Patriot National Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company is a Connecticut bank holding company operating Patriot Bank, N.A., principally in Connecticut, Westchester County, and New York City. All financial amounts below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2020 / Mar. 31, 2020 | Comparison |
|---|---|---|
| Interest and dividend income | $10.72 | $10.59 in Q1 2019 |
| Net interest income | $6.32 | $6.36 in Q1 2019 |
| Net interest margin | 2.72% | 2.88% in Q1 2019 |
| Provision for loan losses | $0.80 | $0.17 in Q1 2019 |
| Noninterest income | $0.42 | $0.75 in Q1 2019 |
| Noninterest expense | $7.37 | $6.45 in Q1 2019 |
| Net income (loss) | $(1.07); $(0.27) per diluted share | $0.32; $0.08 per diluted share in Q1 2019 |
| Operating cash flow | $(4.31) | $0.44 provided in Q1 2019 |
| Total assets | $999.6 | $979.8 at Dec. 31, 2019 |
| Net loans | $807.9 | $802.0 at Dec. 31, 2019 |
| Deposits | $803.2 | $769.5 at Dec. 31, 2019 |
| Total borrowings | $120.9 | $130.9 at Dec. 31, 2019 |
| Shareholders’ equity | $64.6 | $67.0 at Dec. 31, 2019 |
- Cash and cash equivalents were $52.2 million, up $12.8 million from year-end. Management reported balance-sheet liquidity of 11.0% of assets; liquidity including readily available off-balance-sheet funding was 19.6%, and including brokered-deposit availability was 22.2%.
- The allowance for loan losses increased to $10.9 million, or 1.33% of gross loans, from $10.1 million, or 0.99%, at year-end. Nonaccrual loans were $16.5 million; nonperforming assets were $18.9 million, or 1.89% of assets.
- At March 31, the Bank’s regulatory ratios were 11.76% total capital, 10.51% Tier 1 risk-based capital, 10.51% CET1, and 9.16% Tier 1 leverage. The filing says the Bank met fully phased-in capital adequacy requirements.
Material changes and management commentary
- The company moved from Q1 2019 profit to a Q1 2020 loss. Management attributed the deterioration mainly to higher loan-loss provisioning, including COVID-19-related reserves, and increased operating costs.
- Net interest income declined 0.6% and net interest margin fell 16 basis points. Higher average loan balances were offset by increased deposit and FHLB borrowing costs and lower yields on earning assets.
- Noninterest income fell $0.33 million, primarily because SBA loan sales were delayed pending SBA approval; SBA loan-sale gains were $12,000 versus $380,000 in Q1 2019. SBA loans held for sale rose to $18.0 million from $15.3 million.
- Noninterest expense rose $0.92 million, including a $0.68 million increase in salaries and benefits, which management linked largely to staffing for SBA expansion, deposit initiatives, and credit, finance, and compliance functions.
- Deposits increased $33.7 million, principally due to $33.5 million growth in money-market balances. Total borrowings fell $10.0 million, including repayment of FHLB advances.
- Unrealized investment-security losses, net of tax, were $1.34 million for the quarter, contributing to the decline in equity. Management considered the losses temporary and reported no other-than-temporary impairment.
- Management said it expects to return to profitability after absorbing the pandemic’s credit effects and as SBA and deposit-growth investments contribute to income. No quantified earnings or financial guidance was provided.
Outlook, risks, and unusual items
- COVID-19 created significant uncertainty around borrowers, collateral values, loan demand, credit losses, and operations. Management said it could not estimate the pandemic’s full impact and warned that the allowance could increase as economic conditions affect borrowers.
- As of March 31, $5.5 million of loans had been modified for payment deferrals of up to 90 days and were not classified as TDRs. From April 1 through June 8, the company received about 240 further relief requests covering approximately $219 million of loans, predominantly commercial real estate and commercial-and-industrial loans; requests remained under evaluation.
- The company reported that it had approved no PPP loans subsequent to quarter-end through the filing’s subsequent-events disclosure.
- The Bank remained subject to a formal OCC agreement entered in November 2018. The company said it had addressed the listed matters and was working with the OCC toward full resolution.
- The Federal Reserve Bank of New York rejected a request related to a proposed quarterly shareholder dividend in March; no dividend was paid in Q1 2020. The filing notes that regulatory authorities may restrict distributions.
- The 10-Q was filed June 8, 2020, relying on the SEC’s COVID-19 filing extension. The company cited remote work, reduced access to records, and challenges coordinating with auditors as reasons for the delay.
- Management identified interest-rate, credit, liquidity, funding, economic, regulatory, operational, cybersecurity, and regional real-estate risks. The company reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether COVID-related deferrals and the additional $219 million of relief requests resulted in higher delinquencies, risk-rating downgrades, charge-offs, or loan-loss provisions.
- Whether SBA approval delays cleared and the $18.0 million of SBA loans held for sale were sold as expected; verify related gains and servicing income.
- Whether deposit growth and liquidity remained durable, including the company’s reliance on $225.4 million of brokered deposits and the maturity profile of time and brokered deposits.
- Whether profitability improved as SBA and deposit initiatives scaled, and whether the net interest margin recovered from 2.72%.
- Progress toward resolving the OCC formal agreement, and any implications for capital, lending, or dividends.
- How investment-security marks and pandemic-related asset-quality developments affected equity and regulatory capital after March 31.