Patriot National Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company is a Connecticut-based bank holding company operating Patriot Bank, primarily serving Fairfield and New Haven Counties, Westchester County, and New York City.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest and dividend income | $9.0 million | $6.4 million | $23.8 million | $18.6 million |
| Net interest income | $7.1 million | $5.7 million | $18.9 million | $16.5 million |
| Net interest margin | 3.65% | 3.85% | 3.59% | 3.79% |
| Net income | $1.0 million | $0.8 million | $3.5 million | $0.9 million |
| Diluted earnings per share | $0.26 | $0.21 | $0.91 | $0.22 |
- At September 30, total assets were $826.7 million, up 9% from year-end 2016. Net loans were $703.9 million, up 22%; deposits were $605.4 million, up 14%; and shareholders’ equity was $66.3 million, up 6%.
- Cash and cash equivalents fell to $28.4 million from $92.3 million at December 31, 2016, largely reflecting loan and securities investment. Balance-sheet liquidity was 6.8% of assets; available liquidity including off-balance-sheet sources was 17.9%.
- Total deposits included $94.0 million of brokered deposits. Borrowings totaled approximately $151.4 million, including $130.0 million of FHLB and correspondent bank borrowings, $11.7 million of senior notes, $8.1 million of subordinated debt, and a $1.6 million note payable.
- Operating cash flow was $4.6 million for the first nine months. Investing activities used $135.5 million and financing activities provided $67.0 million; cash decreased $63.9 million.
- The Bank’s September 30 regulatory capital ratios were 11.55% total capital, 10.69% Tier 1 and CET1, and 9.57% Tier 1 leverage. Management said the Bank met capital requirements on a fully phased-in basis.
Changes versus comparable periods
- Q3 net income rose 24% year over year; nine-month net income increased $2.7 million. Net interest income grew with loan and deposit expansion, while net interest margin declined 20 basis points in both comparisons.
- Reported nine-month results were materially affected by a $2.8 million insurance recovery in March 2017 on a commercial and industrial loan charged off in 2016. The recovery contributed to a $944,000 loan-loss provision credit for the nine months, versus a $2.3 million provision in 2016. Q3 2017 provision was $545,000.
- Management’s non-GAAP net income excluding loan-loss provision or credit was $1.34 million for Q3 2017 versus $1.03 million in Q3 2016, and $2.98 million for the first nine months versus $2.29 million. Management characterized the nine-month adjusted increase as 30%.
- Interest expense increased substantially, reflecting higher deposit rates, deposit growth, increased FHLB borrowing costs, and the 7% senior notes issued in December 2016. Non-interest expense rose 18% in Q3, driven chiefly by salaries and benefits and regulatory assessments; nine-month expense increased 7%, including higher professional services costs.
Outlook, risks and unusual items
- Management reported a strong loan pipeline and expected continued loan growth; it also continued deposit-growth initiatives. The filing provides no quantified earnings or margin guidance and cautions that interim results may not predict full-year results.
- On August 1, 2017, Patriot agreed to acquire Prime Bank for cash consideration equal to 115% of Prime’s tangible book value at closing. Prime shareholders approved the transaction October 17; customary regulatory approval remained outstanding. Closing was anticipated in Q4 2017. Patriot had incurred $39,000 in related costs and expected approximately $500,000 more; purchase accounting and goodwill estimates were undetermined.
- Credit quality warrants attention: non-accrual loans were $2.1 million, while accruing loans at least 90 days past due were $4.4 million, together 0.92% of loans. The allowance was $6.2 million, or 0.88% of gross loans. Management considered it adequate. Real estate collateral and regional economic conditions are key exposures.
- Deposit growth relied partly on higher-rate certificates and brokered deposits. Management cited interest-rate, repricing, competition, regulatory, and regional economic risks. The company also said it would continue evaluating realization of its $10.7 million deferred tax asset.
- Management stated that a previously identified material weakness in loan-loss-reserve controls had been remediated after enhancements and a period of operation. Disclosure controls were deemed effective; no material changes to internal control over financial reporting occurred in the quarter.
- The company began quarterly cash dividends in 2017, paying $0.01 per share in August. The filing reports no material pending legal proceedings other than routine litigation.
Important facts for investors to verify
- Whether Prime Bank’s acquisition received regulatory approval, closed on schedule, and incurred costs or purchase-accounting effects different from estimates.
- Whether loan growth, credit quality, delinquency trends, and the adequacy of the allowance remain consistent with management’s assessments.
- How deposit pricing and brokered-deposit reliance affect funding costs, liquidity, and net interest margin.
- Whether the reported $2.8 million insurance recovery is nonrecurring and how results perform apart from the loan-loss recovery and provision effects.
- Ongoing evidence supporting remediation of the loan-loss-reserve control weakness and realization of deferred tax assets.