PATRIOT NATIONAL BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
EXPLANATORY NOTE
The Annual Report on Form 10-K (the “Annual Report”) of Patriot National Bancorp, Inc. (“Patriot”, “we”, “our”, “us”, or
For the “Company”) for the year endedYear Ended December 31, 2019 was originally filed with the Securities and Exchange Commission (the “SEC”) on April 29, 2020, and this Amendment No. 1 is being filed solely to include responses to the items required by Part III of the Annual Report. This Amendment No. 1 does not reflect events occurring after April 29, 2020, the date of the filing of the Annual Report, or modify or update those disclosures that may have been affected by subsequent events.
As required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), our Chief Executive Officer and Chief Financial Officer are providing Rule 13a-14(a) certifications dated June 8, 2020 in connection with this Amendment No. 1 on Form 10-K/A and written statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated June 8, 2020.
Due to the outbreak of coronavirus disease 2019 (COVID-19), starting from early March 2020, the Company’s employees and external auditors have been asked to work remotely. As a result, the Company’s books and records have not been easily accessible and communication among internal financial staff and external auditors has been challenging, resulting in delay in preparation and completion of its consolidated financial statements. Based on the foregoing, on April 29, 2020, the Company filed a Current Report on Form 8-K to avail itself of a 45-day extension to file this Form 10-K/A relying on the exemptions provided by an order issued by the SEC on March 25, 2020 pursuant to Section 36 of the Exchange Act (Release No. 34-88465, the “SEC Order”). This Form 10-K/A is being filed in reliance on the SEC Order.
TABLE OF CONTENTS
| ||||||||
| ||||||||
| ||||||||
|
| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
| ||||||||
| ||||||||
| ||||||||
“Safe Harbor” Statement Under Private Securities Litigation Reform Act of 1995 | ||
This Annual Report on Form 10-K contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are not guarantees of future performance. Although Patriot believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond Patriot’s control.
For a discussion of some of the specific factors that could cause actual results to differ materially from the information contained in this report, see the following sections of this report: Part I, Item 1A. "Risk Factors," Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations," including the disclosures under "Critical Accounting Policies." Patriot disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law.
1
PART I
ITEM 1. Business
General
Patriot National Bancorp, Inc. (the “Company” or “PNBK”), a Connecticut corporation, is a one-bank holding company for Patriot Bank, N.A, a national banking association headquartered in Stamford, Fairfield County, Connecticut (the “Bank”) (collectively, “Patriot”). The Bank received its charter and commenced operations as a national bank on August 31, 1994. The Bank has a total of nine branch offices comprised of eight branch offices located in Fairfield and New Haven Counties, Connecticut and one branch office located in Westchester County, New York as of December 31, 2022.
On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company. The Company primarily invested the funds from the issuance of the debt in the Bank. The Bank used the proceeds to fund general operations.
On October 15, 2010, pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”), the Company issued and sold to PNBK Holdings LLC (“Holdings”), an investment limited liability company controlled by Michael Carrazza, 3.36 million shares of its common stock at a purchase price of $15.00 per share (adjusted for a 1-for-10 reverse stock split discussed below) for an aggregate purchase price of $50.4 million. The shares sold to Holdings represented 87.6% of the Company’s then issued and outstanding common stock. In connection with the reverse stock split, the par value of the common stock was changed to $0.01 per share. Also, in connection with the sale of the shares, certain directors and officers of both the Company and the Bank resigned. Such directors and officers were replaced with nominees of Holdings and Michael Carrazza became the Chairman of the Board of Directors (the “Board”) of the Company. Pursuant to its Operating Agreement, on March 31, 2021, Holdings completed a pro-rata in-kind distribution of shares of restricted common stock of Patriot. Following these distributions, Holdings no longer owns any shares of Patriot.
As of the date hereof, the only business of the Company is its ownership of all of the issued and outstanding capital stock of the Bank and the Trust. Except as specifically noted otherwise herein, the balance of the description of the Company’s business is a description of the Bank’s business.
Business Operations
The Bank offers commercial real estate loans, commercial business loans, SBA loans originated under the U.S. Small Business Administration ("SBA") 7(a) program, and a variety of consumer loans with an emphasis on serving the needs of individuals, small and medium‑sized businesses and professionals. The Bank previously had offered loans on residential real estate but discontinued doing so during 2013. Since 2016, Patriot has purchased residential real estate loans. Further information of the purchased residential real estate loans is set forth in Note 4 to the consolidated financial statements. The Bank’s lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, although the Bank’s loan business is not necessarily limited to these areas.
Consumer and commercial deposit accounts offered include: checking, interest‑bearing negotiable order of withdrawal (“NOW”), money market, time certificates of deposit, savings, prepaid deposit accounts, on-line national money market accounts, Certificate of Deposit Account Registry Service (“CDARS”), Individual Retirement Accounts (“IRAs”), and Health Savings Accounts (“HSAs”). Other services offered by the Bank include Automated Clearing House (“ACH”) transfers, lockbox, internet banking, bill paying, remote deposit capture, debit cards, money orders, traveler’s checks, and automatic teller machines (“ATMs”). In addition, the Bank may in the future offer other financial services.
On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. Since the time of acquisition, the prepaid deposit balances have grown to approximately $197.3 million as of December 31, 2022 and provide a source of low cost deposits and interchange revenue.
2
The Bank’s branch office locations are summarized as follows:
| Branch No. | City | County | State | |||||||||||||||||
| 1 | Darien | Fairfield | Connecticut | |||||||||||||||||
| 2 | Fairfield | Fairfield | Connecticut | |||||||||||||||||
| 3 | Greenwich | Fairfield | Connecticut | |||||||||||||||||
| 4 | Milford | New Haven | Connecticut | |||||||||||||||||
| 5 | Norwalk | Fairfield | Connecticut | |||||||||||||||||
| 6 | Orange | New Haven | Connecticut | |||||||||||||||||
| 7 | Stamford | Fairfield | Connecticut | |||||||||||||||||
| 8 | Westport | Fairfield | Connecticut | |||||||||||||||||
| 9 | Scarsdale | Westchester | New York | |||||||||||||||||
The Stamford, Connecticut location serves as Patriot’s headquarters. Additionally, the Bank also operates a loan origination office at its Stamford location.
The Bank’s employees perform most routine day-to-day banking transactions. The Bank has entered into a number of arrangements with third-party outside service providers, who provide services such as correspondent banking, check clearing, data processing services, credit card processing and armored car carrier transport.
In the normal course of business, subject to applicable government regulations, the Bank invests a portion of its assets in investment securities, which may include government securities. The Bank’s investment portfolio strategy is to maintain a balance of high-quality diversified investments that minimizes risk, maintains adequate levels of liquidity, and limits exposure to interest rate and credit risk. Conditionally guaranteed or Government sponsored, U.S. federal government issues comprise the majority of the Bank’s investment portfolio.
Patriot became an approved lender under the SBA program at the end of 2017, enabling it to approve loans to small businesses and entrepreneurs more quickly and efficiently. Since 2018, Patriot has hired people to support new SBA business development in Stamford, Connecticut, Florida, Georgia, Ohio, along with a Rhode Island operations center.
Employees
As of December 31, 2022, Patriot had 130 full-time equivalent employees. None of Patriot’s employees are covered by a collective bargaining agreement.
Competition
The Bank competes with a variety of financial institutions for loans and deposits in its market area. These include larger financial institutions with greater financial resources, larger branch systems and higher lending limits, as well as the ability to conduct larger advertising campaigns to attract business. The larger financial institutions may also offer additional services such as trust and international banking, which the Bank is not equipped or authorized to offer directly. When the need arises, arrangements are made with correspondent financial institutions to provide such services. To attract business in this competitive environment, the Bank relies on local promotional activities, personal contact by officers and directors, customer referrals, and its ability to distinguish itself by offering personalized and responsive banking service. The Bank also leverages a presence on social media and does a reasonable amount of advertising online.
The customer base of the Bank generally is meant to be diversified, so that there is not a concentration of either loans or deposits within a single industry, a group of industries, or a single person or groups of people. The Bank is not dependent on one or a few major customers for its lending or deposit activities, the loss of any one of which would have a material adverse effect on the business of the Bank.
3
The Bank’s loan customers extend beyond the towns and cities in which the Bank has branch offices, including nearby towns in Fairfield and New Haven Counties in Connecticut, and Westchester County and the five boroughs of New York City in New York, although the Bank’s loan business is not necessarily limited to these areas. While the Bank does not currently hold or intend to attract significant deposit or loan business from major corporations with headquarters in its market area, the Bank believes that small manufacturers, distributors and wholesalers, and service industry professionals and related businesses, which have been attracted to this area, as well as the individuals that reside in the area, represent current and potential customers of the Bank.
In recent years, intense market demands, economic pressures, and significant legislative and regulatory actions have eroded banking industry classifications, which were once clearly defined, and have increased competition among banks, as well as other financial services institutions including non-bank competitors. This increase in competition has caused banks and other financial services institutions to diversify their services and become more cost effective. The impact of market dynamics, legislative, and regulatory changes on banks and other financial services institutions has increased customer awareness of product and service differences among competitors and increased merger activity among banks and other financial services institutions.
Supervision and Regulation
As a bank holding company, the Company’s operations are subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “Fed”). The Fed has established capital adequacy guidelines for bank holding companies that are similar to the Office of the Comptroller of the Currency’s (“OCC”) capital guidelines applicable to the Bank. The Bank Holding Company Act of 1956, as amended (the “BHC”), limits the types of companies that a bank holding company may acquire or organize and the activities in which it or they may engage. In general, bank holding companies and their subsidiaries are only permitted to engage in, or acquire direct control of, any company engaged in banking or in a business so closely related to banking as to be a proper incident thereto. Federal legislation enacted in 1999 authorizes certain entities to register as financial holding companies. Registered financial holding companies are permitted to engage in businesses, including securities and investment banking businesses, which are prohibited to bank holding companies. The creation of financial holding companies has had no significant impact on the Company.
Under the BHC, the Company is required to file semi-annual reports of its operations with the Fed for the period ended June 30 and for the year ended December 31. Patriot and any of its subsidiaries are subject to examination by the Fed. In addition, the Company will be required to obtain the prior approval of the Fed to, with certain exceptions, acquire more than 5% of the outstanding voting stock of any bank or bank holding company, acquire all or substantially all of the assets of a bank, or merge or consolidate with another bank holding company. Moreover, Patriot and any of its subsidiaries are prohibited from engaging in certain tying arrangements, in connection with any extension of credit or provision of any property or services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on issuing any extension of credit to the Company or any of its subsidiaries, or making any investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. If the Company wants to engage in businesses permitted to financial holding companies, but not to bank holding companies, it would need to register with the Fed as a financial holding company.
The Fed has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses its view that a bank holding company should pay cash dividends only to the extent that the bank holding company’s net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. The Fed has also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Fed, if any of its subsidiaries is classified as “undercapitalized”, the bank holding company may be prohibited from paying dividends.
A bank holding company is required to give the Fed prior written notice of any purchase or redemption of its outstanding equity securities, if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated retained earnings. The Fed may disapprove of such a purchase or redemption, if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Fed order, or any condition imposed by, or written agreement with, the Fed.
4
The Company is subject to capital adequacy rules and guidelines issued by the Fed and the FDIC and the Bank is subject to capital adequacy rules and guidelines issued by the OCC. These substantially identical rules and guidelines require Patriot to maintain certain minimum ratios of capital to adjusted total assets and/or risk-weighted assets. Under the provisions of the FDIC Improvements Act of 1991, the federal regulatory agencies are required to implement and enforce these rules in a stringent manner. The Company is also subject to applicable provisions of Connecticut law, insofar as they do not conflict with, or are not otherwise preempted by, federal banking law. Patriot’s operations are subject to regulation, supervision, and examination by the FDIC and the OCC.
Federal and state banking regulations govern, among other things, the scope of the business of a bank, a bank holding company, or a financial holding company, the investments a bank may make, deposit reserves a bank must maintain, the establishment of branches, and the activities of a bank with respect to mergers and acquisitions. The Bank is a member of the Fed and, as such, is subject to applicable provisions of the Federal Reserve Act and regulations thereunder. The Bank is subject to the federal regulations promulgated pursuant to the Financial Institutions Supervisory Act that are designed to prevent banks from engaging in unsafe and unsound practices, as well as various other federal, state, and consumer protection laws. The Bank is also subject to the comprehensive provisions of the National Bank Act.
The OCC regulates the number and locations of branch offices of a national bank. The OCC may only permit a national bank to maintain branches in locations and under the conditions imposed by state law upon state banks. At this time, applicable Connecticut banking laws do not impose any material restrictions on the establishment of branches by Connecticut banks throughout Connecticut. New York State law is similar; however, the Bank cannot establish a branch in a New York town with a population of less than 50,000 inhabitants, if another bank is headquartered in that town.
The earnings and growth of Patriot and the banking industry in general are affected by the monetary and fiscal policies of the United States (“U.S.”) government and its agencies, particularly the Fed. The Open Market Committee of the Fed implements national monetary policy to curb inflation and combat recession. The Fed uses its authority and various policies to adjust interest rates on U.S. government securities, the discount rate, and deposit reserve retention rates. The actions of the Fed influence the growth of bank loans, investments, and deposits. They also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
In addition to other laws and regulations, Patriot is subject to the Community Reinvestment Act (“CRA”), which requires the federal bank regulatory agencies, when considering certain applications involving Patriot, to consider Patriot’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA was originally enacted because of concern over unfair treatment of prospective borrowers by banks and unwarranted geographic differences in lending patterns. Existing banks have sought to comply with the CRA in various ways; some banks have made use of more flexible lending criteria for certain types of loans and borrowers (consistent with the requirement to conduct safe and sound operations), while other banks have increased their efforts to make loans to help meet identified credit needs within the consumer community, such as those for home mortgages, home improvements, and small business loans. Compliance may also include participation in various government insured lending programs, such as Federal Housing Administration insured or Veterans Administration guaranteed mortgage loans, Small Business Administration loans, and participation in other types of lending programs such as high loan-to-value ratio conventional mortgage loans with private mortgage insurance. To date, the market area from which the Bank draws much of its business is in the towns and cities in which the Bank has branch offices, which are characterized by a very diverse ethnic, economic and racial cross-section of the population. As the Bank expands further, the market areas served by the Bank will continue to evolve. The Company and the Bank have not and will not adopt any policies or practices, which discourage credit applications from, or unlawfully discriminate against, individuals or segments of the communities served by the Bank.
On October 26, 2001, the United and Strengthening America by Providing Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was enacted to further strengthen domestic security following the September 11, 2001 attacks. The Patriot Act amended various federal banking laws, particularly the Bank Secrecy Act, with the intent to curtail money laundering and other activities that might be undertaken to finance terrorist actions. The Patriot Act also requires that financial institutions in the U.S. enhance already established anti-money laundering policies, procedures and audit functions, and ensure that controls are reasonably designed to detect instances of money laundering through certain correspondent or private banking accounts. Verification of customer identification, maintenance of said verification records, and cross-checking names of new customers against government lists of known or suspected terrorists is also required. The Patriot Act was reauthorized and modified with the enactment of The USA Patriot Act Improvement and Reauthorization Act of 2005.
5
Many of the provisions of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) are aimed at financial institutions that are significantly larger than Patriot. Notwithstanding this, there are many other provisions that Patriot is subject to and had to comply with since July 21, 2010, including any applicable rules promulgated by the Consumer Financial Protection Bureau (“CFPB”). As rules and regulations are promulgated by the agencies responsible for implementing and enforcing Dodd-Frank, Patriot will have to address them to ensure compliance with such applicable provisions. Management expects the cost of compliance to increase, due to the regulatory burden imposed by Dodd-Frank.
Dodd-Frank also broadened the base for FDIC insurance assessments. Under rules issued by the FDIC in February 2011, the base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risks of the institution being assessed. The rule was effective beginning April 1, 2011 and did not have a material impact on the Company.
Financial reform legislation and the implementation of any rules ultimately issued could have adverse implications on the financial industry, the competitive environment, and the Bank’s ability to conduct business.
In July 2013, the Fed, the FDIC, and the OCC approved final rules establishing a new comprehensive capital framework for U.S. Banking organizations (the “New Capital Rules”). The New Capital Rules generally implemented the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework (referred to as “Basel III”) for strengthening international capital standards. The New Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including Patriot.
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and Federal Reserve Bank (“FRB”). The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022. At September 30, 2021, the Bank elected to adopt the CBLR framework.
In response to disruptions in economic conditions caused by the COVID-19 pandemic, federal and state governments and agencies and government-sponsored enterprises have taken a variety of actions to support people and entities affected by the pandemic, including the passage of the CARES Act in March 2020, the Consolidated Appropriations Act, 2021 in December 2020, and the American Rescue Plan Act of 2021 in March 2021, among others. For example, the CARES Act established several programs with the Small Business Administration, including the Paycheck Protection Program (the “PPP”), to provide loans to small businesses. The Bank started participating in the PPP in January 2021.
The CARES Act directed 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 provided that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that met the other existing qualifying criteria) could elect to use the CBLR framework. It also established a two-quarter grace period for qualifying community banking organizations whose leverage ratios fell below the 8% CBLR requirement, so long as the banking organization maintained a leverage ratio of 7% or greater. The second interim final rule provided 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.
The CARES Act also provided financial institutions with the option to suspend certain GAAP requirements for coronavirus-related loan modifications that would otherwise constitute a TDR and further required the federal banking agencies to defer to financial institutions' determinations in making such suspensions, which was extended by the Consolidated Appropriations Act, 2021 until January 1, 2022. Subsequent to January 1, 2022, all modifications to loan agreements will be evaluated in accordance with all applicable GAAP requirements.
6
Recent Developments with Regulators
In November 2018 the Bank entered into a formal written agreement (the “Agreement”) with the Office of the OCC. The Agreement stated that the Board and the Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank. The existence of this Agreement also resulted in increased supervision from the SBA with respect to the Bank’s SBA division and the loss of its preferred lender status.
On September 1, 2021, the OCC terminated the Agreement concluding that the safety and soundness of the Bank and its now established compliance with laws and regulations did not require continued existence of the Agreement. Shortly after the termination of the Agreement, the SBA removed the increased supervision. In October 2022, the SBA renewed the Bank’s Preferred Lender Program (“PLP”) status, with an expiration date of November 15, 2023. As a normal course of business, the PLP is renewed on an annual basis by the SBA. The Bank received a satisfactory audit by the SBA in 2022 and expects its PLP status to be renewed for another term prior to the current expiration period.
Available Information
The Company’s website address is https://www.bankpatriot.com; however, information found on, or that can be accessed through, the website is not incorporated by reference into this Form 10-K. The Company makes available free of charge on its website (under the links entitled “For Investors”, then “SEC filings”, then “Documents”), its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
7
ITEM 1A. Risk Factors
Patriot’s financial condition and results of operation are subject to various risks inherent to its business, including those noted below.
Risks Related to the Pandemic
Although we do not currently expect the effects of COVID-19 to have material adverse impact on the Company’s business and operations going forward, such expectation may be subject to change depending on future development of the pandemic.
The national economy has largely recovered from the COVID-19 pandemic, as many health and safety restrictions have been lifted and vaccine distribution has increased. Certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist, including labor shortages and disruptions of global supply chains. The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, has contributed to rising inflationary pressures.
Since the inception of the COVID-19 pandemic governmental authorities enacted regulations, and protocols, including governmental programs to provide economic relief to businesses and individuals. The application of forbearance and payment deferral policies beyond any statutory requirements has had a minimal impact on the Company’s interest income.
Although we do not currently expect the COVID-19 pandemic to have a negative impact on the Company’s operations, the extent to which the consequences of the pandemic may in the future affect the Company’s financial condition, results of operation, and liquidity and capital position will depend on future developments of a number of evolving factors beyond our control, including the severity and duration of any resurgence of COVID-19 variants, their effects and responsive methods taken by governmental authorities.
Risks Related to General Economic and Market Conditions
We have been and may continue to be adversely affected by national financial markets and economic conditions, as well as local conditions.
Our business and results of operations are affected by the financial markets and general economic conditions in the United States, including factors such as the level and volatility of interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, investor confidence and the strength of the U.S. economy. The deterioration of any of these conditions can adversely affect our securities and loan portfolios, our level of charge-offs and provision for loan losses, our capital levels, liquidity and our results of operations.
In addition, we are affected by the economic conditions within our Connecticut and New York trade areas. Unlike larger banks that are more geographically diversified, the Bank has a total of nine branch offices comprised of eight branch offices located in Fairfield and New Haven Counties, Connecticut and one branch office located in Westchester County, New York. Therefore, any decline in the economy of the Fairfield or New Haven counties of Connecticut or the New York metropolitan area could have an adverse impact on us.
Our loans, the ability of borrowers to repay these loans, and the value of collateral securing these loans are impacted by economic conditions. Our financial results, the credit quality of our existing loan portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest rates, adverse employment conditions and the monetary and fiscal policies of the federal government.
The Bank’s business is subject to various lending and other economic risks that could adversely impact its results of operations and financial condition.
The Company is exposed to changes in economic conditions and general downturns in the U.S. economy, and particularly an economic slowdown in the Fairfield or New Haven counties of Connecticut and the New York metropolitan area could result in the following consequences, any of which may have a material detrimental effect on the Bank’s business:
•Increases in:
-Loan delinquencies;
-Problem assets and foreclosures; or
•Decreases in:
-Demand for the Bank’s products and services;
8
-Customer borrowing power that is caused by declines in the value of assets and/or collateral supporting the Bank’s loans, especially real estate.
During the years 2007 through 2009, the general economic conditions and specific business conditions in the United States, including in Connecticut and New York deteriorated, resulting in increases in loan delinquencies, problem assets and foreclosures, and declines in the value and collateral associated with the Bank’s loans. Two significant impacts resulting from the financial crisis included the housing market suffering falling home prices leading to increased foreclosures and our customer base experiencing rampant unemployment and sustained under-employment. These conditions negatively impacted the credit performance of mortgage and construction loans, and resulted in significant asset-value write-downs by financial institutions, including government-sponsored enterprises, as well as major commercial and investment banks. The loss of mortgage and construction loan asset-value caused many financial institutions to seek additional capital, to merge with larger and financially stronger financial institutions and, in some cases, to fail. Many lenders and institutional investors reduced or ceased providing funding to borrowers, including other financial institutions.
During 2010 through 2019, however, the economic climate generally improved, contributing to decreases in the Bank’s problem assets, delinquencies and foreclosures from the levels experienced in the earlier period of economic turbulence. During the course of the COVID-19 pandemic covering all of 2020 and a significant portion of 2021 and 2022, a temporary disruption and level of uncertainty existed. For a period of time, delinquencies, deferrals and problem assets rose, however foreclosures were relatively unaffected due to the moratorium that was issued by many states. Much of this has stabilized and returned to previous operating levels. The Company is unable to predict, however, future economic conditions and their impact on the Company’s business.
Market turmoil, and the tightening of credit by the Fed, could lead to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and generally widespread reductions in business activity. The resulting economic pressure on consumers and lack of confidence in the financial markets could adversely affect the Company’s business, financial condition, and results of operations. A worsening of these conditions could likely exacerbate the adverse effects these difficult market conditions could have on the Company and other financial institutions. In particular:
•Less than optimal economic conditions may continue to affect market confidence levels and may cause adverse changes in payment patterns, thereby causing increased delinquencies, which could affect the Bank’s provision for loan losses and charge-off of loans receivable.
•The ability to assess the creditworthiness of the Bank’s customers, or to accurately estimate loan collateral value, may be impaired if the models and approaches the Bank uses becomes less predictive of future behaviors, valuations, assumptions, or estimates due to the unpredictable economic climate.
•Increasing consolidation of financial services companies, as a result of current market conditions, could have unexpected adverse effects on the Bank’s ability to compete effectively.
Market Risk
The Bank’s business is subject to interest rate risk and variations in interest rates may negatively affect the Bank’s financial performance.
Patriot is unable to predict, with any degree of certainty, fluctuations of market interest rates, which are affected by many factors including inflation, recession, a rise in unemployment, a tightening money supply, domestic and international disorder, and instability in domestic and foreign financial markets. Changes in the interest rate environment may reduce Patriot’s profits. Patriot realizes income from the differential or “spread” between the interest earned on loans, securities, and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations.
Although Patriot has implemented strategies which are designed to reduce the potential effects of changes in interest rates on operations, these strategies may not always be successful. Accordingly, changes in levels of market interest rates could materially and adversely affect Patriot’s net interest spread, asset quality, levels of prepayments, liquidity and cash flow, as well as the market value of its securities portfolio and overall profitability.
9
Patriot’s investment portfolio includes securities that are sensitive to interest rates and variations in interest rates may adversely impact Patriot’s profitability.
Patriot’s security portfolio is classified as available-for-sale and is comprised primarily of corporate debt and mortgage-backed securities, which are insured or guaranteed by the U.S. Government. These securities are sensitive to interest rate fluctuations. Unrealized gains or losses in the available-for-sale portfolio of securities are reported as a separate component of shareholders’ equity. As a result, future interest rate fluctuations may impact shareholders’ equity, causing material fluctuations from quarter to quarter. The inability to hold its securities until market conditions are favorable for a sale, or until payments are received on mortgage-backed securities, could adversely affect Patriot’s earnings and profitability.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation has risen sharply since the end of 2021 to levels not seen in more than 40 years. Small to medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
Credit Risk
The risks involved in the Bank’s commercial real estate loan portfolio are material.
The Bank’s commercial real estate loan portfolio constitutes a material portion of its assets and generally has different risks than residential mortgage loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan balances to single borrowers or groups of related borrowers both at origination and at maturity. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower's ability to make repayments from the cash flow of the borrower's business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss.
Real estate lending involves risks related to a decline in value of commercial and residential real estate.
The market value of real estate can fluctuate significantly in a relatively short period of time, as a result of market conditions in the geographic area in which real estate is located. A deterioration in the national and regional real estate markets could harm our financial condition and results of operations because a large percentage of our loans are secured by real property. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. If real estate values decline, the collateral for the Bank’s loans will provide less security. As a result, the Bank’s ability to recover on defaulted loans by selling the underlying real estate will be diminished, and the Bank will be more likely to suffer losses on defaulted loans.
