Business Overview Patriot National Bancorp, Inc. (PNBK) is a financial institution with a rich history that has weathered various storms over the years. The company is poised to emerge stronger from its recent challenges.
Patriot National Bancorp, Inc. was founded in 1994 and operates primarily in Fairfield and New Haven Counties in Connecticut, as well as Westchester County in New York. The company provides a range of commercial and consumer banking services, including commercial real estate loans, commercial business loans, consumer loans, and construction loans. In recent years, Patriot has also expanded its presence in the residential mortgage market.
In the early years, Patriot National Bancorp focused on building its commercial real estate lending business, providing financing for commercial properties, multi-family residential projects, and other commercial ventures in its local markets. The bank established a reputation for its lending expertise and customer service, which allowed it to grow its asset base and expand its branch network throughout the 1990s and 2000s.
A significant milestone in Patriot National Bancorp’s history was the acquisition of Norwalk Bank & Trust in 2006, which increased its presence in Fairfield County and expanded its commercial and retail banking customer base. However, the financial crisis of 2008-2009 presented significant challenges for the bank, as it navigated the economic downturn and its impact on the loan portfolio.
In response to the financial crisis, Patriot National Bancorp strengthened its balance sheet and risk management practices while diversifying its revenue streams. The company expanded its Small Business Administration (SBA) lending program and entered the digital payments space through its Digital Payments Division, providing payment processing and other financial technology services to its customers.
Navigating Challenges Patriot’s journey has not been without its share of difficulties. In 2020, the company reported a net loss of $3.82 million, driven by the economic impact of the COVID-19 pandemic. The pandemic’s effect on the regional economy, as well as the real estate market, led to an increase in loan delinquencies and credit losses. To address these challenges, Patriot focused on managing its credit exposure, reducing its loan portfolio, and strengthening its capital position.
Despite these headwinds, Patriot demonstrated resilience, as evidenced by its return to profitability in 2022 with a net income of $6.16 million. This turnaround was largely attributable to the company’s strategic initiatives, including the diversification of its revenue streams and the optimization of its balance sheet.
Digital Payments Division: A Key Growth Driver One of the standout developments at Patriot has been the growth of its Digital Payments Division. Established in 2023, this division provides payment processing and settlement solutions for prepaid, debit, and charge card transactions. The division has quickly become a significant contributor to Patriot’s non-interest income, generating $3.51 million in revenue for the nine months ended September 30, 2024.
The success of the Digital Payments Division has been a testament to Patriot’s ability to identify and capitalize on emerging opportunities. By leveraging its expertise and technological capabilities, the company has been able to diversify its revenue streams and mitigate the impact of challenges in its traditional lending business.
Strengthening the Balance Sheet In 2024, Patriot made a strategic decision to reduce the size of its balance sheet in order to improve its capital ratios. The company has restricted new loan originations and allowed its loan portfolio to decline, resulting in a 93.2 million decrease in loans receivable from December 31, 2023, to September 30, 2024.
This balance sheet optimization has been accompanied by a decline in the company’s net interest income, which decreased from $28.00 million in 2023 to $15.43 million for the nine months ended September 30, 2024. However, Patriot’s management team has demonstrated their ability to manage this transition effectively, as evidenced by the company’s improved liquidity and capital positions.
Financials and Liquidity As of September 30, 2024, Patriot’s on-hand liquidity to total liabilities ratio stood at 12.94%, up from 6.77% at the end of 2023. The company’s total liquidity to total liabilities ratio also increased from 18.24% to 21.45% over the same period. These improvements in liquidity and capital ratios have positioned Patriot to navigate the current economic environment and pursue future growth opportunities.
For the fiscal year 2023, Patriot reported revenue of $34.25 million, with a net loss of $4.18 million. Operating cash flow was negative $10.72 million, and free cash flow was negative $11.13 million. In the most recent quarter (Q3 2024), revenue was $7.06 million, with a net loss of $26.95 million. The significant decrease in net income was primarily driven by a full valuation allowance recorded against deferred tax assets of $25.10 million. However, operating cash flow improved dramatically to $143.97 million, with free cash flow at $144.07 million, largely due to the origination and sale of credit card loans in the Digital Payments Division.
