Patriot National Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Amounts below are in U.S. dollars; financial-statement amounts are rounded to millions unless stated otherwise.
Business context
Patriot is a Connecticut-based bank holding company operating through Patriot Bank. Its lending is concentrated in Fairfield and New Haven Counties, Connecticut, Westchester County, New York, and New York City. The loan book is led by commercial real estate (43% of gross loans at quarter-end).
Financial performance and position
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable / prior date |
|---|---|---|
| Interest and dividend income | $9.31 million | $6.92 million in Q1 2017 |
| Net interest income | $7.06 million | $5.53 million in Q1 2017 |
| Net interest margin | 3.55% | 3.50% in Q1 2017 |
| Provision for loan losses | $185,000 expense | $1.75 million credit in Q1 2017 |
| Non-interest income | $322,000 | $277,000 in Q1 2017 |
| Non-interest expense | $5.79 million | $4.69 million in Q1 2017 |
| Income before taxes | $1.41 million | $2.87 million in Q1 2017 |
| Net income / diluted EPS | $1.07 million / $0.27 | $1.73 million / $0.44 in Q1 2017 |
| Total assets | $870.4 million | $852.1 million at Dec. 31, 2017 |
| Net loans / deposits | $718.1 million / $655.3 million | $713.4 million / $637.4 million at Dec. 31, 2017 |
| Cash and cash equivalents | $62.0 million | $49.2 million at Dec. 31, 2017 |
| Total borrowings | $141.3 million | $141.4 million at Dec. 31, 2017 |
| Shareholders’ equity | $67.6 million | $66.7 million at Dec. 31, 2017 |
Quarterly operating cash flow was $1.68 million; investing activities used $5.77 million, and financing activities provided $16.85 million. Cash increased by $12.75 million. The allowance for loan losses was $6.49 million, or 0.90% of gross loans, versus $6.30 million, or 0.88%, at year-end.
At March 31, 2018, the Bank’s regulatory capital ratios were 11.76% total capital, 10.90% Tier 1 and CET1, and 9.72% Tier 1 leverage. Management said the Bank met applicable capital requirements, including on a fully phased-in basis. The company reported balance-sheet liquidity of 9.5% of assets and total available liquidity, including brokered-deposit availability, of 18.8%.
Material changes versus the prior period
- Net interest income rose 28%, reflecting loan growth and higher yields; average loans increased $157.2 million year over year. Deposit and borrowing costs also increased, with total interest expense up 62%.
- Net income fell 38% year over year. Q1 2017 results included a $2.8 million insurance recovery recorded as a credit to the loan-loss allowance; Q1 2018 instead recorded a $185,000 provision.
- Q1 2018 non-interest expense included $523,000 of merger and acquisition costs. Salaries and benefits rose $339,000 and data-processing expense rose $197,000 year over year.
- Non-accrual loans increased to $5.04 million from $3.78 million at year-end. Loans more than 90 days past due but still accruing rose to $11.19 million from $1.36 million, comprising two construction loans that management described as well secured.
- Deposits increased 2.8%; brokered deposits rose $27.1 million to $165.2 million, while noninterest-bearing deposits fell $9.5 million. Available-for-sale securities declined $783,000, including a $307,000 unrealized loss.
Outlook, transactions, and risks
Management described the loan pipeline as strong and expected continued loan growth, while pursuing franchise expansion and adding lending and retail-banking capabilities. No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Prime Bank: OCC approval was received April 12, 2018; Patriot acquired Prime Bank on May 10 for $5.9 million. At March 31, Prime reported approximately $65 million of assets, including $23 million of loans and $48 million of deposits. Patriot was still evaluating purchase accounting and anticipated about $200,000 of additional acquisition expenses.
- Hana Small Business Lending: The announced SBA-lending-business purchase contemplated approximately $120 million of SBA loans, servicing rights on a $370 million loan pool, and assumption of about $41 million of liabilities for approximately $83 million cash consideration. It remained subject to due diligence and regulatory approvals; Patriot expected results to reflect the transaction beginning in Q3 2018 and anticipated about $350,000 of additional acquisition expenses.
- Key risks include interest-rate movements and repricing, deposit competition and funding reliance, credit quality and real-estate values in the company’s regional markets, and execution and integration of acquisitions. Brokered deposits were $165.2 million. Management considered investment-security unrealized losses temporary and reported no other-than-temporary impairment.
- The company reported no material change in risk factors and no material pending legal proceedings beyond ordinary routine litigation. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
- ASU 2016-01 was adopted in Q1 2018; Patriot refined its loan fair-value methodology using an exit-price approach, making prior-period fair-value information not directly comparable. Adoption of the revenue-recognition standard had no material effect.
Most important facts for investors to verify
- Whether the Prime and Hana transactions closed as expected, their final purchase accounting, integration costs, and contribution to earnings.
- Performance and collateral coverage of the two construction loans over 90 days past due but still accruing, and trends in non-accrual and impaired loans.
- Deposit pricing, retention, and reliance on brokered funding as rates and competition change.
- Whether loan growth, net interest margin, and credit-loss provisioning remain sustainable after the unusual $2.8 million Q1 2017 insurance recovery is excluded.
- Realizability of the $11.3 million deferred tax asset and sensitivity of earnings and capital to interest rates and regional real-estate conditions.