The Bank’s allowance for loan and lease losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for loan and lease losses to provide for loan defaults and non-performance. The allowance for loan and lease losses is based on an evaluation of the risks associated with the Bank’s loans receivable, as well as the Bank’s prior loss experience. Deterioration in general economic conditions and unforeseen risks affecting customers could have an adverse effect on borrowers’ capacity to timely repay their obligations before risk grades could reflect those changing conditions. Maintaining the adequacy of the Bank’s allowance for loan and lease losses may require that the Bank make significant and unanticipated increases in the provision for loan losses, which would materially affect the results of operations and capital adequacy. The dollar amount of future losses is susceptible to changes in economic, operating, and other conditions including changes in interest rates that may be beyond the Bank’s control and which losses may exceed current allowance estimates. Although the current economic environment has improved, conditions remain uncertain and may result in additional risk of loan losses.
10
Federal regulatory agencies, as an integral part of their examination process, review the Bank’s loan portfolio and assess the adequacy of the allowance for loan and lease losses. The regulatory agencies may require the Bank to change classifications or grades on loans, increase the allowance for loan and lease losses by recognizing additional loan loss provisions, or to recognize further loan charge-offs based upon their judgments, which may differ from the Bank’s. Any increase in the allowance for loan and lease losses required by these regulatory agencies could have a negative effect on the Bank’s results of operations and financial condition. While management believes that the allowance for loan and lease losses is currently adequate to cover inherent losses, further loan deterioration could occur, and therefore, management cannot assure shareholders that there will not be a need to increase the allowance for loan and lease losses, or that the regulators will not require management to increase this allowance. Either of these occurrences could materially and adversely affect Patriot’s earnings and profitability.
The implementation of Current Expected Credit Loss (“CECL”), which we expect will result in an increase our allowance for loan losses, could have a material adverse effect on our financial condition and results of operation.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. The new accounting standard is effective for the Company as of January 1, 2023. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, other financial instruments and other commitments to extend credit and provide for the expected credit losses as allowances for credit losses. This will change our current method of providing allowance for loan losses that are probable and we expect to record an allowance for credit losses as of January 1, 2023 in excess of our existing allowance for loan losses. CECL also greatly increases the data we need to collect and review to determine the appropriate level of the allowance for credit losses. Although we expect the Bank and the Company will continue to meet all applicable capital adequacy requirements following recording of the impact of adoption to shareholders’ equity, future provisioning for expected credit losses under CECL may have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Business Operations
Patriot is dependent on its locally-based management team and the loss of its senior executive officers or other key employees could impair its relationship with its customers and adversely affect its business and financial results.
The Bank’s success is dependent upon the continued services and skills of its long-term locally-based management team. The unexpected loss of services of one or more of these key personnel, because of their skills, knowledge of the Bank’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel could have an adverse impact on the Bank’s business.
Patriot’s success also depends, in part, on its continued ability to attract and retain experienced commercial lenders and retail bankers, as well as other management personnel. The loss of services of several such key personnel could adversely affect Patriot’s growth and prospects, to the extent replacement personnel are not able to be identified and promptly retained. Competition for commercial lenders and retail bankers is strong, and Patriot may not be successful in retaining or attracting such personnel.
Natural disasters, acts of war or terrorism, the impact of health epidemics and other adverse external events could detrimentally affect our financial condition and results of operations.
Natural disasters (including severe weather events of increasing strength and frequency due to climate change), acts of war or terrorism, such as the recent outbreak of hostilities between Russia & Ukraine, occurrence of health epidemics and other adverse external events could have a significant negative impact on our ability to conduct business or upon third parties who perform operational services for us or our customers. Such events also could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.
11
Patriot is subject to certain general affirmative debt covenants, which if it cannot comply, may result in default and actions taken against it by its debt holders.
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. Proceeds of $7.8 million were directly contributed to the Bank. The subordinated debt qualifies for Tier 2 Capital of the Company and the funds contributed to the Bank qualify as Tier 1 capital at the Bank.
In December 2022, the Company issued $12 million of senior notes that contain certain affirmative covenants, which 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. 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.
The affirmative covenants contained in the senior notes and subordinated notes agreements are of a general nature and not uncommon in such debt agreements. Management does not anticipate an inability to maintain its compliance with the affirmative covenants contained in the senior notes and subordinated notes agreements as such compliance is inherent in the Bank’s continued operation and Patriot’s public company status, as well as management’s overall strategic plan.
The Bank is subject to environmental liability risk associated with its lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on, and take title to, properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties, which may make Patriot liable for remediation costs, as well as for personal injury and property damage. In addition, Patriot owns and operates certain properties that may be subject to similar environmental liability risks.
Environmental laws may require the Bank to incur substantial expense and may materially reduce the affected property's value, or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures requiring the performance of an environmental site assessment before loan approval or initiating any foreclosure action on real property, these assessments may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Patriot’s financial condition and results of operations.
The Company relies on the dividends and return of capital it receives from its subsidiary.
The Company is a separate and distinct legal entity from the Bank. The Company’s primary source of revenue is the dividends or other returns of capital it receives from the Bank, which the Company uses to fund its activities, meet its obligations, and remit dividends to its shareholders. Various federal and state laws and regulations limit the amount of dividends or other returns of capital that a bank may pay to its parent company. In addition, the Company’s right to participate in a distribution of assets, upon liquidation or reorganization of the Bank or another regulated subsidiary, may be subordinate to claims by the Bank’s or subsidiary's creditors. If the Bank were to be restricted from making payments to the Company, the Company’s ability to fund its activities, meet its obligations, or pay dividends to its shareholders might be curtailed. The inability to receive payments from the Bank could therefore have a material adverse effect on the Company.
Per agreement with Bank regulators, dividends and return of capital from the Bank to the Company are subject to prior approval from the OCC, and dividends from the Company to third parties are also subject to prior approval from FRB. There is no assurance that Company will pay dividends in the future.
12
Uncertainty relating to the LIBOR determination process and LIBOR discontinuance may adversely affect our results of operations.
London Interbank Offered Rate (“LIBOR”) is used extensively in the United States as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks. The United Kingdom Financial Conduct Authority (“FCA”), which regulates the process for establishing LIBOR, announced in July 2017 that the sustainability of LIBOR cannot be guaranteed. The administrator for LIBOR announced on March 5, 2021 that it would permanently cease to publish most LIBOR settings beginning on January 1, 2022 and will cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that it does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.
In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny.
The discontinuance of LIBOR may result in uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments and may also increase operational and other risks to the Company and the industry.
We have derivative contracts and limited loan exposure tied to LIBOR. Although we are not yet able to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Technology Risks
A breach of information security could adversely affect Patriot’s operations or reputation and create significant legal and financial exposure.
The Company faces cybersecurity risks, including denial of service, hacking, and malware or ransomware attacks, which could result in the disclosure of confidential information, adversely affect the Company’s operations or reputation, and create significant legal and financial exposure. Patriot increasingly depends upon data processing, communications, and information exchange on a variety of computing platforms and networks, and the internet to conduct its business. Patriot cannot be certain that all of its systems are entirely free from vulnerability to attack, despite safeguards it has instituted. In addition, Patriot relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached, information can be lost or misappropriated and could result in financial loss or costs to Patriot, or damages to others. These financial losses or costs could materially exceed the amount of Patriot’s insurance coverage, if applicable, which would have an adverse effect on its results of operations and financial condition. In addition, the Bank’s reputation could suffer if its database were breached, which could materially affect Patriot’s financial condition and results of operations.
Risks associated with changes in technology.
Financial products and services have become increasingly technology-driven. The Bank’s ability to compete for new customers and meet the needs of existing customers, in a cost-efficient manner, is dependent on its ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of the Bank’s competitors have greater resources to invest in technology and may be better equipped to market new technology-driven products and services. Failing to keep pace with technological change could have a material adverse impact on the Bank’s business and therefore on Patriot’s financial condition and results of operations.
13
Regulatory, Compliance and Legal Risks
Government regulation may have an adverse effect on Patriot’s profitability and growth.
Patriot is subject to extensive regulation, supervision, and examination by the OCC as the Bank’s chartering authority, the FDIC as the insurer of its deposits, and the Fed as its primary regulator. Changes in federal and state banking laws and regulations, or in federal monetary policies, could adversely affect the Bank’s profitability and continued growth. Legislative and regulatory changes are expected, but cannot be predicted. For example, new legislation or regulation could limit the manner in which Patriot may conduct its business, including the Bank’s ability to obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads. The laws, regulations, interpretations, and enforcement policies that apply to Patriot have been subject to significant, and sometimes retroactively applied, changes in recent years, and are likely to change significantly in the future.
Legislation enacted by the U.S. Congress, proposing significant structural reforms to the financial services industry, has, among other things, created the CFPB, which is given broad authority to regulate financial service providers and financial products. In addition, the Fed has passed guidance on incentive compensation at financial institutions it regulates and the United States Department of the Treasury and federal banking regulators have issued statements calling for higher capital and liquidity requirements. Complying with any new legislative or regulatory requirements and any programs established thereunder by federal and state governments, could have an adverse impact on Patriot’s operations and the results thereof.
The Bank may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could adversely affect its earnings.
Market developments have significantly impacted the insurance fund of the FDIC. As a result, the Bank may be required to pay higher premiums, or special assessments, that could adversely affect earnings. The amount of premiums the FDIC requires for the insurance coverage it provides is outside the Bank’s control. If there are additional banks or financial institution failures, the Bank may be required to pay higher FDIC premiums than are currently assessed. Increases in FDIC insurance premiums, including any future increases or required prepayments, may materially adversely affect the Bank’s results of operations.
Patriot is subject to risks associated with taxation.
The amount of income taxes Patriot is required to pay on its earnings is based on federal and state legislation and regulations. Patriot provides for current and deferred taxes in its financial statements, based on the results of operations, business activity, legal structure, interpretation of tax statutes, assessment of risk of adjustment upon audit, and application of financial accounting standards. Patriot may take tax return filing positions for which the final determination of tax is uncertain. Patriot’s net income or loss and the related amount per share may be reduced, if a federal, state, or local tax authority assesses additional taxes, penalties, or interest that has not been provided for in the consolidated financial statements. Patriot’s equity position and net income or loss can also be reduced if all or apportion of its deferred tax assets are deemed to be unrealizable and require a valuation allowance. There can be no assurance that Patriot will achieve its anticipated effective tax rate, due to a change in a tax law, or the result of a tax audit that disallows previously recognized tax benefits.
Changing regulation of corporate governance and public disclosure.
Patriot is subject to laws, regulations, and standards relating to corporate governance and public disclosure, SEC rules and regulations, and NASDAQ rules. These laws, regulations, and standards are subject to varying interpretations, and as a result, their practical application may evolve over time as new guidance is provided by regulatory and governing bodies. Due to the evolving legal and regulatory environment, compliance may become more difficult and result in higher costs. Patriot is committed to maintaining high standards of corporate governance and public disclosure. As a result, Patriot’s efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. Patriot’s reputation may be harmed, if it does not continue to comply with these laws, regulations and standards.
14
Competition Risks
Strong competition in Patriot’s geographical market could limit growth and profitability.
Competition in the banking and financial services industry is intense. Fairfield County, Connecticut and the New York City metropolitan areas have a high concentration of financial institutions including large money center and regional banks, community banks, and credit unions. Some of Patriot’s competitors offer products and services that the Bank currently does not offer, such as private banking and trust services. Many of these competitors have substantially greater resources and lending limits than the Bank, and may offer certain services that Patriot does not or cannot provide. Price competition might result in the Bank earning less on its loans and paying more for deposits, which would reduce net interest income. Patriot expects competition to increase in the future, as a result of legislative, regulatory and technological changes. Patriot’s profitability depends upon its continued ability to successfully compete in its geographical market.
Liquidity Risk
Patriot is subject to certain risks with respect to liquidity.
"Liquidity" refers to Patriot’s ability to generate sufficient cash flows to support its operations and fulfill its obligations, including commitments by the Bank to originate loans, to repay its wholesale borrowings and other liabilities, and to satisfy the withdrawal of deposits by its customers.
Patriot’s primary sources of liquidity are the deposits the Bank acquires organically through its branch network and through the brokered deposit market, borrowed funds, primarily in the form of collateralized borrowings from the Federal Home Loan Bank, and the cash flows generated through the collection of loan payments and on mortgage-related securities. In addition, depending on current market conditions, Patriot may have the ability to access the capital markets.
Deposit flows, calls of investment securities and wholesale borrowings, and prepayments of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived; local and national economic conditions; and competition for deposits and loans in the markets served. Prepaid deposits coming through the Payments Division will fluctuate on a daily basis based on standard business activity in the underlying customer accounts. Furthermore, changes to the underwriting guidelines for wholesale borrowings, or lending policies may limit or restrict Patriot’s ability to borrow, and could therefore have a significant adverse impact on its liquidity. A decline in available funding could adversely impact Patriot’s ability to originate loans, invest in securities, and meet its expenses, or to fulfill such obligations as repaying its borrowings or meeting deposit withdrawal demands.
Risks Related to the Company’s Common Stock
The price of the Company’s common stock may fluctuate.
The market price of the Company’s common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding the Company’s operations or business prospects. Among other factors, the Company’s stock price may be affected by:
•Operating results that vary from the expectations of securities analysts and investors;
•Developments in its business or in the financial services sector in-general;
•Regulatory or legislative changes affecting its business or the financial services sector in-general;
•Operating results or securities price performance of companies that investors consider being comparable to the Company;
•Changes in estimates or recommendations by securities analysts or rating agencies;
•Announcements of strategic developments, acquisitions, dispositions, financings, and other material events by the Company or the Company’s competitors; and
•Changes or volatility in global financial markets and economies, general market conditions, interest or foreign exchange rates, stock, commodity, credit, or asset valuations.
ITEM 1B. Unresolved Staff Comments
None.
15
ITEM 2. Properties
The following table summarizes Patriot’s owned and leased properties, as of December 31, 2022:
| Street Address | City | County | State | |||||||||||||||||
| Owned: | ||||||||||||||||||||
| 233 Post Road | Darien | Fairfield | Connecticut | |||||||||||||||||
| 1755 Black Rock Turnpike | Fairfield | Fairfield | Connecticut | |||||||||||||||||
| 100 Mason Street | Greenwich | Fairfield | Connecticut | |||||||||||||||||
| 900 Bedford Street | Stamford | Fairfield | Connecticut | |||||||||||||||||
| 999 Bedford Street | Stamford | Fairfield | Connecticut | |||||||||||||||||
| 771 Boston Post Road | Milford | New Haven | Connecticut | |||||||||||||||||
| 50 Charles Street | Westport | Fairfield | Connecticut | |||||||||||||||||
| Leased: | ||||||||||||||||||||
| 16 River Street | Norwalk | Fairfield | Connecticut | |||||||||||||||||
| 415 Post Road East | Westport | Fairfield | Connecticut | |||||||||||||||||
| 495 Central Park Avenue | Scarsdale | Westchester | New York | |||||||||||||||||
| 7 Old Tavern Road | Orange | New Haven | Connecticut | |||||||||||||||||
| 30 Oak Street | Stamford | Fairfield | Connecticut | |||||||||||||||||
| 300 Centerville Rd | Warwick | Kent County | Rhode Island | |||||||||||||||||
At December 31, 2022, five branch buildings were owned and four branch facilities were leased. Additionally, the Bank maintains certain operating and administrative service facilities and additional parking at its main branch banking office, which are subject to eleven non-cancelable operating lease agreements. Patriot’s lease agreements have terms ranging from one year to fifteen years with nine years and seven months remaining on the longest lease term. Generally, Patriot’s lease agreements contain rent escalation clauses, and renewals for one or more periods at the Bank’s option.
As of December 31, 2022, the Bank has excess space that it leases to four unrelated parties. For additional information, see the Leases footnote disclosure in the consolidated financial statements included herein.
ITEM 3. Legal Proceedings
Other than ordinary routine litigation incidental to its business, neither the Company nor the Bank has any pending legal proceedings to which the Company or the Bank is a party or any of its property is subject.
ITEM 4. Mine Safety Disclosures
Not applicable.
16
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s Common Stock is traded on the Nasdaq Global Market under the Symbol “PNBK.”
Holders
There were approximately 252 shareholders of record of the Company’s Common Stock as of December 31, 2022. This number does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms or other nominees.
Dividends
The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends or execute a return of capital to the Company. The Bank can make payments to the Company pursuant to a dividend policy requiring compliance with the Bank's OCC-approved capital program, in compliance with applicable law, and with the prior written determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the capital program, certain other restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the OCC is required to make payments in excess of the Bank’s earnings retained in the current year plus retained net earnings for the preceding two years. The Company is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. OCC regulations impose limitations upon all capital distributions by commercial institutions, like the Bank, such as dividends, returns of capital, and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payments would otherwise violate regulatory requirements.
The Company did not pay any dividends since 2020, and has temporarily suspended dividend payments. There is no assurance that Company will pay dividends in the future.
For information regarding our equity compensation plans, see PART III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.”
17
Performance Graph
The performance graph compares the Company’s cumulative total shareholder return on its common stock over the last five fiscal years to the NASDAQ Community Bank Total Return Index and the S&P 500 Total Return Index. Total shareholder return is measured by dividing the sum of the cumulative amount of dividends for the measurement period (assuming dividend reinvestment) and the Company’s share price at the end of the measurement period, by the share price at the beginning of the measurement period.
| Period Ending | |||||||||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||
| Patriot National Bancorp ("PNBK") | 100.00 | % | 79.83 | % | 71.48 | % | 55.69 | % | 87.11 | % | 59.38 | % | |||||||||||||||||||||||
| Nasdaq Community Bank Index Total Return Index ("XABQ") | 100.00 | % | 82.10 | % | 99.53 | % | 88.95 | % | 124.25 | % | 101.44 | % | |||||||||||||||||||||||
| S&P 500 Total Return Index ("SP500TR") | 100.00 | % | 95.62 | % | 125.72 | % | 148.85 | % | 192.08 | % | 156.88 | % | |||||||||||||||||||||||
ITEM 6. [Reserved]
18
ITEM 7. Management’s Discussion and Analysis - Financial Condition & Results of Operations
General
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies
The accounting and reporting policies of Patriot conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the financial services industry. A summary of Patriot’s significant accounting policies is included in the Notes to consolidated financial statements that are referenced in Item 8. Financial Statements and Supplementary Data. Although all of Patriot’s policies are integral to understanding its consolidated financial statements, certain accounting policies involve management to exercise judgment, develop assumptions, and make estimates that may have a material impact on the financial information presented in the consolidated financial statements or Notes thereto. The assumptions and estimates are based on historical experience and other factors representing the best available information to management as of the date of the consolidated financial statements, up to and including the date of issuance or availability for issuance. As the basis for the assumptions and estimates incorporated in the consolidated financial statements may change, as new information comes to light, the consolidated financial statements could reflect different assumptions and estimates.
Due to the judgments, assumptions, and estimates inherent in the following policies, management considers such accounting policies critical to an understanding of the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Allowance for Loan and Lease Losses (ALLL)
The Company maintains an ALLL at a level management believes is sufficient to absorb estimated credit losses incurred as of the report date. Management’s determination of the adequacy of the ALLL is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by management. As applicable, consideration is given to a variety of factors in establishing these estimates including historical losses, peer and industry data, current economic conditions, the size and composition of the loan portfolio, delinquency statistics, criticized and classified assets and impaired loans, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, and the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change.
To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required, which may adversely affect the Company’s results of operations in the future. Subsequent to acquisition of purchased-credit-impaired loans, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severity, and other factors that are reflective of current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses; subsequent increases in expected cash flows may result in a reversal of the provision for loan losses to the extent of prior charges.
The new accounting standard, CECL, effective for the Company as of January 1, 2023. will require the Bank to determine periodic estimates of lifetime expected credit losses on loans, other financial instruments and other commitments to extend credit and provide for the expected credit losses as allowances for credit losses. This will change our current method of providing allowance for loan losses and require us to record an allowance for credit losses as of January 1,2023 materially in excess of our existing allowance for loan losses. CECL will also greatly increase the data we will need to collect and review to determine the appropriate level of the allowance for credit losses and will likely require larger allowances for credit losses going forward than our current methodology.
19
Unrealized Gains and Losses on Securities Available-for-sale
The Company receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Available-for-sale debt securities consist primarily of U.S. Government agency debt and mortgage-backed securities issued by the U.S. government, corporate bonds, subordinated notes and SBA loan pools. The Company uses various indicators in determining whether a security is other-than-temporarily impaired including, for debt securities, when it is probable that the contractual interest and principal will not be collected, or for equity securities, whether the market value is below its cost for an extended period of time with low expectation of recovery. The debt securities are monitored for changes in credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying collateral or issuer. The Company also considers the volatility of a security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment, as of the balance sheet date, is recognized in earnings, even if the decision to sell the security has not been made.
The fair value of the security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value. Available-for-sale debt securities were not considered to be other-than-temporarily impaired as of December 31, 2022, 2021, or 2020 because the unrealized losses were related to changes in interest rates and did not affect the expected cash flows to be received, or indicate a loss of value on the underlying collateral, or a loss of financial stability on the part of the issuer. Management concluded that the declines in fair value of the investment portfolio as of the reporting dates is temporary and that values would recover by way of increases in market price or positive changes in market interest rates.
Deferred Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
Intangible assets, other than goodwill and indefinite-lived intangible assets, are amortized to expense over their estimated useful lives in a manner consistent with that in which the related benefits are expected to be realized, and are periodically reviewed by management to assess recoverability. Impairment losses on other intangibles are recognized as a charge to expense if carrying amounts exceed fair values.
20
Servicing Assets
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Any impairment, if temporary, would be reported as a valuation allowance.
Derivatives Instruments and Hedging Activities
The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. The Company has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. The swaps are reported at fair value in other assets or other liabilities. The interest rate swaps qualify as 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 also had derivatives designated as cash flow hedges. Cash flow hedges are used to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued.
Further discussion of the derivatives is set forth in Note 1, Note 11, and Note 21 to the consolidated financial statements.
21
FINANCIAL CONDITION
Assets
The Company’s total assets increased $94.9 million, or 10.0%, from $948.5 million at December 31, 2021 to $1.0 billion at December 31, 2022, primarily due to an increase in net loans from $729.6 million as of December 31, 2021, to $838.0 million at December 31, 2022.
Cash and cash equivalents
Cash and cash equivalents decreased $8.6 million or 18.2%, from $47.0 million at December 31, 2021 to $38.5 million as of December 31, 2022. The decrease as of December 31, 2022 was primarily attributable to increase in loan origination and purchased loans. The Company’s liquidity position is strong with liquid assets to total assets of 9.3% as of December 31, 2022.
Investment securities
The following table is a summary of the Company’s available-for-sale securities portfolio and other investments at the dates shown:
| December 31, | |||||||||||||||||
| (In thousands, except per share amounts) | 2022 | 2021 | 2020 | ||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | 59,046 | $ | 66,629 | $ | 16,833 | |||||||||||
| Corporate bonds | 14,655 | 16,921 | 17,290 | ||||||||||||||
| Subordinated notes | 4,602 | 4,626 | 9,005 | ||||||||||||||
| SBA loan pools | 5,718 | 5,603 | 5,567 | ||||||||||||||
| Municipal bonds | 499 | 562 | 567 | ||||||||||||||
| Total available-for-sale securities, at fair value | 84,520 | 94,341 | 49,262 | ||||||||||||||
| Other investments, at cost | 4,450 | 4,450 | 4,450 | ||||||||||||||
| $ | 88,970 | $ | 98,791 | $ | 53,712 | ||||||||||||
Total investments decreased $9.8 million or 9.9%, from $98.8 million at December 31, 2021 to $89.0 million at December 31, 2022. This decrease was primarily attributable to the net unrealized loss of $18.9 million for the available-for-sale securities, associated with rising market interest rates, and $10.3 million in repayments and maturity of principal on available-for-sale securities, which was partially offset by purchases of available-for-sale securities of $19.3 million in 2022. There were no sales of available-for-sales securities during the year ended December 31, 2022 and 2020. During the year ended December 31, 2021, the Bank sold $58.8 million available-for-sale securities and recognized net gain on sale of securities of $76,000.
22
Loans held for investment
The following table provides the composition of the Company’s loan held for investment portfolio as of December 31, for each of the years shown:
| December 31, | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||
| Loan portfolio segment: | ||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 437,443 | 51.57 | % | $ | 365,247 | 49.38 | % | $ | 282,378 | 38.68 | % | ||||||||||||||||||||||||||
| Residential Real Estate | 124,140 | 14.63 | % | 158,591 | 21.45 | % | 153,851 | 21.07 | % | |||||||||||||||||||||||||||||
| Commercial and Industrial | 138,787 | 16.36 | % | 122,810 | 16.61 | % | 144,297 | 19.76 | % | |||||||||||||||||||||||||||||
| Consumer and Other | 141,091 | 16.63 | % | 59,364 | 8.03 | % | 67,635 | 9.26 | % | |||||||||||||||||||||||||||||
| Construction | 4,922 | 0.58 | % | 21,781 | 2.95 | % | 66,984 | 9.17 | % | |||||||||||||||||||||||||||||
| Construction to permanent - CRE | 1,933 | 0.23 | % | 11,695 | 1.58 | % | 15,035 | 2.06 | % | |||||||||||||||||||||||||||||
| Loans receivable, gross | 848,316 | 100.00 | % | 739,488 | 100.00 | % | 730,180 | 100.00 | % | |||||||||||||||||||||||||||||
| Allowance for loan losses | (10,310) | (9,905) | (10,584) | |||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 838,006 | $ | 729,583 | $ | 719,596 | ||||||||||||||||||||||||||||||||
The gross loans receivable increased $108.8 million or 14.7%, from $739.5 million at December 31, 2021 to $848.3 million at December 31, 2022. The increase in loans was primarily attributable to $211.4 million in loan origination and $141.4 million in purchases of loans receivable which was partially offset by a net decrease in loan payoffs of $239.6 million for the year ended December 31, 2022.
Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% of the principal balance. However, during the COVID-19 pandemic in 2021, the SBA temporarily increased the guarantees to 90% and reverted to 75% on October 1, 2021. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment.
SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of December 31, 2022 and 2021, SBA loans included in the commercial real estate loans were $12.2 million and $9.7 million, respectively. SBA loans included in the commercial and industrial loan were $20.3 million and $17.4 million as of December 31, 2022 and 2021, respectively.
