Patriot National Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated financial statements. The company operates a community bank focused principally on Fairfield and New Haven Counties, Connecticut, and New York City, Westchester County, and Long Island.
Financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $5.50 million | $7.19 million in Q1 2012 |
| Net interest income | $3.87 million | $5.16 million in Q1 2012 |
| Net interest margin | 2.70% | 3.24% in Q1 2012 |
| Provision for loan losses | $29,786 release | $845,402 release in Q1 2012 |
| Noninterest income / expense | $487,000 / $6.37 million | $750,000 / $6.21 million in Q1 2012 |
| Net income (loss) | $(1.96) million; $(0.05) per share | $546,000; $0.01 per share in Q1 2012 |
| Operating cash flow | $(8.53) million | $(599,000) in Q1 2012 |
| Total assets | $608.8 million | $617.9 million at Dec. 31, 2012 |
| Net loans / deposits | $455.9 million / $491.7 million | $458.8 million / $497.3 million at Dec. 31, 2012 |
| Cash and cash equivalents | $61.8 million | $71.0 million at Dec. 31, 2012 |
| Borrowings | $65.2 million, including $8.25 million subordinated debt | Unchanged from Dec. 31, 2012 |
| Shareholders’ equity | $47.7 million | $49.6 million at Dec. 31, 2012 |
Cash flows from investing activities were $4.88 million in Q1 2013, versus $44.47 million in Q1 2012; financing activities used $5.60 million, versus providing $4.68 million. Cash and cash equivalents declined $9.25 million during the quarter. Q1 2012 investing cash flow included $67.1 million of loan-sale proceeds.
The reported liquidity ratio was 17%, compared with 24% at March 31, 2012. Management said short-term assets were sufficient for anticipated loan demand, deposit fluctuations, and operating needs. Net loans were 93% of deposits (97% excluding deposits held for sale) and 75% of total assets.
At March 31, the Bank’s Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.03%, 12.88%, and 14.13%, respectively. The company’s corresponding ratios were 9.22%, 13.15%, and 14.40%. The Bank exceeded the stated “well-capitalized” regulatory thresholds, but its capital ratios had declined from year-end.
Changes versus Q1 2012 and prior quarter-end
- Net interest income fell $1.29 million, or 25%. Management attributed the decrease to lower loan yields and balances, lower investment balances, loan payoffs, and new originations at lower rates. Its rate-volume analysis attributed $870,000 of lower interest income to rates and $816,000 to volume.
- Interest expense declined $401,000, partly offsetting lower income. Net interest margin contracted by 54 basis points.
- Noninterest income fell $263,000, principally because Q1 2012 included a $264,000 gain on loan sales. Noninterest expense increased $160,000 despite no Q1 2013 restructuring charge; legal and audit fees, other real estate costs, and salaries rose.
- Net loans declined $2.9 million from December 31, 2012, primarily due to payoffs. Commercial real estate loans fell $5.0 million and home equity loans fell $1.8 million, partly offset by a $4.6 million increase in construction-to-permanent loans.
- Deposits declined $5.6 million from year-end. Lower certificates of deposit, money market, and NOW balances were partly offset by a $17.7 million increase in savings. The reported cost of deposits declined to 1.08% from 1.18% at year-end.
- Nonaccrual loans decreased to $19.0 million from $23.8 million at year-end, while loans over 90 days past due and still accruing rose to $6.0 million from $2.2 million. Impaired loans were $32.9 million, compared with $33.4 million at year-end.
Outlook, risks, contingencies, and unusual items
- No specific earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that future revenues, spreads, and yields cannot be reliably predicted.
- Credit risk remains concentrated in real estate and regional economic conditions. The allowance was $5.72 million, or 1.24% of gross loans, versus $6.02 million and 1.78% at year-end 2012. Management considered the allowance adequate. Nonperforming and over-90-day accruing loans totaled $25.0 million, or 5.42% of loans.
- There were nine troubled debt restructurings totaling $16.0 million at quarter-end, up from eight totaling $11.6 million at year-end; four were accruing and five were nonaccruing. The filing also reports $18.0 million of substandard accruing loans and $29.8 million of special-mention loans.
- The company maintained a full $15.8 million valuation allowance against deferred tax assets, citing its cumulative loss position and uncertainty about future taxable income. Use of certain tax carryforwards is limited by an ownership change.
- The Bank remains subject to a 2009 formal written agreement with the OCC, including restrictions on brokered deposits, criticized lending, and dividends. A 2010 Federal Reserve agreement also restricts dividends, debt, and stock transactions without prior approval. The Bank had an accumulated deficit and could not pay dividends to the company as of March 31. Management said it did not expect the restrictions to impair its current business plan.
- The company had deferred interest payments on its $8.25 million subordinated debentures for 16 consecutive quarters. It continued to accrue interest; the filing says deferral could continue through March 2014, with accrued interest due at the end of the deferral period in June 2014.
- Off-balance-sheet commitments totaled $92.3 million, including future loan commitments, home equity lines, unused lines, and undisbursed construction loans. The filing notes these amounts are not necessarily future cash requirements.
- Management identified interest-rate changes, real estate values, competition, regulation, and the regional economy as risks. The CEO changed effective March 18, 2013, following the prior CEO’s resignation. Management reported effective disclosure controls and no material change in internal controls; no material risk-factor changes or material litigation were reported.
Important facts for investors to verify
- Whether net interest income and margin stabilize after the sharp year-over-year decline, and how loan payoffs, repricing, and deposit costs affect future results.
- Developments in nonaccrual, delinquent, substandard, and restructured loans; subsequent repayment or renewal of problem credits; and adequacy of the allowance.
- Compliance with OCC and Federal Reserve agreements, capital-plan requirements, regulatory capital buffers, and dividend restrictions.
- The company’s ability to meet deferred subordinated-debt interest obligations and the stated payment timetable.
- Liquidity trends, deposit mix and retention, and the effect of loans held for sale and other commitments on cash needs.
- Whether sustained taxable income becomes supportable enough to change the $15.8 million deferred-tax valuation allowance.