction rate preferred equity security and $2.1 million relating to
other auction rate preferred equity securities. During 2009, there were increases in
gains/redemption of investment securities of $451,000 and activity based deposit fees and service
charges of $34,000. These were partially offset by lower revenue from the Bank-owned life
insurance of $217,000, other income of $148,000, loan origination and processing fees of $123,000
and a reduction in mortgage brokerage referral fee income of $70,000.
Non-interest expenses
Non-interest expenses increased $4.2 million, or 16%, from $25.9 million in 2008 to $30.1 million
in 2009. Salaries and benefits decreased $213,000, or 2%, in 2009 compared to 2008, due primarily
to lower performance-based compensation. Occupancy and equipment expenses increased $131,000, or
2%, from $5.5 million in 2008 to $5.6 million in 2009. This increase is due primarily to
additional administrative and operational offices. For the year ended December 31, 2009, data
processing increased $87,000, or 7%, to $1.4 million from $1.3 million for the year ended December
31, 2008. Regulatory assessments increased $2.4 million from $726,000 for the year ended December
31, 2008 to $3.2 million for the year ended December 31, 2009; most of this increase is due to the
increase in the assessment rates for the FDIC and OCC deposit insurance premiums. Professional and
other outside services increased $2.2 million from $1.8 million for the year ended December 31,
2008 to $4.0 million for the year ended December 31, 2009. This is due primarily to an increase in
external and internal audit fees and legal fees relating to the significant increase in
non-performing assets. In addition, the increase relates to an increased amount of expenditures
relating to consulting fees, which largely pertain to the
significant increase in non-performing assets, regulatory matters and capital raising efforts.
Other real estate operations expenses increased $794,000 for the year ended December 31, 2009 from
$0 for the year ended December 31, 2008. This increase is due to expenses incurred by the Bank
relating to nine properties obtained through loan foreclosure proceedings during the year ended
December 31, 2009.
51
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 carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
During the year ended December 31, 2009, Bancorp established a full valuation allowance against the
net deferred tax asset, which resulted in an increase to the valuation allowance of $11.4 million.
The possibility of further loan losses and higher cost levels associated with carrying
nonperforming assets, coupled with Bancorps losses beginning in the third quarter of 2008, creates
sufficient uncertainty regarding the Companys ability to realize these deferred tax assets. In
future periods, if it becomes more likely that these assets can be utilized, Bancorp may reverse
some or all of the valuation allowance. Evidence to substantiate reversing the allowance would
include sustained profitability.
52
LIQUIDITY
Bancorps liquidity position was 24% and 18% at December 31, 2010 and 2009, respectively. The
liquidity ratio is defined as the percentage of liquid assets to total assets. The following
categories of assets as described in the accompanying consolidated balance sheets are considered
liquid assets: cash and due from banks, federal funds sold, short-term investments and
available-for-sale securities. Liquidity is a measure of Bancorps ability to generate adequate
cash to meet financial obligations. The principal cash requirements of a financial institution are
to cover increases in its loan portfolio and downward fluctuations in deposit accounts. Management
believes Bancorps short-term assets provide sufficient liquidity to satisfy loan demand, cover
potential fluctuations in deposit accounts and to meet other anticipated cash requirements.
Historically, the Company has had a high retention rate of maturing certificates of deposit;
however, with the implementation of managements strategy to price these deposits lower, the
Company is projecting a lower retention rate of these deposits as they mature. Even if the runoff
rate meets managements expectations, the Company will still have ample liquidity to meet all of
its funding requirements.
At December 31, 2010, cash and cash equivalents and securities classified as available-for-sale
were $146.8 million and $40.6 million, respectively. In addition to Federal Home Loan Bank
advances outstanding at December 31, 2010, the Bank had the ability to borrow an additional $94.0
million from the Federal Home Loan Bank of Boston, which included a $2.0 million overnight line of
credit. At December 31, 2010 the Bank had $50.0 million in Federal Home Loan Bank advances, none
of which were under the overnight line of credit.
The following table presents Bancorps contractual obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
One to |
|
|
Three to |
|
|
Over five |
|
|
|
Total |
|
|
one year |
|
|
three years |
|
|
five years |
|
|
years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
426,727,810 |
|
|
$ |
307,023,856 |
|
|
$ |
69,731,383 |
|
|
$ |
49,972,571 |
|
|
$ |
|
|
Junior subordinated debt owed
to unconsolidated trust |
|
|
8,248,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,248,000 |
|
FHLB Advances |
|
|
50,000,000 |
|
|
|
|
|
|
|
30,000,000 |
|
|
|
10,000,000 |
|
|
|
10,000,000 |
|
Securities sold under agreements
to repurchase |
|
|
7,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000,000 |
|
Operating lease obligations |
|
|
14,523,783 |
|
|
|
2,855,356 |
|
|
|
5,273,093 |
|
|
|
3,769,448 |
|
|
|
2,625,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
506,499,593 |
|
|
$ |
309,879,212 |
|
|
$ |
105,004,476 |
|
|
$ |
63,742,019 |
|
|
$ |
27,873,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
OFF-BALANCE SHEET ARRANGEMENTS
The following table presents Bancorps off-balance sheet commitments as of December 31, 2010.
These commitments 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 or are contingent upon the customer adhering to the terms of the agreements, the total
commitment amounts do not necessarily represent future cash requirements.
|
|
|
|
|
Future loan commitments |
|
$ |
4,701,779 |
|
Home equity lines of credit |
|
|
21,197,134 |
|
Unused lines of credit |
|
|
7,721,359 |
|
Undisbursed construction loans |
|
|
1,290,628 |
|
Financial standby letters of credit |
|
|
52,000 |
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
34,962,900 |
|
|
|
|
|
REGULATORY CAPITAL REQUIREMENTS
The Companys and the Banks actual capital amounts and ratios at December 31, 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Action Provisions |
|
2010 |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
80,358 |
|
|
|
17.08 |
% |
|
$ |
37,643 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
73,822 |
|
|
|
15.69 |
% |
|
|
18,822 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 Capital (to Average Assets) |
|
|
73,822 |
|
|
|
9.16 |
% |
|
|
32,219 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
77,705 |
|
|
|
16.54 |
% |
|
$ |
37,582 |
|
|
|
8.00 |
% |
|
$ |
46,978 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk Weighted Assets) |
|
|
71,178 |
|
|
|
15.15 |
% |
|
|
18,791 |
|
|
|
4.00 |
% |
|
|
28,187 |
|
|
|
6.00 |
% |
Tier 1 Capital (to Average Assets) |
|
|
71,178 |
|
|
|
8.84 |
% |
|
|
32,203 |
|
|
|
4.00 |
% |
|
|
40,253 |
|
|
|
5.00 |
% |
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Action Provisions |
|
2009 |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
51,072 |
|
|
|
8.58 |
% |
|
$ |
47,620 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
42,971 |
|
|
|
7.22 |
% |
|
|
23,807 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 Capital (to Average Assets) |
|
|
42,971 |
|
|
|
4.72 |
% |
|
|
36,416 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
51,056 |
|
|
|
8.58 |
% |
|
$ |
47,605 |
|
|
|
8.00 |
% |
|
$ |
59,506 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk Weighted Assets) |
|
|
42,960 |
|
|
|
7.22 |
% |
|
|
23,801 |
|
|
|
4.00 |
% |
|
|
35,701 |
|
|
|
6.00 |
% |
Tier 1 Capital (to Average Assets) |
|
|
42,960 |
|
|
|
4.72 |
% |
|
|
36,407 |
|
|
|
4.00 |
% |
|
|
45,508 |
|
|
|
5.00 |
% |
Capital adequacy is one of the most important factors used to determine the safety and soundness of
individual banks and the banking system. Based on the above ratios, the Bank is considered to be
well capitalized at December 31, 2010 under applicable regulations. To be considered well
capitalized, an institution must generally have a leverage capital ratio of at least 5%, a Tier 1
risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%.
However, the OCC has the discretion to require increased capital levels. The increase in capital
ratios during 2010 was primarily the result of the capital infusion in October 2010.
Management continuously assesses the adequacy of the Banks capital with the goal to maintain its
well capitalized classification.
On February 25, 2011, the Bank entered into a Purchase and Sale Agreement with ES Ventures One,
LLC, a Delaware limited liability company, to sell 25 non-performing loans and 4 pieces of other
real estate owned for an aggregate sale price of $65 million. As of contract date, the assets had
an aggregate net book value (net of specific reserves with respect to the loans and write-downs to
fair market value with respect to the OREO) of $72.1 million. The transaction requires the
non-objection of the OCC regulators and is expected to close prior to March 31, 2011.
55
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
MARKET RISK
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign
exchange rates, equity prices, commodity prices and other market-driven rates or prices. Based upon
the nature of Bancorps business, market risk is primarily limited to interest rate risk, which is
the impact that changing interest rates have on current and future earnings.
Qualitative Aspects of Market Risk
Bancorps goal is to maximize long term profitability while minimizing its exposure to interest
rate fluctuations. The first priority is to structure and price Bancorps assets and liabilities to
maintain an acceptable interest rate spread while reducing the net effect of changes in interest
rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing
and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving
this balance is to originate variable rate loans for the portfolio and purchase short term
investments to offset the increasing short term re-pricing of the liability side of the balance
sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity.
Therefore, deposit balances may run off unexpectedly due to changing market conditions.
Additionally, loans and investments with longer term rate adjustment frequencies are matched
against longer term deposits and borrowings when possible to lock in a desirable spread.
The exposure to interest rate risk is monitored by the Management Asset and Liability Committee
consisting of senior management personnel. The Committee meets on a monthly basis, but may convene
more frequently as conditions dictate. The Committee reviews the interrelationships within the
balance sheet to maximize net interest income within acceptable levels of risk. This Committee
reports to the Board of Directors on a monthly basis regarding its activities. In addition to the
Management Asset Liability Committee, there is a Board Asset and Liability Committee (ALCO),
which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment
transactions during the period and determines compliance with Bank policies.
Quantitative Aspects of Market Risk
Management analyzes Bancorps interest rate sensitivity position to manage the risk associated with
interest rate movements through the use of interest income simulation and GAP analysis. The
matching of assets and liabilities may be analyzed by examining the extent to which such assets and
liabilities are interest sensitive. An asset or liability is said to be interest sensitive
within a specific time period if it will mature or reprice within that time period.
Managements goal is to manage asset and liability positions to moderate the effects of interest
rate fluctuations on net interest income. Interest income simulations are completed quarterly and
presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates
on net interest income under a range of assumptions. Changes to these assumptions can
significantly affect the results of the simulations. The simulation incorporates assumptions
regarding the potential timing in the repricing of certain assets and liabilities when market rates
change and the changes in spreads between different market rates.
56
Simulation analysis is only an estimate of Bancorps interest rate risk exposure at a particular
point in time. Management regularly reviews the potential effect changes in interest rates could
have on the repayment of rate sensitive assets and funding requirements of rate sensitive
liabilities.
The table below sets forth examples of changes in estimated net interest income and the estimated
net portfolio value based on projected scenarios of interest rate increases and decreases. The
analyses indicate the rate risk embedded in Bancorps portfolio at the dates indicated should all
interest rates instantaneously rise or fall. The results of these changes are added to or
subtracted from the base case; however, there are certain limitations to these types of analyses.
Rate changes are rarely instantaneous and these analyses may also overstate the impact of
short-term repricings. As a result of the historically low interest rate environment, the
calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the
risk to earnings and equity since the interest rates on certain balance sheet items have approached
their minimums, and, therefore, it is not possible for the analyses to fully measure the entire
impact of these downward shocks.
