Patriot National Bancorp, Inc. — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017. The unaudited consolidated statements cover Patriot National Bancorp and its wholly owned subsidiaries, including Patriot Bank, N.A. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable / prior period |
|---|---|---|
| Net interest income | $5.53 | $5.43 in Q1 2016 |
| Net interest margin | 3.50% | 3.76% in Q1 2016 |
| Net income | $1.73; $0.44 basic and diluted EPS | $0.65; $0.17 basic and $0.16 diluted EPS in Q1 2016 |
| Net cash from operating activities | $0.51 | $1.02 in Q1 2016 |
| Total assets | $774.8 | $756.7 at December 31, 2016 |
| Net loans | $625.0 | $577.0 at December 31, 2016 |
| Total deposits | $561.0 | $529.3 at December 31, 2016 |
| Total borrowings | $145.4 | $159.4 at December 31, 2016 |
| Shareholders’ equity | $64.4 | $62.6 at December 31, 2016 |
- Interest and dividend income rose 13% to $6.92 million year over year, while interest expense more than doubled to $1.39 million. Higher deposit costs and interest on senior notes issued in December 2016 offset much of the increase in asset income. Net interest income grew 2%.
- Pre-tax income was $2.87 million versus $1.07 million a year earlier. The $1.75 million credit for loan losses (a negative provision) materially boosted reported earnings; it principally reflected a $2.8 million insurance recovery on a commercial and industrial loan charged off in Q4 2016.
- Non-interest income was $0.28 million, down from $0.41 million, including a $78,000 loss on securities sales. Non-interest expense declined to $4.69 million from $4.76 million; lower data-processing and salary costs were partly offset by increased professional services.
- Loans grew 8% from year-end, largely due to $72.9 million of purchased residential loan pools, partly offset by lower net originations. Residential real estate loans increased to $155.1 million from $86.5 million. The allowance for loan losses was $5.7 million, or 0.9% of gross loans, versus $4.7 million at year-end.
- Cash and cash equivalents fell to $60.3 million from $92.3 million. Investing activities used $49.2 million, including loan-pool purchases; financing activities provided $16.7 million. The reported liquidity ratio was 10.4%, down from 14.9% at year-end. Management said liquid assets were sufficient for anticipated needs.
- The bank’s regulatory capital ratios at March 31 were 11.96% total capital, 11.09% Tier 1 and CET1, and 10.65% Tier 1 leverage. Management stated the bank met capital requirements, including on a fully phased-in basis.
Changes, outlook and risks
- Deposits rose 6% from year-end, supported by a deposit-growth initiative and competitive certificate-of-deposit rates. Brokered deposits declined to $58.6 million; certificates of deposit increased.
- Borrowings declined mainly after repayment of $15 million of short-term Zions Bank borrowing. The company reported $13.2 million of available FHLB borrowing capacity at quarter-end; its $16 million correspondent-bank facility was undrawn.
- Non-accruing loans were $1.82 million, nearly unchanged from year-end. Loans past due 90 days or more and still accruing were $1.46 million. Management described overall credit quality as strong and stable. Lending is concentrated in the greater New York metropolitan area, making repayment and collateral values sensitive to regional economic and real-estate conditions.
- Off-balance-sheet credit commitments totaled $108.6 million, up from $98.4 million at year-end. These included unused lines, construction-loan disbursements, home-equity lines, future loan commitments and standby letters of credit.
- Management provided no specific earnings or financial guidance and cautioned that first-quarter results are not necessarily indicative of the rest of 2017. Key risks cited include interest-rate and repricing changes, deposit runoff, competition, regulation, and economic and real-estate conditions in its markets.
- A material weakness previously reported in internal controls over loan-loss allowance calculations involved collateral valuation and qualitative factors. Management reported enhancements to related controls and said disclosure controls were effective at March 31, 2017; investors should distinguish that assessment from confirmation that the prior material weakness has been fully remediated.
- No material change to reported risk factors was identified, apart from the stated potential dilution to remaining shareholders if shares are repurchased above net asset value. The authorized repurchase program ran through July 31, 2017; no shares were repurchased in Q1. The company reported no pending material legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether earnings remain sustainable without the one-time $2.8 million insurance recovery and resulting loan-loss credit.
- Whether loan growth, particularly purchased residential loans, can be funded profitably as deposit costs rise and net interest margin contracts.
- Liquidity trends, deposit mix and concentration, available borrowing capacity, and the ability to fund $108.6 million of commitments if drawn.
- Loan-pool underwriting, credit performance, allowance adequacy, and continued trends in past-due and non-accruing loans.
- Progress in remediating the internal-control material weakness and any subsequent control or regulatory developments.