Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in the Company’s public statements, including this one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to:
(1) changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities;
(2) the timing of re-pricing of the Company’s interest earning assets and interest bearing liabilities;
(3) the effect of changes in governmental monetary policy;
(4) the effect of changes in regulations applicable to the Company and the Bank and the conduct of its business;
(5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks;
(6) the ability of competitors that are larger than the Company to provide products and services which it is impracticable for the Company to provide;
(7) the state of the economy and real estate values in the Company’s market areas, and the consequent effect on the quality of the Company’s loans;
(8) demand for loans and deposits in our market area;
(9) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company;
(10) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company;
(11) the application of generally accepted accounting principles in the United States of America (“U.S. GAAP”), consistently applied ;
(12) the fact that one period of reported results may not be indicative of future periods;
(13) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in the Company’s other filings with the Securities and Exchange Commission (the “SEC”);
(14) political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism;
(15) widespread outbreaks of infectious diseases, including the ongoing novel coronavirus ( COVID-19) outbreak;
(16) changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
(17) our ability to access cost-effective funding;
(18) our ability to implement and change our business strategies;
(19) changes in the quality or composition of our loan or investment portfolios;
(20) technological changes that may be more difficult or expensive than expected;
(21) our ability to manage market risk, credit risk and operational risk in the current economic environment;
(22) our ability to enter new markets successfully and capitalize on growth opportunities;
(23) changes in consumer spending, borrowing and savings habits;
(24) our ability to retain key employees; and
(25) our compensation expense associated with equity allocated or awarded to our employees
The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on April 29, 2020 (the “2019 Form 10-K”) and the consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q.
Although the Company believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.
Coronavirus Aid, Relief, and Economic Security Act
In response to the COVID-19 pandemic, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:
Legal Lending Limit Waiver. The CARES Act permits the OCC to waive legal lending limits to any particular borrower (i) with respect to loans to non-bank financial companies or (ii) upon a finding by the OCC that such exemption is in the public interest, with respect to any other borrower, in each case until the earlier of the termination date of the national emergency or December 31, 2020.
Community Bank Leverage Ratio. The CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.
Temporary Troubled Debt Restructurings (“TDRs”) Relief. The CARES Act allows banks to elect to suspend requirements under U.S. GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking agencies are required to defer to the determination of the banks making such suspension. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.
Small Business Administration Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, $669 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions that process loan applications and service the loans. The Bank did not participate in the SBA’s Paycheck Protection Program in the first half of 2020.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
|
●
|
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;
|
|
●
|
declines in collateral values;
|
|
●
|
third party disruptions, including outages at network providers and other suppliers;
|
|
●
|
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
|
|
●
|
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
|
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2019 Form 10-K for additional information.
Summary
The Company reported net loss for the second quarter of 2020 of $1.3 million ($0.32 basic and diluted loss per share) compared to a net loss of $1.7 million ($0.42 basic and diluted earnings per share) for the second quarter of 2019. The loss before income taxes was $1.7 million for second quarter of 2020, as compared to $2.3 million loss before income taxes for the second quarter of 2019.
For the six months ended June 30, 2020, the Company reported net loss of $2.4 million ($0.60 basic and diluted loss per share), compared to a net loss of $1.3 million ($0.34 basic and diluted earnings per share) for the six months ended June 30, 2019.
The 2020 results reflected the impact of a higher loan loss provision associated with credit losses relating to the COVID-19 pandemic along with lower net interest income and non-interest income. The lower net interest income was due to the lower market interest rates.
The Company expects to return to profitability once the impact of the COVID-19 pandemic is fully absorbed in its assessment of credit losses and when its investments in the expansion of its SBA business and deposit raising initiatives (including prepaid debit card deposits) begin to result in stronger net interest and non-interest income. The Company continues to work collaboratively with the OCC and intends to fully resolve all matters associated with the OCC Formal Agreement to the full satisfaction of the OCC.
Financial Condition
As of June 30, 2020, total assets decreased to $979.5 million, as compared to $979.8 million at December 31, 2019. Net Loan portfolio decreased $20.6 million or 2.6% from $802.0 million at December 31, 2019 to $781.4 million at June 30, 2020. Deposits increased to $783.1 million at June 30, 2020, as compared to $769.5 million at December 31, 2019.
Equity decreased $2.8 million or 4.2%, from $67.0 million at December 31, 2019 to $64.2 million at June 30, 2020, primarily due to $2.4 million of net loss and $553,000 of unrealized loss on investment portfolio, net of taxes, which was partially offset by $81,000 of equity compensation in the first half of 2020.
