Patriot National Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context and financial condition
Patriot National Bancorp is a Connecticut bank holding company operating through Patriot Bank. Its lending is concentrated in commercial real estate, residential real estate, commercial and industrial, consumer, and construction loans in Connecticut, Westchester County, and New York City. Management said the COVID-19 pandemic adversely affected earnings and increased uncertainty around credit quality.
- Total assets were $979.5 million, essentially unchanged from $979.8 million at December 31, 2019.
- Net loans declined 2.6% to $781.4 million; gross loans were $792.5 million. Deposits rose 1.8% to $783.1 million.
- Cash and cash equivalents increased to $65.9 million from $39.4 million. Management reported balance-sheet liquidity of 11.9% of assets and total available liquidity, including specified funding sources, of 27.0%.
- Total borrowings were $120.9 million, down from $130.9 million. This includes $90.0 million of FHLB advances, $11.9 million of senior notes, $9.8 million of subordinated debt, $8.1 million of junior subordinated debt, and a $1.1 million note payable.
- Shareholders’ equity was $64.2 million, down 4.2% from year-end, primarily reflecting the $2.4 million first-half net loss and $553,000 after-tax unrealized investment loss.
Results, margins, and cash flow
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $5.7 million | $6.6 million | $12.0 million | $13.0 million |
| Provision for loan losses | $910,000 | $2.9 million | $1.7 million | $3.1 million |
| Non-interest income | $389,000 | $758,000 | $810,000 | $1.5 million |
| Non-interest expense | $6.9 million | $6.7 million | $14.3 million | $13.2 million |
| Net loss | $1.3 million | $1.7 million | $2.4 million | $1.3 million |
| Loss per share, basic and diluted | $0.32 | $0.42 | $0.60 | $0.34 |
| Net interest margin | 2.46% | 2.96% | 2.59% | 2.92% |
Q2 net loss improved year over year, while the first-half loss widened. The lower provision versus Q2 2019 partly reflects a $2.3 million commercial loan charge-off in the prior-year quarter; 2020 provisions included COVID-related reserves. Lower market rates reduced asset yields and net interest income. Lower gains on SBA loan sales also reduced non-interest income, while first-half expenses rose chiefly because of increased SBA staffing.
For the six months, operating cash flow was negative $4.3 million, investing activities provided $27.3 million, and financing activities provided $3.5 million. Cash increased by $26.5 million to $65.9 million, supported by deposit growth and loan paydowns. The filing does not provide a clear standalone revenue total or operating margin measure.
Credit quality, liquidity, capital, and notable changes
- The allowance for loan losses rose to $11.1 million, or 1.41% of gross loans, from $10.1 million, or 1.04%, at year-end. First-half net charge-offs were $681,000.
- Non-accrual loans increased to $21.6 million from $18.0 million; nonperforming assets were $24.9 million, or 2.54% of assets, versus $20.5 million, or 2.09%. Loans past due over 90 days and still accruing were $863,000.
- About $223.2 million of loans had been modified to defer principal and/or interest for up to 180 days. The company reported these qualifying COVID-related modifications were not classified as TDRs under applicable relief. Total recorded TDR loans were $11.1 million, of which $9.4 million were non-accrual.
- Retail deposits grew, including a $47.7 million increase from the company’s national online money-market account rollout; brokered deposits fell $69.0 million. CDs and brokered deposits totaling $390.9 million were scheduled to mature within one year.
- The Bank reported regulatory capital ratios of 11.77% total risk-based capital, 10.52% Tier 1 risk-based capital, 10.52% CET1, and 9.03% Tier 1 leverage at June 30, 2020. Management stated the Bank met fully phased-in capital adequacy requirements. The holding company’s Tier 1 leverage ratio was 6.93%.
- The Bank remained subject to a 2018 formal written agreement with the OCC. Management said it had addressed identified items and was working with the OCC toward full resolution.
- The company suspended dividends during 2020 pending resolution of pandemic-related economic uncertainty. It did not participate in the SBA Paycheck Protection Program during the first half.
Outlook, risks, and subsequent events
Management said it expects to return to profitability after the pandemic’s effect on credit-loss assessments is absorbed and investments in SBA operations and deposit-raising initiatives begin to strengthen net interest and non-interest income. This is not quantified guidance, and management cautioned that interim results may not indicate the remainder of 2020. Management could not estimate the pandemic’s full impact; risks include higher credit losses, falling collateral values, reduced demand, operational and cyber risks, and possible goodwill impairment. The company’s June 30 qualitative goodwill assessment found no impairment.
After quarter-end, the company announced on July 13 that Robert G. Russell, Jr. was named President and CEO. On July 21 it completed a purchase of prepaid debit-card deposits totaling approximately $52 million. These events occurred after the reporting date.
Most important facts for investors to verify
- Whether pandemic-related deferrals convert into delinquency, non-accrual status, charge-offs, or additional allowance requirements, especially given rising nonperforming assets.
- Whether lower rates, deposit pricing, and FHLB funding costs continue to pressure net interest income and margin.
- Whether SBA loan-sale activity resumes as expected and supports fee income, and whether the SBA business and debit-card deposit initiatives deliver the anticipated benefits.
- Deposit stability and upcoming maturities, liquidity access, capital levels, and the effect of the approximately $52 million prepaid-deposit acquisition.
- Progress in resolving the OCC formal agreement and any implications for strategy, capital distributions, or operations.
- Management’s assumptions supporting the allowance, deferred tax assets, and goodwill valuation as economic conditions evolve.