Patriot National Bancorp, Inc. — 2011 Form 10-K
Business context and reporting period. This summary covers the fiscal year ended December 31, 2011, with comparisons to 2010. Patriot is a Connecticut-based bank holding company whose subsidiary, Patriot National Bank, serves consumers and businesses through branches in Connecticut and New York. Its lending is concentrated in real estate in the greater New York metropolitan area.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Interest and dividend income | $28.3 million | $35.6 million |
| Net interest income | $19.8 million | $22.1 million |
| Net interest margin | 3.14% | 2.91% |
| Provision for loan losses | $7.5 million | $7.7 million |
| Non-interest income | $3.4 million | $2.4 million |
| Non-interest expense | $31.2 million | $31.9 million |
| Net loss | $15.5 million | $15.4 million |
| Loss per share | $0.40 | $1.30 |
- Total assets fell 15% to $665.8 million; net loans declined 6% to $501.2 million. Deposits fell 16% to $544.9 million, while shareholders’ equity decreased to $50.5 million from $67.2 million.
- Cash and cash equivalents were $55.4 million and available-for-sale securities were $66.5 million at year-end. The reported liquidity ratio was 18%, down from 24% in 2010. The Bank reported $76.0 million of additional FHLB borrowing capacity.
- Total borrowings, including $8.2 million of junior subordinated debt, were $65.2 million, unchanged from 2010. The Bank’s regulatory capital ratios were 14.75% total risk-based, 13.48% Tier 1 risk-based and 8.69% Tier 1 leverage; it was classified as well capitalized.
- Operating cash flow was negative $1.0 million, compared with negative $2.9 million in 2010. Investing activities provided $11.5 million, while financing activities used $101.9 million, largely reflecting deposit outflows. Cash and cash equivalents declined $91.4 million to $55.4 million.
Material changes versus 2010
- The $15.5 million net loss was nearly unchanged from 2010, although loss per share improved as the weighted-average share count increased following the 2010 equity issuance.
- Net interest income declined 10%, mainly because average earning assets and average loans contracted. Lower deposit costs and reduced interest-bearing liabilities partly offset lower interest income; net interest margin improved to 3.14%.
- Non-performing loans decreased 77% to $20.7 million from $89.2 million. The Bank attributed most of the decline to its March 2011 bulk sale of $66.8 million of non-performing loans and foreclosed properties for $60.6 million, or 90.7% of net book value.
- Commercial real estate and construction loans decreased; together they were 46.7% of total loans versus 55.2% a year earlier. The Bank continued its moratorium on new speculative construction lending.
- Deposits declined by $101.9 million, as management allowed higher-rate certificates of deposit to mature and repriced funding. Non-interest-bearing deposits increased 29% to $65.6 million.
Outlook, management commentary, risks and unusual items
- Management described 2011 as part of a turnaround plan focused on reducing higher-risk loan concentrations, managing funding costs and maintaining regulatory capital. No specific earnings or growth guidance was provided. Management said local real estate prices appeared to have stabilized and activity had increased, while continuing to cite economic and credit uncertainty.
- The year included $3.0 million of restructuring and asset-disposal charges associated with consolidating four branches, vacating office space and reducing the workforce by approximately 10% (18 employees). The Bank also recorded a $1.1 million gain on investment-security sales.
- The $7.5 million loan-loss provision included $6.0 million related to loans transferred to held-for-sale in connection with the bulk sale. Net charge-offs were $7.4 million. The allowance ended at $9.4 million, or 1.84% of gross loans, down from $15.4 million, or 2.80%.
- Impaired loans were $36.8 million, and troubled debt restructurings totaled $25.5 million across 12 loans. Loans over 90 days past due but still accruing rose to $9.5 million from $3.4 million; the filing says some were past maturity but current on payments.
- The Company recorded a full $14.4 million valuation allowance against gross deferred tax assets, citing cumulative losses and uncertainty about future taxable income. The 2010 ownership change also limits use of certain tax-loss carryforwards.
- The Bank remains subject to a 2009 OCC formal written agreement, and the holding company to a 2010 Federal Reserve Bank of New York agreement. These impose capital planning, reporting and operating requirements and restrict dividends and certain transactions. The Bank had no retained earnings available for distribution at year-end. The Company had deferred interest payments on its subordinated debt for 11 consecutive quarters; it continued accruing interest and could defer for no more than 20 consecutive quarters, through March 2014.
- Key risks include real-estate credit exposure in Connecticut and New York, collateral values, potential further loan losses, deposit outflows and funding access, interest-rate changes, and regulatory compliance costs. Management stated the allowance was adequate, but cautioned that further deterioration or regulatory review could require additional provisions.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective. The filing reports no material pending litigation beyond routine matters.
Important facts for investors to verify
- Whether non-performing loans, past-due accruing loans and restructured credits continue to improve, and whether collateral valuations support recorded loan balances and the allowance.
- The realized outcome and remaining costs of the non-performing-asset sale, branch consolidations and workforce reductions.
- Deposit retention, liquidity and borrowing capacity as certificates mature, including compliance with restrictions on brokered deposits and the OCC and Federal Reserve agreements.
- Capital trends and the status of required capital plans, dividend restrictions and deferred subordinated-debt interest, including the March 2014 deferral deadline.
- Whether sustained profitability supports releasing any deferred-tax valuation allowance, given the ownership-change limits on tax attributes.