Net Interest Income and Economic Value
Summary Performance
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
Net Portfolio Value |
|
Projected Interest |
|
Estimated |
|
|
$ Change |
|
|
% Change |
|
|
Estimated |
|
|
$ Change |
|
|
% Change |
|
Rate Scenario |
|
Value |
|
|
from Base |
|
|
from Base |
|
|
Value |
|
|
from Base |
|
|
from Base |
|
+ 200 |
|
|
26,290 |
|
|
|
110 |
|
|
|
0.42 |
% |
|
|
63,164 |
|
|
|
(4,420 |
) |
|
|
-6.54 |
% |
+ 100 |
|
|
26,209 |
|
|
|
29 |
|
|
|
0.11 |
% |
|
|
65,502 |
|
|
|
(2,082 |
) |
|
|
-3.08 |
% |
BASE |
|
|
26,180 |
|
|
|
|
|
|
|
|
|
|
|
67,584 |
|
|
|
|
|
|
|
|
|
- 100 |
|
|
25,869 |
|
|
|
(311 |
) |
|
|
-1.19 |
% |
|
|
70,228 |
|
|
|
2,644 |
|
|
|
3.91 |
% |
- 200 |
|
|
25,068 |
|
|
|
(1,112 |
) |
|
|
-4.25 |
% |
|
|
75,096 |
|
|
|
7,512 |
|
|
|
11.12 |
% |
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
Net Portfolio Value |
|
Projected Interest |
|
Estimated |
|
|
$ Change |
|
|
% Change |
|
|
Estimated |
|
|
$ Change |
|
|
% Change |
|
Rate Scenario |
|
Value |
|
|
from Base |
|
|
from Base |
|
|
Value |
|
|
from Base |
|
|
from Base |
|
+ 200 |
|
|
20,750 |
|
|
|
925 |
|
|
|
4.67 |
% |
|
|
49,704 |
|
|
|
(4,872 |
) |
|
|
-8.93 |
% |
+ 100 |
|
|
20,113 |
|
|
|
288 |
|
|
|
1.45 |
% |
|
|
51,762 |
|
|
|
(2,814 |
) |
|
|
-5.16 |
% |
BASE |
|
|
19,825 |
|
|
|
|
|
|
|
|
|
|
|
54,576 |
|
|
|
|
|
|
|
|
|
- 100 |
|
|
20,557 |
|
|
|
732 |
|
|
|
3.69 |
% |
|
|
54,945 |
|
|
|
369 |
|
|
|
0.68 |
% |
- 200 |
|
|
20,841 |
|
|
|
1,016 |
|
|
|
5.12 |
% |
|
|
50,525 |
|
|
|
(4,051 |
) |
|
|
-7.42 |
% |
57
Impact of Inflation and Changing Prices
Bancorps 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
institutions performance than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of goods and
services. Notwithstanding this, inflation can directly affect the value of loan collateral, in
particular, real estate. Inflation, or disinflation, could significantly affect Bancorps earnings
in future periods.
58
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
The consolidated balance sheets of Bancorp as of December 31, 2010 and December 31, 2009 and the
related consolidated statements of operations, shareholders equity and cash flows for the years
ended December 31, 2010, December 31, 2009 and December 31, 2008, together with the Report of
Independent Registered Public Accounting Firms thereon are included as part of this Form 10-K in
the Financial Report following page 69 hereof.
The following table presents selected quarterly financial information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,690,515 |
|
|
$ |
9,407,519 |
|
|
$ |
8,468,912 |
|
|
$ |
8,041,945 |
|
Interest expense |
|
|
3,681,605 |
|
|
|
3,520,035 |
|
|
|
3,347,397 |
|
|
|
2,925,506 |
|
Net interest income |
|
|
6,008,910 |
|
|
|
5,887,484 |
|
|
|
5,121,515 |
|
|
|
5,116,439 |
|
Provision for loan losses |
|
|
727,000 |
|
|
|
512,000 |
|
|
|
5,025,000 |
|
|
|
1,450,000 |
|
Non-interest income |
|
|
538,468 |
|
|
|
560,626 |
|
|
|
637,096 |
|
|
|
618,050 |
|
Non-interest expenses |
|
|
8,726,944 |
|
|
|
7,336,287 |
|
|
|
7,524,191 |
|
|
|
8,361,111 |
|
Loss before income taxes |
|
|
(2,906,566 |
) |
|
|
(1,400,177 |
) |
|
|
(6,790,580 |
) |
|
|
(4,076,622 |
) |
Provision for income taxes |
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,131,566 |
) |
|
$ |
(1,400,177 |
) |
|
$ |
(6,790,580 |
) |
|
$ |
(4,076,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.66 |
) |
|
$ |
(0.29 |
) |
|
$ |
(1.43 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
12,359,234 |
|
|
$ |
10,998,963 |
|
|
$ |
9,983,932 |
|
|
$ |
9,625,951 |
|
Interest expense |
|
|
6,830,950 |
|
|
|
6,595,455 |
|
|
|
5,983,941 |
|
|
|
4,949,482 |
|
Net interest income |
|
|
5,528,284 |
|
|
|
4,403,508 |
|
|
|
3,999,991 |
|
|
|
4,676,469 |
|
Provision for loan losses |
|
|
1,600,000 |
|
|
|
5,956,000 |
|
|
|
1,453,000 |
|
|
|
4,080,000 |
|
Non-interest income |
|
|
1,022,654 |
|
|
|
666,597 |
|
|
|
617,707 |
|
|
|
639,522 |
|
Non-interest expenses |
|
|
6,305,899 |
|
|
|
7,446,962 |
|
|
|
7,535,346 |
|
|
|
8,843,381 |
|
Loss before income taxes |
|
|
(1,354,961 |
) |
|
|
(8,332,857 |
) |
|
|
(4,370,648 |
) |
|
|
(7,607,390 |
) |
Provision (benefit) for
income taxes |
|
|
(258,000 |
) |
|
|
(3,696,000 |
) |
|
|
9,565,000 |
|
|
|
(3,397,250 |
) |
Net loss |
|
$ |
(1,096,961 |
) |
|
$ |
(4,636,857 |
) |
|
$ |
(13,935,648 |
) |
|
$ |
(4,210,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.23 |
) |
|
$ |
(0.98 |
) |
|
$ |
(2.93 |
) |
|
$ |
(0.88 |
) |
59
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Based on an evaluation of the effectiveness of Bancorps disclosure controls and procedures
performed by Bancorps management, with the participation of Bancorps Chief Executive Officer and
its Chief Financial Officer as of the end of the period covered by this report, Bancorps Chief
Executive Officer and Chief Financial Officer concluded that Bancorps disclosure controls and
procedures have been effective.
As used herein, disclosure controls and procedures mean controls and other procedures of Bancorp
that are designed to ensure that information required to be disclosed by Bancorp in the reports
that it files or submits under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by Bancorp in the reports that it files or submits under
the Securities Exchange Act is accumulated and communicated to Bancorps management, including its
principal executive, and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
There were no changes in Bancorps internal control over financial reporting identified in
connection with the evaluation described in the preceding paragraph that occurred during Bancorps
fiscal year ended December 31, 2010 that has materially affected, or is reasonably likely to
materially affect, Bancorps internal controls over financial reporting.
60
|
|
|
Item 9B. |
|
Other Information |
Managements Report on Internal Control Over Financial Reporting
The management of Patriot National Bancorp, Inc. (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting. The Companys internal control
over financial reporting is a process designed so as to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the United States of
America.
The Companys internal control over financial reporting includes those policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and deployment of the assets of the Company and also provide reasonable assurance that
transactions are recorded in a timely manner to enable the preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America and that
receipts and disbursements of the Company are made only in compliance with the authorizations
established by management and the directors of the Company, and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, projections of any evaluations of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and/or procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2010, based on the framework set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on that
assessment, management concluded that as of December 31, 2010, the Companys internal control over
financial reporting is effective based on the criteria established in Internal Control
Integrated Framework.
The effectiveness of the Companys internal control over financial reporting as of December 31,
2010, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report appearing on page 62, which expresses an unqualified opinion of the Companys internal
control over financial reporting as of December 31, 2010.
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Patriot National Bancorp, Inc.:
We have audited Patriot National Bancorp, Inc. and subsidiarys (the Company) internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
62
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of Patriot National Bancorp, Inc. and
subsidiary as of December 31, 2010, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended, and our report dated March 23, 2011
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Stamford, Connecticut
March 23, 2011
63
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
The information required by Items 401, 405, 406 and 407 (c)(3); (d)(4) and (d)(5) of Regulation S-K
is incorporated into this Form 10-K by reference to Bancorps definitive proxy statement (the
Definitive Proxy Statement) for its 2011 Annual Meeting of Shareholders, to be filed within 120
days following December 31, 2010.
The Company has adopted a Code of Ethics for its senior financial officers. The information
required by Item 406 is contained in Exhibit 14 to this Form 10-K. A copy of this Code of Ethics
will be provided to any person so requesting by writing to Patriot National Bancorp, Inc., 900
Bedford Street, Stamford, Connecticut 06901, Attn: Robert F. OConnell, Chief Financial Officer.
|
|
|
Item 11. |
|
Executive Compensation |
The information required by Item 402 of Regulation S-K is incorporated into this Form 10-K by
reference to the Definitive Proxy Statement.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters |
The information required by Item 201(d) and Item 403 of Regulation S-K is incorporated into this
Form 10-K by reference to the Definitive Proxy Statement.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
The information required by Items 404 and 407(a) of Regulation S-K is incorporated into this Form
10-K by reference to the Definitive Proxy Statement.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
The information required by Item 9(e) of Schedule 14A of Regulation S-K is incorporated into this
Form 10-K by reference to the Definitive Proxy Statement.
64
Part IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
|
|
|
|
|
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 Bancorps Current Report on Form 8-K dated December
1, 1999 (Commission File No. 000-29599)). |
|
|
|
|
|
|
2.1 |
|
|
Securities Purchase Agreement by and among Patriot National Bancorp, Inc., Patriot National
Bank and PNBK Holdings LLC dated as of December 16, 2009 (incorporated by reference to Exhibit
10.1 to Bancorps Current Report on Form 8-K dated December 17, 2009). |
|
|
|
|
|
|
2.2 |
|
|
Amendment to Securities Purchase Agreement by and among Patriot National Bancorp, Inc.,
Patriot National Bank and PNBK Holdings LLC dated as of May 3, 2010 (incorporated by reference
to Exhibit 10(a) to Bancorps Current Report on Form 8-K dated May 4, 2010). |
|
|
|
|
|
|
3 |
(i) |
|
Certificate of Incorporation of Bancorp, (incorporated by reference to Exhibit 3(i) to
Bancorps Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)). |
|
|
|
|
|
|
3 |
(i)(A) |
|
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc.
dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to Bancorps Annual Report
on Form 10-KSB for the year ended December 31, 2004 (Commission File No. 000-29599)). |
|
|
|
|
|
|
3 |
(i)(B) |
|
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc.
dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to Bancorps Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006 (Commission File No. 000-29599)). |
|
|
|
|
|
|
3 |
(ii) |
|
Amended and Restated By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to
Bancorps Current Report on Form 8-K dated October 26, 2010). |
|
|
|
|
|
|
4 |
|
|
Intentionally deleted |
|
|
|
|
|
|
10 |
(a)(1) |
|
2001 Stock Appreciation Rights Plan of Bancorp (incorporated by reference to Exhibit
10(a)(1) to Bancorps Annual Report on Form 10-KSB for the year ended December 31, 2001
(Commission File No. 000-29599)). |
65
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10 |
(a)(3) |
|
Intentionally deleted. |
|
|
|
|
|
|
10 |
(a)(5) |
|
Employment Agreement dated as of January 1, 2008 among Patriot National Bank, Bancorp and
Robert F. OConnell (incorporated by reference to Exhibit 10(a)(5) to Bancorps Annual Report
on Form 10-K for the year ended December 31, 2007 (Commission File No. 000-29599)). |
|
|
|
|
|
|
10 |
(a)(6) |
|
Change of Control Agreement, dated as of January 1, 2007 among Robert F. OConnell and
Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(6) to Bancorps
Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No.
