Patriot National Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results include Patriot Bank, N.A. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Interest and dividend income | $11.0 | $9.9 | $21.6 | $19.2 |
| Net interest income | $6.5 | $7.0 | $12.9 | $14.1 |
| Net interest margin | 2.93% | 3.34% | 2.90% | 3.44% |
| Provision for loan losses | $2.9 | $0.1 | $3.1 | $0.2 |
| Non-interest income | $0.8 | $0.4 | $1.7 | $0.7 |
| Non-interest expense | $6.7 | $6.0 | $13.2 | $11.8 |
| Net income (loss) | ($1.7) | $1.0 | ($1.3) | $2.1 |
| Basic EPS | ($0.42) | $0.27 | ($0.34) | $0.54 |
- Net interest income declined as higher deposit costs, increased reliance on wholesale funding, non-accrual/reduced-rate loans, and the 2018 subordinated debt issuance outweighed higher earning-asset balances and yields.
- Net interest expense rose 57% in Q2 and 71% for the first half year over year. Average deposit cost increased to 2.10% for Q2 from 1.32%; average loan yield rose to 5.14% from 5.00%.
- The elevated credit provision principally reflected a $2.3 million charge-off on one commercial loan. Management cited inadequate demonstrated borrower cash flow and insufficient collateral information; the Bank said it would pursue recovery remedies.
- SBA loan-sale gains supported non-interest income: $0.4 million in Q2 and $0.8 million year to date, on $9.1 million of first-half loan sales. Expenses also rose with SBA and deposit-business expansion and OCC-related control and documentation work.
Financial position, funding and credit
- At June 30, total assets were $977.8 million, loans net of allowance were $803.3 million, deposits were $767.6 million, and shareholders’ equity was $68.3 million. Since year-end 2018, assets rose $26.1 million, net loans $30.5 million, and deposits $24.3 million; equity fell $1.0 million.
- Cash and cash equivalents were $51.1 million, down $15.3 million from year-end, primarily reflecting $38.4 million of net loan originations and purchases, partly offset by deposit growth. Operating cash flow was negative $3.0 million and investing cash flow negative $36.8 million for the first half; financing cash flow was positive $24.4 million.
- Total borrowings were approximately $131 million, broadly unchanged from year-end, including $100 million of FHLB advances. The Bank reported $60.1 million of additional FHLB borrowing capacity. Senior notes were $11.8 million, subordinated debt $9.7 million, and junior subordinated debt $8.1 million.
- Liquidity ratios declined: balance-sheet liquidity to assets was 8.8% versus 10.7% at year-end; liquidity including readily available off-balance-sheet sources was 17.4% versus 19.4%. Available total liquidity, including brokered-deposit availability, was 19.7% versus 23.7%. Management said liquidity was sufficient for lending, deposit fluctuations, and operating needs.
- Gross loans grew 4.0% from year-end. Commercial real estate was 38.4% of the portfolio. Non-accrual loans were $19.4 million; nonperforming assets were $21.6 million, or 2.21% of assets, compared with $23.4 million and 2.46% at year-end. Troubled debt restructurings increased to $11.0 million from $2.1 million; $9.3 million was non-accrual.
- The allowance was $8.5 million, or 1.04% of gross loans, versus $7.6 million, or 0.86%, at year-end. The company reported $2.3 million net charge-offs in the first half.
- At June 30, the Bank’s total risk-based capital ratio was 11.65%, CET1 ratio 10.66%, and leverage ratio 9.61%. Management stated that the Bank met fully phased-in capital requirements. The holding company’s ratios were lower, including a 7.38% CET1 ratio.
Outlook, risks and notable items
- Management expected operating results to build during 2019 as SBA expansion and deposit initiatives contributed to interest and non-interest income. This is qualitative commentary, not quantified guidance; the filing cautions interim results are not necessarily indicative of full-year results.
- The Bank remained subject to a November 2018 formal written agreement with the OCC covering, among other matters, compliance, liquidity and asset-liability management, loan administration, leveraged lending, loan-loss allowance practices, and strategic and capital planning. The company said it had addressed required items and continued responding to OCC-requested enhancements.
- A material weakness in internal control over financial reporting involving management’s review of the allowance calculation remained unremediated at quarter-end. Management said it had enhanced review and collateral-monitoring controls but was continuing remediation; disclosure controls and procedures were deemed ineffective as of June 30.
- The company identified credit quality and regional real estate conditions, interest-rate and deposit repricing risk, funding costs, regulation, competition, and economic conditions in the greater New York metropolitan area as key risks. Its net interest income sensitivity analysis estimated a 10.3% decline under an immediate 200-basis-point rate decrease, versus a 12.6% increase under a 200-basis-point increase; management cautioned that such simulations have limitations.
- The company terminated its proposed Hana Small Business Lending purchase agreement on March 30, 2019 and received the $0.5 million escrowed funds on May 9. The filing reported no material pending legal proceedings beyond routine litigation.
- The company adopted lease accounting on January 1, recognizing $3.4 million of operating lease right-of-use assets and $3.4 million of lease liabilities. It reported no goodwill impairment after a second-quarter qualitative assessment.
Most important facts for investors to verify
- Whether the commercial-loan charge-off is isolated and whether non-accrual loans, TDRs, and the allowance develop favorably in subsequent filings.
- Whether deposit pricing and wholesale funding costs stabilize enough to arrest net interest margin compression, and how brokered-deposit reliance and liquidity evolve.
- Progress and regulatory status of the OCC agreement, including whether the allowance-related material weakness is remediated and disclosure controls improve.
- Whether the company’s stated 2019 recovery expectations translate into sustained earnings and cash generation, given the first-half loss and negative operating cash flow.
- Capital headroom at both the Bank and holding company, especially if credit losses rise or dividend distributions face regulatory constraints.