Cash and Cash Equivalents
Cash and cash equivalents increased $26.5 million, from $39.4 million at December 31, 2019 to $65.9 million at June 30, 2020. The increase in the first half of 2020 was primarily attributable to increasing retail deposits and net decrease in loan portfolio through paydown of the loans - both of which are currently invested in short term cash positions. The Company’s liquidity position is strong with liquid assets rising to 11.9% of total assets at June 30, 2020.
Investments
The following table is a summary of the Company’s available-for-sale securities portfolio, at fair value, at the dates shown:
(In thousands)
|
|
June 30,
|
|
|
December 31,
|
|
|
Increase / (Decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
($)
|
|
|
(%)
|
|
U. S. Government agency mortgage-backed securities
|
|
$
|
15,471
|
|
|
$
|
16,685
|
|
|
$
|
(1,214
|
)
|
|
|
-7.28
|
%
|
Corporate bonds
|
|
|
16,815
|
|
|
|
17,313
|
|
|
|
(498
|
)
|
|
|
-2.88
|
%
|
Subordinated notes
|
|
|
8,809
|
|
|
|
9,204
|
|
|
|
(395
|
)
|
|
|
-4.29
|
%
|
SBA loan pools
|
|
|
5,529
|
|
|
|
5,115
|
|
|
|
414
|
|
|
|
8.09
|
%
|
Total Available-for-Sale Securities, at fair value
|
|
|
46,624
|
|
|
|
48,317
|
|
|
|
(1,693
|
)
|
|
|
-3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments, at cost
|
|
|
4,450
|
|
|
|
4,450
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,074
|
|
|
$
|
52,767
|
|
|
$
|
(1,693
|
)
|
|
|
-3.21
|
%
|
Total investments decreased by $1.7 million or 3.2%, from $52.8 million at December 31, 2019 to $51.1 million at June 30, 2020. This decrease was primarily attributable to repayments of $3.5 million principal and $746,000 change in unrealized loss on available-for-sale securities, which was offsets by purchases of $1.7 million U.S. Government agency mortgage-backed securities and $988,000 SBA loan pools. There were no sales of available-for-sale securities in the three and six months ended June 30, 2020.
Loans held for investment
The following table provides the composition of the Company’s loan held for investment portfolio as of June 30, 2020 and December 31, 2019:
(In thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Loan portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
302,150
|
|
|
|
38.13
|
%
|
|
$
|
314,414
|
|
|
|
38.71
|
%
|
Residential Real Estate
|
|
|
168,482
|
|
|
|
21.26
|
%
|
|
|
175,489
|
|
|
|
21.61
|
%
|
Commercial and Industrial
|
|
|
163,603
|
|
|
|
20.64
|
%
|
|
|
173,875
|
|
|
|
21.41
|
%
|
Consumer and Other
|
|
|
88,325
|
|
|
|
11.15
|
%
|
|
|
85,934
|
|
|
|
10.58
|
%
|
Construction
|
|
|
56,928
|
|
|
|
7.18
|
%
|
|
|
48,388
|
|
|
|
5.96
|
%
|
Construction to permanent - CRE
|
|
|
13,012
|
|
|
|
1.64
|
%
|
|
|
14,064
|
|
|
|
1.73
|
%
|
Loans receivable, gross
|
|
|
792,500
|
|
|
|
100.00
|
%
|
|
|
812,164
|
|
|
|
100.00
|
%
|
Allowance for loan losses
|
|
|
(11,148
|
)
|
|
|
|
|
|
|
(10,115
|
)
|
|
|
|
|
Loans receivable, net
|
|
$
|
781,352
|
|
|
|
|
|
|
$
|
802,049
|
|
|
|
|
|
The Company’s gross loan portfolio decreased $19.7 million, from $812.2 million at December 31, 2019 to $792.5 million at June 30, 2020. The decrease in loans was primarily attributable to $55.6 million net paydown of the loans, which was offset by $29.0 million in purchases of loans receivable and $8.0 million transfer of SBA loans held for sale to loans held for investment in the first half of year 2020.
SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of June 30, 2020 and December 31, 2019, SBA loans included in the commercial real estate loans were $6.1 million and $4.0 million, respectively. SBA loans included in the commercial and industrial loan were $14.4 million and $5.6 million as of June 30, 2020 and December 31, 2019, respectively. Delays in SBA loan sales have been caused by a requirement from the SBA that requires the Bank to receive SBA approval prior to sale. As a result, $8.0 million SBA loans previously classified as held for sale were transferred to held for investment during the first half of 2020.
