UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended September 30, 2016transition period from ______ to ______
Commission file number 000-29599
PATRIOT NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut | 06-1559137 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
|
| |
900 Bedford Street, Stamford, Connecticut |
| 06901 |
( | ( |
900 Bedford Street, Stamford, Connecticut 06901
(Address of principal executive offices)
(203) 324-7500
(Registrant(Registrant’s’s telephone number)number, including area code)
Check
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
days. Yes X No_____☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No_____☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Large Accelerated Filer ____ Accelerated Filer ____ Non-Accelerated Filer_Smaller Reporting Company _ X_ ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
.Yes ☐ No X ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
StateIndicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common equity,stock, as of the latest practicable date.
Common stock, $0.01 par value per share, 3,959,903As of November 6, 2017, there were 3,895,720 shares outstanding as of the close of business November 11, 2016.registrant’s common stock outstanding.
Table of Contents
Table of Contents | 2 | |
PART I- FINANCIAL INFORMATION | 3 | |
Item 1: Consolidated Financial Statements | 3 | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
Note to Consolidated Financial Statements (Unaudited) | 8 | |
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations |
| |
Item 3: Quantitative and Qualitative Disclosures about Market Risk |
| |
Item 4: Disclosure Controls and Procedures |
| |
PART II - OTHER |
| |
Item 1: | Legal Proceedings | |
Item 1A: | Risk Factors |
|
Item 6: | Exhibits | |
SIGNATURES |
|
PART I- FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CCONSOLIDATEDONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2016 | December 31, 2015 | |||||||
(in thousands, except shares and per share amounts) | ||||||||
ASSETS | ||||||||
Cash and due from banks: | ||||||||
Noninterest bearing deposits and cash | $ | 2,454 | 2,588 | |||||
Interest bearing deposits | 43,060 | 82,812 | ||||||
Total cash and cash equivalents | 45,514 | 85,400 | ||||||
Securities: | ||||||||
Available for sale securities, at fair value (Note 2) | 23,374 | 29,377 | ||||||
Other Investments | 4,450 | 4,450 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock, at cost | 7,818 | 8,645 | ||||||
Total securities | 35,642 | 42,472 | ||||||
Loans receivable (net of allowance for loan losses: 2016: $7,328; 2015: $5,242) (Note 3) | 552,822 | 479,127 | ||||||
Premises and equipment, net | 30,850 | 29,421 | ||||||
Cash surrender value of life insurance | - | - | ||||||
Other real estate owned | 851 | - | ||||||
Accrued interest and dividends receivable | 2,308 | 2,010 | ||||||
Deferred tax asset (Note 7) | 13,340 | 13,763 | ||||||
Other assets | 1,759 | 1,338 | ||||||
Total assets | $ | 683,086 | 653,531 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits (Note 5): | ||||||||
Noninterest bearing deposits | $ | 77,304 | 85,812 | |||||
Interest bearing deposits | 393,881 | 358,868 | ||||||
Total deposits | 471,185 | 444,680 | ||||||
Borrowings: | ||||||||
Federal Home Loan Bank borrowings (Note 9) | 135,000 | 132,000 | ||||||
Junior subordinated debt owed to unconsolidated trust (Note 9) | 8,248 | 8,248 | ||||||
Note Payable (Note 9) | 1,800 | 1,939 | ||||||
Advances from borrowers for taxes and insurance | 1,478 | 2,367 | ||||||
Accrued expenses and other liabilities | 2,793 | 2,833 | ||||||
Total liabilities | 620,504 | 592,067 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Shareholders' equity | ||||||||
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $.01 par value, 100,000,000 shares authorized; 3,961,591 and 3,957,377shares issued; 3,959,903 and 3,956,207 shares outstanding; at September 30, 2016 andDecember 31, 2015, respectively | 40 | 40 | ||||||
Additional paid-in capital | 106,694 | 106,568 | ||||||
Accumulated deficit | (43,947 | ) | (44,832 | ) | ||||
Less: Treasury stock, at cost: 1,688 and 1,170 shares held at September 30, 2016 andDecember 31, 2015, respectively | (167 | ) | (160 | ) | ||||
Accumulated other comprehensive loss | (38 | ) | (152 | ) | ||||
Total shareholders' equity | 62,582 | 61,464 | ||||||
Total liabilities and shareholders' equity | $ | 683,086 | 653,531 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Interest and Dividend Income | ||||||||||||||||
Interest and fees on loans | $ | 6,188 | 5,879 | 17,811 | 17,349 | |||||||||||
Interest on investment securities | 131 | 115 | 405 | 350 | ||||||||||||
Dividends on investment securities | 88 | 85 | 264 | 202 | ||||||||||||
Other interest income | 25 | 30 | 94 | 76 | ||||||||||||
Total interest and dividend income | 6,432 | 6,109 | 18,574 | 17,977 | ||||||||||||
Interest Expense | ||||||||||||||||
Interest on deposits | 549 | 498 | 1,518 | 1,540 | ||||||||||||
Interest on Federal Home Loan Bank borrowings | 73 | 90 | 258 | 246 | ||||||||||||
Interest on subordinated debt | 85 | 74 | 250 | 218 | ||||||||||||
Interest on other borrowings | 9 | 3 | 25 | 3 | ||||||||||||
Total interest expense | 716 | 665 | 2,051 | 2,007 | ||||||||||||
Net interest income | 5,716 | 5,444 | 16,523 | 15,970 | ||||||||||||
Provision for Loan Losses | 355 | - | 2,314 | 250 | ||||||||||||
Net interest income after provision for loan losses | 5,361 | 5,444 | 14,209 | 15,720 | ||||||||||||
Non-Interest Income | ||||||||||||||||
Loan application, inspection & processing fees | 64 | 16 | 152 | 171 | ||||||||||||
Fees and service charges | 150 | 148 | 451 | 469 | ||||||||||||
Rental Income | 104 | 107 | 311 | 305 | ||||||||||||
Other income | 94 | 91 | 273 | 262 | ||||||||||||
Total non-interest income | 412 | 362 | 1,187 | 1,207 | ||||||||||||
Non-Interest Expense | ||||||||||||||||
Salaries and benefits | 2,169 | 2,245 | 7,334 | 6,984 | ||||||||||||
Occupancy and equipment expense | 783 | 814 | 2,313 | 2,678 | ||||||||||||
Data processing expense | 288 | 298 | 814 | 803 | ||||||||||||
Advertising and promotional expenses | 128 | 329 | 341 | 516 | ||||||||||||
Professional and other outside services | 409 | 322 | 1,182 | 1,282 | ||||||||||||
Loan administration and processing expenses | 14 | 8 | 30 | 37 | ||||||||||||
Regulatory assessments | 159 | 140 | 453 | 451 | ||||||||||||
Insurance expense | 57 | 79 | 168 | 243 | ||||||||||||
Material and communications | 106 | 95 | 314 | 282 | ||||||||||||
Other operating expenses | 328 | 423 | 992 | 967 | ||||||||||||
Total non-interest expense | 4,441 | 4,753 | 13,941 | 14,243 | ||||||||||||
Income before income taxes | 1,332 | 1,053 | 1,455 | 2,684 | ||||||||||||
Expense for income taxes | 518 | 420 | 570 | 1,073 | ||||||||||||
Net income | $ | 814 | 633 | 885 | 1,611 | |||||||||||
Basic income per share (1) | $ | 0.21 | 0.16 | 0.22 | 0.42 | |||||||||||
Diluted income per share (1) | $ | 0.21 | 0.16 | 0.22 | 0.41 |
(1) All common stock data has been restated for a 1-for-10 reverse stock split which took effect on March 4, 2015.
(In thousands, except share data) | September 30, | December 31, | ||||||
ASSETS | ||||||||
Cash and due from banks: | ||||||||
Noninterest bearing deposits and cash | $ | 3,337 | 2,596 | |||||
Interest bearing deposits | 25,075 | 89,693 | ||||||
Total cash and cash equivalents | 28,412 | 92,289 | ||||||
Investment securities: | ||||||||
Available-for-sale securities, at fair value | 29,586 | 24,428 | ||||||
Other investments, at cost | 4,450 | 4,450 | ||||||
Total investment securities | 34,036 | 28,878 | ||||||
Federal Reserve Bank stock, at cost | 2,460 | 2,109 | ||||||
Federal Home Loan Bank stock, at cost | 6,353 | 5,609 | ||||||
Loans receivable (net of allowance for loan losses: 2017: $6,222, 2016: $4,675) | 703,896 | 576,982 | ||||||
Accrued interest and dividends receivable | 3,501 | 2,726 | ||||||
Premises and equipment, net | 34,713 | 32,759 | ||||||
Other real estate owned | 851 | 851 | ||||||
Deferred tax asset | 10,686 | 12,632 | ||||||
Other assets | 1,823 | 1,819 | ||||||
Total assets | $ | 826,731 | 756,654 | |||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest bearing deposits | $ | 76,875 | 76,772 | |||||
Interest bearing deposits | 528,539 | 452,552 | ||||||
Total deposits | 605,414 | 529,324 | ||||||
Federal Home Loan Bank and correspondent bank borrowings | 130,000 | 138,000 | ||||||
Senior notes, net | 11,684 | 11,628 | ||||||
Junior subordinated debt owed to unconsolidated trust | 8,085 | 8,079 | ||||||
Note payable | 1,627 | 1,769 | ||||||
Advances from borrowers for taxes and insurance | 1,799 | 2,676 | ||||||
Accrued expenses and other liabilities | 1,812 | 2,608 | ||||||
Total liabilities | 760,421 | 694,084 | ||||||
Commitments and Contingencies | ||||||||
Shareholders' equity | ||||||||
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $.01 par value, 100,000,000 shares authorized; 2017: 3,969,461 shares issued; 3,895,720 shares outstanding. 2016: 3,965,538 shares issued; 3,891,897 shares outstanding | 40 | 40 | ||||||
Additional paid-in capital | 106,834 | 106,729 | ||||||
Accumulated deficit | (39,394 | ) | (42,902 | ) | ||||
Less: Treasury stock, at cost: 2017 and 2016, 73,741 and 73,641 shares, respectively | (1,179 | ) | (1,177 | ) | ||||
Accumulated other comprehensive gain (loss) | 9 | (120 | ) | |||||
Total shareholders' equity | 66,310 | 62,570 | ||||||
Total liabilities and shareholders' equity | $ | 826,731 | 756,654 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 814 | 633 | 885 | 1,611 | |||||||||||
Other comprehensive income : | ||||||||||||||||
Unrealized holding gains on securities | 71 | 123 | 186 | 349 | ||||||||||||
Income tax effect | (28 | ) | (49 | ) | (72 | ) | (139 | ) | ||||||||
Total other comprehensive income | 43 | 74 | 114 | 210 | ||||||||||||
Total comprehensive income | $ | 857 | 707 | 999 | 1,821 |
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest and Dividend Income | ||||||||||||||||
Interest and fees on loans | $ | 8,522 | 6,188 | 22,720 | 17,811 | |||||||||||
Interest on investment securities | 275 | 131 | 688 | 405 | ||||||||||||
Dividends on investment securities | 105 | 88 | 280 | 264 | ||||||||||||
Other interest income | 65 | 25 | 148 | 94 | ||||||||||||
Total interest and dividend income | 8,967 | 6,432 | 23,836 | 18,574 | ||||||||||||
Interest Expense | ||||||||||||||||
Interest on deposits | 1,339 | 549 | 3,457 | 1,518 | ||||||||||||
Interest on Federal Home Loan Bank borrowings | 248 | 73 | 509 | 258 | ||||||||||||
Interest on senior debt | 229 | - | 686 | - | ||||||||||||
Interest on subordinated debt | 92 | 85 | 266 | 250 | ||||||||||||
Interest on note payable | 7 | 9 | 24 | 25 | ||||||||||||
Total interest expense | 1,915 | 716 | 4,942 | 2,051 | ||||||||||||
Net interest income | 7,052 | 5,716 | 18,894 | 16,523 | ||||||||||||
Provision (Credit) for Loan Losses | 545 | 355 | (944 | ) | 2,314 | |||||||||||
Net interest income after provision (credit) for loan losses | 6,507 | 5,361 | 19,838 | 14,209 | ||||||||||||
Non-interest Income | ||||||||||||||||
Loan application, inspection and processing fees | 25 | 64 | 61 | 152 | ||||||||||||
Deposit fees and service charges | 149 | 150 | 444 | 451 | ||||||||||||
Rental Income | 117 | 104 | 302 | 311 | ||||||||||||
Loss on sale of investment securities | - | - | (78 | ) | - | |||||||||||
Other income | 95 | 94 | 283 | 273 | ||||||||||||
Total non-interest income | 386 | 412 | 1,012 | 1,187 | ||||||||||||
Non-interest Expense | ||||||||||||||||
Salaries and benefits | 2,741 | 2,169 | 7,668 | 7,334 | ||||||||||||
Occupancy and equipment expense | 796 | 783 | 2,378 | 2,313 | ||||||||||||
Data processing expense | 340 | 288 | 786 | 814 | ||||||||||||
Professional and other outside services | 449 | 409 | 1,651 | 1,182 | ||||||||||||
Advertising and promotional expense | 81 | 128 | 266 | 341 | ||||||||||||
Loan administration and processing expense | 22 | 14 | 45 | 30 | ||||||||||||
Regulatory assessments | 230 | 159 | 572 | 453 | ||||||||||||
Insurance expense | 66 | 57 | 181 | 168 | ||||||||||||
Material and communications | 97 | 106 | 287 | 314 | ||||||||||||
Other operating expense | 400 | 328 | 1,096 | 992 | ||||||||||||
Total non-interest expense | 5,222 | 4,441 | 14,930 | 13,941 | ||||||||||||
Income before income taxes | 1,671 | 1,332 | 5,920 | 1,455 | ||||||||||||
Expense for Income Taxes | 658 | 518 | 2,373 | 570 | ||||||||||||
Net income | $ | 1,013 | 814 | 3,547 | 885 | |||||||||||
Basic earnings per share | $ | 0.26 | 0.21 | 0.91 | 0.22 | |||||||||||
Diluted earnings per share | $ | 0.26 | 0.21 | 0.91 | 0.22 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME (Unaudited)
(in thousands, except shares) | ||||||||||||||||||||||||||||
Number of Shares | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
Balance at December 31, 2014 | 3,924,192 | $ | 39 | 106,108 | (46,975 | ) | (160 | ) | (277 | ) | 58,735 | |||||||||||||||||
Net Income | - | - | - | 1,611 | - | - | 1,611 | |||||||||||||||||||||
Unrealized holding gain on available forsale securities, net of taxes | - | - | - | - | - | 210 | 210 | |||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | - | 1,821 | |||||||||||||||||||||
Share-based compensation expense | - | - | 340 | - | - | - | 340 | |||||||||||||||||||||
Issuance of restricted stock | 675 | 1 | (1 | ) | - | - | - | - | ||||||||||||||||||||
Balance at Septmber 30, 2015 | 3,924,867 | $ | 40 | 106,447 | (45,364 | ) | (160 | ) | (67 | ) | 60,896 | |||||||||||||||||
Balance December 31, 2015 | 3,956,207 | $ | 40 | 106,568 | (44,832 | ) | (160 | ) | (152 | ) | 61,464 | |||||||||||||||||
Net income | - | - | - | 885 | - | - | 885 | |||||||||||||||||||||
Unrealized holding gain on available forsale securities, net of taxes | - | - | - | - | - | 114 | 114 | |||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | - | 999 | |||||||||||||||||||||
Repurchase of Common shares | (518 | ) | - | - | - | (7 | ) | - | (7 | ) | ||||||||||||||||||
Share-based compensation expense,net of forfeitures | - | - | 126 | - | - | - | 126 | |||||||||||||||||||||
Issuance of restricted stock | 4,214 | - | - | - | - | - | - | |||||||||||||||||||||
Balance at September 30, 2016 | 3,959,903 | $ | 40 | 106,694 | (43,947 | ) | (167 | ) | (38 | ) | 62,582 |
(In thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 1,013 | 814 | 3,547 | 885 | |||||||||||
Other comprehensive income | ||||||||||||||||
Unrealized holding gains on securities | 2 | 71 | 289 | 186 | ||||||||||||
Income tax effect | (1 | ) | (28 | ) | (112 | ) | (72 | ) | ||||||||
Reclassification for realized losses on sale of investment securities | - | - | (78 | ) | - | |||||||||||
Income tax effect | - | - | 30 | - | ||||||||||||
Total other comprehensive income | 1 | 43 | 129 | 114 | ||||||||||||
Comprehensive income | $ | 1,014 | 857 | 3,676 | 999 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
(in thousands) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 885 | 1,611 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization (accretion) of investment premiums and discounts, net | 97 | 155 | ||||||
Amortization and accretion of purchase loan premiums and discounts, net | 118 | 190 | ||||||
Provision for loan losses, net of recoveries | 2,314 | 250 | ||||||
Depreciation and amortization | 920 | 776 | ||||||
Share-based compensation | 126 | 340 | ||||||
Deferred income taxes | 351 | 888 | ||||||
Loss on disposal of fixed assets | - | 133 | ||||||
Gain on acquisition of OREO | (11 | ) | - | |||||
Changes in assets and liabilities: | ||||||||
Decrease in net deferred loan costs | 115 | 216 | ||||||
Increase in accrued interest and dividends receivable | (298 | ) | (189 | ) | ||||
(Increase)/Decrease in other assets | (421 | ) | 100 | |||||
(Decrease)/Increase in accrued expenses and other liabilities | (40 | ) | 548 | |||||
Net cash provided by operating activities | 4,156 | 5,018 | ||||||
Cash Flows from Investing Activities: | ||||||||
Principal repayments on available for sale securities | 2,092 | 3,151 | ||||||
Purchase of available for sale securities | (1,000 | ) | - | |||||
Proceeds from call of available for sale securities | 5,000 | - | ||||||
Redemptions of Federal Home Loan Bank and Federal Reserve Bank, net | 827 | 10 | ||||||
Increase in loans, net | (77,082 | ) | (19,746 | ) | ||||
Purchase of bank premises and equipment, net | (2,349 | ) | (7,745 | ) | ||||
Net cash used in investing activities | (72,512 | ) | (24,330 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net increase in deposits | 26,505 | 4,227 | ||||||
Increase in FHLB borrowings | 3,000 | - | ||||||
Repurchase of common stock | (7 | ) | - | |||||
Repayment of Note Payable | (139 | ) | (15 | ) | ||||
Proceeds from Note Payable | - | 2,000 | ||||||
Decrease in advances from borrowers for taxes and insurance | (889 | ) | (820 | ) | ||||
Net cash used in financing activities | 28,470 | 5,392 | ||||||
Net decrease in cash and cash equivalents | (39,886 | ) | (13,920 | ) | ||||
Cash and Cash Equivalents: | ||||||||
Beginning | 85,400 | 73,258 | ||||||
Ending | $ | 45,514 | 59,338 | |||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Interest paid | $ | 2,398 | 1,717 | |||||
Income taxes paid | $ | 253 | 3 | |||||
Transfer of loans to other real estate owned | $ | 840 | - |
(In thousands, except shares) | Number | Common | Additional | Accumulated | Treasury | Accumulated | Total | |||||||||||||||||||||
Balance at December 31, 2016 | 3,891,897 | $ | 40 | 106,729 | (42,902 | ) | (1,177 | ) | (120 | ) | 62,570 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 3,547 | - | - | 3,547 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 129 | 129 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 3,547 | - | 129 | 3,676 | |||||||||||||||||||||
Purchase of treasury stock | (100 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||
Common stock dividends | (39 | ) | (39 | ) | ||||||||||||||||||||||||
Share-based compensation expense | - | - | 105 | - | - | - | 105 | |||||||||||||||||||||
Vesting of restricted stock | 3,923 | - | - | - | - | - | - | |||||||||||||||||||||
Balance at September 30, 2017 | 3,895,720 | $ | 40 | 106,834 | (39,394 | ) | (1,179 | ) | 9 | 66,310 | ||||||||||||||||||
Balance at December 31, 2015 | 3,956,207 | 40 | 106,568 | (44,832 | ) | (160 | ) | (152 | ) | 61,464 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 885 | - | - | 885 | |||||||||||||||||||||
Unrealized holding gain on available-for-sale securities, net of tax | - | - | - | - | - | 114 | 114 | |||||||||||||||||||||
Total comprehensive income | - | - | - | 885 | - | 114 | 999 | |||||||||||||||||||||
Purchase of treasury stock | (518 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||
Share-based compensation expense | - | - | 126 | - | - | - | 126 | |||||||||||||||||||||
Vesting of restricted stock | 4,214 | - | - | - | - | - | - | |||||||||||||||||||||
Balance at September 30, 2016 | 3,959,903 | $ | 40 | 106,694 | (43,947 | ) | (167 | ) | (38 | ) | 62,582 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, | ||||||||
(In thousands) | 2017 | 2016 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 3,547 | 885 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of investment premiums, net | 66 | 97 | ||||||
Amortization and accretion of purchase loan premiums and discounts, net to loans | 476 | 118 | ||||||
Amortization of debt issuance costs | 62 | 5 | ||||||
(Credit) provision for loan losses | (944 | ) | 2,314 | |||||
Depreciation and amortization | 926 | 920 | ||||||
Loss on sales of available-for-sale securities | 78 | - | ||||||
Share-based compensation | 105 | 126 | ||||||
Deferred income taxes | 1,864 | 351 | ||||||
Gain on acquisition of OREO | - | (11 | ) | |||||
Changes in assets and liabilities: | ||||||||
Increase in accrued interest and dividends receivable | (775 | ) | (298 | ) | ||||
Increase in other assets | (4 | ) | (426 | ) | ||||
Decrease in accrued expenses and other liabilities | (796 | ) | (40 | ) | ||||
Net cash provided by operating activities | 4,605 | 4,041 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from sales on available-for-sale securities | 13,846 | 5,000 | ||||||
Principal repayments on available-for-sale securities | 1,639 | 2,092 | ||||||
Purchases of available-for-sale securities | (20,576 | ) | (1,000 | ) | ||||
Purchases of Federal Reserve Bank stock | (351 | ) | - | |||||
(Purchases) redemptions of Federal Home Loan Bank stock | (744 | ) | 827 | |||||
Increase in net originations of loans receivable | (53,424 | ) | (57,991 | ) | ||||
Purchase of loan pools receivable | (73,022 | ) | (18,976 | ) | ||||
Purchase of premises and equipment | (2,880 | ) | (2,349 | ) | ||||
Net cash used in investing activities | (135,512 | ) | (72,397 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Increase in deposits, net | 76,090 | 26,505 | ||||||
(Repayments of) increase in FHLB and correspondent bank borrowings | (8,000 | ) | 3,000 | |||||
Principal repayments of note payable | (142 | ) | (139 | ) | ||||
Decrease in advances from borrowers for taxes and insurance | (877 | ) | (889 | ) | ||||
Purchases of treasury stock | (2 | ) | (7 | ) | ||||
Dividends paid on common stock | (39 | ) | - | |||||
Net cash provided by financing activities | 67,030 | 28,470 | ||||||
Net decrease in cash and cash equivalents | (63,877 | ) | (39,886 | ) | ||||
Cash and cash equivalents at beginning of period | 92,289 | 85,400 | ||||||
Cash and cash equivalents at end of period | $ | 28,412 | 45,514 | |||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 4,467 | 2,398 | |||||
Cash paid for income taxes | $ | 475 | 253 | |||||
Supplemental Disclosures of Noncash Investing Activities: | ||||||||
Transfers of loans receivable to other real estate owned | $ | - | 840 |
See Accompanying Notes to Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 1:Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries including Patriot Bank, N.A. (the “Bank”) (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed consolidated financial statements presented herein should be read in conjunction with the previously filed audited consolidated financial statements of the Company and notes thereto included on the Form 10-K for the year ended December 31, 2015.2016.
