Patriot National Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. The company is a Connecticut-based bank holding company operating primarily in Connecticut and New York.
Financial performance and condition
- Q3 results: Net income was $255,459, or $0.01 per share, versus a $6.79 million net loss, or $1.43 per share, in Q3 2010. Net interest income was $4.95 million, down 3%; the net interest margin improved to 3.40% from 2.71%. No loan-loss provision was recorded in Q3 2011, compared with $5.03 million in Q3 2010.
- Nine-month results: Net loss was $15.90 million, or $0.41 per share, versus a $11.32 million net loss, or $2.38 per share, in 2010. Net interest income fell 12% to $14.92 million; net interest margin rose to 3.12% from 2.98%. The loan-loss provision was $8.46 million versus $6.26 million.
- Other income and expenses: Q3 non-interest income rose to $1.28 million, including a $780,000 securities-sale gain. Nine-month non-interest expense increased 6% to $24.94 million, including $2.99 million in restructuring and asset-disposal charges. Q3 expense fell 21% year over year to $5.97 million.
- Balance sheet at September 30: Assets were $628.4 million, down from $784.3 million at year-end 2010. Net loans were $453.1 million, down from $534.5 million; deposits were $507.7 million, down from $646.8 million. Available-for-sale securities increased to $88.5 million from $40.6 million. Shareholders’ equity was $50.7 million versus $67.2 million.
- Cash flow and liquidity: Nine-month operating cash flow was $0.68 million; investing activities provided $34.82 million and financing activities used $139.09 million. Cash and cash equivalents declined $103.59 million to $43.19 million. The reported liquidity ratio was 21%, versus 20% a year earlier. Management said available liquidity was sufficient for anticipated needs.
- Debt and capital: Borrowings were $57.0 million, unchanged from year-end; junior subordinated debt was $8.25 million. Total capital ratios at the company were 15.82% risk-based and 9.25% Tier 1 leverage; at the Bank they were 15.27% and 8.90%, respectively. The Bank’s capital plan targets a 9% Tier 1 leverage ratio.
Material changes and credit quality
- On March 24, 2011, the Bank sold $66.8 million of non-performing loans and real estate for $60.6 million, or 90.7% of net book value. Management cited this sale as a major factor in reducing problem assets; the sale contributed to the nine-month loss.
- Non-accrual loans declined to $21.8 million from $89.1 million at December 31, 2010. Non-performing loans were 4.7% of total loans; non-accrual loans plus loans over 90 days past due and still accruing totaled $27.6 million, or 5.95% of loans.
- The allowance for loan losses was $11.16 million, or 2.40% of gross loans, compared with $15.37 million, or 2.80%, at year-end. Nine-month net charge-offs were $6.63 million. Management considered the allowance adequate, while noting estimates depend on economic conditions, collateral values, and other judgments.
- Other real estate owned fell to $4.73 million from $16.41 million. Troubled debt restructurings totaled $27.7 million across 13 loans; two modified loans defaulted during the first nine months.
- Deposits decreased 22%, principally as higher-rate certificates of deposit ran off and customers moved money-market funds elsewhere. Management also invested excess liquidity in securities and continued a moratorium on new speculative construction loans.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that recent trends are not reliable predictors of future performance.
- The Bank remains subject to a 2009 formal written agreement with the OCC, and the holding company remains subject to a 2010 Federal Reserve agreement. These impose capital planning, reporting, and restrictions on dividends, certain debt actions, and other transactions requiring regulatory approval. The Bank had an accumulated deficit and could not pay dividends to the parent as of quarter-end.
- The Company deferred interest payments on its $8.25 million subordinated debentures for a tenth consecutive quarter; interest continued to accrue. The filing says deferral may continue until March 2014, with accrued interest payable by the end of the deferral period.
- A full $16.1 million valuation allowance was maintained against deferred tax assets because management concluded realization was not more likely than not. The filing also notes that the 2010 ownership change limits use of certain tax attributes.
- Key risks include regional real-estate and economic weakness, borrower repayment and collateral values, interest-rate changes, deposit outflows, regulatory requirements, and costs or effects of implementing Dodd-Frank rules.
- On November 8, 2011, the Company entered a three-year financial advisory agreement with PNBK Sponsor LLC, whose manager is the Bancorp board chairman and whose affiliate owns 87.6% of Bancorp. The agreement provides transaction-contingent fees of 3% of the first $50 million, 2% of the next $50 million, and 1% of consideration above $100 million, plus expense reimbursement.
Important facts for investors to verify
- Whether declining non-accrual loans and OREO translate into sustained credit improvement, and whether the remaining allowance adequately reflects regional collateral risk.
- The Bank’s progress toward its 9% Tier 1 leverage target and continued compliance with OCC and Federal Reserve agreements.
- Whether deposit runoff stabilizes and liquidity remains adequate as cash balances fall and securities holdings rise.
- Potential costs and conflicts related to the Sponsor advisory agreement, including the transaction-fee terms and related-party relationship.
- Future operating performance excluding the securities-sale gain and the nonrecurring bulk-sale and restructuring impacts; the filing gives no specific forward guidance.