Patriot National Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Business context and financial performance
Patriot National Bancorp operates through Patriot Bank, serving Connecticut, parts of New York and northern New Jersey. It reported a second-quarter net loss as higher funding costs, increased credit-loss provisioning and higher operating expenses offset growth in interest income.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Interest and dividend income | $15.3 | $9.7 | $29.0 | $18.0 |
| Interest expense | $7.6 | $2.0 | $13.2 | $3.6 |
| Net interest income | $7.7 | $7.7 | $15.7 | $14.4 |
| Net interest margin | 2.96% | 3.27% | 3.12% | 3.17% |
| Provision for credit losses, net | $1.2 | $0.3 | $2.6 | $0.3 |
| Noninterest income | $0.8 | $0.8 | $1.7 | $1.6 |
| Noninterest expense | $8.1 | $6.5 | $15.6 | $12.9 |
| Net income (loss) | $(0.5) | $1.3 | $(0.6) | $2.1 |
| Basic and diluted EPS | $(0.14) | $0.32 | $(0.15) | $0.52 |
For Q2, interest income rose substantially, but the increase was absorbed by higher interest expense; net interest income was essentially unchanged. Management attributed margin compression chiefly to higher deposit costs amid rising market rates and banking-sector uncertainty. First-half noninterest expense increased mainly due to staffing and business initiatives. Noninterest income growth was attributed in part to the prepaid card program.
Financial position, cash flow and credit
- Assets and loans: Total assets were $1.163 billion, up $119.4 million from year-end 2022. Gross loans rose $82.4 million to $930.7 million, led by commercial real estate and commercial and industrial loans. Commercial real estate was 55.0% of gross loans.
- Deposits and borrowings: Deposits were $863.4 million, up $2.9 million. Interest-bearing deposits increased while noninterest-bearing deposits declined; brokered deposits rose to $109.1 million from $48.7 million. Borrowings increased to $207.0 million on the balance sheet, including $195.0 million of FHLB advances; total borrowings including other debt were $237.1 million.
- Liquidity: Cash and cash equivalents increased to $70.8 million from $38.5 million. Balance-sheet liquidity was 8.4% of assets and liquidity including readily available off-balance-sheet sources was 13.2%, above the company’s 10% policy minimum. FHLB unused borrowing capacity was $46.3 million. In July 2023, the Bank established an $80 million collateralized Bank Term Funding Program line.
- Capital and equity: Shareholders’ equity fell to $52.4 million from $59.6 million, reflecting CECL adoption, the first-half loss and securities-related other comprehensive loss. The Bank’s Tier 1 leverage ratio was 8.70%, below the 9% CBLR threshold; the Bank was using the framework’s two-quarter grace period, ending December 31, 2023.
- Credit quality: The loan allowance was $16.9 million, or 1.81% of gross loans. Nonaccrual loans were $20.6 million, versus $18.6 million at year-end; total nonperforming assets were $22.1 million, or 1.90% of assets. First-half net charge-offs were $4.0 million, including $4.3 million of consumer-loan charge-offs, partly offset by recoveries.
- Cash flow: First-half operating cash flow was $3.8 million, compared with cash use of $2.2 million in the prior-year period. Investing activities used $98.5 million, primarily reflecting loan growth and securities purchases; financing activities provided $127.0 million, including $122.0 million of increased borrowings. Cash increased $32.3 million.
- Debt and securities: Available-for-sale securities had a fair value of $90.5 million and gross unrealized losses of $21.7 million. Management attributed the losses mainly to higher market rates, reported no credit-loss allowance on these securities, and said it did not expect to have to sell them before recovery.
Material changes, outlook and risks
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $7.4 million and the reserve for unfunded commitments by $1.1 million, with a $6.2 million after-tax reduction to opening equity. As a result, allowance and provision comparisons with prior periods are not directly comparable.
- Management reported 6% loan growth in Q2, versus 3.6% in Q1. It gave no specific earnings, margin, growth or credit-loss guidance, and cautioned that interim results do not necessarily indicate full-year results.
- Key stated risks include interest-rate and repricing changes, deposit retention and funding costs, access to cost-effective funding, real-estate values and regional economic conditions, credit quality and loan concentrations, and regulatory or accounting changes.
- On August 8, 2023, the company and Bank entered a retention and severance agreement with the CFO. It provides for a $340,000 retention payment, an option to convert up to $140,000 to restricted stock, and potential COBRA premiums for up to 12 months, subject to conditions including advance notice of retirement.
- The Bank’s leverage ratio was below the 9% CBLR requirement. Management stated that by the end of the grace period it intended either to meet the framework’s qualifying criteria or comply with generally applicable Basel III rules.
Important facts for investors to verify
- The MD&A summary appears to state first-half 2022 EPS as a loss of $0.52, while the statements of operations and EPS note show earnings of $0.52. Confirm the apparent narrative typo against the filed financial statements.
- Track the Bank’s progress toward the 9% CBLR threshold before the grace period ends, and assess any implications if it must move to Basel III capital rules.
- Review consumer charge-offs, nonaccrual loans, commercial real estate concentration and allowance assumptions as loan growth continues.
- Monitor deposit composition, brokered-deposit reliance, borrowing levels and funding costs, as well as the availability and terms of contingent liquidity sources.
- Assess the effect of unrealized securities losses and whether liquidity needs could require asset sales before recovery.
- Verify the conditions, timing and total potential cost of the CFO retention and severance agreement.