Patriot National Bancorp, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Patriot is a one-bank holding company operating Patriot Bank, N.A., a community bank serving Connecticut and the New York metropolitan area. The Bank completed its acquisition of Prime Bank on May 10, 2018.
Financial performance and condition
- Scale and growth: Total assets rose 11.7% to $951.7 million; gross loans increased 8.4% to $780.4 million, and deposits grew 16.6% to $743.3 million. Growth reflected lending, purchased loans, and the Prime Bank acquisition.
- Earnings: Net income was $3.2 million ($0.82 per diluted share), down from $4.1 million ($1.06) in 2017. Interest and dividend income increased to $40.4 million; net interest income rose 8.1% to $28.0 million. Interest expense grew to $12.4 million, and noninterest expense increased to $24.2 million.
- Margins and credit costs: Net interest margin declined to 3.29% from 3.58%, as deposit costs and wholesale funding increased. The Bank recorded a $1.3 million loan-loss provision, compared with a $857,000 credit in 2017.
- Asset quality: Nonaccrual loans rose to $19.2 million from $3.8 million; nonperforming assets reached $23.4 million, or 2.46% of assets, versus $5.1 million, or 0.60%, a year earlier. The allowance for loan losses was $7.6 million, 0.98% of gross loans. Management cited a single loan with cash-flow weakness and collateral shortfall as a driver of a late-year provision.
- Cash flow and liquidity: Operating cash flow was $5.6 million; investing activities used $27.2 million and financing activities provided $39.3 million. Cash and cash equivalents ended at $66.4 million. Balance-sheet liquidity was 10.7% of assets; liquidity including readily available and brokered-deposit sources was 23.7%.
- Funding and debt: Total borrowings were $131.0 million, down from $141.4 million; this included $100.0 million of FHLB advances. Brokered deposits totaled $183.6 million. The Company issued $10 million of subordinated notes in June 2018 at an initial 6.25% rate, maturing in 2028; it also has $12 million of senior notes due in 2021.
- Capital: At year-end, Bank total risk-based capital was 11.49%, CET1 was 10.61%, and leverage capital was 9.82%. The Company reported total risk-based capital of 10.38% and CET1 of 7.42%. Management said capital requirements were met on a fully phased-in basis.
Material changes versus 2017
- Net income fell by about 23%. The comparison was affected by a $2.8 million loan-insurance recovery recognized in 2017 and $2.1 million of 2018 merger and tax-initiative project costs, including costs related to the proposed Hana SBL transaction.
- Loan-loss provision shifted from a credit of $857,000 to an expense of $1.3 million; nonperforming assets increased materially.
- Prime Bank added a branch and, at acquisition, approximately $65 million in assets, including $46 million in deposits and $23 million in loans. The acquired securities were subsequently sold at acquisition-date fair value.
- Funding costs rose as the Bank expanded brokered and listed deposits and issued subordinated debt. The net interest margin contracted despite higher loan yields and interest income.
Outlook, oversight, risks, and unusual items
- Management reported a strong loan pipeline and said it expected continued growth; approximately $230 million in new loans was funded and committed during 2018. The filing gives no quantified earnings or margin guidance.
- Regulatory agreement: In November 2018, the Bank entered a formal written agreement with the OCC requiring actions covering governance, executive compensation, conflicts, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, the loan-loss allowance, interest-rate-risk modeling, and a three-year strategic and capital plan. The Bank was designated by the OCC as being in “troubled condition.” The Bank said it had provided requested documents and awaited further OCC assessment.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective at year-end because of a material weakness in the review of the allowance-for-loan-loss calculation, including the completeness and accuracy of inputs and review precision. Management stated the financial statements did not contain a material misstatement and described remediation efforts. The auditor did not provide an internal-control opinion.
- Proposed acquisition terminated: The Company and Hana SBL mutually terminated the proposed SBA lending business purchase on March 30, 2019, after the Company withdrew its OCC application and had not received regulatory non-objection. Escrowed funds are to be released back to the Company.
- Other risks and items: Real-estate and commercial-credit concentration, rising funding costs, deposit reliance on brokered sources, interest-rate sensitivity, and the adequacy of the loan-loss allowance remain key risks. A $1.1 million uncertain tax position related to federal NOL use was recorded in 2018; the Company reported a $10.9 million deferred tax asset and said realization is not guaranteed. The Company also reported a $671,000 after-tax unrealized securities loss in other comprehensive income.
Important facts for investors to verify
- OCC agreement status, the “troubled condition” designation, and any restrictions or required corrective actions.
- Trends in nonaccrual loans, nonperforming assets, foreclosed property, criticized loans, and allowance coverage—especially construction and commercial credit exposures.
- Progress and independent validation of remediation for the material weakness in allowance controls.
- Deposit retention, brokered-funding dependence, deposit repricing, and liquidity availability under stress.
- Whether the loan pipeline converts to funded, performing loans and whether net interest margin stabilizes.
- Realizability of deferred tax assets and resolution of the uncertain tax position.