At June 30, 2020, the net loan to deposit ratio was 100% and the net loan to total assets ratio was 80%. At December 31, 2019, these ratios were 104% and 82%, respectively.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses increased $1.0 million or 9.9% from $10.1 million at December 31, 2019 to $11.1 million at June 30, 2020. The increase was primarily attributable to $1.7 million in provision for all loan categories, which was primarily due to $735,000 charge-offs and an additional reserve related to the COVID-19 pandemic in the first half of 2020.
Based upon the overall assessment and evaluation of the loan portfolio at June 30, 2020, management believes $11.1 million in the allowance for loan and lease losses, which represented 1.4% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.
The following table provides detail of activity in the allowance for loan and lease losses:
|
|
Three Month Ended June 30,
|
|
|
Six months ended June 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
10,916
|
|
|
$
|
7,823
|
|
|
$
|
10,115
|
|
|
$
|
7,609
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(13
|
)
|
|
|
(12
|
)
|
Commercial and Industrial
|
|
|
(679
|
)
|
|
|
(2,292
|
)
|
|
|
(683
|
)
|
|
|
(2,292
|
)
|
Consumer and Other
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(39
|
)
|
|
|
(3
|
)
|
Total charge-offs
|
|
|
(691
|
)
|
|
|
(2,307
|
)
|
|
|
(735
|
)
|
|
|
(2,307
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Commercial and Industrial
|
|
|
11
|
|
|
|
-
|
|
|
|
51
|
|
|
|
47
|
|
Consumer and Other
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
Total recoveries
|
|
|
13
|
|
|
|
5
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(678
|
)
|
|
|
(2,302
|
)
|
|
|
(681
|
)
|
|
|
(2,253
|
)
|
Provision charged to earnings
|
|
|
910
|
|
|
|
2,937
|
|
|
|
1,714
|
|
|
|
3,102
|
|
Balance at end of the period
|
|
$
|
11,148
|
|
|
$
|
8,458
|
|
|
$
|
11,148
|
|
|
$
|
8,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans
|
|
|
(0.083
|
)%
|
|
|
(0.287
|
)%
|
|
|
(0.082
|
)%
|
|
|
(0.284
|
)%
|
Allowance for loan losses to total loans
|
|
|
1.41
|
%
|
|
|
1.04
|
%
|
|
|
1.41
|
%
|
|
|
1.04
|
%
|
The following table provides an allocation of allowance for loan and lease losses by portfolio segment and the percentage of the loans to total loans:
(In thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Allowance for loan losses
|
|
|
% of
loans
|
|
|
Allowance for loan losses
|
|
|
% of
loans
|
|
Commercial Real Estate
|
|
$
|
4,274
|
|
|
|
38.13
|
%
|
|
$
|
3,789
|
|
|
|
38.71
|
%
|
Residential Real Estate
|
|
|
1,910
|
|
|
|
21.26
|
%
|
|
|
1,038
|
|
|
|
21.61
|
%
|
Commercial and Industrial
|
|
|
3,526
|
|
|
|
20.64
|
%
|
|
|
4,340
|
|
|
|
21.41
|
%
|
Consumer and Other
|
|
|
534
|
|
|
|
11.15
|
%
|
|
|
341
|
|
|
|
10.58
|
%
|
Construction
|
|
|
666
|
|
|
|
7.18
|
%
|
|
|
477
|
|
|
|
5.96
|
%
|
Construction to permanent - CRE
|
|
|
149
|
|
|
|
1.64
|
%
|
|
|
130
|
|
|
|
1.73
|
%
|
Unallocated
|
|
|
89
|
|
|
|
N/A
|
|
|
|
-
|
|
|
|
N/A
|
|
Total
|
|
$
|
11,148
|
|
|
|
100.00
|
%
|
|
$
|
10,115
|
|
|
|
100.00
|
%
|
Non-performing Assets
The following table presents non-performing assets as of June 30, 2020 and December 31, 2019:
(In thousands)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Non-accruing loans:
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
15,019
|
|
|
$
|
11,961
|
|
Residential Real Estate
|
|
|
3,347
|
|
|
|
3,228
|
|
Commercial and Industrial
|
|
|
1,725
|
|
|
|
2,094
|
|
Consumer and Other
|
|
|
1,502
|
|
|
|
766
|
|
Total non-accruing loans
|
|
|
21,593
|
|
|
|
18,049
|
|
|
|
|
|
|
|
|
|
|
Loans past due over 90 days and still accruing
|
|
|
863
|
|
|
|
19
|
|
Other real estate owned
|
|
|
2,400
|
|
|
|
2,400
|
|
Total nonperforming assets
|
|
$
|
24,856
|
|
|
$
|
20,468
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
|
|
|
2.54
|
%
|
|
|
2.09
|
%
|
Nonperforming loans to total loans, net
|
|
|
2.87
|
%
|
|
|
2.25
|
%
|
The $21.6 million of non-accrual loans at June 30, 2020 was comprised of 27 borrowers, for which a specific reserve of $1.6 million was established. Three TDR loans of total $9.4 million were included in the non-accrual loans. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank’s experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Bank evaluated the impaired loans individually and determined that a specific reserve of $1.6 million was established as of June 30, 2020.
