PATRIOT NATIONAL BANCORP INC quarterly report, Q2 FY2022

Full document

Patriot National Bancorp, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.

Business context and financial performance

Patriot National Bancorp operates through Patriot Bank, serving markets in Connecticut, Westchester County, New York, and New York City. The bank’s lending includes commercial real estate, commercial and industrial, residential, consumer, construction, and SBA loans.

  • Q2 earnings: Net income was $1.265 million, or $0.32 per basic and diluted share, versus $1.022 million, or $0.26 per share, in Q2 2021. First-half net income was $2.065 million versus $1.876 million; diluted EPS was $0.52 versus $0.47.
  • Interest income and margin: Q2 interest and dividend income was $9.687 million, up 24.7% year over year; net interest income rose 30.0% to $7.720 million. Q2 net interest margin increased to 3.27% from 2.82%. For the first half, net interest income increased 19.7% to $14.446 million and margin was 3.17%, versus 2.90%.
  • Other income and costs: Q2 noninterest income was $0.798 million, compared with $0.753 million. Noninterest expense increased to $6.502 million from $5.286 million; salaries and benefits were $3.763 million versus $2.447 million. First-half noninterest expense was $12.931 million versus $10.681 million.
  • Assets and loans: Total assets were $1.049 billion, up $100.7 million from December 31, 2021. Net loans rose to $849.2 million from $729.6 million. Gross loans grew $119.6 million, with commercial real estate at 52.3% and consumer and other loans at 14.3% of gross loans.
  • Deposits and liquidity: Deposits increased 13.1% to $846.8 million. Cash and cash equivalents were $37.5 million, down from $47.0 million at year-end. Balance-sheet liquidity was 8.7% of assets, down from 11.4%; including available off-balance-sheet funding, liquidity was 18.2%, down from 21.7%. Management stated it believed liquidity was sufficient for anticipated needs.
  • Debt and capital: Total borrowings were $130.6 million versus $120.7 million at year-end, including $100 million of FHLB borrowings. FHLB unused borrowing capacity was $77.3 million. The Bank’s Tier 1 leverage ratio was 9.44%, above the 9.0% threshold under the Community Bank Leverage Ratio framework, compared with 9.86% at year-end.
  • Cash flow and equity: First-half operating cash flow was negative $2.241 million and investing cash flow was negative $117.273 million, primarily reflecting loan originations and purchases. Financing cash flow was positive $109.985 million, including deposit growth and additional FHLB borrowing. Shareholders’ equity declined to $59.8 million from $67.3 million, primarily due to $9.648 million of after-tax unrealized securities losses, partly offset by net income.

Material changes versus comparable periods

  • Reported earnings increased year over year, while net interest income and net interest margin improved with loan growth. Management attributed higher net interest income primarily to increased average loan balances.
  • Comparability is affected by the prior-year employee retention tax credit: $1.1 million was recognized in Q2 2021 and $2.0 million in the first half of 2021; none was recognized in 2022. Despite this, reported first-half noninterest expense rose year over year.
  • Available-for-sale securities fell to $77.0 million fair value from $94.3 million at year-end. The portfolio had $15.214 million of gross unrealized losses at June 30, versus $2.384 million at year-end, largely associated with rising market interest rates. Management considered the losses temporary and said it did not intend, and was not more likely than not required, to sell before recovery.
  • Nonaccrual loans were $23.324 million, compared with $23.095 million at year-end; nonperforming loans were 2.75% of net loans versus 3.17%. The allowance was $9.929 million, or 1.16% of gross loans, and the company recorded a $275,000 provision in the first half, compared with none in 2021.
  • Consumer and other loans more than doubled from year-end to $122.9 million. The company purchased $50.3 million of unsecured consumer loans and $27.7 million of HELOC loans during the first half.

Outlook, risks, contingencies, and unusual items

  • The filing provides no quantified earnings or growth guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
  • On July 18, 2022, after quarter-end, Patriot and American Challenger terminated their merger agreement because not all closing conditions could be met under the existing structure. The parties remained in discussions about a possible modified transaction, but a new agreement was uncertain. Related investment agreements for an approximately $540 million private placement were also terminated.
  • The company had recorded $1.9 million of merger-related expenses in 2021 and $63,000 in the first half of 2022. It also had $1.9 million of deferred capital-raise costs; the filing says these would be expensed if the capital raise were aborted or treated as a reduction to capital if completed.
  • Senior notes of $12 million were amended in June, extending maturity to December 31, 2022. The interest rate increases from 7.0% to 7.25% for Q3 2022 and to 7.50% thereafter.
  • Key risks cited include interest-rate changes and repricing, regional economic and real estate conditions, loan credit quality and allowance adequacy, deposit funding and liquidity, competition, regulation, and operational and technology risks. The Bank’s loan-to-deposit ratio was 100% at quarter-end, versus 97% at year-end.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. Patriot reported no material pending legal proceedings beyond routine litigation. Dividends have not been paid since 2020.

Investor verification priorities

  1. Confirm the post-quarter merger termination, status of any renewed transaction, and accounting treatment of the $1.9 million deferred capital-raise costs.
  2. Review consumer-loan growth and credit performance, including the unsecured loan purchases, $23.3 million of nonaccrual loans, impaired-loan reserves, and allowance methodology.
  3. Assess the duration, credit composition, and potential recovery or capital impact of the securities portfolio’s unrealized losses.
  4. Monitor liquidity and funding mix, including the 100% net loan-to-deposit ratio, deposit composition, brokered deposits, and remaining borrowing capacity.
  5. Track the Bank’s capital buffer above the 9.0% leverage threshold and the sensitivity of earnings and economic value to interest-rate changes.