The Consolidated Balance Sheet at December 31, 20152016 presented herein has been derived from the audited consolidated financial statements of the Company at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of AmericaUS GAAP for complete financial statements.
The preparation of consolidated financial statements in accordance with US GAAP 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 accounting for the allowance for loan losses, the analysis and valuation of its investment securities, and the valuation of deferred tax assets as certain of Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of Patriot’s Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform to current year presentation.
The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine months ended September 30, 20162017 are not necessarily indicative of the results of operations that may be expected for the remainder of 2016.2017.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 2:Investment Available-for SaleSecurities
The amortized cost, gross unrealized gains and losses and approximate fair values of available-for-sale securities at September 30, 20162017 and December 31, 20152016 are as follows:
Gross | Gross | |||||||||||||||
(in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
September 30, 2016: | ||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | 11,436 | 26 | (50 | ) | 11,412 | ||||||||||
Corporate bonds | 9,000 | - | (63 | ) | 8,937 | |||||||||||
Subordinated Notes | 3,000 | 25 | - | 3,025 | ||||||||||||
$ | 23,436 | 51 | (113 | ) | 23,374 | |||||||||||
December 31, 2015: | ||||||||||||||||
U. S. Government agency bonds | $ | 5,000 | - | (46 | ) | 4,954 | ||||||||||
U. S. Government agency mortgage-backed securities | 13,625 | - | (212 | ) | 13,413 | |||||||||||
Corporate bonds | 9,000 | 71 | (61 | ) | 9,010 | |||||||||||
Subordinated Notes | $ | 2,000 | - | - | 2,000 | |||||||||||
29,625 | 71 | (319 | ) | 29,377 |
(In thousands)
| Amortized | Gross | Gross | Fair | ||||||||||||
September 30, 2017: | ||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | 8,071 | 34 | (69 | ) | 8,036 | ||||||||||
Corporate bonds | 14,000 | - | (95 | ) | 13,905 | |||||||||||
Subordinated notes | 7,500 | 145 | - | 7,645 | ||||||||||||
$ | 29,571 | 179 | (164 | ) | 29,586 | |||||||||||
December 31, 2016: | ||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | 10,624 | 9 | (192 | ) | 10,441 | ||||||||||
Corporate bonds | 9,000 | - | (39 | ) | 8,961 | |||||||||||
Subordinated notes | 5,000 | 26 | - | 5,026 | ||||||||||||
$ | 24,624 | 35 | (231 | ) | 24,428 |
The following table presents the available-for-sale securities’ gross unrealized losslosses and fair value, of the Company’s available-for-sale securities, aggregated by the length of time the individual securities have been in a continuous loss position atas of September 30, 20162017 and December 31, 2015:2016:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
(in thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
September 30, 2016: | ||||||||||||||||||||||||
U. S. Government agency mortgage - backed securities | - | - | 3,683 | (50 | ) | 3,683 | (50 | ) | ||||||||||||||||
Corporate bonds | 2,992 | (8 | ) | 5,945 | (55 | ) | 8,937 | (63 | ) | |||||||||||||||
Totals | $ | 2,992 | (8 | ) | 9,628 | (105 | ) | 12,620 | (113 | ) | ||||||||||||||
December 31, 2015: | ||||||||||||||||||||||||
U. S. Government agency bonds | $ | 4,954 | (46 | ) | - | - | 4,954 | (46 | ) | |||||||||||||||
U. S. Government agency mortgage - backed securities | 2,863 | (42 | ) | 10,550 | (170 | ) | 13,413 | (212 | ) | |||||||||||||||
Corporate bonds | - | - | 5,939 | (61 | ) | 5,939 | (61 | ) | ||||||||||||||||
Totals | $ | 7,817 | (88 | ) | 16,489 | (231 | ) | 24,306 | (319 | ) |
(In thousands) | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2017: | ||||||||||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | 626 | (2 | ) | 3,329 | (67 | ) | 3,955 | (69 | ) | ||||||||||||||
Corporate bonds | 13,905 | (95 | ) | - | - | 13,905 | (95 | ) | ||||||||||||||||
$ | 14,531 | (97 | ) | 3,329 | (67 | ) | 17,860 | (164 | ) | |||||||||||||||
December 31, 2016: | ||||||||||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | 5,969 | (144 | ) | 3,356 | (48 | ) | 9,325 | (192 | ) | ||||||||||||||
Corporate bonds | - | - | 5,961 | (39 | ) | 5,961 | (39 | ) | ||||||||||||||||
$ | 5,969 | (144 | ) | 9,317 | (87 | ) | 15,286 | (231 | ) |
At September 30, 2016, five of eleven available-for-sale securities had unrealized losses with an average depreciation of 0.9% from the total amortized cost. At2017 and December 31, 2015, nine2016, eight of thirteen and seven out of eleventwelve available-for-sale securities had unrealized losses with an aggregate depreciation of 1.3%0.9% and 1.5% from the total amortized cost.cost, respectively.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The Company performs aBased on its quarterly analysis of those securities that are in an unrealized loss position to determine if those losses qualify as other-than-temporary impairments. This analysis considers the following criteria in its determination: the ability of the issuer to meet its obligations, management’s plans and ability to maintain its investment in the security, the length of time and the amount by which the security has been in a loss position, the interest rate environment, the general economic environment and prospects or projections for improvement or deterioration.
Managementreviews, management believes that none of the unrealized losses on available-for-sale securities noted above constitute an other-than-temporary impairment (“OTTI”). The noted losses are other thanconsidered temporary due to the fact that they relate to market fluctuations in available interest rate changesrates on U.S. Government agency debt, investment grade corporate debt and mortgage-backed securities issued by U.S. Government agencies.agencies, and corporate debt. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the amount by which the securities are in a loss position small. Additionally, the Company has both the intent and the ability to hold these securities until its amortized cost basis can be recovered, which may be at maturity. Accordingly, the Company expects to receivecollectability of all contractual principal and interest relatedpayments is reasonably expected. Since Patriot is not more-likely-than-not to thesebe required to sell the investments andbefore recovery of the Companyamortized cost basis and does not consider themintend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be other-than-temporarily impaired atOTTI as of September 30, 2016.2017.
The amortized cost and fair value of available-for-sale debt securities atAt September 30, 2016, by contractual maturity, are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be prepaid without any penalties. The actual maturities will also differ from contractual maturities because issuers of certain securities retain early call or prepayment rights.
Amortized Cost | Fair Value | |||||||
Maturity: | ||||||||
Due from one to five years | $ | 9,000 | 8,937 | |||||
Due after five years | 3,000 | 3,025 | ||||||
U.S. Government agency mortgage-backed securities | 11,436 | 11,412 | ||||||
Total | $ | 23,436 | 23,374 |
AtSeptember 30, 20162017 and December 31, 2015,2016, available-for-sale securities of $4.6$5.0 million and $5.5$4.2 million, respectively, were pledged to the Federal Reserve BankFRB of New York, primarily to secure municipal deposits.
The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at September 30, 2017 and December 31, 2016. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.
(In thousands) | Amortized Cost | Fair Value | ||||||||||||||||||||||||||||||
Due | Due After | Due | Total | Due | Due After | Due | Total | |||||||||||||||||||||||||
September 30, 2017: | ||||||||||||||||||||||||||||||||
Corporate bonds | $ | - | 9,000 | 5,000 | 14,000 | - | 8,954 | 4,951 | 13,905 | |||||||||||||||||||||||
Subordinated Notes | 1,000 | 6,500 | - | 7,500 | 1,019 | 6,626 | - | 7,645 | ||||||||||||||||||||||||
Available-for-sale securities with single maturity dates | 1,000 | 15,500 | 5,000 | 21,500 | 1,019 | 15,580 | 4,951 | 21,550 | ||||||||||||||||||||||||
U. S. Government agency mortgage-backed securities | - | 940 | 7,131 | 8,071 | - | 920 | 7,116 | 8,036 | ||||||||||||||||||||||||
$ | 1,000 | 16,440 | 12,131 | 29,571 | 1,019 | 16,500 | 12,067 | 29,586 | ||||||||||||||||||||||||
December 31, 2016: | ||||||||||||||||||||||||||||||||
Corporate bonds | $ | 9,000 | - | - | 9,000 | 8,961 | - | - | 8,961 | |||||||||||||||||||||||
Subordinated Notes | 1,000 | 4,000 | - | 5,000 | 1,026 | 4,000 | - | 5,026 | ||||||||||||||||||||||||
Available-for-sale securities with single maturity dates | 10,000 | 4,000 | - | 14,000 | 9,987 | 4,000 | - | 13,987 | ||||||||||||||||||||||||
U. S. Government agency mortgage-backed securities | - | 2,132 | 8,492 | 10,624 | - | 2,106 | 8,335 | 10,441 | ||||||||||||||||||||||||
$ | 10,000 | 6,132 | 8,492 | 24,624 | 9,987 | 6,106 | 8,335 | 24,428 |
There were no$13.8 million sales and $20.6 million purchases of available-for-sale securities in 2017. No loss on the sale of available-for-sale securities was recorded during the nine-month periodsthird quarter ended September 30, 2016 or2017. A loss on the sale of available-for-sale securities of $78,000 was recorded during the nine months ended September 30, 2015.2017. There were no realized gains (losses) of available-for sale securities during the three and nine months ended September 30, 2016.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
Note 3:Loans Receivable and Allowance for Loan Losses
Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity, are generally reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs.
Interest income is accrued based on the unpaid principal balance. Loan application fees are non interest income while other certain direct origination costs are deferred, and amortized as a level yield adjustment over the respective termAs of the loan and reported in interest income.
The accrual of interest on loans is discontinued at the time the loan is ninety days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
All interest accrued, but not collected, on loans that are placed on nonaccrual status, or are charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Upon receipt of cash, the cash received is first applied to satisfy principal and then applied to interest, unless the loan is in a cure period and Management believes there will be a loss. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
On September 30, 2016, the Company purchased $23.0 million face amount ($23.7 million fair value) of non-credit impaired student loans receivable, together with accrued interest of $107,822, from another Bank. The purchase price aggregated $23.8 million. By the terms of the agreement, the seller Bank will continue to service these loans in return for a fee. In accordance with the Company’s accounting policies, the premium paid will be amortized to interest income, in order to achieve a consistent effective yield.
A summary of the Company’s loan portfolio at September 30, 20162017 and December 31, 2015 is as follows:2016, loans receivable, net, consists of the following:
(in thousands) | September 30, | December 31, | ||||||||||||||
2016 | 2015 | |||||||||||||||
(In thousands) | ||||||||||||||||
Loan portfolio segment: | September 30, | December 31, | ||||||||||||||
Commercial Real Estate | $ | 296,625 | 271,229 | |||||||||||||
Residential Real Estate | 150,664 | 86,514 | ||||||||||||||
Commercial and Industrial | $ | 69,723 | 59,752 | 117,673 | 60,977 | |||||||||||
Commercial Real Estate | 258,920 | 245,828 | ||||||||||||||
Consumer and Other | 90,973 | 101,449 | ||||||||||||||
Construction | 48,048 | 15,551 | 48,328 | 53,895 | ||||||||||||
Construction to permanent- CRE | 5,587 | 4,880 | ||||||||||||||
Residential | 103,969 | 110,837 | ||||||||||||||
Consumer/Other | 73,903 | 47,521 | ||||||||||||||
Total Loans | 560,150 | 484,369 | ||||||||||||||
Construction to permanent - CRE | 5,855 | 7,593 | ||||||||||||||
Loans receivable, gross | 710,118 | 581,657 | ||||||||||||||
Allowance for loan losses | (7,328 | ) | (5,242 | ) | (6,222 | ) | (4,675 | ) | ||||||||
Loans receivable, net | $ | 552,822 | 479,127 | $ | 703,896 | 576,982 |
Amounts presented at December 31, 2015 include $28.2 million of loans secured by 1-4 Family Non-owner Occupied real estate in the Residential category, reclassified from Commercial Real Estate for consistency with the September 30, 2016 presentation. Net unamortized purchase loan premiums aggregated $1.4 million and $0.9 million as of September 30, 2016 and December 31, 2015, respectively. Net deferred loan costs aggregated $0.2 million as of September 30, 2016 and $0.3 million as of December 31, 2015.
The Company'sPatriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. The CompanyPatriot originates commercial real estate loans, commercial business loans, and a variety of consumer loans, and construction loans. In addition, the Company previously had originated loans onAll commercial and residential real estate. All residential and commercial mortgageestate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.
The CompanyPatriot has established credit policies applicable to each type of lending activity in which it engages by which itand evaluates the creditworthiness of each customer and, in most cases, extendsborrower. Unless extenuating circumstances exist, Patriot limits the extension of credit of upon commercial real estate loans to 75% of the market value of the collateralunderlying collateral. Patriot’s loan origination policy for commercialmulti–family residential real estate at the dateis limited to 80% of the credit extension depending on the Company's evaluationmarket value of the borrowers' creditworthiness and type of collateral and up to 80% for multi–family real estate.underlying collateral. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value. Thevalue of the real estate project. Management monitors the appraised value of collateral is monitored on an ongoingon-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral. Other importantcollateral, although other forms of collateral aredo exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets, marketable securities and time deposits.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)assets.
Risk characteristics of the Company’sCompany’s portfolio classes include the following:
Commercial and Industrial Loans– The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance accounts receivable, the purchase of inventory or new or used equipment and for other short or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source of repayment. Payments on such loans are often dependent upon the successful operation of the underlying business involved. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower, or loss of markets for the borrower’s products or services.
Commercial Real Estate Loans –
In underwriting commercial real estate loans, the CompanyPatriot evaluates both the prospective borrower’sborrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, or should there be a substantial decline in the value of the property securingcollateralizing the loan substantially decline, or declinethere are declines in general economic conditions. Where the owner occupies the property, the CompanyPatriot also evaluates the businessbusiness’ ability to repay the loan on a timely basis. In addition, the Companybasis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company when the property is owner occupied.
Construction Loans– Construction loans are short-term loans (generally up to eighteen months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Included in this category are loans to construct single family homes where no contract of sale exists. These loans are based upon the experience and the financial strength of the builder, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, a downturn in the new construction market, a significant increase in interest rates, or decline in general economic conditions.company.
Construction
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Permanent-CRE– One time close of a construction facility converting to an amortizing mortgage loan typically upon an event which would include a certificate of occupancy as well as stabilization, defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio, as well as other conditions and covenants particular to the loan type. The construction facility would typically carry a floating rate, then upon conversion to amortization would reset at a predetermined spread over FHLB with a minimum interest rate.consolidated financial statements (unaudited)
Residential Real Estate Loans– Home equity loans secured by real estate properties are offered by the Company. The Company no longer offers residential
In 2013, Patriot discontinued offering primary mortgages having exited this business in 2013.on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declinedeclines in general economic conditions.
In March 2017, Patriot purchased $73 million of residential real estate loans.
Commercial and Industrial Loans
PatriotConsumer/’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.
Consumer and Other Loans– The Company also
Patriot offers individual consumers various forms of credit including installment loans, credit cards, and consumer overdraft protection, and reserve lines of credit to individuals.credit. Repayments of such loans are oftengenerally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdendebt-burdened ratios.
Construction Loans
Construction loans are of a short-term nature, generally of eighteen-months or less, that are secured by land intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.
Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
Construction to Permanent – CRE
One time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 20-25 years, resetting every five years to the FHLB rate.
Close of the construction facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.
Allowance for Loan Losses
The following table sets forthtables summarize the activity in ourthe allowance for loan losses, byallocated to segments of the loan type,portfolio, for the three and nine months ended September 30, 2016. 2017 and 2016:
(In thousands) | Commercial | Residential | Commercial | Consumer | Construction | Construction | Unallocated | Total | ||||||||||||||||||||||||
Three months ended September 30, 2017 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
June 30, 2017 | $ | 2,218 | 1,041 | 1,453 | 593 | 490 | 73 | 76 | 5,944 | |||||||||||||||||||||||
Charge-offs | - | - | (265 | ) | (10 | ) | - | - | - | (275 | ) | |||||||||||||||||||||
Recoveries | 6 | - | - | 2 | - | - | - | 8 | ||||||||||||||||||||||||
Provisions (credits) | (52 | ) | 4 | 685 | (327 | ) | 293 | (27 | ) | (31 | ) | 545 | ||||||||||||||||||||
September 30, 2017 | $ | 2,172 | 1,045 | 1,873 | 258 | 783 | 46 | 45 | 6,222 | |||||||||||||||||||||||
Three months ended September 30, 2016 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
June 30, 2016 | $ | 2,295 | 647 | 3,400 | 531 | 169 | 145 | 22 | 7,209 | |||||||||||||||||||||||
Charge-offs | - | (186 | ) | (50 | ) | (2 | ) | - | - | - | (238 | ) | ||||||||||||||||||||
Recoveries | - | 2 | - | - | - | - | - | 2 | ||||||||||||||||||||||||
Provisions (credits) | (491 | ) | 949 | 352 | (329 | ) | (108 | ) | (18 | ) | - | 355 | ||||||||||||||||||||
September 30, 2016 | $ | 1,804 | 1,412 | 3,702 | 200 | 61 | 127 | 22 | 7,328 |
(In thousands) | Commercial | Residential | Commercial | Consumer | Construction | Construction | Unallocated | Total | ||||||||||||||||||||||||
Nine months ended September 30, 2017 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
December 31, 2016 | $ | 1,853 | 534 | 740 | 641 | 712 | 69 | 126 | 4,675 | |||||||||||||||||||||||
Charge-offs | - | - | (265 | ) | (23 | ) | - | - | - | (288 | ) | |||||||||||||||||||||
Recoveries | 8 | - | 2,769 | 2 | - | - | - | 2,779 | ||||||||||||||||||||||||
Provisions (credits) | 311 | 511 | (1,371 | ) | (362 | ) | 71 | (23 | ) | (81 | ) | (944 | ) | |||||||||||||||||||
September 30, 2017 | $ | 2,172 | 1,045 | 1,873 | 258 | 783 | 46 | 45 | 6,222 | |||||||||||||||||||||||
Nine months ended September 30, 2016 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
December 31, 2015 | $ | 1,970 | 740 | 1,027 | 677 | 486 | 123 | 219 | 5,242 | |||||||||||||||||||||||
Charge-offs | - | (190 | ) | (50 | ) | (4 | ) | - | - | - | (244 | ) | ||||||||||||||||||||
Recoveries | - | 3 | 12 | 1 | - | - | - | 16 | ||||||||||||||||||||||||
Provisions (credits) | (166 | ) | 859 | 2,713 | (474 | ) | (425 | ) | 4 | (197 | ) | 2,314 | ||||||||||||||||||||
September 30, 2016 | $ | 1,804 | 1,412 | 3,702 | 200 | 61 | 127 | 22 | 7,328 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The following table also detailstables summarize, by loan portfolio segment, the amount of loans receivable that are evaluated individually and collectively for impairment and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, as of September 30, 2016.
