Patriot National Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; financial amounts below are in U.S. dollars. The company is a Connecticut-based bank holding company operating principally in Fairfield and New Haven Counties, Connecticut, and Westchester County, New York.
Financial performance and condition
- Profit: Net income was $289,000, or $0.07 per diluted share, versus $319,000, or $0.08 per share, in Q1 2014. Pretax income rose 53.6% to $490,000, but Q1 2015 included $201,000 of income tax expense; Q1 2014 had no tax expense or benefit.
- Interest income and margins: Net interest income increased 27.5% to $5.077 million. Net interest margin was 3.49%, versus 3.25% a year earlier (3.35% in Q1 2014 excluding a one-time subordinated-debt interest charge, per management).
- Other income and costs: Noninterest income declined to $394,000 from $593,000, including the loss of $121,000 of bank-owned life insurance income after policies were liquidated in December 2014. Noninterest expense rose 10.5% to $4.731 million, largely from higher salaries and professional services.
- Balance sheet: Total assets were $647.1 million, up 2.3% from year-end 2014. Gross loans grew 4.7% to $499.4 million; net loans were $494.2 million. Commercial real estate loans were $281.4 million, the largest portfolio category.
- Credit quality: The allowance for loan losses was $5.193 million, or 1.04% of gross loans, versus $4.924 million, or 1.30%, at year-end. The quarter included a $250,000 provision and $19,000 of net recoveries. Nonaccrual loans were $515,000; loans over 90 days past due and still accruing were $1.537 million. Total nonaccrual and over-90-day accruing loans were 0.41% of total loans, down from 0.57% at year-end. Management attributed the allowance increase primarily to loan growth, not credit deterioration.
- Deposits and liquidity: Deposits increased $14.1 million to $457.1 million, including a $17.5 million increase in brokered deposits to $48.2 million. Cash and cash equivalents fell $7.3 million to $66.0 million as loan growth exceeded deposit growth. The reported liquidity ratio decreased to 14.2% from 15.6%; management said short-term assets were sufficient for anticipated and unanticipated needs. Net loans were 108% of deposits.
- Cash flow: Operating activities provided $1.078 million, compared with $255,000 a year earlier. Investing activities used $22.452 million, principally reflecting a $22.698 million increase in loans; financing activities provided $14.074 million, mainly from deposit growth. Cash and cash equivalents declined by $7.3 million during the quarter.
- Debt and capital: Borrowings totaled $128.2 million: $120 million of FHLB advances and $8.2 million of junior subordinated debt. FHLB advances had a 0.27% weighted-average rate and maturities under six months. The subordinated debt bears interest at three-month LIBOR plus 3.15%; the company had deferred interest payments at its option, with $212,000 of interest owed at quarter-end. Company regulatory capital ratios included 9.23% Tier 1 leverage, 10.03% Common Equity Tier 1, and 12.72% total risk-based capital; the filing states current ratios exceeded fully phased-in Basel III minimums.
Changes, outlook, and risks
- Growth in average loan balances was the principal contributor to higher interest income and net interest income. Lower deposit rates and a prior-year subordinated-debt interest catch-up also reduced interest expense year over year.
- Management provided no specific earnings or growth guidance and cautioned that interim results are not necessarily indicative of full-year results. It said future revenue, spreads, and yields cannot be reliably predicted.
- Key risks include interest-rate changes and repricing timing, regional economic and real-estate conditions affecting borrowers and collateral, competition, and regulatory or accounting changes. Management identifies the loan-loss allowance, investment-security valuations, and deferred-tax-asset valuation as critical estimates.
- The company reported a $14.6 million deferred tax asset and said it would continue to assess realizability; a future valuation allowance could be required if evidence indicates some amount will not be realized. Available-for-sale securities had $186,000 of unrealized losses; management did not consider them other-than-temporary.
- Off-balance-sheet credit commitments and standby letters of credit totaled $67.9 million; the company recorded a $5,000 reserve for these commitments. The filing reports no material change in risk factors and no material pending legal proceedings beyond routine litigation.
- The filing lists termination of the bank’s Federal Reserve Bank of New York formal written agreement in an April 27, 2015 Form 8-K exhibit, after quarter-end; it also lists the OCC agreement’s termination in October 2014. The company reported effective disclosure controls and no material change in internal controls during Q1.
- A 1-for-10 reverse stock split took effect March 4, 2015; share and per-share data were restated. The quarter’s results are unaudited.
Important facts for investors to verify
- Whether commercial real estate concentration and rapid loan growth are matched by underwriting quality, collateral values, and subsequent credit performance.
- Whether the $48.2 million brokered-deposit balance and short-term FHLB funding remain available and affordable as loans grow; also review liquidity trends and the 108% net loan-to-deposit ratio.
- Whether deferred subordinated-debt interest is paid or continues to accrue, and the implications of the $212,000 owed at quarter-end.
- Whether the deferred tax asset remains realizable and how recurring tax expense affects reported earnings.
- The effect of interest-rate changes on net interest income and economic value: the filing’s simulation estimates net portfolio value falls 10.7% under a 200-basis-point increase, while management cautions that such simulations depend on assumptions.
- The status and terms of the Federal Reserve agreement termination disclosed after quarter-end, and continued compliance with regulatory requirements.