At December 31, 2022, the net loan to deposit ratio was 97.4% and the net loan to total assets ratio was 80.3%. At December 31, 2021, these ratios were 97.0% and 77.0%, respectively.
23
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents loans receivable, gross by portfolio segment, by contractual maturity as of December 31, 2022:
| Contractual Maturity of Loan Balance | |||||||||||||||||||||||
| (In thousands) | One year or less | One through Five Years | After Five Years | Total | |||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||
| Commercial Real Estate | $ | 51,910 | $ | 201,391 | $ | 184,142 | $ | 437,443 | |||||||||||||||
| Residential Real Estate | 1,006 | 8,053 | 115,081 | 124,140 | |||||||||||||||||||
| Commercial and Industrial | 17,638 | 59,946 | 61,203 | 138,787 | |||||||||||||||||||
| Consumer and Other | 112 | 72,991 | 67,988 | 141,091 | |||||||||||||||||||
| Construction | 3,885 | 1,037 | — | 4,922 | |||||||||||||||||||
| Construction to permanent - CRE | — | — | 1,933 | 1,933 | |||||||||||||||||||
| Total | $ | 74,551 | $ | 343,418 | $ | 430,347 | $ | 848,316 | |||||||||||||||
| Fixed rate loans | $ | 7,307 | $ | 211,974 | $ | 148,959 | $ | 368,240 | |||||||||||||||
| Variable rate loans | 67,244 | 131,444 | 281,388 | 480,076 | |||||||||||||||||||
| Total | $ | 74,551 | $ | 343,418 | $ | 430,347 | $ | 848,316 | |||||||||||||||
All variable rate loans account for 56.59% of the total loan portfolio. Approximately 26.00% of the variable rate loan portfolio reprices with changes in interest rates within three months of the rate change. The balance of the loan portfolio has an initial rate for a fixed period, for example one, three or five years and then reprice annually after the initial fixed period. These repricing characteristics are reflected in the Bank’s aggregate analysis of net interest sensitivity included in Item 7A. of this report.
As a community bank, the Bank is invested in a local economy, which may be subject to the vagaries of general economic conditions. As of December 31, 2022, the investments in Commercial Real Estate and Commercial and Industrial were approximately 67.93% of total loans receivable. These loans generally are collateralized by the underlying real estate and supported by personal guarantees of the borrowers.
24
Allowance for loan and lease losses
The allowance for loan and lease losses increased $405,000 from $9.9 million at December 31, 2021 to $10.3 million at December 31, 2022. The increase was primarily attributable to a provision for loan losses of $1.9 million due to increased loan balances and additional specific reserve for one impaired loan, which was partially offset by net charge-offs of $1.5 million for the year ended December 31, 2022.
Based upon the overall assessment and evaluation of the loan portfolio at December 31, 2022 and based upon the prevailing accounting standard (ASC 310-10-35), management believes the allowance for loan and lease losses of $10.3 million, which represents 1.2% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio. As of January 1, 2023, the Company adopted ASU 2016-13 to recognize and measure credit losses on financial assets measured at amortized cost as discussed further in the Summary of Significant Accounting Policies.
The following table provides detail of activity in the allowance for loan and lease losses:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Balance at beginning of the period | $ | 9,905 | $ | 10,584 | $ | 10,115 | ||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Commercial Real Estate | — | (51) | (1,032) | |||||||||||||||||
| Residential Real Estate | — | (3) | (24) | |||||||||||||||||
| Commercial and Industrial | (70) | (212) | (677) | |||||||||||||||||
| Consumer and Other | (1,690) | (23) | (45) | |||||||||||||||||
| Construction | (68) | (69) | — | |||||||||||||||||
| Total charge-offs | (1,828) | (358) | (1,778) | |||||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial Real Estate | 154 | — | — | |||||||||||||||||
| Residential Real Estate | 4 | 3 | 1 | |||||||||||||||||
| Commercial and Industrial | 69 | 65 | 70 | |||||||||||||||||
| Consumer and Other | 121 | 111 | 6 | |||||||||||||||||
| Total recoveries | 348 | 179 | 77 | |||||||||||||||||
| Net charge-offs | (1,480) | (179) | (1,701) | |||||||||||||||||
| Provision (credit) for loan losses | 1,885 | (500) | 2,170 | |||||||||||||||||
| Balance at end of the period | $ | 10,310 | $ | 9,905 | $ | 10,584 | ||||||||||||||
| Ratios: | ||||||||||||||||||||
| Net charge-offs to average loans | (0.18) | % | (0.03) | % | (0.22) | % | ||||||||||||||
| Allowance for loan losses to total loans | 1.22 | % | 1.34 | % | 1.45 | % | ||||||||||||||
25
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:
| December 31, | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses | Percent of loans in each category to total loans | Allowance for loan losses | Percent of loans in each category to total loans | Allowance for loan losses | Percent of loans in each category to total loans | |||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 6,966 | 51.57 | % | $ | 5,063 | 49.38 | % | $ | 4,485 | 38.68 | % | ||||||||||||||||||||||||||
| Residential Real Estate | 665 | 14.63 | % | 1,700 | 21.45 | % | 1,379 | 21.07 | % | |||||||||||||||||||||||||||||
| Commercial and Industrial | 1,403 | 16.36 | % | 2,532 | 16.61 | % | 3,284 | 19.76 | % | |||||||||||||||||||||||||||||
| Consumer and Other | 1,207 | 16.63 | % | 253 | 8.03 | % | 295 | 9.26 | % | |||||||||||||||||||||||||||||
| Construction | 24 | 0.58 | % | 78 | 2.95 | % | 739 | 9.17 | % | |||||||||||||||||||||||||||||
| Construction to permanent - CRE | 10 | 0.23 | % | 41 | 1.58 | % | 162 | 2.06 | % | |||||||||||||||||||||||||||||
| Unallocated | 35 | N/A | 238 | N/A | 240 | N/A | ||||||||||||||||||||||||||||||||
| Total Allowance for loan losses | $ | 10,310 | 100.00 | % | $ | 9,905 | 100.00 | % | $ | 10,584 | 100.00 | % | ||||||||||||||||||||||||||
Nonperforming Assets
The following table presents non-accrual and accruing loans which were past due by over 90 days for the dates indicated:
| (In thousands) | December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Non-accruing loans: | |||||||||||||||||
| Commercial Real Estate | $ | 11,241 | $ | 15,704 | $ | 14,534 | |||||||||||
| Residential Real Estate | 2,470 | 3,148 | 3,854 | ||||||||||||||
| Commercial and Industrial | 4,833 | 4,101 | 700 | ||||||||||||||
| Consumer and Other | 49 | 142 | 917 | ||||||||||||||
| Construction | — | — | — | ||||||||||||||
| Total non-accruing loans | 18,593 | 23,095 | 20,005 | ||||||||||||||
| Loans past due over 90 days and still accruing | 1,155 | 2 | 16 | ||||||||||||||
| Other real estate owned | — | — | 1,906 | ||||||||||||||
| Total nonperforming assets | $ | 19,748 | $ | 23,097 | $ | 21,927 | |||||||||||
| Nonperforming assets to total assets | 1.89 | % | 2.44 | % | 2.49 | % | |||||||||||
| Nonperforming loans to total loans, net | 2.36 | % | 3.17 | % | 2.78 | % | |||||||||||
Non-accrual loans decreased $4.5 million, from $23.1 million at December 31, 2021 to $18.6 million at December 31, 2022. The $18.6 million of non-accrual loans at December 31, 2022 was comprised of 28 borrowers. Two TDR loans totaling $9.5 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 established a specific reserve of $6.0 million as of December 31, 2022.
As of December 31, 2021, the $23.1 million of non-accrual loans was comprised of thirty borrowers, for which a specific reserve of $2.3 million had been established. Three TDR loans of total $9.7 million were included in the non-accrual loans as of December 31, 2021.
26
Loans held for sale
Loans held for sale are made up of SBA loans which totaled $5.2 million and $3.1 million at December 31, 2022 and 2021, respectively.
Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.
Under the SBA 7(a) program the loans generally carry an SBA guaranty for 75% of the loan. The Bank can sell the guaranteed portion in the secondary market and retain and hold for investment the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications. As a result of the COVID-19 pandemic, in 2021, the SBA increased the guaranteed percentage to 90% during one of the rounds of stimulus. As of October 1, 2021, the guaranteed percentage reverted back to 75% of the loan.
Patriot sells the guaranteed portion of SBA loans for liquidity purposes and to generate non-interest income. 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 December 31, 2022 consisted of $3.1 million SBA commercial and industrial loans and $2.1 million SBA commercial real estate, respectively. SBA loans held for sale at December 31, 2021, consisted of $2.6 million SBA commercial and industrial loans and $562,000 SBA commercial real estate, respectively. The Company sold $21.6 million SBA loans during the year ended December 31, 2022, compared to $14.3 million for the year ended December 31, 2021.
During 2022 and 2021, no loans held for investment were transferred to loans held for sale. In September 2020, one commercial and industrial loan of $5.0 million was reclassified from loans held for investment to loans held for sale. The loan was sold in October 2020 which resulted in proceeds of $5.0 million.
Premises and equipment
As of December 31, 2022 and 2021, Patriot recorded premises and equipment, net, of $30.6 million and $31.5 million, respectively. The decreases in premises and equipment were normal depreciation of the active premises and equipment during the year ended December 31, 2022. In 2021, the Bank sold a building in New Haven, Connecticut, and recognized proceeds from the sale of $1.5 million for the year ended December 31, 2021. The Bank did not sell any property and equipment in 2022.
Management continuously reviews its branch locations and corporate offices evaluating operating efficiencies and market share as well as effective customer service and delivery.
Other Real Estate Owned (“OREO”)
In 2021, Patriot sold the last OREO of $1.9 million and recognized a gain of $2,000. Therefore, no OREO balance was record on the balance sheet as of December 31, 2022 and 2021.
Goodwill
As of December 31, 2022 and 2021, the Company's goodwill was recorded unchanged at $1.1 million, which resulted from the acquisition of Prime Bank in May 2018. The Company performed its annual review of goodwill as of October 31, 2022 and determined that there was no impairment of goodwill.
Core deposit intangible (“CDI”)
Core deposit intangible (“CDI”) was recorded as part of the Prime Bank business combination in May 2018. The CDI is amortized over a 10-year period using the straight-line method. In 2020, an impairment charge of $206,000 was recorded for the year ended December 31, 2020, due to the decline in interest rates in 2020. The Company performed a review of the CDI as of October 31, 2022 and determined that there was no impairment of the CDI as of December 31, 2022. The decrease in CDI of $47,000 from $296,000 at December 31, 2021 to $249,000 at December 31, 2022, was solely due to the amortization of the CDI for the year ended December 31, 2022.
27
Deferred Taxes
As of December 31, 2022, Patriot had available approximately $15.8 million of Federal net operating loss carryforwards (“NOL”) that are offset by $15.5 million in Internal Revenue Code §382 limitations. After applying the limitation, at December 31, 2022, Patriot has post-change net operating loss carry-forwards of approximately $0.3 million which do not expire. For the years ended December 31, 2022 and 2021, the Bank did not record any uncertain tax position (“UTP”) related to the utilization of certain federal net operating losses.
Additionally, Patriot has approximately $52.8 million of NOLs available for Connecticut tax purposes at December 31, 2022, which may be used to offset up to 50% of taxable income in any year. The NOLs expire between 2030 and 2040.
As of December 31, 2022, Patriot had a $15.5 million deferred tax asset, comprised of multiple temporary differences, in addition to the previously aforementioned NOLs. The assessment of the potential realizability of the deferred tax assets is based on observation of the condition and future of the Bank, including:
•Cumulative pre-tax profit over the last four years;
•Forecasted taxable income for 2023 and future periods;
•Historical average pre-tax income over the last four years adjusted for a fraud loss and other non-recurring expenses relating to merger and acquisition activity, and a reduced cost of funds now reflected in its most recent results;
•Improvements in operations and cost management; and
•Net operating loss carry-forwards that do not begin to expire until 2030.
Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In 2022, management noted improvements in the results of operations, forecasted future period taxable income, the overall quality of the loan portfolio, continued efforts to reduce and control operating expenses, and net operating loss carryforwards that do not begin to expire until the year 2030. Based upon this evidence, management concluded there was no need for a valuation allowance as of December 31, 2022.
Patriot 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.
Derivatives
As of December 31, 2022, 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 non-interest income. No gain on the swaps was recognized for the year ended December 31, 2022, 2021 and 2020.
In April 2021, Patriot entered into a receive fixed/pay variable interest rate swap, intended to reduce the Company’s exposure to interest rate movements. This contractual agreement was designated as a cash flow hedge. Under the term of the swap contract, the Company hedged the cash flows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid float swap for a 7-year rolling period beginning April 29, 2021. In August 2021, the cash flow hedge interest rate swap contract was terminated.
The Company did not recognize any unrealized and realized gain or loss for the year ended December 31, 2022. During the year ended December 31, 2021, the Company recognized $149,000 of accumulated other comprehensive income that was reclassified into interest income. The interest swap interest income is included in interest and fees on loans on the consolidated statements of operations. A gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the year ended December 31, 2021, which is included in other income on the consolidated statements of operations.
Further discussion of the final derivatives is set forth in Note 11 and Note 21 to the consolidated financial statements.
28
Deposits
The following table is a summary of the Company’s deposits at the dates shown:
| (In thousands) | December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Non-interest bearing: | |||||||||||||||||
| Non-interest bearing | $ | 118,541 | $ | 140,384 | $ | 99,344 | |||||||||||
| Prepaid DDA | 151,095 | 86,329 | 59,332 | ||||||||||||||
| Total non-interest bearing | 269,636 | 226,713 | 158,676 | ||||||||||||||
| Interest bearing: | |||||||||||||||||
| Negotiable order of withdrawal accounts | 34,440 | 34,741 | 30,529 | ||||||||||||||
| Savings | 71,002 | 109,744 | 98,635 | ||||||||||||||
| Money market | 164,827 | 111,957 | 131,378 | ||||||||||||||
| Money market - prepaid deposits | 46,173 | 52,561 | 15,011 | ||||||||||||||
| Certificates of deposit, less than $250,000 | 165,793 | 142,246 | 160,968 | ||||||||||||||
| Certificates of deposit, $250,000 or greater | 59,877 | 53,584 | 49,172 | ||||||||||||||
| Brokered deposits | 48,698 | 17,016 | 41,287 | ||||||||||||||
| Total Interest bearing | 590,810 | 521,849 | 526,980 | ||||||||||||||
| Total Deposits | $ | 860,446 | $ | 748,562 | $ | 685,656 | |||||||||||
The Bank has substantially improved its deposit and funding mix over the past year, while reducing its aggregate cost of funds. As of December 31, 2022, total deposits increased $111.9 million, primarily due to growth in prepaid DDA and Money market deposits of $58.4 million and a $61.5 million increase in brokered deposits and certificates of deposits.
Borrowings
As of December 31, 2022 and 2021, total borrowings were $115.2 million and $120.7 million, respectively. Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, senior notes, junior subordinated debentures, and a note payable to the seller from whom the Fairfield branch building was purchased in 2015.
Shareholders’ Equity
Equity decreased $7.8 million from $67.3 million at December 31, 2021 to $59.6 million at December 31, 2022. The decrease was primarily due to $14.0 million unrealized loss in investment portfolio for the year ended December 31, 2022, which was partially offset by $6.2 million of net income for the year ended December 31, 2022.
29
The following table presents average balance sheets, interest income, interest expense and the corresponding yields earned, and rates paid for each of the years in the three-year period ended December 31, 2022.
| (In thousands) | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Yield | Average Balance | Interest | Yield | Average Balance | Interest | Yield | |||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest Earning Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans | $ | 831,634 | $ | 40,823 | 4.91 | % | $ | 705,353 | $ | 30,115 | 4.27 | % | $ | 791,626 | $ | 35,835 | 4.51 | % | |||||||||||||||||||||||||||||||||||
| Investments | 96,770 | 2,691 | 2.78 | % | 102,466 | 2,147 | 2.10 | % | 59,668 | 1,859 | 3.12 | % | |||||||||||||||||||||||||||||||||||||||||
| Cash equivalents and other | 32,229 | 498 | 1.55 | % | 57,753 | 89 | 0.15 | % | 49,071 | 209 | 0.42 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest earning assets | 960,633 | 44,012 | 4.58 | % | 865,572 | 32,351 | 3.74 | % | 900,365 | 37,903 | 4.20 | % | |||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 8,091 | 4,016 | 2,357 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (9,762) | (10,384) | (10,896) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| OREO | — | 893 | 2,259 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 66,440 | 61,182 | 62,086 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 1,025,402 | $ | 921,279 | $ | 956,171 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits | $ | 572,295 | $ | 5,300 | 0.93 | % | $ | 525,537 | $ | 2,243 | 0.43 | % | $ | 641,981 | $ | 9,154 | 1.42 | % | |||||||||||||||||||||||||||||||||||
| Borrowings | 105,333 | 3,475 | 3.30 | % | 94,511 | 2,986 | 3.16 | % | 92,469 | 2,671 | 2.88 | % | |||||||||||||||||||||||||||||||||||||||||
| Senior notes | 12,002 | 866 | 7.22 | % | 11,963 | 913 | 7.63 | % | 11,888 | 915 | 7.70 | % | |||||||||||||||||||||||||||||||||||||||||
| Subordinated debt | 17,947 | 1,066 | 5.94 | % | 17,910 | 933 | 5.21 | % | 17,872 | 991 | 5.53 | % | |||||||||||||||||||||||||||||||||||||||||
| Note Payable and other | 678 | 46 | 6.78 | % | 881 | 15 | 1.70 | % | 1,086 | 19 | 1.74 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 708,255 | 10,753 | 1.52 | % | 650,802 | 7,090 | 1.09 | % | 765,296 | 13,750 | 1.79 | % | |||||||||||||||||||||||||||||||||||||||||
| Demand deposits | 244,128 | 196,287 | 116,519 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 10,610 | 8,485 | 8,760 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 962,993 | 855,574 | 890,575 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' equity | 62,409 | 65,705 | 65,596 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 1,025,402 | $ | 921,279 | $ | 956,171 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 33,259 | $ | 25,261 | $ | 24,153 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest margin | 3.46 | % | 2.92 | % | 2.68 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest spread | 3.06 | % | 2.65 | % | 2.41 | % | |||||||||||||||||||||||||||||||||||||||||||||||
30
The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the years ended December 31, 2022 to 2021 and December 31, 2021 to 2020.
| Year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 compared to 2021 | 2021 compared to 2020 | ||||||||||||||||||||||||||||||||||
| (In thousands) | Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||
| Interest Earning Assets: | |||||||||||||||||||||||||||||||||||
| Loans | $ | 5,063 | $ | 5,645 | $ | 10,708 | $ | (3,816) | $ | (1,904) | $ | (5,720) | |||||||||||||||||||||||
| Investments | (115) | 659 | 544 | 1,252 | (964) | 288 | |||||||||||||||||||||||||||||
| Cash equivalents and other | (42) | 451 | 409 | 36 | (156) | (120) | |||||||||||||||||||||||||||||
| Total interest earning assets | 4,906 | 6,755 | 11,661 | (2,528) | (3,024) | (5,552) | |||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Deposit | 463 | 2,594 | 3,057 | (2,762) | (4,149) | (6,911) | |||||||||||||||||||||||||||||
| Borrowings | 342 | 147 | 489 | 58 | 257 | 315 | |||||||||||||||||||||||||||||
| Senior notes | 3 | (50) | (47) | (2) | — | (2) | |||||||||||||||||||||||||||||
| Subordinated debt | 2 | 131 | 133 | — | (58) | (58) | |||||||||||||||||||||||||||||
| Note payable and other | 31 | — | 31 | (4) | — | (4) | |||||||||||||||||||||||||||||
| Total interest bearing liabilities | 841 | 2,822 | 3,663 | (2,710) | (3,950) | (6,660) | |||||||||||||||||||||||||||||
| Net interest income | $ | 4,065 | $ | 3,933 | $ | 7,998 | $ | 182 | $ | 926 | $ | 1,108 | |||||||||||||||||||||||
31
RESULTS OF OPERATIONS
A discussion regarding the financial condition and results of operations for fiscal 2022 compared to fiscal 2021 is presented below. Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 24, 2022.
Comparison of Results of Operations for the years 2022 and 2021
For the year ended December 31, 2022, the Company recorded net income of $6.2 million ($1.56 basic and diluted earnings per share) compared to net income of $5.1 million ($1.29 basic and diluted loss per share) for the year ended December 31, 2021.
Pre-tax income was $7.8 million for the year ended December 31, 2022, compared to pre-tax income of $5.0 million for the year ended December 31, 2021. Significant variances are summarized below and discussed in detail subsequently:
•Interest and dividend income increased $11.7 million;
•Interest expense increased $3.7 million;
•Net interest income increased $8.0 million;
•Provision for loan losses increased $2.4 million;
•Non-interest income decreased $818,000; and
•Non-interest expense increased $2.1 million.
Net interest income
Net interest income is the difference between interest income on interest earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.
For the year ended December 31, 2022, interest income increased to $44.0 million, as compared to $32.4 million for the year ended December 31, 2021, which was primarily attributable to an increase of $126.3 million in average loan balances, along with an increase in rates earned on loans reflecting the increase in interest rates during 2022.
For the year ended December 31, 2022, total interest expense increased to $10.8 million, as compared to $7.1 million for the year ended December 31, 2021, primarily due to an increase in average deposits balance of $46.8 million. The increase in deposit interest expense reflects higher deposit balances and higher market interest rates.
Net interest income for the years ended December 31, 2022 and 2021 was $33.3 million and $25.3 million, respectively. The Bank’s net interest margin showed improvement, and increased to 3.5% for the year ended December 31, 2022, compared with 2.9% for the year ended December 31, 2021. The higher net interest margin was due to effective monitoring of the Bank’s interest sensitivity position during the rising interest rate environment, higher loan balances and the increase in deposit balances resulting from the addition of $58.4 million of low-cost prepaid deposits in 2022.
Provision (Credit) for loan losses
For the year ended December 31, 2022, the Bank recorded a provision for loan losses of $1.9 million reflecting the increased loan balance and higher charge-offs associated with a purchased consumer loan portfolio. For the year ended December 31, 2021, a credit for loan losses of $500,000 was recorded as a result of improvements in the economy and in classified loan balances.
Non-interest income
For the year ended December 31, 2022, non-interest income decreased to $3.6 million, as compared to $4.4 million in 2021. The decrease was primarily attributable to lower net realized gains on sale of SBA loans as premiums available in the SBA secondary market declined during the year.
32
Non-interest expense
For the year ended December 31, 2022, non-interest expense increased to $27.2 million, as compared to $25.2 million for 2021. The increase was primarily attributable to an Employee Retention Credits of $2.9 million recognized in 2021, which was partially offset by a non-recurring project expenses of $1.9 million in connection with the proposed merger transaction with American Challenger in 2021.
Termination of Pending acquisition
On November 14, 2021, the Company and American Challenger entered into a merger agreement, which was subsequently amended on January 28, 2022 and February 28, 2022. On July 18, 2022, the merger agreement was terminated by the parties due to mutual determination that not all closing conditions of the merger agreement could be satisfied. In connection with the proposed merger, the Company has previously recognized expenses of $1.9 million for the full year ended December 31, 2021 and $112,000 for the year ended December 31, 2022.
Other financial measures and ratios:
| As of and for the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Return on average assets | 0.60 | % | 0.55 | % | (0.40) | % | |||||||||||
| Return on average equity | 9.87 | % | 7.75 | % | (5.82) | % | |||||||||||
| Average equity to average assets | 6.09 | % | 7.13 | % | 6.86 | % | |||||||||||
We derived the selected balance sheet measures as of December 31, 2022, 2021 and 2020 and the selected statement of income measures for the years ended December 31, 2022, 2021 and 2020 from our audited consolidated financial statements included elsewhere in this annual report. Average balances have been computed using daily averages.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2022, the Company’s balance sheet liquidity was $97.4 million, which was 9.3% of total assets of $1.0 billion. At December 31, 2021, the balance sheet liquidity was $108.4 million, which was 11.4% of total assets of $948.5 million. Liquidity including readily available off-balance sheet funding sources was 18.0% at December 31, 2022 compared to 21.7% at December 31, 2021.
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), unpledged available-for-sale securities, and loans held for sale. In addition, off-balance sheet funding sources include collateral based borrowing available from the FHLB, correspondent bank borrowing lines, and advised borrowing lines through an interbank borrowing network.
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 for next 12 months and beyond.
The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). At December 31, 2022, the outstanding advances from the FHLB-B aggregated $85.0 million. The additional borrowing capacity available from FHLB-B was $69.2 million, which is comprised of $67.2 million of advances and a $2.0 million overnight line of credit. Additionally, the Bank retains a collateralized borrowing line with the Federal Reserve Bank which totaled $20.4 million at December 31, 2022 and correspondent bank borrowing lines totaling $24.5 million at December 31, 2022.
33
As of December 31, 2022, the maturities of Patriot’s contractual obligations are as follows:
| (In thousands) | Contractual Obligations Due | |||||||||||||||||||||||||||||||
| Contractual Obligation Category | Less than One Year | One to Three Years | Three to Five Years | Over Five Years | Total | |||||||||||||||||||||||||||
| Certificates of deposit | $ | 169,088 | $ | 43,876 | $ | 12,706 | $ | — | $ | 225,670 | ||||||||||||||||||||||
| Brokered deposits | 43,589 | 5,109 | — | — | 48,698 | |||||||||||||||||||||||||||
| Federal Home Loan Bank borrowings | 55,000 | 30,000 | — | — | 85,000 | |||||||||||||||||||||||||||
| Senior notes | — | — | 12,000 | — | 12,000 | |||||||||||||||||||||||||||
| Subordinated debt | — | — | — | 10,000 | 10,000 | |||||||||||||||||||||||||||
| Junior subordinated debt | — | — | — | 8,248 | 8,248 | |||||||||||||||||||||||||||
| Note payable | 210 | 375 | — | — | 585 | |||||||||||||||||||||||||||
| Operating lease obligations | 583 | 775 | 551 | 830 | 2,739 | |||||||||||||||||||||||||||
| Total contractual obligations | $ | 268,470 | $ | 80,135 | $ | 25,257 | $ | 19,078 | $ | 392,940 | ||||||||||||||||||||||
Management manages its capital resources by seeking to maintain a capital structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses while effectively leveraging capital to enhance profitability and return to shareholders. Due to prior year losses, dividends have not been paid to shareholders over the most recent three-year period but may resume in future periods.
