Patriot National Bancorp, Inc. — 2014 Form 10-K
Reporting period: Year ended December 31, 2014. Although the request refers to 2014 Q4, this is an annual filing; fourth-quarter results are also summarized below. Amounts are in U.S. dollars.
Business context
Patriot is a one-bank holding company operating Patriot National Bank, a community bank with eight Connecticut branches and two in Westchester County, New York. The bank focuses on commercial real estate, commercial business and consumer lending. It exited residential mortgage origination in 2013.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets at year-end | $632.6 million | $541.2 million |
| Net loans at year-end | $472.0 million | $418.1 million |
| Total deposits at year-end | $443.0 million | $430.2 million |
| Total borrowings at year-end | $128.2 million | $65.2 million |
| Shareholders’ equity at year-end | $58.7 million | $41.8 million |
| Net interest income | $17.4 million | $16.8 million |
| Net interest margin | 3.37% | 3.13% |
| Provision for loan losses | None | $970,000 |
| Non-interest income | $1.8 million | $2.4 million |
| Non-interest expense | $18.3 million | $25.9 million |
| Income (loss) before taxes | $959,000 | ($7.6 million) |
| Net income (loss) | $15.7 million | ($7.3 million) |
Net income included a $14.75 million income tax benefit, following release of $16.8 million of the valuation allowance against deferred tax assets. Thus, reported profitability substantially reflects a tax-accounting benefit; pretax income was $959,000. Net interest income rose $598,000 as lower funding costs more than offset reduced interest income. Management reported a 29.4% decline in non-interest expense, including savings from operational streamlining.
Loans grew 12.9%, led by commercial real estate and commercial lending. Commercial real estate and construction together represented 56.2% of loans. The allowance for loan losses was $4.9 million, or 1.03% of gross loans, versus $5.7 million, or 1.34%, a year earlier. Non-accrual loans fell to $866,000 from $12.3 million; criticized assets declined to $13.0 million from $28.2 million.
Cash and cash equivalents were $73.3 million at year-end, up $38.4 million. The reported liquidity ratio was 16%, versus 13% in 2013. The bank reported $26.2 million of unpledged available-for-sale securities and $29.8 million of additional FHLB borrowing capacity. Its net loan-to-deposit ratio was 107%, up from 97%.
FHLB advances increased by $63.0 million to $120.0 million; all were due within one year. The bank said it used low-cost FHLB funding in part to support an approximately $50 million loan participation. Regulatory capital ratios improved: the bank reported Tier 1 leverage of 9.63%, Tier 1 risk-based capital of 12.98% and total risk-based capital of 14.08% at year-end.
Net cash provided by operating activities was $22.5 million; investing activities used $59.9 million, principally reflecting loan growth and $8.4 million in premises and equipment purchases; financing activities provided $75.8 million, including increased deposits and FHLB advances. No cash dividends were declared.
Material changes and unusual items
- The company recorded its first annual net income since 2007, attributing the improvement primarily to balance-sheet and operating restructuring begun in 2013 and continued in 2014.
- In December, the bank liquidated $22.4 million of bank-owned life insurance and used the proceeds to purchase adjustable-rate residential mortgage loans. The transaction generated a $455,000 loss in non-interest income, $437,000 of non-interest expense and $1.7 million of tax expense.
- Fourth-quarter net loss was $2.4 million, including the BOLI-related effects. The filing’s adjusted fourth-quarter presentation, excluding the BOLI transaction, shows net income of $341,000.
- The OCC terminated the bank’s formal written agreement in September 2014, citing satisfactory asset quality, liquidity, management and capital. The agreement had been in place since 2009.
- Management identified a material weakness in fourth-quarter controls over certain quantitative and qualitative factors in the loan-loss allowance process. It reported remediation through enhanced documentation and controls, no required restatement, and concluded internal control over financial reporting was effective at year-end.
- A 1-for-10 reverse stock split became effective March 4, 2015; reported per-share figures have been restated for it.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management cited forecast taxable income, improving credit quality and lower operating costs as evidence supporting deferred-tax-asset realization, but said a valuation allowance could be reinstated if future evidence changes. New Basel III-based capital rules took effect for the company on January 1, 2015; management said it did not foresee compliance difficulties.
Key disclosed risks include concentration in commercial real estate and lending tied to regional property values; borrower defaults and the adequacy of loan-loss reserves; deposit withdrawals, wholesale funding access and near-term FHLB maturities; interest-rate and securities-value changes; competition and regulatory costs; and cybersecurity, key-personnel and environmental risks. The filing reports $84.5 million in off-balance-sheet credit commitments, which may not be fully drawn. It reports no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- How much of 2014’s $15.7 million net income is attributable to the deferred-tax-asset valuation allowance release, and what supports the remaining asset’s realization?
- Whether loan growth and the loan participation funded with short-term FHLB advances can be sustained without increasing liquidity, refinancing or credit risk.
- Whether the decline in non-accrual and criticized loans persists, and whether the $4.9 million allowance remains adequate as the portfolio grows.
- Whether the allowance-process control weakness remains remediated and whether the OCC agreement’s termination is followed by sustained regulatory performance.
- How the BOLI-funded loan purchases affect future yields and earnings after the one-time transaction charges.