Patriot National Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless noted, amounts are in U.S. dollars; financial statement amounts are in thousands. The company is a bank holding company operating Patriot Bank, N.A., principally in Connecticut, southern New York and northern New Jersey.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparable period / December 31, 2022 |
|---|---|---|
| Quarterly net income (loss) | $(3.8) million; $(0.95) per diluted share | Q3 2022: $2.3 million; $0.59 per diluted share |
| Nine-month net income (loss) | $(5.1) million; $(1.28) per diluted share | Nine months 2022: $4.4 million; $1.11 per diluted share |
| Net interest income | Q3: $6.5 million; nine months: $22.3 million | Q3 2022: $9.2 million; nine months 2022: $23.7 million |
| Net interest margin | Q3: 2.48%; nine months: 2.90% | Q3 2022: 3.68%; nine months 2022: 3.35% |
| Total assets | $1.137 billion | $1.043 billion |
| Total deposits | $837.0 million | $860.4 million |
| Borrowings | $245.1 million | $115.2 million |
| Shareholders’ equity | $40.0 million | $59.6 million |
| Cash and cash equivalents | $78.9 million | $38.5 million |
- Revenue and costs: Q3 interest and dividend income was $15.1 million, up from $12.0 million a year earlier, but interest expense rose to $8.5 million from $2.8 million. Nine-month interest income was $44.0 million and interest expense was $21.8 million. Higher deposit and borrowing costs outpaced higher yields on earning assets.
- Credit costs: Q3 provision for credit losses was $4.7 million, including an additional reserve of about $4.0 million associated with one loan. Nine-month provision was $8.2 million, after credits for off-balance-sheet exposures partly offset loan provisions. Net charge-offs were $7.2 million for the nine months.
- Loans and asset quality: Gross loans increased to $889.9 million from $848.3 million at year-end; commercial real estate was 56.1% of gross loans. The allowance for credit losses was $25.7 million, or 2.88% of gross loans. Non-accrual loans rose to $30.8 million from $18.6 million; nonperforming assets were 2.72% of total assets versus 1.89%.
- Cash flow: Cash and cash equivalents increased $40.4 million over the nine months. Operating activities used $10.5 million and investing activities used $57.5 million; financing activities provided $108.5 million, including $130.0 million of additional FHLB and correspondent borrowings.
- Liquidity and funding: Balance-sheet liquidity was 10.6% of assets; liquidity including readily available off-balance-sheet sources was 17.1%, above the company’s 10% policy minimum. Deposits declined $23.4 million; noninterest-bearing deposits fell $133.5 million, partly offset by higher interest-bearing balances. Uninsured deposits were $297.6 million, 35.56% of total deposits. The net loan-to-deposit ratio was 103.2%.
- Capital: The Bank’s Tier 1 leverage ratio was 8.34%, below the 9% CBLR threshold. The Bank said it remained classified as well capitalized while using the framework’s two-quarter grace period; by December 31, 2023 it intended either to meet CBLR criteria or comply with generally applicable Basel III rules.
Material changes and unusual items
- The company adopted CECL on January 1, 2023, recording a $13.0 million increase in the loan allowance and a $2.7 million reserve for unfunded commitments, with an $11.5 million after-tax reduction to opening accumulated equity. This affects comparability with prior periods.
- Accumulated other comprehensive loss widened to $18.7 million from $15.6 million at year-end. Available-for-sale securities had $25.3 million of gross unrealized losses at September 30; management attributed these primarily to higher market interest rates and recorded no credit-loss allowance on the securities.
- Deferred tax assets increased to $26.1 million from $15.5 million. Management recorded no valuation allowance and said realization will continue to be evaluated.
- Noninterest income increased to $1.2 million for Q3 and $2.8 million for nine months, with management attributing the increase primarily to the digital payments program. Noninterest expense rose to $8.1 million for Q3 and $23.8 million for nine months, including higher staffing-related salary and benefit costs.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- On November 1, 2023, the company initiated a reduction in force. It expects a fourth-quarter 2023 restructuring charge of approximately $500,000 and annualized salary and benefit savings of approximately $3.5 million.
- At the filing date, the company was negotiating with a third-party consumer-loan originator/servicer; if finalized, the arrangement was expected to produce a material recovery of part of the consumer-loan allowance and commitment reserve. This was not yet finalized.
- Interest-rate and funding-cost changes, deposit outflows, regional real estate and economic conditions, credit quality, and access to cost-effective funding are cited risks. Management notes that many interest-bearing deposit balances may run off as market conditions change.
- Disclosure controls and procedures were judged not effective for the quarter, following accounting errors that led to restatements of the March and June 2023 quarterly reports. Management said it had reviewed and improved ACL recognition controls and would reassess effectiveness as of year-end.
- The filing reports no material pending legal proceedings other than routine litigation. The company has not paid dividends since 2020 and has no present plans to do so.
Most important facts for investors to verify
- Whether the Bank met CBLR qualifying criteria by December 31, 2023, or moved to Basel III reporting, and the resulting capital position.
- Subsequent trends in non-accrual loans, charge-offs, the $25.7 million loan allowance, and the reserve for unfunded commitments—particularly the loan driving the additional Q3 reserve.
- Deposit stability, uninsured-deposit levels, borrowing dependence and available collateral-based liquidity.
- Whether the consumer-loan negotiations closed and generated the anticipated reserve recovery, and the actual restructuring costs and savings.
- Progress in remediating disclosure controls after the prior-quarter restatements, including results of the year-end reassessment.
- The sustainability of net interest margin amid deposit repricing and borrowing costs, and the company’s ability to realize its deferred tax assets.