Patriot National Bancorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Patriot is a Connecticut-based bank holding company serving Fairfield and New Haven Counties, Westchester County, and New York City. Unless noted, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest and dividend income | $6.109 | $4.977 | $17.977 | $14.712 |
| Net interest income | $5.444 | $4.286 | $15.970 | $12.429 |
| Net interest margin | 3.67% | 3.37% | 3.63% | 3.31% |
| Noninterest income | $0.362 | $0.587 | $1.207 | $1.803 |
| Noninterest expense | $4.753 | $4.424 | $14.243 | $12.939 |
| Income before taxes | $1.053 | $0.449 | $2.684 | $1.293 |
| Income tax expense (benefit) | $0.420 | ($16.812) | $1.073 | ($16.812) |
| Net income | $0.633 | $17.261 | $1.611 | $18.105 |
| Diluted earnings per share | $0.16 | $4.45 | $0.41 | $4.66 |
The 2014 comparisons are heavily affected by a $16.8 million income-tax benefit from releasing most of the deferred-tax-asset valuation allowance in Q3 2014. Excluding that unusual benefit, pretax income increased 135% in Q3 and 108% for the nine-month period. Per-share data reflects the March 2015 1-for-10 reverse stock split.
- Balance sheet at September 30, 2015: Assets were $640.7 million, up 1.3% from year-end 2014; net loans were $491.1 million, up 4.0%; deposits were $446.4 million, up 0.8%; and shareholders’ equity was $60.9 million.
- Funding and liquidity: Cash and cash equivalents were $59.3 million, down $13.9 million from year-end. The reported liquidity ratio was 13.14%, versus 15.6% at December 31, 2014. Management stated that short-term assets were sufficient for anticipated and unanticipated cash needs.
- Cash flow, nine months: Operating activities provided $5.0 million; investing activities used $24.3 million, including $19.7 million of net loan growth and $7.7 million of premises and equipment purchases; financing activities provided $5.4 million. Cash declined $13.9 million to $59.3 million.
- Debt: The company had $120.0 million of FHLB advances, $8.2 million of subordinated debentures, and a $2.0 million note payable for its Fairfield branch. FHLB advances had maturities of one day to six months and a weighted-average rate of 0.43%. Subordinated-debt interest payments had been deferred at the company’s option; $0.356 million of interest was owed at quarter-end. The new branch note has a ten-year term and a fixed 1.75% rate.
- Credit quality: The allowance for loan losses was $5.24 million, or 1.06% of gross loans, compared with $4.92 million at year-end. The nine-month provision was $0.25 million; management attributed the increase primarily to loan growth, not credit deterioration. Nonaccrual loans were $0.383 million, down from $0.866 million at year-end. Loans 90 days or more past due and still accruing were $3.3 million; combined past-due and nonaccrual loans were 0.74% of total loans.
- Regulatory capital: Company ratios were 9.47% Tier 1 leverage, 9.83% Common Equity Tier 1, 11.39% Tier 1 risk-based, and 12.41% total risk-based. Bank ratios were 9.52%, 11.48%, 11.48%, and 12.51%, respectively. Management reported that current ratios exceeded fully phased-in Basel III minimums.
Material changes and management commentary
- Net interest income rose as average loan balances and yields increased, while the cost of deposits fell. Net interest margin improved by 30 basis points year over year in Q3.
- Loan growth was concentrated in commercial, commercial real estate, and construction lending. Residential loans declined, consistent with the company’s exit from residential mortgage originations in 2013. Commercial real estate was the largest portfolio class.
- Noninterest income fell, principally because the company liquidated its bank-owned life insurance policies in December 2014 and had lower deposit fees, mainly overdraft fees.
- Noninterest expense increased 7.4% in Q3. The quarter included approximately $0.25 million of one-time rebranding costs and a $0.117 million noncash write-off of abandoned leasehold improvements; management said these charges were not expected to recur. The company also cited higher staffing and investments in technology, training, and facilities.
- Deposits shifted toward noninterest-bearing, NOW, and savings accounts, while time deposits declined. Brokered deposits increased 56.7% to $48.1 million, contributing to overall deposit growth and lower funding costs.
- Deferred tax assets were $13.9 million, down from $14.9 million at year-end. A $0.572 million valuation allowance remained against a $1.5 million capital-loss carryforward that may expire unused; management said it would continue assessing recoverability.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that recent trends may not predict future performance. Principal disclosed risks include interest-rate changes and repricing timing, regional economic and real-estate conditions affecting borrowers and collateral, competition, regulation, and the realization of deferred tax assets.
Interest-rate simulations estimated net interest income changes of +1.7% for a 100-basis-point increase, +2.8% for a 200-basis-point increase, +2.3% for a 100-basis-point decrease, and +1.8% for a 200-basis-point decrease. Estimated net portfolio value declined 2.60% and 4.82% in the respective rising-rate scenarios and increased 6.7% and 12.1% in the falling-rate scenarios. The filing notes that simulations depend on assumptions and that low rates limit the usefulness of downward-rate shocks.
Off-balance-sheet commitments and standby letters of credit totaled $81.0 million, including future loan commitments, unused lines, home equity lines, undisbursed construction loans, and standby letters of credit. The company reported no material pending legal proceedings beyond routine litigation, no material risk-factor changes during the quarter, and effective disclosure controls. The bank’s formal written agreements with the OCC and Federal Reserve were terminated in 2014 and April 2015, respectively.
Important facts for investors to verify
- Whether the $3.3 million of loans 90 days or more past due but still accruing remains current in subsequent filings, and how loan classifications and reserves evolve.
- Brokered-deposit levels, deposit pricing, and the refinancing or renewal of short-maturity FHLB advances.
- Realizability of the $13.9 million deferred tax asset, including the capital-loss carryforward subject to a valuation allowance.
- Whether loan growth, branch and technology investments, and the announced nonrecurring charges translate into sustained earnings and cash generation.
- Changes in liquidity, capital ratios, and interest-rate sensitivity as rates and funding conditions change.