As of December 31, 2019, the $18.0 million of non-accrual loans was comprised of 27 borrowers, for which a specific reserve of $1.5 million was established. Two TDR loans of total $9.3 million were included in the non-accrual loans as of December 31, 2019.
Loans held for sale
SBA loans held for sale totaled $7.6 million and $15.3 million as of June 30, 2020 and December 31, 2019, respectively.
Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. Loans held for sale at June 30, 2020, consisted of $2.8 million commercial and industrial loans and $4.8 million commercial real estate, respectively. Loans held for sale at December 31, 2019, consisted of $10.2 million commercial and industrial loans and $5.1 million commercial real estate, respectively. The decrease in loans held for sale was primary due to $8.0 million reclass of SBA loans held for sale to held for investment, and $1.8 million sale of SBA loans in the first half of 2020.
Goodwill
The Company completed its acquisition of Prime Bank in May 2018, and recorded $1.7 million of goodwill at December 31, 2018. The goodwill was adjusted to $1.1 million as a result of reducing by $621,000 the estimated amount to be paid pursuant to certain problem loans pending resolution as of May 10, 2019. No further adjustment was made as of June 30, 2020.
The Company identified the COVID-19 pandemic and related reported losses as a triggering event for the period ended June 30, 2020. Due to this triggering event, the Company performed a qualitative assessment of the goodwill, and concluded it was more likely than not that the fair value of the reporting unit exceeded its carrying value, and goodwill was not impaired as of June 30, 2020.
Deferred Taxes
Deferred tax assets increased $1.1 million, from $11.1 million at December 31, 2019 to $12.2 million at June 30, 2020. The increase in deferred tax assets resulted primarily from the impact of net loss and currently non-deductible reserves and accruals in the first half of 2020.
Our effective tax rate for the three and six months ended June 30, 2020 was 26% and 26%, respectively, compared to the effective tax rate of 28% and 26% for the three and six months ended June 30, 2019, respectively. The Company’s effective rates for both periods were affected primarily by states taxes and non-deductible expenses.
Patriot anticipates utilizing the net operating loss carry forwards to reduce income taxes otherwise payable on current and future years taxable income.
The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that a portion of the deferred tax assets will not be realized, a valuation allowance will be established.
On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.
Deposits
The following table is a summary of the Company’s deposits at the dates shown:
(In thousands)
|
|
June 30,
|
|
|
December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
97,360
|
|
|
$
|
88,135
|
|
|
$
|
9,225
|
|
|
|
10.47
|
%
|
Interest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
|
26,941
|
|
|
|
26,864
|
|
|
|
77
|
|
|
|
0.29
|
%
|
Savings
|
|
|
70,230
|
|
|
|
64,020
|
|
|
|
6,210
|
|
|
|
9.70
|
%
|
Money market
|
|
|
165,658
|
|
|
|
99,115
|
|
|
|
66,543
|
|
|
|
67.14
|
%
|
Certificates of deposit, less than $250,000
|
|
|
194,388
|
|
|
|
193,942
|
|
|
|
446
|
|
|
|
0.23
|
%
|
Certificates of deposit, $250,000 or greater
|
|
|
67,626
|
|
|
|
67,550
|
|
|
|
76
|
|
|
|
0.11
|
%
|
Brokered deposits
|
|
|
160,885
|
|
|
|
229,909
|
|
|
|
(69,024
|
)
|
|
|
(30.02
|
)%
|
Total Interest bearing
|
|
|
685,728
|
|
|
|
681,400
|
|
|
|
4,328
|
|
|
|
0.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
783,088
|
|
|
$
|
769,535
|
|
|
$
|
13,553
|
|
|
|
1.76
|
%
|
Deposits increased $13.6 million or 1.8%, from $769.5 million at December 31, 2019 to $783.1 million at June 30, 2020, resulting primarily from an increase in money market deposits impacted by the roll-out of the Company’s national on-line money market account which added $47.7 million to the money market balance through June 30, 2020. Other retail deposit balances also increased as customers generally retained higher balances through the uncertainty associated with the COVID-19 pandemic, non-interest-bearing deposit balances increased $9.2 million and savings account balances showed an increase of $6.2 million. These increases in retail deposit activity were partially offset by a reduction of $69.0 million in higher cost brokered deposits as those balances were allowed to roll off in connection with the planned decline in outstanding loan balances.
