Patriot National Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results include Patriot Bank and, from May 10, 2018, acquired Prime Bank. Financial amounts are in millions unless stated otherwise.
Financial results and position
- Q3 earnings: Net income was $0.77 million, or $0.20 per basic and diluted share, versus $1.01 million, or $0.26 per share, in Q3 2017. Pretax income fell to $1.05 million from $1.67 million.
- Nine-month earnings: Net income was $2.87 million, or $0.74 basic and $0.73 diluted per share, versus $3.55 million, or $0.91 per share, in 2017.
- Interest income and margin: Q3 interest and dividend income rose 14% to $10.24 million, but interest expense increased 80% to $3.46 million. Net interest income declined 4% to $6.79 million. Net interest margin fell to 3.11% from 3.65%. For nine months, net interest income rose 11% to $20.89 million, while margin declined to 3.33% from 3.59%.
- Other income and expenses: Q3 noninterest income was $0.35 million, down from $0.39 million; noninterest expense rose to $6.05 million from $5.22 million. Nine-month noninterest expense rose to $17.80 million from $14.93 million, including $1.77 million of merger and tax-initiative project costs. The filing reports $1.8 million of such expenses for the nine-month period in its discussion.
- Balance sheet at September 30: Assets were $915.3 million, up from $852.1 million at December 31, 2017. Net loans were $756.6 million, up 6.1%; deposits were $719.5 million, up 12.9%; and shareholders’ equity was $68.9 million, versus $66.7 million.
- Cash flow and liquidity: Nine-month operating cash flow was $5.42 million; investing activities used $8.53 million and financing activities provided $3.11 million. Cash and cash equivalents were $49.2 million, essentially unchanged from year-end. Balance-sheet liquidity was 9.3% of assets; liquidity including readily available off-balance-sheet sources was 18.9%, and total available liquidity including brokered-deposit capacity was 24.4%.
- Funding and capital: Borrowings totaled $121.0 million, down from $141.4 million at year-end. The company issued $10 million of subordinated notes in June. At September 30, the Bank’s total risk-based capital ratio was 11.385%, CET1 ratio 10.612%, and leverage ratio 9.917%; management stated the Bank met fully phased-in capital requirements.
Changes versus comparable periods
- Lower earnings reflected the cost of funding growth and transaction-related expenses. Management noted that the 2017 nine-month comparison included a material credit recovery, including a $2.8 million insurance recovery credited to the allowance in Q1 2017; 2018 included acquisition and tax-initiative expenses.
- Growth in assets, loans, and deposits was partly attributable to the Prime Bank acquisition. Interest costs rose as deposit rates increased, the Bank added subordinated debt, and it relied more on wholesale funding; management cited these factors in the decline in net interest margin.
- The allowance for loan losses was $6.61 million, or approximately 0.87% of gross loans, compared with $6.30 million at year-end. The company changed its allowance methodology in Q3, adding risk premiums by loan risk rating and a separate premium for leveraged lending.
Outlook, risks, and unusual items
- Management outlook: Management described progress on building scale and its lending and retail-banking presence, and expected acquisition-related investments to enhance performance into 2019 and beyond. No quantified earnings or financial guidance was provided. Management cautioned that recent results may not predict future performance.
- Prime Bank: The May acquisition added a Connecticut branch. Patriot recorded $1.94 million of goodwill and a $0.75 million core deposit intangible at September 30; acquisition accounting remains subject to measurement-period adjustments. Acquisition costs were charged to operations.
- Hana SBL transaction: The proposed acquisition of Hana Small Business Lending’s SBA business remained pending. The closing deadline had been extended to August 1, 2019; on October 29 the company withdrew its initial OCC application and entered renewed negotiations to restructure terms. Regulatory approval or non-objection is required, and there is no assurance of approval or agreement on revised terms.
- OCC agreement after quarter-end: On November 7, 2018, the Bank entered a formal written agreement requiring governance, compliance, internal audit, liquidity and asset-liability, commercial loan administration, leveraged lending, allowance, and interest-rate-risk improvements, as well as a three-year strategic and capital plan. The OCC designated the Bank as in “troubled condition” and not an “eligible bank.” This is a significant regulatory and operational risk.
- Credit quality: Nonaccrual loans were $6.48 million at September 30, versus $3.78 million at year-end, and other real estate owned was $0.99 million. Loans more than 90 days past due but still accruing totaled $18.38 million, primarily including an $8.8 million construction loan that management said was well secured and in collection. Total nonperforming assets were $25.85 million, or 2.82% of assets, versus $5.13 million, or 0.60%, at year-end. The filing’s narrative also refers to $7.1 million of nonaccrual loans; the tabular amount is $6.479 million.
- Other exposures: Off-balance-sheet commitments were $163.0 million. The loan portfolio is concentrated in the New York metropolitan region and exposed to regional economic and real-estate conditions. Interest-rate changes, deposit repricing and runoff, funding costs, credit losses, regulatory requirements, acquisition execution, and estimates for deferred tax assets and acquired-asset values are identified risks.
Most important facts for investors to verify
- Progress and consequences of the OCC agreement, including whether required plans and remediation are completed and whether regulatory restrictions affect growth, capital actions, or the Hana transaction.
- Hana SBL’s revised transaction terms, regulatory status, total expected costs, and whether the acquisition closes.
- Status and recoverability of the large past-due accruing loans, the increase in nonaccrual loans and nonperforming assets, and adequacy of the allowance under the revised methodology.
- Whether deposit costs, brokered funding reliance, and subordinated-debt expense continue to pressure net interest margin and earnings.
- Final Prime Bank purchase accounting, remaining contingent consideration, and realization of the $10.9 million deferred tax asset.