Patriot National Bancorp, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparative results are for 2012 unless noted. The company is a one-bank holding company operating Patriot National Bank, a community bank serving Connecticut and Westchester County, New York.
Financial results and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Interest and dividend income | $21.7 million | $25.2 million |
| Net interest income | $16.8 million | $17.8 million |
| Net interest margin | 3.13% | 2.91% |
| Provision for loan losses | $970,000 expense | $2.4 million credit |
| Non-interest income | $2.4 million | $3.3 million |
| Non-interest expense | $25.9 million | $24.0 million |
| Net loss | $7.3 million; $0.19 per share | $536,000; $0.01 per share |
| Net cash from operating activities | $(4.7) million | $(3.2) million |
- Fourth-quarter 2013 net income was $950,000, compared with a $1.4 million net loss in fourth-quarter 2012.
- Total assets declined 12% to $541.2 million. Net loans fell 8.9% to $418.1 million; deposits declined 13% to $430.2 million; shareholders’ equity fell to $41.8 million from $49.6 million.
- Cash and cash equivalents were $34.9 million, down from $71.0 million. Available-for-sale securities were $37.7 million. Management reported a 13% liquidity ratio, versus 18% in 2012, and access to an additional $39 million of FHLB borrowing capacity.
- Total borrowings were $65.2 million: $57.0 million of FHLB advances and $8.2 million of junior subordinated debt. The $57 million FHLB balance was short-term and contractually due in 2014. The bank’s regulatory capital ratios were 13.86% total risk-based, 12.61% Tier 1 risk-based, and 9.28% Tier 1 leverage; it exceeded the stated “well-capitalized” thresholds.
- Net charge-offs were $1.3 million, or 0.29% of average loans. The allowance was $5.7 million, 1.34% of gross loans. Non-accrual loans declined to $12.3 million from $23.8 million; other real estate owned fell to zero from $4.9 million.
Material changes and unusual items
- Management reported a $7.3 million annual net loss, substantially worse than 2012. Lower interest income and a swing from a 2012 reserve release to a 2013 provision contributed; income was also affected by reduced average earning assets and lower yields.
- Non-interest expense included a $4.1 million prepayment penalty on high-cost borrowings and $522,000 in restructuring and asset-disposal charges. Excluding these non-recurring items, management said non-interest expense decreased by approximately $1.8 million.
- The company reduced its balance sheet, sold $10.5 million of residential loans, allowed higher-rate certificates of deposit to mature, sold a branch’s deposits, and purchased two branch buildings. Residential lending operations and back-office staffing were reduced. Management described these actions as part of a turnaround intended to support future profitability and growth.
- Commercial real estate and construction loans represented 55.5% of total loans. The loan portfolio remained concentrated in the company’s regional real estate markets, despite improving credit indicators.
- The company recorded a full $18.1 million valuation allowance against deferred tax assets, concluding realization was not more likely than not given cumulative losses. No cash dividends were declared in 2013 or 2012.
- The company continued deferring interest payments on its $8.2 million subordinated debentures. At year-end, accrued interest was approximately $1.4 million; the filing said the 20-quarter deferral period ran through March 2014 and accrued interest was due at the end of the deferral period in June 2014.
Outlook, risks, and contingencies
- No quantified earnings or growth guidance is provided. Management stated it believed restructuring positioned the company for profitability and to consider growth opportunities; future revenues, spreads, and yields were described as difficult to predict.
- The bank remained subject to a 2009 formal agreement with the OCC, and the holding company to a 2010 agreement with the Federal Reserve Bank of New York. Requirements include capital planning and reporting, limits on dividends and certain activities, and prior regulatory approvals. The OCC had not consented to bank dividends; the company also had no retained earnings available for distribution at year-end.
- Key risks include regional real-estate and commercial-credit deterioration, adequacy of loan-loss reserves, deposit outflows and refinancing/liquidity, interest-rate changes, regulatory requirements and compliance costs, and dependence on bank dividends to service parent-company debt.
- Off-balance-sheet commitments totaled $79.3 million, including $40.2 million of unused lines of credit and $28.7 million of home-equity lines. These amounts are contingent and may not be fully drawn. The filing reported no material pending legal proceedings beyond routine litigation.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether the $57 million FHLB advance due in 2014 was repaid, renewed, or refinanced, and the resulting liquidity and funding cost.
- Whether deferred subordinated-debt interest was paid by the stated June 2014 deadline, and the current status of regulatory restrictions and approvals.
- Whether operating results improved after 2013’s restructuring, particularly recurring expenses, net interest income, and deposit stability.
- Whether non-performing and criticized assets continued to decline, and whether the $5.7 million allowance remains adequate against the real-estate-heavy portfolio.
- Whether capital ratios and available borrowing capacity remain sufficient under the company’s regulatory capital plan and applicable newer capital rules.