Patriot National Bancorp, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 24, 2022. The company is a one-bank holding company operating Patriot Bank, N.A., with nine branches in Connecticut and New York. The filing also provides unaudited fourth-quarter results.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income (loss) | $5.1 million | $(3.8) million |
| Basic and diluted EPS | $1.29 | $(0.97) |
| Net interest income | $25.3 million | $24.2 million |
| Net interest margin | 2.9% | 2.7% |
| Total assets at year-end | $948.5 million | $880.7 million |
| Total deposits at year-end | $748.6 million | $685.7 million |
| Net loans at year-end | $729.6 million | $719.6 million |
| Cash and cash equivalents at year-end | $47.0 million | $34.6 million |
| Total borrowings at year-end | $120.7 million | $120.8 million |
- Income drivers: Interest and dividend income fell $5.6 million to $32.4 million, but interest expense fell $6.7 million to $7.1 million. Net interest income consequently rose $1.1 million. Average loan balances and yields declined.
- Credit costs: The company recorded a $500,000 credit to loan-loss provision, versus a $2.2 million provision in 2020. The allowance was $9.9 million, or 1.34% of gross loans. Net charge-offs were $179,000.
- Other income and expenses: Noninterest income rose to $4.4 million from $2.0 million, including $1.9 million in gains on SBA loan sales. Noninterest expense fell to $25.2 million from $28.1 million, reflecting a $2.9 million Employee Retention Credit; expenses included $1.9 million of merger-related project costs.
- Cash flow: Operating activities provided $7.6 million; investing activities used $55.2 million; financing activities provided $60.0 million. Cash increased $12.4 million during the year.
- Liquidity and capital: Balance-sheet liquidity was $108.4 million, or 11.4% of assets; reported liquidity including available off-balance-sheet funding was 21.7%. The Bank reported a 9.86% Tier 1 leverage ratio under the Community Bank Leverage Ratio framework, above its 9.0% well-capitalized threshold.
- Asset quality: Nonperforming assets were $23.1 million, or 2.44% of assets, versus $21.9 million, or 2.49%, a year earlier. Nonaccrual loans rose to $23.1 million from $20.0 million; three TDR loans totaling $9.7 million were included. No OREO remained at year-end.
Fourth-quarter highlights
Fourth-quarter 2021 net income was $1.9 million, compared with a $1.4 million net loss in fourth-quarter 2020. Fourth-quarter net interest income was $6.9 million. Merger-related costs of $1.9 million reduced fourth-quarter pretax income from approximately $2.5 million to $633,000; a $1.9 million deferred-tax valuation allowance reversal contributed to the quarter’s tax benefit.
Material changes and notable items
- Assets grew 7.7%; available-for-sale securities increased $45.1 million, and deposits increased $62.9 million. Growth in prepaid debit-card deposits was a key deposit driver; the prepaid balances were approximately $139 million at year-end.
- Gross loans increased just 1.3% to $739.5 million. $89.3 million of loan purchases were largely offset by a net decrease of $77.7 million in internal originations. Commercial real estate loans grew to 49.4% of gross loans from 38.7%; construction loans declined to 3.0% from 9.2%.
- The Bank terminated its 2018 OCC formal written agreement on September 1, 2021. The SBA subsequently removed heightened supervision and reinstated the Bank’s preferred lender status before year-end.
- The company reversed its $1.9 million deferred-tax valuation allowance, reporting a $12.1 million net deferred tax asset. Realization depends on future taxable income and remains subject to management’s reassessment.
- Available-for-sale securities had $2.4 million in gross unrealized losses at year-end, attributed by management to interest-rate changes and considered temporary. A $1.1 million after-tax unrealized loss reduced shareholders’ equity.
Outlook, risks and contingencies
- No standalone earnings or operating guidance is provided. Management states that liquid assets are expected to cover anticipated operating needs, loan demand and deposit fluctuations for the next 12 months and beyond.
- PNBK agreed to merge with American Challenger Development Corp.; the agreement was amended in January and February 2022. The proposed plan includes at least $875 million of capital for the combined company and two operating divisions. Completion remained subject to shareholder and regulatory approvals.
- A related proposed commercial loan portfolio acquisition calls for at least $650 million of unpaid principal balance. The filing describes additional potential payments, including an estimated $6.5 million structuring/advisory fee and specified employee-related amounts; final accounting and purchase-price details were not determined.
- If the merger fails under specified circumstances, Patriot may owe a $4.75 million termination fee and would not realize expected transaction benefits; the filing also cites execution, integration, employee-retention and customer-relationship risks.
- Key ongoing risks include regional real-estate and commercial-credit concentration, higher nonaccrual loans, interest-rate and securities valuation exposure, deposit and wholesale-funding liquidity, COVID-19 effects, cybersecurity, regulatory compliance and competition. The $12 million senior notes mature June 30, 2022 after an extension; $90 million of FHLB advances mature in 2023–2024. The Bank reported $73.6 million of additional FHLB advance capacity and a $25.1 million Federal Reserve collateral borrowing line.
- The company paid no dividends in 2021 or 2020. Bank distributions to the parent are subject to regulatory approval, and future dividends are not assured.
- The auditor issued an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal control effectiveness.
Important facts for investors to verify
- Current status and final terms of the American Challenger merger, capital raise, and proposed loan-portfolio purchase, including approvals, financing commitments, costs and dilution.
- Whether elevated nonaccrual loans, especially commercial real estate exposures, require additional reserves or affect collections; review the $2.3 million specific reserve against impaired loans.
- Sustainability of earnings excluding the tax-allowance reversal, Employee Retention Credit, SBA sale gains and other unusual or transaction-related items.
- Near-term funding and refinancing plans for the senior notes and FHLB advances, and the effect of changing rates on net interest income, securities values and liquidity.
- Whether future taxable income supports realization of the $12.1 million deferred tax asset and the company’s ability to resume dividends subject to regulatory permissions.