Patriot National Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; audited consolidated results. Patriot is a Connecticut bank holding company operating Patriot Bank, N.A., with branches in Connecticut and Westchester County, New York. It focuses on commercial, real estate, consumer and small-business banking.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars.
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $852.1 | $756.7 |
| Gross loans | $719.6 | $581.7 |
| Total deposits | $637.4 | $529.3 |
| Total borrowings | $141.4 | $159.5 |
| Net interest income | $25.9 | $22.4 |
| Net interest margin | 3.58% | 3.78% |
| Provision (credit) for loan losses | $(0.9) | $2.5 |
| Non-interest income | $1.4 | $1.6 |
| Non-interest expense | $21.2 | $18.4 |
| Net income | $4.1 | $1.9 |
| Basic and diluted earnings per share | $1.06 | $0.49 |
- Interest and dividend income increased to $32.8 million from $25.4 million. Loan growth and higher investment yields supported income, while higher deposit and debt costs reduced the margin.
- Loans grew 23.7%, principally from $73.0 million of purchased residential loans and $63.1 million of net originations. Commercial and industrial loans rose 115.1%; residential real estate loans rose 69.2%.
- Deposits grew 20.4%, including a $74.2 million increase in brokered deposits. The filing describes brokered funding as supporting loan growth.
- Cash and cash equivalents fell to $49.2 million from $92.3 million. Operating cash flow was $7.3 million; investing activities used $140.3 million and financing activities provided $90.0 million.
- Allowance for loan losses was $6.3 million, or 0.88% of gross loans, versus $4.7 million, or 0.81%, a year earlier. The 2017 provision was a net credit, principally reflecting a $2.8 million insurance recovery related to a commercial loan charged off in 2016.
- Non-accrual loans increased to $3.8 million from $1.8 million; total nonperforming assets were $5.1 million, or 0.60% of assets, versus $4.1 million, or 0.55%. Loans past due over 90 days and still accruing were $1.4 million.
- Bank regulatory capital ratios at year-end included total capital of 11.41%, Tier 1 and CET1 capital of 10.55%, and leverage capital of 9.36%. The Bank was reported as well capitalized.
Changes, unusual items and quarterly results
- Reported net income increased $2.2 million year over year, but the comparison reflects the 2017 $2.8 million insurance recovery and a net $0.9 million loan-loss credit, versus a $2.5 million provision in 2016. Management’s non-GAAP net income excluding the loan-loss provision or credit was $3.6 million in 2017 and $3.4 million in 2016.
- Non-interest expense increased $2.8 million, including $1.4 million higher salaries and benefits and $0.3 million higher professional services. The company recorded $0.64 million of merger and tax-project costs in 2017; $0.365 million related to the Prime Bank transaction.
- Fourth-quarter 2017 net income was $0.6 million, compared with $1.0 million in fourth-quarter 2016. Fourth-quarter 2017 non-interest expense was $6.2 million; the quarterly table identifies $0.601 million of special project costs.
- The 2017 income-tax provision was $2.9 million. The federal corporate tax-rate reduction to 21% increased tax expense by about $2.8 million, mostly offset by a roughly $2.8 million benefit from reclassifying certain NOL carryforwards. The company reported a $10.4 million net deferred tax asset and no valuation allowance, while noting realization is not assured.
- The company began paying quarterly cash dividends in 2017 and paid $77,000 for the year. Dividends remain subject to regulatory and bank-level constraints.
Liquidity, debt and outlook
- Balance-sheet liquidity was 8.2% of assets, down from 14.9% in 2016; liquidity including readily available off-balance-sheet funding was 15.6%, versus 20.9%. Including brokered-deposit availability, total available liquidity was 18.3%, versus 23.0%.
- At year-end, the Bank reported $48.1 million of additional FHLB borrowing capacity, plus access to Federal Reserve borrowing. It had $120.0 million of FHLB advances outstanding. Total borrowings also included $11.7 million net carrying value of 7% senior notes due in 2021 and $8.1 million of junior subordinated debt.
- Management cited a strong loan pipeline and expected continued loan growth. No quantified earnings or margin guidance is provided. The filing cautions that results depend on interest rates, funding costs, local economic and real-estate conditions, competition, regulation and loan quality.
- A proposed Prime Bank merger, agreed in August 2017, remained subject to regulatory approval; Prime shareholders had approved it. Cash consideration is set at 115% of Prime’s tangible book value at closing, anticipated in the second quarter of 2018. Patriot expected about $250,000 of additional merger costs in 2018.
- In February 2018, Patriot announced an agreement to acquire Hana SBL’s SBA lending business, including approximately $120 million of SBA 7(a) loans and servicing rights on a $370 million pool, for about $83 million cash and assumption of about $41 million in liabilities. The deal remained subject to due diligence, adjustments and regulatory approvals; the filing expected results to reflect it beginning in the third quarter of 2018.
- Regulators reported overall satisfactory findings in 2017, with minor corrective actions. A 2016 material weakness involving loan-loss-reserve controls was reported remediated after management’s fourth-quarter 2017 testing. The independent auditor did not attest to internal-control effectiveness.
Key investor verification points
- Assess the sustainability of earnings apart from the insurance recovery, loan-loss credit and unusual project costs.
- Review the rise in non-accrual loans and whether the $6.3 million allowance remains adequate as the loan book expands.
- Examine funding concentration and repricing risk, including the sharp increase in brokered deposits and the impact of deposit costs on net interest margin.
- Confirm liquidity capacity and the maturity/refinancing profile of deposits, FHLB advances and the 2021 senior notes.
- Track regulatory approvals, purchase terms, integration costs and expected financial impact of both pending acquisitions.
- Monitor realization of the $10.4 million deferred tax asset and the company’s continuing evaluation of its loan-reserve controls.