000-29599)). |
|
|
|
|
|
|
10 |
(a)(9) |
|
License agreement dated July 1, 2003 between Patriot National Bank and L. Morris Glucksman
(incorporated by reference to Exhibit 10(a)(9) to Bancorps Annual Report on Form 10-KSB for
the year ended December 31, 2003 (Commission File No. 000-29599)). |
|
|
|
|
|
|
10 |
(a)(12) |
|
2005 Director Stock Award Plan (incorporated by reference to Exhibit 10(a)(12) to
Bancorps Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (Commission File
No. 000-295999)). |
|
|
|
|
|
|
10 |
(a)(13) |
|
Change of Control Agreement, dated as of January 1, 2007 between Martin G. Noble and
Patriot National Bank (incorporated by reference to Exhibit 10(a)(13) to Bancorps Annual
Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)). |
|
|
|
|
|
|
10 |
(a)(14) |
|
Change of Control Agreement, dated as of January 1, 2007 among Philip W. Wolford, Patriot
National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(14) to Bancorps Annual
Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)). |
|
|
|
|
|
|
10 |
(a)(15) |
|
Formal Written Agreement between Patriot National Bank and the Office of the Comptroller
of the Currency (incorporated by reference to Exhibit 10(a)(15) to Bancorps Current Report on
Form 8-K dated February 9, 2009 (Commission File No. 000-29599)). |
|
|
|
|
|
|
10 |
(a)(16) |
|
Formal Written Agreement between Patriot National Bank and the Federal Reserve Bank of
New York. |
|
|
|
|
|
|
10 |
(c) |
|
1999 Stock Option Plan of the Bank (incorporated by reference to Exhibit 10(c) to Bancorps
Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)). |
66
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
14 |
|
|
Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to
Bancorps Annual Report on Form 10-KSB for the year ended December 31, 2004 (Commission File
No. 000-29599)). |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of Bancorp (Incorporated by reference to Exhibit 21 to Bancorps Annual Report
on Form 10-KSB for the year ended December 31, 1999 (Commission File No. 000-29599)). |
|
|
|
|
|
|
23.1 |
|
|
Consent of KPMG LLP |
|
|
|
|
|
|
23.2 |
|
|
Consent of McGladrey & Pullen, LLP |
|
|
|
|
|
|
31 |
(1) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
|
31 |
(2) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
|
32 |
|
|
Section 1350 Certification |
67
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/ Christopher D. Maher
|
|
|
|
Name: |
Christopher D. Maher |
|
|
|
Title: |
Chief Executive Officer |
|
|
Date: March 23, 2011
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/ Christopher D. Maher
|
|
March 23, 2011 |
|
|
|
Christopher D. Maher,
|
|
Date |
President and Chief Executive Officer |
|
|
and Director |
|
|
|
|
|
/s/ Robert F. OConnell
|
|
March 23, 2011 |
|
|
|
Robert F. OConnell
|
|
Date |
Senior Executive Vice President, |
|
|
Chief Financial Officer and Director |
|
|
|
|
|
/s/ Todd C. Scaccia
|
|
March 23, 2011 |
|
|
|
Todd C. Scaccia
|
|
Date |
Vice President & Controller |
|
|
|
|
|
/s/ Michael A. Carrazza
|
|
March 23, 2011 |
|
|
|
Michael A. Carrazza,
|
|
Date |
Chairman of the Board |
|
|
|
|
|
/s/ Edward Constantino
|
|
March 23, 2011 |
|
|
|
Edward Constantino
|
|
Date |
Director |
|
|
68
Form 10 K Signatures continued
|
|
|
/s/ Kenneth T. Neilson
|
|
March 23, 2011 |
|
|
|
Kenneth T. Neilson
|
|
Date |
Director |
|
|
|
|
|
/s/ Emile van den Bol
|
|
March 23, 2011 |
|
|
|
Emile van den Bol
|
|
Date |
Director |
|
|
|
|
|
/s/ Michael Weinbaum
|
|
March 23, 2011 |
|
|
|
Michael Weinbaum
|
|
Date |
Director |
|
|
69
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
FINANCIAL REPORT
DECEMBER 31, 2010, 2009 and 2008
CONTENTS
|
|
|
|
|
|
|
|
1 - 2 |
|
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6-7 |
|
|
|
|
|
|
|
|
|
8-66 |
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Patriot National Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Patriot National Bancorp, Inc. and
subsidiary (the Company) as of December 31, 2010, and the related consolidated statements of
operations, shareholders equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit 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 audit provides 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, 2010, and the results of their operations and their cash flows for the year then ended
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March
23, 2011 expressed an unqualified opinion on the effectiveness of the Companys internal control
over financial reporting.
/s/ KPMG LLP
Stamford, Connecticut
March 23, 2011
1
McGladrey & Pullen, LLP
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Patriot National Bancorp, Inc. and Subsidiary
We have audited the consolidated balance sheets of Patriot National Bancorp, Inc. and Subsidiary as
of December 31, 2009, and the related consolidated statements of operations, shareholders equity
and cash flows for each of the two years in the period ended December 31, 2009. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit 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, 2009, and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/S/ McGladrey & Pullen, LLP
New Haven, Connecticut
March 15, 2010
2
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks (Note 2): |
|
|
|
|
|
|
|
|
Noninterest bearing deposits and cash |
|
$ |
4,613,211 |
|
|
$ |
19,465,521 |
|
Interest bearing deposits |
|
|
131,711,047 |
|
|
|
78,070,072 |
|
Federal funds sold |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
Short-term investments |
|
|
453,400 |
|
|
|
263,839 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
146,777,658 |
|
|
|
107,799,432 |
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
Available for sale securities, at fair value (Note 3) |
|
|
40,564,700 |
|
|
|
48,829,981 |
|
Other Investments |
|
|
3,500,000 |
|
|
|
|
|
Federal Reserve Bank stock, at cost |
|
|
1,192,000 |
|
|
|
1,839,650 |
|
Federal Home Loan Bank stock, at cost (Note 8) |
|
|
4,508,300 |
|
|
|
4,508,300 |
|
|
|
|
|
|
|
|
Total securities |
|
|
49,765,000 |
|
|
|
55,177,931 |
|
Loans receivable (net of allowance for loan losses: 2010: $15,374,101 2009: $15,794,118) (Notes 4 and 17)
|
|
|
534,531,213 |
|
|
|
645,205,943 |
|
Accrued interest and dividends receivable |
|
|
2,512,186 |
|
|
|
3,236,252 |
|
Premises and equipment, net (Notes 5 and 9) |
|
|
5,270,312 |
|
|
|
6,595,727 |
|
Cash surrender value of life insurance (Note 12) |
|
|
20,348,332 |
|
|
|
19,859,732 |
|
Other real estate owned (Note 6) |
|
|
16,408,787 |
|
|
|
19,073,993 |
|
Deferred Tax Asset (Note 10) |
|
|
|
|
|
|
|
|
Other assets (Note 11) |
|
|
8,711,366 |
|
|
|
9,467,911 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
784,324,854 |
|
|
$ |
866,416,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits (Notes 7 and 17): |
|
|
|
|
|
|
|
|
Noninterest bearing deposits |
|
$ |
51,058,373 |
|
|
$ |
49,755,521 |
|
Interest bearing deposits |
|
|
595,750,456 |
|
|
|
711,578,771 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
646,808,829 |
|
|
|
761,334,292 |
|
|
|
|
|
|
|
|
|
|
Borrowings (Note 8) |
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
7,000,000 |
|
|
|
7,000,000 |
|
Federal Home Loan Bank borrowings |
|
|
50,000,000 |
|
|
|
50,000,000 |
|
|
|
|
|
|
|
|
Total borrowings |
|
|
57,000,000 |
|
|
|
57,000,000 |
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt owed to unconsolidated trust (Note 8) |
|
|
8,248,000 |
|
|
|
8,248,000 |
|
Accrued expenses and other liabilities |
|
|
5,095,837 |
|
|
|
3,973,319 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
717,152,666 |
|
|
|
830,555,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 8, 9 and 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (Notes 13 and 16) |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, 2010: $.01 par value, 100,000,000 shares authorized; 38,374,432 shares issued;
38,362,727 shares outstanding. Common stock, 2009: $2 par value; 60,000,000 shares
authorized; 4,774,432 shares issued;4,762,727 shares outstanding |
|
|
383,744 |
|
|
|
9,548,864 |
|
Additional paid-in capital |
|
|
105,050,433 |
|
|
|
49,651,534 |
|
Accumulated deficit |
|
|
(39,399,345 |
) |
|
|
(24,000,400 |
) |
Less: Treasury stock, at cost: 2010 and 2009 11,705 shares |
|
|
(160,025 |
) |
|
|
(160,025 |
) |
Accumulated other comprehensive income |
|
|
1,297,381 |
|
|
|
821,337 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
67,172,188 |
|
|
|
35,861,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
784,324,854 |
|
|
$ |
866,416,921 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
3
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
33,615,884 |
|
|
$ |
41,121,342 |
|
|
$ |
52,484,054 |
|
Interest on investment securities |
|
|
1,522,873 |
|
|
|
1,335,283 |
|
|
|
2,324,817 |
|
Dividends on investment securities |
|
|
267,790 |
|
|
|
293,735 |
|
|
|
803,704 |
|
Interest on federal funds sold |
|
|
17,036 |
|
|
|
37,546 |
|
|
|
129,475 |
|
Other interest income |
|
|
185,308 |
|
|
|
180,174 |
|
|
|
8,196 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
35,608,891 |
|
|
|
42,968,080 |
|
|
|
55,750,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
11,178,793 |
|
|
|
22,021,255 |
|
|
|
25,968,124 |
|
Interest on Federal Home Loan Bank borrowings |
|
|
1,698,771 |
|
|
|
1,698,712 |
|
|
|
1,725,699 |
|
Interest on subordinated debt |
|
|
288,428 |
|
|
|
331,309 |
|
|
|
535,659 |
|
Interest on other borrowings |
|
|
308,551 |
|
|
|
308,552 |
|
|
|
309,585 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
13,474,543 |
|
|
|
24,359,828 |
|
|
|
28,539,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
22,134,348 |
|
|
|
18,608,252 |
|
|
|
27,211,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses (Note 4) |
|
|
7,714,000 |
|
|
|
13,089,000 |
|
|
|
11,289,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
14,420,348 |
|
|
|
5,519,252 |
|
|
|
15,921,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage brokerage referral fees |
|
|
90,889 |
|
|
|
167,854 |
|
|
|
237,933 |
|
Loan application, inspection and processing fees |
|
|
155,494 |
|
|
|
214,334 |
|
|
|
355,526 |
|
Fees and service charges |
|
|
1,174,361 |
|
|
|
1,025,258 |
|
|
|
990,843 |
|
Loss on impaired investment securities |
|
|
|
|
|
|
|
|
|
|
(3,167,285 |
) |
Gain on sale of investment securities |
|
|
|
|
|
|
434,334 |
|
|
|
|
|
Gain on redemption of investment securities |
|
|
|
|
|
|
16,880 |
|
|
|
|
|
Earnings on cash surrender value of life insurance |
|
|
546,910 |
|
|
|
724,627 |
|
|
|
941,421 |
|
Other income |
|
|
386,586 |
|
|
|
363,193 |
|
|
|
492,454 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss) |
|
|
2,354,240 |
|
|
|
2,946,480 |
|
|
|
(149,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (Notes 9 and 14) |
|
|
13,195,673 |
|
|
|
11,879,544 |
|
|
|
12,092,917 |
|
Occupancy and equipment expense |
|
|
5,555,240 |
|
|
|
5,657,908 |
|
|
|
5,526,910 |
|
Data processing |
|
|
1,456,873 |
|
|
|
1,373,489 |
|
|
|
1,285,989 |
|
Advertising and promotional expenses |
|
|
312,621 |
|
|
|
280,567 |
|
|
|
814,374 |
|
Professional and other outside services |
|
|
3,067,221 |
|
|
|
4,021,330 |
|
|
|
1,755,896 |
|
Loan administration and processing expenses |
|
|
303,562 |
|
|
|
519,412 |
|
|
|
303,338 |
|
Regulatory assessments |
|
|
2,957,010 |
|
|
|
3,165,722 |
|
|
|
725,613 |
|
Insurance expense |
|
|
936,035 |
|
|
|
762,766 |
|
|
|
144,946 |
|
Other real estate operations (Note 6) |
|
|
2,286,948 |
|
|
|
793,781 |
|
|
|
|
|
Material and communications |
|
|
804,623 |
|
|
|
782,068 |
|
|
|
859,425 |
|
Other operating expenses |
|
|
1,072,727 |
|
|
|
895,001 |
|
|
|
1,073,006 |
|
Goodwill impairment (Note 11) |
|
|
|
|
|
|
|
|
|
|
1,365,491 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
31,948,533 |
|
|
|
30,131,588 |
|
|
|
25,947,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(15,173,945 |
) |
|
|
(21,665,856 |
) |
|
|
(10,175,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) benefit for Income Taxes (Note 10) |
|
|
(225,000 |
) |
|
|
(2,213,750 |
) |
|
|
3,064,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,398,945 |
) |
|
$ |
(23,879,606 |
) |
|
$ |
(7,111,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (Note 13) |
|
$ |
(1.30 |
) |
|
$ |
(5.02 |
) |
|
$ |
(1.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.180 |
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
4
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Outstanding |
|
|
Common |
|
|
Paid-in |
|
|
(Accumulated |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Deficit) |
|
|
Stock |
|
|
Income (Loss) |
|
|
Total |
|
|
Balance, December 31, 2007 |
|
|
4,746,844 |
|
|
$ |
9,493,688 |
|
|
$ |
49,549,119 |
|
|
$ |
7,846,060 |
|
|
$ |
|
|
|
$ |
(53,500 |
) |
|
$ |
66,835,367 |
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,111,606 |
) |
|
|
|
|
|
|
|
|
|
|
(7,111,606 |
) |
Unrealized holding loss on available for
sale securities, net of taxes (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,010 |
) |
|
|
(37,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,148,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends ($0.180 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(854,340 |
) |
|
|
|
|
|
|
|
|
|
|
(854,340 |
) |
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchased under buyback |
|
|
(11,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,025 |
) |
|
|
|
|
|
|
(160,025 |
) |
|
Issuance of capital stock (Note 13) |
|
|
8,270 |
|
|
|
16,540 |
|
|
|
83,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,483 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
4,743,409 |
|
|
$ |
9,510,228 |
|
|
$ |
49,634,337 |
|
|
$ |
(119,886 |
) |
|
$ |
(160,025 |
) |
|
$ |
(90,510 |
) |
|
$ |
58,774,144 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,879,606 |
) |
|
|
|
|
|
|
|
|
|
|
(23,879,606 |
) |
Unrealized holding gain on available for
sale securities, net of taxes (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911,847 |
|
|
|
911,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,967,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital stock (Note 13) |
|
|