The primary source of liquidity at the Company as a stand-alone parent company is return of capital from the Bank. These capital returns are subject to OCC approval and are needed periodically to provide funds needed to service debt payments at the Company. Return of Capital payments from the Bank to the Company totaled $900,000 for the year ended December 31, 2022, $500,000 for the year ended December 31, 2021, and $2.0 million for the year ended December 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank’s off-balance sheet commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon or are contingent upon the customer adhering to the terms of the agreements, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 2022 and 2021, the Bank’s off-balance sheet commitments were $154.3 million and $127.0 million, respectively.
REGULATORY CAPITAL REQUIREMENTS
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk-based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. In September 2021, the Bank adopted the CBLR framework. The Bank’s Tier 1 leverage ratio as of December 31, 2022 and 2021 was 9.3% and 9.9%, respectively, which is above the well-capitalized required level of 9.0%.
Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.
34
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. The Bank’s market risk is primarily limited to interest rate risk.
The Bank’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price the Bank’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loans for the portfolio and purchase short-term investments to offset the increasing short-term re-pricing of the liability side of the balance sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loans and investments with longer term rate adjustment frequencies can be matched against longer term deposits and borrowings to lock in a desirable spread.
The exposure to interest rate risk is monitored by the Management Asset and Liability Committee consisting of senior management personnel. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactions during the period and determines compliance with the Bank’s Investment, ALCO and Liquidity policies.
Management analyzes the Bank’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.
Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.
Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
35
The tables below set forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in the Company’s portfolio at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous, and these analyses may therefore overstate the impact of short-term repricing. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity, since the interest rates on certain balance sheet items have approached their minimums. Therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| Net Portfolio Value - Performance Summary | ||||||||||||||||||||||||||||||||||||||
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Projected Interest Rate Scenario | Estimated Value | Change from Base ($) | Change from Base (%) | Estimated Value | Change from Base ($) | Change from Base (%) | ||||||||||||||||||||||||||||||||
| +200 | $ | 146,888 | $ | (15,357) | (9.47) | % | $ | 116,941 | $ | (15,137) | (11.46) | % | ||||||||||||||||||||||||||
| +100 | 157,368 | (4,877) | (3.01) | % | 126,152 | (5,926) | (4.49) | % | ||||||||||||||||||||||||||||||
| BASE | 162,245 | — | — | 132,078 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 163,472 | 1,227 | 0.76 | % | 135,803 | 3,725 | 2.82 | % | ||||||||||||||||||||||||||||||
| -200 | 155,386 | (6,859) | (4.23) | % | 134,277 | 2,199 | 1.66 | % | ||||||||||||||||||||||||||||||
| Net Interest Income - Performance Summary | ||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Projected Interest Rate Scenario | Estimated Value | Change from Base ($) | Change from Base (%) | Estimated Value | Change from Base ($) | Change from Base (%) | ||||||||||||||||||||||||||||||||
| +200 | $ | 46,131 | $ | (1,177) | (2.49) | % | $ | 31,521 | $ | 45 | 0.14 | % | ||||||||||||||||||||||||||
| +100 | 46,938 | (370) | (0.78) | % | 31,575 | 99 | 0.31 | % | ||||||||||||||||||||||||||||||
| BASE | 47,308 | — | — | 31,476 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 47,657 | 349 | 0.74 | % | 31,587 | 111 | 0.35 | % | ||||||||||||||||||||||||||||||
| -200 | 46,747 | (561) | (1.19) | % | 31,548 | 72 | 0.23 | % | ||||||||||||||||||||||||||||||
Impact of Inflation and Changing Prices
Patriot’s financial statements have been prepared in terms of historical dollars, without considering changes in 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 the Bank’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in 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, or disinflation, could significantly affect Patriot’s earnings in future periods.
36
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements required by this item are presented in the order shown below:
| - | |||||
| - | |||||
| - | |||||
| - | |||||
| - | |||||
| - | |||||
| - | |||||
37
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Patriot National Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Patriot National Bancorp, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Qualitative Adjustments to the Allowance for Loan and Lease Losses
As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for loan and lease losses (allowance) totaled $10.3 million as of December 31, 2022. The recorded allowance was established based on an allowance of $4.3 million related to loans collectively evaluated for impairment and on an allowance of $6.0 million relating to loans individually evaluated for impairment as of December 31, 2022.
38
For loans that are collectively evaluated for impairment, the Company segregates loans into pools based on homogeneous risk characteristics. The non-specific allowance is established through historical loss experience of the loan pools over their respective loss emergence periods adjusted for qualitative factors. The qualitative factors are additional reserves applied to the segmented loan pools to reflect the inherent risk of loss that exists in the portfolio as of the balance sheet date. The Company has determined qualitative factors to include: 1) changes in lending policies and procedures including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of the Company’s loan review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in its current loan portfolio. Evaluation of the allowance, in particular the qualitative factor adjustments, requires considerable judgment in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.
We identified the qualitative factor adjustments applied to the non-specific allowance as a critical audit matter due to the high degree of auditor judgment in order to evaluate the subjective assumptions made by management within the calculation.
Our audit procedures related to the qualitative factor adjustments applied to the non-specific allowance included the following:
-We tested the completeness and accuracy of data used by management in determining the qualitative factor adjustments by agreeing them to their appropriate internal or external sources.
-We evaluated the reasonableness of the directional consistency of changes in the qualitative factor adjustments as well as the overall magnitude of management’s qualitative factor adjustments applied to each pool based on the data used by management.
Goodwill Impairment Assessment
As described in Notes 1 and 8 of the consolidated financial statements, the Company’s goodwill balance totaled $1.1 million as of December 31, 2022. The Company performs a goodwill impairment test annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used.
We identified the impairment assessment of goodwill as a critical audit matter due to the high degree of auditor judgment and subjectivity in order to evaluate the fair value of the reporting unit due to the judgments made by management in the estimation of the Company’s reporting unit fair value, including those related to future cash flows, the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate. In addition, the increased audit effort involved the use of internal professionals with specialized skill and knowledge in the field of business valuation.
39
Our audit procedures related to goodwill impairment assessment included the following for the impairment test performed for the year:
-We evaluated management’s process for developing the fair value estimates of the reporting unit, including an assessment of the appropriateness of the valuation techniques used.
-We evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the Company, the Company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit.
-We used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology. This included:
◦Testing the fair value of the reporting unit through testing of the completeness and accuracy of the data used by management to develop the estimate.
◦Evaluating the reasonableness of the cash flow projection calculations used to develop the estimate.
◦Evaluating the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate by assessing the reasonableness, comparability and appropriateness of the market-based information used by agreeing the components to independent source data.
/s/ RSM US LLP
We have served as the Company’s auditor since 2017.
Hartford, Connecticut
March 29, 2023
40
| December 31, | |||||||||||
| (In thousands, except share data) | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Cash and due from banks: | |||||||||||
| Noninterest bearing deposits and cash | $ | 5,182 | $ | 3,264 | |||||||
| Interest bearing deposits | 33,311 | 43,781 | |||||||||
| Total cash and cash equivalents | 38,493 | 47,045 | |||||||||
| Investment securities: | |||||||||||
| Available-for-sale securities, at fair value | 84,520 | 94,341 | |||||||||
| Other investments, at cost | 4,450 | 4,450 | |||||||||
| Total investment securities | 88,970 | 98,791 | |||||||||
| Federal Reserve Bank stock, at cost | 2,627 | 2,843 | |||||||||
| Federal Home Loan Bank stock, at cost | 3,874 | 4,184 | |||||||||
| Loans receivable (net of allowance for loan and lease losses: 2022: $10,310 and 2021: $9,905) | 838,006 | 729,583 | |||||||||
| Loans held for sale | 5,211 | 3,129 | |||||||||
| Accrued interest and dividends receivable | 7,267 | 5,822 | |||||||||
| Premises and equipment, net | 30,641 | 31,500 | |||||||||
| Deferred tax asset | 15,527 | 12,146 | |||||||||
| Goodwill | 1,107 | 1,107 | |||||||||
| Core deposit intangible, net | 249 | 296 | |||||||||
| Other assets | 11,387 | 12,035 | |||||||||
| Total assets | $ | 1,043,359 | $ | 948,481 | |||||||
| Liabilities | |||||||||||
| Deposits: | |||||||||||
| Noninterest bearing deposits | $ | 269,636 | $ | 226,713 | |||||||
| Interest bearing deposits | 590,810 | 521,849 | |||||||||
| Total deposits | 860,446 | 748,562 | |||||||||
| Federal Home Loan Bank and correspondent bank borrowings | 85,000 | 90,000 | |||||||||
| Senior notes, net | 11,640 | 12,000 | |||||||||
| Subordinated debt, net | 9,840 | 9,811 | |||||||||
| Junior subordinated debt owed to unconsolidated trust, net | 8,128 | 8,119 | |||||||||
| Note payable | 585 | 791 | |||||||||
| Advances from borrowers for taxes and insurance | 886 | 1,101 | |||||||||
| Accrued expenses and other liabilities | 7,251 | 10,753 | |||||||||
| Total liabilities | 983,776 | 881,137 | |||||||||
| Commitments and Contingencies | |||||||||||
| Shareholders' equity | |||||||||||
| Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding | — | — | |||||||||
| Common stock, $.01 par value, 100,000,000 shares authorized; As of December 31, 2022: 4,038,927 shares issued; 3,965,186 shares outstanding; As of December 31, 2021: 4,030,233 shares issued; 3,956,492 shares outstanding; | 106,565 | 106,479 | |||||||||
| Accumulated deficit | (31,337) | (37,498) | |||||||||
| Accumulated other comprehensive loss | (15,645) | (1,637) | |||||||||
| Total shareholders' equity | 59,583 | 67,344 | |||||||||
| Total liabilities and shareholders' equity | $ | 1,043,359 | $ | 948,481 | |||||||
See Accompanying Notes to Consolidated Financial Statements.
41
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | |||||||||||||||||
| (In thousands, except per share amounts) | 2022 | 2021 | 2020 | ||||||||||||||
| Interest and Dividend Income | |||||||||||||||||
| Interest and fees on loans | $ | 40,823 | $ | 30,115 | $ | 35,835 | |||||||||||
| Interest on investment securities | 2,307 | 1,924 | 1,460 | ||||||||||||||
| Dividends on investment securities | 384 | 223 | 399 | ||||||||||||||
| Other interest income | 498 | 89 | 209 | ||||||||||||||
| Total interest and dividend income | 44,012 | 32,351 | 37,903 | ||||||||||||||
| Interest Expense | |||||||||||||||||
| Interest on deposits | 5,300 | 2,243 | 9,154 | ||||||||||||||
| Interest on Federal Home Loan Bank borrowings | 3,475 | 2,986 | 2,671 | ||||||||||||||
| Interest on senior debt | 866 | 913 | 915 | ||||||||||||||
| Interest on subordinated debt | 1,066 | 933 | 991 | ||||||||||||||
| Interest on note payable and other | 46 | 15 | 19 | ||||||||||||||
| Total interest expense | 10,753 | 7,090 | 13,750 | ||||||||||||||
| Net interest income | 33,259 | 25,261 | 24,153 | ||||||||||||||
| Provision (credit) for loan losses | 1,885 | (500) | 2,170 | ||||||||||||||
| Net interest income after provision (credit) for loan losses | 31,374 | 25,761 | 21,983 | ||||||||||||||
| Non-interest Income | |||||||||||||||||
| Loan application, inspection and processing fees | 386 | 257 | 223 | ||||||||||||||
| Deposit fees and service charges | 256 | 251 | 321 | ||||||||||||||
| Gains on sales of loans | 1,461 | 1,886 | 566 | ||||||||||||||
| Rental income | 566 | 543 | 523 | ||||||||||||||
| Gain on sale of investment securities | — | 76 | — | ||||||||||||||
| Other income | 936 | 1,410 | 346 | ||||||||||||||
| Total non-interest income | 3,605 | 4,423 | 1,979 | ||||||||||||||
| Non-interest Expense | |||||||||||||||||
| Salaries and benefits | 15,506 | 11,089 | 14,323 | ||||||||||||||
| Occupancy and equipment expense | 3,428 | 3,430 | 3,513 | ||||||||||||||
| Data processing expense | 1,185 | 1,451 | 1,571 | ||||||||||||||
| Professional and other outside services | 2,664 | 3,155 | 2,828 | ||||||||||||||
| Project expenses, net | 133 | 1,882 | 818 | ||||||||||||||
| Advertising and promotional expense | 232 | 235 | 454 | ||||||||||||||
| Loan administration and processing expense | 234 | 134 | 174 | ||||||||||||||
| Regulatory assessments | 817 | 907 | 1,477 | ||||||||||||||
| Insurance expense, net | 271 | 280 | 285 | ||||||||||||||
| Communications, stationary and supplies | 616 | 604 | 476 | ||||||||||||||
| Other operating expense | 2,136 | 2,004 | 2,199 | ||||||||||||||
| Total non-interest expense | 27,222 | 25,171 | 28,118 | ||||||||||||||
| Income (loss) before income taxes | 7,757 | 5,013 | (4,156) | ||||||||||||||
| Provision (benefit) for income taxes | 1,596 | (81) | (337) | ||||||||||||||
| Net income (loss) | $ | 6,161 | $ | 5,094 | $ | (3,819) | |||||||||||
| Basic earnings (loss) per share | $ | 1.56 | $ | 1.29 | $ | (0.97) | |||||||||||
| Diluted earnings (loss) per share | $ | 1.55 | $ | 1.29 | $ | (0.97) | |||||||||||
See Accompanying Notes to Consolidated Financial Statements.
42
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) | $ | 6,161 | $ | 5,094 | $ | (3,819) | |||||||||||
| Other comprehensive (loss) income | |||||||||||||||||
| Unrealized holding loss on securities | (18,879) | (1,432) | (155) | ||||||||||||||
| Income tax effect | 4,871 | 369 | 40 | ||||||||||||||
| Reclassification for realized gain on sale of investment securities | — | (76) | — | ||||||||||||||
| Income tax effect | — | 20 | — | ||||||||||||||
| (14,008) | (1,119) | (115) | |||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Unrealized holding gain on cash flow hedge | — | 149 | — | ||||||||||||||
| Income tax effect | — | (39) | — | ||||||||||||||
| Reclassification adjustment for net gain included in net income | — | (149) | — | ||||||||||||||
| Income tax effect | — | 39 | — | ||||||||||||||
| — | — | — | |||||||||||||||
| Total other comprehensive loss | (14,008) | (1,119) | (115) | ||||||||||||||
| Comprehensive (loss) income | $ | (7,847) | $ | 3,975 | $ | (3,934) | |||||||||||
See Accompanying Notes to Consolidated Financial Statements.
43
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| (In thousands, except shares) | Number of Shares | Common Stock | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||
| Balance at January 1, 2020 | 3,930,669 | $ | 106,170 | $ | (38,773) | $ | (403) | $ | 66,994 | ||||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||||||||
| Net loss | — | — | (3,819) | — | (3,819) | ||||||||||||||||||||||||
| Unrealized holding loss on available-for-sale securities, net of tax | — | — | — | (115) | (115) | ||||||||||||||||||||||||
| Total comprehensive loss | — | — | (3,819) | (115) | (3,934) | ||||||||||||||||||||||||
| Share-based compensation expense | — | 159 | — | — | 159 | ||||||||||||||||||||||||
| Vesting of restricted stock | 12,903 | — | — | — | — | ||||||||||||||||||||||||
| Balance at December 31, 2020 | 3,943,572 | 106,329 | (42,592) | (518) | 63,219 | ||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||
| Net income | — | — | 5,094 | — | 5,094 | ||||||||||||||||||||||||
| Unrealized holding loss on available-for-sale securities, net of tax | — | — | — | (1,119) | (1,119) | ||||||||||||||||||||||||
| Total comprehensive income (loss) | — | — | 5,094 | (1,119) | 3,975 | ||||||||||||||||||||||||
| Share-based compensation expense | — | 150 | — | — | 150 | ||||||||||||||||||||||||
| Vesting of restricted stock | 12,920 | — | — | — | — | ||||||||||||||||||||||||
| Balance at December 31, 2021 | 3,956,492 | 106,479 | (37,498) | (1,637) | 67,344 | ||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||
| Net income | — | — | 6,161 | — | 6,161 | ||||||||||||||||||||||||
| Unrealized holding loss on available-for-sale securities, net of tax | — | — | — | (14,008) | (14,008) | ||||||||||||||||||||||||
| Total comprehensive income (loss) | — | — | 6,161 | (14,008) | (7,847) | ||||||||||||||||||||||||
| Share-based compensation expense | — | 86 | — | — | 86 | ||||||||||||||||||||||||
| Vesting of restricted stock | 8,694 | — | — | — | — | ||||||||||||||||||||||||
| Balance at December 31, 2022 | 3,965,186 | $ | 106,565 | $ | (31,337) | $ | (15,645) | $ | 59,583 | ||||||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
44
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net income (loss) | $ | 6,161 | $ | 5,094 | $ | (3,819) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||
| Amortization and accretion of investment premiums and discounts, net | (51) | 267 | 269 | ||||||||||||||
| Amortization and accretion of purchase loan premiums and discounts, net | 2,722 | 2,087 | 816 | ||||||||||||||
| Amortization of debt issuance costs | 38 | 111 | 112 | ||||||||||||||
| Amortization of core deposit intangible | 47 | 47 | 74 | ||||||||||||||
| Amortization of servicing assets of sold SBA loans | 98 | 67 | 22 | ||||||||||||||
| Impairment of intangible assets | — | — | 206 | ||||||||||||||
| Purchase price adjustment expense related to acquisition activity | — | — | 556 | ||||||||||||||
| Provision (credit) for loan losses | 1,885 | (500) | 2,170 | ||||||||||||||
| Depreciation and amortization | 1,325 | 1,521 | 1,505 | ||||||||||||||
| Gain on sales of available-for-sale securities | — | (76) | — | ||||||||||||||
| Gain on sale of premises and equipment | — | (550) | — | ||||||||||||||
| Share-based compensation | 86 | 150 | 159 | ||||||||||||||
| Decrease (increase) in deferred income taxes, net | 1,490 | (261) | (323) | ||||||||||||||
| Originations of SBA loans held for sale | (23,972) | (16,574) | (2,049) | ||||||||||||||
| Proceeds from sale of SBA loans held for sale | 23,077 | 16,267 | 12,160 | ||||||||||||||
| Gains on sale of SBA loans held for sale, net | (1,461) | (1,886) | (566) | ||||||||||||||
| Net (gain) loss on sale and write-down of other real estate owned | — | (2) | 69 | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| (Increase) decrease in accrued interest and dividends receivable | (1,445) | 798 | (3,017) | ||||||||||||||
| Increase in other assets | (879) | (2,124) | (331) | ||||||||||||||
| (Decrease) increase in accrued expenses and other liabilities | (2,085) | 3,160 | (1,732) | ||||||||||||||
| Net cash provided by operating activities | 7,036 | 7,596 | 6,281 | ||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Proceeds from maturity or sales on available-for-sale securities | 3,600 | 77,690 | — | ||||||||||||||
| Principal repayments on available-for-sale securities | 6,723 | 11,667 | 9,879 | ||||||||||||||
| Purchases of available-for-sale securities | (19,330) | (136,135) | (11,248) | ||||||||||||||
| Redemptions (purchases) of Federal Reserve Bank stock | 216 | (60) | 114 | ||||||||||||||
| Redemptions (purchases) of Federal Home Loan Bank stock | 310 | 319 | (26) | ||||||||||||||
| Origination of loans receivable | (211,383) | (220,349) | (36,860) | ||||||||||||||
| Purchases of loans receivable | (141,412) | (89,338) | (32,785) | ||||||||||||||
| Payments received on loans receivable | 239,639 | 298,059 | 153,495 | ||||||||||||||
| Purchases of premises and equipment | (414) | (430) | (70) | ||||||||||||||
| Proceeds from sale of premises and equipment | — | 1,464 | — | ||||||||||||||
| Proceeds from sale of other real estate owned | — | 1,908 | 425 | ||||||||||||||
| Net cash (used in) provided by investing activities | (122,051) | (55,205) | 82,924 | ||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Increase (decrease) in deposits, net | 111,884 | 62,906 | (133,877) | ||||||||||||||
| Increase in purchased deposits | — | — | 49,998 | ||||||||||||||
| Repayments of FHLB borrowings | (5,000) | — | (10,000) | ||||||||||||||
| Repayments of senior notes | (12,000) | — | — | ||||||||||||||
| Proceeds from issuance of senior notes | 12,000 | — | — | ||||||||||||||
| Principal repayments of note payable | (206) | (203) | (199) | ||||||||||||||
| (Increase) decrease in advances from borrowers for taxes and insurance | (215) | (2,685) | 105 | ||||||||||||||
| Net cash provided by (used in) financing activities | 106,463 | 60,018 | (93,973) | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (8,552) | 12,409 | (4,768) | ||||||||||||||
| Cash and cash equivalents at beginning of period | 47,045 | 34,636 | 39,404 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 38,493 | $ | 47,045 | $ | 34,636 | |||||||||||
45
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||||||||
| Cash paid for interest | $ | 10,472 | $ | 7,210 | $ | 15,037 | |||||||||||
| Cash paid (refund) for income taxes, net | $ | 102 | $ | 140 | $ | (659) | |||||||||||
| Non-cash transactions: | |||||||||||||||||
| Transfers of SBA loans held for sale to loans receivable | $ | 274 | $ | 281 | $ | 9,542 | |||||||||||
| Transfers of loans receivable to loans held for sale | $ | — | $ | — | $ | 5,022 | |||||||||||
| Capitalized servicing assets | $ | 400 | $ | 335 | $ | 137 | |||||||||||
| Operating lease right-of-use assets | $ | 80 | $ | 373 | $ | 40 | |||||||||||
| Accrued rent payable - adoption ASC 842 | $ | — | $ | — | $ | 22 | |||||||||||
| Interest rate swaps | $ | (535) | $ | 449 | $ | (493) | |||||||||||
| Deferred cost for capital raise | $ | (825) | $ | 825 | $ | — | |||||||||||
| Deferred debt issuance costs | $ | 360 | $ | — | $ | — | |||||||||||
| Increase in premises and equipment | $ | — | $ | 10 | $ | 290 | |||||||||||
| Reclassification of premises and equipment to implementation cost | $ | — | $ | 52 | $ | — | |||||||||||
| Increase in accrued expense and other liabilities | $ | — | $ | (62) | $ | (290) | |||||||||||
| Business Combination Non-Cash Disclosures: | |||||||||||||||||
| Decrease in escrow deposit related to acquisition activity | $ | — | $ | — | $ | (657) | |||||||||||
| Decrease in liabilities related to acquisition activity | $ | — | $ | — | $ | 15 | |||||||||||
| Decrease in contingent consideration related to acquisition activity | $ | — | $ | — | $ | 86 | |||||||||||
See Accompanying Notes to Consolidated Financial Statements.
46
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Patriot National Bancorp, Inc. (the "Company" or "PNBK"), a Connecticut corporation, is a bank holding company that was organized in 1999. Patriot Bank, N.A. (the "Bank") (collectively, “Patriot”) is a wholly owned subsidiary of the Company. The Bank is a nationally chartered commercial bank whose deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank provides a full range of banking services to commercial and consumer customers through its main office in Stamford, Connecticut, eight branch offices in Connecticut and one branch office in New York. The Bank's customers are concentrated in Fairfield and New Haven Counties in Connecticut and Westchester County in New York.
On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company, and on March 26, 2003, the first series of trust preferred securities were issued. In accordance with accounting principles generally accepted in the United States of America (“US GAAP”), the Trust is not included in the Company’s consolidated financial statements.
On May 10, 2018, the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”). The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. The results of Prime Bank’s operations are included in the Company’s consolidated financial statements from the date of acquisition.
The preparation of consolidated financial statements in accordance with US 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 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 Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of Patriot’s consolidated financial statements.
Certain prior period amounts have been reclassified to conform to current year presentation.
Summary of Significant Accounting Policies:
Principles of consolidation and basis of financial statement presentation
The consolidated financial statements include the accounts of Patriot, and the Bank's wholly owned subsidiaries, PinPat Acquisition Corporation and have been prepared in conformity with US GAAP. All significant intercompany balances and transactions have been eliminated.
Cash and cash equivalents
Patriot considers all short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and due from banks, federal funds sold, and short-term investments are recognized as cash equivalents in the consolidated balance sheets.
Patriot maintains amounts due from banks which, at times, may exceed federally insured limits. Patriot has not experienced any losses from such concentrations.
Federal Reserve Bank and Federal Home Loan Bank stock
The Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLB-B”), as collateral, in an amount equal to a percentage of its outstanding mortgage loans and loans secured by residential properties, including mortgage-backed securities. Additionally, the Bank is required to maintain an investment in the capital stock of the Federal Reserve Bank (“FRB”), as collateral, in an amount equal to one percent of six percent of the Bank’s total equity capital as per its latest Report of Condition (“Call Report”) filed with the Federal Deposit Insurance Corporation. The FRB
47
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
requires that one-half of the investment in its stock be funded currently, with the remaining amount subject to call when deemed necessary by the FRB Board of Governors.
Shares in the FHLB-B and FRB are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost, and evaluated for impairment in accordance with relevant accounting guidance. In accordance with this guidance, the stocks’ values are determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as: (a) the significance of any decline in net assets of the FHLB-B or FRB, as applicable, compared to its capital stock amount, and the length of time this situation has persisted; (b) commitments by either the FHLB-B or FRB to make payments required by law or regulation and the level of such payments in relation to their operating performance; (c) the potential impact of any legislative or regulatory changes; and (d) the regulatory capital ratios and liquidity position of the FHLB-B or FRB, as applicable.
Included in the Bank’s investment portfolio are shares in the FHLB-B and FRB of $6.5 million and $7.0 million as of December 31, 2022 and 2021, respectively. Management has evaluated its investment in the capital stock of the FHLB-B and FRB for impairment, based on the aforementioned criteria, and has determined that as of December 31, 2022 and 2021 there is no impairment of its investment in either the FHLB-B or FRB.
Investment Securities
Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.
Debt securities, if any, that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost. “Trading” securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method of accounting, in order to achieve a constant effective yield over the contractual term of the securities.
