Patriot National Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020. Unaudited. Amounts below are in U.S. dollars; financial figures are generally in millions unless otherwise noted.
Business context and financial performance
Patriot National Bancorp is a Connecticut bank holding company operating through Patriot Bank, with lending concentrated in Connecticut, Westchester County, and New York City. Its portfolio includes commercial and residential real estate, commercial and industrial, construction, and consumer loans.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Interest and dividend income | $7.77 | $9.60 | $15.88 | $20.33 |
| Net interest income | $5.94 | $5.69 | $12.06 | $12.01 |
| Net interest margin | 2.82% | 2.46% | 2.90% | 2.59% |
| Non-interest income | $0.75 | $0.39 | $1.20 | $0.81 |
| Non-interest expense | $5.29 | $6.89 | $10.68 | $14.26 |
| Net income (loss) | $1.02 | $(1.28) | $1.88 | $(2.35) |
| Diluted EPS | $0.26 | $(0.32) | $0.47 | $(0.60) |
Financial position, liquidity, and credit
- Assets and funding: Total assets were $963.1 million at June 30, up from $880.7 million at year-end. Deposits rose 11.0% to $761.2 million; loans, net of allowance, fell 8.2% to $660.5 million. Cash and cash equivalents increased to $116.2 million from $34.6 million.
- Liquidity: Management reported balance-sheet liquidity of 22.8% of assets, versus 9.0% at year-end; including readily available off-balance-sheet funding, liquidity was 30.6%, versus 21.7%. The Bank reported $47.6 million of available FHLB borrowing capacity.
- Cash flow: For the first half, operating activities provided $0.5 million, investing activities provided $5.8 million, and financing activities provided $75.3 million. Cash increased $81.6 million to $116.2 million, principally reflecting deposit growth and loan paydowns.
- Debt: Total borrowings were $120.8 million, unchanged from year-end, including $90.0 million of FHLB advances. The $12 million face-value senior notes bear 7% interest and mature December 22, 2021. Subordinated notes have a 2028 maturity; junior subordinated debt matures in 2033.
- Credit quality: The allowance for loan losses was $10.4 million, or 1.54% of gross loans, versus $10.6 million and 1.45% at year-end. No provision was recorded in the first half, compared with $1.7 million in the prior-year period. Non-accrual loans increased to $24.5 million from $20.0 million; total nonperforming assets rose to $26.3 million from $21.9 million, or 2.74% of assets versus 2.49%.
- Capital: Patriot Bank reported a 10.1% Tier 1 leverage ratio and 13.3% total risk-based capital ratio at June 30, and was categorized as well capitalized. The Bank remains subject to OCC-imposed minimum capital requirements.
Material changes and unusual items
- Profitability returned versus the 2020 comparison, with lower deposit costs supporting net interest margin despite lower loan balances and interest income. Net interest income increased modestly year over year in Q2 and the first half.
- Non-interest expense benefited from an Employee Retention Credit recognized as a reduction in compensation and benefits expense: $1.1 million in Q2 and $2.0 million in the first half. The Company was still in the process of filing for the credit.
- Deposits grew $75.5 million, including growth in prepaid-card-related balances; prepaid deposits totaled about $137.8 million. Brokered deposits declined $28.5 million during the first half.
- Available-for-sale securities increased to $108.6 million from $49.3 million, following substantial purchases and sales during the period. A $93,000 net gain on securities sales was recognized.
- The Bank entered a $50 million cash-flow hedge in April, converting a portion of floating-rate loan cash flows to fixed rates. The filing says $508,000 is expected to be reclassified to interest income over the next 12 months.
- Management refined its allowance methodology in 2021; it said the refinement did not affect first-half provision. Dividends remain suspended pending resolution of economic uncertainty.
Outlook, risks, and contingencies
- Management expects net interest margins to be sustained and grow in the second half of 2021; the filing provides no specific earnings or balance-sheet guidance and cautions that interim results are not necessarily indicative of full-year results.
- COVID-19 and its economic effects could increase credit losses, delinquencies, collateral impairment, and pressure on demand and operations. Management said the full impact remained uncertain. About $21.3 million of previously modified loans remained on deferment at June 30; these modifications were not classified as TDRs under applicable guidance.
- Credit exposure is sensitive to regional economic and real estate conditions. The filing identifies interest-rate, funding, competition, regulatory, operational, and cyber risks. A modeled +200 basis-point shock indicated a 6.0% increase in estimated annual net interest income but a 5.4% decline in net portfolio value; management cautions that simulations depend on assumptions and have limitations.
- The Bank entered a formal written agreement with the OCC in 2018. Management reported addressing the identified items and continuing to work with the OCC toward full resolution; the filing does not say the agreement has been terminated.
- Off-balance-sheet commitments totaled $119.6 million, primarily commitments to lend. The Company reported no legal proceedings expected to have a material adverse effect.
Investor verification priorities
- Verify that the $2.0 million Employee Retention Credit is filed, received or otherwise supportable, and determine the extent to which reported expense reductions and earnings depend on it.
- Review subsequent updates on the OCC agreement and the Bank’s compliance with its individual capital requirements.
- Assess the December 2021 senior-note maturity and the Company’s refinancing or repayment plan.
- Track non-accrual loans, past-due balances, loan modifications, collateral valuations, and allowance adequacy—particularly given rising nonperforming assets despite no first-half provision.
- Evaluate the durability and concentration of prepaid deposits, liquidity, and the expected benefit and risks of the $50 million interest-rate hedge.