Patriot National Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The company and its wholly owned Patriot Bank, N.A. operate a community banking business focused principally on Connecticut, Westchester County, New York, and New York City. This unaudited report covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
- Quarter earnings: Net income was $27,000, or $0.01 per basic and diluted share, versus $769,000, or $0.20 per share, in Q3 2018. Pretax income was $35,000 versus $1.045 million.
- Nine-month earnings: Net loss was $1.305 million, or $0.33 per share, versus net income of $2.870 million, or $0.74 basic and $0.73 diluted per share, in the prior-year period.
- Revenue and margins: Q3 interest and dividend income rose 7.5% to $11.0 million, but interest expense rose 38.0% to $4.8 million; net interest income fell 8.8% to $6.2 million. Nine-month net interest income fell 8.1% to $19.2 million. Net interest margin declined to 2.70% for Q3 and 2.85% year to date, from 3.11% and 3.33%, respectively, in 2018. Noninterest income was $571,000 for Q3 and $2.075 million year to date, helped by SBA loan-sale gains of $188,000 and $864,000, respectively.
- Credit costs and asset quality: Loan-loss provision was $100,000 in Q3 and $3.202 million year to date, compared with $50,000 and $285,000 in 2018. The year-to-date increase primarily reflects a $2.3 million charge-off on one commercial loan. The allowance was $8.405 million, or 1.05% of gross loans. Nonaccrual loans were $19.183 million; total nonperforming assets were $21.590 million, or 2.22% of assets. TDRs totaled $10.958 million, including $9.338 million in nonaccrual loans.
- Expenses: Noninterest expense increased 10.5% in Q3 to $6.679 million and 11.6% year to date to $19.855 million. The company cited higher staffing, professional services, and operating costs tied to SBA and deposit initiatives and remediation work related to the OCC agreement.
- Balance sheet and liquidity: Total assets were $971.985 million, up from $951.696 million at year-end; net loans were $791.909 million, up 2.5%, and deposits were $762.056 million, up 2.5%. Cash and cash equivalents were $50.001 million, down from $66.437 million. Management reported balance-sheet liquidity of 10.3% of assets and total available liquidity, including identified funding sources, of 21.7%.
- Funding and debt: Borrowings and debt totaled approximately $130.9 million, including $100 million of FHLB advances; these advances were unchanged from year-end. Brokered deposits were $196.629 million. The net loan-to-deposit ratio was 104%.
- Cash flows: Operating activities used $1.435 million in the first nine months, investing activities used $32.770 million, and financing activities provided $17.769 million. The resulting net cash decrease was $16.436 million.
- Capital and equity: Shareholders’ equity was $68.179 million, down from $69.340 million. At the bank, total risk-based capital was 11.812%, CET1 was 10.819%, and Tier 1 leverage was 9.469% at September 30. Management stated the bank met fully phased-in capital requirements.
Material changes versus the prior comparable period
- Year-to-date results shifted from profit to loss, principally due to higher loan-loss provision, including the $2.3 million commercial-loan charge-off.
- Funding costs grew faster than interest income: higher deposit rates and the cost of subordinated debt contributed to lower net interest income and net interest margin. Management also cited nonaccrual and reduced-rate loans and increased reliance on more expensive funding.
- Gross loans and deposits grew modestly from year-end, while cash declined. The loan portfolio’s commercial real estate share increased to 37.44% from 35.23%.
- Nonperforming assets declined to $21.590 million from $23.447 million at year-end, while nonaccrual loans were nearly unchanged. TDR balances increased materially, from $2.066 million to $10.958 million.
Outlook, risks, contingencies, and unusual items
- Management said it expects operating results to build back up as SBA business expansion and deposit-raising initiatives contribute to income. No quantified earnings, margin, or growth guidance was provided.
- The Bank remains subject to a November 2018 formal written agreement with the OCC covering, among other matters, controls and policies, liquidity and asset-liability management, commercial loan administration, leveraged lending, and the allowance process. Management said it continues to work with the OCC toward resolution.
- Management concluded disclosure controls and procedures were not effective at September 30, 2019 because of a previously disclosed material weakness in review of the allowance-for-loan-loss calculation. Remediation work was underway; management said the weakness would not be considered remediated until controls had operated effectively for a sufficient period and been tested.
- Credit risk includes regional real-estate exposure and increased TDR balances. Management reported no specific reserve against individually impaired loans at quarter-end and said the allowance was adequate; estimates depend on collateral values and borrower cash flows.
- Other stated risks include deposit-rate competition and funding availability, interest-rate sensitivity, economic and real-estate conditions, regulatory changes, and the company’s ability to implement business initiatives. Management cautioned that recent results may not predict future performance.
- The company received $500,000 of escrowed funds in May after mutually terminating its November 2018 purchase agreement with Hana Small Business Lending Inc. Management reported no pending material legal proceedings.
Important facts for investors to verify
- Whether the OCC agreement’s requirements are satisfied and the material weakness is formally remediated.
- Credit performance and recoveries related to the charged-off commercial loan, nonaccrual loans, and the elevated TDR balance.
- Whether the allowance remains adequate as loan balances and portfolio composition change.
- Whether deposit costs stabilize, brokered-deposit reliance changes, and net interest margin recovers.
- Whether SBA and deposit initiatives generate sufficient revenue to offset rising operating costs and support management’s stated improvement outlook.
- Capital and liquidity headroom, including the availability and cost of funding as deposits and loan demand evolve.