Patriot National Bancorp, Inc. — Q3 2012 Form 10-Q
Business context and period. The regional bank holding company reported unaudited results for the three and nine months ended September 30, 2012. Its lending is concentrated in commercial and residential real estate, commercial business and consumer loans in Connecticut and New York.
Financial performance and position
- Quarterly earnings: Net income was $18,000, or $0.00 per diluted share, versus $255,000, or $0.01 per share, in Q3 2011. Net interest income fell 14% to $4.2 million; net interest margin declined to 2.86% from 3.40%. Noninterest income was $1.46 million and noninterest expense was $5.67 million.
- Nine-month results: Net income was $909,000, or $0.02 per share, versus a $15.9 million loss, or $(0.41) per share, in 2011. Net interest income declined 8% to $13.8 million, and net interest margin decreased to 2.98% from 3.12%. The $2.6 million release of loan-loss provision and lower expenses supported the year-to-date improvement.
- Interest income and costs: Nine-month interest and dividend income declined 9% to $19.5 million, mainly reflecting lower rates. Interest expense fell 12% to $5.7 million, partly offsetting the income decline. Q3 included a $924,000 securities-sale gain; nine-month securities-sale gains were $916,000.
- Balance sheet at September 30: Total assets were $615.3 million, down $50.5 million from year-end 2011. Net loans were $493.1 million, down $8.1 million; deposits were $484.0 million, down $61.0 million. Cash and cash equivalents were $44.5 million, versus $55.4 million at year-end.
- Funding, debt and liquidity: Borrowings totaled $67.0 million, including $60.0 million of FHLB advances; junior subordinated debt was $8.25 million. The company had deferred interest payments on subordinated debt for 14 consecutive quarters, while continuing to accrue interest. The reported liquidity ratio was 10%, versus 21% at September 30, 2011; net loans equaled 102% of deposits. The Bank reported approximately $45 million of additional FHLB borrowing capacity.
- Capital: Company total risk-based and Tier 1 leverage ratios were 14.78% and 9.60%; Bank ratios were 14.45% and 9.37%. The Bank exceeded the stated prompt-corrective-action “well capitalized” thresholds, but remains subject to regulatory agreements and a capital plan.
- Cash flow: For the nine months, operating cash flow was negative $17.3 million, investing cash flow positive $57.4 million, and financing cash flow negative $51.0 million; cash declined $10.9 million. Operating cash flow included a $14.6 million increase in a receivable from settlement of investment securities.
Material changes and credit quality
- The Bank sold approximately $81.2 million of residential loans in 2012; sales and repayments drove a sharp reduction in the securities portfolio, which fell from $66.5 million to $18.3 million. Commercial real estate loans increased about $39.9 million, while residential loans declined about $49.4 million.
- Allowance for loan losses fell to $6.7 million from $9.4 million at year-end, or 1.34% of gross loans versus 1.84%. The nine-month provision was a $2.6 million release, compared with an $8.5 million provision in 2011. Management attributed the reserve reduction partly to improved credit trends and a revised methodology; the methodology change itself reduced the allowance by $1.1 million in Q2.
- Nonaccrual loans rose to $30.0 million from $20.7 million at year-end. Total impaired loans were $39.1 million, versus $36.8 million. Loans past due over 90 days but still accruing declined to $2.5 million from $9.5 million. Ten troubled debt restructurings totaled $19.1 million, compared with 12 totaling $25.5 million at year-end.
- Management identified $24.4 million of substandard accruing loans and $32.3 million of special-mention loans as potential problem loans. Real-estate collateral values and regional economic conditions are key collection risks. The Bank had maintained a moratorium on new speculative construction lending since 2008.
Outlook, commentary, risks and unusual items
- Management said the nine-month results are not necessarily indicative of the remainder of 2012 and provided no specific earnings guidance. It cited lower market interest rates, deposit runoff and real-estate credit conditions as important uncertainties.
- Management reported that its initial assessment of Super Storm Sandy’s October 2012 impact did not indicate a significant effect on Q4 results.
- A full $13.7 million valuation allowance was maintained against deferred tax assets because the company remained in a cumulative loss position; realization depends on sustained future taxable income. Use of certain pre-2010 tax losses is limited by Section 382.
- The Bank remains subject to a 2009 OCC written agreement, including restrictions on brokered deposits, criticized lending and dividends. The holding company is also subject to a Federal Reserve written agreement restricting dividends, debt and certain capital actions without prior approval. The Bank’s accumulated deficit prevented dividend payments to the parent.
- Cost-reduction actions included closing the New York City branch and reducing back-office staff; three additional branch consolidations were delayed until October 5, 2012. Nine-month restructuring charges were $503,000, versus $3.0 million in 2011.
- Off-balance-sheet commitments totaled $87.9 million, including $20.3 million in future loan commitments and $29.9 million in home-equity lines; the reserve for unfunded commitments was $8,000. The filing reported no material change in risk factors and no material pending litigation beyond ordinary routine matters.
Important facts for investors to verify
- Whether rising nonaccrual and impaired loans, potential problem loans and real-estate exposure may require additional reserves or charge-offs.
- Whether the lower allowance remains adequate, given the $2.6 million release, the $1.1 million methodology effect and the increase in nonaccrual loans.
- Whether deposit declines, the 10% liquidity ratio and a 102% net loan-to-deposit ratio leave sufficient funding flexibility, including under regulatory restrictions.
- How sustainable earnings are when securities-sale gains and reserve releases are excluded, and whether net interest margin can stabilize.
- The implications of the written agreements, deferred subordinated-debt interest and the full deferred-tax-asset valuation allowance.
- The filing’s narrative contains an apparent inconsistency in its description of Q3 2011 per-share earnings; verify against the statements, which report $255,459 net income and $0.01 per share.