As of September 30, 2024, Patriot had $72.77 million in cash, cash equivalents, and restricted cash. The company also had access to $146.30 million in available FHLB borrowing capacity, $19.38 million in FRB borrowing capacity, and $5.00 million in unsecured credit lines from correspondent banks. The debt-to-equity ratio stood at 7.56, reflecting the company’s leveraged position.
Regulatory Challenges and the Path Forward In April 2024, Patriot Bank, N.A., the company’s subsidiary, was notified by the Office of the Comptroller of the Currency (OCC) that it had established individual minimum capital ratios (IMCR) for the bank. Specifically, the bank was required to maintain a common equity tier 1 capital ratio of 10.0%, a tier 1 capital ratio of 10.0%, a tier 1 leverage ratio of 9.0%, and a total capital ratio of 11.5%.
As of September 30, 2024, the bank did not meet all of these regulatory capital requirements. The company has taken steps to reduce its total and risk-weighted assets in order to achieve the IMCR targets, including significantly limiting new loan originations. This strategy is expected to continue through the remainder of 2024, with the goal of meeting the IMCR requirements in 2025.
While navigating the regulatory challenges has been a priority, Patriot remains focused on diversifying its revenue streams and positioning the company for long-term success. The continued growth of the Digital Payments Division and the company’s efforts to optimize its balance sheet are key elements of this strategy.
Product Segments and Loan Portfolio Patriot National Bancorp operates several key product segments:
Residential Real Estate Loans: Making up 12.52% of total loans, this segment primarily consists of purchased residential mortgages. In 2024, the bank re-entered the residential mortgage business by establishing a Residential Mortgage Division to originate and typically sell these loans to third parties.
Commercial and Industrial Loans: Representing 17.78% of the total loan portfolio, these loans are made to businesses and professionals for various purposes, including financing accounts receivable, inventory, and equipment. The syndicated and leveraged loan portfolio, totaling $5.7 million as of September 30, 2024, is included in this segment.
Consumer and Other Loans: Accounting for 9.05% of total loans, this segment includes various consumer loan products such as installment loans, credit cards, auto loans, and unsecured loans purchased from third parties.
Construction and Construction-to-Permanent Loans: This small segment made up 0.51% and 0.31% of the total loan portfolio as of September 30, 2024, respectively.
The overall loan portfolio has declined from $848.9 million as of December 31, 2023, to $755.7 million as of September 30, 2024, reflecting the bank’s strategy to reduce its balance sheet and strengthen capital ratios. The allowance for credit losses stood at $15.0 million, or 1.98% of total loans, as of September 30, 2024. Non-performing assets increased from 1.95% of total assets at the end of 2023 to 4.45% as of September 30, 2024, due to an increase in non-accrual loans.
Conclusion Patriot National Bancorp, Inc. has demonstrated its resilience and adaptability in the face of significant challenges. The company’s strategic initiatives, including the expansion of its Digital Payments Division and the optimization of its balance sheet, have positioned it to emerge stronger and more resilient.
As Patriot works to address its regulatory capital requirements, the company’s management team has shown a clear understanding of the path forward. With a diversified revenue stream, a strengthened balance sheet, and a commitment to serving its customers, Patriot is well-positioned to capitalize on future growth opportunities and create value for its shareholders.
The company’s focus on its core markets in the northeastern United States, particularly New York, Connecticut, and New Jersey, provides a solid foundation for its operations. While facing challenges in profitability and asset quality, Patriot’s liquidity position appears adequate, with access to various borrowing facilities to support operations. As the company continues to navigate the current economic environment and regulatory landscape, its ability to adapt and innovate, as demonstrated by the success of its Digital Payments Division, will be crucial in driving long-term success and shareholder value.
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