19,318 |
|
|
|
38,636 |
|
|
|
17,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,833 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
4,762,727 |
|
|
$ |
9,548,864 |
|
|
$ |
49,651,534 |
|
|
$ |
(24,000,400 |
) |
|
$ |
(160,025 |
) |
|
$ |
821,337 |
|
|
$ |
35,861,310 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,398,945 |
) |
|
|
|
|
|
|
|
|
|
|
(15,398,945 |
) |
Unrealized holding gain on available for
sale securities, net of taxes (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476,044 |
|
|
|
476,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,922,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of capital stock |
|
|
|
|
|
|
(9,501,120 |
) |
|
|
9,501,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock issued in acquisition (Note 13) |
|
|
33,600,000 |
|
|
|
336,000 |
|
|
|
45,897,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,233,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
38,362,727 |
|
|
$ |
383,744 |
|
|
$ |
105,050,433 |
|
|
$ |
(39,399,345 |
) |
|
$ |
(160,025 |
) |
|
$ |
1,297,381 |
|
|
$ |
67,172,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
5
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,398,945 |
) |
|
$ |
(23,879,606 |
) |
|
$ |
(7,111,606 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and accretion of investment premiums and discounts, net |
|
|
401,949 |
|
|
|
157,727 |
|
|
|
131,456 |
|
Amortization and accretion of purchase loan premiums and discounts, net |
|
|
110,433 |
|
|
|
26,079 |
|
|
|
37,732 |
|
Amortization of core deposit intangible |
|
|
15,900 |
|
|
|
16,788 |
|
|
|
17,688 |
|
Provision for loan losses |
|
|
7,714,000 |
|
|
|
13,089,000 |
|
|
|
11,289,772 |
|
Gain on sale of investment securities |
|
|
|
|
|
|
(434,334 |
) |
|
|
|
|
Loss on impaired investment securities |
|
|
|
|
|
|
|
|
|
|
3,167,285 |
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
1,365,491 |
|
Loss on sale of other real estate owned |
|
|
164,494 |
|
|
|
|
|
|
|
|
|
Impairment write-down on other real estate owned |
|
|
1,084,023 |
|
|
|
|
|
|
|
|
|
Gain on redemption of investment security |
|
|
|
|
|
|
(16,880 |
) |
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
1,498,334 |
|
|
|
1,660,803 |
|
|
|
1,632,985 |
|
Payment of fees to directors in common stock |
|
|
|
|
|
|
55,833 |
|
|
|
49,932 |
|
Earnings on and decrease in cash surrender value of life insurance |
|
|
(488,600 |
) |
|
|
(724,627 |
) |
|
|
(941,421 |
) |
Deferred income taxes |
|
|
|
|
|
|
8,624,602 |
|
|
|
(5,869,368 |
) |
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in deferred loan fees |
|
|
(288,790 |
) |
|
|
(843,519 |
) |
|
|
(849,073 |
) |
Decrease in accrued interest and dividends receivable |
|
|
724,066 |
|
|
|
1,320,503 |
|
|
|
19,263 |
|
Decrease (increase) in other assets |
|
|
740,809 |
|
|
|
(8,018,616 |
) |
|
|
(437,841 |
) |
Increase (decrease) in accrued expenses and other liabilities |
|
|
830,750 |
|
|
|
(832,112 |
) |
|
|
(1,031,841 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(2,891,577 |
) |
|
|
(9,798,359 |
) |
|
|
1,470,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities |
|
|
(15,162,500 |
) |
|
|
(34,265,081 |
) |
|
|
(18,366,036 |
) |
Purchases of other investments |
|
|
(3,500,000 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of available for sale securities |
|
|
|
|
|
|
19,852,541 |
|
|
|
|
|
Proceeds from redemptions of available for sale securities |
|
|
15,000,000 |
|
|
|
12,000,000 |
|
|
|
19,000,000 |
|
Principal repayments on available for sale securities |
|
|
8,793,644 |
|
|
|
7,326,444 |
|
|
|
11,317,968 |
|
Purchase of Federal Reserve Bank stock |
|
|
|
|
|
|
(1,500 |
) |
|
|
(1,500 |
) |
Purchase of Federal Home Loan Bank stock |
|
|
|
|
|
|
|
|
|
|
(1,852,200 |
) |
Proceeds from repurchase of excess stock by the Federal Reserve Bank |
|
|
647,650 |
|
|
|
75,050 |
|
|
|
|
|
Net decrease (increase) in loans |
|
|
93,035,888 |
|
|
|
112,017,191 |
|
|
|
(113,161,128 |
) |
Capital improvements to other real estate owned |
|
|
(266,449 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of other real estate owned |
|
|
11,786,337 |
|
|
|
|
|
|
|
|
|
Purchases of premises and equipment |
|
|
(173,083 |
) |
|
|
(308,185 |
) |
|
|
(1,775,967 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
110,161,487 |
|
|
|
116,696,460 |
|
|
|
(104,838,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in demand, savings and money market deposits |
|
|
(33,040,482 |
) |
|
|
69,100,673 |
|
|
|
43,490,488 |
|
Net (decrease) increase in time certificates of deposit |
|
|
(81,484,981 |
) |
|
|
(92,587,732 |
) |
|
|
68,931,454 |
|
Net increase in FHLB borrowings |
|
|
|
|
|
|
|
|
|
|
2,500,000 |
|
Net proceeds from issuance of common stock in acquisition |
|
|
46,233,779 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
50,551 |
|
Other |
|
|
|
|
|
|
(908 |
) |
|
|
1,275 |
|
Payment under stock buyback program |
|
|
|
|
|
|
|
|
|
|
(160,025 |
) |
Dividends paid on common stock |
|
|
|
|
|
|
(213,453 |
) |
|
|
(854,497 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(68,291,684 |
) |
|
|
(23,701,420 |
) |
|
|
113,959,246 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
38,978,226 |
|
|
|
83,196,681 |
|
|
|
10,590,837 |
|
6
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash and cash equivalents at |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
107,799,432 |
|
|
|
24,602,751 |
|
|
|
14,011,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
146,777,658 |
|
|
$ |
107,799,432 |
|
|
$ |
24,602,751 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
13,250,797 |
|
|
$ |
24,348,048 |
|
|
$ |
28,340,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
2,080 |
|
|
$ |
1,216,134 |
|
|
$ |
1,816,392 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available for sale securities
arising during the period |
|
$ |
767,812 |
|
|
$ |
1,470,721 |
|
|
$ |
(59,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends declared on common stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
213,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned |
|
$ |
10,103,199 |
|
|
$ |
19,073,993 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
7
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
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, fifteen other branch offices
in Connecticut and three branch offices in New York. The Banks customers are concentrated in
Fairfield and New Haven Counties in Connecticut and Westchester County, New York City and Long
Island, New York. The Bank also conducts mortgage brokerage operations through a loan production
office in Stamford, Connecticut.
On March 11, 2003, the Company formed Patriot National Statutory Trust I (the Trust) for the
purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures
issued by the Company, and on March 26, 2003, the first series of trust preferred securities were
issued. In accordance with generally accepted accounting principles, the Trust is not included in
the Companys consolidated financial statements.
The following is a summary of the Companys significant accounting policies:
Significant group concentrations of credit risk
Most of the Companys activities are with customers located within Fairfield and New Haven Counties
in Connecticut and Westchester County, New York City and Long Island, New York. Note 3 discusses
the types of securities in which the Company invests. Note 4 discusses the types of lending in
which the Company engages. The Company does not have any significant concentrations to any one
industry or customer; however, the Companys investment in life insurance is in a separate account
of a single insurance carrier.
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 Banks wholly owned subsidiary, PinPat Acquisition Corporation, and
have been prepared in conformity with U.S. generally accepted accounting principles. 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 reported amounts of revenues and expenses for the
reporting 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, the valuation of investment securities and deferred tax assets, and the
evaluation of investment securities for impairment. Certain prior year balances have been
reclassified to conform to the current year presentation.
8
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
On July 1, 2009, the Accounting Standards Codification (ASC) became the Financial Accounting
Standard Boards (FASB) single source of authoritative U.S. accounting and reporting standards
applicable to all public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF)
and related literature. The adoption of this ASC topic changed the applicable citations and naming
conventions used when referencing generally accepted accounting principles.
Cash and cash equivalents
Cash and due from banks, federal funds sold and short-term investments are recognized as cash
equivalents in the consolidated balance sheets. Federal funds sold generally mature in one day.
For purposes of reporting cash flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company
maintains amounts due from banks and federal funds sold which, at times, may exceed federally
insured limits. The Company has not experienced any losses from such concentrations. The
short-term investments represent an investment in a money market mutual fund of a single issuer.
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.
The Bank is required to maintain an investment in capital stock of the FHLB, as collateral, in an
amount equal to a percentage of its outstanding mortgage loans and contracts secured by residential
properties, including mortgage-backed securities. The stock is purchased from and redeemed by the
FHLB based upon its $100 par value. The stock is a non-marketable equity security and as such is
classified as restricted stock, carried at cost and evaluated for impairment in accordance with
relevant accounting guidance. In accordance with this guidance, the stocks value is determined by
the ultimate recoverability of the par value rather than by recognizing temporary declines. The
determination of whether the par value will ultimately be recovered is influenced by criteria such
as the following: (a) the significance of the decline in net assets of the FHLB as compared to the
capital stock amount and the length of time this situation has persisted; (b) commitments by the
FHLB to make payments required by law or regulation and the level of such payments in relation to
the operating performance; (c) the impact of legislative and regulatory changes on the customer
base of the FHLB; and (d) the liquidity position of the FHLB.
9
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The FHLB had incurred losses in 2008 and 2009 and suspended the payment of dividends and excess
stock redemptions. The losses were primarily attributable to impairment of investment securities
associated with the extreme economic conditions in prior years. They returned to profitability in
2010, and it was recently announced that the FHLBs board of directors declared a dividend for the
fourth quarter 2010 and its anticipated that they will continue to declare modest cash dividends
through 2011. Management evaluated the stock and concluded that the stock was not impaired for the
periods presented herein. More consideration was given to the long-term prospects for the FHLB as
opposed to the recent stress caused by the extreme economic conditions the world is facing.
Management also considered that the FHLBs regulatory capital ratios have increased from the prior
year, liquidity appears adequate, and new shares of FHLB stock continue to exchange hands at $100
par value.
The Bank is required to maintain an investment in capital stock of the FRB, as collateral, in an
amount equal to one percent of six percent of the Banks total equity capital as per the latest
Report of Condition (Call Report). The stock is purchased from and redeemed by the FRB based upon
its $100 par value. The stock is a non-marketable equity security and as such is classified as
restricted stock, carried at cost and evaluated for impairment in accordance with relevant
accounting guidance. In accordance with this guidance, the stocks value is determined by the
ultimate recoverability of the par value rather than by recognizing temporary declines. The
determination of whether the par value will ultimately be recovered is influenced by criteria such
as the following: (a) the significance of the decline in net assets of the FRB as compared to the
capital stock amount and the length of time this situation has persisted; (c) the impact of
legislative and regulatory changes on the customer base of the FRB; and (d) the liquidity position
of the FRB.
Member banks may carry over changes within a calendar year until the cumulative change exceeds the
lesser of 15% or 100 shares of Federal Reserve Bank stock. However, any change required by a
member banks capital and surplus, as shown in its Report of Condition as of December 31 of each
year, must be applied for even if the change is less than 100 shares of Federal Reserve Bank stock
and less than 15% of the Federal Reserve Bank stock held by the member bank.
Management evaluated the stock and concluded that the stock was not impaired for the periods
presented herein. Consideration was given to the long-term prospects for the FRB. Management also
considered that liquidity appears adequate and new shares of FRB stock continue to exchange hands
at the $100 par value.
Debt securities, if any, that management has the positive intent and ability to hold to maturity
are classified as held to maturity and are recorded at amortized cost. Trading securities, if
any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities
not classified as held to maturity or trading, including equity securities with readily
determinable fair values, are classified as available for sale and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other comprehensive income
(loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the
interest method over the contractual lives of the securities.