Borrowings
Total borrowings were $120.9 million and $130.9 million as of June 30, 2020 and December 31, 2019, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable. The senior notes, subordinated notes and junior subordinated debentures contain affirmative covenants that require the Company to: maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements.
Federal Home Loan Bank borrowings
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. As of June 30, 2020, the Bank had $95.5 million of available borrowing capacity from the FHLB-B.
FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. At June 30, 2020 and December 31, 2019, outstanding advances from the FHLB-B aggregated $90.0 million and $100.0 million, respectively.
At June 30, 2020, advances of $80.0 million outstanding bore fixed rates of interest ranging from 2.40% to 3.61% with maturities ranging from 3.0 years to 4.2 years. The FHLB-B advances with fixed interest rates have a weighted average interest rate of 3.13%. Included in the fixed rate advances are two advances totaling $50.0 million, callable by the FHLB-B quarterly through October 2023.
The remaining $10.0 million floating to fixed rate advance resets to a fixed rate in October of 2020. During its initial term (two years), this advance carries a floating rate 100 basis points below LIBOR. After the initial term, the rate resets to a fixed rate of 4.23% per annum, and the borrowing can be called by the FHLB-B on a quarterly basis.
At June 30, 2020, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $293.2 million.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three and six months ended June 30, 2020 and 2019, no funds had been borrowed under the line of credit.
Interest expenses incurred for the three and six months ended June 30, 2020 were $638,000 and $1.3 million, respectively. Interest expenses incurred for the three and six months ended June 30, 2019 were $426,000 and $865,000, respectively.
Correspondent Bank - Line of Credit
Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent banks. Borrowings available under the agreements totaled $5 million at June 30, 2020 and $5 million at December 31, 2019. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, Automated Clearing House (ACH), and other clearinghouse transactions.
There was no outstanding balance under the agreements at June 30, 2020 and December 31, 2019. No interest expense incurred for the three and six months ended June 30, 2020. Interest expense incurred for the three and six months ended June 30, 2019 was $2,000.
Senior notes
On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 22 and December 22 of each year beginning on June 22, 2017.
In connection with the issuance of the Senior Notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. At June 30, 2020 and December 31, 2019, $110,000 and $147,000 of unamortized debt issuance costs were deducted from the face amount of the Senior Notes included in the consolidated balance sheet, respectively.
The Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity.
For the three and six months ended June 30, 2020, the Company recognized interest expense of $228,000 and $457,000, respectively. For the three and six months ended June 30, 2019, the Company recognized interest expense of $228,000 and $457,000, respectively.
Subordinated notes
On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.
The Subordinated Notes will initially bear interest at 6.25% per annum, from and including June 29, 2018, to but excluding, September 30, 2023, payable semi-annually in arrears. From and including September 30, 2023, until but excluding September 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning on September 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes. Interest payable on the Subordinated Notes began on December 30, 2018.
In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At June 30, 2020 and December 31, 2019, $233,000 and $248,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.
For the three and six months ended June 30, 2020, the Company recognized interest expense of $163,000 and $327,000, respectively. For the three and six months ended June 30, 2019, the Company recognized interest expense of $161,000 and $329,000, respectively.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The proceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.
Trust preferred securities currently qualify for up to 25% of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.
The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.
The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (3.43% at June 30, 2020) and mature on March 26, 2033, at which time the principal amount borrowed will be due. The placement fee of $240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As of June 30, 2020 and December 31, 2019, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $142,000 and $146,000, respectively, and accrued interest on the junior subordinated debentures was $4,000 and $6,000, respectively.
For the three and six months ended June 30, 2020, the Company recognized interest expense of $90,000 and $194,000 respectively. For the three and six months ended June 30, 2019, the Company recognized interest expense of $118,000 and $239,000 respectively.
At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.
Note Payable
In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of June 30, 2020 and December 31, 2019, the note had a balance outstanding of $1.1 million and $1.2 million, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.
For the three and six months ended June 30, 2020, the Company recognized interest expense of $5,000 and $10,000 respectively. For the three and six months ended June 30, 2019, the Company recognized interest expense of $6,000 and $12,000 respectively.
Equity
Equity decreased $2.8 million, from $67.0 million at December 31, 2019 to $64.2 million at June 30, 2020, primarily due to $2.4 million of net loss and $553,000 of net investment portfolio unrealized loss for the first half of 2020.
