Patriot National Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company is a Connecticut-based bank holding company operating primarily in Connecticut and the New York metropolitan area. Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest and dividend income | $9.0 million | $11.0 million | $29.4 million | $32.7 million |
| Net interest income | $5.9 million | $6.2 million | $17.9 million | $19.2 million |
| Provision for loan losses | $85,000 | $100,000 | $1.8 million | $3.2 million |
| Non-interest income | $704,000 | $571,000 | $1.5 million | $2.1 million |
| Non-interest expense | $6.6 million | $6.7 million | $20.9 million | $19.9 million |
| Net income (loss) | ($87,000) | $27,000 | ($2.4 million) | ($1.3 million) |
| Basic and diluted EPS | ($0.02) | $0.01 | ($0.62) | ($0.33) |
| Net interest margin | 2.61% | 2.70% | 2.60% | 2.85% |
- Balance sheet at September 30, 2020: Total assets were $922.9 million, down from $979.8 million at December 31, 2019. Net loans were $740.1 million, compared with $802.0 million; deposits were $727.4 million, compared with $769.5 million; and shareholders’ equity was $64.5 million, compared with $67.0 million.
- Credit and allowance: The allowance for loan losses was $11.2 million, or 1.49% of gross loans, versus $10.1 million, or 1.05%, at year-end 2019. Non-accrual loans were $20.4 million, up from $18.0 million; nonperforming assets were $23.1 million, or 2.50% of assets, versus $20.5 million, or 2.09%.
- Liquidity and cash flow: Cash and cash equivalents were $49.6 million, up from $39.4 million. The company reported $753,000 of net cash used in operating activities and $64.4 million provided by investing activities for the nine months. Balance-sheet liquidity was 11.0% of assets; liquidity including readily available off-balance-sheet sources was 24.3%, and including brokered-deposit availability was 38.8%.
- Borrowings and capital: Total borrowings were $120.8 million, versus $130.9 million at year-end; this included $90.0 million of FHLB advances. The Bank’s total risk-based capital ratio was 12.33%, CET1 ratio 11.08%, and Tier 1 leverage ratio 9.35%. The company stated that the Bank met fully phased-in capital adequacy requirements.
Material changes versus comparable periods
- Q3 net loss replaced prior-year net income. For the first nine months, the net loss widened to $2.4 million from $1.3 million.
- Net interest income fell 5.4% in Q3 and 6.8% year to date. Management attributed the decline to lower market rates, reduced loan volume, and margin compression; deposit rates declined more slowly than asset yields, while some FHLB funding costs rose as advances reset from introductory variable rates to fixed rates.
- Interest expense declined, partly offsetting lower interest income. The nine-month loan-loss provision was lower than in 2019, when a $2.3 million single commercial-loan charge-off drove the provision; 2020’s provision reflected pandemic-related reserves and charge-offs.
- Nine-month non-interest income decreased, chiefly because SBA loan-sale gains were lower amid delays; management said sale activity resumed in Q3 and expected it to continue in Q4. Non-interest expense increased year over year, primarily from SBA business staffing costs.
- Gross loans declined $60.9 million, mainly from net loan paydowns, partly offset by purchased loans and SBA loans moved from held for sale to held for investment. Deposits declined $42.1 million as brokered balances ran off, partly offset by growth in retail balances and prepaid debit-card deposits.
Outlook, risks, and unusual items
- Management gave no numerical earnings or revenue guidance. It expects to return to profitability after pandemic-related credit effects are absorbed and its SBA expansion and deposit-raising initiatives, including prepaid debit-card deposits, contribute more income.
- COVID-19 created substantial uncertainty. The company cited potential higher credit losses, collateral-value declines, weaker demand, and operational, cyber, and third-party risks. It said it could not estimate the pandemic’s full effect.
- Patriot had modified $244.4 million of loans for payment deferrals; approximately $157.7 million remained deferred at September 30. Subsequent to quarter-end, the balance had fallen to $59.1 million. These accommodations were not classified as TDRs under applicable CARES Act and regulatory guidance.
- The Bank remained subject to a 2018 formal written agreement with the OCC. Management said it had addressed the identified items and was working with the OCC toward resolution.
- The company suspended dividends during 2020 pending resolution of pandemic-related economic uncertainty. It also identified COVID-19 and reported losses as a goodwill impairment trigger in Q1; its qualitative assessment found no impairment, and a quantitative annual assessment was planned for October 31, 2020.
- The company did not participate in the SBA Paycheck Protection Program through September 30, 2020. It did not adopt the Community Bank Leverage Ratio framework at quarter-end, though it retained the option to do so.
Important facts for investors to verify
- Whether deferred borrowers resume payments and whether non-accrual loans, criticized credits, charge-offs, or allowance needs rise as accommodations expire.
- Whether the company’s expected return to profitability materializes, including the pace of SBA loan sales and the contribution and stability of prepaid debit-card deposits.
- Whether net interest margin stabilizes amid low rates, loan runoff, deposit repricing, and FHLB advance costs.
- Progress toward resolving the OCC formal agreement and continued compliance with regulatory capital requirements.
- Results of the planned goodwill impairment assessment and the realizability of deferred tax assets.