10
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Company conducts a periodic review and evaluation of the securities portfolio to determine if a
decline in the fair value of any security below its cost basis is other-than-temporary. Our
evaluation of other-than-temporary impairment, or OTTI, considers the duration and severity of the
impairment, our intent and ability to hold the securities and our assessments of the reason for the
decline in value and the likelihood of a near-term recovery. If such decline is deemed
other-than-temporary, the security is written down to a new cost basis and the resulting loss is
charged to earnings as a component of non-interest income, except for the amount of the total OTTI
for a debt security that does not represent credit losses which is recognized in other
comprehensive income/loss, net of applicable taxes.
Security transactions are recorded on the trade date. Realized gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific identification
method and reported in non-interest income.
The sale of a held to maturity security within three months of its maturity date or after
collection of at least 85% of the principal outstanding at the time the security was acquired is
considered a maturity for purposes of classification and disclosure.
Loans held for sale
Loans held for sale, if any, are those loans the Company has the intent to sell in the foreseeable
future, and are carried at the lower of aggregate cost or fair value, less estimated selling costs.
Gains and losses on sales of loans are recognized on the trade dates, and are determined by the
difference between the sales proceeds and the carrying value of the loans. Once loans are
transferred to held for sale, any subsequent impairment in loans held for sale is recorded in
non-interest income.
Loans receivable
Loans that the Company has the intent and ability to hold for the foreseeable future or until
maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted
for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs.
Interest income is accrued based on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and amortized as a level yield adjustment over the
respective term of the loan and reported in interest income.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due for
payment unless the loan is well-secured and in process of collection. Consumer installment loans
are typically charged off no later than 180 days past due. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged
off are reversed against interest income. The interest on these loans is accounted for on the
cash-basis method until qualifying for return to accrual status. Upon receipt of cash, all cash
received is first applied to satisfy principal and then applied to interest. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
11
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Companys real estate loans are collateralized by real estate located principally in Fairfield
and New Haven Counties in Connecticut and Westchester County, New York City and Long Island, New
York, and accordingly, the ultimate collectability of a substantial portion of the Companys loan
portfolio is susceptible to changes in regional real estate market conditions.
A loan is considered impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and real estate loans by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Impaired loans also include loans modified in troubled debt restructurings (TDRs), where
concessions have been granted to borrowers experiencing financial difficulties. These concessions
could include a reduction in the interest rate on the loan, payment extensions, forgiveness of
principal, forbearance or other actions intended to maximize collection. TDRs are placed on
non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return
to accrual status once they have demonstrated performance with the restructured term of the loan
agreement for a minimum of six months.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer installment loans for
impairment disclosures, unless such loans are the subject of a restructuring agreement due to
financial difficulties of the borrower.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
12
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to
loans that are considered impaired. For such impaired loans, an allowance is established when the
discounted cash flows (or collateral value if the loan is collateral dependent or observable market
price) of the impaired loan is lower than the carrying value of that loan. The general component
covers all other loans, segregated generally by loan type, and is based on historical loss
experience with adjustments for qualitative factors which are made after an assessment of internal
or external influences on credit quality that are not fully reflected in the historical loss data.
In addition, a risk rating system is utilized to evaluate the general component of the allowance
for loan losses. Under this system, management assigns risk ratings between one and nine to
commercial and industrial loans, construction loans and commercial real estate loans. Risk ratings
are assigned based upon the recommendations of the credit analyst and the originating loan officer
and confirmed by the Loan Committee at the initiation of the transactions and are reviewed and
changed, when necessary, during the life of the loan. Loans assigned a risk rating of six or above
are monitored more closely by the credit administration officers and the Loan Committee.
Included in the valuation allowance are disposition discount adjustments made to real estate
appraisals on collateral dependent impaired loans anticipated to become other real estate owned (OREO) in the coming quarter,
as the Companys recent experience has indicated that the ultimate sales prices of the underlying
collateral have been less than the appraisal amounts. The appraisal adjustment percentage will be
reviewed quarterly for those loans anticipated to become OREO in the subsequent quarter, based on
an analysis of actual variances between appraised values as of the date the loan is transferred
into OREO and the actual sales prices of the OREO properties. Generally, the sales prices have
been below the appraised values due to the fact that buyers become aware that the Bank owns those
properties, and, therefore, attempt to offer less than fair market value. In the future,
additional revisions may be made to the methodology and assumptions based on historical information
related to charge-off and recovery experience and managements evaluation of the current loan
portfolio, and prevailing internal and external factors including but not limited to current
economic conditions and local real estate markets.
13
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Company provides for loan losses based on the consistent application of our documented
allowance for loan loss methodology. Loan losses are charged to the allowance for loans losses and
recoveries are credited to it. Additions to the allowance for loan losses are provided by charges
against income based on various factors which, in our judgment, deserve current recognition in
estimating probable losses. Loan losses are charged-off in the period the loans, or portion
thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including
a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral,
less cost to sell, for collateral dependent loans. The Company regularly
reviews the loan portfolio and makes adjustments for loan losses in order to maintain the allowance
for loan losses in accordance with U.S. generally accepted accounting principles. The allowance
for loan losses consists primarily of the following two components:
|
(1) |
|
Allowances are established for impaired loans (generally defined by the Company
as non-accrual loans and troubled debt restructurings). The amount of impairment
provided for as an allowance is represented by the deficiency, if any, between the
present value of expected future cash flows discounted at the original loans effective
interest rate or the underlying collateral value (less estimated costs to sell,) if the
loan is collateral dependent, and the carrying value of the loan. Impaired loans that
have no impairment losses are not considered for general valuation allowances described
below. |
|
(2) |
|
General allowances are established for loan losses on a portfolio basis for
loans that do not meet the definition of impaired. The portfolio is grouped into
similar risk characteristics, primarily loan type, loan-to-value, if collateral
dependent, and internal risk ratings. Management applies an estimated loss rate to
each loan group. The loss rates applied are based on the Companys cumulative prior
three year loss experience adjusted, as appropriate, for the environmental factors
discussed below. This evaluation is inherently subjective, as it requires material
estimates that may be susceptible to significant revisions based upon changes in
economic and real estate market conditions. Actual loan losses may be more or less
than the allowance for loan losses management has established, which could have an
effect on the Companys financial results. |
The adjustments to the Companys loss experience are based on managements evaluation of several
environmental factors, including:
|
|
|
Changes in local, regional, national and international economic and business
conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments; |
|
|
|
Changes in the nature and volume of the portfolio and in the terms of the loans; |
|
|
|
Changes in the experience, ability, and depth of lending management and other
relevant staff; |
|
|
|
Changes in the volume and severity of past due loans, the volume of nonaccrual
loans, and the volume and severity of adversely classified or graded loans; |
|
|
|
Changes in the quality of the loan review system; |
|
|
|
Changes in the value of the underlying collateral for collateral-dependent
loans; |
|
|
|
The existence and effect of any concentrations of credit, and changes in the
level of such concentrations; and |
|
|
|
The effect of other external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the existing
portfolio. |
In evaluating the estimated loss factors to be utilized for each loan group, management also
reviews actual loss history over an extended period of time as reported by the Office of the Comptroller
of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) for
institutions both in the Companys market area and nationally for periods that are believed to have
experienced similar economic conditions.
14
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
In underwriting a loan secured by real property, we require an appraisal of the property by an
independent licensed appraiser approved by the Companys Board of Directors. For loans in excess
of $2.5 million, the appraisal is subject to review by an independent third party hired by the
Company. Management reviews and inspects properties before disbursement of funds during the term
of a construction loan. Generally, management obtains updated appraisals when a loan is deemed
impaired and if a construction loan, within 120 days prior to the scheduled maturity date. These
appraisals may be more limited than those prepared for the underwriting of a new loan. All
appraisals are also reviewed internally by qualified staff independent from the lending department.
Management evaluates the allowance for loan losses based on the combined total of the impaired and
general components. Generally, when the loan portfolio increases, absent other factors, the
allowance for loan loss methodology results in a higher dollar amount of estimated probable losses.
Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss
methodology results in a lower dollar amount of estimated probable losses.
Each quarter management evaluates the allowance for loan losses and adjusts the allowance as
appropriate through a provision for loan losses. While the Company uses the best information
available to make evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the information used in making the evaluations. In addition, as an
integral part of their examination process, the Office of the Comptroller of the Currency will
periodically review the allowance for loan losses. The OCC may require the Company to adjust the
allowance based on their analysis of information available to them at the time of their
examination. The last full examination was as of March 31, 2010 and there was an interim follow-up
examination as of September 30, 2010.
Loan brokerage activities
The Company receives loan brokerage fees for soliciting and processing conventional loan
applications on behalf of investors. Brokerage fee income is recognized upon closing of loans for
permanent investors.
Transfers of financial asset
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 put presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership, (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 no condition both constrains the transferee from taking advantage of that
right and provides more than a trivial benefit for the transferor, and (3) the transferor does not
maintain effective control over the transferred assets through either (a) an agreement that both
entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the
ability to unilaterally cause the holder to return specific assets, other than through a cleanup
call.
15
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
In June 2009, the FASB issued guidance which modifies certain guidance relating to transfers and
servicing of financial assets. This guidance eliminates the concept of qualifying special purpose
entities, provides guidance as to when a portion of a transferred financial asset can be evaluated
for sale accounting, provides additional guidance with regard to accounting for transfers of
financial assets and requires additional disclosures. This guidance is effective for the Company
as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after
the effective date. The adoption of this guidance did not have a material impact on the Companys
consolidated financial statements.
Other real estate owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at the lower of cost or estimated fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. In addition, when the Company acquires other real estate owned, it
obtains a current appraisal to substantiate the net carrying value of the asset. Subsequent to
foreclosure, valuations are periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance 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 non-interest expenses upon disposal.
Write-downs required upon transfer to other real estate owned are charged to the allowance for loan
losses. Thereafter, an allowance for other real estate owned losses is established for any further
declines in the propertys value. These losses are included in non-interest expenses in the
consolidated statement of operations. Other real estate owned is reported net of an allowance for
losses of $16,408,787 and $19,073,993 at December 31, 2010 and 2009, respectively.
Premises and equipment
Premises and equipment are stated at cost, 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
for furniture, equipment and software using the straight-line method over the estimated useful
lives of the related assets which range from three to ten years. Gains and losses on dispositions
are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements
are capitalized.
Impairment of assets
Long-lived assets, which are held and used by the Company, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment is indicated by that review, the asset is written down to its estimated
fair value through a charge to non-interest expense.
16
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Goodwill and other intangible assets
Goodwill and other intangible assets with indefinite lives represent the cost in excess of net
assets of businesses acquired and are not subject to amortization. Other identified intangible
assets with finite lives consist of a core deposit intangible recorded in connection with a branch
acquisition and is amortized over its estimated useful life. The Companys goodwill and other
intangible assets are tested for impairment annually, or more frequently under prescribed
conditions.
Cash surrender value of life insurance
Cash surrender value of life insurance represents life insurance on certain employees who have
consented to allow the Bank to be the beneficiary of those policies. Increases in the cash value
of the policies, as well as insurance proceeds received above the carrying value, are recorded in
other non-interest income and are not subject to income tax. Management reviews the financial
strength of the insurance carrier on an annual basis.
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 carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized.
The Company recognizes a benefit from its tax positions only if it is more-likely-than-not that the
tax position will be sustained on examination by taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all relevant information.
The periods subject to examination for the Companys Federal returns are the tax years 2005 through
2010. The periods subject to examination for the Companys significant state return, which is
Connecticut, are the tax years 2007 through 2010. The Company believes that its income tax filing
positions and deductions will be sustained upon examination and does not anticipate any adjustments
that will result in a material change in its financial statements. As a result, no reserve for
uncertain income tax positions has been recorded.
17
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Companys policy for recording interest and penalties related to uncertain tax positions is to
record such items as part of its provision for federal and state income taxes.
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 and entities 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
requirements, as those prevailing at the time for comparable transactions with other customers who
are not directors or officers. In the opinion of management, the transactions with related parties
did not involve more than normal risks of collectability or favored treatment or terms, or present
other unfavorable features. Note 17 contains details regarding related party transactions.
Loss per share
Basic loss per share represents loss available to common stockholders and is computed by dividing
net loss by the weighted-average number of common shares outstanding. Diluted loss per share
reflects additional common shares that would have been outstanding if potential dilutive common
shares had been issued, as well as any adjustment to income that would result from the assumed
issuance unless such assumed issuance in antidilutive. Potential common shares that may be issued
by the Company relate to any stock options and warrants that may be outstanding, and are determined
using the treasury stock method.