Off-Balance Sheet Commitments
The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, increased $7.3 million from $145.1 million at December 31, 2019 to $152.4 million at June 30, 2020.
Derivatives
As of June 30, 2020, Patriot had entered into four interest rate swaps (“swaps”). Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot’s swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized no gain on the swaps for the three and six months ended June 30, 2020 and 2019, respectively.
Further discussion of the fair value of derivatives is set forth in Note 8 to the consolidated financial statements.
RESULTS OF OPERATIONS
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three and six months ended June 30, 2020 and 2019:
(In thousands)
|
|
Three months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Daily
Average
Balance
($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
|
Daily
Average
Balance
($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
820,911
|
|
|
$
|
9,111
|
|
|
|
4.45
|
|
|
$
|
801,525
|
|
|
$
|
10,345
|
|
|
|
5.18
|
|
Investments
|
|
|
56,912
|
|
|
|
468
|
|
|
|
3.29
|
|
|
|
54,263
|
|
|
|
512
|
|
|
|
3.77
|
|
Cash equivalents and other
|
|
|
50,145
|
|
|
|
24
|
|
|
|
0.19
|
|
|
|
41,225
|
|
|
|
237
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
927,968
|
|
|
|
9,603
|
|
|
|
4.15
|
|
|
|
897,013
|
|
|
|
11,094
|
|
|
|
4.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
6,178
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,920
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,829
|
)
|
|
|
|
|
|
|
|
|
OREO
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
2,913
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
61,855
|
|
|
|
|
|
|
|
|
|
|
|
59,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
983,169
|
|
|
|
|
|
|
|
|
|
|
$
|
957,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
697,256
|
|
|
$
|
2,792
|
|
|
|
1.61
|
|
|
$
|
675,442
|
|
|
$
|
3,533
|
|
|
|
2.10
|
|
Borrowings
|
|
|
90,791
|
|
|
|
638
|
|
|
|
2.82
|
|
|
|
91,868
|
|
|
|
426
|
|
|
|
1.86
|
|
Senior notes
|
|
|
11,879
|
|
|
|
228
|
|
|
|
7.68
|
|
|
|
11,804
|
|
|
|
228
|
|
|
|
7.73
|
|
Subordinated debt
|
|
|
17,867
|
|
|
|
253
|
|
|
|
5.68
|
|
|
|
17,830
|
|
|
|
279
|
|
|
|
6.28
|
|
Note Payable and other
|
|
|
1,109
|
|
|
|
5
|
|
|
|
1.80
|
|
|
|
1,636
|
|
|
|
8
|
|
|
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
818,902
|
|
|
|
3,916
|
|
|
|
1.92
|
|
|
|
798,580
|
|
|
|
4,474
|
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
89,974
|
|
|
|
|
|
|
|
|
|
|
|
80,189
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,303
|
|
|
|
|
|
|
|
|
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
918,179
|
|
|
|
|
|
|
|
|
|
|
|
887,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
64,990
|
|
|
|
|
|
|
|
|
|
|
|
70,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
983,169
|
|
|
|
|
|
|
|
|
|
|
$
|
957,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,687
|
|
|
|
|
|
|
|
|
|
|
$
|
6,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest margin
|
|
|
|
|
|
|
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
2.96
|
|
Interest spread
|
|
|
|
|
|
|
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
2.71
|
|
(In thousands)
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Daily
Average
Balance
($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
|
Daily
Average
Balance
($)
|
|
|
Interest
($)
|
|
|
Yield
(%)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
826,956
|
|
|
$
|
19,144
|
|
|
|
4.64
|
|
|
$
|
792,879
|
|
|
$
|
20,100
|
|
|
|
5.11
|
|
Investments
|
|
|
58,308
|
|
|
|
1,022
|
|
|
|
3.51
|
|
|
|
53,551
|
|
|
|
1,009
|
|
|
|
3.77
|
|
Cash equivalents and other
|
|
|
45,742
|
|
|
|
159
|
|
|
|
0.70
|
|
|
|
49,897
|
|
|
|
570
|
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
931,006
|
|
|
|
20,325
|
|
|
|
4.38
|
|
|
|
896,327
|
|
|
|
21,679
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
6,997
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,537
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,712
|
)
|
|
|
|
|
|
|
|
|
OREO
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
2,929
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
60,780
|
|
|
|
|
|
|
|
|
|
|
|
59,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
985,789
|
|
|
|
|
|
|
|
|
|
|
$
|
957,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
699,992
|
|
|
$
|
5,992
|
|
|
|
1.72
|
|
|
$
|
675,643
|
|
|
$
|
6,797
|
|
|
|
2.03
|
|
Borrowings
|
|
|
94,965
|
|
|
|
1,335
|
|
|
|
2.82
|
|
|
|
91,271
|
|
|
|
865
|
|
|
|
1.91
|
|
Senior notes
|
|
|
11,870
|
|
|
|
457
|
|
|
|
7.70
|
|
|
|
11,795
|
|
|
|
457
|
|
|
|
7.75
|
|
Subordinated debt
|
|
|
17,862
|
|
|
|
521
|
|
|
|
5.85
|
|
|
|
17,825
|
|
|
|
568
|
|
|
|
6.43
|
|
Note Payable and other
|
|
|
1,135
|
|
|
|
10
|
|
|
|
1.77
|
|
|
|
1,497
|
|
|
|
14
|
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
825,824
|
|
|
|
8,315
|
|
|
|
2.02
|
|
|
|
798,031
|
|
|
|
8,701
|
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
84,797
|
|
|
|
|
|
|
|
|
|
|
|
80,704
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,907
|
|
|
|
|
|
|
|
|
|
|
|
8,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
919,528
|
|
|
|
|
|
|
|
|
|
|
|
887,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
66,261
|
|
|
|
|
|
|
|
|
|
|
|
70,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
985,789
|
|
|
|
|
|
|
|
|
|
|
$
|
957,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
12,010
|
|
|
|
|
|
|
|
|
|
|
$
|
12,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest margin
|
|
|
|
|
|
|
|
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
2.92
|
|
Interest spread
|
|
|
|
|
|
|
|
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
2.68
|
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-bearing assets and interest-bearing liabilities for the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020 compared to 2019
|
|
|
2020 compared to 2019
|
|
(In thousands)
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
178
|
|
|
$
|
(1,412
|
)
|
|
$
|
(1,234
|
)
|
|
$
|
646
|
|
|
$
|
(1,602
|
)
|
|
$
|
(956
|
)
|
Investments
|
|
|
24
|
|
|
|
(68
|
)
|
|
|
(44
|
)
|
|
|
86
|
|
|
|
(73
|
)
|
|
|
13
|
|
Cash equivalents and other
|
|
|
51
|
|
|
|
(264
|
)
|
|
|
(213
|
)
|
|
|
(47
|
)
|
|
|
(364
|
)
|
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
253
|
|
|
|
(1,744
|
)
|
|
|
(1,491
|
)
|
|
|
685
|
|
|
|
(2,039
|
)
|
|
|
(1,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
|
|
|
73
|
|
|
|
(814
|
)
|
|
|
(741
|
)
|
|
|
251
|
|
|
|
(1,056
|
)
|
|
|
(805
|
)
|
Borrowings
|
|
|
(5
|
)
|
|
|
217
|
|
|
|
212
|
|
|
|
37
|
|
|
|
433
|
|
|
|
470
|
|
Senior notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debt
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
(47
|
)
|
Note payable and other
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
65
|
|
|
|
(623
|
)
|
|
|
(558
|
)
|
|
|
284
|
|
|
|
(670
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
188
|
|
|
$
|
(1,121
|
)
|
|
$
|
(933
|
)
|
|
$
|
401
|
|
|
$
|
(1,369
|
)
|
|
$
|
(968
|
)
|
For the quarter ended June 30, 2020, interest income and dividend income decreased $1.5 million or 13.4% as compared to the quarter ended June 30, 2019. Total interest expense decreased $558,000 or 12.5% as compared to the quarter ended June 30, 2019. For the six months ended June 30, 2020, interest income decreased $1.4 million or 6.2% as compared to the six months ended June 30, 2019. Total interest expense decreased $386,000 or 4.4% as compared to the six months ended June 30, 2019.
Net interest income was $5.7 million for the quarter ended June 30, 2020, which decreased 14.1% from $6.6 million for the quarter ended June 30, 2019. For the six months ended June 30, 2020, net interest income was $12.0 million, decreased 7.5% from $13.0 million for the six months ended June 30, 2019.
Net interest margin for the three and six months ended June 30, 2020 were 2.46% and 2.59%, respectively. Net interest margin for the three and six months ended June 30, 2019, were 2.96% and 2.92%, respectively.
The decline in net interest income and net interest margin reflects the impact of lower interest rates connected with the 1.50% decline in market interest rates in late first quarter of 2020 connected to the COVID 19 pandemic. Asset yields were impacted by those changes in the second quarter while retail and brokered deposit rates have declined at a slower pace. Compared to the prior year, net interest income was also negatively impacted by an increase in the rate paid on FHLB borrowings associated with the conversion of certain borrowings from a low variable teaser rate to higher fixed rate.
