Patriot National Bancorp, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 31, 2017. The company is a Connecticut bank holding company operating Patriot Bank, N.A., with ten branches in Connecticut and New York. Figures below are consolidated unless noted.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total interest and dividend income | $25.4 million | $23.7 million |
| Net interest income | $22.4 million | $21.1 million |
| Net interest margin | 3.78% | 3.60% |
| Provision for loan losses | $2.464 million | $0.250 million |
| Non-interest income | $1.556 million | $1.551 million |
| Non-interest expense | $18.355 million | $18.851 million |
| Net income | $1.930 million | $2.143 million |
| Basic and diluted EPS | $0.49 | $0.55 |
| Total assets at year-end | $756.7 million | $653.4 million |
| Loans receivable, net | $577.0 million | $479.1 million |
| Deposits | $529.3 million | $444.7 million |
| Total borrowings | $159.5 million | $142.0 million |
| Shareholders’ equity | $62.6 million | $61.5 million |
- Net interest income rose 6.4%, reflecting loan growth and improved asset yields; net income declined about 10%, primarily as the loan-loss provision increased.
- Net cash provided by operations was $4.5 million; investing activities used $99.1 million, principally for loan originations and $52.0 million of loan-pool purchases; financing activities provided $101.5 million. Cash and cash equivalents ended at $92.3 million, up $6.9 million.
- Management reported a 14.9% liquidity ratio, versus 16.7% in 2015. Year-end liquidity included $92.3 million cash and $20.2 million of unpledged available-for-sale securities. The Bank reported $16.2 million of additional FHLB borrowing capacity.
- The Bank’s 2016 regulatory capital ratios were 11.93% total capital, 11.18% Tier 1, 11.18% common equity Tier 1 and 10.52% leverage. The company-level ratios were lower: 10.60%, 9.85%, 8.57% and 9.30%, respectively. Management said the Bank met applicable requirements, including the fully phased-in capital rules.
Material changes and notable items
- Assets grew 15.8% and net loans grew 20.4%. Loan growth included $52.0 million in purchased education-loan pools and increased originations; the consumer and construction portfolios grew substantially, while residential real estate loans declined.
- Deposits increased $84.7 million, or 19.0%, following a second-half campaign offering competitive rates. Growth included larger certificates of deposit and brokered deposits; the average rate on interest-bearing deposits increased to 0.553% from 0.548%.
- A single commercial and industrial loan resulted in an approximately $3.0 million charge-off in the fourth quarter. The Bank received $2.8 million in insurance proceeds in March 2017. The 2016 allowance for loan losses ended at $4.675 million, down from $5.242 million; the annual provision was $2.464 million.
- In December 2016, the company issued $12 million of 7% unsecured senior notes due December 2021. Approximately $7.2 million of proceeds was contributed to the Bank as Tier 1 capital. The Bank also had $15 million outstanding on a correspondent-bank line at year-end; it repaid that amount in early January 2017.
- The company repurchased 72,471 shares during 2016 for about $1.0 million at an average $14.04 per share. No cash dividends were declared.
- In July 2016, the Federal Reserve terminated supervisory restrictions that had limited dividends and new debt without prior approval. Senior leadership changed during the year; the Board appointed Richard A. Muskus, Jr. President in January 2017.
Outlook, risks and controls
The filing provides no numerical earnings or revenue guidance. Management described continued loan and deposit growth, balance-sheet and operating efficiency measures, and branch realignment as strategic priorities. It expected to complete the Stamford and Westport facility work in the second quarter of 2017.
- Credit and concentration: Commercial real estate and construction lending are material exposures; management reported that CRE and construction loans represented 55.9% of total loans. Approximately 71.7% of loans were variable-rate, while 63.0% had maturities beyond five years. Local real estate and economic deterioration could raise delinquencies, collateral losses and provisioning needs.
- Funding and interest rates: Deposit competition, reliance on wholesale funding, deposit withdrawals and asset/liability repricing could pressure liquidity and margins. The filing’s modeled interest-rate scenarios estimate net interest income rises 4.0% under a +200-basis-point shock and falls 2.7% under a -100-basis-point shock; management cautioned that such simulations have limitations.
- Material control weakness: Management concluded disclosure controls were ineffective at year-end due to a material weakness in the loan-loss-reserve process, involving collateral valuation and qualitative reserve factors. Remediation and testing had begun, but management had not concluded the corrective actions were effective. The external auditor did not attest to internal-control effectiveness.
- Other risks and contingencies: The $12 million senior notes carry general affirmative covenants; the company depends on Bank dividends subject to regulatory limits. The filing also cites regulatory, cyber-security, competitive, tax, environmental and key-personnel risks. Routine legal proceedings were not expected by management to have a material adverse effect. A $12.6 million deferred tax asset depends on future realization of taxable income; management said realization was not guaranteed.
Important facts for investors to verify
- Whether the reserve-process remediation and testing have resolved the disclosed material weakness, and whether subsequent filings report any restatement or control findings.
- How the $2.8 million insurance settlement was recorded after year-end, and whether any remaining recovery or related claims are outstanding.
- Credit performance and reserve adequacy as the loan book expands, particularly in CRE, construction and purchased education-loan pools.
- Deposit stability, the cost and mix of funding, near-term certificate-of-deposit maturities, and repayment or replacement of short-term borrowings.
- Capital headroom at both the holding company and Bank, including any implications of continued repurchases, growth or regulatory limits on distributions.
- Progress in realizing the deferred tax asset and the results of the planned branch and facility realignment.