Treasury shares are not deemed outstanding for loss per share purposes.
Stock compensation plan
The Company accounts for share-based compensation transactions at fair-value and recognizes the
related expense in the consolidated statements of operations. The Company had no outstanding
stock-based compensation plans at December 31, 2010 and 2009.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be
included in net income (loss). 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 shareholders equity in the consolidated balance sheets, such items, along with net income, are
components of comprehensive income.
18
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Segment reporting
The Companys only business segment is Community Banking. During the years ended 2010, 2009 and
2008, this segment represented all the revenues and income of the consolidated group and therefore,
is the only reported segment.
Fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and to
determine fair value disclosures. Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value is best determined based upon quoted market prices. However, in
certain instances, there are no quoted market prices for certain assets or liabilities. 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 rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the asset or liability.
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement date under current
market conditions. If there has been a significant decrease in the volume and level of activity
for the asset or liability, a change in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances, determining the price at which willing market
participants would transact at the measurement date under current market conditions depends on the
facts and circumstances and requires the use of significant judgment.
The Companys fair value measurements are classified into a fair value hierarchy based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. The three categories within the hierarchy are as follows:
|
|
|
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. |
|
|
|
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (such as interest rates,
volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means. |
|
|
|
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
19
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Prior to 2009, the fair value guidance only pertained to financial assets and liabilities. In
January 2009, the provisions of the fair value accounting guidance became effective for
nonfinancial assets and liabilities. The Company adopted these provisions in 2009.
In April 2009, the FASB issued guidance which addressed concerns that fair value measurements
emphasized the use of an observable market transaction even when that transaction may not have been
orderly or the market for that transaction may not have been active. This guidance relates to the
following: (a) determining when the volume and level of activity for the asset or liability has
significantly decreased; (b) identifying circumstances in which a transaction is not orderly; and
(c) understanding the fair value measurement implications of both (a) and (b). The Company adopted
this new guidance in 2009, and the adoption had no impact on the Companys consolidated financial
statements.
In February 2010, the FASB issued ASU No. 2010-06 Topic 820 Improving Disclosures about Fair Value
Measurements which amends the existing guidance related to Fair Value Measurements and
Disclosures. The amendments require the following new fair value disclosures:
|
|
|
Separate disclosure of the significant transfers in and out of Level 1 and
Level 2 fair value measurements, and a description of the reasons for the transfers. |
|
|
|
In the rollforward of activity for Level 3 fair value measurements (significant
unobservable inputs), purchases, sales, issuances, and settlements should be presented
separately (on a gross basis rather than as one net number). |
In addition, the amendments clarify existing disclosure requirements, as follows:
|
|
|
Fair value measurements and disclosures should be presented for each class of
assets and liabilities within a line item in the statement of financial position. |
|
|
|
Reporting entities should provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. |
The new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures included in the
rollforward of activity for Level 3 fair value measurements, for which the effective date is for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
See Note 19 for additional information regarding fair value.
20
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Recently issued accounting pronouncements
In July 2010, the FASB issued ASU 2010-20 Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses (ASU 2010-20), guidance which addressed
disclosures about the credit quality of financing receivables and the allowance for credit losses.
The amendments apply to financing receivables, excluding short-term trade accounts receivable or
receivables measured at fair value or lower of cost or fair value. The amendments enhance
disclosures about the credit quality of financing receivables and the allowance for credit losses.
This amends existing disclosure guidance to require the Company to provide a greater level of
disaggregated information about the credit quality of its financing receivables and its allowance
for credit losses. In addition, it requires the Company to disclose credit quality indicators,
past due information, and modifications of its financing receivables. For the Company, the
disclosures as of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning on or after
December 15, 2010. The Company adopted this guidance during the quarter ended December 31, 2010.
The adoption of this guidance did not have a material impact on the Companys results of operations
or financial position. Effective December 31, 2010, FASB amended ASU 2010-20 to defer the
disclosures about the modifications of its financing receivables, which will be effective for
interim and annual reporting periods ending after June 15, 2011.
In May 2009, the FASB issued guidance relating to accounting for, and disclosure of, events that
occur after the balance sheet date but before financial statements are issued or available to be
issued. This guidance defines (i) the period after the balance sheet date during which a reporting
entitys management should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial
statements, and (iii) the disclosures an entity should make about events or transactions that
occurred after the balance sheet date. The guidance became effective for the Company during the
year ended December 31, 2009. The Company has evaluated subsequent events through the date these
financial statements were issued.
Note 2. Restrictions on Cash and Due From Banks
At December 31, 2010 and 2009, the Company was required to maintain $25,000 in the Federal Reserve
Bank for clearing purposes for its transaction accounts and non-personal time deposits
21
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
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, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
2010 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency mortgage-backed
securities |
|
$ |
36,572,430 |
|
|
$ |
900,286 |
|
|
$ |
(838 |
) |
|
$ |
37,471,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,572,430 |
|
|
|
900,286 |
|
|
|
(838 |
) |
|
|
37,471,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred equity securities |
|
|
1,899,720 |
|
|
|
1,193,102 |
|
|
|
|
|
|
|
3,092,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,472,150 |
|
|
$ |
2,093,388 |
|
|
$ |
(838 |
) |
|
$ |
40,564,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency obligations |
|
$ |
5,176,712 |
|
|
$ |
|
|
|
$ |
(68,212 |
) |
|
$ |
5,108,500 |
|
U. S. Government agency mortgage-backed
securities |
|
|
40,428,810 |
|
|
|
241,520 |
|
|
|
(166,872 |
) |
|
|
40,503,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,605,522 |
|
|
|
241,520 |
|
|
|
(235,084 |
) |
|
|
45,611,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred equity securities |
|
|
1,899,720 |
|
|
|
1,318,303 |
|
|
|
|
|
|
|
3,218,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,505,242 |
|
|
$ |
1,559,823 |
|
|
$ |
(235,084 |
) |
|
$ |
48,829,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table presents the Companys available for sale securities gross unrealized losses
and fair value, aggregated by the length of time the individual securities have been in a
continuous loss position, at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
mortgage-backed securities |
|
$ |
86,375 |
|
|
$ |
(838 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
86,375 |
|
|
$ |
(838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
86,375 |
|
|
$ |
(838 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
86,375 |
|
|
$ |
(838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency
obligations |
|
$ |
5,108,500 |
|
|
$ |
(68,212 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,108,500 |
|
|
$ |
(68,212 |
) |
U. S. Government agency
mortgage-backed securities |
|
|
19,548,726 |
|
|
|
(159,918 |
) |
|
|
759,207 |
|
|
|
(6,954 |
) |
|
|
20,307,933 |
|
|
|
(166,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
24,657,226 |
|
|
$ |
(228,130 |
) |
|
$ |
759,207 |
|
|
$ |
(6,954 |
) |
|
$ |
25,416,433 |
|
|
$ |
(235,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, two securities had unrealized losses with aggregate depreciation of 1.0%
from the amortized cost, compared to six securities at December 31, 2009 with aggregate
depreciation of 0.9% from the amortized cost. There were no securities with unrealized losses
greater than 5% of amortized cost.
Management believes that none of the unrealized losses on available-for-sale securities noted above
are other than temporary due to the fact that they relate to market interest changes on debt and
mortgage-backed securities issued by U.S. Government agencies. Management considers the issuers of
the securities to be financially sound, and the Company expects to receive all contractual
principal and interest related to these investments. Because the Company does not intend to sell
the investments, and it is not more-likely-than-not that the Company will be required to sell the
investments before recovery of their amortized cost basis, which may be maturity, the Company does
not consider those investments to be other-than-temporarily impaired at December 31, 2010.
During 2008, management determined that the following investments had other-than-temporary
impairment for which charges were recorded:
|
|
|
Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) $1,050,000. As a
result of actions taken on September 7, 2008 by the United States Treasury Department and
the Federal Housing Finance Agency with respect to placing Freddie Mac into receivership,
the Companys investment in FHLMC preferred equity securities was deemed to be
other-than-temporarily impaired and a write-down of $1,050,000 was recorded during the
third quarter of 2008. |
|
|
|
Auction Rate Preferred Securities $2,100,000. The Company had investments in six
auction rate preferred securities of companies primarily in the financial services sector.
The illiquidity in the auction rate market during 2008 resulted in significant declines in
market value for these investments. As management was unable to predict near term
prospects for recovery of these
securities, impairment charges totaling $2,100,000 were recorded during the fourth quarter
of 2008. |
23
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
At December 31, 2010 and 2009, available-for-sale securities with a carrying value of $2,811,000
and $1,950,000, respectively, were pledged to secure obligations under municipal deposits. At
December 31, 2010 and 2009, available-for-sale securities with a carrying value of $9,486,000 and
$9,392,000, respectively, were pledged to secure securities sold under agreements to repurchase.
The amortized cost and fair value of available-for-sale debt securities at December 31, 2010 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 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: |
|
|
|
|
|
|
|
|
Over 10 years |
|
$ |
|
|
|
$ |
|
|
Mortgage-backed securities |
|
|
36,572,430 |
|
|
|
37,471,878 |
|
|
|
|
|
|
|
|
Total |
|
$ |
36,572,430 |
|
|
$ |
37,471,878 |
|
|
|
|
|
|
|
|
During 2010 and 2008, there were no sales of available-for-sale securities. During 2009, there
were six sales of available-for-sale securities, which resulted in the Company recognizing proceeds
from the sales of $19,852,541 and gains of $434,334.
24
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Note 4. Loans Receivable and Allowance for Loan Losses
Loans receivable, net, consists of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Real Estate: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
228,842,489 |
|
|
$ |
230,225,306 |
|
Residential |
|
|
187,058,318 |
|
|
|
195,571,225 |
|
Construction |
|
|
63,889,083 |
|
|
|
154,457,082 |
|
Construction-to-permanent |
|
|
10,331,043 |
|
|
|
15,989,976 |
|
Commercial |
|
|
14,573,790 |
|
|
|
19,298,505 |
|
Consumer home equity |
|
|
42,884,962 |
|
|
|
44,309,265 |
|
Consumer installment |
|
|
1,932,763 |
|
|
|
1,155,059 |
|
|
|
|
|
|
|
|
Total loans |
|
|
549,512,448 |
|
|
|
661,006,418 |
|
Premiums on purchased loans |
|
|
242,426 |
|
|
|
131,993 |
|
Net deferred costs (fees) |
|
|
150,440 |
|
|
|
(138,350 |
) |
Allowance for loan losses |
|
|
(15,374,101 |
) |
|
|
(15,794,118 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
$ |
534,531,213 |
|
|
$ |
645,205,943 |
|
|
|
|
|
|
|
|
A summary of changes in the allowance
for loan losses for the years ended December 31, 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
15,794,118 |
|
|
$ |
16,247,070 |
|
|
$ |
5,672,620 |
|
Provision for loan losses |
|
|
7,714,000 |
|
|
|
13,089,000 |
|
|
|
11,289,772 |
|
Recoveries of loans
previously
charged-off |
|
|
236,262 |
|
|
|
187,647 |
|
|
|
904 |
|
Loans charged-off |
|
|
(8,370,279 |
) |
|
|
(13,729,598 |
) |
|
|
(716,226 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
15,374,101 |
|
|
$ |
15,794,118 |
|
|
$ |
16,247,070 |
|
|
|
|
|
|
|
|
|
|
|
25
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
At December 31, 2010 and 2009, the unpaid principal balances of loans delinquent 90 days or more,
but current as to payments, and still accruing were approximately $3,374,242 and $3,571,000,
respectively, and the unpaid principal balances of loans placed on non-accrual status and
considered impaired were $89,150,000 and $113,537,114, respectively. Construction loans comprise
approximately $32,266,000 of the $89,150,000 in non-accrual loans at December 31, 2010, for which
specific reserves of approximately $2,079,000 are recorded. In most cases, and based on the
strength of the borrower, the Company requires construction loan borrowers to maintain interest
reserve accounts which are restricted. Approved interest reserve amounts remaining on construction
loans outstanding aggregated approximately $1,159,000 at December 31, 2010, of which approximately
$1,043,000 are held in restricted accounts and approximately $116,000 represents approved, interest
reserve amounts not yet drawn against the approved loan commitment amounts, none of which are
related to impaired loans.
At December 31, 2010, there were 19 loans totaling $38.0 million that were considered as troubled
debt restructurings, all of which are included in impaired loans, as compared to 9 loans totaling
$11.5 million at December 31, 2009. Loan modifications, which resulted in these loans being
considered troubled debt restructurings, are primarily in the form of rate concessions or term
extensions. Commitments to advance additional funds under troubled debt restructured loans total
approximately $115,000 at December 31, 2010.