Patriot conducts a quarterly review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is an other-than-temporary impairment (“OTTI”). Our evaluation of OTTI considers the duration and severity of the impairment, our intent to hold the securities, whether or not we will be required to sell the securities, and our assessments of the reason for the decline in value and the likelihood of a near-term recovery. If such decline is deemed to be an OTTI, the security is written down to its fair value, which becomes its new cost basis, and the resulting loss is charged to earnings as a component of non-interest income. Other than the credit loss portion, OTTI on a debt security that we have the intent and ability to hold until recovery of its amortized cost is recognized in other comprehensive income/loss, net of applicable taxes. The credit loss portion of OTTI (i.e., any losses resulting from an inability to collect on the instrument) is charged against earnings.
Securities transactions are recorded on the trade date. Realized gains and losses on the sale of securities are determined using the specific identification method, recorded on the trade date, and reported in non-interest income for the period.
At December 31, 2022 and 2021, the Bank’s investment portfolio includes a $4.5 million investment in the Solomon Hess SBA Loan Fund (“SBA Fund”). The Bank uses this investment to satisfy its Community Reinvestment Act lending requirements. At December 31, 2022 and 2021, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value.
Loans receivable
Loans that Patriot has the intent and ability to hold until maturity or for the foreseeable future generally are reported at their outstanding unpaid principal balances adjusted for deferred costs, an allowance for loan and lease losses, if any, and any unamortized discount, premium and deferred fees.
Interest income is accrued based on unpaid principal balances. Loan application fees are reported as non-interest income, while other certain direct origination costs, or for purchased loans, any discounts or premiums are deferred and amortized to interest income as a level yield adjustment over the respective term of the loan.
48
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Loans are placed on non-accrual status or charged off when collection of principal or interest is considered doubtful. The accrual of interest on loans is discontinued no later than when the loan is 90 days past due for payment, unless the loan is well secured and in process of collection. Consumer installment loans are typically charged off no later than when they become 180 days past due. Past due status is based on the contractual terms of the loan.
Accrued uncollected interest income on loans that are placed on non-accrual status or have been charged off is reversed against interest income. Interest income on such non-performing loans is accounted for on the cash-basis of accounting until qualifying for return to accrual status. Any cash received on non-accrual or charged off loans is first applied against unpaid and past-due principal and then to interest, unless the loan is in a cure period. If in a cure period, and management believes there will be a loss, cash receipts are applied to principal until the balance at risk and collateral value, if any, is equal to the amount management believes will ultimately be collected. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status.
Patriot’s real estate loans are collateralized by real estate located principally in Fairfield and New Haven Counties in Connecticut, and Westchester County and New York City in New York. Accordingly, the ultimate collectability of a substantial portion of Patriot’s loan portfolio is susceptible to regional real estate market conditions.
A loan is considered impaired when, based on current information and events, it is probable that Patriot will be unable to collect the scheduled payments of principal or interest when due, according to the loan’s contractual terms. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration the circumstances contributing to the borrower’s loan performance issues, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of the shortfall in relation to the principal and interest owed. For commercial and real estate loans, impairment is measured for each individual loan based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or, for collateral dependent loans, the fair value of the collateral less applicable selling costs.
Impaired loans also include loans modified in troubled debt restructurings (“TDR”), where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment or maturity date extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. TDRs are generally placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated compliance with the restructured terms of the loan agreement and have performed for a minimum of six months.
Lower balance lending arrangements, such as consumer installment loans, are evaluated for impairment by pooling the loans into homogenous groupings. Accordingly, Patriot does not separately identify individual consumer installment loans for impairment, unless such loans are individually evaluated for impairment due to financial difficulties of the borrower.
Acquired Loans
Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan and lease losses is prohibited as any credit losses in the acquired loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Acquired Impaired Loans- Purchase Credit Impaired “PCI” Loans
Acquired loans that exhibit evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as PCI loans under Accounting Standards Codification (“ASC”) 310-30. The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is accreted into interest income over the remaining life of the loans using the interest method. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses and other contractually required payments that the Company
49
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan and lease losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan and lease losses or a reversal of a corresponding amount of the non-accretable discount, which the Company then reclassifies as an accretable discount that is accreted into interest income over the remaining life of the loans using the interest method.
PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date.
Acquired loans that met the criteria for non-accrual of interest prior to acquisition were not considered performing upon acquisition. When the customers resume payments, to make the nonaccrual loans current, the loans may return to accrual status, including the impact of any accretable discounts, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans.
Acquired Non-impaired Loans
Acquired loans that do not meet the requirements under ASC 310-30 are considered acquired non-impaired loans. The difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan and includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life in accordance with ASC 310-20. Fair value adjustments for revolving loans are accreted (or amortized) using a straight-line method. Term loans are accreted (or amortized) using the constant effective yield method.
Subsequent to the purchase date, the methods used to estimate the allowance for loan and lease losses for the acquired non-impaired loans are consistent with the policy for allowance for loan and lease losses described below.
Allowance for loan and lease losses
The allowance for loan and lease losses (“ALLL”) is regularly evaluated by management, based upon the nature and volume of the loan portfolio, periodic review of loan collectability using historical experience rates, adverse situations potentially affecting individual borrowers’ ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions on overall segments of the loan portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The non-specific ALLL by loan segment is calculated using a systematic methodology, consisting of a quantitative and qualitative analytical component, applied on a quarterly basis to homogeneous loans. The model is comprised of six distinct loan portfolio segments: Commercial Real Estate, Residential Real Estate, Commercial and Industrial, Consumer and Other, Construction, and Construction to Permanent – Commercial Real Estate (“Construction to permanent – CRE”). Management monitors a distinct set of risk characteristics for each loan segment. Additionally, management assesses and monitors risk and performance on a disaggregated basis, including an internal risk rating system for loans included in the Commercial loan segment and analyzing the type of collateral, lien position, and loan-to-value (i.e., LTV) ratio for loans included in the Consumer loan segment.
Management’s ALLL process first applies historical loss rates to pools of loans with homogeneous risk characteristics. Loss rates are calculated by historical charge-off rates that have occurred within each pool of homogenous loans over its loss emergence period (“LEP”). The LEP is an estimate of the average amount of time from the point at which a loan loss is incurred to the point in time at which the loan loss is confirmed. In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, when adverse conditions are not generally applicable across a class of borrowers and individual customers are better able to manage deteriorating conditions.
Another key assumption is the look-back period (“LBP”), which represents the historical data period utilized to calculate loss rates. A three-year LBP is used for each loan segment, in order to capture relevant historical data believed to reflect losses inherent in the loan segment portfolios.
50
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
After considering the historic loss calculations, management applies additional qualitative adjustments to the ALLL to reflect the inherent risk of loss that exists in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in economic conditions, loan portfolio and asset quality data, and credit process changes, such as credit policies or underwriting standards. Evaluation of the ALLL requires considerable judgment, to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.
Qualitative adjustments are aggregated into nine categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators. Within the statement, the following qualitative factors are considered:
•Changes in lending policies and procedures, including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
•Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments;
•Changes in the nature and volume of the loan portfolio and terms of loans;
•Changes in the experience, ability and depth of lending management and staff;
•Changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans;
•Changes in the quality of the loan review system;
•Changes in the value of the underlying collateral for collateral-dependent loans;
•The existence and effect of any concentrations of credit and changes in the level of such concentrations;
•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio.
Patriot provides for loan losses by consistently applying the documented ALLL methodology. Loan losses are charged to the allowance as incurred and recoveries are credited to the ALLL. Additions to the ALLL are charged against income, based on various factors which, in management’s judgment, deserve current recognition in estimating probable losses. Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, Patriot will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less costs to sell, for collateral dependent loans. Subsequent recoveries, if any, are credited to the ALLL. Patriot regularly reviews the loan portfolio and makes adjustments for loan losses, in order to maintain the allowance for loan and lease losses in accordance with US GAAP.
The allowance for loan and lease losses consists primarily of the following three components:
(1)Allowances are established for impaired loans (generally defined by Patriot as non-accrual loans, troubled debt restructured loans, and loans that were previously classified as troubled debt restructurings but have been upgraded). The amount of impairment provided as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the loan’s original effective interest rate or the underlying collateral value, less estimated costs to sell, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans that have no discounted cash flow or collateral deficiency, if applicable, are not considered for general valuation allowances described below.
(2)General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into homogeneous risk characteristics, primarily loan type. Management applies an estimated loss rate to each pool of homogeneous loans. The loss rates applied are based on Patriot’s three-year loss LBP adjusted, as appropriate, for the factors discussed above. The evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions. Actual loan losses may be more or less than the ALLL management established which could have an effect on Patriot’s financial results.
In addition, a risk rating system is utilized to evaluate the general component of the ALLL. Under this system, management assigns risk ratings between one and eleven. Risk ratings are assigned based upon the recommendation of the credit analyst and the originating loan officer. The risk ratings are reviewed and confirmed by the management loan committee of the Board of Directors (the “Loan Committee”). Risk ratings are established at the initiation of transactions and are reviewed and changed, when necessary, during the life of the loan. Loans assigned a risk rating of six or above are monitored more closely by the credit administration officers and the Loan Committee.
51
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
(3)An unallocated component of the ALLL is considered when necessary to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the ALLL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies applied to estimating specific and general losses in the loan portfolio.
In underwriting a loan secured by real property, a property appraisal is required to be performed by an independent licensed appraiser that has been approved by Patriot’s Board of Directors. Appraisals are subject to review by independent third parties hired by Patriot. All appraisals are reviewed by qualified independent parties to the firm preparing the appraisals. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new loan. Additionally, the Bank hires an outside engineering consultant perform the inspection on properties and Management reviews and inspection reports before disbursing funds, during the term of a construction loan.
The Bank further segmented its loan pools by Pass, Special Mention, and Substandard risk ratings and assigned additional risk premiums to each group. The qualitative and economic factors for all of the pools and subsegments were also evaluated, with Pass loans receiving adjustments to reflect their credit profile relative to the non-impaired criticized assets. These adjustments generally flow through the qualitative factors addressing severity of past due loans and other similar conditions and the nature and volume of the portfolio and terms of the loans.
The Bank’s SBA loan portfolio consists of the unguaranteed portion of certain C&I and Owner-Occupied CRE loans. An additional risk premium was assigned to those loans due to their risk parameters and profile, including higher historical loss rates (based on historical SBA data) than the rest of the C&I and Owner-Occupied CRE portfolio.
Acquired loans are marked to fair value on the date of acquisition and are evaluated on a quarterly basis to ensure the necessary purchase accounting updates are made in parallel with the allowance for loan loss calculation. Acquired loans that have been renewed since acquisition are included in the allowance for loan loss calculation since these loans have been underwritten to the Bank’s guidelines. Acquired loans that have not been renewed since acquisition, or that have a PCI mark, are excluded from the allowance for loan loss calculation.
While Patriot uses the best information available to evaluate the ALLL, future adjustments to the ALLL may be necessary if conditions differ or substantially change from the information used in making the evaluation. In addition, as an integral part of its regulatory examination process, the OCC will periodically review the ALLL. The OCC may require Patriot to adjust the ALLL based on its analysis of information available at the time of its examination.
As discussed further in the section titled “Accounting Standards Issued but not yet adopted”, the current ALLL methodology will be replaced by the measurement of losses under a current expected cumulative loss (CECL) model beginning January 1, 2023 in accordance with new accounting standard ASU 2016-13.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Patriot -- put presumptively beyond the reach of Patriot and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for Patriot, and (3) Patriot does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates it to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
52
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Loans Held for Sale
Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. Patriot originates loans to customers under the SBA program that historically has provided for SBA guarantees of 75% of the principal balance of each loan. As a result of the pandemic, in 2021, the SBA increased the guaranteed percentage to 90% during one of the rounds of stimulus. As of October 1, 2021, the guaranteed percentage reverted back to 75% of the loan. Patriot generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. The amount of loan origination fees is included in the carrying value of loans sold and in the calculation of the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.
Servicing Assets
Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.
Other real estate owned
Assets acquired through, loan foreclosure or in lieu of, are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. In addition, when Patriot acquires other real estate owned (“OREO”), it obtains a current appraisal to substantiate the net carrying value of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the results of operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in non-interest expenses upon disposal.
Write-downs of foreclosed properties that are required upon transfer to OREO are charged to the ALLL. Thereafter, an allowance for OREO losses is established for any further declines in the property’s value. These losses are included in non-interest expenses in the consolidated statements of operations.
Premises and equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation is charged to operations for buildings, furniture, equipment and software using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Impairment of long-lived assets
Long-lived assets, which are held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense.
Intangible Assets
Intangible assets include core deposit intangibles (“CDI”) and goodwill arising from acquisitions. The initial and ongoing carrying value of intangible assets is based upon modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.
53
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
CDI is amortized on straight-line basis over a 10-year period because that is managements’ estimate of the period Patriot will benefit from Prime Bank’s deposit base comprised of funds associated with long-term customer relationships. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The annual impairment test is conducted annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.
Derivatives
Derivatives are recognized at fair value and included in other assets and other liabilities in the accompanying consolidated balance sheets. The value of exchange-traded contracts is based on quoted market prices while non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities. Cash flows from derivative financial instruments are included in net cash provided by operating activities in the accompanying consolidated statements of cash flows.
Derivatives Not Designated in Hedge Relationships: Patriot enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan. The customer swaps are simultaneously hedged by offsetting derivatives that Patriot entered into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. These swaps qualify as 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 non-interest income.
The credit risk associated with derivatives executed with customers is similar as that involved in extending loans and is subject to normal credit policies. Collateral is obtained based on management’s assessment of the customer. The positions of customer derivatives are recorded at fair value and changes in value are included in non-interest income on the consolidated statement of operations.
Derivatives Designated in Hedge Relationships: The Company uses derivatives to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships as cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge and remain highly effective in offsetting changes in the cash flows attributable to the risk being hedged both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued. The gain or loss on a derivative designated and qualifying as a cash flow hedge is initially recorded as a component of accumulated other comprehensive income or loss, net of tax and subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made in the same period during which the hedged transaction affects earnings.
Income taxes
Patriot recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and loss carry forwards. Deferred tax assets (“DTA”s) and liabilities (“DTL”s) are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on DTAs and DTLs of a change in tax rates is recognized in income in the period that includes the enactment date.
In certain circumstances DTAs are subject to reduction by a valuation allowance. A valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited to the deferred tax component of the income tax provision or benefit.
54
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and net operating loss carry-forwards that do not begin to expire until the year 2030. As of December 31, 2022, no valuation allowance was recorded. See Note 14 for more information on the deferred tax valuation allowance.
Management will continue to evaluate its ability to realize the net deferred tax asset. Future evidence may indicate that it is more likely than not that a portion of the net deferred tax asset will not be realized at which point the valuation allowance may need to be increased.
Patriot had a net deferred tax asset of $15.5 million at December 31, 2022 as compared to a net deferred tax asset of $12.1 million at December 31, 2021.
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, and modifications to the net interest deduction limitations. The CARES Act did not have a material impact on the Company’s income taxes or related disclosures.
Unrecognized tax benefits
Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.
Patriot’s returns for tax years 2019 through 2022 are subject to examination by the Internal Revenue Service (“IRS”) for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.
As of December 31, 2022 and 2021, the Bank did not record any uncertain tax position (“UTP”). Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.
Earnings per Share
Basic earnings per share represent earnings accruing to common shareholders and are computed by dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive securities had been converted to common stock, as well as any adjustments to earnings resulting from the assumed conversion, unless such effect is anti-dilutive. Potential common shares that may be issued by Patriot include any unvested restricted stock awards, stock options, and stock warrants and are determined using the treasury stock method.
Share-based compensation plan
Incentive and compensatory share-based compensation granted to employees is accounted for at the grant date fair value of the award and recognized in the results of operations as compensation expense with an off-setting entry to equity on a straight-line basis over the requisite service period, which is the vesting period. Non-employee members of the Board of Directors are treated as employees for any share-based compensation granted in exchange for their service on the Board of Directors.
Patriot does not currently have, nor has it had in the past, any grants of share-based compensation to non-employees. However, should such awards exist in the future, the value of the goods or services received shall be measured at the grant date fair value of the award or the goods or services to be received, if determined to be a more reliable measurement of fair value. A liability will be recognized for the award, which will periodically be adjusted to reflect the then current fair value, and compensation expense will be recognized over the requisite period during which the goods or services are received, so that the fair value at the date of settlement is the compensation expense recognized.
55
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The Compensation Committee of the Board of Directors establishes terms and conditions applicable to the vesting of restricted stock awards and stock options. Restricted stock grants generally vest in quarterly or annual installments over a three-, four- or five-year period from the date of grant. All restricted stock awards are non- participating grants.
Comprehensive income
Accounting principles generally require that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of shareholders' equity in the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
Segment reporting
Patriot’s only business segment is Community Banking. During the years ended December 31, 2022, 2021 and 2020, this segment represented all the revenues and income of Patriot.
Reserve for Unfunded Commitments
The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for our loan portfolio as well as a draw down factor applied to the various commitments. The reserve for unfunded commitments is included within other liabilities in the accompanying consolidated balance sheets, and changes in the reserve are reported as a component of other expenses in the accompanying consolidated statements of operations. See Note 18: Financial Instruments with Off-Balance-Sheet Risk for further information.
Related Party Transactions
Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such people will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. See Note 20: Related Party Transactions for further information.
Fair value
Patriot uses fair value measurements to record adjustments to the carrying amounts of certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate sale or settlement of the asset or liability, respectively.
Provided in these notes to the consolidated financial statements is a detailed summary of Patriot’s application of fair value measurements and the effect on the assets and liabilities presented in the consolidated financial statements.
Advertising Costs
Patriot's policy is to expense advertising costs in the period in which they are incurred.
Project expenses
Project expenses represent non-recurring expenses, primarily legal and consulting not directly related to the core business of Community Banking. The project expenses consist of material non-recurring costs related to the previously planned merger with American Challenger in 2021 and 2022. However, the merger was terminated in July 2022. In 2020, the project expenses consist of an adjustment of goodwill after measurement period of the Prime acquisition in May 2018.
56
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Employee Retention Credit
The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers for 2020. In 2021, the tax credit is up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter. The Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as a reduction to compensation and benefits expense on the Company’s consolidated statements of operations. Accordingly, the Company recorded an employee retention credit of $2.9 million for the year ended December 31, 2021, which was included as a reduction to salaries and benefits non-interest expense on the consolidated statements of operations. No employee retention credit was recorded for the year ended December 31, 2022.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:
•Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Recently Adopted and Issued Accounting Standards
Accounting Standards Adopted During 2022
There were no applicable material accounting pronouncements adopted by the Company during 2022.
57
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Accounting Standards Issued But Not Yet Adopted
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay was applicable to the Company. Upon adoption on January 1, 2023, the Company will record a pre-tax adjustment in the range of $2.0 million to $4.0 million to the allowance for loan losses and a pre-tax adjustment in the range of $0.5 million to $1.0 million to reserve for unfunded commitments (which will be reflected in other liabilities on the Company’s consolidated balance sheets), and a cumulative-effect adjustment to increase the opening balance of accumulated deficit of $1.8 million to $3.7 million. These impacts will be reflected in the Company's first quarter 2023 financial statements.
ASU Update 2020-02
In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.
ASU Update 2020-03
In March 2020, the FASB issued ASU No. 2020-3, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.
ASU 2022-02
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures". ASU 2022-02 updates guidance in Topic 326, to eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty and to require entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements. See the discussion regarding the adoption of ASU 2016-13 above.
58
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
ASU 2022-06
On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) “Deferral of the Sunset Date of Topic 848” This ASU defers the sunset date of the temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other interbank offered rates to alternative reference rates. In response to the United Kingdom’s Financial Conduct Authority's extension of the cessation date of LIBOR in the United States to June 30, 2023, the FASB has deferred the expiration date of these optional expedients to December 31, 2024. The ASU became effective upon issuance and affords the Company an extended period to utilize the currently available optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other inter-bank offered rates. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
Note 2. Restrictions on Cash and Due from Banks
Federal Reserve System regulations require depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The Board of Governors of the Federal Reserve System generally makes annual adjustments to the tiered cash reserve requirements. In March of 2020, the Federal Reserve Bank eliminated reserve requirements for all depository institution. Therefore, the Company was not required to have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements as of December 31, 2022 and 2021.
Note 3. Available-for-sale securities
At December 31, 2022 and 2021, the amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of available-for-sale securities was as follows:
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | 73,480 | $ | — | $ | (14,434) | $ | 59,046 | |||||||||||||||
| Corporate bonds | 19,773 | 7 | (5,125) | 14,655 | |||||||||||||||||||
| Subordinated notes | 5,000 | — | (398) | 4,602 | |||||||||||||||||||
| SBA loan pools | 6,791 | — | (1,073) | 5,718 | |||||||||||||||||||
| Municipal bonds | 561 | — | (62) | 499 | |||||||||||||||||||
| 105,605 | 7 | (21,092) | 84,520 | ||||||||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | 67,850 | $ | 24 | $ | (1,245) | $ | 66,629 | |||||||||||||||
| Corporate bonds | 17,754 | 118 | (951) | 16,921 | |||||||||||||||||||
| Subordinated notes | 4,608 | 35 | (17) | 4,626 | |||||||||||||||||||
| SBA loan pools | 5,772 | — | (169) | 5,603 | |||||||||||||||||||
| Municipal bonds | 563 | 1 | (2) | 562 | |||||||||||||||||||
| $ | 96,547 | $ | 178 | $ | (2,384) | $ | 94,341 | ||||||||||||||||
59
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table presents available-for-sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position as of December 31, 2022 and 2021:
| (In thousands) | Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||
| Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | ||||||||||||||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | 11,126 | $ | (633) | $ | 47,920 | $ | (13,801) | $ | 59,046 | $ | (14,434) | |||||||||||||||||||||||
| Corporate bonds | 1,959 | (64) | 10,934 | (5,061) | 12,893 | (5,125) | |||||||||||||||||||||||||||||
| Subordinated notes | 4,602 | (398) | — | — | 4,602 | (398) | |||||||||||||||||||||||||||||
| SBA loan pools | 1,437 | (12) | 4,280 | (1,061) | 5,717 | (1,073) | |||||||||||||||||||||||||||||
| Municipal bonds | — | — | 498 | (62) | 498 | (62) | |||||||||||||||||||||||||||||
| $ | 19,124 | $ | (1,107) | $ | 63,632 | $ | (19,985) | $ | 82,756 | $ | (21,092) | ||||||||||||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | 60,606 | $ | (1,196) | $ | 1,610 | $ | (49) | $ | 62,216 | $ | (1,245) | |||||||||||||||||||||||
| Corporate bonds | 15,042 | (951) | — | — | 15,042 | (951) | |||||||||||||||||||||||||||||
| Subordinated notes | — | — | 1,092 | (17) | 1,092 | (17) | |||||||||||||||||||||||||||||
| SBA loan pools | 5,603 | (169) | — | — | 5,603 | (169) | |||||||||||||||||||||||||||||
| Municipal bonds | 406 | (2) | — | — | 406 | (2) | |||||||||||||||||||||||||||||
| $ | 81,657 | $ | (2,318) | $ | 2,702 | $ | (66) | $ | 84,359 | $ | (2,384) | ||||||||||||||||||||||||
At December 31, 2022 and 2021, forty-six of forty-seven and thirty-two of thirty-nine available-for-sale securities had unrealized losses with an aggregate depreciation of 20.3% and 2.7% from amortized cost, respectively.
Management believes that none of the losses on available-for-sale securities noted above constitute OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, subordinated notes, corporate debt, and municipal bonds. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. SBA government guaranteed loan pools securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Since Patriot is not more-likely-than-not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of December 31, 2022.
As of December 31, 2022 and 2021, available-for-sale securities of $30.8 million and $36.6 million were pledged primarily to secure municipal deposits and FHLB borrowing, respectively. The securities were pledged to the FRB and FHLB.
60
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at December 31, 2022 and 2021. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.
| (In thousands) | Amortized Cost | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||
| Due Within 5 years | Due After 5 years through 10 years | Due After 10 years | Total | Due Within 5 years | Due After 5 years through 10 years | Due After 10 years | Total | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 3,778 | $ | 15,995 | $ | — | $ | 19,773 | $ | 3,721 | $ | 10,934 | $ | — | $ | 14,655 | |||||||||||||||||||||||||||||||
| Subordinated notes | 3,000 | 2,000 | — | 5,000 | 2,830 | 1,772 | — | 4,602 | |||||||||||||||||||||||||||||||||||||||
| SBA loan pools | — | 1,449 | 5,342 | 6,791 | — | 1,438 | 4,280 | 5,718 | |||||||||||||||||||||||||||||||||||||||
| Municipal bonds | 154 | 407 | — | 561 | 139 | 360 | — | 499 | |||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities with stated maturity dates | 6,932 | 19,851 | 5,342 | 32,125 | 6,690 | 14,504 | 4,280 | 25,474 | |||||||||||||||||||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | — | 5,276 | 68,204 | 73,480 | — | 4,129 | 54,917 | 59,046 | |||||||||||||||||||||||||||||||||||||||
| $ | 6,932 | $ | 25,127 | $ | 73,546 | $ | 105,605 | $ | 6,690 | $ | 18,633 | $ | 59,197 | $ | 84,520 | ||||||||||||||||||||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 17,754 | $ | — | $ | — | $ | 17,754 | $ | 16,921 | $ | — | $ | — | $ | 16,921 | |||||||||||||||||||||||||||||||
| Subordinated notes | — | 4,608 | — | 4,608 | — | 4,626 | — | 4,626 | |||||||||||||||||||||||||||||||||||||||
| SBA loan pools | — | — | 5,772 | 5,772 | — | — | 5,603 | 5,603 | |||||||||||||||||||||||||||||||||||||||
| Municipal bonds | — | 563 | — | 563 | — | 562 | — | 562 | |||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities with stated maturity dates | 17,754 | 5,171 | 5,772 | 28,697 | 16,921 | 5,188 | 5,603 | 27,712 | |||||||||||||||||||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | 13,876 | — | 53,974 | 67,850 | 13,835 | — | 52,794 | 66,629 | |||||||||||||||||||||||||||||||||||||||
| $ | 31,630 | $ | 5,171 | $ | 59,746 | $ | 96,547 | $ | 30,756 | $ | 5,188 | $ | 58,397 | $ | 94,341 | ||||||||||||||||||||||||||||||||
61
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 4. Loans Receivables and Allowance for Loan and Lease Losses
As of December 31, 2022 and 2021, loans receivable, net, consisted of the following:
| December 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Loan portfolio segment: | |||||||||||
| Commercial Real Estate | $ | 437,443 | $ | 365,247 | |||||||
| Residential Real Estate | 124,140 | 158,591 | |||||||||
| Commercial and Industrial | 138,787 | 122,810 | |||||||||
| Consumer and Other | 141,091 | 59,364 | |||||||||
| Construction | 4,922 | 21,781 | |||||||||
| Construction to Permanent - CRE | 1,933 | 11,695 | |||||||||
| Loans receivable, gross | 848,316 | 739,488 | |||||||||
| Allowance for loan and lease losses | (10,310) | (9,905) | |||||||||
| Loans receivable, net | $ | 838,006 | $ | 729,583 | |||||||
Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. Patriot originates commercial real estate loans, commercial business loans, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.
Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75% of the market value of the underlying collateral. Patriot’s loan origination policy for multi-family residential real estate is limited to 80% of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.
In May 2018, loans were acquired in connection with the Prime Bank merger. A subset of these loans was determined to have evidence of credit deterioration at the acquisition date, which was accounted for in accordance with ASC 310-30. The purchased credit impaired (“PCI”) loans presently maintain a carrying value of zero as of December 31, 2022 and 2021. The loans were evaluated for impairment through the periodic reforecasting of expected cash flows.
Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.
There were no PCI loans transactions in 2022 and 2021. A summary of changes in the accretable discount for PCI loans for the year ended December 31, 2020 follows:
| (In thousands) | Year Ended December 31, 2020 | ||||
| Accretable discount, beginning of period | $ | (47) | |||
| Accretion | 2 | ||||
| Other changes, net | 45 | ||||
| Accretable discount, end of period | $ | — | |||
62
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The accretion of the accretable discount for PCI loans for the year end December 31, 2020 was $2,000. The other changes represent primarily loans that were either fully paid-off or totally charged off.
Risk characteristics of the Company’s portfolio classes include the following:
Commercial Real Estate Loans
In underwriting commercial real estate loans, Patriot evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, the value of the property collateralizing the loan substantially decline, or there are declines in general economic conditions. Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company.
During 2022, Patriot purchased $20.7 million of commercial real estate loans. There were no commercial real estate loans purchased during 2021.
Residential Real Estate Loans
In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.
In 2022 and 2021, Patriot purchased $0 and $72.3 million of residential real estate loans, respectively.
Commercial and Industrial Loans
Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.
Patriot’s syndicated and leveraged loan portfolios totaled $5.8 million and $19.6 million at December 31, 2022 and 2021, respectively. The syndicated and leveraged loans are included in the commercial and industrial loan classification and are primarily comprised of loan transactions led by major financial institutions and regional banks, which are the Agent Bank or Lead Arranger, and are referred to as syndicated loans or "Shared National Credits (SNC)". SNC loans were determined to be complementary to the Bank’s existing commercial and industrial loan portfolio and product offerings. Further originations in this loan class are not expected.
Consumer and Other Loans
Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans, and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.
63
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
During 2022 and 2021, Patriot purchased unsecured consumer loans of $90.1 million and $17.0 million, respectively. Total outstanding from this program totaled $78.9 million and $15.7 million as of December 31, 2022 and 2021, respectively. These loans carry higher rates of return than the Bank’s commercial portfolio, with an overall yield of 8.70% , and incurred net charge-offs of $1.6 million for the year ended December 31, 2022. No charge-off was recorded in 2021. Patriot purchased home equity line of credit loans (“HELOC”) of $30.6 million for the year ended December 31, 2022. No HELOC loan was purchases in 2021.
Construction Loans
Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.
Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.
Construction to Permanent - Commercial Real Estate (“CRE”)
Loans in this category represent a one-time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short-term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 20-25 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.
Close of the permanent facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.
SBA Loans
Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% of the principal balance. However, during the pandemic in 2021, the SBA temporarily increased the guarantees to 90% and reverted to 75% on October 1, 2021. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $(0.8) million and $27.1 million at December 31, 2022 and 2021, respectively.
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 participated in the SBA’s Paycheck Protection Program in 2021.
Paycheck Protection Program loans totaled $31,700,000 and $919,000 as of December 31, 2022 and 2021, respectively, which are included in the commercial and industrial loan classifications.
64
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Allowance for Loan and Lease Losses
The following tables summarize the activity in the allowance for loan and lease losses, allocated to segments of the loan portfolio, for each year in the three-year period ended December 31, 2022:
| (In thousands) | Commercial Real Estate | Residential Real Estate | Commercial and Industrial | Consumer and Other | Construction | Construction to Permanent - CRE | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| As of and for the year ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | 5,063 | $ | 1,700 | $ | 2,532 | $ | 253 | $ | 78 | $ | 41 | $ | 238 | $ | 9,905 | |||||||||||||||||||||||||||||||
| Charge-offs | — | — | (70) | (1,690) | (68) | — | — | (1,828) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 154 | 4 | 69 | 121 | — | — | — | 348 | |||||||||||||||||||||||||||||||||||||||
| Provisions (credits) | 1,749 | (1,039) | (1,128) | 2,523 | 14 | (31) | (203) | 1,885 | |||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | 6,966 | $ | 665 | $ | 1,403 | $ | 1,207 | $ | 24 | $ | 10 | $ | 35 | $ | 10,310 | |||||||||||||||||||||||||||||||
| As of and for the year ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | 4,485 | $ | 1,379 | $ | 3,284 | $ | 295 | $ | 739 | $ | 162 | $ | 240 | $ | 10,584 | |||||||||||||||||||||||||||||||
| Charge-offs | (51) | (3) | (212) | (23) | (69) | — | — | (358) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | — | 3 | 65 | 111 | — | — | — | 179 | |||||||||||||||||||||||||||||||||||||||
| Provisions (credits) | 629 | 321 | (605) | (130) | (592) | (121) | (2) | (500) | |||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | 5,063 | $ | 1,700 | $ | 2,532 | $ | 253 | $ | 78 | $ | 41 | $ | 238 | $ | 9,905 | |||||||||||||||||||||||||||||||
| As of and for the year ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | $ | 3,789 | $ | 1,038 | $ | 4,340 | $ | 341 | $ | 477 | $ | 130 | $ | — | $ | 10,115 | |||||||||||||||||||||||||||||||
| Charge-offs | (1,032) | (24) | (677) | (45) | — | — | — | (1,778) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | — | 1 | 70 | 6 | — | — | — | 77 | |||||||||||||||||||||||||||||||||||||||
| Provisions (credits) | 1,728 | 364 | (449) | (7) | 262 | 32 | 240 | 2,170 | |||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | 4,485 | $ | 1,379 | $ | 3,284 | $ | 295 | $ | 739 | $ | 162 | $ | 240 | $ | 10,584 | |||||||||||||||||||||||||||||||
65
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of December 31, 2022 and 2021:
| (In thousands) | Commercial Real Estate | Residential Real Estate | Commercial and Industrial | Consumer and Other | Construction | Construction to Permanent - CRE | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 5,430 | $ | 5 | $ | 608 | $ | — | $ | — | $ | — | $ | — | $ | 6,043 | |||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 1,536 | 660 | 795 | 1,207 | 24 | 10 | 35 | 4,267 | |||||||||||||||||||||||||||||||||||||||
| Total allowance for loan and lease losses | $ | 6,966 | $ | 665 | $ | 1,403 | $ | 1,207 | $ | 24 | $ | 10 | $ | 35 | $ | 10,310 | |||||||||||||||||||||||||||||||
| Loans receivable, gross: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 11,241 | $ | 2,508 | $ | 4,653 | $ | 514 | $ | — | $ | — | $ | — | $ | 18,916 | |||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 426,202 | 121,632 | 134,134 | 140,577 | 4,922 | 1,933 | — | 829,400 | |||||||||||||||||||||||||||||||||||||||
| Total loans receivable, gross | $ | 437,443 | $ | 124,140 | $ | 138,787 | $ | 141,091 | $ | 4,922 | $ | 1,933 | $ | — | $ | 848,316 | |||||||||||||||||||||||||||||||
| (In thousands) | Commercial Real Estate | Residential Real Estate | Commercial and Industrial | Consumer and Other | Construction | Construction to Permanent - CRE | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 1,567 | $ | 3 | $ | 722 | $ | — | $ | — | $ | — | $ | — | $ | 2,292 | |||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 3,496 | 1,697 | 1,810 | 253 | 78 | 41 | 238 | 7,613 | |||||||||||||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 5,063 | $ | 1,700 | $ | 2,532 | $ | 253 | $ | 78 | $ | 41 | $ | 238 | $ | 9,905 | |||||||||||||||||||||||||||||||
| Loans receivable, gross: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 15,704 | $ | 2,954 | $ | 4,031 | $ | 523 | $ | — | $ | — | $ | — | $ | 23,212 | |||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 349,543 | 155,637 | 118,779 | 58,841 | 21,781 | 11,695 | — | 716,276 | |||||||||||||||||||||||||||||||||||||||
| Total loans receivable, gross | $ | 365,247 | $ | 158,591 | $ | 122,810 | $ | 59,364 | $ | 21,781 | $ | 11,695 | $ | — | $ | 739,488 | |||||||||||||||||||||||||||||||
Patriot monitors the credit quality of its loans receivable on an ongoing basis. Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.
66
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, credit officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the credit officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed by the Credit Department either annually or biannually, depending upon the amount of the bank’s exposure.
Additionally, Patriot retains an independent third-party loan review expert to perform a quarterly analysis of the results of its risk rating process. The semi-annual review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans. Any changes to the assigned risk ratings, based on the semi-annual review, are required to be reported to the Board Audit Committee.
When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:
•Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected.
•Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard”, with the added characteristic that the identified weaknesses make collection or liquidation-in-full improbable, on the basis of currently existing facts, conditions, and values.
Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.
If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold. In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and 120 days delinquent, respectively. Loans receivable that are part of the unsecured loan purchase program are charged-off in full when the loan is 90 days past due.
The allowance for loan losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.
67
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Loan Portfolio Aging Analysis
The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2022.
| (In thousands) | Performing (Accruing) Loans | ||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2022: | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Performing Loans | Non- accruing Loans | Loans Receivable Gross | |||||||||||||||||||||||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | — | $ | — | $ | — | $ | — | $ | 401,313 | $ | 401,313 | $ | — | $ | 401,313 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 24,559 | 24,559 | — | 24,559 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 330 | — | — | 330 | — | 330 | 11,241 | 11,571 | |||||||||||||||||||||||||||||||||||||||
| 330 | — | — | 330 | 425,872 | 426,202 | 11,241 | 437,443 | ||||||||||||||||||||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 330 | — | — | 330 | 120,715 | 121,045 | — | 121,045 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 625 | 625 | — | 625 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | 2,470 | 2,470 | |||||||||||||||||||||||||||||||||||||||
| 330 | — | — | 330 | 121,340 | 121,670 | 2,470 | 124,140 | ||||||||||||||||||||||||||||||||||||||||
| Commercial and Industrial: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 2 | — | 230 | 232 | 131,092 | 131,324 | — | 131,324 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 597 | 597 | — | 597 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 1,488 | 412 | — | 1,900 | 133 | 2,033 | 4,833 | 6,866 | |||||||||||||||||||||||||||||||||||||||
| 1,490 | 412 | 230 | 2,132 | 131,822 | 133,954 | 4,833 | 138,787 | ||||||||||||||||||||||||||||||||||||||||
| Consumer and Other: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 929 | 3,175 | 925 | 5,029 | 135,990 | 141,019 | — | 141,019 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 23 | 23 | 49 | 72 | |||||||||||||||||||||||||||||||||||||||
| 929 | 3,175 | 925 | 5,029 | 136,013 | 141,042 | 49 | 141,091 | ||||||||||||||||||||||||||||||||||||||||
| Construction: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 895 | — | — | 895 | 3,503 | 4,398 | — | 4,398 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 524 | 524 | — | 524 | |||||||||||||||||||||||||||||||||||||||
| 895 | — | — | — | — | — | 895 | — | 4,027 | — | 4,922 | — | 4,922 | |||||||||||||||||||||||||||||||||||
| Construction to Permanent -CRE: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | — | 1,933 | 1,933 | — | 1,933 | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | 1,933 | 1,933 | — | 1,933 | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,974 | $ | 3,587 | $ | 1,155 | $ | 8,716 | $ | 821,007 | $ | 829,723 | $ | 18,593 | $ | 848,316 | |||||||||||||||||||||||||||||||
| Loans receivable, gross: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 2,156 | 3,175 | 1,155 | 6,486 | 794,546 | 801,032 | — | 801,032 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 26,305 | 26,305 | — | 26,305 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 1,818 | 412 | — | 2,230 | 156 | 2,386 | 18,593 | 20,979 | |||||||||||||||||||||||||||||||||||||||
| Loans receivable, gross | $ | 3,974 | $ | 3,587 | $ | 1,155 | $ | 8,716 | $ | 821,007 | $ | 829,723 | $ | 18,593 | $ | 848,316 | |||||||||||||||||||||||||||||||
68
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2021.
| (In thousands) | Performing (Accruing) Loans | ||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2021: | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Performing Loans | Non-accruing Loans | Loans Receivable Gross | |||||||||||||||||||||||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 696 | $ | — | $ | — | $ | 696 | $ | 324,858 | $ | 325,554 | $ | — | $ | 325,554 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 16,625 | 16,625 | — | 16,625 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 7,364 | 7,364 | 15,704 | 23,068 | |||||||||||||||||||||||||||||||||||||||
| 696 | — | — | 696 | 348,847 | 349,543 | 15,704 | 365,247 | ||||||||||||||||||||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | — | 154,044 | 154,044 | — | 154,044 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 1,399 | 1,399 | — | 1,399 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | 3,148 | 3,148 | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | 155,443 | 155,443 | 3,148 | 158,591 | ||||||||||||||||||||||||||||||||||||||||
| Commercial and Industrial: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 243 | — | — | 243 | 114,306 | 114,549 | — | 114,549 | |||||||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 1,951 | 1,951 | — | 1,951 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 2,209 | 2,209 | 4,101 | 6,310 | |||||||||||||||||||||||||||||||||||||||
| 243 | — | — | 243 | 118,466 | 118,709 | 4,101 | 122,810 | ||||||||||||||||||||||||||||||||||||||||
| Consumer and Other: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | 26 | 2 | 28 | 59,171 | 59,199 | — | 59,199 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 23 | 23 | 142 | 165 | |||||||||||||||||||||||||||||||||||||||
| — | 26 | 2 | 28 | 59,194 | 59,222 | 142 | 59,364 | ||||||||||||||||||||||||||||||||||||||||
| Construction: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | — | 21,781 | 21,781 | — | 21,781 | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | 21,781 | 21,781 | — | 21,781 | ||||||||||||||||||||||||||||||||||||||||
| Construction to Permanent - CRE: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | — | — | — | — | 11,695 | 11,695 | — | 11,695 | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | 11,695 | 11,695 | — | 11,695 | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 939 | $ | 26 | $ | 2 | $ | 967 | $ | 715,426 | $ | 716,393 | $ | 23,095 | $ | 739,488 | |||||||||||||||||||||||||||||||
| Loans receivable, gross: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 939 | $ | 26 | $ | 2 | $ | 967 | $ | 685,855 | $ | 686,822 | $ | — | $ | 686,822 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 19,975 | 19,975 | — | 19,975 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 9,596 | 9,596 | 23,095 | 32,691 | |||||||||||||||||||||||||||||||||||||||
| Loans receivable, gross | $ | 939 | $ | 26 | $ | 2 | $ | 967 | $ | 715,426 | $ | 716,393 | $ | 23,095 | $ | 739,488 | |||||||||||||||||||||||||||||||
69
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of December 31, 2022 and 2021:
| (In thousands) | Non-accruing Loans | ||||||||||||||||||||||||||||||||||
| 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Non-accruing Loans | ||||||||||||||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate: | |||||||||||||||||||||||||||||||||||
| Substandard | $ | — | $ | — | $ | 11,241 | $ | 11,241 | $ | — | $ | 11,241 | |||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||||||||
| Substandard | 657 | — | 1,796 | 2,453 | 17 | 2,470 | |||||||||||||||||||||||||||||
| Commercial and Industrial: | |||||||||||||||||||||||||||||||||||
| Substandard | 46 | 395 | 3,196 | 3,637 | 1,196 | 4,833 | |||||||||||||||||||||||||||||
| Consumer and Other: | |||||||||||||||||||||||||||||||||||
| Substandard | — | — | 27 | 27 | 22 | 49 | |||||||||||||||||||||||||||||
| Total non-accruing loans | $ | 703 | $ | 395 | $ | 16,260 | $ | 17,358 | $ | 1,235 | $ | 18,593 | |||||||||||||||||||||||
| As of December 31, 2021: | |||||||||||||||||||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate: | |||||||||||||||||||||||||||||||||||
| Substandard | $ | — | $ | — | $ | 15,704 | $ | 15,704 | $ | — | $ | 15,704 | |||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||||||||
| Substandard | — | — | 2,419 | 2,419 | 729 | 3,148 | |||||||||||||||||||||||||||||
| Commercial and Industrial: | |||||||||||||||||||||||||||||||||||
| Substandard | — | 491 | 2,458 | 2,949 | 1,152 | 4,101 | |||||||||||||||||||||||||||||
| Consumer and Other: | |||||||||||||||||||||||||||||||||||
| Substandard | — | 94 | 28 | 122 | 20 | 142 | |||||||||||||||||||||||||||||
| Total non-accruing loans | $ | — | $ | 585 | $ | 20,609 | $ | 21,194 | $ | 1,901 | $ | 23,095 | |||||||||||||||||||||||
If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $372,000, $802,000, and $904,000 would have been recognized in income for the years ended December 31, 2022, 2021, and 2020, respectively.
Interest income collected and recognized on non-accruing loans for the year ended December 31, 2022, 2021 and 2020 was $329,000, $377,000 and $156,000, respectively.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful.
70
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. Management considers all non-accrual loans and Trouble Debt Restructurings (“TDR”) for impaired loans. In most cases, loan payments that are past due less than 90 days, well-secured, and in the process of collection are not considered impaired. The Bank considers consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.
Troubled Debt Restructurings (“TDR”)
On a case-by-case basis, Patriot may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a TDR.
Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may also result in the forgiveness of principal or accrued interest. In addition, when modifying commercial loans, Patriot frequently obtains additional collateral or guarantor support. If the borrower has performed under the existing contractual terms of the loan and Patriot’s underwriters determine that the borrower has the capacity to continue to perform under the terms of the TDR, the loan continues accruing interest. Non-accruing TDRs may be returned to accrual status when there has been a sustained period of performance (generally six consecutive months of payments) and both principal and interest are reasonably assured of collection.
The following table summarizes the recorded investment in TDRs as of December 31, 2022 and 2021:
| (In thousands) | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Loan portfolio segment: | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||||||||
| Commercial Real Estate | 1 | $ | 8,806 | 1 | $ | 8,884 | |||||||||||||||||
| Residential Real Estate | 3 | 814 | 3 | 870 | |||||||||||||||||||
| Consumer and Other | 2 | 537 | 3 | 640 | |||||||||||||||||||
| Total TDR Loans | 6 | 10,157 | 7 | 10,394 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| TDRs included in non-accrual loans | 2 | (9,464) | 3 | (9,688) | |||||||||||||||||||
| Total accrual TDR Loans | 4 | $ | 693 | 4 | $ | 706 | |||||||||||||||||
During the year ended December 31, 2022 and 2021, no loans were modified as TDRs, and there were no defaults of TDRs.
The following loans were modified as TDR during the year ended December 31, 2020.
| Outstanding Recorded Investment | |||||||||||||||||||||||||||||||||||
| (In thousands) | Pre-Modification | Post-Modification | |||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2020 | 2020 | 2020 | ||||||||||||||||||||||||||||||||
| Loan portfolio segment: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | 2 | $ | 822 | $ | 819 | ||||||||||||||||||||||||||||||
| Commercial and Industrial | 1 | 4,000 | 4,000 | ||||||||||||||||||||||||||||||||
| Consumer and Other | 3 | 413 | 414 | ||||||||||||||||||||||||||||||||
| Total TDR Loans | 6 | $ | 5,235 | $ | 5,233 | ||||||||||||||||||||||||||||||
71
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table provides information on how loans were modified as TDRs during the year ended December 31, 2020.
| (In thousands) | Year Ended December 31, | ||||||||||
| 2020 | |||||||||||
| Rate reduction | $ | 4,819 | |||||||||
| Extension of interest only period | 121 | ||||||||||
| Payment deferral | 293 | ||||||||||
| Total | $ | 5,233 | |||||||||
The loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, extending payment periods for the interest and /or principal, or substituting or adding a co-borrower or guarantor.
At December 31, 2022 and 2021, there were no commitments to advance additional funds under TDRs. The balances reflected here as TDR’s are also included in the non-accruing loan balance included in the prior table - Loan Portfolio Aging Analysis.
Impaired Loans
Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of December 31, 2022 and 2021, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $19.3 million and $23.8 million, respectively, were identified, for which $6.0 million and $2.3 million specific reserves were established, respectively.
At December 31, 2022, exposure to the impaired loans was related to thirty-two borrowers. Twenty-one out of thirty-two impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $100,000, totaling $371,000, with a general reserve of $2,000 were collectively evaluated, and not individually evaluated for impairment.
At December 31, 2021, exposure to the impaired loans was related to thirty-four borrowers. Twenty-three out of thirty-four impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $100,000, totaling $590,000, with a general reserve of $7,000 were collectively evaluated, and not individually evaluated for impairment.
For collateral dependent loans, appraisal reports of the underlying collateral, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were first reduced by a 5.8% discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8% in selling costs, in order to estimate the potential loss, if any, that may eventually be realized. Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value. 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.
Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.
72
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table reflects information about the impaired loans by class as of December 31, 2022 and 2021:
| (In thousands) | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||
| Recorded Investment | Principal Outstanding | Related Allowance | Recorded Investment | Principal Outstanding | Related Allowance | ||||||||||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 2,435 | $ | 2,428 | $ | — | $ | 6,820 | $ | 7,776 | $ | — | |||||||||||||||||||||||
| Residential Real Estate | 2,402 | 2,224 | — | 2,847 | 2,763 | — | |||||||||||||||||||||||||||||
| Commercial and Industrial | 1,939 | 2,424 | — | 630 | 758 | — | |||||||||||||||||||||||||||||
| Consumer and Other | 514 | 514 | — | 523 | 523 | — | |||||||||||||||||||||||||||||
| 7,290 | 7,590 | — | 10,820 | 11,820 | — | ||||||||||||||||||||||||||||||
| With a related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 8,806 | $ | 8,656 | $ | 5,430 | $ | 8,884 | $ | 8,811 | $ | 1,567 | |||||||||||||||||||||||
| Residential Real Estate | 223 | 221 | 6 | 461 | 488 | 8 | |||||||||||||||||||||||||||||
| Commercial and Industrial | 2,895 | 3,052 | 609 | 3,471 | 3,916 | 723 | |||||||||||||||||||||||||||||
| Consumer and Other | 73 | 74 | — | 166 | 201 | 1 | |||||||||||||||||||||||||||||
| 11,997 | 12,003 | 6,045 | 12,982 | 13,416 | 2,299 | ||||||||||||||||||||||||||||||
| Impaired Loans, Total: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 11,241 | $ | 11,084 | $ | 5,430 | $ | 15,704 | $ | 16,587 | $ | 1,567 | |||||||||||||||||||||||
| Residential Real Estate | 2,625 | 2,445 | 6 | 3,308 | 3,251 | 8 | |||||||||||||||||||||||||||||
| Commercial and Industrial | 4,834 | 5,476 | 609 | 4,101 | 4,674 | 723 | |||||||||||||||||||||||||||||
| Consumer and Other | 587 | 588 | — | 689 | 724 | 1 | |||||||||||||||||||||||||||||
| Impaired Loans, Total | $ | 19,287 | $ | 19,593 | $ | 6,045 | $ | 23,802 | $ | 25,236 | $ | 2,299 | |||||||||||||||||||||||
73
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
For each year in the three-year period ended December 31, 2022, the average recorded investment in and interest income recognized on impaired loans without and with a related allowance, by loan portfolio segment, was as follows:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 6,621 | $ | 87 | $ | 7,636 | $ | 103 | $ | 5,859 | $ | 39 | |||||||||||||||||||||||
| Residential Real Estate | 3,452 | 34 | 4,014 | 51 | 3,681 | 28 | |||||||||||||||||||||||||||||
| Commercial and Industrial | 565 | 63 | 2,548 | 12 | 2,111 | 79 | |||||||||||||||||||||||||||||
| Consumer and Other | 342 | 23 | 702 | 16 | 1,132 | 47 | |||||||||||||||||||||||||||||
| 10,980 | 207 | 14,900 | 182 | 12,783 | 193 | ||||||||||||||||||||||||||||||
| With a related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 7,096 | $ | 113 | $ | 8,869 | $ | 66 | $ | 8,861 | $ | 35 | |||||||||||||||||||||||
| Residential Real Estate | 518 | 8 | 428 | 21 | 34 | 7 | |||||||||||||||||||||||||||||
| Commercial and Industrial | 3,365 | 29 | 2,239 | 126 | — | — | |||||||||||||||||||||||||||||
| Consumer and Other | 342 | 4 | 106 | 7 | 39 | — | |||||||||||||||||||||||||||||
| 11,321 | 154 | 11,642 | 220 | 8,934 | 42 | ||||||||||||||||||||||||||||||
| Impaired Loans, Total: | |||||||||||||||||||||||||||||||||||
| Commercial Real Estate | $ | 13,717 | $ | 200 | $ | 16,505 | $ | 169 | $ | 14,720 | $ | 74 | |||||||||||||||||||||||
| Residential Real Estate | 3,970 | 42 | 4,442 | 72 | 3,715 | 35 | |||||||||||||||||||||||||||||
| Commercial and Industrial | 3,930 | 92 | 4,787 | 138 | 2,111 | 79 | |||||||||||||||||||||||||||||
| Consumer and Other | 684 | 27 | 808 | 23 | 1,171 | 47 | |||||||||||||||||||||||||||||
| Impaired Loans, Total | $ | 22,301 | $ | 361 | $ | 26,542 | $ | 402 | $ | 21,717 | $ | 235 | |||||||||||||||||||||||
74
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 5. Loans Held for Sale
SBA loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. There were $5.2 million of SBA loans held for sale at December 31, 2022, consisting of $3.1 million SBA commercial and industrial loans and $2.1 million SBA commercial real estate loans. As of December 31, 2021, SBA loans held for sale totaled $3.1 million, consisting of $2.6 million of SBA commercial and industrial loans and $562,000 SBA commercial real estate loans. During 2022 and 2021, $274,000 and $281,000 SBA loans previously classified as held for sale were transferred to held for investment, respectively.