ALLOWANCE FOR LOANS LOSSES | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2016: | Commercial and Industrial | Commercial Real Estate | Construction | Construction to Permanent | Residential | Consumer/ Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance | $ | 3,400 | 2,295 | 169 | 145 | 647 | 531 | 22 | 7,209 | |||||||||||||||||||||||
Charge-offs | (50 | ) | - | - | - | (186 | ) | (2 | ) | - | (238 | ) | ||||||||||||||||||||
Recoveries | - | - | - | - | 2 | - | - | 2 | ||||||||||||||||||||||||
Provision | 352 | (491 | ) | (108 | ) | (18 | ) | 949 | (329 | ) | - | 355 | ||||||||||||||||||||
Ending Balance | $ | 3,702 | 1,804 | 61 | 127 | 1,412 | 200 | 22 | 7,328 | |||||||||||||||||||||||
Nine months ended September 30, 2016: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance | $ | 1,027 | 1,970 | 486 | 123 | 740 | 677 | 219 | 5,242 | |||||||||||||||||||||||
Charge-offs | (50 | ) | - | - | - | (190 | ) | (4 | ) | - | (244 | ) | ||||||||||||||||||||
Recoveries | 12 | - | - | - | 3 | 1 | - | 16 | ||||||||||||||||||||||||
Provision | 2,713 | (166 | ) | (425 | ) | 4 | 859 | (474 | ) | (197 | ) | 2,314 | ||||||||||||||||||||
Ending Balance | $ | 3,702 | 1,804 | 61 | 127 | 1,412 | 200 | 22 | 7,328 | |||||||||||||||||||||||
As of September 30, 2016: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | 3,158 | - | - | - | - | 3 | - | 3,161 | ||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | 544 | 1,804 | 61 | 127 | 1,412 | 197 | 22 | 4,167 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 3,702 | 1,804 | 61 | 127 | 1,412 | 200 | 22 | 7,328 | |||||||||||||||||||||||
Total loans ending balance | $ | 69,723 | 258,920 | 48,048 | 5,587 | 103,969 | 73,903 | - | 560,150 | |||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 3,158 | 6,713 | - | - | 4,676 | 3 | - | 14,550 | |||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 66,565 | 252,207 | 48,048 | 5,587 | 99,293 | 73,900 | - | 545,600 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)2017 and December 31, 2016:
The following table sets forth activity in our allowance for loan losses, by loan type, for the three and nine months ended September 30, 2015. The following table also details the amount of loans receivable that are evaluated individually and collectively for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, as of December 31, 2015.
(In thousands) | Commercial | Residential | Commercial | Consumer | Construction | Construction | Unallocated | Total | ||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | - | 285 | - | - | - | - | 285 | |||||||||||||||||||||||
Collectively evaluated for impairment | 2,172 | 1,045 | 1,588 | 258 | 783 | 46 | 45 | 5,937 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 2,172 | 1,045 | 1,873 | 258 | 783 | 46 | 45 | 6,222 | |||||||||||||||||||||||
Loans receivable, gross: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,081 | 1,904 | 285 | 715 | - | - | - | 8,985 | |||||||||||||||||||||||
Collectively evaluated for impairment | 290,544 | 148,760 | 117,388 | 90,258 | 48,328 | 5,855 | - | 701,133 | ||||||||||||||||||||||||
Total loans receivable, gross | $ | 296,625 | 150,664 | 117,673 | 90,973 | 48,328 | 5,855 | - | 710,118 |
ALLOWANCE FOR LOANS LOSSES | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2015: | Commercial and Industrial | Commercial Real Estate | Construction | Construction to Permanent | Residential | Consumer/ Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance | $ | 982 | 2,145 | 275 | 150 | 832 | 726 | 98 | 5,208 | |||||||||||||||||||||||
Charge-offs | - | - | - | - | (7 | ) | (4 | ) | - | (11 | ) | |||||||||||||||||||||
Recoveries | 7 | 35 | - | - | - | 1 | - | 43 | ||||||||||||||||||||||||
Provision | (219 | ) | 204 | 119 | 38 | (198 | ) | (25 | ) | 81 | - | |||||||||||||||||||||
Ending Balance | $ | 770 | 2,384 | 394 | 188 | 627 | 698 | 179 | 5,240 | |||||||||||||||||||||||
Nine Months Ended September 30, 2015: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance | $ | 1,918 | 1,419 | 63 | 215 | 831 | 478 | - | 4,924 | |||||||||||||||||||||||
Charge-offs | - | - | - | - | (10 | ) | (11 | ) | - | (21 | ) | |||||||||||||||||||||
Recoveries | 37 | 35 | - | 5 | - | 10 | - | 87 | ||||||||||||||||||||||||
Provision | (1,185 | ) | 930 | 331 | (32 | ) | (194 | ) | 221 | 179 | 250 | |||||||||||||||||||||
Ending Balance | $ | 770 | 2,384 | 394 | 188 | 627 | 698 | 179 | 5,240 | |||||||||||||||||||||||
As of December 31, 2015: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | - | - | - | - | 3 | - | 3 | |||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | 1,027 | 1,970 | 486 | 123 | 740 | 674 | 219 | 5,239 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 1,027 | 1,970 | 486 | 123 | 740 | 677 | 219 | 5,242 | |||||||||||||||||||||||
Total loans ending balance | $ | 59,752 | 245,828 | 15,551 | 4,880 | 110,837 | 47,521 | - | 484,369 | |||||||||||||||||||||||
Ending balance: individually evaluated for impairment | - | 7,745 | - | - | 4,556 | 550 | - | 12,851 | ||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 59,752 | 238,083 | 15,551 | 4,880 | 106,281 | 46,971 | - | 471,518 |
(In thousands) | Commercial | Residential | Commercial | Consumer | Construction | Construction | Unallocated | Total | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | - | 231 | - | - | - | - | 231 | |||||||||||||||||||||||
Collectively evaluated for impairment | 1,853 | 534 | 509 | 641 | 712 | 69 | 126 | 4,444 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 1,853 | 534 | 740 | 641 | 712 | 69 | 126 | 4,675 | |||||||||||||||||||||||
Loans receivable, gross: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,267 | 1,911 | 231 | 542 | - | - | - | 8,951 | |||||||||||||||||||||||
Collectively evaluated for impairment | 264,962 | 84,603 | 60,746 | 100,907 | 53,895 | 7,593 | - | 572,706 | ||||||||||||||||||||||||
Total loans receivable, gross | $ | 271,229 | 86,514 | 60,977 | 101,449 | 53,895 | 7,593 | - | 581,657 |
The CompanyPatriot monitors the credit quality of its loans receivable inon an ongoing manner.basis. Credit quality is monitored by reviewing certain credit quality indicators, including loan to value ratios, debt service coverage ratios, and credit scores.
The Company hasPatriot employs a risk rating system as part of the risk assessment of its loan portfolio. The Company’sAt origination, lending officers are required to assign a risk rating to each loan in their portfolio, at origination, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. WhenIf financial developments occur on a loan in the lender learnslending officer’s portfolio of important financial developments,responsibility, the risk rating is reviewed accordingly, and adjusted, if necessary. Similarly,as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating. The Company employs a loan officer whose responsibility is to independently reviewrating based on available information. In addition, the risk ratings annually foron all commercial creditsloans over $250,000.$250,000 are reviewed annually by the Credit Department.
Additionally, Patriot retains a third-party objective loan reviewing expert to perform a quarterly analysis of the results of its risk rating process. The Company uses an independent third party loan reviewer who performs quarterly reviews ofreview is based on a randomly selected sample of loans validatingwithin established parameters (e.g., value, concentration), in order to assess and validate the Company’s risk ratings assigned to suchindividual loans. Any upgrades or downgradeschanges to classified loans mustthe assigned risk ratings, based on the quarterly review, are required to be approved by the Management Loan Committee.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
When assigning a risk rating to a loan, management utilizes the Company’sBank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the CompanyBank to sufficient risk to warrant classification in one of the following categories:
● | Sub-standard: An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. |
● | Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified |
Charge–off generally commences after the loan is classified “doubtful”Charge–offs, to reduce the loan to its recoverable balance. Ifvalue, generally commence after the accountloan is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. That amount is recognized as a recovery after the collateral is sold.“doubtful”.
In accordance with FFIEC (“Federal Financial Institutions Examination Council”)Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and120 days delinquent, and “Closed-end” credits arerespectively.
If an account is classified as “Loss”, the full balance of the loan receivable is charged off, when 120 days delinquent. regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold.
IncludedIn March 2017, the Bank reached a settlement agreement with its insurance carrier for a loss recognized in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The unpaid principal balances of loans on nonaccrual status and considered impaired were $4.7 million at September 30, 2016, and $1.6 million at December 31, 2015.
The $4.7 million of non-accrual loans at September 30, 2016 is comprised of 5 relationships, for which a specific reserve of $3.2 million has been established. The non-accrual increase of $3.1 million from December 31, 2015 is related to a single commercialCommercial and Industrial loan, resulting in cash receipts of $2.8 million, net of related deductibles and is not indicative of a credit quality trendother amounts excluded pursuant to the insurance policy.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the portfolio. Despite the Company’s decision to fully reserve for thisapplicable loan portfolio segment as of JuneSeptember 30, 2016, the Company has commenced recovery actions for alleged fraud across all available avenues, including insurance coverage2017 and claims against third parties. Potentially responsive insurance coverage, under which the Company has sought recovery, includes a Financial Institution Bond with a limit of liability of $5.0 million above a $50,000 deductible. The Company will vigorously pursue its avenues of recovery, including insurance coverage and third party claims.December 31, 2016:
(In thousands) | Non-accruing Loans | |||||||||||||||||||||||
30 - 59 Days | 60 - 89 Days | 90 Days | Total | Current | Total | |||||||||||||||||||
As of September 30, 2017: | ||||||||||||||||||||||||
Loan portfolio segment: | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Sub-standard | $ | - | - | 1,590 | 1,590 | - | 1,590 | |||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||
Sub-standard | - | - | 286 | 286 | - | 286 | ||||||||||||||||||
Consumer and Other | ||||||||||||||||||||||||
Sub-standard | - | - | 175 | 175 | - | 175 | ||||||||||||||||||
Total non-accruing loans | $ | - | - | 2,051 | 2,051 | - | 2,051 | |||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||
Loan portfolio segment: | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Sub-standard | $ | - | - | 1,590 | 1,590 | - | 1,590 | |||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||
Sub-standard | - | - | 231 | 231 | - | 231 | ||||||||||||||||||
Total non-accruing loans | $ | - | - | 1,821 | 1,821 | - | 1,821 |
If non-accrual loans had been performing in accordance with theirthe original contractual terms, the Companyadditional interest income of $27,000 and $70,000 would have recorded $70,000 and $266,000 of additionalbeen recognized in income during the three and nine months ended September 30, 2016, respectively, and $3,000 and $8,000 during2017, respectively. For the three and nine months ended September 30, 2015, respectively.2016, additional interest income of $70,000 and $266,000 would have been recognized in income.
Additionally, certain loans for which the borrower cannot demonstrate sufficient cash flow to continue loan payments in the future and certain troubled debt restructurings (“TDRs”) are placed on non-accrual status. During the three and nine months ended September 30, 2017 and 2016, no interest income was collected and recognized on non-accruing loans.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, and there is six months of performance. Management considers all non-accrual loans and troubled debt restructurings to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are considered collection delays and not an indication of loan impairment. The Bank considers consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following table sets forth the detail,tables summarize performing and non-performing loans receivable by portfolio segment, by aging category, by delinquency status as of non-accrual loans at September 30, 2016:
(in thousands) | ||||||||||||||||||||||||
2016: | 31 - 60 Days Past Due | 61 - 90 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Non-Accrual Loans | ||||||||||||||||||
Commercial & Industrial | $ | - | - | 3,158 | 3,158 | - | 3,158 | |||||||||||||||||
Residential | - | - | 1,590 | 1,590 | - | 1,590 | ||||||||||||||||||
Consumer | - | - | 3 | 3 | - | 3 | ||||||||||||||||||
Total | $ | - | - | 4,751 | 4,751 | - | 4,751 |
The following table sets forth the detail,2017 and delinquency status, of non-accrual loans at December 31, 2015:
(in thousands) | ||||||||||||||||||||||||
2015: | 31 - 60 Days Past Due | 61 - 90 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Non-Accrual Loans | ||||||||||||||||||
Residential | $ | - | - | 1,590 | 1,590 | - | 1,590 | |||||||||||||||||
Consumer | - | - | 3 | 3 | - | 3 | ||||||||||||||||||
Total | $ | - | - | 1,593 | 1,593 | - | 1,593 |
Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have at least six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.2016.
At September 30,2016,5loanswere onnon-accrualstatustotaling$4.7million.For these 5loans,a specificreserve of $3.2has beenestablished.
(In thousands) | Performing (Accruing) Loans | |||||||||||||||||||||||||||||||
As of September 30, 2017: | 30 - 59 Days | 60 - 89 Days | 90 Days Past Due | Total | Current | Total | Non-accruing | Loans | ||||||||||||||||||||||||
Loan portfolio segment: | ||||||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Pass | $ | 1,300 | - | - | 1,300 | 277,475 | 278,775 | - | 278,775 | |||||||||||||||||||||||
Special Mention | 652 | - | - | 652 | 12,510 | 13,162 | - | 13,162 | ||||||||||||||||||||||||
Substandard | - | 1,699 | - | 1,699 | 2,989 | 4,688 | - | 4,688 | ||||||||||||||||||||||||
1,952 | 1,699 | - | 3,651 | 292,974 | 296,625 | - | 296,625 | |||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Pass | 556 | 364 | 1,447 | 2,367 | 145,170 | 147,537 | - | 147,537 | ||||||||||||||||||||||||
Special Mention | - | - | - | - | 1,537 | 1,537 | - | 1,537 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 1,590 | 1,590 | ||||||||||||||||||||||||
556 | 364 | 1,447 | 2,367 | 146,707 | 149,074 | 1,590 | 150,664 | |||||||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||||||
Pass | 1,799 | 500 | 2,500 | 4,799 | 112,088 | 116,887 | - | 116,887 | ||||||||||||||||||||||||
Substandard | - | - | 500 | 500 | - | 500 | 286 | 786 | ||||||||||||||||||||||||
1,799 | 500 | 3,000 | 5,299 | 112,088 | 117,387 | 286 | 117,673 | |||||||||||||||||||||||||
Consumer and Other: | ||||||||||||||||||||||||||||||||
Pass | - | 125 | - | 125 | 90,673 | 90,798 | - | 90,798 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 175 | 175 | ||||||||||||||||||||||||
- | 125 | - | 125 | 90,673 | 90,798 | 175 | 90,973 | |||||||||||||||||||||||||
Construction: | ||||||||||||||||||||||||||||||||
Pass | - | - | - | - | 48,328 | 48,328 | - | 48,328 | ||||||||||||||||||||||||
Construction to permanent - CRE: | ||||||||||||||||||||||||||||||||
Pass | - | - | - | - | 5,855 | 5,855 | - | 5,855 | ||||||||||||||||||||||||
Total | $ | 4,307 | 2,688 | 4,447 | 11,442 | 696,625 | 708,067 | 2,051 | 710,118 | |||||||||||||||||||||||
Loans receivable, gross: | ||||||||||||||||||||||||||||||||
Pass | $ | 3,655 | 989 | 3,947 | 8,591 | 679,589 | 688,180 | - | 688,180 | |||||||||||||||||||||||
Special Mention | 652 | - | - | 652 | 14,047 | 14,699 | - | 14,699 | ||||||||||||||||||||||||
Substandard | - | 1,699 | 500 | 2,199 | 2,989 | 5,188 | 2,051 | 7,239 | ||||||||||||||||||||||||
Loans receivable, gross | $ | 4,307 | 2,688 | 4,447 | 11,442 | 696,625 | 708,067 | 2,051 | 710,118 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at September 30, 2016:
(in thousands) | Performing (Accruing) Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016: | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Performing Loans | Total Non-Accrual Loans | Total Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial & Industrial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | - | 571 | - | 571 | 65,990 | 66,561 | - | 66,561 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | - | - | - | - | 4 | 4 | 3,158 | 3,162 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Commercial & Industrial | - | 571 | - | 571 | 65,994 | 66,565 | 3,158 | 69,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Performing (Accruing) Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2016: | 30 - 59 Days | 60 - 89 Days | 90 Days | Total | Current | Total | Non-accruing | Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan portfolio segment: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 2,522 | 4,000 | - | 6,522 | 246,349 | 252,871 | - | 252,871 | $ | - | - | - | - | 265,246 | 265,246 | - | 265,246 | |||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | - | - | - | - | 5,176 | 5,176 | - | 5,176 | - | - | - | - | 4,531 | 4,531 | - | 4,531 | ||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | - | - | - | - | 873 | 873 | - | 873 | - | - | - | - | 1,452 | 1,452 | - | 1,452 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Commercial Real Estate | 2,522 | 4,000 | - | 6,522 | 252,398 | 258,920 | - | 258,920 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction - Pass | - | - | - | - | 48,048 | 48,048 | - | 48,048 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction to Permanent - Pass | - | - | - | - | 5,587 | 5,587 | - | 5,587 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- | - | - | - | 271,229 | 271,229 | - | 271,229 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 390 | - | 1,458 | 1,848 | 100,531 | 102,379 | - | 102,379 | 131 | 9 | 1,449 | 1,589 | 83,335 | 84,924 | - | 84,924 | ||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 1,590 | 1,590 | - | - | - | - | - | - | 1,590 | 1,590 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Residential Real Estate | 390 | - | 1,458 | 1,848 | 100,531 | 102,379 | 1,590 | 103,969 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
131 | 9 | 1,449 | 1,589 | 83,335 | 84,924 | 1,590 | 86,514 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer/Other: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 112 | 3 | 11 | 126 | 73,774 | 73,900 | - | 73,900 | 47 | 4 | - | 51 | 60,692 | 60,743 | - | 60,743 | ||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 3 | 3 | - | - | - | - | 3 | 3 | 231 | 234 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Consumer/Other | 112 | 3 | 11 | 126 | 73,774 | 73,900 | 3 | 73,903 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
47 | 4 | - | 51 | 60,695 | 60,746 | 231 | 60,977 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Grand Total: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer and Other: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 75 | - | 3 | 78 | 101,371 | 101,449 | - | 101,449 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | - | - | - | - | 53,895 | 53,895 | - | 53,895 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction to permanent - CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | - | - | - | - | 7,593 | 7,593 | - | 7,593 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 253 | 13 | 1,452 | 1,718 | 578,118 | 579,836 | 1,821 | 581,657 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable, gross: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 3,024 | 4,574 | 1,469 | 9,067 | 540,279 | 549,346 | - | 549,346 | $ | 253 | 13 | 1,452 | 1,718 | 572,132 | 573,850 | - | 573,850 | |||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | - | - | - | - | 5,176 | 5,176 | - | 5,176 | - | - | - | - | 4,531 | 4,531 | - | 4,531 | ||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | - | - | - | - | 877 | 877 | 4,751 | 5,628 | - | - | - | - | 1,455 | 1,455 | 1,821 | 3,276 | ||||||||||||||||||||||||||||||||||||||||||||||||
Grand Total | $ | 3,024 | 4,574 | 1,469 | 9,067 | 546,332 | 555,399 | 4,751 | 560,150 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable, gross | $ | 253 | 13 | 1,452 | 1,718 | 578,118 | 579,836 | 1,821 | 581,657 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at December 31, 2015:
(in thousands) | Performing (Accruing) Loans | |||||||||||||||||||||||||||||||
2015: | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Performing Loans | Total Non-Accrual Loans | Total Loans | ||||||||||||||||||||||||
Commercial & Industrial: | ||||||||||||||||||||||||||||||||
Pass | $ | 43 | 605 | 520 | 1,168 | 55,600 | 56,768 | - | 56,768 | |||||||||||||||||||||||
Substandard | 2,977 | - | - | 2,977 | 7 | 2,984 | - | 2,984 | ||||||||||||||||||||||||
Total Commercial & Industrial | 3,020 | 605 | 520 | �� | 4,145 | 55,607 | 59,752 | - | 59,752 | |||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Pass | - | - | - | - | 237,996 | 237,996 | - | 237,996 | ||||||||||||||||||||||||
Special Mention | - | - | - | - | 5,322 | 5,322 | - | 5,322 | ||||||||||||||||||||||||
Substandard | 840 | - | - | 840 | 1,670 | 2,510 | - | 2,510 | ||||||||||||||||||||||||
Total Commercial Real Estate | 840 | - | - | 840 | 244,988 | 245,828 | - | 245,828 | ||||||||||||||||||||||||
Construction - Pass | - | - | - | - | 15,551 | 15,551 | - | 15,551 | ||||||||||||||||||||||||
Construction to Permanent - Pass | - | - | - | - | 4,880 | 4,880 | - | 4,880 | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Pass | 154 | 87 | 1,517 | 1,758 | 107,489 | 109,247 | - | 109,247 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 1,590 | 1,590 | ||||||||||||||||||||||||
Total Residential Real Estate | 154 | 87 | 1,517 | 1,758 | 107,489 | 109,247 | 1,590 | 110,837 | ||||||||||||||||||||||||
Consumer/Other: | ||||||||||||||||||||||||||||||||
Pass | 309 | 2 | 9 | 320 | 47,198 | 47,518 | - | 47,518 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 3 | 3 | ||||||||||||||||||||||||
Total Consumer/Other | 309 | 2 | 9 | 320 | 47,198 | 47,518 | 3 | 47,521 | ||||||||||||||||||||||||
Grand Total: | ||||||||||||||||||||||||||||||||
Pass | 506 | 694 | 2,046 | 3,246 | 468,714 | 471,960 | - | 471,960 | ||||||||||||||||||||||||
Special Mention | - | - | - | - | 5,322 | 5,322 | - | 5,322 | ||||||||||||||||||||||||
Substandard | 3,817 | - | - | 3,817 | 1,677 | 5,494 | 1,593 | 7,087 | ||||||||||||||||||||||||
Grand Total | $ | 4,323 | 694 | 2,046 | 7,063 | 475,713 | 482,776 | 1,593 | 484,369 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
Impaired Loans
Impaired loans consist of non-accrual loans, Troubled Debt Restructurings(“TDRs”TDR”), and loans previously classified as TDRs that have been upgraded. As of September 30, 2016, the Company’s impairment analysis resulted in identification of $14.6 million of impaired loans, for which specific reserves of $3.2 million were required at September 30, 2016, compared to $12.9 million of impaired loans at December 31, 2015, for which specific reserves of $3,000 were required. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.
Troubled Debt Restructurings
On a case-by-case basis, the CompanyPatriot may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a troubled debt restructured loan.TDR.
ForThere were no loans modified as TDRs and no defaults of TDRs during the three and nine months ended September 30, 20162017 and 2015, there were no loans modified as a “troubled debt restructuring”.2016. At September 30, 20162017 and December 31, 2015,2016, there were no commitments to advance additional funds under troubled debt restructured loans.TDRs.