If impaired loans had been performing in accordance with their original terms, the Company would
have recorded $6,844,986, $5,312,327 and $2,854,253, of additional income during the years ended
December 31, 2010, 2009 and 2008, respectively.
During 2010, 2009 and 2008, interest income collected and recognized on impaired loans was
$1,806,759 $424,745 and $352,014, respectively. The average recorded investment in impaired loans
for the years ending December 31, 2010, 2009 and 2008 were $104,946,719, $105,309,710 and
$14,788,497, respectively.
The Companys lending activities are conducted principally in Fairfield and New Haven Counties in
Connecticut and Westchester County, New York City and Long Island, New York. The Company grants
commercial real estate loans, commercial business loans and a variety of consumer loans. In
addition, the Company had granted loans for the construction of residential homes, residential
developments and for land development projects. A moratorium on all construction loans was
instituted by management in July 2008. 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 collectability of a
substantial portion of the loan portfolio and the recovery of a substantial portion of any
resulting real estate acquired is susceptible to changes in market conditions.
26
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Company has established credit policies applicable to each type of lending activity in which it
engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up
to 75% of the market value of the collateral at the date of the credit extension depending on the
Companys evaluation of the borrowers creditworthiness and type of collateral. In the case of
construction loans, the maximum loan-to-value was 65% of the as completed market value. The
market value of collateral is monitored on an ongoing basis and additional collateral is obtained
when warranted. Real estate is the primary form of collateral. Other important forms of
collateral are accounts receivable, inventory, other business assets, marketable securities and
time deposits. While collateral provides assurance as a secondary source of repayment, the Company
ordinarily requires the primary source of repayment to be based on the borrowers ability to
generate continuing cash flows on all loans not related to construction.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime
lending generally targets borrowers with weakened credit histories typically characterized by
payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with
questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.
27
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table sets forth activity in our allowance for loan losses, by loan type, for the
year ended December 31, 2010. The following table also details the amount of loans receivable,
net, that are evaluated individually, and collectively, for impairment, and the related portion of
allowance for loan losses that is allocated to each loan portfolio segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Commercial |
|
|
Real Estate |
|
|
Construction |
|
|
to Permanent |
|
|
Residential |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
|
$ |
925,102 |
|
|
$ |
4,987,239 |
|
|
$ |
6,673,204 |
|
|
$ |
497,584 |
|
|
$ |
1,575,189 |
|
|
$ |
750,549 |
|
|
$ |
385,251 |
|
|
$ |
15,794,118 |
|
Charge-offs |
|
|
(396,300 |
) |
|
|
(2,560,074 |
) |
|
|
(4,726,015 |
) |
|
|
|
|
|
|
(600,000 |
) |
|
|
(87,890 |
) |
|
|
|
|
|
|
(8,370,279 |
) |
Recoveries |
|
|
|
|
|
|
67,116 |
|
|
|
157,289 |
|
|
|
|
|
|
|
|
|
|
|
11,857 |
|
|
|
|
|
|
|
236,262 |
|
Provision |
|
|
(87,483 |
) |
|
|
5,138,074 |
|
|
|
1,373,580 |
|
|
|
(6,138 |
) |
|
|
1,388,649 |
|
|
|
(95,904 |
) |
|
|
3,222 |
|
|
|
7,714,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
441,319 |
|
|
$ |
7,632,355 |
|
|
$ |
3,478,058 |
|
|
$ |
491,446 |
|
|
$ |
2,363,838 |
|
|
$ |
578,612 |
|
|
$ |
388,473 |
|
|
$ |
15,374,101 |
|
Ending balance: individually evaluated for impairment |
|
$ |
76,045 |
|
|
$ |
2,300,199 |
|
|
$ |
1,895,326 |
|
|
$ |
183,835 |
|
|
$ |
1,556,077 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,011,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively
evaluated for impairment |
|
$ |
365,274 |
|
|
$ |
5,332,156 |
|
|
$ |
1,582,732 |
|
|
$ |
307,611 |
|
|
$ |
807,761 |
|
|
$ |
578,612 |
|
|
$ |
388,473 |
|
|
$ |
9,362,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Losses |
|
$ |
441,319 |
|
|
$ |
7,632,355 |
|
|
$ |
3,478,058 |
|
|
$ |
491,446 |
|
|
$ |
2,363,838 |
|
|
$ |
578,612 |
|
|
$ |
388,473 |
|
|
$ |
15,374,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans ending balance |
|
$ |
14,573,790 |
|
|
$ |
228,842,489 |
|
|
$ |
63,889,083 |
|
|
$ |
10,331,043 |
|
|
$ |
187,058,318 |
|
|
$ |
44,817,725 |
|
|
$ |
|
|
|
$ |
549,512,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated
for
impairment |
|
$ |
1,214,950 |
|
|
$ |
28,466,238 |
|
|
$ |
30,886,023 |
|
|
$ |
1,379,835 |
|
|
$ |
37,219,868 |
|
|
$ |
1,516,977 |
|
|
$ |
|
|
|
$ |
100,683,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for
impairment |
|
$ |
13,358,840 |
|
|
$ |
200,376,251 |
|
|
$ |
33,003,060 |
|
|
$ |
8,951,208 |
|
|
$ |
149,838,450 |
|
|
$ |
43,300,748 |
|
|
$ |
|
|
|
$ |
448,828,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The Company continuously monitors the credit quality of its loans receivable in an ongoing
manner. Credit quality is monitored by reviewing certain credit quality indicators. Management
has determined that loan-to-value ratios (LTVs), (at period end) and internally assigned risk
ratings are the key credit quality indicators that best help management monitor the credit quality
of the Companys loans receivable. Loan-to-value ratios used by management in monitoring credit
quality are based on current period loan balances and original values at time of originations
(unless a current appraisal has been obtained as a result of the loan being deemed impaired or the
loan is a maturing construction loan).
The Company has also adopted a risk rating system as part of the risk assessment of its loan
portfolio. The Companys lending officers are required to assign a risk rating to each loan in
their portfolio at origination. When the lender learns of important financial developments, the
risk rating is reviewed accordingly, and adjusted if necessary. Similarly, the Banks internal
loan review department and the Loan Committee can adjust a risk rating. The Directors Loan
Committee, meets on a regular basis and reviews all loans rated special mention or worse. In
addition, the Company engages a third party independent loan reviewer that performs semi-annual
reviews of a sample of loans, validating the risk ratings assigned to such loans. The risk ratings
play an important role in the establishment of the loan loss provision and to confirm the adequacy
of the allowance for loan losses.
When assigning a risk rating to a loan, management utilizes the Banks internal nine-point risk
rating system. Loans deemed to be acceptable quality are rated 1 through 5, with a rating of 1
established for loans with minimal risk and borrowers exhibiting the strongest financial condition.
Loans that are deemed to be of questionable quality are rated 6 (special mention). An asset is
considered special mention when it has a potential weakness based on objective evidence, but does
not currently expose the Company to sufficient risk to warrant classification in one of the
following categories. Loans with adverse classifications (substandard, doubtful or loss) are rated
7, 8 or 9, respectively. Loans rated 1 5 are considered Pass. An asset is considered
substandard if it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets have well defined weaknesses
based on objective evidence, and are characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard with the added characteristic
that the weaknesses present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable. Assets classified as
loss are those considered uncollectible and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
29
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table details the credit risk exposure of loans receivable, by loan type and credit
quality indicator at December 31, 2010:
CREDIT RISK PROFILE BY CREDITWORTHINESS CATEGORY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
Construction |
|
|
Residential |
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Real Estate |
|
|
Construction |
|
|
to Permanent |
|
|
Real Estate |
|
|
Consumer |
|
|
|
|
LTVs: |
|
< 75% |
|
|
>= 75% |
|
|
< 75% |
|
|
>= 75% |
|
|
< 75% |
|
|
>= 75% |
|
|
< 75% |
|
|
>= 75% |
|
|
< 75% |
|
|
>= 75% |
|
|
< 75% |
|
|
>= 75% |
|
|
Other |
|
|
Total |
|
Internal Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
11,225,261 |
|
|
$ |
256,296 |
|
|
$ |
124,645,152 |
|
|
$ |
9,449,059 |
|
|
$ |
1,272,028 |
|
|
$ |
350,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
91,534,348 |
|
|
$ |
51,996,851 |
|
|
$ |
35,192,214 |
|
|
$ |
|
|
|
|
1,917,783 |
|
|
$ |
327,838,992 |
|
Special Mention |
|
|
704,053 |
|
|
|
181,600 |
|
|
|
35,253,018 |
|
|
|
4,645,738 |
|
|
|
15,059,704 |
|
|
|
4,485,209 |
|
|
|
1,709,333 |
|
|
|
|
|
|
|
2,088,700 |
|
|
|
2,907,285 |
|
|
|
3,146,244 |
|
|
|
2,879,621 |
|
|
|
|
|
|
|
73,060,505 |
|
Substandard &
Doubtful |
|
|
1,424,161 |
|
|
|
782,419 |
|
|
|
13,792,482 |
|
|
|
41,057,040 |
|
|
|
10,712,146 |
|
|
|
32,009,996 |
|
|
|
|
|
|
|
8,621,710 |
|
|
|
18,052,003 |
|
|
|
20,479,131 |
|
|
|
99,235 |
|
|
|
1,567,648 |
|
|
|
14,980 |
|
|
|
148,612,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,353,475 |
|
|
$ |
1,220,315 |
|
|
$ |
173,690,652 |
|
|
$ |
55,151,837 |
|
|
$ |
27,043,878 |
|
|
$ |
36,845,205 |
|
|
$ |
1,709,333 |
|
|
$ |
8,621,710 |
|
|
$ |
111,675,051 |
|
|
$ |
75,383,267 |
|
|
$ |
38,437,693 |
|
|
$ |
4,447,269 |
|
|
$ |
1,932,763 |
|
|
$ |
549,512,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT RISK PROFILE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
Construction |
|
|
Residential |
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Real Estate |
|
|
Construction |
|
|
to Permanent |
|
|
Real Estate |
|
|
Consumer |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
$ |
13,358,840 |
|
|
$ |
202,054,317 |
|
|
$ |
33,003,060 |
|
|
$ |
8,951,208 |
|
|
$ |
159,270,574 |
|
|
$ |
43,724,749 |
|
|
$ |
460,362,748 |
|
Non Performing |
|
|
1,214,950 |
|
|
|
26,788,172 |
|
|
|
30,886,023 |
|
|
|
1,379,835 |
|
|
|
27,787,744 |
|
|
|
1,092,976 |
|
|
|
89,149,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,573,790 |
|
|
$ |
228,842,489 |
|
|
$ |
63,889,083 |
|
|
$ |
10,331,043 |
|
|
$ |
187,058,318 |
|
|
$ |
44,817,725 |
|
|
$ |
549,512,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Included in loans receivable are loans for which the accrual of interest income has been
discontinued due to deterioration in the financial condition of the borrowers. The recorded
balance of these nonaccrual loans was $89.1 million and $113.5 million at December 31, 2010, and
December 31, 2009 respectively. Generally, loans are placed on non-accruing status when they
become 90 days or more delinquent, and remain on non-accrual status until they are brought current,
have six months of performance under the loan terms, and factors indicating reasonable doubt about
the timely collection of payments no longer exist. Therefore, loans may be current in accordance
with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing
status. Additionally, certain loans that cannot demonstrate sufficient global cash flow to
continue loan payments in the future and certain trouble debt restructures (TDRs) are placed on
non-accrual status.