In September 2020, one commercial and industrial loan of $5.0 million was reclassified from loans held for investment to loans held for sale. The loan was sold in October 2020 which resulted in proceeds of $5.0 million. No held of investment loan was reclassified to held of sale during 2022 and 2021.
The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.
Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.
Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $47.3 million and $29.6 million at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the servicing asset has a carrying value of $886,000 and $584,000, respectively, and fair value of $1.0 million and $617,000 respectively. Income and fees collected for loan servicing are credited to non-interest income when earned, net of amortization on the related servicing assets.
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2022, 2021 and 2020:
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning balance | $ | 584 | $ | 316 | $ | 201 | |||||||||||
| Servicing rights capitalized | 400 | 335 | 137 | ||||||||||||||
| Servicing rights amortized | (87) | (22) | (22) | ||||||||||||||
| Servicing rights disposed | (11) | (45) | — | ||||||||||||||
| Ending balance | $ | 886 | $ | 584 | $ | 316 | |||||||||||
The servicing assets are included in the other assets on the consolidated balance sheet.
75
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 6. Premises and Equipment
At December 31, 2022 and 2021, premises and equipment consisted of the following:
| (In thousands) | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Land | $ | 12,819 | $ | 12,819 | |||||||
| Buildings | 19,046 | 19,046 | |||||||||
| Leasehold Improvements | 3,058 | 3,058 | |||||||||
| Furniture, equipment, and software | 12,674 | 12,264 | |||||||||
| Construction-in-progress | 69 | 65 | |||||||||
| Premises and equipment, gross | 47,666 | 47,252 | |||||||||
| Accumulated depreciation and amortization | (17,025) | (15,752) | |||||||||
| Premises and equipment, net | $ | 30,641 | $ | 31,500 | |||||||
In 2021, the Bank sold a building located in the City New Haven, Connecticut for a cash proceed of $1.5 million, and recognized a gain of $550,000, which is included in other income of the consolidated statements of operations. No property was sold in 2022. For the years ended December 31, 2022, 2021 and 2020, depreciation and amortization expense related to premises and equipment totaled $1.3 million, $1.4 million, and $1.5 million, respectively.
Note 7. Other Real Estate Owned (“OREO”)
The OREO balance consists of foreclosed residential properties from loans receivable that were marketed for sale. As of December 31, 2022 and 2021, no OREO was recorded. The following table presents an analysis of the activity in OREO for the years ended December 31, 2022, 2021 and 2020:
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning balance | $ | — | $ | 1,906 | $ | 2,400 | |||||||||||
| Additions | — | — | — | ||||||||||||||
| Sold | — | (1,906) | (446) | ||||||||||||||
| Write-downs | — | — | (48) | ||||||||||||||
| Ending balance | $ | — | $ | — | $ | 1,906 | |||||||||||
All OREO were sold prior to December 31, 2021. Patriot recognized a gain of $2,000 on the sale of OREO for the year ended December 31, 2021. For the year ended December 31, 2020, Patriot recorded losses on sales of OREO properties of $69,000. The recognized gain and losses are included in the other operating expenses on the consolidated statements of operations.
76
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 8. Business Combination, Goodwill and Other Intangible Assets
Acquisition of Prime Bank
The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. At date of acquisition fair values are generally preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.
On May 10, 2018, the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.
Information on goodwill for the year ended December 31, 2022, 2021 and 2020 is as follows:
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | ||||||||||||||
| Balance, beginning of period | $ | 1,107 | $ | 1,107 | $ | 1,107 | |||||||||||
| Balance, end of period | $ | 1,107 | $ | 1,107 | $ | 1,107 | |||||||||||
Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.
Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.
The Company performed a quantitative assessment as of October 31, 2022, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was not impaired as of December 31, 2022.
CDI was recorded as part of the Prime Bank business combination in May 2018. The CDI is amortized over a 10-year period using the straight-line method. For the year ended December 31, 2022, 2021 and 2020 the amortization was $47,000, $47,000 and 74,000, respectively. The Company performed a quantitative assessment for CDI as of October 31, 2022, and concluded that the CDI was not impaired as of December 31, 2022. The amortization expense and impairment charge were included in the other operating expenses on the consolidated statements of operations.
The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.
| (In thousands) | As of December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Gross carrying amount | $ | 748 | $ | 748 | |||||||
| Accumulated amortization | (293) | (246) | |||||||||
| Impairment | (206) | (206) | |||||||||
| Net carrying amount | $ | 249 | $ | 296 | |||||||
77
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Merger and acquisition with American Challenger
On November 15, 2021, the Company and American Challenger Development Corp., a Delaware corporation (“American Challenger”), entered into an Agreement and Plan of Merger (the “Original Merger Agreement”), which was subsequently amended on January 26, 2022 and February 28, 2022 (the Original Merger Agreement, as amended, referred to as the “Merger Agreement”).
On July 18, 2022, Patriot and American Challenger entered into a Termination and Release Agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement. The parties mutually determined that not all closing conditions of the Merger Agreement could be satisfied under the current structure and agreement. In connection with the merger, the Company has recognized expenses of $1.9 million for the full year ended December 31, 2021 and $112,000 for the year ended December 31, 2022.
Note 9. Deposits
The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December 31, 2022 and 2021.
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In thousands) | Balance | Weighted Avg. Stated Interest Rate | Balance | Weighted Avg. Stated Interest Rate | |||||||||||||||||||
| Non-interest bearing | $ | 269,636 | — | $ | 226,713 | — | |||||||||||||||||
| Interest bearing: | |||||||||||||||||||||||
| Negotiable order of withdrawal accounts | 34,440 | 0.07 | % | 34,741 | 0.07 | % | |||||||||||||||||
| Savings | 71,002 | 0.61 | % | 109,744 | 0.13 | % | |||||||||||||||||
| Money market | 211,000 | 1.38 | % | 164,518 | 0.23 | % | |||||||||||||||||
| Certificates of deposit, less than $250,000 | 165,793 | 1.72 | % | 142,246 | 0.35 | % | |||||||||||||||||
| Certificates of deposit, $250,000 or greater | 59,877 | 1.72 | % | 53,584 | 0.40 | % | |||||||||||||||||
| Brokered deposits | 48,698 | 2.07 | % | 17,016 | 1.05 | % | |||||||||||||||||
| Interest bearing, Total | 590,810 | 1.40 | % | 521,849 | 0.27 | % | |||||||||||||||||
| Total Deposits | $ | 860,446 | 0.96 | % | $ | 748,562 | 0.19 | % | |||||||||||||||
On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $197.3 million and $150.4 million as of December 31, 2022 and 2021, respectively.
78
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table presents interest expense, by deposit category, and the related weighted average effective interest rate for each of the years in the three-year period ended December 31, 2022.
| (In thousands) | Year ended December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Interest Expense | Weighted Avg. Effective Interest Rate | Interest Expense | Weighted Avg. Effective Interest Rate | Interest Expense | Weighted Avg. Effective Interest Rate | ||||||||||||||||||||||||||||||
| Negotiable order of withdrawal accounts | $ | 23 | 0.07 | % | $ | 24 | 0.07 | % | $ | 23 | 0.07 | % | |||||||||||||||||||||||
| Savings | 1,028 | 1.02 | % | 238 | 0.22 | % | 426 | 0.54 | % | ||||||||||||||||||||||||||
| Money market | 1,973 | 1.09 | % | 449 | 0.30 | % | 1,451 | 1.05 | % | ||||||||||||||||||||||||||
| Certificates of deposit, less than $250,000 | 1,411 | 0.79 | % | 899 | 0.61 | % | 3,227 | 1.75 | % | ||||||||||||||||||||||||||
| Certificates of deposit, $250,000 or greater | 400 | 0.68 | % | 270 | 0.49 | % | 1,188 | 1.95 | % | ||||||||||||||||||||||||||
| Brokered deposits | 465 | 1.39 | % | 363 | 1.83 | % | 2,839 | 1.88 | % | ||||||||||||||||||||||||||
| $ | 5,300 | 0.93 | % | $ | 2,243 | 0.43 | % | $ | 9,154 | 1.43 | % | ||||||||||||||||||||||||
As of December 31, 2022, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:
| (In thousands) | CDs less than $250,000 | CDs $250,000 or greater | Brokered Deposits | Total | |||||||||||||||||||
| 1 year or less | $ | 119,299 | $ | 49,789 | $ | 43,589 | $ | 212,677 | |||||||||||||||
| More than 1 year through 2 years | 22,200 | 7,581 | 4,609 | 34,390 | |||||||||||||||||||
| More than 2 years through 3 years | 11,588 | 2,507 | 500 | 14,595 | |||||||||||||||||||
| More than 3 years through 4 years | 1,051 | — | — | 1,051 | |||||||||||||||||||
| More than 4 years through 5 years | 11,655 | — | — | 11,655 | |||||||||||||||||||
| $ | 165,793 | $ | 59,877 | $ | 48,698 | $ | 274,368 | ||||||||||||||||
79
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 10. Borrowings
As of December 31, 2022 and 2021, total borrowings were $115.2 million and $120.7 million, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable.
The senior notes, subordinated notes, 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 December 31, 2022, the Bank had $67.2 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 December 31, 2022 and 2021, outstanding advances from the FHLB-B aggregated $85.0 million and $90.0 million, respectively.
At December 31, 2022, FHLB-B advances of $85.0 million outstanding bore fixed rates of interest ranging from 2.40% to 4.37% with maturities ranging from 6 days to 1.71 years, and have a weighted average interest rate of 3.69%.
At December 31, 2022, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $233.5 million. Remaining borrowing capacity under this line totaled $67.2 million at December 31, 2022.
In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. At December 31, 2022 and 2021, no funds had been borrowed under the line of credit.
Interest expense incurred for FHLB-B borrowing for the year ended December 31, 2022, 2021 and 2020 were $3.5 million, $3.0 million and $2.7 million, respectively.
Correspondent Bank - Lines of Credit
Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent Banks. As of December 31, 2022 and 2021, borrowings available under the agreements totaled $24.5 million and $5 million, respectively. 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, ACH, and other clearinghouse transactions.
There was no outstanding balance under the agreements at December 31, 2022 and 2021. No interest expense incurred in 2022, 2021 and 2020.
Other Borrowing
In August 2020, Patriot was approved to pledge commercial and industrial loans and leases, commercial real estate, construction loans and one-to-four family first lien loans under the Federal Reserve Bank of New York’s (“FRBNY”) Borrower-in-Custody program. As of December 31, 2022, Patriot had pledged eligible loans with a book value of $19.9 million and a collateral value of $13.7 million as collateral to support borrowing capacity at the FRBNY. There was no outstanding balance under the agreements as of December 31, 2022.
Senior notes
On December 22, 2016, the Company issued $12 million of senior notes (“2016 Senior Notes”) bearing interest at 7% per annum. On November 17, 2021, the original maturity date of the Senior Notes were extended from December 22, 2021 to June 30, 2022.
80
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
On June 22, 2022, the Company amended and restated the Senior Notes. The maturity date of the Senior Notes were further extended to December 31, 2022, and the interest rate increases from (i) 7% to 7.25% from July 1, 2022 until September 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The Senior Notes were repaid in December 2022.
On December 21, 2022, the Company completed an issuance and sale of $12 million in aggregate principal amount of 8.50% fixed rate Senior Notes due January 15, 2026 (“2022 Senior Notes”). In connection with the issuance of the Senior Notes, the Company incurred $360,000 of costs, which are being amortized over the term of the 2022 Senior Notes to recognize a constant rate of interest expense. As of December 31, 2022, unamortized debt issuance cost of $360,000 was deducted from the face amount of the Senior Notes included in the consolidated balance sheet.
The 2022 Senior Note Purchase Agreement contains certain customary representations, warranties, and covenants made by each of the Company and the Purchasers. The 2022 Senior Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2022 Senior Notes are not subject to redemption at the option of the holders. Principal and interest on the 2022 Senior Notes are subject to acceleration only in limited circumstances. The 2022 Senior Notes are an unsecured, unsubordinated obligation and ranks equally in right of payment to all of the Company’s existing and future unsecured indebtedness, liabilities and other obligations that are not subordinated in right of payment to the Senior Note, and will be effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The 2022 Senior Notes are the obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s affiliates.
For the year ended December 31, 2022, 2021 and 2020, the Company recognized interest expense of $866,000, $913,000 and $915,000, respectively, and the debt issuance cost amortization expense was $0, $73,000 and $75,000, respectively. As of December 31, 2022 and 2021, $28,000 and $23,000 of interest has been included in the consolidated balance sheet in accrued expenses and other liabilities, 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 initially bear interest at 6.25% per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 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 June 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes. Interest on the Subordinated Notes is payable beginning 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 December 31, 2022 and 2021, $160,000 and $189,000 of unamortized debt issuance costs have been deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively. For the year ended December 31, 2022, 2021 and 2020, the Company recognized interest expense of $654,000, $654,000 and $654,000, 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.
81
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
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% (7.79% at December 31, 2022) and mature on March 26, 2033, at which time the principal amount borrowed will be due. Beginning in the second quarter of 2009, the Company opted to defer payment of quarterly interest on the junior subordinated debentures for 20 consecutive quarters. In June of 2014, the Company brought the debt current by paying approximately $1.7 million of interest in arrears to the holders of the junior subordinated debentures. On bringing the debt current and, as permitted under the terms of the junior subordinated debentures, the Company again opted to defer payment of quarterly interest through September 2016, when a $0.7 million payment was made to bring the debt current.
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. For the years ended December 31, 2022, 2021 and 2020, $9,000, $9,000 and $8,000 of debt placement fee amortization has been included in interest expense recognized of $412,000, $279,000 and $337,000, respectively. As of December 31, 2022 and 2021, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $120,000 and $129,000, respectively, and accrued interest on the junior subordinated debentures was $9,000 and $4,000, 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 December 31, 2022 and 2021, the note had a balance outstanding of $585,000 and $791,000, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property. Interest expenses incurred for the year ended December 31, 2022, 2021 and 2020 were $12,000, $15,000 and $19,000, respectively.
82
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Maturity of borrowings
At December 31, 2022, the contractual maturities of the Company’s borrowings in future periods were as follows:
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| Year ending December 31, | FHLB Borrowings | Senior Notes | Subordinated Notes | Junior Subordinated Debt | Note Payable | Total | ||||||||||||||||||||||||||||||||
| 2023 | $ | 55,000 | $ | — | $ | — | $ | — | $ | 210 | $ | 55,210 | ||||||||||||||||||||||||||
| 2024 | 30,000 | — | — | — | 375 | 30,375 | ||||||||||||||||||||||||||||||||
| 2025 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| 2026 | — | 12,000 | — | — | — | 12,000 | ||||||||||||||||||||||||||||||||
| 2027 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Thereafter | — | — | 10,000 | 8,248 | — | 18,248 | ||||||||||||||||||||||||||||||||
| Total contractual maturities of borrowings | 85,000 | 12,000 | 10,000 | 8,248 | 585 | 115,833 | ||||||||||||||||||||||||||||||||
| Unamortized debt issuance costs | — | (360) | (160) | (120) | — | (640) | ||||||||||||||||||||||||||||||||
| Balance of borrowings as of December 31, 2022 | $ | 85,000 | $ | 11,640 | $ | 9,840 | $ | 8,128 | $ | 585 | $ | 115,193 | ||||||||||||||||||||||||||
Note 11. Derivatives
Derivatives Not Designated in Hedge Relationships
Patriot is a party to interest rate swaps; derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. Patriot entered into total four interest rate swaps (“swaps”) in November 2018 and May 2019. 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, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with the program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets.
As of December 31, 2022 and 2021, Patriot had cash pledged for collateral on its interest rate swaps of $0.0 million and $1.4 million, respectively. This collateral is included in other assets on the consolidated balance sheets. Patriot did not recognize any net gain or loss in other non-interest income on the consolidated statements of operations during the year ended December 31, 2022, 2021 and 2020.
83
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Derivatives Designated in Hedge Relationships
Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cash flows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
In August 2021, the cash flow hedge interest rate swap contract was terminated. During the year ended December 31, 2021, the Company recognized $149,000 of accumulated other comprehensive income that was reclassified into interest income. The swap interest income is included in interest and fees on loans on the consolidated statements of operations. In addition, a gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the year ended December 31, 2021, which was included in other income on the consolidated statements of operations. In 2022, no interest income was recognized.
The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.
Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 21 to the consolidated financial statements.
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):
| (In thousands) | Notional Amount | Maturity (Years) | Fixed Rate | Variable Rate | Fair Value | ||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Classified in Other Assets: | |||||||||||||||||||||||||||||
| Customer interest rate swap | $ | 4,736 | 6.3 | 5.25 | % | 1 Mo. LIBOR + 1.96% | $ | 106 | |||||||||||||||||||||
| Customer interest rate swap | 1,363 | 6.5 | 4.38 | % | 1 Mo. LIBOR + 2.00% | 97 | |||||||||||||||||||||||
| Classified in Other Liabilities: | |||||||||||||||||||||||||||||
| 3rd party interest rate swap | $ | 4,736 | 6.3 | 5.25 | % | 1 Mo. LIBOR + 1.96% | $ | (106) | |||||||||||||||||||||
| 3rd party interest rate swap | 1,363 | 6.5 | 4.38 | % | 1 Mo. LIBOR + 2.00% | (97) | |||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Classified in Other Assets: | |||||||||||||||||||||||||||||
| Customer interest rate swap | $ | 4,843 | 7.3 | 5.25 | % | 1 Mo. LIBOR + 1.96% | $ | 638 | |||||||||||||||||||||
| Customer interest rate swap | 1,398 | 7.5 | 4.38 | % | 1 Mo. LIBOR + 2.00% | 100 | |||||||||||||||||||||||
| Classified in Other Liabilities: | |||||||||||||||||||||||||||||
| 3rd party interest rate swap | $ | 4,843 | 7.3 | 5.25 | % | 1 Mo. LIBOR + 1.96% | $ | (638) | |||||||||||||||||||||
| 3rd party interest rate swap | 1,398 | 7.5 | 4.38 | % | 1 Mo. LIBOR + 2.00% | (100) | |||||||||||||||||||||||
84
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
For the year ended December 31, 2021, changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows:
| (In thousands) | Year Ended December 31, 2021 | ||||
| Interest rate swap designated as cash flow hedge: | |||||
| Unrealized gain recognized in accumulated other comprehensive income before reclassifications | $ | 149 | |||
| Amounts reclassified from accumulated other comprehensive income | (149) | ||||
| Other comprehensive income | $ | — | |||
The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income.
Note 12. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Patriot has eleven non-cancelable operating leases, including four Bank branch locations and four for administrative and operational space, two locations for an Interactive Teller Machine (“ITM”) and an automated teller machine (“ATM”), and one equipment lease. The leases expire on various dates through 2032 and some include renewal options. Most of the leases contain rent escalation provisions, as well as renewal options for one or more periods. The last potential year the leases can be extended through 2037. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability. Renew periods were included in the future cash flows for purposes of calculating the ROU and lease liability. The Company has no finance leases (previously referred to as a capital lease).
ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
As of December 31, 2022 and 2021, the Company recognized ROU assets of $2.2 million and $2.6 million, respectively, and lease liabilities of $2.4 million and $2.8 million, respectively. ROU lease assets are included in other assets on the consolidated balance sheet. The lease liabilities are included in accrued expenses and other liabilities on the consolidated balance sheet.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the standard. The Company elected to separate lease and non-lease components. The fixed lease costs are recognized as ROU lease assets and Lease liability. The variable lease cost primarily represents variable payments such as common area maintenance and utilities, which are included in the occupancy and equipment expenses on the consolidated statements of operations. For the year ended December 31, 2022, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $582,000 and $39,000, respectively. For the year ended December 31, 2021, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $571,000 and $38,000, respectively. For the year ended December 31, 2020, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $565,000 and $38,000, respectively.
85
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following is a maturity analysis of the operating lease liabilities as of December 31, 2022:
| (in thousands) | Operating lease Obligation | |||||||
| Years ending December 31, | ||||||||
| 2023 | $ | 583 | ||||||
| 2024 | 446 | |||||||
| 2025 | 329 | |||||||
| 2026 | 299 | |||||||
| 2027 | 252 | |||||||
| Thereafter | 830 | |||||||
| Total undiscounted lease payments | $ | 2,739 | ||||||
| Less imputed interest | (379) | |||||||
| Present value of operating lease liabilities | $ | 2,360 | ||||||
| Operating lease right-of-use asset | $ | 2,223 | ||||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Lease cost | |||||||||||||||||
| Operating lease cost | $ | 582 | $ | 571 | $ | 565 | |||||||||||
| Short-term lease cost | 12 | 12 | 18 | ||||||||||||||
| Total lease cost | $ | 594 | $ | 583 | $ | 583 | |||||||||||
| Other information | |||||||||||||||||
| Operating cash flows from operating leases | $ | 582 | $ | 552 | $ | 543 | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Weighted -average remaining lease term - operating leases (in years) | 8 | 8 | |||||||||
| Weighted -average discount rate - operating leases | 3.35 | % | 3.30 | % | |||||||
As of December 31, 2022 and 2021, the undiscounted lease payments were $2.7 million and $3.2 million, respectively. The lease payments were not reduced by minimum sublease rentals of $964,000 and $812,000 due in the future under non-cancelable subleases, respectively.
Rent expense for operating leases is recognized in earnings on a straight-line basis over the base term of the respective lease and is included in the consolidated statement of operations as a component of Occupancy and Equipment expense. For the years ended December 31, 2022, 2021 and 2020, total rent expense for cancellable and non-cancellable operating leases was $594,000, $583,000, and $583,000, respectively.
For the years ended December 31, 2022, 2021 and 2020, Patriot recognized gross rental income of $566,000, $543,000, and $523,000 offset by rental costs of $5,000, $5,000, and $5,000, respectively.
86
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 13. Commitments and Contingencies
Employment Agreements
The Company has a severance agreement for two Executive Vice Presidents that provides for severance equal to 12 months of current salary, if the Executive officer is terminated within 12 months of a change of control of Patriot.
Legal Matters
Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.
Note 14. Income Taxes
Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the three-year period ended December 31, 2022.
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 44 | $ | — | $ | (100) | |||||||||||
| State | 62 | 180 | 86 | ||||||||||||||
| 106 | 180 | (14) | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 1,117 | 1,860 | (2,448) | ||||||||||||||
| State | 373 | (2,121) | 2,125 | ||||||||||||||
| 1,490 | (261) | (323) | |||||||||||||||
| Income tax expense (benefit) | $ | 1,596 | $ | (81) | $ | (337) | |||||||||||
For each of the years in the three-year period ended December 31, 2022, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income taxes at statutory Federal rate | $ | 1,629 | $ | 1,053 | $ | (873) | |||||||||||
| State taxes, net of Federal benefit | 343 | 404 | (191) | ||||||||||||||
| Project expenses for merger and acquisition | (383) | 383 | — | ||||||||||||||
| Deferred tax valuation allowance | — | (1,938) | 1,938 | ||||||||||||||
| Reversal UTP on Federal DTA | — | — | (1,132) | ||||||||||||||
| Nondeductible expenses | (3) | (10) | 8 | ||||||||||||||
| Other | 10 | 27 | (87) | ||||||||||||||
| Income tax expense (benefit) | $ | 1,596 | $ | (81) | $ | (337) | |||||||||||
87
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The effective tax rate for the years ended December 31, 2022, 2021 and 2020 was 20.6%, (1.6)%, and 8.1%, respectively. The effective tax rate for 2022 was decreased by the reversal of project expenses. The decrease in the effective tax rate for 2021 was primarily due to the full reversal of $1.9 million deferred tax asset valuation allowance recorded at December 31, 2020. There were no significant changes to the effective tax rate in 2020.
Deferred Tax Assets and Liabilities
The significant components of Patriot’s net deferred tax assets at December 31, 2022 and 2021 are presented below.
| (In thousands) | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
| Federal NOL carryforward benefit | $ | 3,321 | $ | 3,605 | |||||||
| NOL write-off for Sec 382 Limit | (3,258) | (3,258) | |||||||||
| Capitalized cost temporary item | 3,023 | 3,325 | |||||||||
| State NOL carryforward benefit | 3,128 | 3,168 | |||||||||
| Allowance for loan loss | 2,793 | 3,017 | |||||||||
| Lease liabilities | 634 | 746 | |||||||||
| Non-accrual interest | 907 | 827 | |||||||||
| Merger and acquisition | 171 | 187 | |||||||||
| Accrued expenses | 80 | 421 | |||||||||
| Unrealized loss AFS securities | 5,440 | 569 | |||||||||
| Goodwill and intangible | 104 | 137 | |||||||||
| Depreciation of premises and equipment | 120 | 98 | |||||||||
| Share based compensation | — | 3 | |||||||||
| Other | 25 | 17 | |||||||||
| Gross deferred tax assets | 16,488 | 12,862 | |||||||||
| Total deferred tax assets | $ | 16,488 | $ | 12,862 | |||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use assets | (597) | (709) | |||||||||
| Prepaid Expenses | (337) | — | |||||||||
| Other | (27) | (7) | |||||||||
| Gross deferred tax liabilities | (961) | (716) | |||||||||
| Net deferred tax asset | $ | 15,527 | $ | 12,146 | |||||||
As of December 31, 2022, Patriot had available approximately $15.8 million of Federal net operating loss carryforwards (“NOL”) that is offset by $15.5 million in §382 limitations imposed by the Internal Revenue Code. Of the NOL of $15.8 million, approximately $15.5 million will expire between 2030 and 2033 and $0.3 million do not expire.
Patriot has approximately $52.8 million of NOLs available for Connecticut tax purposes at December 31, 2022, which may be used to offset up to 50% of taxable income in any year. The NOLs will expire between 2030 and 2040.
Valuation Allowance against net Deferred Tax Assets
Patriot uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.
