Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in the Company’s public statements, including this one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to: (1) changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities; (2) the timing of repricing of the Company’s interest earning assets and interest bearing liabilities; (3) the effect of changes in governmental monetary policy; (4) the effect of changes in regulations applicable to the Company and the Bank and the conduct of its business; (5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks; (6) the ability of competitors that are larger than the Company to provide products and services which it is impracticable for the Company to provide; (7) the state of the economy and real estate values in the Company’s market areas, and the consequent effect on the quality of the Company’s loans; (8) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company; (9) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company; (10) the application of generally accepted accounting principles, consistently applied; (11) the fact that one period of reported results may not be indicative of future periods; (12) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and (13) other such factors, including risk factors, as may be described in the Company’s other filings with the SEC. The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019 (the “2018 Form 10-K”) and the consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q.
Although the Company believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets and the valuation of the assets acquired and liabilities assumed in correction with its business combination, as the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2018 Form 10-K for additional information.
Summary
The Company reported net income for the first quarter of 2019 of $323,000 ($0.08 basic and diluted earnings per share) compared to a net income of $1.1 million ($0.27 basic and diluted earnings per share) for the quarter ended March 31, 2018. On a pre-tax basis, the Company earned $491,000 for the three- month period ended March 31, 2019, a decrease of $918,000 compared to $1.4 million for the first quarter of 2018. The decline from the prior year first quarter was due to a decline in net interest income of $719,000 which was primarily due to higher retail deposit rates, the impact of a higher balance of non-performing loans and the impact of interest on subordinated debt added in mid-2018. The first quarter results were also impacted by an increase in operating expenses associated with the build-up of its SBA business, expansion of deposit initiatives, and costs incurred in conjunction with enhancing processes, controls and documentation in response to the Formal Agreement with the OCC.
As previously disclosed, on March 30, 2019 the Company and Hana Small Business Lending Inc. mutually agreed to terminate the purchase agreement between the parties entered into in November 2018. The termination agreement provided for the release of escrowed funds back to the Company. The Company received the escrowed funds on May 9, 2019.
The Company expects operating results to build back up during 2019 as it begins to see increasingly positive results from the expansion of its organic SBA business and deposit raising initiatives. The Company will also continue to be focused on taking all actions necessary to resolve the remaining matters associated with the OCC Formal Agreement.
Financial Condition
As of March 31, 2019, total assets increased to $953.1 million, as compared to $951.7 million at December 31, 2018. Net Loan portfolio increased $7.9 million or 1.0% from $772.8 million at December 31, 2018 to $780.7 million at March 31, 2019. Deposits continued to grow to $752.8 million at March 31, 2019, as compared to $743.3 million at December 31, 2018.
Equity increased $309,000 or 0.4%, from $69.3 million at December 31, 2018 to $69.6 million at March 31, 2019, primarily due to $323,000 of net income and $48,000 of equity compensation, which were offset by $12,000 of investment portfolio unrealized losses and $39,000 common stock dividend payments in the three months period ended March 31, 2019.
Cash and Cash Equivalents
Cash and cash equivalents decreased $9.8 million, from $66.4 million at December 31, 2018 to $56.6 million at March 31, 2019. The decrease in the first quarter of 2019 was primarily attributable to $10.0 million in repayments of FHLB borrowings, $4.8 million cash used for loan purchases and $3.5 million cash outflows for increase in net origination of loans receivable, which was partially offset by a $9.5 million cash increase in deposits.
Investments
The following table is a summary of the Company’s available-for-sale securities portfolio, at fair value, at the dates shown:
(In thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
Increase /
(Decrease)
|
|
|
Increase /
(Decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
($)
|
|
|
(%)
|
|
U. S. Government agency mortgage-backed securities
|
|
$
|
19,976
|
|
|
|
20,473
|
|
|
|
(497
|
)
|
|
|
-2.43
|
%
|
Corporate bonds
|
|
|
12,828
|
|
|
|
12,974
|
|
|
|
(146
|
)
|
|
|
-1.13
|
%
|
Subordinated notes
|
|
|
5,980
|
|
|
|
4,564
|
|
|
|
1,416
|
|
|
|
31.03
|
%
|
U.S. Treasury notes
|
|
|
1,491
|
|
|
|
1,485
|
|
|
|
6
|
|
|
|
0.40
|
%
|
Total Available-for-Sale Securities
|
|
$
|
40,275
|
|
|
|
39,496
|
|
|
|
779
|
|
|
|
1.97
|
%
|
Available-for-sale securities increased $779,000 or 1.97%, from $39.5 million at December 31, 2018 to $40.3 million at March 31, 2019. This increase was primarily attributable to the purchases of $1.4 million in subordinated notes, which was offset by $613,000 in repayments of principal on U.S. Government agency mortgage-backed securities. There were no sales of available-for sales securities in the three month period ended March 31, 2019.
Loans
The following table provides the composition of the Company’s loan portfolio as of March 31, 2019 and December 31, 2018:
(In thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
291,556
|
|
|
|
36.97
|
%
|
|
|
274,938
|
|
|
|
35.23
|
%
|
Residential Real Estate
|
|
|
159,985
|
|
|
|
20.29
|
%
|
|
|
157,300
|
|
|
|
20.16
|
%
|
Commercial and Industrial
|
|
|
177,866
|
|
|
|
22.56
|
%
|
|
|
191,852
|
|
|
|
24.58
|
%
|
Consumer and Other
|
|
|
95,755
|
|
|
|
12.14
|
%
|
|
|
94,569
|
|
|
|
12.12
|
%
|
Construction
|
|
|
45,356
|
|
|
|
5.75
|
%
|
|
|
46,040
|
|
|
|
5.90
|
%
|
Construction to permanent - CRE
|
|
|
18,018
|
|
|
|
2.29
|
%
|
|
|
15,677
|
|
|
|
2.01
|
%
|
Loans receivable, gross
|
|
|
788,536
|
|
|
|
100.00
|
%
|
|
|
780,376
|
|
|
|
100.00
|
%
|
Allowance for loan losses
|
|
|
(7,823
|
)
|
|
|
|
|
|
|
(7,609
|
)
|
|
|
|
|
Loans receivable, net
|
|
$
|
780,713
|
|
|
|
|
|
|
|
772,767
|
|
|
|
|
|
The Company’s gross loan portfolio increased $8.1 million, or 1.0%, from $780.4 million at December 31, 2018 to $788.5 million at March 31, 2019. The increase in loans was primarily attributable to $4.8 million in purchases of loans receivable and net increase in originated loans receivable in the first quarter of 2019. As of March 31, 2019, the loan pipeline is strong. The Company will continue to add to the product lines and enhance service offerings to customers.
At March 31, 2019, the net loan to deposit ratio was 104% and the net loan to total assets ratio was 82%. At December 31, 2018, these ratios were 104% and 81%, respectively.
Allowance for
L
oan and
L
ease
L
osses
The allowance for loan and lease losses increased $214,000 or 2.8% from $7.6 million at December 31, 2018 to $7.8 million at March 31, 2019. The increase was primarily attributable to $165,000 in provision for all loan categories and $47,000 in recoveries in commercial and industrial loans.
The overall credit quality of the loan portfolio is stable. Based upon the overall assessment and evaluation of the loan portfolio at March 31, 2019, management believes $7.8 million in the allowance for loan and lease losses, which represented 1.0% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.
The following table provides detail of activity in the allowance for loan and lease losses for business activities loans:
|
|
March 31,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
7,609
|
|
|
|
6,297
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
-
|
|
|
|
-
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
3
|
|
Commercial and Industrial
|
|
|
47
|
|
|
|
-
|
|
Consumer and Other
|
|
|
2
|
|
|
|
-
|
|
Total recoveries
|
|
|
49
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net recoveries
|
|
|
49
|
|
|
|
3
|
|
Provision charged to earnings
|
|
|
165
|
|
|
|
185
|
|
Balance at end of the period
|
|
$
|
7,823
|
|
|
|
6,485
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Net recoveries to average loans
|
|
|
0.006
|
%
|
|
|
0.000
|
%
|
Allowance for loan losses to total loans
|
|
|
0.99
|
%
|
|
|
0.90
|
%
|
The following table provides an allocation of allowance for loan and lease losses by portfolio segment and the percentage of the loans to total loans:
(In thousands)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Allowance
for loan
losses
|
|
|
% of
loans
|
|
|
Allowance
for loan
losses
|
|
|
% of
loans
|
|
Commercial Real Estate
|
|
$
|
1,862
|
|
|
|
36.97
|
%
|
|
|
1,866
|
|
|
|
35.23
|
%
|
Residential Real Estate
|
|
|
1,389
|
|
|
|
20.29
|
%
|
|
|
1,059
|
|
|
|
20.16
|
%
|
Commercial and Industrial
|
|
|
3,490
|
|
|
|
22.56
|
%
|
|
|
3,558
|
|
|
|
24.58
|
%
|
Consumer and Other
|
|
|
592
|
|
|
|
12.14
|
%
|
|
|
641
|
|
|
|
12.12
|
%
|
Construction
|
|
|
355
|
|
|
|
5.75
|
%
|
|
|
350
|
|
|
|
5.90
|
%
|
Construction to permanent - CRE
|
|
|
123
|
|
|
|
2.29
|
%
|
|
|
108
|
|
|
|
2.01
|
%
|
Unallocated
|
|
|
12
|
|
|
|
N/A
|
|
|
|
27
|
|
|
|
N/A
|
|
Total
|
|
$
|
7,823
|
|
|
|
100.00
|
%
|
|
|
7,609
|
|
|
|
100.00
|
%
|
Non-performing Assets
The following table presents non-performing assets as of March 31, 2019 and December 31, 2018:
(In thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Non-accruing loans:
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
10,953
|
|
|
|
3,525
|
|
Residential Real Estate
|
|
|
3,473
|
|
|
|
2,006
|
|
Commercial and Industrial
|
|
|
4,632
|
|
|
|
4,681
|
|
Consumer and Other
|
|
|
172
|
|
|
|
174
|
|
Construction
|
|
|
8,800
|
|
|
|
8,800
|
|
Total non-accruing loans
|
|
|
28,030
|
|
|
|
19,186
|
|
|
|
|
|
|
|
|
|
|
Loans past due over 90 days and still accruing
|
|
|
1,316
|
|
|
|
1,316
|
|
Other real estate owned
|
|
|
2,945
|
|
|
|
2,945
|
|
Total nonperforming assets
|
|
$
|
32,291
|
|
|
|
23,447
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
|
|
|
3.39
|
%
|
|
|
2.46
|
%
|
Nonperforming loans to total loans, net
|
|
|
3.76
|
%
|
|
|
2.65
|
%
|
The $28.0 million of non-accrual loans at March 31, 2019 was comprised of 27 relationships, for which a specific reserve of $1.6 million has been established.
The Company has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment.
The $19.2 million of non-accrual loans at December 31, 2018 was comprised of 23 borrowers, for which a specific reserve of $1.5 million had been established.
Deferred Taxes
Deferred tax assets decreased $494,000, from $10.9 million at December 31, 2018 to $10.4 million at March 31, 2019. The decrease in deferred tax assets resulted primarily from the impact of transaction costs and reclassification of prior year alternative minimum tax credits to refundable tax credits included with other assets.
Our effective tax rate for the three-month period ended March 31, 2019 was 34%, compared to the effective tax rate of 24% for the three-month period ended March 31, 2018. The Company’s effective rates for both periods were affected primarily by state taxes and non-deductible expenses.
Patriot anticipates utilizing the net operating loss carry forwards to reduce income taxes otherwise payable on current year taxable income and net unrealized gains on the investment portfolio to the net operating loss carry forward.