Substantially all of our troubled debt restructuredTDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below marketthe contract rate, an extension of the term of the loan, or a combination of adjusting these two methods. Thesecontractual attributes. TDR loan modifications rarelymay result in the forgiveness of principal or accrued interest. In addition, wewhen modifying commercial loans, Patriot frequently obtainobtains additional collateral or guarantor support when modifying commercial loans.support. If the borrower had demonstrated performancehas performed under the previousexisting contractual terms of the loan and our underwriting process showsPatriot’s underwriters determine that the borrower has the capacity to continue to perform under the restructured terms of the TDR, the loan will continue to accruecontinues accruing interest. Non-accruing restructured loansTDRs may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. All troubled debt restructurings are classified asreasonably assured of collection.
Impaired Loans
Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of September 30, 2017 and December 31, 2016, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $9.0 million and $8.9 million were identified, for which $285,000 and $231,000 specific reserves were established, respectively. Loans not requiring specific reserves had sufficient collateral values, less costs to sell, supporting the carrying amount of the loans. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.
At September 30, 2017 exposure to the $9.0 million of impaired loans was related to 12 borrowers. In all cases, appraisal reports of the underlying collateral, if any, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were reduced by an estimate of the costs to sell the assets, in order to estimate the potential loss, if any, that may eventually be realized. Performing loans are individually evaluatedmonitored to determine when, if at all, additional loan loss reserves may be required for impairment.a loss of underlying collateral value.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following table summarizes the investment in, outstanding principal balance of, and the related allowance, if any, for impaired loans by loan portfolio class as of September 30, 2017 and December 31, 2016:
(in thousands) | ||||||||||||
2016: | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial & Industrial | $ | - | - | - | ||||||||
Commercial Real Estate | 6,713 | 6,833 | - | |||||||||
Construction | - | - | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | 4,676 | 5,527 | - | |||||||||
Consumer/Other | - | - | - | |||||||||
11,389 | 12,360 | - | ||||||||||
With an allowance recorded: | ||||||||||||
Commercial & Industrial | 3,158 | 3,208 | 3,158 | |||||||||
Commercial Real Estate | - | - | - | |||||||||
Construction | - | - | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | - | - | - | |||||||||
Consumer/Other | 3 | 3 | 3 | |||||||||
3,161 | 3,211 | 3,161 | ||||||||||
Grand Total: | ||||||||||||
Commercial & Industrial | 3,158 | 3,208 | 3,158 | |||||||||
Commercial Real Estate | 6,713 | 6,833 | - | |||||||||
Construction | - | - | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | 4,676 | 5,527 | - | |||||||||
Consumer/Other | 3 | 3 | 3 | |||||||||
Grand Total | $ | 14,550 | 15,571 | 3,161 |
(In thousands) | ||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Principal | Related | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial Real Estate | $ | 6,081 | 6,531 | - | 6,267 | 6,721 | - | |||||||||||||||||
Residential Real Estate | 1,904 | 1,935 | - | 1,911 | 2,915 | - | ||||||||||||||||||
Commercial and Industrial | - | 503 | - | - | - | - | ||||||||||||||||||
Consumer and Other | 715 | 809 | - | 542 | 631 | - | ||||||||||||||||||
Construction | - | 39 | - | - | - | - | ||||||||||||||||||
8,700 | 9,817 | - | 8,720 | 10,267 | - | |||||||||||||||||||
With a related allowance recorded: | ||||||||||||||||||||||||
Commercial Real Estate | - | - | - | - | - | - | ||||||||||||||||||
Residential Real Estate | - | - | - | - | - | - | ||||||||||||||||||
Commercial and Industrial | 285 | 285 | 285 | 231 | 231 | 231 | ||||||||||||||||||
Consumer and Other | - | - | - | - | - | - | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
285 | 285 | 285 | 231 | 231 | 231 | |||||||||||||||||||
Impaired Loans, Total: | ||||||||||||||||||||||||
Commercial Real Estate | 6,081 | 6,531 | - | 6,267 | 6,721 | - | ||||||||||||||||||
Residential Real Estate | 1,904 | 1,935 | - | 1,911 | 2,915 | - | ||||||||||||||||||
Commercial and Industrial | 285 | 788 | 285 | 231 | 231 | 231 | ||||||||||||||||||
Consumer and Other | 715 | 809 | - | 542 | 631 | - | ||||||||||||||||||
Construction | - | 39 | - | - | - | - | ||||||||||||||||||
Impaired Loans, Total | $ | 8,985 | 10,102 | 285 | 8,951 | 10,498 | 231 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following table summarizes impaired loans by loan portfolio class as of December 31, 2015:
(in thousands) | ||||||||||||
2015: | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial & Industrial | $ | - | 96 | - | ||||||||
Commercial Real Estate | 7,745 | 8,259 | - | |||||||||
Construction | - | 287 | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | 4,556 | 5,559 | - | |||||||||
Consumer/Other | 547 | 633 | - | |||||||||
12,848 | 14,834 | - | ||||||||||
With an allowance recorded: | ||||||||||||
Commercial & Industrial | - | - | - | |||||||||
Commercial Real Estate | - | - | - | |||||||||
Construction | - | - | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | - | - | - | |||||||||
Consumer/Other | 3 | 3 | 3 | |||||||||
3 | 3 | 3 | ||||||||||
Grand Total: | ||||||||||||
Commercial & Industrial | - | 96 | - | |||||||||
Commercial Real Estate | 7,745 | 8,259 | - | |||||||||
Construction | - | 287 | - | |||||||||
Construction to Permanent | - | - | - | |||||||||
Residential | 4,556 | 5,559 | - | |||||||||
Consumer/Other | 550 | 636 | 3 | |||||||||
Grand Total | $ | 12,851 | 14,837 | 3 | ||||||||
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
The following tables summarize additional information regarding impaired loans for the three and nine months ended September 30, 20162017 and 2015.2016.
Three Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial & Industrial | $ | 148 | - | - | - | |||||||||||
Commercial Real Estate | 6,428 | 77 | 7,916 | 94 | ||||||||||||
Residential | 4,787 | 36 | 3,373 | 31 | ||||||||||||
Consumer/ Other | 272 | - | 549 | 4 | ||||||||||||
11,635 | 113 | 11,838 | 129 | |||||||||||||
With an allowance recorded: | ||||||||||||||||
Commercial & Industrial | 3,068 | - | - | - | ||||||||||||
Consumer/ Other | 2 | - | 1 | - | ||||||||||||
3,070 | - | 1 | - | |||||||||||||
Grand Total: | ||||||||||||||||
Commercial & Industrial | 3,216 | - | - | - | ||||||||||||
Commercial Real Estate | 6,428 | 77 | 7,916 | 94 | ||||||||||||
Residential | 4,787 | 36 | 3,373 | 31 | ||||||||||||
Consumer/ Other | 274 | - | 550 | 4 | ||||||||||||
Grand Total | $ | 14,705 | 113 | 11,839 | 129 |
(In thousands) | Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | |||||||||||||||
Average | Interest | Average | �� | Interest | ||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial Real Estate | $ | 6,111 | 10 | 6,428 | 77 | |||||||||||
Residential Real Estate | 1,903 | - | 4,787 | 36 | ||||||||||||
Commercial and Industrial | 37 | - | 148 | - | ||||||||||||
Consumer and Other | 584 | - | 272 | - | ||||||||||||
8,635 | 10 | 11,635 | 113 | |||||||||||||
With a related allowance recorded: | ||||||||||||||||
Commercial Real Estate | - | - | - | - | ||||||||||||
Residential Real Estate | - | - | - | - | ||||||||||||
Commercial and Industrial | 245 | - | 3,068 | - | ||||||||||||
Consumer and Other | - | - | 2 | - | ||||||||||||
245 | - | 3,070 | - | |||||||||||||
Impaired Loans, Total: | ||||||||||||||||
Commercial Real Estate | 6,111 | 10 | 6,428 | 77 | ||||||||||||
Residential Real Estate | 1,903 | - | 4,787 | 36 | ||||||||||||
Commercial and Industrial | 282 | - | 3,216 | - | ||||||||||||
Consumer and Other | 584 | - | 274 | - | ||||||||||||
Impaired Loans, Total | $ | 8,880 | 10 | 14,705 | 113 |
Nine Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial & Industrial | $ | 74 | - | - | - | |||||||||||
Commercial Real Estate | 7,281 | 236 | 8,079 | 281 | ||||||||||||
Residential | 4,666 | 98 | 3,430 | 95 | ||||||||||||
Consumer/ Other | 409 | 9 | 551 | 13 | ||||||||||||
Total: | 12,430 | 343 | 12,060 | 389 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Commercial & Industrial | 2,278 | - | - | - | ||||||||||||
Consumer/ Other | 2 | - | 1 | - | ||||||||||||
Total: | 2,280 | - | 1 | - | ||||||||||||
Grand Total: | ||||||||||||||||
Commercial & Industrial | 2,352 | - | - | - | ||||||||||||
Commercial Real Estate | 7,281 | 236 | 8,079 | 281 | ||||||||||||
Residential | 4,666 | 98 | 3,430 | 95 | ||||||||||||
Consumer/ Other | 411 | 9 | 552 | 13 | ||||||||||||
Grand Total | $ | 14,710 | 343 | 12,061 | 389 |
(In thousands) | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial Real Estate | $ | 6,173 | 159 | 7,281 | 236 | |||||||||||
Residential Real Estate | 1,907 | 5 | 4,666 | 98 | ||||||||||||
Commercial and Industrial | 46 | - | 74 | - | ||||||||||||
Consumer and Other | 558 | 10 | 409 | 9 | ||||||||||||
8,684 | 174 | 12,430 | 343 | |||||||||||||
With a related allowance recorded: | ||||||||||||||||
Commercial Real Estate | - | - | - | - | ||||||||||||
Residential Real Estate | - | - | - | - | ||||||||||||
Commercial and Industrial | 237 | - | 2,278 | - | ||||||||||||
Consumer and Other | - | - | 2 | - | ||||||||||||
237 | - | 2,280 | - | |||||||||||||
Impaired Loans, Total: | ||||||||||||||||
Commercial Real Estate | 6,173 | 159 | 7,281 | 236 | ||||||||||||
Residential Real Estate | 1,907 | 5 | 4,666 | 98 | ||||||||||||
Commercial and Industrial | 283 | - | 2,352 | - | ||||||||||||
Consumer and Other | 558 | 10 | 411 | 9 | ||||||||||||
Impaired Loans, Total | $ | 8,921 | 174 | 14,710 | 343 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 4:4Other Real Estate Owned: Deposits
At September 30, 2016, Other Real Estate Owned (“OREO”) consisted of a single property which consists of raw land that is zoned for multi-use construction. The following table presents a summarythe balance of OREO activity for the nine months endeddeposits held, by category as of September 30, 2016:
(in thousands) | OREO | |||
Balance at December 31, 2015 | $ | - | ||
Transfers from loans | 840 | |||
Gain recognized in acquisition | 11 | |||
Balance at September 30, 2016 | $ | 851 |
The recognized gain represents the amount by which fair market value of the property, net of estimated liquidation costs, exceeded the remaining loan balance as of the date possession was taken of the property.
As of2017 and for the nine months ended September 30, 2015, there was no OREO activity.
Note 5: DepositsDecember 31, 2016.
The following table is a summary of the Company’s deposits at:
(in thousands) | ||||||||
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Non-interest bearing | $ | 77,304 | 85,812 | |||||
Interest bearing | ||||||||
NOW | 24,672 | 27,951 | ||||||
Savings | 130,901 | 106,291 | ||||||
Money market | 17,230 | 19,508 | ||||||
Time certificates, less than $250,000 | 140,028 | 139,455 | ||||||
Time certificates, $250,000 or more | 23,865 | 17,509 | ||||||
Brokered Deposits | 57,185 | 48,154 | ||||||
Total interest bearing | 393,881 | 358,868 | ||||||
Total Deposits | $ | 471,185 | 444,680 |
(In thousands) | September 30, 2017 | December 31, 2016 | ||||||
Non-interest bearing | $ | 76,875 | $ | 76,772 | ||||
Interest bearing: | ||||||||
NOW | 27,420 | 29,912 | ||||||
Savings | 141,256 | 131,429 | ||||||
Money market | 13,477 | 15,593 | ||||||
Certificates of deposit, less than $250,000 | 182,960 | 160,609 | ||||||
Certificates of deposit, $250,000 or greater | 69,415 | 51,077 | ||||||
Brokered deposits | 94,011 | 63,932 | ||||||
Interest bearing, Total | 528,539 | 452,552 | ||||||
Total Deposits | $ | 605,414 | $ | 529,324 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 6:5:Share-Based Compensation and Employee Benefit Plan
The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan (the “Plan”) to provide an incentive to directors and employees of the Company. Grants underCompany by the Plan may take the formgrant of stock options, restricted stock andawards (“RSA”), options, or phantom stock units. UpSince 2013, the Company’s practice is to three milliongrant RSAs; as of September 30, 2017 and December 31, 2016, there were no options or phantom stock units outstanding, or that have been exercised during the period then ended.
The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock and one million phantom stock units may be issued under the Plan, subject to certain limitations. As of September 30, 2016, 2,884,7162017, 2,887,032 shares of common stock and one million phantom stock units are available for issuance under the Plan.
Restricted In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs and stock grants are availableoption grants. RSAs granted to directors and employees and generally vest in quarterly or annual installments over a three, four or five year period from the date of grant, as determined by the Compensation Committee of the Company’s Board of Directors. Vesting may be accelerated under certain circumstances. The Company expenses the grant date fair value of all share-based compensation over the requisite vesting periods on a prorated straight-line basis.
Due to the resignation of the Company’s Chief Executive Officer from the Company and the Board of Directors and the resignation of the Chief Operating Officer, 65,000 shares of unvested restricted stock were cancelled and $227,000 of stock-based compensation expense was reversed in the third quarter. As a result, the Company recorded a net credit to stock-based compensation expense of $182,000 for the three months ended September 30, 2016, and net expense of $126,000 for the nine month period then ended.grant. During the three and nine months ended September 30, 2015,2017, the Company recorded $112,000granted 5,084 RSAs to directors and $340,000 of total stock-based compensation, respectively.
zero RSA to employees. During the nine months ended September 30, 2016, the Company issuedgranted 52,200 restricted shares to employees and 5,884 restricted shares to directors, respectively. During the three and nine months ended September 30, 2017, 1,692 and 3,923 shares of restricted stock to directorsbecame vested, 600 and 52,2006,600 shares of restricted stock forfeited, respectively. All RSAs are non- participating grants.
The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value. For the three and nine months ended September 30, 2017, the Company recognized share-based compensation expense of $37,000 and $105,000, respectively. The share-based compensation attributable to employees underof Patriot amounted to $16,000 and $48,000, respectively.
For the 2012 Stock Plan.three months ended September 30, 2016, the Company recorded a net credit to share-based compensation expense of $182,000, and net expense of $126,000, for the nine months ended September 30, 2016. The share-based compensation attributable to employees of Patriot amounted to a net credit of $198,000 and net expense of $80,000 for the three and nine months ended September 30, 2016, respectively. The net credit was primarily due to the resignations of the Company’s Chief Executive Officer and the Chief Operating Officer in the third quarter of 2016.
Included in share-based compensation expense for the three and nine months ended September 30, 2017 were $21,000 and $57,000 attributable to Patriot’s external Directors, who received total compensation of $80,000 and $226,000 for each of those periods, respectively, which amounts are included in Other Operating Expenses in the Consolidated Statements of Income.
The share-based compensation expense for the three and nine months ended September 30, 2016 were $16,000 and $46,000 attributable to Patriot’s external Directors, who received total compensation of $75,000 and $227,000 for each of those periods, respectively, which amounts are included in Other Operating Expenses in the Consolidated Statements of Income.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The following is a summary of the status of the Company’sCompany’s restricted shares as of September 30, 2017 and 2016 and changes therein during the periods indicated:
Three months ended September 30, 2016: | Number of Shares Awarded | Weighted Average Grant Date Fair Value | ||||||
Non-vested at June 30, 2016 | 107,199 | $ | 14.16 | |||||
Granted | - | - | ||||||
Vested | (1,688 | ) | 16.80 | |||||
Forfeited | (65,500 | ) | 14.87 | |||||
Non-vested at September 30, 2016 | 40,011 | $ | 12.87 | |||||
Three months ended September 30, 2015: | ||||||||
Non-vested at June 30, 2015 | 81,698 | $ | 12.92 | |||||
Granted | 9,760 | 16.85 | ||||||
Vested | (225 | ) | 17.25 | |||||
Forfeited | (1,539 | ) | 10.40 | |||||
Non-vested at September 30, 2015 | 89,694 | $ | 13.37 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
The following is a summary of
Three months ended September 30, 2017: | Number | Weighted Average | ||||||
Unvested at June 30, 2017 | 32,117 | $ | 12.39 | |||||
Vested | (1,692 | ) | $ | 16.80 | ||||
Forfeited | (600 | ) | $ | 15.50 | ||||
Unvested at September 30, 2017 | 29,825 | $ | 12.08 | |||||
Nine months ended September 30, 2017: | ||||||||
Unvested at December 31, 2016 | 35,264 | $ | 12.84 | |||||
Granted | 5,084 | $ | 15.05 | |||||
Vested | (3,923 | ) | $ | 14.66 | ||||
Forfeited | (6,600 | ) | $ | 15.50 | ||||
Unvested at September 30, 2017 | 29,825 | $ | 12.08 |
Three months ended September 30, 2016: | Number | Weighted Average | ||||||
Unvested at June 30, 2016 | 107,199 | $ | 14.16 | |||||
Vested | (1,688 | ) | $ | 16.80 | ||||
Forfeited | (65,500 | ) | $ | 14.87 | ||||
Unvested at September 30, 2016 | 40,011 | $ | 12.87 | |||||
Nine months ended September 30, 2016: | ||||||||
Unvested at December 31, 2015 | 55,854 | $ | 12.83 | |||||
Granted | 58,084 | $ | 15.25 | |||||
Vested | (4,214 | ) | $ | 15.55 | ||||
Forfeited | (69,713 | ) | $ | 14.66 | ||||
Unvested at September 30, 2016 | 40,011 | $ | 12.87 |
Compensation expense attributable to the status of the Company’sunvested restricted shares outstanding as of September 30, 2015 and changes therein during the periods indicated:
Nine months ended September 30, 2016: | Number of Shares Awarded | Weighted Average Grant Date Fair Value | ||||||
Non-vested at December 31, 2015 | 55,854 | $ | 12.83 | |||||
Granted | 58,084 | 15.25 | ||||||
Vested | (4,214 | ) | 15.55 | |||||
Forfeited | (69,713 | ) | 14.66 | |||||
Non-vested at September 30, 2016 | 40,011 | $ | 12.87 | |||||
Nine months ended September 30, 2015: | ||||||||
Non-vested at December 31, 2014 | 79,208 | $ | 12.79 | |||||
Granted | 12,700 | 16.85 | ||||||
Vested | (675 | ) | 17.25 | |||||
Forfeited | (1,539 | ) | 10.40 | |||||
Non-vested at September 30, 2015 | 89,694 | $ | 13.37 |
Expected future stock award expense related2017 amounts to the non-vested restricted awards as of September 30, 2016, is $505,000,$321,000, which amount is expected to be recognized over anthe weighted average periodremaining life of 3.14the awards of 2.27 years.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
RSA Grant - Non-executive Employees
On January 4, 2016, the Company granted 100 restricted shares of common stock to each of eighty-seven full- and part-time non-executive employees as of December 31, 2015. The Company had no outstanding stock optionstotal number of shares granted was 8,700 at a grant date fair value of $15.50 per share. The shares granted vest on January 2, 2019 and are non-participating during the vesting period.
During the nine months ended September 30, 2016.2017, 600 granted shares were forfeited. During the nine months ended September 30, 2016, 1,800 granted shares were forfeited. The remaining 6,300 shares continue to vest and $41,000 of compensation expense is expected to be recognized through the January 2019 vesting date.
Retirement Plan
The Company offers a 401K retirement plan (the “401K”), which provides for tax-deferred salary deductions for eligible employees. Employees may choose to make voluntary contributions to the 401K, limited to an annual maximum amount as set forth periodically by the Internal Revenue Service. The Company matches 50% of such contributions, up to a maximum of six percent.percent. During the three and nine months ended September 30, 2017, compensation expense under the 401K aggregated $37,000 and $132,000, respectively. During the three and nine months ended September 30, 2016, compensation expense under the 401K aggregated $39,000 and $120,000, respectively. During
Dividends
On July 17, 2017, the three andCompany announced its intention to begin making quarterly cash dividend payments. The first dividend of $0.01 per share was announced for shareholders of record as of July 24, 2017 with a payment date of August 1, 2017. For the nine months ended September 30, 2015, compensation expense under2017, the 401K aggregated $35,000Company paid cash dividends of $39,000. No dividend was declared and $112,000, respectively.
Note 7: Income Taxes
Forpaid for the three and nine months ended September 30, 2016, the Company recorded income tax expense2016. The next dividend payment is scheduled on November 10, 2017 for shareholders of $0.5 million and $0.6 million, respectively. This compares to income tax expenserecord as of $0.4 million and $1.1 million,respectively, for the three and nine months ended September 30, 2015.
Deferred tax assets decreased $0.4 million from $13.8 million at December 31, 2015 to $13.3 million at September 30, 2016. This decrease was due to deferred taxes being applied to the tax liability arising from current year taxable income.
The Company will continue to evaluate its ability to realize its net deferred tax asset. If future evidence suggests that it is more likely than not that a portion of the deferred tax asset will not be realized, the valuation allowance may be increased.November 9, 2017.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 8: Income 6:Earningsper share
The Company presentsis required to present basic incomeearnings per share and diluted incomeearnings per share in its consolidated statementsConsolidated Statements of operations.Income. Basic incomeearnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted incomeearnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding restricted stocksunvested RSAs granted to directors and would beemployees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also providesrequired to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted incomeearnings per share.
The Company had no outstanding stock options as of September 30, 2016 or December 31, 2015. The following is information about the computation of incomebasic and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016 and 2015:follows.
