Patriot National Bancorp, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The company operates through Patriot Bank in Connecticut, Westchester County, and New York City, with lending focused on commercial real estate, commercial business, construction, residential equity, and consumer loans.
Financial performance and condition
Dollar amounts below are in millions unless stated otherwise.
- Earnings: Net income was $0.653 million, versus $0.289 million in Q1 2015; diluted EPS was $0.16 versus $0.07. Pretax income increased 119% to $1.071 million.
- Interest income and margin: Interest and dividend income rose to $6.109 million from $5.748 million. Net interest income increased 6.9% to $5.425 million, and net interest margin improved to 3.76% from 3.49%, primarily from higher asset yields. Noninterest income was $0.410 million, compared with $0.394 million.
- Expenses and credit provision: Noninterest expense rose 0.7% to $4.764 million; higher compensation was partly offset by lower occupancy and professional-services costs. No loan-loss provision was recorded, compared with $0.250 million a year earlier.
- Assets and lending: Total assets declined 2.7% to $635.8 million. Net loans edged up 0.2% to $479.9 million; gross loans were $485.2 million. Construction loans increased 39.8% to $21.7 million, while residential loans fell 2.5% to $108.1 million.
- Deposits and liquidity: Deposits fell 4.8% to $425.6 million, including a $15.0 million decrease in brokered deposits and lower time deposits. Cash and cash equivalents declined 21.5% to $67.0 million. The liquidity ratio was 14.22%, versus 16.4% at year-end; management said available short-term assets were sufficient for expected and unexpected needs. The net loan-to-deposit ratio rose to 113% from 107%.
- Debt and capital: Borrowings totaled $145.0 million: $134.9 million of FHLB advances, $8.2 million of junior subordinated debt, and $1.9 million of notes payable. Bank regulatory ratios included 9.95% Tier 1 leverage, 11.79% Common Equity Tier 1, and 12.80% total risk-based capital. Management stated capital exceeded fully phased-in Basel III minimums.
- Cash flow and equity: Operating cash flow was $1.014 million; cash decreased $18.394 million during the quarter, mainly reflecting deposit outflows. Shareholders’ equity increased $0.842 million to $62.3 million.
Material changes versus comparable periods
- Q1 net income increased $0.364 million year over year, helped by higher net interest income and no provision for loan losses in 2016; Q1 2015 included a $0.250 million provision.
- Nonaccrual loans increased to $5.409 million from $1.593 million at year-end; impaired loans rose to $16.6 million from $12.9 million. Management attributed the nonaccrual increase mainly to two commercial loans to the same borrower and said it was not indicative of a broader portfolio trend. A $0.739 million specific reserve was established.
- Deposits declined $21.410 million from year-end. Management said a $15 million brokered CD matured in March and was replaced in April; this contributed to the quarter’s lower cash balance.
- Loan classifications were revised to move certain 1–4 family non-owner-occupied real estate loans from Commercial and Industrial to Residential; prior-period loan categories were reclassified for consistency.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results and that future revenues, spreads, and yields cannot be reliably predicted.
- Key risks include interest-rate changes and repricing, competition, regulation, and economic and real-estate conditions in the greater New York metropolitan area. Management’s interest-rate simulation showed projected net interest income changing by +0.7% under a +100-basis-point shock and -1.0% under a -100-basis-point shock; management noted simulation limitations, particularly in the low-rate environment.
- Credit exposure includes the regional real-estate-sensitive loan portfolio and $87.036 million of commitments, including future loan commitments, credit lines, undisbursed construction loans, and standby letters of credit. Commitments may expire undrawn; a $5,000 reserve was recorded for them.
- The company holds a $13.4 million deferred tax asset and said it will continue assessing its realizability; a valuation allowance could be increased if future evidence warrants it.
- Interest payments on the $8.2 million subordinated debt have been deferred at the company’s option, while interest continues to accrue; $0.510 million of interest was owed at March 31, 2016. The debt bears interest at three-month LIBOR plus 3.15% and matures in 2033.
- A material weakness identified in the prior-year filing related to controls over loan prepayment-fee receivables was reported as remediated by March 31, 2016. Management said disclosure controls were effective. No material risk-factor changes or material pending legal proceedings were reported.
- Two new Connecticut branches were under construction, and the company purchased interactive teller machines. The CFO was appointed January 5, 2016; the former CFO resigned from the executive vice-president role effective April 30, 2016.
Important facts for investors to verify
- Whether the nonaccrual commercial relationship improves and whether the $0.739 million specific reserve remains adequate.
- Whether the April replacement of the matured brokered CD occurred as described and how deposit composition and liquidity develop.
- Whether the deferred subordinated-debt interest is paid or continues to accrue, and the terms governing any future payment.
- Whether the $13.4 million deferred tax asset remains realizable and whether management’s assessment changes.
- Whether the reported remediation of the material weakness is sustained, and whether loan growth, branch construction, and commitments affect capital and liquidity.