The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that a portion of the deferred tax assets will not be realized, a valuation allowance will be established.
Deposits
The following table is a summary of the Company’s deposits at the dates shown:
(In thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
Inc/(Dec)
|
|
|
Inc/(Dec)
|
|
|
|
2019
|
|
|
2018
|
|
|
($)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
82,248
|
|
|
|
84,471
|
|
|
|
(2,223
|
)
|
|
|
(2.63
|
)%
|
Interest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
|
24,924
|
|
|
|
26,100
|
|
|
|
(1,176
|
)
|
|
|
(4.51
|
)%
|
Savings
|
|
|
67,708
|
|
|
|
81,912
|
|
|
|
(14,204
|
)
|
|
|
(17.34
|
)%
|
Money market
|
|
|
88,493
|
|
|
|
85,197
|
|
|
|
3,296
|
|
|
|
3.87
|
%
|
Certificates of deposit, less than $250,000
|
|
|
217,701
|
|
|
|
203,683
|
|
|
|
14,018
|
|
|
|
6.88
|
%
|
Certificates of deposit, $250,000 or greater
|
|
|
88,953
|
|
|
|
78,318
|
|
|
|
10,635
|
|
|
|
13.58
|
%
|
Brokered deposits
|
|
|
182,794
|
|
|
|
183,600
|
|
|
|
(806
|
)
|
|
|
(0.44
|
)%
|
Total Interest bearing
|
|
|
670,573
|
|
|
|
658,810
|
|
|
|
11,763
|
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
752,821
|
|
|
|
743,281
|
|
|
|
9,540
|
|
|
|
1.28
|
%
|
Deposits increased $9.5 million or 1.3%, from $743.3 million at December 31, 2018 to $752.8 million at March 31, 2019, resulting from an increase of $24.6 million in certificates of deposits and $3.2 million in money market deposits partially offset by a decline of $14.2 million in savings deposits as stronger more competitive rates offered in the CD and money market products attracted net new deposit balances.
Borrowings
Total borrowings were $121.0 million and $131.0 million as of March 31, 2019 and December 31, 2018, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable.
Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. As of March 31, 2019, the Bank had $60.1 million of available borrowing capacity from the FHLB-B.
FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. At March 31, 2019 and December 31, 2018, outstanding advances from the FHLB-B aggregated $90.0 million and $100.0 million, respectively. $30.0 million advances outstanding at March 31, 2019 bore fixed rates of interest ranging from 3.01% to 3.2% with maturities ranging from 2.3 years to 2.6 years.
$60.0 million advances from the FHLB-B with a weighted average interest rate of 1.4% are callable in the second half of 2019 and up to October 2020. During their initial term (one or two years), each of these advances carries a floating rate from 100 basis points to 200 basis points below LIBOR. After the initial term, the rates reset to fixed rates between 3.47% and 4.23%, per annum, and the borrowing can be called by the FHLB-B on a quarterly basis.
At March 31, 2018, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $251.5 million.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. At March 31, 2019 and December 31, 2018, no funds had been borrowed under the line of credit.
Interest expenses incurred for the three months ended March 31, 2019 and 2018 were $439,000 and $257,000, respectively.
Correspondent Bank - Line of Credit
Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent Banks. Borrowings available under the agreements totaled $5 million at March 31, 2019 and $26 million at December 31, 2018. The purpose of the agreement is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions.
There was no outstanding balance under the agreements at March 31, 2019 and December 31, 2018. No interest expenses incurred for the three months ended March 31, 2019 and 2018.
Senior notes
On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 22 and December 22 of each year beginning on June 22, 2017.
In connection with the issuance of the Senior Notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. At March 31, 2019 and December 31, 2018, $204,000 and $222,000 of unamortized debt issuance costs were deducted from the face amount of the Senior Notes included in the Consolidated Balance Sheet, respectively.
The Senior Notes contain affirmative covenants that require the Company to: maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements. The Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity.
For the three months ended March 31, 2019 and 2018, the Company recognized interest expense of $229,000 and $229,000, respectively.
Subordinated notes
On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.
The Subordinated Notes will initially bear interest at 6.25% per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning on June 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes. Interest on the Subordinated Notes is payable beginning on December 30, 2018.
In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At March 31, 2019, $269,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the Consolidated Balance Sheet.
For the three months ended March 31, 2019 and 2018, the Company recognized interest expense of $168,000 and $0, respectively.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The proceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.
Trust preferred securities currently qualify for up to 25% of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.
The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.
The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (5.76% at March 31, 2019) and mature on March 26, 2033, at which time the principal amount borrowed will be due. The placement fee of $240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As of March 31, 2019 and December 31, 2018, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $152,000 and $152,000, respectively, and accrued interest on the junior subordinated debentures was $8,000 and $8,000, respectively.
For the three months ended March 31, 2019 and 2018, the Company recognized interest expense of $121,000 and $99,000 respectively.
At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.
Note Payable
In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of March 31, 2019 and December 31, 2018, the note had a balance outstanding of $1.3 million and $1.4 million, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.
For the three months ended March 31, 2019 and 2018, the Company recognized interest expense of $6,000 and $7,000 respectively.
Equity
Equity increased $309,000, from $69.3 million at December 31, 2018 to $69.6 million at March 31, 2019, primarily due to $323,000 of net income and $48,000 of equity compensation, which were offset by $12,000 of investment portfolio unrealized losses and $39,000 of common stock dividend payments in the three months period ended March 31, 2019.
Off-Balance Sheet Commitments
The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, decreased $53.5 million from $179.7 million at December 31, 2018 to $126.2 million at March 31, 2019.
Derivatives
In 2018, Patriot entered into two interest rate swaps (“swaps”), one with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan, and another with an outside third party. The customer interest rate swap is matched in offsetting terms to the third party interest rate swap. These two swaps are reported at fair value in other assets or other liabilities. Patriot’s swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. No net gain was recognized on the swaps for the three months ended March 31, 2019.
Further discussion of the fair value of derivatives is set forth in Note 11 to the Consolidated Financial Statements.
RESULTS OF
OPERATIONS
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended March 31, 2019 and 2018:
(In thousands)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Daily
Average
Balance ($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
|
Daily
Average
Balance ($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
784,137
|
|
|
|
9,741
|
|
|
|
5.04
|
|
|
|
726,688
|
|
|
|
8,774
|
|
|
|
4.90
|
|
Investments
|
|
|
52,829
|
|
|
|
503
|
|
|
|
3.81
|
|
|
|
38,496
|
|
|
|
387
|
|
|
|
4.08
|
|
Cash equivalents and other
|
|
|
59,217
|
|
|
|
327
|
|
|
|
2.24
|
|
|
|
41,440
|
|
|
|
151
|
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
896,183
|
|
|
|
10,571
|
|
|
|
4.78
|
|
|
|
806,624
|
|
|
|
9,312
|
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
7,305
|
|
|
|
|
|
|
|
|
|
|
|
3,897
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,592
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,383
|
)
|
|
|
|
|
|
|
|
|
OREO
|
|
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