31
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table sets forth the detail, and delinquency status, of non-accrual loans and past
due loans at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accrual and Past Due Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>90 Days Past |
|
|
Accrual and |
|
|
|
31-60 Days |
|
|
61-90 Days |
|
|
Greater Than |
|
|
Total Past |
|
|
|
|
|
|
Due and |
|
|
Past Due |
|
2010 |
|
Past Due |
|
|
Past Due |
|
|
90 Days |
|
|
Due |
|
|
Current |
|
|
Accruing |
|
|
Loans |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
63,289 |
|
|
$ |
63,289 |
|
Substandard |
|
|
350,000 |
|
|
|
100,000 |
|
|
|
698,767 |
|
|
|
1,148,767 |
|
|
|
66,183 |
|
|
|
175,000 |
|
|
|
1,389,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
$ |
350,000 |
|
|
$ |
100,000 |
|
|
$ |
698,767 |
|
|
$ |
1,148,767 |
|
|
$ |
66,183 |
|
|
$ |
238,289 |
|
|
$ |
1,453,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
$ |
269,672 |
|
|
$ |
6,449,096 |
|
|
$ |
13,521,123 |
|
|
$ |
20,239,891 |
|
|
$ |
6,548,281 |
|
|
$ |
|
|
|
$ |
26,788,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real
Estate |
|
$ |
269,672 |
|
|
$ |
6,449,096 |
|
|
$ |
13,521,123 |
|
|
$ |
20,239,891 |
|
|
$ |
6,548,281 |
|
|
$ |
|
|
|
$ |
26,788,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
$ |
1,517,943 |
|
|
$ |
4,059,516 |
|
|
$ |
13,736,985 |
|
|
$ |
19,314,444 |
|
|
$ |
11,571,579 |
|
|
$ |
3,135,953 |
|
|
$ |
34,021,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction |
|
$ |
1,517,943 |
|
|
$ |
4,059,516 |
|
|
$ |
13,736,985 |
|
|
$ |
19,314,444 |
|
|
$ |
11,571,579 |
|
|
$ |
3,135,953 |
|
|
$ |
34,021,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction to Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,379,835 |
|
|
$ |
|
|
|
$ |
1,379,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction to
Permanent |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,379,835 |
|
|
$ |
|
|
|
$ |
1,379,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
$ |
|
|
|
$ |
|
|
|
$ |
15,897,248 |
|
|
$ |
15,897,248 |
|
|
$ |
11,890,496 |
|
|
$ |
|
|
|
$ |
27,787,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Residential Real
Estate |
|
$ |
|
|
|
$ |
|
|
|
$ |
15,897,248 |
|
|
$ |
15,897,248 |
|
|
$ |
11,890,496 |
|
|
$ |
|
|
|
$ |
27,787,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,092,976 |
|
|
$ |
1,092,976 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,092,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,092,976 |
|
|
$ |
1,092,976 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,092,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,137,615 |
|
|
$ |
10,608,612 |
|
|
$ |
44,947,099 |
|
|
$ |
57,693,326 |
|
|
$ |
31,456,374 |
|
|
$ |
3,374,242 |
|
|
$ |
92,523,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These non-accrual amounts included loans deemed to be impaired of $89.1 million and $113.5 million
at December 31, 2010, and December 31, 2009, respectively. Loans past due ninety days or more and
still accruing interest were $3.4 million and $3.6 million at December 31, 2010, and December 31,
2009 respectively, and consisted of loans that are current as to payment but past maturity where
payoff is pending or in the process of renewal.
32
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table sets forth the detail and delinquency status of loans receivable, net, by
performing and non-performing loans at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing (Accruing) Loans |
|
|
|
|
|
|
Total Non- |
|
|
|
|
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual and |
|
|
|
|
|
|
31-60 Days |
|
|
Than 60 |
|
|
Total Past |
|
|
|
|
|
|
Total Loan |
|
|
Past Due |
|
|
Total Loans |
|
2010 |
|
Past Due |
|
|
Days |
|
|
Due |
|
|
Current |
|
|
Balances |
|
|
Loans |
|
|
Receivable, net |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,481,557 |
|
|
$ |
11,481,557 |
|
|
$ |
|
|
|
$ |
11,481,557 |
|
Special Mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822,364 |
|
|
|
822,364 |
|
|
|
63,289 |
|
|
|
885,653 |
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
816,630 |
|
|
|
816,630 |
|
|
|
1,389,950 |
|
|
|
2,206,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,120,551 |
|
|
$ |
13,120,551 |
|
|
$ |
1,453,239 |
|
|
$ |
14,573,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
134,094,210 |
|
|
$ |
134,094,210 |
|
|
$ |
|
|
|
$ |
134,094,210 |
|
Special Mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,898,756 |
|
|
|
39,898,756 |
|
|
|
|
|
|
|
39,898,756 |
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,061,351 |
|
|
|
28,061,351 |
|
|
|
26,788,172 |
|
|
|
54,849,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real
Estate |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
202,054,317 |
|
|
$ |
202,054,317 |
|
|
$ |
26,788,172 |
|
|
$ |
228,842,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,622,029 |
|
|
$ |
1,622,029 |
|
|
$ |
|
|
|
$ |
1,622,029 |
|
Special Mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,544,913 |
|
|
|
19,544,913 |
|
|
|
|
|
|
|
19,544,913 |
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,700,165 |
|
|
|
8,700,165 |
|
|
|
34,021,976 |
|
|
|
42,722,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
29,867,107 |
|
|
$ |
29,867,107 |
|
|
$ |
34,021,976 |
|
|
$ |
63,889,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction to Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Special Mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,709,333 |
|
|
|
1,709,333 |
|
|
|
|
|
|
|
1,709,333 |
|
Substandard |
|
|
1,127,875 |
|
|
|
|
|
|
|
1,127,875 |
|
|
|
6,114,000 |
|
|
|
7,241,875 |
|
|
|
1,379,835 |
|
|
|
8,621,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction to
Permanent |
|
$ |
1,127,875 |
|
|
$ |
|
|
|
$ |
1,127,875 |
|
|
$ |
7,823,333 |
|
|
$ |
8,951,208 |
|
|
$ |
1,379,835 |
|
|
$ |
10,331,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
198,357 |
|
|
$ |
|
|
|
$ |
198,357 |
|
|
$ |
143,332,842 |
|
|
$ |
143,531,199 |
|
|
$ |
|
|
|
$ |
143,531,199 |
|
Special Mention |
|
|
2,907,285 |
|
|
|
|
|
|
|
2,907,285 |
|
|
|
2,088,700 |
|
|
|
4,995,985 |
|
|
|
|
|
|
|
4,995,985 |
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,743,390 |
|
|
|
10,743,390 |
|
|
|
27,787,744 |
|
|
|
38,531,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Residential Real
Estate |
|
$ |
3,105,642 |
|
|
$ |
|
|
|
$ |
3,105,642 |
|
|
$ |
156,164,932 |
|
|
$ |
159,270,574 |
|
|
$ |
27,787,744 |
|
|
$ |
187,058,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37,109,997 |
|
|
$ |
37,109,997 |
|
|
$ |
|
|
|
$ |
37,109,997 |
|
Special Mention |
|
|
168,589 |
|
|
|
|
|
|
|
168,589 |
|
|
|
5,857,276 |
|
|
|
6,025,865 |
|
|
|
|
|
|
|
6,025,865 |
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588,887 |
|
|
|
588,887 |
|
|
|
1,092,976 |
|
|
|
1,681,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer |
|
$ |
168,589 |
|
|
$ |
|
|
|
$ |
168,589 |
|
|
$ |
43,556,160 |
|
|
$ |
43,724,749 |
|
|
$ |
1,092,976 |
|
|
$ |
44,817,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,402,106 |
|
|
$ |
|
|
|
$ |
4,402,106 |
|
|
$ |
452,586,400 |
|
|
$ |
456,988,506 |
|
|
$ |
92,523,942 |
|
|
$ |
549,512,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
The following table summarizes impaired loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
Unpaid Principal |
|
|
Related |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,077,512 |
|
|
$ |
1,828,917 |
|
|
$ |
|
|
Commercial Real Estate |
|
|
12,770,033 |
|
|
|
13,052,924 |
|
|
|
|
|
Construction |
|
|
14,060,251 |
|
|
|
15,133,253 |
|
|
|
|
|
Construction to Permanent |
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
24,513,106 |
|
|
|
24,737,293 |
|
|
|
|
|
Consumer |
|
|
1,516,977 |
|
|
|
1,883,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
53,937,879 |
|
|
$ |
56,635,972 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
137,438 |
|
|
$ |
151,633 |
|
|
$ |
76,045 |
|
Commercial Real Estate |
|
|
15,696,205 |
|
|
|
19,509,247 |
|
|
|
2,300,199 |
|
Construction |
|
|
16,825,772 |
|
|
|
19,368,468 |
|
|
|
1,895,326 |
|
Construction to Permanent |
|
|
1,379,835 |
|
|
|
1,425,000 |
|
|
|
183,835 |
|
Residential |
|
|
12,706,762 |
|
|
|
12,826,248 |
|
|
|
1,556,077 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
46,746,012 |
|
|
$ |
53,280,596 |
|
|
$ |
6,011,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,214,950 |
|
|
$ |
1,980,550 |
|
|
$ |
76,045 |
|
Commercial Real Estate |
|
|
28,466,238 |
|
|
|
32,562,171 |
|
|
|
2,300,199 |
|
Construction |
|
|
30,886,023 |
|
|
|
34,501,721 |
|
|
|
1,895,326 |
|
Construction to Permanent |
|
|
1,379,835 |
|
|
|
1,425,000 |
|
|
|
183,835 |
|
Residential |
|
|
37,219,868 |
|
|
|
37,563,541 |
|
|
|
1,556,077 |
|
Consumer |
|
|
1,516,977 |
|
|
|
1,883,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
100,683,891 |
|
|
$ |
109,916,568 |
|
|
$ |
6,011,482 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the recorded investment of impaired loans was $100.7 million, with related
allowances of $6.0 million.
Included in the table above at December 31, 2010, are loans with carrying balances of $53.9 million
that required no specific reserves in our allowance for loan losses. Loans that did not require
specific reserves at December 31, 2010 have sufficient collateral values, less costs to sell,
supporting the carrying balances of the loans. In some cases, there may be no specific reserves
because the Company already charged-off
the specific impairment. Once a borrower is in default, the Company is under no obligation to
advance additional funds on unused commitments.
34
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Note 5. Premises and Equipment
At December 31, 2010 and 2009, premises and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
$ |
8,014,802 |
|
|
$ |
7,984,334 |
|
Furniture, equipment and software |
|
|
6,205,687 |
|
|
|
6,100,927 |
|
|
|
|
|
|
|
|
|
|
|
14,220,489 |
|
|
|
14,085,261 |
|
Less: accumulated depreciation and amortization |
|
|
(8,950,177 |
) |
|
|
(7,489,534 |
) |
|
|
|
|
|
|
|
|
|
$ |
5,270,312 |
|
|
$ |
6,595,727 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, depreciation and amortization expense related
to premises and equipment totaled $1,498,334 $1,660,803 and $1,632,985, respectively.
Note 6. Other Real Estate Operations
At December 31, 2010 and 2009, the Company had other real estate owned of $16,408,787 and
$19,073,993 respectively. Included in other real estate owned is $15,774,187 of residential
construction properties. For the years ended December 31, 2010 and 2009, amounts charged to
operations for other real estate owned totaled $2,286,948 and $793,781 respectively. There were no
amounts charged to operations for 2008. A summary of other real estate operations for the years
ended December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Expenses of holding other real estate owned |
|
$ |
1,051,631 |
|
|
$ |
837,781 |
|
Impairment write-downs on other real estate owned |
|
|
1,084,023 |
|
|
|
|
|
Loss on sale of other real estate owned |
|
|
164,494 |
|
|
|
|
|
Rental income from other real estate owned |
|
|
(13,200 |
) |
|
|
(44,000 |
) |
|
|
|
|
|
|
|
Expense from other real estate operations |
|
$ |
2,286,948 |
|
|
$ |
793,781 |
|
|
|
|
|
|
|
|
35
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2010, 2009 and 2008
Note 7. Deposits
At December 31, 2010 and 2009, deposits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Interest Rate |
|
|
2010 |
|
|
Interest Rate |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
$ |
51,058,373 |
|
|
|
|
|
|
$ |
49,755,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates, less than $100,000 |
|
|
1.79 |
% |
|
|
251,296,558 |
|
|
|
2.34 |
% |
|
|
305,719,484 |
|
Time certificates, $100,000 or more |
|
|
1.91 |
% |
|
|
175,431,252 |
|
|
|
2.29 |
% |
|
|
202,493,307 |
|
Money market |
|
|
0.15 |
% |
|
|
92,683,478 |
|
|
|
1.23 |
% |
|
|
112,017,987 |
|
Savings |
|
|
0.42 |
% |
|
|
57,041,943 |
|
|
|
1.53 |
% |
|
|
69,766,296 |
|
NOW |
|
|
0.08 |
% |
|
|
19,297,225 |
|
|
|
0.73 |
% |
|
|
21,581,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing |
|
|
|
|
|
|
595,750,456 |
|
|
|
|
|
|
|
711,578,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
|
|
|
$ |
646,808,829 |
|
|
|
|
|
|
$ |
761,334,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in time certificates are certificates of deposit through the Certificate of Deposit
Account Registry Service (CDARS) network of $2,879,838 and $18,871,451 at December 31, 2010 and
2009, respectively. These are considered brokered deposits. Pursuant to the Agreement described
in Note 16, the level of deposits accepted from Bank customers, and the Banks participation in the
CDARS program as an issuer of deposits to customers of other banks in the CDARS program, may not
exceed 10% of total deposits.
Interest expense on deposits consists of the following: