Patriot National Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Patriot is a one-bank holding company operating Patriot Bank, N.A., with nine branches in Connecticut and New York. Its community-banking business focuses on commercial real estate, commercial and industrial, SBA, consumer, and purchased residential real estate loans.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $880.7 million | $979.8 million |
| Gross loans | $730.2 million | $812.2 million |
| Total deposits | $685.7 million | $769.5 million |
| Total borrowings | $120.8 million | $130.9 million |
| Shareholders’ equity | $63.2 million | $67.0 million |
| Interest and dividend income | $37.9 million | $43.6 million |
| Net interest income | $24.2 million | $25.4 million |
| Net interest margin | 2.68% | 2.80% |
| Provision for loan losses | $2.2 million | $5.0 million |
| Non-interest income | $2.0 million | $2.5 million |
| Non-interest expense | $28.1 million | $26.7 million |
| Net loss | $3.8 million; $0.97 per share | $2.8 million; $0.72 per share |
Net interest income fell as lower average loan balances and lower asset yields outweighed reduced deposit costs. Interest and dividend income declined $5.7 million, while interest expense fell $4.5 million. The average yield on interest-earning assets decreased to 4.20% from 4.80%; the average cost of interest-bearing liabilities decreased to 1.79% from 2.25%.
Cash flow: Operating activities provided $6.3 million, compared with $11.9 million used in 2019. Investing activities provided $82.9 million, largely reflecting net loan paydowns; financing activities used $94.0 million, principally from deposit outflows. Cash and cash equivalents ended the year at $34.6 million, down from $39.4 million.
Credit and liquidity: The allowance for loan losses was $10.6 million, or 1.45% of gross loans, versus $10.1 million, or 1.25%, in 2019. Nonperforming assets were $21.9 million, or 2.49% of assets, compared with $20.5 million, or 2.09%. Non-accrual loans increased to $20.0 million from $18.0 million. Balance-sheet liquidity was 9.0% of assets; including available off-balance-sheet funding, liquidity was 21.7%. The Bank reported $80.4 million of FHLB borrowing capacity and a $26.3 million collateralized Federal Reserve borrowing line.
Capital and debt: At year-end, the Bank’s total risk-based capital ratio was 12.50% and Tier 1 leverage ratio was 9.80%; it was categorized as well capitalized and exceeded its OCC-set minimums. The parent company’s corresponding ratios were 11.13% and 7.54%. The company had $12 million of senior notes due December 22, 2021; total borrowings were approximately $120.8 million.
Material changes versus 2019
- Management intentionally reduced the balance sheet amid COVID-19 uncertainty. Gross loans fell 10.1%, and assets declined 10.1%.
- Deposits fell 10.9%, primarily as higher-cost brokered deposits and certificates of deposit rolled off. Non-interest-bearing deposits rose to $158.7 million from $88.1 million, including $59.3 million associated with a prepaid debit-card deposit business acquired in July 2020.
- The loan-loss provision declined to $2.2 million from $5.0 million, but the allowance increased and included additional COVID-related reserves. Net charge-offs were $1.7 million, compared with $2.5 million.
- Non-interest expense increased $1.5 million, including higher SBA staffing, project costs, and regulatory assessments. Non-interest income declined, partly because COVID-related delays reduced gains on SBA loan sales.
- Shareholders’ equity declined $3.8 million, mainly reflecting the annual net loss. The company paid no dividend in 2020, suspending payments amid pandemic-related uncertainty.
Outlook, risks, and unusual items
- Outlook: The filing provides no company-specific earnings or growth guidance. Management says the pandemic’s effects remain uncertain and could result in further credit losses, lower demand, or other adverse effects. The Bank began participating in the SBA Paycheck Protection Program in January 2021.
- COVID-19 loan accommodations: The Bank had modified $232.4 million of loans to defer principal and/or interest; $52.6 million remained on deferment at December 31, 2020. By March 30, 2021, modified balances had declined to $37.7 million. The filing states these modifications generally were not classified as troubled debt restructurings under applicable relief, subject to exceptions.
- Regulatory agreement: The Bank remained subject to a formal OCC written agreement entered in November 2018 covering areas including liquidity, asset/liability management, commercial lending, internal audit, and credit-loss practices. Management said it had addressed the identified items and was working with the OCC toward full resolution; the agreement was not reported as terminated.
- Unusual expenses and estimates: 2020 results included a $556,000 final purchase-price adjustment related to the Prime Bank acquisition and a $206,000 impairment charge on the core deposit intangible. Goodwill was $1.1 million and was not impaired. The company recorded a $1.9 million deferred-tax-asset valuation allowance; realizability of deferred tax assets was a critical audit matter.
- Key risks: Concentration in regional real estate and commercial lending; pandemic-driven borrower stress and collateral-value declines; higher non-accrual loans; interest-rate and funding risks; competition; cybersecurity and operational disruption; and dependence on regulatory approval for capital distributions. Commercial real estate and commercial/industrial loans together represented 58.4% of gross loans.
- Ownership and governance: PNBK Holdings owned 56.7% of the company and the company relied on controlled-company exemptions from certain Nasdaq governance requirements. The CEO changed in July 2020.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and identified allowance qualitative adjustments, goodwill impairment, and deferred-tax-asset realizability as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an ICFR attestation.
Important facts for investors to verify
- Track subsequent non-accrual loans, criticized assets, charge-offs, and the adequacy of the allowance as pandemic accommodations expire.
- Assess whether deposit levels and mix remain stable after the prepaid debit-card deposit acquisition and brokered-deposit runoff.
- Confirm the OCC agreement’s status and any continuing restrictions on dividends or capital distributions.
- Evaluate repayment or refinancing plans for the $12 million senior notes due in December 2021, alongside available borrowing capacity and liquidity needs.
- Review the assumptions supporting the $11.5 million net deferred tax asset and whether the company can generate sufficient taxable income to realize it.
- Note a disclosure inconsistency: MD&A describes 2019 as having income before taxes of $3.7 million, while the consolidated statements of operations report a pre-tax loss of $3.716 million. The financial statements report a 2019 net loss of $2.817 million; investors should consult the filed statements and related disclosures.