59,243
|
|
|
|
|
|
|
|
|
|
|
|
50,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
958,084
|
|
|
|
|
|
|
|
|
|
|
|
855,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
675,851
|
|
|
|
3,264
|
|
|
|
1.96
|
|
|
|
571,134
|
|
|
|
1,657
|
|
|
|
1.18
|
|
Borrowings
|
|
|
90,667
|
|
|
|
439
|
|
|
|
1.96
|
|
|
|
120,000
|
|
|
|
257
|
|
|
|
0.87
|
|
Senior notes
|
|
|
11,785
|
|
|
|
229
|
|
|
|
7.77
|
|
|
|
11,711
|
|
|
|
229
|
|
|
|
7.93
|
|
Subordinated debt
|
|
|
17,820
|
|
|
|
289
|
|
|
|
6.58
|
|
|
|
8,087
|
|
|
|
99
|
|
|
|
4.96
|
|
Note Payable and other
|
|
|
1,357
|
|
|
|
6
|
|
|
|
1.79
|
|
|
|
1,547
|
|
|
|
7
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
797,480
|
|
|
|
4,227
|
|
|
|
2.15
|
|
|
|
712,479
|
|
|
|
2,249
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
81,224
|
|
|
|
|
|
|
|
|
|
|
|
71,540
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,173
|
|
|
|
|
|
|
|
|
|
|
|
3,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
887,877
|
|
|
|
|
|
|
|
|
|
|
|
787,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
70,207
|
|
|
|
|
|
|
|
|
|
|
|
67,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
958,084
|
|
|
|
|
|
|
|
|
|
|
|
855,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
6,344
|
|
|
|
|
|
|
|
|
|
|
|
7,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest margin
|
|
|
|
|
|
|
|
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
3.55
|
|
Interest spread
|
|
|
|
|
|
|
|
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
3.40
|
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-bearing assets and interest-bearing liabilities for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019 compared to 2018
|
|
(In thousands)
|
|
Increase/(Decrease)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
695
|
|
|
|
272
|
|
|
|
967
|
|
Investments
|
|
|
151
|
|
|
|
(35
|
)
|
|
|
116
|
|
Cash equivalents and other
|
|
|
62
|
|
|
|
114
|
|
|
|
176
|
|
Total interest earning assets
|
|
|
908
|
|
|
|
351
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
|
|
|
389
|
|
|
|
1,218
|
|
|
|
1,607
|
|
Borrowings
|
|
|
(63
|
)
|
|
|
245
|
|
|
|
182
|
|
Senior notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debt
|
|
|
168
|
|
|
|
22
|
|
|
|
190
|
|
Note payable and other
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Total interest bearing liabilities
|
|
|
493
|
|
|
|
1,485
|
|
|
|
1,978
|
|
Net interest income
|
|
$
|
415
|
|
|
|
(1,134
|
)
|
|
|
(719
|
)
|
For the quarter ended March 31, 2019, interest income increased $1.3 million or 13.5% as compared to the quarter ended March 31, 2018, as focused growth and diversification in the loan portfolio yielded an increase in interest income. Average loan balances increased $57.4 million or 8% as compared to the quarter ended March 31, 2018. Total interest expense increased $2.0 million or 88% as compared to the quarter ended March 31, 2018, primarily driven by an increase of $1.6 million in deposit interests due to higher deposit rates, an increase of $182,000 in interest on borrowings, and an increase of $190,000 in subordinated debt interest.
Net interest income was $6.3 million for the quarter ended March 31, 2019, which decreased 10% from $7.1 million for the quarter ended March 31, 2018. Net interest margin for the quarter ended March 31, 2019 and 2018, were 2.87% and 3.55%, respectively. The decline in net interest margin reflects the impact of increasing deposit costs associated with higher rates paid on retail deposits, the impact of non-accrual and reduced rate loans,an increased reliance on more expensive wholesale funding sources, and the impact of the subordinated debt issued June 30, 2018.
Provision for Loan Losses
The provision for loan losses for three months ended March 31, 2019 was $165,000, which was consistent with $185,000 for the three months ended March 31, 2018.
Non-interest income
Non-interest income increased $500,000 from $322,000 for the quarter ended March 31, 2018 to $822,000 for the quarter ended March 31, 2019. The increase was primarily attributable to a gain of $456,000 on sale of SBA loans in the first quarter of 2019. The gain on sale represents a net 6.4% gain on $7.1 million of loans sold in the quarter.