Three months ended September 30, 2016: | Net Income | Weighted Average Common Shares Outstanding | Amount | |||||||||
Basic Income Per Share | $ | 814,000 | 3,958,718 | $ | 0.21 | |||||||
Effect of Dilutive Securities | ||||||||||||
Non-vested Restricted Stock Grants | N/A | - | N/A | |||||||||
Diluted Income Per Share | $ | 814,000 | 3,958,718 | $ | 0.21 | |||||||
Three months Ended September 30, 2015: | ||||||||||||
Basic Income Per Share | $ | 633,000 | 3,872,298 | $ | 0.16 | |||||||
Effect of Dilutive Securities | ||||||||||||
Non-vested Restricted Stock Grants | N/A | 34,622 | N/A | |||||||||
Diluted Income Per Share | $ | 633,000 | 3,906,920 | $ | 0.16 |
(Net income in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Basic earnings per share: | ||||||||||||||||
Net income attributable to Common shareholders | $ | 1,013 | 814 | 3,547 | 885 | |||||||||||
Divided by: | ||||||||||||||||
Weighted average shares outstanding | 3,894,237 | 3,958,718 | 3,893,702 | 3,957,343 | ||||||||||||
Basic earnings per common share | $ | 0.26 | 0.21 | 0.91 | 0.22 | |||||||||||
Diluted earnings per share: | ||||||||||||||||
Net income attributable to Common shareholders | $ | 1,013 | 814 | 3,547 | 885 | |||||||||||
Weighted average shares outstanding | 3,894,237 | 3,958,718 | 3,893,702 | 3,957,343 | ||||||||||||
Effect of potentially dilutive restricted common shares | 9,193 | - | 4,854 | - | ||||||||||||
Divided by: | ||||||||||||||||
Weighted average diluted shares outstanding | 3,903,430 | 3,958,718 | 3,898,556 | 3,957,343 | ||||||||||||
Diluted earnings per common share | $ | 0.26 | 0.21 | 0.91 | 0.22 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
The following is information about the computation of income per share for the nine months ended September 30, 2016 and 2015:
Nine months ended September 30, 2016: | Net Income | Weighted Average Common Shares Outstanding | Amount | |||||||||
Basic Earnings Per Share | $ | 885,000 | 3,957,343 | $ | 0.22 | |||||||
Effect of Dilutive Securities | ||||||||||||
Non-vested Restricted Stock Grants | N/A | - | N/A | |||||||||
Diluted Income Per Share | $ | 885,000 | 3,957,343 | $ | 0.22 | |||||||
Nine months Ended September 30, 2015: | ||||||||||||
Basic Income Per Share | $ | 1,611,000 | 3,872,074 | $ | 0.42 | |||||||
Effect of Dilutive Securities | ||||||||||||
Non-vested Restricted Stock Grants | N/A | 30,699 | N/A | |||||||||
Diluted Income Per Share | $ | 1,611,000 | 3,902,773 | $ | 0.41 |
NoNote 9:te Borrowings7
Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB"). The Company has the ability to borrow from the FHLB based on a certain percentage of the value of the Company’s qualified collateral, as defined in the FHLB Statement of Products Policy, comprised mainly of mortgage-backed securities and loans segregated as collateral for the FHLB.
At September 30, 2016 and December 31, 2015, outstanding advances from the FHLB aggregated $135.0 million and $132.0 million, respectively. The advances outstanding at September 30, 2016 had maturities ranging from three days to fifty-three months with rates ranging from 6.1 basis points to 51.0 basis points. The FHLB borrowings are collateralized by a mixture of real estate loans and securities with a book value of $146.1 million as of September 30, 2016.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
Junior subordinated debt owed to unconsolidated trust
The subordinated debentures of $8.2 million are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. These obligations qualify as Tier 1 capital. The subordinated debentures bear interest at three-month LIBOR plus 3.15% (4.01% at September 30, 2016), mature on March 26, 2033. Beginning in the second quarter of 2009, the Company deferred quarterly interest payments on the subordinated debentures for twenty consecutive quarters as permitted under the terms of the debentures. The Company made a payment of approximately $1.6 million in June 2014, which brought the debt current as of that date. Interest payments since June 2014 were deferred at the Company’s option, until the third quarter of 2016 when the Company paid approximately $0.7 million representing the total amount accrued. Interest expense continues to be accrued and charged to operations. At September 30, 2016, interest owed for the subordinated debt was insignificant.
Note Payable
In September 2015, the Company executed a $2.0 million Note Payable for the purchase of its Fairfield, CT branch, which had formerly been leased by the Company. The note has a ten-year term and bears interest at a fixed rate of 1.75%. The Company makes interest and principal payments monthly. The note is secured by a first Mortgage Deed and Security Agreement on the property purchased and has an outstanding balance of $1.8 million and $1.9 million as of September 30, 2016 and December 31, 2015, respectively.
Note 10: :Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the CompanyPatriot is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement the CompanyPatriot has in particular classes of financial instruments.
The contractual amount of commitments to extend credit and standby letters of credit representsrepresents the totalmaximum amount of potential accounting loss shouldshould: the contractscontract be fully drawn upon,upon; the customers default,customer default; and the value of any existing collateral becomebecomes worthless. The Company uses the samePatriot applies its credit policies in approvingto entering commitments and conditional obligations and, as it does for on-balance-sheet instruments andwith its lending activates, evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that the Company controlsit effectively mitigates the credit risk of these financial instruments through its credit approvals,approval processes, establishing credit limits, monitoring proceduresthe on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.
Financial instruments whose contractual amounts representwith credit risk at September 30, 20162017 are as follows:
Commitments to extend credit: | (in thousands) | |||
Future loan commitments | $ | 17,833 | ||
Home equity lines of credit | 21,303 | |||
Unused lines of credit | 14,742 | |||
Undisbursed construction loans | 19,574 | |||
Financial standby letters of credit | 1,313 | |||
$ | 74,765 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
(In thousands) | ||||
As of September 30, 2017 | ||||
Commitments to extend credit: | ||||
Unused lines of credit | $ | 49,464 | ||
Undisbursed construction loans | 10,433 | |||
Home equity lines of credit | 20,177 | |||
Future loan commitments | 21,938 | |||
Financial standby letters of credit | 1,299 | |||
$ | 103,311 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension ofextending credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include commercial property, residential and commercial property, deposits and securities. The CompanyPatriot has established a $5,000 reserve for credit loss as of September 30, 2016 for these commitments,2017, which amount is minimal and included in accrued expenses and other liabilities.
Standby letters of credit are written commitments issued by the CompanyPatriot to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded on the Company’s consolidated balance sheet at their fair value at inception. Any instruments deemed to be derivatives would be accounted for as a fair value or cash flow hedge as appropriate.
Note 11: Regulatory and Operational Mattersincluded in the Consolidated Balance Sheet.
The Company’s and the Bank’s capital and capital ratios at September 30, 2016 and December 31, 2015 are as follows:
Capital Requirements | ||||||||||||||||||||||||||||||||
Actual | Minimum | Minimum with Capital Buffer | Well Capitalized | |||||||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
September 30, 2016: | ||||||||||||||||||||||||||||||||
The Company | ||||||||||||||||||||||||||||||||
Tier 1 Leverage Capital (to Average Assets) | $ | 60,794 | 9.72 | % | $ | 25,009 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 52,794 | 8.99 | % | 26,435 | 4.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 60,794 | 10.35 | % | 35,247 | 6.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | 68,130 | 11.60 | % | 46,996 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
The Bank | ||||||||||||||||||||||||||||||||
Tier 1 Leverage Capital (to Average Assets) | $ | 60,523 | 9.68 | % | $ | 24,998 | 4.00 | % | N/A | N/A | $ | 31,248 | 5.00 | % | ||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 60,523 | 10.34 | % | 26,337 | 4.50 | % | 29,994 | 5.125 | % | 38,042 | 6.50 | % | ||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 60,523 | 10.34 | % | 35,115 | 6.00 | % | 38,773 | 6.625 | % | 46,821 | 8.00 | % | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | 67,839 | 11.59 | % | 46,821 | 8.00 | % | 50,478 | 8.625 | % | 58,526 | 10.00 | % | ||||||||||||||||||||
December 31, 2015: | ||||||||||||||||||||||||||||||||
The Company | ||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 59,595 | 9.77 | % | $ | 24,401 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 51,595 | 10.04 | % | 23,119 | 4.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 59,595 | 11.60 | % | 30,826 | 6.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 64,845 | 12.62 | % | 41,101 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
The Bank | ||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 59,958 | 9.83 | % | $ | 24,393 | 4.00 | % | N/A | N/A | $ | 30,491 | 5.00 | % | ||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 59,958 | 11.72 | % | 23,029 | 4.50 | % | N/A | N/A | 33,265 | 6.50 | % | |||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 59,958 | 11.72 | % | 30,706 | 6.00 | % | N/A | N/A | 40,941 | 8.00 | % | |||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 65,207 | 12.74 | % | 40,941 | 8.00 | % | N/A | N/A | 51,177 | 10.00 | % |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 8: Regulatory and Operational Matters
Federal and State regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, Federal banking agencies imposed four minimum capital requirements on community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.
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 instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 5.0%. However, regardless of a financial institution’s ratios, the OCC may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.
Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The Company’s and the Bank’s regulatory capital amounts and ratios at September 30, 2017 and December 31, 2016 are summarized as follows:
(In thousands) | Patriot National Bancorp, Inc. | Patriot Bank, N.A. | ||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
Total Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Actual | 74,470 | 10.222 | 66,254 | 10.603 | 83,558 | 11.554 | 74,303 | 11.928 | ||||||||||||||||||||||||
To be Well Capitalized(1) | - | - | - | - | 72,320 | 10.000 | 62,292 | 10.000 | ||||||||||||||||||||||||
For capital adequacy with Capital Buffer(2) | - | - | - | - | 66,896 | 9.250 | 53,727 | 8.625 | ||||||||||||||||||||||||
For capital adequacy | 58,280 | 8.000 | 49,989 | 8.000 | 57,856 | 8.000 | 49,834 | 8.000 | ||||||||||||||||||||||||
Tier 1 Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Actual | 68,240 | 9.367 | 61,571 | 9.854 | 77,328 | 10.692 | 69,620 | 11.176 | ||||||||||||||||||||||||
To be Well Capitalized(1) | - | - | - | - | 57,856 | 8.000 | 49,834 | 8.000 | ||||||||||||||||||||||||
For capital adequacy with Capital Buffer(2) | - | - | - | - | 52,432 | 7.250 | 41,269 | 6.625 | ||||||||||||||||||||||||
For capital adequacy | 43,710 | 6.000 | 37,491 | 6.000 | 43,392 | 6.000 | 37,375 | 6.000 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Actual | 60,240 | 8.269 | 53,571 | 8.573 | 77,328 | 10.692 | 69,620 | 11.176 | ||||||||||||||||||||||||
To be Well Capitalized(1) | - | - | - | - | 47,008 | 6.500 | 40,490 | 6.500 | ||||||||||||||||||||||||
For capital adequacy with Capital Buffer(2) | - | - | - | - | 41,584 | 5.750 | 31,925 | 5.125 | ||||||||||||||||||||||||
For capital adequacy | 32,783 | 4.500 | 28,119 | 4.500 | 32,544 | 4.500 | 28,031 | 4.500 | ||||||||||||||||||||||||
Tier 1 Leverage Capital (to average assets): | ||||||||||||||||||||||||||||||||
Actual | 68,240 | 8.449 | 61,571 | 9.296 | 77,328 | 9.574 | 69,620 | 10.518 | ||||||||||||||||||||||||
To be Well Capitalized(1) | - | - | - | - | 40,384 | 5.000 | 33,096 | 5.000 | ||||||||||||||||||||||||
For capital adequacy | 32,308 | 4.000 | 26,494 | 4.000 | 32,308 | 4.000 | 26,477 | 4.000 |
(1) | Designation as "Well Capitalized" does not apply to bank holding companies - - the Company. Such categorization of capital adequacy only applies to insured depository institutions - - the Bank. |
(2) | The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016. It was not applicable to periods prior to that date and does not apply to bank holding companies - - the Company. |
Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 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 canmay be paid out in dividendsdistributed 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. We have included theThe 0.625% increasecapital conversation buffer for 2016 has been included in ourthe minimum capital adequacy ratios in the 2016 column in the table above. The capital conversation buffer increased to 1.25% for 2017, which has been included in the minimum capital adequacy ratios in the 2017 column above.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The capital buffer requirement effectively raises the minimum required common equity Tier 1 capitalTotal Capital ratio to 7.0%10.5%, the Tier 1 capital ratio to 8.5%, and the totalCET1 capital ratio to 10.5%7.0% on a fully phased-in basis, which will be as ofeffective beginning on January 1, 2019. Management believes that, as of September 30, 2016, the Company would meet2017, 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.
Note 12:9:Fair Value and Interest Rate Risk
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value, requiring entities to maximize the use of observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs generally require significant management judgment.
The three levels withinof the fair value hierarchy are as follows:consist of:
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Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities) |
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Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently) |
– | Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.). |
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A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instrumentsinstruments not recorded at fair value, is set forth below.
Cash and due from banks, federal funds sold short-term investments and accrued interest receivable and payable:payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.
Available-for-Sale Securities:Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) isare determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices.prices, or using unobservable inputs employing various techniques and assumptions (Level 3).
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Other Investments:Investments
The Bank’sBank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized for the purposes ofby the Bank satisfyingto satisfy its CRACommunity Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded and therefore have no readily determinable market value. The investment in the Fund is reported in the financial statementsConsolidated Financial Statements at cost, as adjusted for income, losses, and cash distributions attributable to the investment.cost.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
Shares in the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.
LoansLoans:
For variable rate loans, which periodically reprice frequently and havewith no significantapparent change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. portfolios, are a reasonable estimate of fair value.
The fair value of fixed rate loans is estimated by discounting the future cash flows using the period-endperiod-end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. As estimates are dependent
Since individual loans do not trade on management’s observations,an open market and transfer of individual loans are private transactions that are not publicized, the fair value of the loan portfolio is classified aswithin Level 3. The Company3 of the fair value hierarchy. Patriot does not record loans at fair value on a recurring basis. However,basis; however, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downsthe net realizable value expected to be collected on default by the borrower based on the observable market priceinputs or current appraised value of collateral.collateral held. Fair values estimated in this manner do not fully incorporate an exit-price approach, to fair value, but instead are based on a comparison to current market rates for comparable loans.loans, adjusted by management based on the best information available.
OREO:OREO
The fair value of other OREO properties the CompanyBank may obtain is based on the estimated current appraised property valuationsvalue less estimated selling costs.costs to sell. When the fair value is based on unadjusted current observable appraised values, OREO is classified within Level 2. The Company2 of the fair value hierarchy. Patriot classifies OREO within Level 3 of the fair value hierarchy when unobservable adjustmentsinputs are madeused to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value and then monitors property and market conditions that may indicate a change in value is warranted.
Deposits:Deposits
The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits.
The Company does not record deposits at fair value on a recurring basis.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
Senior Notes and Junior Subordinated Debt:Debt
The senior notes were issued in December 2016 and therefore the carrying value is considered comparable to fair value. Management does not intend to measure the senior notes at fair value on a recurring basis.
Junior subordinated debt reprices quarterly and, as a result, the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.
Federal Home Loan Bank Borrowings: Theand Correspondent Bank Borrowings
The fair value of theFHLB advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan BankFHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.
Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments)
Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value (i.e., commitments to extend credit) on a recurring basis.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
The following table detailss detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of September 30, 20162017 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value:2016:
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of September 30, 2016 | ||||||||||||
September 30, 2016: | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | - | 11,412 | - | 11,412 | |||||||||||
Corporate bonds | - | 8,937 | - | 8,937 | ||||||||||||
Subordinated Notes | - | 3,025 | - | 3,025 | ||||||||||||
Securities available for sale | $ | - | 23,374 | - | 23,374 |
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of December 31, 2015 | |||||||||||||
December 31, 2015: | ||||||||||||||||
U.S. Government agency bonds | $ | - | 4,954 | - | 4,954 | |||||||||||
U.S. Government agency mortgage-backed securities | - | 13,413 |
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Corporate bonds | - | 9,010 |
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Subordinated Notes | - | 2,000 | - | 2,000 | ||||||||||||
Securities available for sale | $ | - | 29,377 | - | 29,377 |
(In thousands) | Quoted Prices in | Significant Observable Inputs | Significant Unobservable Inputs | Total | ||||||||||||
September 30, 2017: | ||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | - | 8,036 | - | 8,036 | |||||||||||
Corporate bonds | - | 13,905 | - | 13,905 | ||||||||||||
Subordinated notes | - | 5,610 | 2,035 | 7,645 | ||||||||||||
Available-for-sale securities | $ | - | 27,551 | 2,035 | 29,586 | |||||||||||
December 31, 2016: | ||||||||||||||||
U. S. Government agency mortgage-backed securities | $ | - | 10,441 | - | 10,441 | |||||||||||
Corporate bonds | - | 8,961 | - | 8,961 | ||||||||||||
Subordinated notes | - | 3,026 | 2,000 | 5,026 | ||||||||||||
Available-for-sale securities | $ | - | 22,428 | 2,000 | 24,428 |
The Company regularly monitors significant market inputs and assumptions used in its fair value measurements and evaluates the level oftable below presents the valuation input according to the fair value hierarchy. This may result in a transfer between levels in the hierarchy from period to period.There were no transfers ofmethodology and unobservable inputs for level 3 assets between levels 1, 2 or 3 during the nine months ended September 30, 2016 or 2015. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)
The following table reflects financial assets measuredmeasures at fair value on a non-recurring basis as of September 30, 20162017 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized:2016:
(in thousands) | ||||||||||||||||
Asset Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance | ||||||||||||
September 30, 2016: | ||||||||||||||||
Impaired loans | $ | - | - | - | - | |||||||||||
Other real estate owned | $ | - | - | 851 | 851 | |||||||||||
December 31, 2015: | ||||||||||||||||
Impaired loans | $ | - | - | 363 | 363 |
(In thousands) | ||||||||||||
| Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs | ||||||||
September 30, 2017: | ||||||||||||
Impaired loans | $ | 8,985 | Real Estate Appraisals | Discount for appraisal type | 0% | - | 8% | |||||
OREO | 851 | Real Estate Appraisals | Discount for appraisal type | 21% | ||||||||
December 31, 2016: | ||||||||||||
Impaired loans | $ | 8,951 | Real Estate Appraisals | Discount for appraisal type | 0% | - | 8% | |||||
OREO | 851 | Real Estate Appraisals | Discount for appraisal type | 21% |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
(in thousands) | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Asset Description | Fair Value | Valuation Technique | Unobservable Input | Range/ (Weighted Average ) | ||||||
September 30, 2016: | ||||||||||
Other real estate owned | $ | 851 | Appraised Value of Property(1) | Liquidation Costs(2) | 9.6% / (9.6%)(3) | |||||
December 31, 2015: | ||||||||||
Impaired loans | $ | 363 | Appraised Value of Collateral(1) | Liquidation Costs(2) | 8% / (8%)(3) |
Notes to consolidated financial statements (unaudited)
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The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet,Consolidated Balance Sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of the Company.financial instruments included in the Consolidated Financial Statements.
The estimated fair value amounts have been measured as of September 30, 20162017 and December 31, 20152016 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair valuevalues of thesethe financial instruments subsequent to the respective reporting datesmeasured may be different than amounts reported on those dates.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)if they had been subsequently valued.
The information presented should not be interpreted as an estimate of the total fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.liabilities, since only a portion of Patriot’s assets and liabilities are liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.
