Patriot National Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. All dollar amounts below are in U.S. dollars. The company is a one-bank holding company operating Patriot Bank, N.A., a community bank with nine branches in Connecticut and New York. The 2019 financial statements were audited by RSM US LLP, which issued an unqualified opinion. The filing was submitted April 29, 2020, with a COVID-19-related filing extension.
Key financial results and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $979.8 million | $951.7 million |
| Gross loans | $812.2 million | $780.4 million |
| Total deposits | $769.5 million | $743.3 million |
| Total borrowings | $130.9 million | $131.0 million |
| Shareholders’ equity | $67.0 million | $69.3 million |
| Interest and dividend income | $43.6 million | $40.4 million |
| Net interest income | $25.4 million | $28.0 million |
| Provision for loan losses | $5.0 million | $1.3 million |
| Non-interest income | $2.5 million | $1.6 million |
| Non-interest expense | $26.7 million | $24.2 million |
| Net income (loss) | $(2.8) million; $(0.72) per share | $3.2 million; $0.82 per share |
- Margins and profitability: Net interest margin fell to 2.80% from 3.29%; interest spread declined to 2.55% from 3.10%. Return on average assets was (0.29)% and return on average equity was (4.05)%, versus 0.35% and 4.64%, respectively, in 2018.
- Cash flow: Operating activities used $11.9 million; investing activities used $41.8 million; financing activities provided $26.7 million. Cash and cash equivalents fell $27.0 million to $39.4 million. Investing outflows included loan purchases and SBA loan originations.
- Liquidity and funding: The company reported a 10.0% balance-sheet liquidity-to-assets ratio and 17.3% liquidity including readily available off-balance-sheet funding; available total liquidity including brokered-deposit capacity was 18.21%. The Bank had $100.0 million in FHLB advances and $65.9 million in additional FHLB capacity. Management said liquid assets were sufficient for anticipated needs. The filing also reports a 10.96% on-balance-sheet liquidity measure using a broader liquid-funds definition.
- Capital: At year-end, the Bank’s total risk-based capital ratio was 11.826%, CET1 ratio 10.640%, Tier 1 risk-based ratio 10.640%, and Tier 1 leverage ratio 9.279%. The company-level Tier 1 leverage ratio was 7.148%. Management said the Bank met applicable Basel III capital requirements.
- Credit quality: The allowance for loan losses rose to $10.1 million, or 1.25% of gross loans, from $7.6 million, or 0.98%. Net charge-offs were $2.5 million. Non-accrual loans were $18.0 million, down from $19.2 million; nonperforming assets were $20.5 million, or 2.09% of assets, versus $23.4 million, or 2.46%. Troubled debt restructurings increased to $11.0 million from $2.1 million.
Material changes and unusual items
- Despite 3.0% asset growth and a 4.1% increase in gross loans, net interest income declined $2.6 million. Higher deposit costs, increased use of wholesale funding, FHLB borrowing costs, and non-accrual or reduced-rate loans pressured earnings.
- Interest expense increased $5.8 million, including a $5.0 million increase in deposit interest expense. Brokered deposits rose $46.3 million to $229.9 million. Core deposits declined 1.9% to $472.1 million.
- The $5.0 million loan-loss provision included a $2.3 million commercial loan charge-off and a $1.5 million reserve for a commercial real estate TDR. The fourth-quarter $1.5 million TDR reserve increased the quarterly net loss from $422,000 to $1.5 million; reported fourth-quarter loss per share was $0.39. Fourth-quarter 2018 net income was $326,000.
- SBA loan-sale gains were $891,000; the Bank sold $12.0 million of SBA loans in 2019. At year-end, $15.3 million of guaranteed SBA loans were held for sale pending SBA review, with sales expected in the first half of 2020.
- Non-interest expense increased $2.4 million, reflecting salaries, professional services, and business expansion, partly offset by lower project expenses. The Bank recorded a $899,000 income tax benefit and carried an $11.1 million net deferred tax asset; realization depends on future taxable income.
- Cash dividends of $0.01 per share, totaling $155,000, were paid in 2019. The Federal Reserve Bank of New York rejected the company’s request for a first-quarter 2020 shareholder dividend, which was not paid.
Outlook, management commentary, and risks
- The filing gives no quantitative earnings or revenue guidance. Management said it was exploring lower-cost funding sources and deposit initiatives, including an online money market account launched in January 2020. A prepaid deposit initiative remained subject to OCC review.
- COVID-19 developments after year-end were identified as a material uncertainty, not reflected in the 2019 year-end results. Management anticipated potential pressure on net interest income from sharply lower market rates and possible higher credit losses; the magnitude was unknown. Risks include borrower distress, collateral declines, operational disruption, cyber risk, and weaker regional economic conditions.
- The Bank remained subject to a November 2018 formal written agreement with the OCC covering, among other matters, liquidity and asset-liability management, commercial loan administration, leveraged lending, loan-loss allowance practices, internal audit, and interest-rate-risk assumptions. The Bank said it had addressed the identified items and was working with the OCC toward full resolution.
- Other key exposures include commercial real estate and regional loan concentrations, interest-rate sensitivity, reliance on brokered deposits and wholesale funding, and a sizable balance of deposits and certificates maturing within one year. The filing lists $145.1 million in credit commitments and standby letters of credit at year-end; actual drawdowns may be lower.
- In March 2020, President Richard Muskus resigned effective April 17. On April 2, the Bank announced elimination of the President and Chief Lending Officer positions as part of cost and capital-buffer initiatives. These were post-period developments.
- Management reported that the previously identified material weakness in the allowance-for-loan-loss review process had been remediated and concluded internal control over financial reporting was effective at December 31, 2019. The independent auditor did not provide an opinion on internal controls.
Most important facts for investors to verify
- Subsequent-quarter loan performance, TDR outcomes, charge-offs, and whether the year-end allowance adequately reflects pandemic-related credit risk.
- Progress toward resolving the OCC agreement and the Bank’s capital position under evolving requirements.
- Deposit retention, brokered-funding dependence, near-term maturities, and actual available borrowing capacity.
- Whether the $15.3 million of SBA loans held for sale cleared SBA review and generated the expected proceeds and gains.
- Realizability of deferred tax assets and any later decision on shareholder dividends.
- Effects of the 2020 executive departures and organizational changes on lending, controls, and operating costs.