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Can These Factors Give You An Edge In Patriot National Bancorp, Inc. (NASDAQ:PNBK)?

Alex Johannesen

As a small-cap bank stock with a market capitalisation of US$57m, Patriot National Bancorp, Inc.’s (NASDAQ:PNBK) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Patriot National Bancorp to vulnerabilities. Unpredictable macro events such as political instability could weaken its financial position which is why it is important to understand how well the bank manages its risk levels. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Patriot National Bancorp’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.

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NASDAQGM:PNBK Historical Debt January 30th 19

Why Does PNBK’s Leverage Matter?

Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, Patriot National Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 13.28x, is considered to be very cautious and prudent. With assets 13.28 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.

What Is PNBK’s Level of Liquidity?

Handing Money Transparent

Since loans are relatively illiquid, we should know how much of Patriot National Bancorp’s total assets are comprised of these loans. Generally, they should make up less than 70% of total assets, but its current level of 83% means the bank has obviously lent out 12.67% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.

What is PNBK’s Liquidity Discrepancy?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Compared to the appropriate industry loan to deposit level of 90%, Patriot National Bancorp’s ratio of over 105% is higher, which puts the bank in a risky position due to the negative liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.

Next Steps:

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 further research:

  1. Future Outlook: What are well-informed industry analysts predicting for PNBK’s future growth? Take a look at our free research report of analyst consensus for PNBK’s outlook.
  2. 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.
  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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.