Patriot National Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless noted, figures are in U.S. dollars; financial statement amounts below are in millions.
Business context and financial condition
Patriot is a Connecticut-based bank holding company operating primarily in Connecticut, Westchester County, and New York City. Its lending is concentrated in commercial real estate, residential real estate, commercial and industrial, consumer, and construction loans.
- Total assets were $886.2 million, up from $880.7 million at December 31, 2020.
- Net loans fell to $666.3 million from $719.6 million; gross loans declined 7.3% to $676.7 million. Management attributed the decline chiefly to $69.4 million of net loan paydowns, partly offset by $16.0 million of loan purchases.
- Deposits rose 1.1% to $692.9 million. Noninterest-bearing deposits increased $14.8 million; brokered deposits declined $22.8 million. The company cited stronger retail activity and growth in its prepaid debit card business.
- Cash and cash equivalents increased to $84.3 million from $34.6 million. The company reported balance-sheet liquidity of 15.8% of assets and liquidity including available off-balance-sheet sources of 27.1%.
- Total borrowings were $120.8 million, unchanged from year-end, including $90.0 million of FHLB advances. Shareholders’ equity was $63.9 million, versus $63.2 million.
Results, cash flow, and key metrics
- Net income: $854,000, or $0.22 per basic and diluted share, compared with a $1.1 million net loss, or $0.27 loss per share, in Q1 2020. Pretax income was $1.173 million versus a $1.431 million pretax loss.
- Employee retention credit: The company recorded an $843,000 CARES Act credit as a reduction of compensation expense and was still filing to claim it. Pretax income before that credit was $330,000.
- Net interest income: $6.126 million, down 3.1% from $6.323 million. Net interest margin improved to 2.99% from 2.72%; the average yield on earning assets declined to 3.96% from 4.60%, while the rate paid on interest-bearing liabilities fell to 1.24% from 2.12%.
- Credit provision and allowance: No loan-loss provision was recorded, compared with $804,000 in Q1 2020. The allowance was $10.426 million, or 1.54% of gross loans, versus $10.584 million at year-end. Net charge-offs were $158,000.
- Noninterest income and expense: Noninterest income was $442,000, compared with $421,000. Noninterest expense fell to $5.395 million from $7.371 million; the company cited the employee retention credit, lower compensation following 2020 staffing changes, and lower regulatory assessments.
- Cash flow: Operating activities used $834,000, compared with $4.313 million used in Q1 2020. Investing activities provided $44.929 million and financing activities provided $5.543 million; cash increased $49.638 million during the quarter.
- Regulatory capital: At March 31, the Bank’s total risk-based capital ratio was 13.32% and Tier 1 leverage ratio was 10.12%. The filing states the Bank met applicable capital requirements and was well capitalized.
Material changes versus comparable periods
- Results turned profitable from a Q1 2020 loss, but the $843,000 employee retention credit was a material contributor; management reported $330,000 of pretax income before that credit.
- Net interest income declined as average loan balances and asset yields fell. Lower deposit costs helped lift net interest margin, despite lower interest income.
- Operating expenses fell substantially, reflecting the employee retention credit and lower compensation and regulatory assessment costs.
- Credit indicators weakened sequentially: nonaccrual loans rose to $24.6 million from $20.0 million at year-end, and nonperforming assets increased to $25.8 million from $21.9 million. Nonperforming assets were 2.91% of total assets, up from 2.49%.
- Available-for-sale securities increased to $57.9 million from $49.3 million, reflecting purchases, while accumulated other comprehensive loss widened to $688,000 from $518,000.
Outlook, risks, and unusual items
- Management said it expects further profitability improvement as loan balances begin to grow and SBA loan and sale activity accelerates, and expects higher net interest margins to be sustained and grow. These are management expectations, not quantified formal guidance.
- COVID-19 effects remain uncertain. The filing warns of possible credit losses, declining collateral values, reduced demand, operational disruption, and adverse effects on earnings and financial condition. Approximately $37.7 million of loans remained on payment deferment at March 31; $232.7 million had been modified for payment deferrals, and these modifications were not classified as TDRs under the cited guidance.
- The company continues working with the OCC toward full resolution of a formal written agreement entered into by the Bank in 2018. The filing says the Bank has addressed the items identified and is collaborating with the OCC; the agreement remains a matter to monitor.
- Dividend payments have been temporarily suspended amid economic uncertainty associated with the pandemic.
- Interest-rate, credit, funding, real estate market, regulatory, and pandemic risks are identified. The company also notes that its interim results are not necessarily indicative of full-year results.
- The filing reports no legal proceeding expected to have a material adverse effect and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $843,000 employee retention credit is ultimately claimed and whether future earnings remain positive without similar credits or other unusual benefits.
- Trends in nonaccrual loans, impaired loans, charge-offs, and the adequacy of the $10.4 million allowance, particularly given the rise in nonperforming assets.
- Whether loan balances, originations, and SBA loan sales recover as management expects, and whether improved margins offset lower earning-asset yields.
- Progress toward resolving the OCC agreement and the Bank’s ability to maintain required capital ratios.
- Deposit composition, liquidity, and the company’s capacity to service borrowings, including $90.0 million of FHLB advances and the $12 million senior notes due in December 2021.
- Whether loan deferrals, pandemic-related borrower stress, and regional real estate conditions lead to further deterioration in credit quality.