Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of USD $69.98M, Patriot National Bancorp Inc (NASDAQ:PNBK)’s profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Patriot National Bancorp’s bottom line. Today we will analyse Patriot National Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Patriot National Bancorp
Does Patriot National Bancorp Understand Its Own Risks?
The ability for Patriot National Bancorp to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 166.54% Patriot National Bancorp has cautiously over-provisioned 66.54% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
If Patriot National Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Patriot National Bancorp’s profit. Since bad loans make up a relatively small 0.53% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?
Patriot National Bancorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Patriot National Bancorp’s total deposit level of 81.17% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Patriot National Bancorp exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Patriot National Bancorp a less risky investment. We’ve only touched on operational risks for PNBK in this article. But as a stock investment, there are other fundamentals you need to understand. There are three essential aspects you should look at:
- 1. Valuation: What is PNBK worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether PNBK is currently mispriced by the market.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Patriot National Bancorp’s board and the CEO’s back ground.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.