Provision for Loan Losses
The provision for loan losses for three and six months ended June 30, 2020 was $910,000 and $1.7 million, respectively, as compared to $2.9 million and $3.1 million for the three and six months ended June 30, 2019, respectively. The provision for loan losses in 2020 was primarily due to loan charge-offs and an additional reserve attributable to COVID-19 pandemic. The provision for loan losses in 2019 was primarily attributable to a $2.3 million single commercial loan charge off.
Non-interest income
Non-interest income for the three and six months ended June 30, 2020 was $389,000 and $810,000, respectively, as compared to $758,000 and $1.5 million for the three and six months ended June 30, 2019, respectively. The reduction was primarily attributable to decrease in gain on sale of SBA loans in the three and six months ended June 30, 2020 associated with delays in executing the sale of those loans. Some sale activity is expected to resume in the second half of 2020.
Non-interest expense
Non-interest expense for the three and six months ended June 30, 2020 was $6.8 million and $14.3 million, respectively, as compared to $6.7 million and $13.2 million for the three and six months ended June 30, 2019, respectively. The increase in non-interest expense for the year to date periods was primarily driven by increase of $714,000 in salaries and benefits reflecting the build-up of staffing in the SBA business during the second half of 2019.
Provision (benefit) for income taxes
The Company reported benefit for income taxes of $446,000 and $805,000 for three and six months ended June 30, 2020, respectively, as compared to a benefit for income taxes of $632,000 and $464,000 for the three and six months ended June 30, 2019, respectively. The changes mainly reflected the impact of the net loss and non-deductible reserves and accruals in 2020.
Liquidity
The Company’s balance sheet liquidity to total assets ratio was 11.9% at June 30, 2020, compared to 10.0% at December 31, 2019. Liquidity including readily available off-balance sheet funding sources was 22.3% at June 30, 2020, compared to 17.3% at December 31, 2019. The Company’s available total liquidity (readily available plus brokered deposit availability) to total assets ratio was 27.0% at June 30, 2020, compared to 18.2% at December 31, 2019.
The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any) and unpledged available-for-sale securities. In addition, off balance sheet funding sources include collateral based borrowing available from the FHLB, correspondent bank borrowing lines, and brokered deposits subject to internal limitations.
Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements.
Capital
The following table illustrates the Company’s and the Bank’s regulatory capital ratios as of June 30, 2020 and December 31, 2019:
|
|
Patriot National Bancorp, Inc.
|
|
|
Patriot Bank, N.A.
|
|
(In thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
|
Amount
($)
|
|
|
Ratio
(%)
|
|
Total Capital (to risk weighted assets)
|
|
$
|
88,310
|
|
|
|
10.558
|
|
|
$
|
90,083
|
|
|
|
10.510
|
|
|
$
|
98,941
|
|
|
|
11.769
|
|
|
$
|
100,953
|
|
|
|
11.826
|
|
Tier 1 Capital (to risk weighted assets)
|
|
|
67,846
|
|
|
|
8.111
|
|
|
|
69,957
|
|
|
|
8.161
|
|
|
|
88,424
|
|
|
|
10.518
|
|
|
|
90,827
|
|
|
|
10.640
|
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
59,846
|
|
|
|
7.155
|
|
|
|
61,957
|
|
|
|
7.228
|
|
|
|
88,424
|
|
|
|
10.518
|
|
|
|
90,827
|
|
|
|
10.640
|
|
Tier 1 Leverage Capital (to average assets)
|
|
|
67,846
|
|
|
|
6.927
|
|
|
|
69,957
|
|
|
|
7.148
|
|
|
|
88,424
|
|
|
|
9.026
|
|
|
|
90,827
|
|
|
|
9.279
|
|
Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have a leverage capital ratio of at least 9.0%, CET1 capital ratio at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10%. However, the OCC has the discretion to require increased capital ratios.
Under the final capital rules that became effective on January 1, 2015, there is a requirement for a CET1 Capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.
The capital buffer requirement is being phased in over three years beginning in 2016. The capital conversation buffer increased to 2.5% for 2019 and 2020, which has been included in the minimum capital adequacy ratios in the table above.
The capital buffer requirement effectively raises the Bank’s minimum required Total Capital ratio to 10.5%, the Tier 1 Capital ratio to 8.5%, and the CET1 Capital ratio to 7.0% on a fully phased-in basis, which was effective on January 1, 2019. As of June 30, 2020, Patriot satisfies all capital adequacy requirements on a fully phased-in basis.
Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.
IMPACT OF INFLATION AND CHANGING PRICES
The Company’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, deflation or disinflation could significantly affect the Company’s earnings in future periods.