Patriot National Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results include Patriot Bank, N.A. Unless otherwise indicated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest and dividend income | $7.945 | $6.033 | $14.869 | $12.142 |
| Net interest income | $6.308 | $5.382 | $11.842 | $10.807 |
| Net interest margin | 3.61% | 3.78% | 3.56% | 3.77% |
| Net income (loss) | $0.804 | $(0.582) | $2.534 | $0.071 |
| Diluted EPS | $0.21 | $(0.15) | $0.65 | $0.02 |
- Q2 pre-tax income was $1.383 million versus a $0.948 million loss a year earlier. Non-interest income was $0.349 million and non-interest expense was $5.014 million in the quarter.
- At June 30, assets were $773.4 million, up 2% from year-end 2016; shareholders’ equity was $65.3 million, up from $62.6 million.
- Net loans rose 16.7% from year-end to $673.1 million. Gross loans were $679.1 million; the allowance for loan losses was $5.944 million, or 0.9% of gross loans.
- Deposits increased 6.2% to $562.0 million. Borrowings totaled approximately $141.4 million, down from $159.5 million at year-end; this included $120 million of FHLB and correspondent-bank borrowings and $11.7 million of senior notes.
- Cash and cash equivalents fell to $10.8 million from $92.3 million at year-end. Operating cash flow was $1.747 million; investing cash outflow was $98.249 million and financing cash inflow was $15.056 million for the first half.
- Balance-sheet liquidity to assets was 4.4%, down from 14.9%; total available liquidity, including off-balance-sheet sources, was 17.6%, versus 19.1%. The Bank reported $41 million of available FHLB borrowing capacity.
- At the Bank, regulatory capital ratios were 11.594% total risk-based, 10.734% Tier 1 and CET1, and 9.974% Tier 1 leverage. Management said the Bank met applicable requirements, including on a fully phased-in basis.
Material changes and notable items
- Compared with Q2 2016, net interest income increased 17%, supported by higher average loan balances and yields. Interest expense rose 151%, reflecting higher deposit costs, the 7% senior notes issued in December 2016, and increased borrowing rates; net interest margin narrowed by 17 basis points.
- Six-month 2017 earnings benefited from a $2.8 million insurance recovery in March related to a previously charged-off commercial and industrial loan. This was recorded as a credit to the allowance; the first half included a $1.489 million provision credit, compared with a $1.959 million provision in the 2016 period. Management’s non-GAAP measure excluding loan-loss provision/credit showed first-half net income of $1.629 million versus $1.275 million in 2016; Q2 was $0.955 million versus $0.622 million.
- The loan portfolio’s growth included a $73 million purchase of residential real estate loans in March and $21.9 million of net loan originations. Residential real estate loans increased to $152.4 million from $86.5 million at year-end; commercial and industrial loans rose to $94.9 million from $61.0 million.
- Past-due loans 90 days or more and still accruing were $2.197 million; non-accrual loans were $1.859 million. Combined, they were 0.60% of gross loans. The allowance increased to $5.944 million, partly reflecting the recovery and provision activity. Management characterized overall credit quality as strong and stable.
- Professional and outside services expense increased, primarily due to consulting for operational improvements. Six-month non-interest expense was $9.708 million, up from $9.500 million.
Outlook, risks and contingencies
- Management described the loan pipeline as strong and expected continued loan growth, while continuing deposit-growth initiatives. The filing provides no quantified earnings or margin guidance and cautions that interim results are not necessarily indicative of full-year results.
- On August 1, 2017, the Company agreed to acquire Prime Bank through its merger into Patriot Bank. Prime Bank shareholders are to receive cash equal in aggregate to 115% of Prime Bank’s tangible book value at closing; closing was anticipated in Q4 2017, subject to regulatory and shareholder approvals. Purchase accounting values, goodwill and acquisition costs were not yet determined.
- On July 17, the Company announced its first quarterly cash dividend: $0.01 per share, paid August 1, 2017 to shareholders of record July 24.
- Key exposures include interest-rate changes, deposit repricing and runoff, regional economic and real-estate conditions, and loan concentrations. Management noted that estimated net interest income under a 200-basis-point rate increase was 1.3% below its base case; the filing cautions that rate-shock models rely on assumptions and have limitations.
- Management said the material weakness previously identified in loan-loss allowance controls had been remediated after control enhancements. Officers concluded disclosure controls were effective as of June 30, 2017. The Company reported no material changes to risk factors, and no material pending litigation beyond ordinary routine matters.
- Off-balance-sheet credit commitments totaled $101.1 million, including unused lines, undisbursed construction loans, home-equity lines, future loan commitments and standby letters of credit. Such commitments may not be fully drawn.
Important facts for investors to verify
- How much of reported earnings reflects recurring operations versus the $2.8 million insurance recovery and related allowance movements; review the company’s non-GAAP reconciliation and tax effects.
- Whether loan growth—particularly purchased residential loans—can be funded sustainably, given cash of $10.8 million, a 120% net loan-to-deposit ratio, and reduced balance-sheet liquidity.
- Trends in deposit costs, net interest margin, brokered deposits, and access to FHLB and other liquidity sources.
- Subsequent Prime Bank merger approvals, purchase price and tangible-book-value calculation, expected integration costs, and final acquired-asset and assumed-liability valuations.
- Continued performance of the allowance-control remediation and future credit quality, including delinquent, non-accrual and impaired loans and the adequacy of the allowance.