The following istable provides a summarycomparison of the carrying amounts and estimated fair values of the Company’sPatriot’s financial instruments not measuredassets and not reported at fair value on the consolidated balance sheets atliabilities as of September 30, 20162017 and December 31, 2015:2016:
(in thousands) | September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||||||||||||
(In thousands) | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||||
Fair Value | Carrying | Estimated | Carrying | Estimated | Fair Value | Carrying | Estimated | Carrying | Estimated | |||||||||||||||||||||||||
Financial Assets: | Hierarchy | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||||||
Cash and noninterest bearing balances due from banks | Level 1 | $ | 2,454 | 2,454 | 2,588 | 2,588 | Level 1 | $ | 3,337 | 3,337 | 2,596 | 2,596 | ||||||||||||||||||||||
Interest-bearing deposits due from banks | Level 1 | 43,060 | 43,060 | 82,812 | 82,812 | Level 1 | 25,075 | 25,075 | 89,693 | 89,693 | ||||||||||||||||||||||||
Available for sale securities | Level 2 | 23,374 | 23,374 | 29,377 | 29,377 | |||||||||||||||||||||||||||||
U. S. Government agency mortgage-backed securities | Level 2 | 8,036 | 8,036 | 10,441 | 10,441 | |||||||||||||||||||||||||||||
Corporate bonds | Level 2 | 13,905 | 13,905 | 8,961 | 8,961 | |||||||||||||||||||||||||||||
Subordinated Notes | Level 2 | 5,610 | 5,610 | 3,026 | 3,026 | |||||||||||||||||||||||||||||
Subordinated Notes | Level 3 | 2,035 | 2,035 | 2,000 | 2,000 | |||||||||||||||||||||||||||||
Other investments | Level 2 | 4,450 | 4,450 | 4,450 | 4,450 | Level 2 | 4,450 | 4,450 | 4,450 | 4,450 | ||||||||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | Level 2 | 7,818 | 7,818 | 8,645 | 8,645 | |||||||||||||||||||||||||||||
Federal Reserve Bank stock | Level 2 | 2,460 | 2,460 | 2,109 | 2,109 | |||||||||||||||||||||||||||||
Federal Home Loan Bank stock | Level 2 | 6,353 | 6,353 | 5,609 | 5,609 | |||||||||||||||||||||||||||||
Loans receivable, net | Level 3 | 552,822 | 562,114 | 479,127 | 478,160 | Level 3 | 703,896 | 699,764 | 576,982 | 576,757 | ||||||||||||||||||||||||
Accrued interest receivable | Level 2 | 2,308 | 2,308 | 2,010 | 2,010 | Level 2 | 3,501 | 3,501 | 2,726 | 2,726 | ||||||||||||||||||||||||
Financial assets, total | Financial assets, total | $ | 778,658 | 774,526 | 708,593 | 708,368 | ||||||||||||||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||||||||||||
Demand deposits | Level 2 | $ | 77,304 | 77,304 | 85,812 | 85,812 | Level 2 | $ | 76,875 | 76,875 | 76,772 | 76,772 | ||||||||||||||||||||||
Savings deposits | Level 2 | 130,901 | 130,901 | 106,291 | 106,291 | Level 2 | 141,256 | 141,256 | 131,429 | 131,429 | ||||||||||||||||||||||||
Money market deposits | Level 2 | 17,230 | 17,230 | 19,508 | 19,508 | Level 2 | 13,477 | 13,477 | 15,593 | 15,593 | ||||||||||||||||||||||||
NOW accounts | Level 2 | 24,672 | 24,672 | 27,951 | 27,951 | Level 2 | 27,420 | 27,420 | 29,912 | 29,912 | ||||||||||||||||||||||||
Time deposits | Level 2 | 163,893 | 221,105 | 156,964 | 156,964 | Level 2 | 252,375 | 251,966 | 211,686 | 210,321 | ||||||||||||||||||||||||
Brokered Deposits | Level 1 | 57,185 | 57,725 | 48,154 | 48,154 | |||||||||||||||||||||||||||||
FHLB Borrowings | Level 2 | 135,000 | 135,497 | 132,000 | 132,000 | |||||||||||||||||||||||||||||
Brokered deposits | Level 1 | 94,011 | 93,950 | 63,932 | 63,897 | |||||||||||||||||||||||||||||
FHLB and correspondent bank borrowings | Level 2 | 130,000 | 130,214 | 138,000 | 138,149 | |||||||||||||||||||||||||||||
Senior notes | Level 2 | 11,684 | 11,324 | 11,628 | 11,628 | |||||||||||||||||||||||||||||
Subordinated debentures | Level 2 | 8,248 | 8,248 | 8,248 | 8,248 | Level 2 | 8,085 | 8,085 | 8,079 | 8,079 | ||||||||||||||||||||||||
Note Payable | Level 3 | 1,800 | 1,780 | 1,939 | 1,939 | |||||||||||||||||||||||||||||
Note payable | Level 3 | 1,627 | 1,466 | 1,769 | 1,565 | |||||||||||||||||||||||||||||
Accrued interest payable | Level 2 | 180 | 180 | 532 | 532 | Level 2 | 532 | 532 | 118 | 118 | ||||||||||||||||||||||||
Financial liabilities, total | Financial liabilities, total | $ | 757,342 | 756,565 | 688,918 | 687,463 |
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
In the normal course of its operations, the Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.. As a result, the fair values of the Company’s financial instruments will changeassets and liabilities are affected when interest rate levelsmarket rates change, and thatwhich change may be either favorable or unfavorable to the Company.unfavorable. Management attempts to match maturities of assets and liabilities to the extent possible to mitigate interest rate risk.risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and maturities of its financial assets and liabilities, and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’san attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk.risk through its available funds investment strategy.
Off-balance sheet instruments
Loan commitments on which the committed interest rate is less than the current market rate were insignificant at September 30, 20162017 and December 31, 2015.2016. The estimated fair value of fee income on letters of credit at September 30, 20162017 and December 31, 20152016 was insignificant.
Note 10: PendingMerger and Acquisition
On August 1, 2017, a definitive merger agreement (“Merger Agreement”) was entered into by and among the Company, Patriot Bank, Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”) (PMHV:US) and a stockholder representative of Prime Bank. Pursuant to the Merger Agreement, Prime Bank will merge into Patriot Bank and existing stockholders of Prime Bank will receive aggregate cash consideration (“Merger Consideration”) equal to 115% of Prime Bank’s tangible book value as of the closing date which is anticipated to be in the fourth quarter 2017. Moreover, all outstanding stock options of Prime Bank will be settled by cash payment in an amount equal to the amount by which the per share Merger Consideration exceeds the exercise price of each stock option.
The acquisition will enable Patriot to expand its consumer and small business relationships, lending operations, and community presence, all of which will improve key operating metrics. This transaction was approved by the shareholders of Prime Bank on October 17, 2017 and is also insignificant. subject to customary regulatory approval. Upon closing, the acquisition will result in a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.
Patriot is still evaluating the estimated fair values of the assets to be acquired and the liabilities to be assumed. Accordingly, the amount of any goodwill and other intangible assets to be recognized in the connection with this transaction, as well as acquisition costs incurred and expected to be incurred, are also yet to be determined. The Company incurred $39,000 of merger and acquisition expenses related to the Prime Bank merger for the nine months ended September 30, 2017. The Company anticipates that it will incur approximately $500,000 of additional merger and acquisition expenses.
The effect of the merger is expected to be reflected in Patriot’s results beginning with the fourth quarter of 2017.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (Unaudited)(unaudited)
Note 11: Recent Accounting Pronouncements
Note 13: Recent Accounting Pronouncements
Recently Issued Accounting Standards Updates
ASU 2014-09
ASU 2014-09:In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers. This update will replace all current U.S. GAAP related to revenue recognition and will eliminate all industry-specific guidance.During 2016, the update was further clarified by ASU 2016-08Revenue from Contracts with Customers: Principle versus Agent Considerations; ASU2016-10, Revenue from Contracts with Customers: Principle versus Agent Considerations;Customers ASU2016-10,Revenue from Contracts with Customers: : Identifying Performance Obligations and Licensingand ASU 2016-12Revenue from Contracts with Customers:Customers: Narrow-Scope Improvements and Practical Expedients. In July 2015, the FASB affirmed its proposal to defer the effective date of this new standard. As a result, public companies will apply the new revenue standard to annual reporting periods beginning after December 15, 2017.2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Companycore principle of the new guidance is currently assessingthat a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The banking industry does not expect significant changes because major sources of revenue are from financial instruments that have been excluded from the scope of the new standard, (including loans, debt and equity securities, etc.). However, these new standards affect other fees charged by banks, such as asset management fees, credit card interchange fees, deposit account fees, etc. Adoption may be made on a full retrospective basis with practical expedients, or on a modified retrospective basis with a cumulative effect adjustment. Management continues to assess the impact that this guidance willmay have on its consolidated financial statements, but doesConsolidated Financial Statements with respect to new transactions entered into through the course of normal operations. Except for additional disclosures that are required, management has determined that ASU 2014-09 will not expecthave a material impact on its financial condition or results of operations.operations with respect to its normal and customary operations, but continues to monitor potential impacts that may occur as it explores additional transactions and opportunities.
ASU 2016-01:2016-01
In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall. ASU 2016-01 requires cost-method equity investments,excluding equity investments that are consolidated or accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income. The ASU simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and a measurement of the investment at fair value only when an impairment is qualitatively identified to exist. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted. The CompanyManagement is currently assessing the potential impact ASU 2016-01 will have on its financial statements, but does not expect a material impact on its financial condition or results of operations.
ASU 2016-02:2016-02
In February 2016, the FASB issued Accounting Standards Update ("ASU")ASU No. 2016-02, Leases. This updateASU increases transparency and comparability among organizations by requiring the recognition of leased assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The CompanyManagement is currently evaluating the impact of the pending adoption of the new updatestandard on its consolidated financial statements.Consolidated Financial Statements.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
ASU 2016-13:
In June 2016, the FASB issued ASU 2016-13,Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.The standardASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and the timing of when such losses are recognized.purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. The CompanyManagement is currently evaluating the impact that the standard will have on its consolidated financial statements.Consolidated Financial Statements.
ASU 2016-15: 2016-15
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows:Classification of Certain Cash Receipts and Cash Payments.The standardASU 2016-15 addresses the classification of certain specific transactions presented on the Statement of Cash Flow,Flows, in order to improve consistency across entities. Debt prepayment or extinguishment, debt-instrument settlement, contingent consideration payments post-business combination, and beneficial interests in securitiszationsecuritization transactions are specific items addressed by this Accounting Standards UpdateASU that may affect the Bank. Additionally, the StandardASU codifies the predominance principle for classifying separately identifiable cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The CompanyManagement is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.
ASU 2016-18
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows:Restricted Cash.The purpose of the standard is to improve consistency and comparability among companies with respect to the reporting of changes in restricted cash and cash equivalents on the Statement of Cash Flows. The ASU requires the Statement of Cash Flows to include all changes in total cash and cash equivalents, including restricted amounts, and to the extent restricted cash and cash equivalents are presented in separate line items on the Balance Sheet, disclosure reconciling the change in total cash and cash equivalents to the amounts shown on the Balance Sheet are required. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. As of September 30, 2017 and December 31, 2016, Patriot does not have restricted cash and cash equivalents separately disclosed on its Balance Sheet. In the future, if Patriot’s activities warrant presenting separate line items on its Balance Sheet for restricted cash and cash equivalents, management does not envision any difficulties implementing the requirements of ASU 2016-18, as applicable.
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to consolidated financial statements (unaudited)
ASU 2017-08
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has not yet determined the impact the adoption of ASU 2017-08 will have on the consolidated financial statements.
ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718 Stock compensation. The ASU is effective all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. Management is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.
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.
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 losses, the analysis and valuation of its investment securities and the valuation of deferred tax assets, 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 Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 20162017 for additional information.
Summary
The Company reported net income for the third quarter of 20162017 of $1,013,000 ($0.26 basic and diluted earnings per share) compared to a net income of $814,000 ($0.21 basic and diluted income per share) compared to net income of $633,000 ($0.16 basic and diluted incomeloss per share) for the quarter ended September 30, 2015, an increase of 29%.2016. On a pre-tax basis, the Company earned $1.3$1.7 million for the three month period ended September 30, 2016,2017, an increase of $279,000, or 26%$339,000 over the third quarter of 2015.2016.
For the nine months ended September 30, 2016,2017, the Company reported net income of $0.9$3.5 million ($0.220.91 basic and diluted incomeearnings per share) compared to net income of $1.6 million$885,000 ($0.420.22 basic and $0.41diluted incomediluted earnings per share) for the nine months ended September 30, 2015; a decrease2016, an increase of $0.7 million, or 45%. On a pre-tax basis, the Company earned $1.5 million$2.66 million.
The comparative results for the nine month period ended September 30, 2016 and 2017 were affected by a decreasetroubled loan that was ultimately resolved. In June 2016, the Bank recorded a significant loan loss provision of $1.2$1.96 million or 46%related to this loan, but aggressively worked towards a recovery, which was successfully accomplished in the first quarter of 2017.
Excluding the impact of the loan loss provision (credit) (which primarily included loan losses and recoveries related to this loan), Patriot’s net income for the nine-month period ending September 30, 2017 was 30% higher than the same period in 2016. These results are the by-product of aggressive value-enhancing strategies that have been underway over the past year.
The following table represents a reconciliation of the reported net income to the net income excluding loan loss provision for the three and nine months ended September 30, 2015.2017 and 2016. The table is reported in a format that is not in compliance with Generally Accepted Accounting Principles (non-GAAP) but is beneficial to the reader and provides enhanced comparability due to the loan loss and subsequent loan recovery associated with the troubled loan described previously. Company management finds this measure useful when assessing the period to period change in core performance of the business.
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net Income excluding Loan Loss Provision (credit) | ||||||||||||||||
Net income reported | $ | 1,013 | $ | 814 | $ | 3,547 | $ | 885 | ||||||||
Tax provision | 658 | 518 | 2,373 | 570 | ||||||||||||
Loan loss provision (credit) | 545 | 355 | (944 | ) | 2,314 | |||||||||||
Pre-tax income reported | $ | 1,671 | 1,332 | 5,920 | 1,455 | |||||||||||
Pre-tax income excluding loan loss provision | 2,216 | 1,687 | 4,976 | 3,769 | ||||||||||||
Net income excluding loan loss provision (credit) | 1,343 | 1,031 | 2,981 | 2,292 |
Total assets increased $29.6$70 million or 5%9%, from $653.5$756.7 million at December 31, 20152016 to $683.1$826.7 million at September 30, 2016.2017.
● | Cash and cash equivalents decreased |
● | The net loan portfolio increased |
Total liabilities increased $28.4$66.3 million or 10%, from $592.1$694.1 million at December 31, 20152016 to $620.5$760.4 million at September 30, 2016.2017.
● | Deposits increased |
● | Following historical seasonal trends, non-interest bearing deposits |
● | Interest bearing deposits increased |
Equity increased $1.1$3.7 million or 6%, from $61.5$62.6 million at December 31, 20152016 to $62.6$66.3 million at September 30, 2016,2017, primarily due to $0.9$3.5 million of year-to-date net income, $0.1 million$105,000 of equity compensation, and $0.1 million$129,000 of investment portfolio netunrealized gains.
Financial Condition
Financial Condition
Cash and Cash Equivalents
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Cash and cash equivalents decreased $
63.9 million, from $92.3 million at December 31, 2016 to $28.4 million at September 30, 2017. The Company funded $73.0 million in purchases of loans, $53.4 million in net originations of loans receivable, and $20.6 million in purchases of available-for-sale securities. The effect of these outlays was partially offset by a $76.1 million increase in deposits, and $15.5 million of proceeds from sales and principal repayments on available for sale securities, and $4.6 million in net cash provided by operations during the period.
Investments
The following table is a summary of the Company’sCompany’s available-for-sale securities portfolio, at fair value, at the dates shown:
(in thousands) | ||||||||||||||||
September 30, 2016 | December 31, 2015 | Inc/(Dec) ($) | Inc/(Dec) (%) | |||||||||||||
U.S. Government Agency bonds | $ | - | 4,954 | (4,954 | ) | (100.0% | ) | |||||||||
U.S. Government Agency mortgage-backed securities | 11,412 | 13,413 | (2,001 | ) | (14.9 | ) | ||||||||||
Corporate bonds | 8,937 | 9,010 | (73 | ) | (0.8 | ) | ||||||||||
Subordinated Notes | 3,025 | 2,000 | 1,025 | 51.3 | ||||||||||||
Total Available-for-Sale Securities | $ | 23,374 | 29,377 | (6,003 | ) | (20.4% | ) |
September 30, | December 31, | Inc/(Dec) | Inc/(Dec) | |||||||||||||
(In thousands) | 2017 | 2016 | ($) | (%) | ||||||||||||
U. S. Government agency mortgage-backed securities | $ | 8,036 | 10,441 | (2,405 | ) | (23.03 | )% | |||||||||
Corporate bonds | 13,905 | 8,961 | 4,944 | 55.17 | % | |||||||||||
Subordinated notes | 7,645 | 5,026 | 2,619 | 52.11 | % | |||||||||||
Total Available-for-Sale Securities | $ | 29,586 | 24,428 | 5,158 | 21.12 | % |
Available-for-sale securities decreased $6.0increased $5.2 million or 20.4%21.1%, from $29.4$24.4 million at December 31, 20152016 to $23.4$29.6 million at September 30, 2016.2017. This decrease isincrease was primarily attributable to $5the purchase of $2.5 million face amountsubordinated notes, purchase of government-sponsored$4.0 million Government agency bonds that were called in April of 2016, $2.0 million received from payments of mortgage-backed securities, and the purchase of $1.0$5.0 million corporate bonds, which was offset by the sale of approximate $6.4 million of Government agency mortgage-backed securities and repayments of principal on the same securities. In addition, the Company received $9.0 million from sales of corporate bonds.
bonds, which was offset by a purchase of a different set of $9.0 million corporate bonds with superior rates of return.
Loans
The following table is a summary of the Company’sCompany’s loan portfolio at the dates shown:
(in thousands) | September 30, | December 31, | ||||||||||||||||||||||||||||||
2016 | 2015 | Inc (Dec) | Inc/(Dec) % | |||||||||||||||||||||||||||||
(In thousands) | September 30, | December 31, | Inc/(Dec) | Inc/(Dec) | ||||||||||||||||||||||||||||
Loan portfolio segment: | 2017 | 2016 | ($) | (%) | ||||||||||||||||||||||||||||
Commercial Real Estate | $ | 296,625 | 271,229 | 25,396 | 9.36 | % | ||||||||||||||||||||||||||
Residential Real Estate | 150,664 | 86,514 | 64,150 | 74.15 | % | |||||||||||||||||||||||||||
Commercial and Industrial | $ | 69,722 | 59,752 | 9,970 | 16.69 | % | 117,673 | 60,977 | 56,696 | 92.98 | % | |||||||||||||||||||||
Commercial Real Estate | 258,920 | 245,828 | 13,092 | 5.33 | % | |||||||||||||||||||||||||||
Consumer and Other | 90,973 | 101,449 | (10,476 | ) | (10.33 | )% | ||||||||||||||||||||||||||
Construction | 48,048 | 15,551 | 32,497 | 208.97 | % | 48,328 | 53,895 | (5,567 | ) | (10.33 | )% | |||||||||||||||||||||
Construction to permanent- CRE | 5,587 | 4,880 | 707 | 14.49 | % | |||||||||||||||||||||||||||
Residential | 103,970 | 110,837 | (6,867 | ) | (6.20 | )% | ||||||||||||||||||||||||||
Consumer/Other | 73,903 | 47,521 | 26,382 | 55.52 | % | |||||||||||||||||||||||||||
Total Loans | 560,150 | 484,369 | 75,781 | 15.65 | % | |||||||||||||||||||||||||||
Construction to permanent - CRE | 5,855 | 7,593 | (1,738 | ) | (22.89 | )% | ||||||||||||||||||||||||||
Loans receivable, gross | 710,118 | 581,657 | 128,461 | 22.09 | % | |||||||||||||||||||||||||||
Allowance for loan losses | (7,328 | ) | (5,242 | ) | (2,086 | ) | 39.79 | % | (6,222 | ) | (4,675 | ) | (1,547 | ) | 33.09 | % | ||||||||||||||||
Loans receivable, net | $ | 552,822 | 479,127 | 73,695 | 15.38 | % | $ | 703,896 | 576,982 | 126,914 | 22.00 | % |
Certain amounts presented for prior periods have been reclassified for consistency with the current period.
The Company’s netCompany’s gross loan portfolio increased $73.7$128.4 million, or 15.4%22.1%, from $479.1$581.7 million at December 31, 20152016 to $552.8$710.1 million at September 30, 2016.2017. The increase in loans was primarily attributable to purchases of $73.0 million residential real estate loans, and $53.4 million increase in net origination of loans receivable. As of September 30, 2016,2017, the loan pipeline is strong, and management expects continued growth.
At September 30, 2016,2017, the net loan to deposit ratio was 117%116% and the net loan to total assets ratio was 81%85%. At December 31, 2015,2016, these ratios were 108%109% and 73%76%, respectively.
Allowance for Loan Losses
The allowance for loan losses increased $2.1$1.5 million or 40%32% from $5.2$4.7 million at December 31, 20152016 to $7.3$6.2 million at September 30, 2016.2017. The increase iswas primarily attributable to a $2.7$2.8 million increase in specific reservesrecoveries within our Commercial and Industrial category and a $0.7 million increase in collective reserves within our Residential categorythat was offset by reductions in the collective reserves$(944,000) provision (credit) for all other loan categories.
The overall credit quality of the loan portfolio continues to be strong and stable. Based upon the overall assessment and evaluation of the loan portfolio at September 30, 2016,2017, management believes the allowance for loan losses of $7.3$6.2 million, which represents 1.3%0.88% of gross loans outstanding, iswas adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.
Non-Accrual, Past Due and Restructured Loans
The following table presentspresents non-accruing loans and loans past due 90 days or more and still accruing:
(in thousands) | ||||||||||||||||||||||||
(In thousands) | September 30, | December 31, | Inc/(Dec) | Inc/(Dec) | ||||||||||||||||||||
September 30, 2016 | December 31, 2015 | 2017 | 2016 | ($) | (%) | |||||||||||||||||||
Loans past due over 90 daysand still accruing | $ | 1,469 | 2,046 | |||||||||||||||||||||
Loans past due over 90 days and still accruing | $ | 4,447 | 1,452 | 2,995 | 206.27 | % | ||||||||||||||||||
Non-accruing loans | 4,751 | 1,593 | 2,051 | 1,821 | 230 | 12.63 | % | |||||||||||||||||
Total | $ | 6,220 | 3,639 | $ | 6,498 | 3,273 | 3,225 | 98.53 | % | |||||||||||||||
% of Total Loans | 1.11 | % | 0.75 | % | 0.92 | % | 0.57 | % | ||||||||||||||||
% of Total Assets | 0.91 | % | 0.56 | % | 0.79 | % | 0.43 | % |
The $4.8$2.1 million of non-accrual loans at September 30, 20162017 is comprised of fivesix relationships, for which a specific reserve of $3.2 million$285,000 has been established. The non-accrual increase of $3.2 million from December 31, 2015 is related to a single commercial loan and is not indicative of a credit quality trend within the portfolio. Despite the Company’s decision to fully reserve for this loan as of June 30, 2016, the Company has commenced recovery actions for alleged fraud across all available avenues, including insurance coverage and claims against third parties. Potentially responsive insurance coverage, under which the Company has sought recovery, includes a Financial Institution Bond with a limit of liability of $5.0 million above a $50,000 deductible. The Company will vigorously pursue its avenues of recovery, including insurance coverage and third party claims.
The Company has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment.
The $1.6$1.8 million of non-accrual loans at December 31, 20152016 was comprised of three borrowers, for which a specific reserve of $3,000$231,000 had been established.
