Business context and reporting period
Patriot National Bancorp, Inc. is a Connecticut-based bank holding company operating through Patriot Bank, N.A. This unaudited Form 10-Q covers the three months ended March 31, 2019; income and cash-flow comparisons are with the first quarter of 2018, while balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars; financial-statement figures are generally shown in millions.
Key financial results and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $10.57 million | $9.31 million in Q1 2018 |
| Net interest income | $6.34 million | $7.06 million in Q1 2018 |
| Net interest margin | 2.87% | 3.55% in Q1 2018 |
| Pre-tax income | $491,000 | $1.41 million in Q1 2018 |
| Net income / diluted EPS | $323,000 / $0.08 | $1.07 million / $0.27 in Q1 2018 |
| Total assets | $953.1 million | $951.7 million at December 31, 2018 |
| Net loans | $780.7 million | $772.8 million at December 31, 2018 |
| Total deposits | $752.8 million | $743.3 million at December 31, 2018 |
| Cash and cash equivalents | $56.6 million | $66.4 million at December 31, 2018 |
| Shareholders’ equity | $69.6 million | $69.3 million at December 31, 2018 |
- Interest expense rose 88% to $4.23 million. Deposit interest expense increased $1.61 million, reflecting higher deposit rates; subordinated-debt interest also increased following the 2018 issuance.
- Non-interest income was $822,000, up from $322,000, including a $456,000 gain on the sale of $7.1 million of SBA loans. Non-interest expense increased to $6.51 million from $5.79 million, with higher staffing, professional services, occupancy, and other operating costs partly offset by lower merger and tax-project expenses.
- The loan-loss provision was $165,000. The allowance was $7.82 million, about 1.0% of gross loans; the company reported no charge-offs and $49,000 in recoveries during the quarter.
- Net cash provided by operating activities was $435,000, versus $1.68 million in Q1 2018. Investing activities used $8.69 million, including $4.8 million for purchased loans and $3.5 million of net loan originations. Financing activities used $1.55 million, including $10 million of FHLB repayments, partly offset by $9.54 million of deposit growth.
- Total borrowings were $121.0 million, down from $131.0 million at year-end. FHLB advances were $90.0 million; the Bank reported $60.1 million of remaining FHLB borrowing capacity.
- Liquidity ratios declined from year-end: balance-sheet liquidity to assets was 9.7% versus 10.7%; including readily available off-balance-sheet sources, 16.7% versus 19.4%; and including brokered-deposit availability, 21.2% versus 23.7%.
- At March 31, the Bank’s total risk-based capital ratio was 11.91%, CET1 ratio 10.99%, and Tier 1 leverage ratio 9.79%. Management said the Bank met fully phased-in capital requirements.
Material changes and credit trends
- Net interest income fell 10% year over year despite 13.5% growth in interest income. Management attributed the decline principally to higher deposit costs, non-accrual and reduced-rate loans, increased reliance on more expensive funding, and interest on subordinated debt. Net interest spread decreased to 2.63% from 3.40%.
- Gross loans grew 1.0% from year-end. Commercial real estate loans increased to $291.6 million from $274.9 million, while commercial and industrial loans declined to $177.9 million from $191.9 million. The net loan-to-deposit ratio was 104%.
- Non-accrual loans rose to $28.0 million from $19.2 million at year-end. Total nonperforming assets increased to $32.3 million, or 3.39% of assets, from $23.4 million, or 2.46%. Nonperforming loans were 3.76% of net loans, versus 2.65%.
- Recorded troubled debt restructurings rose to $10.9 million from $2.1 million, including an $8.8 million construction loan restructured with maturity and payment concessions. That loan was non-accrual at quarter-end. Management described overall portfolio credit quality as stable.
- Impaired loans increased to $30.1 million from $21.2 million; specific reserves were $1.6 million. The filing says non-accrual loans would have generated approximately $275,000 more interest income in Q1 2019 had they performed under their original terms.
Outlook, risks, contingencies, and unusual items
- Management expects operating results to build during 2019 as the expanded organic SBA business and deposit-raising initiatives produce results. No quantified earnings, revenue, or margin guidance is provided; management cautions that first-quarter results are not necessarily indicative of the rest of the year.
- The Bank remains subject to a formal written agreement with the OCC, entered into in November 2018. The filing says required policy and planning items have been addressed to date, while the Bank continues work on further enhancements and resolution of remaining matters.
- A material weakness in internal control over financial reporting related to the allowance-for-loan-losses process remained under review. Management reported enhancements to the reserve calculation, collateral monitoring, and review process, but concluded disclosure controls and procedures were not effective as of March 31, 2019; remediation had not yet been declared complete.
- On March 30, 2019, the company and Hana Small Business Lending mutually terminated their purchase agreement. Escrowed funds were released to the company and received May 9, 2019. The filing does not state the amount of the escrow in the supplied text.
- Other principal risks identified include interest-rate changes and repricing, deposit runoff and funding costs, regional economic and real-estate conditions, credit quality, competition, and regulatory or accounting changes. The loan portfolio is concentrated in the greater New York/Connecticut region and includes substantial real-estate lending.
- Available-for-sale securities had $1.30 million of gross unrealized losses at March 31, including $1.17 million on corporate bonds. Management considered the losses temporary and reported no other-than-temporary impairment. The company adopted lease accounting in 2019, recording approximately $3.4 million of operating lease assets and liabilities without an income-statement impact.
- There were no pending material legal proceedings reported beyond routine litigation incidental to the business. The filing reports $126.6 million of commitments to extend credit and standby letters of credit at March 31; these amounts are not necessarily expected cash outflows.
Most important facts for investors to verify
- Whether deposit pricing, funding mix, and net interest margin stabilize after the reported 68-basis-point year-over-year margin decline.
- Developments in non-accrual loans, the $8.8 million restructured construction credit, TDRs, collateral values, and the adequacy of the loan-loss allowance.
- Progress and any further requirements under the OCC agreement, and whether the material weakness is fully remediated in subsequent filings.
- Whether SBA loan growth and deposit initiatives improve recurring earnings, apart from gains on loan sales, and whether operating expenses remain elevated.
- Liquidity and capital trends, including the 104% net loan-to-deposit ratio, reliance on brokered deposits, available borrowing capacity, and the Bank’s regulatory capital buffers.
- The final accounting and cash impact of the terminated Hana transaction and release of escrow funds.