Non-interest expense
Non-interest expense increased $719,000 from $5.8 million for the quarter ended March 31, 2018 to $6.5 million for the quarter ended March 31, 2019, which was primarily driven by increase of $415,000 in salaries and benefits, $211,000 in other operating expenses, $199,000 in professional and other outside services, and $176,000 in occupancy and equipment expenses, due to continued expansion of the Bank’s business activities. The increases were partially offset by reduction of $443,000 in non-recurring merger and tax initiative project expenses.
The increase in salaries and benefits reflects the build-up of the SBA team, additional costs associated with the Prime acquisition, and increased headcount supporting new deposit initiatives and expansion of credit, finance and compliance support functions.
The increase in professional and outside service fees included the impact of costs incurred with SBA origination and sale and additional expenses associated with the expansion of deposit raising initiatives and resolution of documentation and policy matters.
The increase in other operating expense primarily due to increase of $76,000 in OREO expenses.
Provision for income taxes
The provision for income taxes for three months ended March 31, 2019 and 2018 were $168,000 and $344,000, respectively. The decrease mainly reflected the lower pre-tax income.
Liquidity
The Company’s balance sheet liquidity to total assets ratio was 9.7% at March 31, 2019, compared to 10.7% at December 31, 2018. Liquidity including readily available off balance sheet funding sources was 16.7% at March 31, 2019, compared to 19.4% at December 31, 2018. The Company’s available total liquidity (readily available plus brokered deposit availability) to total assets ratio was 21.2% at March 31, 2019, compared to 23.7% at December 31, 2018.
The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any) and unpledged available-for-sale securities. In addition, off balance sheet funding sources include collateral based borrowing available from the FHLB, correspondent bank borrowing lines, and brokered deposits subject to internal limitations.
Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements.
Capital
The following table illustrates the Company’s and the Bank’s regulatory capital ratios as of March 31, 2019 and December 31, 2018:
|
|
Patriot National Bancorp, Inc.
|
|
|
Patriot Bank, N.A.
|
|
(In thousands)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
Total Capital (to risk weighted assets)
|
|
|
91,489
|
|
|
|
10.332
|
|
|
|
90,722
|
|
|
|
10.452
|
|
|
|
101,239
|
|
|
|
11.908
|
|
|
|
99,341
|
|
|
|
11.500
|
|
Tier 1 Capital (to risk weighted assets)
|
|
|
73,654
|
|
|
|
8.318
|
|
|
|
73,101
|
|
|
|
8.422
|
|
|
|
93,404
|
|
|
|
10.987
|
|
|
|
91,720
|
|
|
|
10.618
|
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
65,654
|
|
|
|
7.415
|
|
|
|
65,101
|
|
|
|
7.500
|
|
|
|
93,404
|
|
|
|
10.987
|
|
|
|
91,720
|
|
|
|
10.618
|
|
Tier 1 Leverage Capital (to average assets)
|
|
|
73,654
|
|
|
|
7.721
|
|
|
|
73,101
|
|
|
|
7.842
|
|
|
|
93,404
|
|
|
|
9.789
|
|
|
|
91,720
|
|
|
|
9.838
|
|
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have a leverage capital ratio of at least 5.0%, CET1 capital ratio at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10%. However, the OCC has the discretion to require increased capital ratios.
Under the final capital rules that became effective on January 1, 2015, there is a requirement for a CET1 Capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.
The capital buffer requirement is being phased in over three years beginning in 2016. The 1.875% capital conversation buffer for 2018 has been included in the minimum capital adequacy ratios in the 2018 column in the table above. The capital conversation buffer increased to 2.5% for 2019, which has been included in the minimum capital adequacy ratios in the 2019 column above.
The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 Capital ratio to 8.5%, and the CET1 Capital ratio to 7.0% on a fully phased-in basis, which was effective on January 1, 2019. Management believes that, as of March 31, 2019, Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.
Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.
IMPACT OF INFLATION AND CHANGING PRICES
The Company’s Consolidated Financial Statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, deflation or disinflation could significantly affect the Company’s earnings in future periods.
Stock Repurchase Program
No shares of Patriot’s common stock were repurchased during the three months period ended March 31, 2019.