Patriot National Bancorp, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The company and its subsidiary, Patriot Bank, N.A., are a regional bank operating principally in Connecticut, Westchester County, and New York City. This unaudited report covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance and condition
- Quarterly results: Net income was $0.814 million, or $0.21 per basic and diluted share, versus $0.633 million, or $0.16 per share, in Q3 2015. Pretax income increased 26% to $1.332 million. Interest and dividend income was $6.432 million; net interest income was $5.716 million.
- Nine-month results: Net income was $0.885 million, or $0.22 per share, compared with $1.611 million, or $0.42 basic and $0.41 diluted, in the prior-year period. Pretax income fell 46% to $1.455 million.
- Margins and expenses: Net interest margin improved to 3.85% for Q3 from 3.67% and to 3.79% year to date from 3.63%. Q3 noninterest expense decreased to $4.441 million from $4.753 million; the company attributed the reduction primarily to reversing executive stock-compensation accruals after resignations.
- Credit costs: Provision for loan losses was $0.355 million in Q3 versus none in Q3 2015, and $2.314 million for the first nine months versus $0.250 million. The company attributed the increase mainly to one commercial loan associated with alleged fraud.
- Balance sheet and lending: Total assets were $683.1 million, up 5% from year-end. Gross loans were $560.2 million, up 15.7%; net loans were $552.8 million, up $73.7 million. Construction loans rose from $15.6 million to $48.0 million, while consumer/other loans rose from $47.5 million to $73.9 million. Management said the loan pipeline was strong and expected continued growth.
- Credit quality: The allowance for loan losses was $7.328 million, or 1.3% of gross loans, compared with $5.242 million at year-end. Nonaccrual loans increased to $4.751 million from $1.593 million; five relationships had a specific reserve of approximately $3.2 million. The increase was attributed to one commercial loan, not a broader portfolio trend, according to management. Loans past due over 90 days and still accruing were $1.469 million.
- Deposits, liquidity, and cash flow: Deposits increased 6.0% to $471.2 million, including $57.2 million of brokered deposits. Cash and cash equivalents declined to $45.5 million from $85.4 million, chiefly as loan growth absorbed funds. The liquidity ratio fell to 9.4% from 16.4%; management said short-term assets were adequate for anticipated and unanticipated needs. Nine-month operating cash flow was $4.156 million; investing activities used $72.512 million, and financing activities provided $28.470 million.
- Debt and capital: Borrowings totaled $145.0 million: $135.0 million of FHLB advances, $8.248 million of junior subordinated debt, and a $1.8 million property note. The company’s regulatory capital ratios included 9.72% Tier 1 leverage, 8.99% common equity Tier 1, and 11.60% total risk-based capital. The bank reported 11.59% total risk-based capital and remained well capitalized.
- Equity: Shareholders’ equity was $62.582 million, compared with $61.464 million at year-end. Book and tangible book value per share were reported as $15.80. Shares outstanding were 3,959,903 at September 30.
Material changes, outlook, and risks
- The company reported no formal earnings guidance. Management cited a strong loan pipeline and expected continued loan growth, while cautioning that interim results are not necessarily indicative of full-year results.
- Management said it was pursuing recovery related to the alleged fraud affecting the commercial loan, including insurance coverage under a financial institution bond with a $5.0 million limit above a $50,000 deductible, and potential third-party claims. Recovery is uncertain.
- The CEO and COO resigned effective August 19, 2016; interim replacements were appointed. The CFO had resigned earlier in 2016, and a new CFO was appointed. These departures also contributed to the stock-compensation expense reversal.
- A material weakness in controls over the allowance for loan losses remained unremediated as of September 30. Management concluded disclosure controls and procedures were not effective, citing weaknesses in collateral valuation and monitoring and in qualitative factors used to calculate reserves. The company was implementing corrective controls. A separate prior weakness involving loan prepayment fee accounting was reported as remediated in March 2016.
- The board authorized repurchases of up to 500,000 shares through July 31, 2017, subject to suspension or termination. Repurchases could be made above net asset value and dilute per-share net asset value. The filing reports 518 shares repurchased for $7,000 during the nine-month period.
- Principal disclosed risks include interest-rate and funding sensitivity, regional economic and real-estate conditions affecting borrowers and collateral, competition, regulatory changes, and the judgment involved in loan-loss reserves and deferred tax asset realizability. The company reported no material changes to its other previously disclosed risk factors and no material pending legal proceedings other than routine litigation.
Important facts for investors to verify
- Progress and outcomes of the alleged-fraud loan recovery efforts, including any insurance or third-party recoveries, and the adequacy of the related reserve.
- Whether nonaccrual loans and the allowance for loan losses continue to rise, particularly as the loan portfolio expands.
- Remediation and testing of the allowance-related material weakness, and whether disclosure controls become effective.
- How loan growth is funded, including reliance on brokered deposits and FHLB advances, and the effect on liquidity and net interest margin.
- Execution of the CEO and COO transitions, the permanent CEO appointment, and the scale and pricing of any share repurchases relative to book value.