Other Real Estate Owned
At As of September 30, 2017 and December 31, 2016, other real estate owned (“OREO”)OREO of $851,000, isconsisting of a single undeveloped property (i.e., raw land) zoned for multi-use construction, was reported on the Balance Sheet. The carrying amount was comprised of $840,000 related torepresenting the value of the loan receivable due from the mortgagor of the foreclosed property and ana gain of $11,000 gain recognized upon taking possession of the property in May 2016. The singlegain was the excess of the fair value of the property consistsat the date of raw land that is zoned for multi-use construction. Duringpossession over the twelve months ended December 31, 2015, there was no OREO activity.
loan receivable's carrying amount, after deducting an estimate of costs to liquidate the property.
Deferred Taxes
Deferred tax assets decreased $0.4$1.9 millionmillion,, from $13.8$12.6 million at December 31, 20152016 to $13.3$10.7 million atSeptemberat September 30, 2016.This2017. This decrease was primarily due to the utilization of net operating loss carry forwards applied to the tax liabilityreduce income taxes otherwise payable on current year taxable income and net unrealized gains on the investment portfolio.portfolio to the net operating loss carry forward.
TheCompanyThe Company will continue to evaluate its ability to realize its net deferred tax asset. If future evidence suggests that it is more likely than not that a portion of the deferred tax asset will not be realized, the valuation allowance may be increased.
Deposits
The following table is a summary of the Company’sCompany’s deposits at the dates shown:
(in thousands) | ||||||||||||||||
September 30, 2016 | December 31, 2015 | Inc/(Dec) | Inc/ (Dec) % | |||||||||||||
Non-interest bearing | $ | 77,304 | 85,812 | (8,508 | ) | (9.9% | ) | |||||||||
Interest bearing | ||||||||||||||||
NOW | 24,672 | 27,951 | (3,279 | ) | (11.7% | ) | ||||||||||
Savings | 130,901 | 106,291 | 24,610 | 23.2 | % | |||||||||||
Money market | 17,230 | 19,508 | (2,278 | ) | (11.7% | ) | ||||||||||
Time certificates, less than $250,000 | 140,028 | 139,455 | 573 | 0.4 | % | |||||||||||
Time certificates, $250,000 or more | 23,865 | 17,509 | 6,356 | 36.3 | % | |||||||||||
Brokered Deposits | 57,185 | 48,154 | 9,031 | 18.8 | % | |||||||||||
Total interest bearing | 393,881 | 358,868 | 35,013 | 9.8 | % | |||||||||||
Total Deposits | $ | 471,185 | 444,680 | 26,505 | 6.0 | % |
(In thousands) | September 30, | December 31, | Inc/(Dec) | Inc/(Dec) | ||||||||||||
2017 | 2016 | ($) | (%) | |||||||||||||
Non-interest bearing | $ | 76,875 | 76,772 | 103 | 0.13 | % | ||||||||||
Interest bearing: | ||||||||||||||||
NOW | 27,420 | 29,912 | (2,492 | ) | (8.33 | )% | ||||||||||
Savings | 141,256 | 131,429 | 9,827 | 7.48 | % | |||||||||||
Money market | 13,477 | 15,593 | (2,116 | ) | (13.57 | )% | ||||||||||
Certificates of deposit, less than $250,000 | 182,960 | 160,609 | 22,351 | 13.92 | % | |||||||||||
Certificates of deposit, $250,000 or greater | 69,415 | 51,077 | 18,338 | 35.90 | % | |||||||||||
Brokered deposits | 94,011 | 63,932 | 30,079 | 47.05 | % | |||||||||||
Total Interest bearing | 528,539 | 452,552 | 75,987 | 16.79 | % | |||||||||||
Total Deposits | $ | 605,414 | 529,324 | 76,090 | 14.37 | % |
Deposits increased $26.5$76.1 million or 14.4%, from $444.7$529.3 million at December 31, 20152016 to $471.2$605.4 million at September 30, 2016. Decreases2017. The increase was substantially the result of an effort to attract new deposits and strengthen the loyalty of the existing customer base by offering attractive rates. The effort was part of a strategy to establish long-term relationships for sustained growth and profitability. The increase in non-interest bearing deposits, were causedmost notably in the category of time certificates, signifies the success in strengthening the Bank’s liquidity by typical seasonal decline. Regarding interest-bearing deposits, decreases in NOW and Money market accounts were offset by increases in Savings, Brokered Deposits, and Time certificates.refocusing its operations on its customer base. The Company continues to implement deposit growth initiatives.
Borrowings
Total borrowings were $145.0declined by $8.1 million or 5.1%, from $159.5 million at December 31, 2016 to $151.4million at September 30, 2016 and were comprised2017. Borrowings consist primarily of $135.0 million in Federal Home Loan Bank (“FHLB”) advances, $8.2million insenior notes, junior subordinated debentures and a $1.8million note payable.
Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB"). Borrowings from the FHLB are limited to a percentage of the value of qualified collateral, as defined on the FHLB 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 September 30, 2017, the Bank had $19.3 million of available borrowing capacity from the FHLB.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB. At September 30, 2017 and December 31, 2016, no funds had been borrowed under the line of credit.
Correspondent Bank - Line of Credit
Effective July 2016, Patriot entered into a Federal funds sweep and Federal funds line of credit facility agreement (the “Correspondent Bank Agreement”) with ZB, N.A. (“Zions Bank”). The purpose of the agreement is to provide a credit facility intended to satisfy overnight Fed account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions.
The Correspondent Bank Agreement provides for up to $16 million in funds of which no funds was outstanding as of September 30, 2017. The Correspondent Bank Agreement is unsecured, currently requires a compensating balance of $250,000 to remain on account with Zions Bank at all times, pays interest on funds on account (e.g., Fed funds sweep, compensating balance) at variable rates depending on the total deposit, and charges interest on advances hadat Zions Bank’s daily Fed funds rate, which is variable.
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 weighted average interestconstant rate of 33.25 basis points. All had remaining maturities ranging between three days to fifty-three months.interest expense. At September 30, 2017 and December 31, 2016, $316,000 and $372,000 of unamortized debt issuance costs have been deducted from the face amount of the Senior notes included in the Consolidated Balance Sheet.
The subordinated debentures of $8.2Senior Notes contain affirmative covenants that require the Company to: maintain its and its subsidiariesmillion’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements. The 7% Senior Notes are unsecured, rank equally with all other senior obligations of the Company, and are subordinate and junior in right of paymentnot redeemable nor may they be put to all present and future senior indebtednessthe Company by the holders of the Company. These obligations qualify as Tier 1 capital. The Company has entered into a guarantee, which together with its obligations under the subordinated debenturesnotes, and the declarationrequire no payment of trust governing the Patriot National Statutory Trust I (an unconsolidated affiliate), provides a full and unconditional guarantee of the capital securities. These subordinated debentures, which bear interest at three-month LIBOR plus 3.15% (4.01% at September 30, 2016), mature on March 26, 2033.principal until maturity.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Trust, which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The trust has an early redemption feature atproceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company’sCompany, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.
At its option, exercisable on a quarterly basis. basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.
Note Payable
In the third quarter ofSeptember 2015, the Company entered intoBank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2 million, a note payable inproperty it had been leasing until that date. The purchase price was primarily satisfied by issuing the amount ofseller a $2.0 million, for the purchase of its Fairfield, CT branch which was formerly leased. Thenine-year, promissory note has a ten-year term and bearsbearing interest at a fixed rate of 1.75%. per annum. As of September 30, 2017 and December 31, 2016, the principalnote had a balance outstanding of $1.6 million and $1.8 million, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000. The note is secured by a first Mortgage Deed and Security Agreement on this note was $1.8million. the purchased property.
Equity
Equity increased $1.1$3.7 million from $61.5$62.6 million at December 31, 20152016 to $62.3$66.3 million at September 30, 2016,2017, primarily due to $0.9$3.5 million of year-to-date net income, $0.1 million$105,000 of equity compensation, and $0.1 million$129,000 of investment portfolio netunrealized gains. Book and tangible book value per share aggregated $15.80 at September 30, 2016, as compared to $15.53 at December 31, 2015.
Off-Balance Sheet ArrangementsCommitments
The Company’sCompany’s off-balance sheet arrangements,commitments, which primarily consist of commitments to lend, decreased $11.2increased $4.9 million from $86.2$98.4 million at December 31, 20152016 to $74.8$103.3 million at September 30, 2016.2017.
RESULTS OF OPERATIONS
Distribution of Assets, Liabilities and ShareholdersRESULTS OF OPERATIONS’ Equity; Interest Rates and Interest Differential
Net Interest Income
The following tablestables present daily average balance sheets, (daily averages), interest income, interest expense and the corresponding yields earned and rates paid for the three months ended September 30, 2017 and 2016:
(In thousands) | Three months ended September 30, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Daily | Interest | Yield | Daily | Interest | Yield | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||||||||
Loans | $ | 702,307 | 8,522 | 4.81 | 530,068 | 6,188 | 4.64 | |||||||||||||||||
Cash equivalents | 23,383 | 65 | 1.11 | 24,326 | 25 | 0.41 | ||||||||||||||||||
Investments | 39,923 | 380 | 3.81 | 35,564 | 219 | 2.45 | ||||||||||||||||||
Total interest earning assets | 765,613 | 8,967 | 4.65 | 589,958 | 6,432 | 4.34 | ||||||||||||||||||
Cash and due from banks | 2,766 | 3,938 | ||||||||||||||||||||||
Premised and equipment, net | 34,618 | 30,361 | ||||||||||||||||||||||
Allowance for loan losses | (6,120 | ) | (7,210 | ) | ||||||||||||||||||||
OREO | 851 | 851 | ||||||||||||||||||||||
Other assets | 16,076 | 17,085 | ||||||||||||||||||||||
Total Assets | $ | 813,804 | 634,983 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposit | $ | 511,941 | 1,339 | 1.04 | 379,352 | 549 | 0.58 | |||||||||||||||||
Borrowings | 137,027 | 248 | 0.72 | 105,326 | 73 | 0.28 | ||||||||||||||||||
Senior notes | 11,673 | 229 | 7.77 | - | - | - | ||||||||||||||||||
Subordinated debt | 8,237 | 92 | 4.47 | 8,248 | 85 | 4.10 | ||||||||||||||||||
Note Payable | 1,639 | 7 | 1.74 | 1,829 | 9 | 1.96 | ||||||||||||||||||
Total interest bearing liabilities | 670,517 | 1,915 | 1.13 | 494,755 | 716 | 0.58 | ||||||||||||||||||
Demand deposits | 75,081 | 74,594 | ||||||||||||||||||||||
Other liabilities | 1,811 | 3,213 | ||||||||||||||||||||||
Total Liabilities | 747,409 | 572,562 | ||||||||||||||||||||||
Shareholders' equity | 66,395 | 62,421 | ||||||||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | 813,804 | 634,983 | |||||||||||||||||||||
Net interest income | 7,052 | 5,716 | ||||||||||||||||||||||
Interest margin | 3.65 | 3.85 | ||||||||||||||||||||||
Interest spread | 3.52 | 3.76 |
The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the nine months ended September 30, 20162017 and 2015:2016:
(In thousands) | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
Average Balance Sheet Net Interest income- Rate and Volume Variance Analysis Three months ended September 30, | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/Expense | Average Rate | Average Balance | Interest Income/Expense | Average Rate | Daily | Interest | Yield | Daily | Interest | Yield | ||||||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 530,068 | 6,188 | 4.64 | % | 489,164 | 5,879 | 4.77 | % | $ | 642,742 | 22,720 | 4.73 | 508,033 | 17,811 | 4.68 | ||||||||||||||||||||||||||||||||
Cash equivalents | 23,365 | 148 | 0.85 | 36,384 | 94 | 0.35 | ||||||||||||||||||||||||||||||||||||||||||
Investments | 35,564 | 219 | 2.45 | % | 44,249 | 200 | 1.79 | % | 36,871 | 968 | 3.50 | 38,210 | 669 | 2.33 | ||||||||||||||||||||||||||||||||||
Cash Equivalents | 24,326 | 25 | 0.41 | % | 54,819 | 30 | 0.22 | % | ||||||||||||||||||||||||||||||||||||||||
Total interest earning assets | 589,958 | 6,432 | 4.34 | % | 588,232 | 6,109 | 4.12 | % | 702,978 | 23,836 | 4.53 | 582,627 | 18,574 | 4.26 | ||||||||||||||||||||||||||||||||||
Cash and due from banks | 3,938 | 2,632 | 4,092 | 3,395 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 30,361 | 26,178 | ||||||||||||||||||||||||||||||||||||||||||||||
Premised and equipment, net | 33,816 | 29,969 | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (7,210 | ) | (5,211 | ) | (5,547 | ) | (5,913 | ) | ||||||||||||||||||||||||||||||||||||||||
OREO | 851 | 851 | ||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 17,936 | 17,057 | 16,717 | 16,270 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 634,983 | 628,888 | |||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | 752,907 | 627,199 | |||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 379,352 | 549 | 0.58 | % | 380,769 | 498 | 0.52 | % | |||||||||||||||||||||||||||||||||||||||
Deposit | $ | 487,248 | 3,457 | 0.95 | 367,415 | 1,518 | 0.55 | |||||||||||||||||||||||||||||||||||||||||
Borrowings | 105,326 | 73 | 0.28 | % | 100,217 | 90 | 0.36 | % | 102,900 | 509 | 0.66 | 108,835 | 258 | 0.32 | ||||||||||||||||||||||||||||||||||
Senior notes | 11,655 | 686 | 7.87 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Subordinated debt | 8,248 | 85 | 4.10 | % | 8,248 | 74 | 3.56 | % | 8,244 | 266 | 4.32 | 8,248 | 250 | 4.04 | ||||||||||||||||||||||||||||||||||
Note payable | 1,829 | 9 | 1.96 | % | 131 | 3 | 1.75 | % | ||||||||||||||||||||||||||||||||||||||||
Note Payable | 1,689 | 24 | 1.76 | 1,876 | 25 | 1.75 | ||||||||||||||||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 494,755 | 716 | 0.58 | % | 489,365 | 665 | 0.54 | % | 611,736 | 4,942 | 1.08 | 486,374 | 2,051 | 0.56 | ||||||||||||||||||||||||||||||||||
Demand deposits | 74,594 | 75,337 | 73,815 | 75,045 | ||||||||||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 3,213 | 3,406 | ||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 2,344 | 3,212 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | 687,895 | 564,631 | ||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' equity | 62,421 | 60,780 | 65,012 | 62,568 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 634,983 | 628,888 | |||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | 752,907 | 627,199 | |||||||||||||||||||||||||||||||||||||||||||||
Net interest income | 5,716 | 5,444 | 18,894 | 16,523 | ||||||||||||||||||||||||||||||||||||||||||||
Interest margin | 3.85 | % | 3.67 | % | 3.59 | 3.79 | ||||||||||||||||||||||||||||||||||||||||||
Interest spread | 3.76 | % | 3.58 | % | 3.45 | 3.70 |
Average Balance Sheet Net Interest income- Rate and Volume Variance Analysis Nine months ended September 30, | ||||||||||||||||||||||||
(in thousands) | 2016 | 2015 | ||||||||||||||||||||||
| Average Balance | Interest Income/Expense | Average Rate | Average Balance | Interest Income/Expense | Average Rate | ||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Loans | $ | 508,033 | 17,811 | 4.68 | % | 495,006 | 17,349 | 4.69 | % | |||||||||||||||
Investments | 38,210 | 669 | 2.33 | % | 45,301 | 552 | 1.63 | % | ||||||||||||||||
Cash Equivalents | 36,384 | 94 | 0.35 | % | 48,080 | 76 | 0.21 | % | ||||||||||||||||
Total interest earning assets | 582,627 | 18,574 | 4.26 | % | 588,387 | 17,977 | 4.08 | % | ||||||||||||||||
Cash and due from banks | 3,395 | 2,611 | ||||||||||||||||||||||
Premises and equipment, net | 29,969 | 24,212 | ||||||||||||||||||||||
Allowance for loan losses | (5,913 | ) | (5,116 | ) | ||||||||||||||||||||
Other assets | 17,121 | 17,402 | ||||||||||||||||||||||
Total assets | $ | 627,199 | 627,496 | |||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits | $ | 367,415 | 1,518 | 0.55 | % | 379,466 | 1,540 | 0.54 | % | |||||||||||||||
Borrowings | 108,835 | 258 | 0.32 | % | 107,033 | 246 | 0.31 | % | ||||||||||||||||
Subordinated debt | 8,248 | 250 | 4.04 | % | 8,248 | 218 | 3.53 | % | ||||||||||||||||
Note payable | 1,876 | 25 | 1.75 | % | 44 | 3 | 1.75 | % | ||||||||||||||||
Total interest bearing liabilities | 486,374 | 2,051 | 0.56 | % | 494,791 | 2,007 | 0.54 | % | ||||||||||||||||
Demand deposits | 75,045 | 69,669 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 3,212 | 3,018 | ||||||||||||||||||||||
Shareholders' equity | 62,568 | 60,018 | ||||||||||||||||||||||
Total liabilities and equity | $ | 627,199 | 627,496 | |||||||||||||||||||||
Net interest income | 16,523 | 15,970 | ||||||||||||||||||||||
Interest margin | 3.79 | % | 3.63 | % | ||||||||||||||||||||
Interest spread | 3.70 | % | 3.54 | % |
TheThe 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 and nine months ended September 30, 20162017 and 2015: 2016:
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2016 vs 2015 | NineMonths Ended September 30, 2016 vs 2015 | 2017 compared to 2016 | 2017 compared to 2016 | ||||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) due to change in: | Increase (decrease) due to change in: | Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 506 | (197 | ) | 309 | $ | 496 | (34 | ) | 462 | $ | 1,902 | 432 | 2,334 | $ | 4,492 | 417 | 4,909 | ||||||||||||||||||||||||||||||
Cash equivalents | (1 | ) | 41 | 40 | (34 | ) | 88 | 54 | ||||||||||||||||||||||||||||||||||||||||
Investments | (44 | ) | 63 | 19 | (96 | ) | 213 | 117 | 25 | 136 | 161 | (29 | ) | 328 | 299 | |||||||||||||||||||||||||||||||||
Cash Equivalents | (23 | ) | 18 | (5 | ) | (21 | ) | 39 | 18 | |||||||||||||||||||||||||||||||||||||||
Total interest earning assets | 439 | (116 | ) | 323 | 379 | 218 | 597 | 1,926 | 609 | 2,535 | 4,429 | 833 | 5,262 | |||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | (2 | ) | 53 | 51 | (49 | ) | 27 | (22 | ) | |||||||||||||||||||||||||||||||||||||||
Deposit | 224 | 566 | 790 | 581 | 1,358 | 1,939 | ||||||||||||||||||||||||||||||||||||||||||
Borrowings | 4 | (21 | ) | (17 | ) | 4 | 8 | 12 | 22 | 153 | 175 | (14 | ) | 265 | 251 | |||||||||||||||||||||||||||||||||
Senior notes | 229 | - | 229 | 686 | - | 686 | ||||||||||||||||||||||||||||||||||||||||||
Subordinated debt | - | 11 | 11 | - | 32 | 32 | - | 7 | 7 | - | 16 | 16 | ||||||||||||||||||||||||||||||||||||
Note Payable | 6 | - | 6 | 22 | - | 22 | ||||||||||||||||||||||||||||||||||||||||||
Note payable | (2 | ) | - | (2 | ) | (1 | ) | - | (1 | ) | ||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 8 | 43 | 51 | (23 | ) | 67 | 44 | 473 | 726 | 1,199 | 1,252 | 1,639 | 2,891 | |||||||||||||||||||||||||||||||||||
Net interest income | $ | 431 | (159 | ) | 272 | $ | 402 | 151 | 553 | $ | 1,453 | (117 | ) | 1,336 | $ | 3,177 | (806 | ) | 2,371 |
For the quarter ended September 30, 2016,2017, interest income increased $323,000,$2.5 million or 5%,39% as compared to the quarter ended September 30, 2015. An2016, as focused growth and diversification in the loan portfolio yielded an increase of $40.9 million in averageinterest income. Average loan balances been bolstered by lower loan prepayment fees as the trend of fewer loan prepayments continues. Interest expense increased slightly$172.2 million or 32% as compared to the year-ago period, mostlyquarter ended September 30, 2016. Total interest expense increased $1.2 million or 167% as compared to the quarter ended September 30, 2016, primarily driven by $790,000 increase in interest on deposits as the result of an increase in borrowings since that time. Together, these changes produced andeposit rates, $229,000 increase in net interest income of $272,000 during the third quarter ofexpense on senior debt that was issued in December 2016, as comparedand $175,000 increase in interest expense on FHLB borrowings, due to the third quarter of 2015. The Company’s loan portfolio as of September 30, 2016 increased $75.8 million compared to December 31, 2015. The loan pipeline remains strong and continued growth is expected.increase in general market borrowing rates.
For the nine-month period ended September 30, 2016,2017, interest income increased $597,000. Most of this increase related$5.3 million or 28% as compared to the achievement of a higher rate of return on investments and cash equivalentnine-months ended September 30, 2016. Average loan balances increased $134.7 million as compared to the nine-months ended September 30, 2016, primarily driven by $73.0 million purchases of loan pools during the first quarter of 2017 and $53.4 million new loans originated in 2017.
As the loan pipeline continued to grow in 2017, so did the need to increase the Bank’s deposit base and liquidity sources. Since the second half of 2016, the Bank has adopted a certificate of deposits (CD) program to attract term deposits at competitive rates. For the nine-month period ended September 30, 2017, total interest expense increased $2.9 million or 141% as compared to the nine-months ended September 30, 2016, primarily driven by $1.9 million increase in interest on deposits as the result of an increase in deposit rates, and the $686,000 increase in interest expense associated with the issuance of senior debt in December 31, 2016.
Net interest income was $7.0 million for the quarter ended September 30, 2017, up 23% from the corresponding 2016 period, reflecting strong loan and deposit growth. Net interest income of $18.9 million for the nine months ended September 30, 2015, offset by reductions in average investment and cash equivalent balances of $7.12017 was 14% higher than the $16.5 million and $11.7 million, respectively.
