Patriot National Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2021. Dollar amounts below are in millions unless noted.
Business context and financial performance
Patriot is a Connecticut-based bank holding company operating Patriot Bank, with lending concentrated in Fairfield and New Haven Counties, Westchester County, and New York City. The bank lends primarily in commercial real estate, commercial and industrial, residential real estate, and consumer categories.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest and dividend income | $12.0 | $8.0 | $30.0 | $23.8 |
| Net interest income | $9.2 | $6.3 | $23.7 | $18.4 |
| Net interest margin | 3.68% | 2.81% | 3.35% | 2.87% |
| Provision (credit) for loan losses | $0.2 | ($0.3) | $0.5 | ($0.3) |
| Noninterest income | $0.7 | $0.9 | $2.3 | $2.1 |
| Noninterest expense | $7.2 | $5.7 | $20.1 | $16.4 |
| Net income | $2.3 | $1.3 | $4.4 | $3.2 |
| Diluted earnings per share | $0.59 | $0.34 | $1.11 | $0.81 |
Financial condition, liquidity, and capital
- Growth: Total assets were $1.059 billion, up $110.5 million from year-end 2021. Gross loans rose 16.7% to $862.9 million; deposits increased 11.5% to $834.4 million.
- Funding and liquidity: Cash and equivalents were $31.2 million, down from $47.0 million. Reported balance-sheet liquidity was 9.2% of assets; including readily available off-balance-sheet funding, liquidity was 16.2%. The company said available liquidity was sufficient for anticipated needs.
- Deposits: Noninterest-bearing deposits were $247.7 million. Prepaid debit-card program deposits were approximately $169.1 million, which management described as a growing, low-cost funding source. Brokered deposits increased to $34.4 million from $17.0 million.
- Debt: Total borrowings were $155.6 million, versus $120.7 million at year-end, including $125.0 million of FHLB and correspondent-bank borrowings. The $12 million senior notes were extended to December 31, 2022; their rate stepped up to 7.50% after September 30. The filing reports $9.8 million subordinated debt and $8.1 million junior subordinated debt.
- Credit quality: Allowance for loan losses was $10.0 million, or 1.15% of gross loans. Nonaccrual loans were $19.2 million and total nonperforming assets were $19.4 million, down from $23.1 million at year-end; nonperforming assets were 1.83% of assets. The allowance included $6.1 million of specific reserves on impaired loans.
- Capital: The Bank’s Tier 1 leverage ratio was 9.23%, above the greater-than-9% Community Bank Leverage Ratio threshold for well-capitalized status. The filing notes this designation applies to the Bank, not the holding company.
- Equity and securities: Shareholders’ equity fell to $58.0 million from $67.3 million, mainly reflecting a $13.8 million after-tax unrealized securities loss, partly offset by net income. Available-for-sale securities had $20.8 million of gross unrealized losses; management considered them temporary and said it did not intend or expect to be required to sell before recovery.
- Cash flow: For the first nine months, operating cash flow was negative $0.4 million, investing cash flow was negative $137.3 million, and financing cash flow was positive $121.8 million. Cash declined $15.9 million.
Changes, outlook, and risks
- Quarterly net income increased year over year as net interest income and margin improved. Higher loan balances and yields, alongside growth in prepaid-card-related deposits, supported the improvement; higher deposit costs partially offset it.
- Prior-year results included a nonrecurring employee retention tax credit of $0.9 million for Q3 and $2.9 million for the nine-month period; no such credit was recognized in 2022. Noninterest expense rose, including higher salaries and benefits.
- The proposed American Challenger merger was terminated by mutual agreement on July 18, 2022 because not all closing conditions could be met under the existing structure. The company reported $112,000 of merger-related expenses for the first nine months of 2022; termination-related tax treatment contributed to lower 2022 effective tax rates.
- No specific earnings, growth, or margin guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. It identified interest-rate changes, funding access and costs, local economic and real-estate conditions, loan quality, competition, regulation, and execution risks among the factors that could affect results.
- Loan concentrations and credit risks merit attention: commercial real estate represented 50.9% of gross loans, and consumer and other loans grew to $138.1 million from $59.4 million at year-end, partly reflecting purchased unsecured consumer loans. The net loan-to-deposit ratio was 102%.
- Off-balance-sheet lending commitments increased to $187.3 million from $127.0 million. The filing reports no material pending legal proceedings beyond routine litigation and states management expects no material adverse effect from those matters.
Important facts for investors to verify
- Whether the $12 million senior notes were repaid, refinanced, or further extended after their December 31, 2022 maturity.
- Whether the Bank maintained its narrow margin above the 9% CBLR threshold as assets and funding needs changed.
- Subsequent-quarter trends in deposit pricing, brokered deposits, available liquidity, and reliance on FHLB borrowings.
- Credit performance of the growing consumer portfolio and the commercial real-estate book, including changes in nonaccrual loans, charge-offs, and specific reserves.
- Whether unrealized securities losses, which management attributed to market interest rates, recover or create a need to sell securities or otherwise affect capital and liquidity.
- The impact of adopting CECL, which the filing said the company was evaluating for its planned effective period beginning in 2023.