Interest expense for the nine-month period increased slightly. Lower average deposit balances were offset by an increase in the average rate of FHLB borrowings and a note payable for the purchase of the Company’s Fairfield CT property entered into during the third quarter of 2015.
nine month period ended September 30, 2016. Net interest margin for the quarter ended September 30, 20162017 was 3.85%3.65% as compared to 3.67%3.85% for the quarter ended September 30, 2015. 2016. For the nine-months ended September 30, 2017, net interest margin was 3.59% as compared to 3.79% for the year-ago period.
Provision (Credit) for Loan Losses
Provision for loan losses increased $190,000 from $355,000 for the quarter ended September 30, 2016 to $545,000 for the quarter ended September 30, 2017. The increase is primarily attributable to a higher loan balance in 2017.
For the nine months ended September 30, 2017, provision (credit) for loan losses decreased $3.3 million from $2.3 million provision for the nine month period ended September 30, 2016 to a credit balance of provision for loan losses $(944,000). This is primarily attributable to a single recovery in its Commercial and Industrial portfolio segment. Potential loss on the loan was fully reserved during 2016 and the loan was charged off during the fourth quarter of 2016. In March 2017, the Bank received a $2.8 million insurance recovery, which was recorded as a credit to the allowance for loan losses.
Non-interest income
Non-interest income decreased $26,000 from $412,000 for the quarter ended September 30, 2016 to $386,000 for the quarter ended September 30, 2017. The decrease was primarily attributable to a decrease of $39,000 in loan application and processing fees, which was partially offset by an increase of $13,000 in rental income.
For the nine months ended September 30, 2016, net interest margin was 3.79%2017, non-interest income decreased $175,000 to $1.0 million as compared to 3.63% for the year-ago period. The improvement results primarily from a 0.7% increase in the average yield on investments.
Provision for Loan Losses
For the three months ended September 30, 2016, a provision for loan losses of $355,000 was recorded. No such provision was recorded in the same three month period in 2015.
A provision for loan losses of $2.3 million was recorded in the nine months ended September 30, 2016 compared to a provision for loan losses of $250,000 in the nine months ended September 30, 2015. The increase in the provision is primarily attributable to a single troubled loan for which the value of the underlying collateral has substantially deteriorated. Such loan is related to the alleged fraud disclosed in relation to the Loan Loss Allowance discussion. Overall, the credit quality of the loan portfolio is strong as the overall risk rating for the portfolio has improved.
Non-interest income
Non-interest income increased $50,000 from $362,000 for the quarter ended September 30, 2015 to $412,000 for the quarter ended September 30, 2016. The increase is primarily due to higher loan activity fees.
Non-interest income decreased $20,000 in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily attributable to decrease in loan activity fees and fees and service charges offset by increases in rental and other income.
Non-interest expense
Non-interest expense decreased $312,000 from $4.7$1.2 million for the quarter ended September 30, 2015 to $4.4 million for the quarternine months ended September 30, 2016. The decrease is primarily attributable to reversing$91,000 reduction of loan activity fees and a $315,000 accrual related to$78,000 loss on sale of investment securities in the stock compensation for executives that resigned in August 2016 (see discussionfirst quarter of Management Changes below).2017.
Non-interest expense
Non-interest expense decreased $302,000increased $781,000 from $14.2$4.4 million for the quarter ended September 30, 2016 to $5.2 million for the quarter ended September 30, 2017. The increase is primarily attributable to $572,000 increase in salaries and benefits, $71,000 increase in regulatory assessments, and $52,000 increase in data processing expense. The increase in salaries and benefits was primarily due to new hires to support the Company’s expanding business activities.
For the nine months ended September 30, 20152017, non-interest expense increased $989,000 to $14.9 million as compared to $13.9 million for the nine months ended September 30, 2016,2016. The increase is primarily attributable to reversing a $315,000 accrual related$469,000 increase in professional and other outside services incurred in connection with implementation of operational improvements, $334,000 increase in salaries and benefits, and $119,000 increase in regulatory assessments due to growth in the stock compensation for executives that resigned in August 2016 (see discussion of Management Changes below).Bank’s balance sheet.
Liquidity
The CompanyLiquidity’s balance sheet liquidity to total assets ratio was 6.8% at September 30, 2017 compared to 14.9% at December 31, 2016. The Company’s available total liquidity (including off balance sheet funding sources) to total assets ratio was 17.9% at September 30, 2017 compared to 19.1% at December 31, 2016.
The Company’s liquidity ratio was 9.4% at September 30, 2016 compared to 16.4% at December 31, 2015. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets as described in the accompanying consolidated balance sheets, are considered liquid assets:balance sheet liquidity: cash and cash equivalents (which includesdue from banks, federal funds sold)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’sCompany’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 and increases in its loan portfolio.accounts. Management believes the Company’s short-termliquid assets provide sufficient liquiditycoverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated and unanticipatedoperational cash requirements.
CAPITALCapital
The following table illustrates the Company’s regulatory capital ratios at September 30, 2016Company’s and December 31, 2015:
Patriot National Bancorp, Inc. | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
Tier 1 Leverage Capital | 9.72 | % | 9.77 | % | ||||
Common Equity Tier 1 Capital | 8.99 | % | 10.04 | % | ||||
Tier 1 Risk-based Capital | 10.35 | % | 11.60 | % | ||||
Total Risk-based Capital | 11.60 | % | 12.62 | % |
The following table illustrates the Bank’s regulatory capital ratios atas of September 30, 20162017 and December 31, 2015: 2016:
Patriot Bank, N.A | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
Tier 1 Leverage Capital | 9.68 | % | 9.68 | % | ||||
Common Equity Tier 1 Capital | 10.34 | % | 10.34 | % | ||||
Tier 1 Risk-based Capital | 10.34 | % | 10.34 | % | ||||
Total Risk-based Capital | 11.59 | % | 11.59 | % |
Patriot National Bancorp, Inc. | Patriot Bank, N.A. | |||||||||||||||||||||||||||||||
(In thousands) | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
Total Capital (to risk weighted assets) | 74,470 | 10.222 | 66,254 | 10.603 | 83,558 | 11.554 | 74,303 | 11.928 | ||||||||||||||||||||||||
Tier 1 Capital (to risk weighted assets) | 68,240 | 9.367 | 61,571 | 9.854 | 77,328 | 10.692 | 69,620 | 11.176 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 60,240 | 8.269 | 53,571 | 8.573 | 77,328 | 10.692 | 69,620 | 11.176 | ||||||||||||||||||||||||
Tier 1 Leverage Capital (to average assets) | 68,240 | 8.449 | 61,571 | 9.296 | 77,328 | 9.574 | 69,620 | 10.518 |
ImplementationCapital adequacy is one of the Basel III final framework commenced on January 1, 2015, for bothmost important factors used to determine the Companysafety and soundness of individual banks and the Bank. The new regulationsbanking system. Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have changed thea leverage capital ratio calculations, resulting in an initial decline upon adoption. Among other provisions, Basel III increased some asset risk weightings, introduced a new capital measure “Commonof at least 5.0%, Common Equity Tier 1” and will increase1 capital ratio requirements duringat least 6.5%, a phase-in period from JanuaryTier 1 2015risk-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 January 1, 2019. require increased capital ratios.
Under the final capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capitalCET1 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 will become subject to progressively more stringent limitations on the percentage of earnings that canmay be paid out as dividendsdistributed 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 0.625% capital conservation buffer for 2016 has been included in the minimum capital adequacy ratios in 2016 column in the table above. The capital conversation buffer increased to 1.25% for 2017, which has been included in the minimum capital adequacy ratios in the 2017 column above.
The capital buffer requirement effectively raises the minimum required common equity Tier 1 capitalTotal Capital ratio to 7.0%10.5%, the Tier 1 capitalCapital ratio to 8.5%, and the total capitalCET1 Capital ratio to 10.5%7.0% on a fully phased-in basis, which will be effective beginning on January 1, 2019. The minimum required ratios perManagement believes that, as of September 30, 2017, Patriot satisfies all capital adequacy requirements under the Basel III for 2016 and 2019 are: Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.
January 01, 2016 | January 01, 2019 | |||||||
Tier 1 Leverage Capital | 4.00 | % | 5.00 | % | ||||
Common Equity Tier 1 Capital | 4.50 | % | 7.00 | % | ||||
Tier 1 Risk-based Capital | 6.00 | % | 8.50 | % | ||||
Total Risk-based Capital | 8.00 | % | 10.50 | % |
BothManagement continuously assesses the Company’s andadequacy of the Bank’s currentBank’s capital ratios exceedwith the fully phased in minimum capital ratios of Basel III. The Bank maintained itsgoal to maintain a “well capitalized” regulatory status through the third quarter of 2016.classification.
IMPACT OF INFLATION AND CHANGING PRICES
The Company’s consolidated financial statementsCompany’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.
MANAGEMENT CHANGES
Stock Repurchase Program
The following table presents share repurchases of PatriotDeparture’s common stock during the three months ended September 30, 2017 and Appointment of Certain OfficersDecember 31, 2016.
Period Beginning | Period Ending | No. of Shares | Average Price Share | No. of Shares Purchased | Maximum No. of Shares | |||||||||||||
November 1, 2016 | November 30, 2016 | 629 | $ | 13.73 | 629 | 498,853 | ||||||||||||
December 1, 2016 | December 31, 2016 | 71,324 | $ | 14.04 | 71,324 | 427,529 | ||||||||||||
Three-months ended December 31, 2016 | 71,953 | $ | 14.04 | |||||||||||||||
August 1, 2017 | August 31, 2017 | 100 | (2) | $ | 17.10 | 0 (2) | 427,529(2) | |||||||||||
Three-months ended September 30, 2017 | 100 | $ | 17.10 |
On August 4, 2016, Kenneth T. Neilson provided notice of his resignation as Chief Executive Officer and President of the Company and the Bank (together, “Patriot”), effective August 19, 2016. On August 10, 2016, the Board of Directors of the Company (the “Board”) appointed Michael A. Carrazza to serve as interim Chief Executive Officer, effective as of August 19, 2016. Mr. Carrazza has been the Chairman of both Boards of Directors of Patriot, since leading its turnaround recapitalization in October 2010. Mr. Carrazza is not receiving additional compensation for his service as interim Chief Executive Officer, and has agreed to serve as interim Chief Executive Officer until the Board’s appointment of a new, permanent Chief Executive Officer.
(1) | All shares have been repurchased in connection with the stock repurchase program (the "Program") authorized by the Company's Board of Directors on July 29, 2016. The Program authorized the Company's chairman to direct the Company to repurchase up to 500,000 shares of Patriot's common stock on the open-market or in private transactions, through July 31, 2017. |
(2) | After the Program closed, one shareholder elected to sell 100 shares back to the Company. This transaction was accepted and executed on the same terms as those executed during the Program. |
Also, on August 4, 2016, Susan Neilson provided notice of her resignation as Chief Operating Officer and Executive Vice President of the Bank, effective August 19, 2016. On August 10, 2016, the Board appointed Peter D. Cureau to serve as the interim Chief Operating Officer and President of the Company, effective as of August 19, 2016. Mr. Cureau has over 25 years of banking experience, culminating most recently in his role as the President and Chief Executive Officer of Capital Bank and Trust Company in Albany, New York. He has experience in all aspects of commercial banking, including operations and management.
For additional information, refer to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 10, 2016.
On January 5, 2016, Christina L. Maier resigned, for personal reasons, as Chief Financial Officer of Patriot, and as of April 30, 2016, from her position as Executive Vice President of Patriot. Also on that date, Neil M. McDonnell was appointed as Chief Financial Officer of Patriot. Mr. McDonnell had been serving as Executive Vice President, Finance of Patriot since December 9, 2015, and was a consultant to Patriot from October 5, 2015 through December 8, 2015.
Stock Repurchase Program
On July 26, 2016, the Company authorized a stock repurchase program under which it may repurchase up to 500,000 of its outstandingThere were 100 shares of Patriot’s common stock. The program will terminate on July 31, 2017, unless suspended, discontinued or replaced at any time without prior notice. Understock repurchased during the program,three and nine months period ended September 30, 2017. No shares of Patriot’s common stock were repurchased during the Company may repurchase shares in open-market purchases or in private transactions in accordance with applicable securities lawsthree and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934. The specific timing and amount of repurchases will be determined by the Company’s chairman, in his discretion, and will vary based on market conditions, securities laws limitations and other factors. The repurchases will be funded using available cash on hand.nine months period ended September 30, 2016.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. The Company’s market risk is primarily limited to interest rate risk.
The Company’sCompany’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price the Company’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing.re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loans for the portfolio and purchase short-term investments to offset the increasing short term re-pricing of the liability side of the balance sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loans and investments with longer term rate adjustment frequencies can be matched against longer term deposits and borrowings to lock in a desirable spread.
The exposure to interest rate risk is monitored by the Management Asset and Liability Committee (the “Committee”) consisting of senior management personnel. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets at least quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactions during the period and determines compliance with the Company,Company’s Investment, ALCO and Liquidity policies.
Management analyzes the Company’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.
Management’sManagement’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.
Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate- sensitive assets and funding requirements of rate-sensitive liabilities.
The tables below setsset forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in the Company’s portfolio at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous and these analyses may therefore overstate the impact of short-term repricings. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity, since the interest rates on certain balance sheet items have approached their minimums. Therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.
(in thousands) | |||||||||||||||||||||||||
Net Interest Income and Economic Value Summary Performance | |||||||||||||||||||||||||
September 30, 2016 | |||||||||||||||||||||||||
Net Interest Income | Net Portfolio Value | ||||||||||||||||||||||||
Projected Interest Rate Scenario | Estimated Value | $ Change from Base | % Change from Base | Estimated Value | $ Change from Base | % Change from Base | |||||||||||||||||||
+ 200 | $ | 23,487 | 177 | 0.8 | % | 86,670 | (146 | ) | 0.2 | % | |||||||||||||||
+ 100 | 23,520 | 210 | 0.9 | % | 86,797 | (19 | ) | 0.0 | % | ||||||||||||||||
BASE | 23,310 | - | 0.0 | % | 86,816 | - | 0.0 | % | |||||||||||||||||
- 100 | 23,338 | 29 | 0.1 | % | 87,753 | 937 | 1.1 | % | |||||||||||||||||
- 200 | 23,331 | 21 | 0.1 | % | 93,360 | 6,543 | 7.5 | % |
(In thousands) | |||||||||||||||||||||||||
Net Portfolio Value - Performance Summary | |||||||||||||||||||||||||
As of September 30, 2017 | As of December 31, 2016 | ||||||||||||||||||||||||
Projected Interest | Estimated | Change | Change | Estimated | Change | Change | |||||||||||||||||||
+200 | 99,330 | (5,093 | ) | (4.9 | ) | 102,546 | (1,629 | ) | (1.6) | ||||||||||||||||
+100 | 102,910 | (1,513 | ) | (1.5 | ) | 104,044 | (130 | ) | (0.1) | ||||||||||||||||
BASE | 104,423 | - | - | 104,174 | - | - | |||||||||||||||||||
-100 | 104,873 | 450 | 0.4 | 105,408 | 1,233 | 1.2 | |||||||||||||||||||
-200 | 106,334 | 1,911 | 1.8 | 107,152 | 2,977 | 2.9 |
December 31, 2015 | |||||||||||||||||||||||||
Net Interest Income | Net Portfolio Value | ||||||||||||||||||||||||
Projected Interest Rate Scenario | Estimated Value | $ Change from Base | % Change from Base | Estimated Value | $ Change from Base | % Change from Base | |||||||||||||||||||
+ 200 | $ | 21,502 | 545 | 2.6 | % | 82,588 | (3,456 | ) | (4.0 | %) | |||||||||||||||
+ 100 | 21,319 | 362 | 1.7 | % | 84,303 | (1,741 | ) | (2.0 | %) | ||||||||||||||||
BASE | 20,957 | - | - | 86,044 | - | - | |||||||||||||||||||
- 100 | 20,653 | (304 | ) | (1.5 | %) | 89,085 | 3,041 | 3.5 | % | ||||||||||||||||
- 200 | 20,506 | (451 | ) | (2.2 | %) | 92,546 | 6,502 | 7.6 | % |
Net Interest Income - Performance Summary | |||||||||||||||||||||||||
September 30, 2017 | Year ended December 31, 2016 | ||||||||||||||||||||||||
Projected Interest | Estimated | Change | Change | Estimated | Change | Change | |||||||||||||||||||
+200 | 29,474 | 397 | 1.4 | 25,588 | 976 | 4.0 | |||||||||||||||||||
+100 | 29,373 | 296 | 1.0 | 25,149 | 538 | 2.2 | |||||||||||||||||||
BASE | 29,076 | - | - | 24,611 | - | - | |||||||||||||||||||
-100 | 28,447 | (629 | ) | (2.2 | ) | 23,956 | (655 | ) | (2.7) | ||||||||||||||||
-200 | 28,367 | (709 | ) | (2.4 | ) | 24,073 | (538 | ) | (2.2) |
Item 4: Disclosure Controls and Procedures
The Bank maintains disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures.
An evaluation of the effectiveness of the Company’sCompany’s disclosure controls and procedures was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report. As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules
and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’sCompany’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the aforementioned officers concluded that, as of September 30, 2016,2017, the Company'sCompany’s disclosure controls and procedures were not effective as a result of theeffective.
Internal Control over Financial Reporting
A material weakness in internal controls over financial reporting that affected its financial reporting for the previous quarter.
The identified material weakness inCompany’s internal control over financial reporting relates towas disclosed in Item 9A, Controls and Procedures, of the processCompany’s annual report on Form 10-K, for establishing the allowance for loan losses. Specifically,year ended December 31, 2016. The Company did not have effective controls were not maintained over (i) the recording, monitoring and valuation of eligible collateral when calculating specific reserves on impaired loans;loans; and (ii) controls over the development and monitoring of qualitative factors used in calculating the general component of the loan loss reserve in accordance with the approved allowance for loan losses policy. Management has determinedBased on their evaluation, management concluded that, the Company’s financial reporting controls and procedures with respect to the allowance for loan losses were not operating effectively, which affected the financial reporting for the previous quarter and for which corrective action is not yet finalized as of the quarter ended September 30, 2016. As such, management believes thatDecember 31, 2016, the Company's disclosure controls and procedures were not effective as a result of September 30,the material weakness in internal controls over financial reporting that affected its financial reporting during the second and third quarters of 2016.
In response to the identified material weakness, identified above, the Company is in the process of implementingmanagement implemented changes to its disclosure controls and procedures and its system of internal control over financial reporting in each of the quarters ended December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, including changes to the allowanceprocess and procedures for establishing allowances for loan loss process and control procedures, and enhancements to internal controls over thecreate a more robust review process. Other implemented enhancements will include strengthened controls over the monitoring and valuation of collateral related to loans deemed to be impaired and for which specific reserves on impaired loans. The material weaknesshave been established.
Management believes all disclosure controls and procedures needed to provide reasonable assurance that information will not be considered remediated untilcommunicated in a timely fashion to management are now in place and such controls related to the applicable remedial controls operateallowance for loan losses have operated for a sufficient period of time and management has concluded, through testing, that these controls arefor Management to evaluate the operating
effectively. Management is in process effectiveness of finalizing changes to its disclosurethe controls and, procedures, in order to remedyaccordingly, Management believes the identified material weakness and prevent such circumstances from occurringin internal control described in the future.
Internal Control over Financial Reportingpreceding paragraph has been remediated.
A material weakness in the Company’s internal control over financial reporting was disclosed in Item 9A, Controls and Procedures, of the Company’s annual report on Form 10-K, for the year ended December 31, 2015. The Company did not have an effective policy, procedure and review controls over the accounting for loan prepayment fees receivable which resulted in improper revenue recognition in December 2015 related to one non-routine transaction. No restatement of prior period financial statements and no change in previously released financial results were required as a result of this finding, as the error was corrected prior to the issuance of the Company’s annual financial statement.
The Company committed to remediate the control deficiency that constitutes a material weakness by implementing changes to the internal control process over financial reporting by the end of the first quarter 2016. The following changes to improve the overall effectiveness of internal control over financial reporting have been implemented as of March 31, 2016:
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Based on the actions taken by management, the Company successfully completed the assessment necessary to conclude that the material weakness identified on Form 10-K for the year ended December 31, 2015 has been fully remediated as of March 31, 2016.
Other than preceding and as described inItem 4: Disclosure Controls and Procedures, no other changes in the Company’s internal controls over financial reporting have occurred during the Company’s fiscal quarter ended September 30, 20162017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Neither the Company nor the Bank has any pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or the Bank is a party or any of its property is subject.
Item 1A: Risk Factors
During the three and nine months ended September 30, 2016,2017, there were no material changes to the risk factors relevant to the Company’s operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2015,2016, except as follows.
Our stockholders may experience dilution upon the repurchase of common shares.On July 26, 2016, our Board of Directors authorized a stock repurchase plan permitting the Company to repurchase up to 500,000 shares of its common stock. The Company may repurchasecould have repurchased shares of its common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in the most recently published financial statements. The share repurchase program will bewas in effect until July 31, 2017, or until suspended, discontinued or replaced. If the Company were to repurchasehad repurchased shares at a price above net asset value per share, such repurchases would resulthave resulted in an immediate dilution in net asset value per share to existing common stockholders.
Item 6: Exhibits
No. | Description |
3(i) (C) |
3(ii) | |
10(a) (2) |
10(a) (20) |
10(a) |
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14 |
21 |
31(1) | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31(2) | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32 |
101.INS# | XBRL Instance Document |
101.SCH# | XBRL Schema Document |
101.CAL# | XBRL Calculation Linkbase Document |
101.LAB# | XBRL Labels Linkbase Document |
101.PRE# | XBRL Presentation Linkbase Document |
101.DEF# | XBRL Definition Linkbase Document |
The exhibits marked with the section symbol (#) are interactive data files.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 9, 2017 |
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| Patriot National Bancorp, Inc. (Registrant) |
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| By: | /s/ |
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| Executive Vice President and Chief Financial Officer |
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November 14, 201658
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