88
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and prudent and feasible tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
For the year ended December 31, 2022, Patriot was in a cumulative income position. Patriot reviewed its accumulated pre-tax income (loss) for the current and prior two- and there-year periods and adjusted for non-recurring items. After the adjustments, Patriot remained in a cumulative income position. Patriot used the average adjusted pre-tax income for the current and prior three years as the basis for objectively estimating future taxable income. Patriot will continue to evaluate the need for a valuation allowances.
Secondly, Patriot has a tax planning strategy available under ASC 740 that would be implemented to prevent a carry-forward state net operating losses from expiring. The strategy consists of capitalizing loan costs to increase income and avoid state net operating losses from expiring unused.
As of December 31, 2021, based on Patriot’s objective projection of future taxable income and tax planning, Patriot fully reversed the partial valuation allowance of $1.9 million recorded at December 31, 2020. As of December 31, 2022, no valuation allowance was recorded. Patriot will review the valuation allowance quarterly to determine if an adjustment, to either increase or decrease, the allowance is required.
Unrecognized tax benefits
Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.
As of December 31, 2022 and 2021, the Bank did not record any uncertain tax position related to the utilization of certain federal net operating losses. At December 31, 2022 and 2021, Patriot no longer has a liability for unrecognized tax benefits. Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (In thousands) | Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Balance, beginning of year | $ | — | $ | — | $ | 1,220 | |||||||||||
| Increases due to tax positions related to a prior year | — | — | 65 | ||||||||||||||
| Decreases to tax positions as a result of a lapse of statute | — | — | (1,285) | ||||||||||||||
| Balance, end of year | $ | — | $ | — | $ | — | |||||||||||
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.
Patriot’s returns for tax years 2019 through 2022 are subject to examination by the IRS for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.
89
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 15. Share-based Compensation
In 2011, the Company adopted the Patriot National Bancorp, Inc. 2012 Stock Plan (the “2012 Plan”). The 2012 Plan was amended in 2020 and renamed as the Patriot National Bancorp, Inc. 2020 Restricted Stock Award Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on April 30, 2021. The 2020 Plan provides an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”).
On November 10, 2022, the Board of Directors approved the Amendment and Restatement of the 2020 Plan (the “Amended and Restated 2020 Plan”), which was approved and ratified by shareholders of the Company on December 14, 2022.
The 2020 Plan was amended primarily to (i) reduce the total number of shares authorized for issuance thereunder from 3,000,000 shares to 400,000 shares; and (ii) limit the maximum number of shares of Company’s Common Stock granted during a single fiscal year to any non-employee director, together with any cash fees paid to such director, to be no more than a total value of $300,000. As of December 31, 2022, 224,731 shares of stock are available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three, four or five year period from the date of grant.
The following is a summary of the status of the Company’s restricted share awards as of and for each of the years in the three-year period ended December 31, 2022.
| Number of Shares Awarded | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2019 | 21,470 | $ | 12.91 | ||||||||
| Granted | 12,484 | $ | 6.12 | ||||||||
| Vested | (12,903) | $ | 13.82 | ||||||||
| Forfeited | (2,553) | $ | 15.86 | ||||||||
| Unvested at December 31, 2020 | 18,498 | $ | 7.29 | ||||||||
| Granted | 20,476 | $ | 10.48 | ||||||||
| Vested | (12,920) | $ | 12.95 | ||||||||
| Forfeited | (4,586) | $ | 9.39 | ||||||||
| Unvested at December 31, 2021 | 21,468 | $ | 6.48 | ||||||||
| Granted | 9,886 | $ | 11.94 | ||||||||
| Vested | (8,694) | $ | 11.05 | ||||||||
| Unvested at December 31, 2022 | 22,660 | $ | 7.11 | ||||||||
The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value. For the years ended December 31, 2022, 2021 and 2020, the Company recognized share-based compensation expense of $86,000, $150,000, and $159,000, respectively.
For the years ended December 31, 2022, 2021 and 2020, share-based compensation attributable to employees of Patriot amounted to $32,000, $90,000, and $80,000, respectively.
The share-based compensation expense attributable to Patriot’s external Directors for the years ended December 31, 2022, 2021, and 2020 was $54,000, $60,000, and $79,000, respectively. For each of those years, the Directors received total compensation of $248,000, $325,000, and $429,000, respectively, which amounts are included in Other Operating Expenses in the consolidated statements of operations.
90
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of December 31, 2022 amounted to $236,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 2.78 years.
Note 16. Shareholders’ Equity
Common Stock
On December 16, 2009, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with PNBK Holdings, LLC, a limited liability company controlled by Michael Carrazza (“Holdings”). Pursuant to the Securities Purchase Agreement, on October 15, 2010, the Company issued 3,360,000 shares of common stock to Holdings at $15.00 per share, for an aggregate issuance value of $50.4 million. The shares issued to Holdings represented 87.6% of the Company’s then issued and outstanding common stock. In connection with the equity interest obtained by Holdings, Michael Carrazza became Patriot’s Chairman of the Board and nominees of Holdings replaced certain directors and officers who resigned. Additionally, the Company reduced the par value of its common stock from $2 to $0.01 per share, increased the number of its authorized common shares to 100,000,000.
Pursuant to its Operating Agreement, on March 31, 2021, Holdings completed a pro-rata in-kind distribution of shares of restricted common stock of Patriot. Following these distributions, Holdings no longer owns any shares of Patriot.
Dividends
The Company did not pay any dividends for the year ended December 31, 2022, 2021, and 2020, and has suspended dividend payments.
Earnings per Share
The Company is required to present basic earnings per share and diluted earnings per share in its consolidated statements of operations. Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to the outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings per share.
91
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following is a summary of the computation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 2022.
| (Net income in thousands) | Year ended December 31, | |||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||||||
| Net income (loss) attributable to Common shareholders | $ | 6,161 | $ | 5,094 | $ | (3,819) | ||||||||||||||
| Divided by: | ||||||||||||||||||||
| Weighted average shares outstanding | 3,957,097 | 3,946,384 | 3,934,886 | |||||||||||||||||
| Basic earnings (loss) per common share | $ | 1.56 | $ | 1.29 | $ | (0.97) | ||||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||||||||||
| Net income (loss) attributable to Common shareholders | $ | 6,161 | $ | 5,094 | $ | (3,819) | ||||||||||||||
| Weighted average shares outstanding | 3,957,097 | 3,946,384 | 3,934,886 | |||||||||||||||||
| Effect of potentially dilutive restricted common shares | 5,801 | 6,270 | — | (1) | ||||||||||||||||
| Divided by: | ||||||||||||||||||||
| Weighted average diluted shares outstanding | 3,962,898 | 3,952,654 | 3,934,886 | |||||||||||||||||
| Diluted earnings (loss) per common share | $ | 1.55 | $ | 1.29 | $ | (0.97) | ||||||||||||||
(1)The weighted average diluted shares outstanding does not include 3,039 anti-dilutive restricted common shares for the year ended December 31, 2020.
Note 17. 401(k) Savings Plan
Patriot offers employees participation in the Patriot Bank, N.A. 401(k) Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue Code, along with the ROTH feature to the Plan. The 401(k) Plan covers substantially all employees who have completed one month of service, are 21 years of age and who elect to participate. Under the terms of the 401(k) Plan, participants can contribute up to the maximum amount allowed, subject to Federal limitations. At its discretion, Patriot may match eligible participating employee contributions at the rate of 50% of the first 6% of the participants’ salary contributed to the 401(k) Plan. Eligibility for matching contributions is dependent on an employee’s completing 6 consecutive month(s) of service or 500 hours of employment. Participants immediately vest in Patriot’s matching contributions, if applicable. During the years ended December 31, 2022, 2021, and 2020, Patriot made matching contributions to the 401(k) Plan of $251,000, $215,000, and $253,000, respectively.
92
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 18. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit and standby letters of credit represent the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral becomes worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activities, evaluates each customer's creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.
At December 31, 2022 and 2021, financial instruments with credit risk are as follows:
| December 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Commitments to extend credit: | |||||||||||
| Unused lines of credit | $ | 100,986 | $ | 68,341 | |||||||
| Undisbursed construction loans | 12,000 | 18,594 | |||||||||
| Home equity lines of credit | 26,878 | 16,396 | |||||||||
| Future loan commitments | 14,365 | 23,486 | |||||||||
| Financial standby letters of credit | 78 | 164 | |||||||||
| $ | 154,307 | $ | 126,981 | ||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits, and securities. The Bank has established a reserve for credit loss of $8,000 and $8,000 as of December 31, 2022 and 2021, respectively.
Standby letters of credit are written commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheet.
93
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 19. Regulatory and Operational Matters
Federal and state regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, federal banking agencies imposed four minimum capital requirements on a community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.
In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement, and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.”
In September 2021, the Bank elected to adopt the CBLR framework. The Bank’s Tier 1 leverage ratio as of December 31, 2022 and 2021 was 9.3% and 9.9%, respectively, which satisfied the “greater than 9 percent” leverage ratio requirement under the CBLR framework. Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.
The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at December 31, 2022 and 2021 are summarized as follows:
| (In thousands) | December 31, | |||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Patriot Bank, N.A. | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||
| Tier 1 Leverage Capital (to average assets): | ||||||||||||||||||||||||||
| Actual | $ | 100,267 | 9.27 | % | $ | 93,923 | 9.86 | % | ||||||||||||||||||
| To be Well Capitalized | 97,388 | 9.00 | % | (1) | $ | 85,773 | 9.00 | % | (1) | |||||||||||||||||
(1)Leverage Capital Ratio greater than 9% is considered well-capitalized under the CBLR Framework.
Designation as "Well Capitalized" does not apply to bank holding companies - the Company. Such categorization of capital adequacy only applies to insured depository institutions - the Bank.
Note 20. Related Party Transactions
In the normal course of business, the Company grants loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. No related party loans were outstanding as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, deposits from related parties aggregated $64,000 and $58,000, respectively.
94
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 21. Fair Value and Interest Rate Risk
Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.
Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements.
The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.
The three levels of the fair value hierarchy consist of:
Level 1 Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).
Level 2 Observable inputs other than quoted prices included in Level 1, such as:
-Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)
-Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)
-Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).
Level 3 Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).
A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.
Cash and due from banks and accrued interest receivable and payable
The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.
Available-for-sale securities
The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).
95
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Other Investments
The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund, which is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both December 31, 2022 and 2021 due to its short-term nature.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock
Shares in the FRB and FHLB are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.
Loans
The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.
Loans Held for Sale
The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.
SBA Servicing Asset
Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.
Derivative asset (liability) - Interest Rate Swaps
The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Notes 1 and 11 for additional disclosures on derivatives.
Deposits
The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.
The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.
96
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Senior Notes, Subordinated Notes, Junior Subordinated Debt and Note Payable
Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record subordinated notes at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.
Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value.
The Company considers its own credit worthiness in determining the fair value of its senior Notes, subordinated notes, notes payable and junior subordinated debt.
Federal Home Loan Bank Borrowings
The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.
Off-balance-sheet financial instruments
Off-balance-sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis.
97
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of December 31, 2022 and 2021:
| (In thousands) | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
| Fair Value Hierarchy | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||||||||
| Cash and noninterest bearing balances due from banks | Level 1 | $ | 5,182 | $ | 5,182 | $ | 3,264 | $ | 3,264 | ||||||||||||||||||||
| Interest-bearing deposits due from banks | Level 1 | 33,311 | 33,311 | 43,781 | 43,781 | ||||||||||||||||||||||||
| Available-for-sale securities | Level 2 | 75,093 | 75,093 | 81,161 | 81,161 | ||||||||||||||||||||||||
| Available-for-sale securities | Level 3 | 9,427 | 9,427 | 13,180 | 13,180 | ||||||||||||||||||||||||
| Other investments | Level 2 | 4,450 | 4,450 | 4,450 | 4,450 | ||||||||||||||||||||||||
| Federal Reserve Bank stock | Level 2 | 2,627 | 2,627 | 2,843 | 2,843 | ||||||||||||||||||||||||
| Federal Home Loan Bank stock | Level 2 | 3,874 | 3,874 | 4,184 | 4,184 | ||||||||||||||||||||||||
| Loans receivable, net | Level 3 | 838,006 | 818,960 | 729,583 | 727,733 | ||||||||||||||||||||||||
| Loans held for sale | Level 2 | 5,211 | 5,534 | 3,129 | 3,506 | ||||||||||||||||||||||||
| SBA servicing assets | Level 3 | 886 | 1,013 | 584 | 617 | ||||||||||||||||||||||||
| Accrued interest receivable | Level 2 | 7,267 | 7,267 | 5,822 | 5,822 | ||||||||||||||||||||||||
| Interest rate swap receivable | Level 2 | 203 | 203 | 738 | 738 | ||||||||||||||||||||||||
| Financial assets, total | $ | 985,537 | $ | 966,941 | $ | 892,719 | $ | 891,279 | |||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||||||||
| Demand deposits | Level 2 | $ | 269,636 | $ | 269,636 | $ | 226,713 | $ | 226,713 | ||||||||||||||||||||
| Savings deposits | Level 2 | 71,002 | 71,002 | 109,744 | 109,744 | ||||||||||||||||||||||||
| Money market deposits | Level 2 | 211,000 | 211,000 | 164,518 | 164,518 | ||||||||||||||||||||||||
| Negotiable order of withdrawal accounts | Level 2 | 34,440 | 34,440 | 34,741 | 34,741 | ||||||||||||||||||||||||
| Time deposits | Level 2 | 225,670 | 221,353 | 195,830 | 195,048 | ||||||||||||||||||||||||
| Brokered deposits | Level 1 | 48,698 | 47,684 | 17,016 | 17,003 | ||||||||||||||||||||||||
| FHLB borrowings | Level 2 | 85,000 | 83,853 | 90,000 | 93,643 | ||||||||||||||||||||||||
| Senior notes | Level 2 | 11,640 | 11,103 | 12,000 | 12,045 | ||||||||||||||||||||||||
| Subordinated debt | Level 2 | 9,840 | 9,680 | 9,811 | 9,947 | ||||||||||||||||||||||||
| Junior subordinated debt owed to unconsolidated trust | Level 2 | 8,128 | 8,128 | 8,119 | 8,119 | ||||||||||||||||||||||||
| Note payable | Level 3 | 585 | 544 | 791 | 775 | ||||||||||||||||||||||||
| Accrued interest payable | Level 2 | 585 | 585 | 343 | 343 | ||||||||||||||||||||||||
| Interest rate swap liability | Level 2 | 203 | 203 | 738 | 738 | ||||||||||||||||||||||||
| Financial liabilities, total | $ | 976,427 | $ | 969,211 | $ | 870,364 | $ | 873,377 | |||||||||||||||||||||
The carrying amount of cash and non-interest-bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.
98
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.
The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of December 31, 2022 and 2021.
| (In thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | — | $ | 59,046 | $ | — | $ | 59,046 | |||||||||||||||
| Corporate bonds | — | 5,228 | 9,427 | 14,655 | |||||||||||||||||||
| Subordinated notes | — | 4,602 | — | 4,602 | |||||||||||||||||||
| SBA loan pools | — | 5,718 | — | 5,718 | |||||||||||||||||||
| Municipal bonds | — | 499 | — | 499 | |||||||||||||||||||
| Available-for-sale securities | $ | — | $ | 75,093 | $ | 9,427 | $ | 84,520 | |||||||||||||||
| Interest rate swap receivable | $ | — | $ | 203 | $ | — | $ | 203 | |||||||||||||||
| Interest rate swap liability | $ | — | $ | 203 | $ | — | $ | 203 | |||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||
| U. S. Government agency and mortgage-backed securities | $ | — | $ | 66,629 | $ | — | $ | 66,629 | |||||||||||||||
| Corporate bonds | — | 3,741 | 13,180 | 16,921 | |||||||||||||||||||
| Subordinated notes | — | 4,626 | — | 4,626 | |||||||||||||||||||
| SBA loan pools | — | 5,603 | — | 5,603 | |||||||||||||||||||
| Municipal bonds | — | 562 | — | 562 | |||||||||||||||||||
| Available-for-sale securities | $ | — | $ | 81,161 | $ | 13,180 | $ | 94,341 | |||||||||||||||
| Interest rate swap receivable | $ | — | $ | 738 | $ | — | $ | 738 | |||||||||||||||
| Interest rate swap liability | $ | — | $ | 738 | $ | — | $ | 738 | |||||||||||||||
Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.
99
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
As of December 31, 2022, four corporate bonds purchased in 2021, were classified as Level 3 instruments. The fair values of these securities were determined using a present value approach. The discount rate assumed was determined based on unobservable inputs in a pricing model. During the years ended December 31, 2022, 2021 and 2020, the Company had no transfers into or out of Levels 1, 2 or 3.
The reconciliation of the beginning and ending balances for Level 3 available-for-sale securities for the years ended December 31, 2022 and 2021 is as follows:
| (In thousands) | Year Ended December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Level 3 fair value, beginning of year | $ | 13,180 | $ | — | |||||||
| Purchases | — | 14,000 | |||||||||
| Realized gain (loss) | — | — | |||||||||
| Unrealized loss | (3,753) | (820) | |||||||||
| Transfers in and /or out of Level 3 | — | — | |||||||||
| Level 3 fair value, end of year | $ | 9,427 | $ | 13,180 | |||||||
The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of December 31, 2022 and 2021:
| (In thousands) | Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs | |||||||||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||||||||
| Impaired loans, net | $ | 12,873 | Real Estate Appraisals | Discount for appraisal type | 5.8% | - | 20% | ||||||||||||||||||||||
| SBA servicing assets | 1,013 | Discounted Cash Flows | Market discount rates | 14.73% | - | 14.90% | |||||||||||||||||||||||
| December 31, 2021: | |||||||||||||||||||||||||||||
| Impaired loans, net | $ | 20,920 | Real Estate Appraisals | Discount for appraisal type | 5.8% | - | 20% | ||||||||||||||||||||||
| SBA servicing assets | 617 | Discounted Cash Flows | Market discount rates | 14.73 | % | - | 14.90 | % | |||||||||||||||||||||
Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements.
The estimated fair value amounts have been measured as of December 31, 2022 and 2021 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.
The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.
100
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 22. Parent Company-only Financial Statements
The following represent the condensed stand-alone financial statements of the Company, which is the sole owner and parent company of the Bank, its operating bank subsidiary.
CONDENSED BALANCE SHEETS
December 31, 2022 and 2021
| (In thousands) | As of December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 11 | $ | 377 | |||||||
| Investment in subsidiary | 89,533 | 96,799 | |||||||||
| Other assets | 50 | 149 | |||||||||
| Total assets | $ | 89,594 | $ | 97,325 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Borrowings | $ | 29,608 | $ | 29,930 | |||||||
| Accrued expenses and other liabilities | 403 | 51 | |||||||||
| Shareholders' equity | 59,583 | 67,344 | |||||||||
| Total liabilities and shareholders' equity | $ | 89,594 | $ | 97,325 | |||||||
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2022, 2021 and 2020
| (In thousands) | Year ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Expenses: | |||||||||||||||||
| Interest on subordinated debt | $ | 1,078 | $ | 941 | $ | 1,001 | |||||||||||
| Interest on senior debt | 866 | 913 | 915 | ||||||||||||||
| Total interest expense | 1,944 | 1,854 | 1,916 | ||||||||||||||
| Other expenses | 87 | 173 | 159 | ||||||||||||||
| Loss before benefit for income taxes | 2,031 | 2,027 | 2,075 | ||||||||||||||
| Benefit for income taxes | (550) | (540) | (532) | ||||||||||||||
| Loss before equity in undistributed net income of subsidiary | 1,481 | 1,487 | 1,543 | ||||||||||||||
| Equity in undistributed net income (loss) of subsidiary | 7,642 | 6,581 | (2,276) | ||||||||||||||
| Net income (loss) | 6,161 | 5,094 | (3,819) | ||||||||||||||
| Equity in subsidiary other comprehensive loss, net of subsidiary | (14,008) | (1,119) | (115) | ||||||||||||||
| Total comprehensive (loss) income | $ | (7,847) | $ | 3,975 | $ | (3,934) | |||||||||||
101
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2022, 2021 and 2020
| (In thousands) | Year ended December 31, | ||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net income (loss) | $ | 6,161 | $ | 5,094 | $ | (3,819) | |||||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||||||||
| Equity in undistributed net income (loss) of subsidiary | (7,642) | (6,581) | 2,276 | ||||||||||||||
| Dividends received from Patriot Bank, N.A. | 900 | 500 | 2,000 | ||||||||||||||
| Share-based compensation expense | 86 | 150 | 159 | ||||||||||||||
| Amortization of debt issuance costs | 38 | 111 | 112 | ||||||||||||||
| Change in assets and liabilities: | |||||||||||||||||
| Decrease (increase) in other assets | 99 | 955 | (540) | ||||||||||||||
| Decrease in accrued expenses and other liabilities | (8) | (399) | (315) | ||||||||||||||
| Net cash used in operating activities | (366) | (170) | (127) | ||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Net (increase) decrease in investment in Patriot Bank N.A. | — | (1) | 8 | ||||||||||||||
| Net cash (used in) provided by investing activities | — | (1) | 8 | ||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Proceeds from issuance of senior notes | 12,000 | — | — | — | |||||||||||||
| Repayments of senior notes | (12,000) | — | — | — | |||||||||||||
| Net cash used in financing activities | — | — | — | ||||||||||||||
| Net decrease in cash and cash equivalents | (366) | (171) | (119) | ||||||||||||||
| Cash and cash equivalents at beginning of year | $ | 377 | $ | 548 | $ | 667 | |||||||||||
| Cash and cash equivalents at end of year | $ | 11 | $ | 377 | $ | 548 | |||||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||||||||
| Cash paid for interest | $ | 1,897 | $ | 1,570 | $ | 1,776 | |||||||||||
| Supplemental Disclosure of Non-cash Activity: | |||||||||||||||||
| Deferred debt issuance costs | $ | 360 | $ | — | $ | — | |||||||||||
102
PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Note 23. Subsequent Event
On March 10, 2023, Silicon Valley Bank Santa Clara, CA was closed by the California Department of Financial Protection & Innovation which appointed the Federal Deposit Insurance Corporation (FDIC) as Receiver. To protect depositors, on March 13, 2023, the FDIC transferred all the deposits, both insured and uninsured, of Silicon Valley Bank to Silicon Valley Bridge Bank, N.A. a full-service 'bridge bank' that will be operated by the FDIC as it markets the institution to potential bidders. The initial FDIC actions created concerns among depositors, investors, and other bank stakeholders that the banking system could be subject to an overall drain on liquidity. The Company has no current direct investment in or contractual relationships with Silicon Valley Bank or its holding company.
103
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Patriot maintains disclosure controls and procedures that are designed to provide reasonable assurance that information that is required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to management in a timely fashion.
Patriot’s management, with the participation of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of its disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, Patriot’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, Patriot’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Patriot’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in rules 13a-15(f) and 15d-15f under the Exchange Act. Patriot’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Patriot’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and deployment of its assets; provide reasonable assurance that transactions are recorded in a timely manner to enable the preparation of financial statements in accordance with U.S. GAAP; receipts and disbursements are made only in compliance with the authorizations established by management and policies instituted by its Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and/or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, management concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.
In accordance with the rules and regulations of the SEC, management’s report on the design and effectiveness of Patriot’s system of internal controls over financial reporting is not subject to attestation by Patriot’s independent registered public accounting firm. The SEC rules and regulations applicable to Patriot only require a report by management. Accordingly, this annual report on Form 10-K for the year ended December 31, 2022 does not include an opinion by Patriot’s independent registered public accounting firm regarding management’s system of internal controls over financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the fourth fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
104
ITEM 9B. Other Information
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None
105
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Board of Directors
The following sets forth information regarding our executive officers and directors.directors as of March 29, 2023. Unless otherwise indicated, each person holds the same position(s) of both Patriotthe Company and Patriot Bank, N.A. (the “Bank”). Bank.
Name | Age | Current Position with Patriot | |||||||||||||||
Michael A. Carrazza |
| Director and Chairman of the Board of Directors of the Company and the Bank | |||||||||||||||
| Robert G. Russell, Jr. | 57 | Director, President and Chief Executive Officer of the Company and the Bank | * | ||||||||||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
Edward N. Constantino |
| Director | |||||||||||||||
|
|
| |||||||||||||||
Emile Van den Bol |
| Director | |||||||||||||||
Michael J. Weinbaum |
| Director | |||||||||||||||
Our directors are pointed for one-year terms to hold office until the next annual meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by the Board of Directors and hold office until removed by the Board.
Michael A. CarrazzaMr. Carrazza has been Chairman of the Board of Directors of the Company since 2010 and served as interim Chief Executive Officer sinceof the Company from August 2016. Through PNBK Sponsor, Mr. Carrazza manages PNBK Holdings, LLC (“PNBK Holdings”), the Company’s largest shareholder.2016 to July 2020. Mr. Carrazza is also CEO of Solaia Capital Advisors, an investment management company.firm engaged in making private equity and credit investments. In 2012, Mr. Carrazza led the spin-out of the Bank of Ireland’s U.S. Asset-Based Lending Group, nowpresently known as Siena Lending Group, and servesserved as its Chairman. In 2004, he co-foundedChairman through 2019. Previously, Mr. Carrazza was co-founder of Bard Capital Group where he sponsored several transactions in the industrial sector. From 2001 until 2003, he was principal at The Glen Rock Group, a middle market investment firm, where heHe has structured and financed the leveraged buyout of International Surface Preparation Group, Inc. (“ISPC”) from U.S. Filter/Vivendi. HeVivendi and subsequently worked at ISPC as Vice President in the office of thealongside its Chairman, managing the company’s turnaround, financings, restructure and subsequent sale. Mr. Carrazza also led the financing and restructuring of Mitchell Madison Group and served on the firm’s Executive Team, where he assisted in the firm’s global expansion and managed its subsequent sale to US Web/CKS. Mr. Carrazza began his career at Goldman, Sachs & Co. Mr. Carrazza earned his MBA in Finance from The Stern School of Business at New York University and his B.S. in Electrical Engineering from The Pennsylvania State University.
Joseph D. Perillo
Mr. PerilloCarrazza is qualified to be a director as he has an extensive background in the financial services industry, has served as Patriot’s Chairman since 2011 and served as Interim CEO from 2016 to 2020.
Robert G. Russell, Jr. Mr. Russell was appointed as President and Chief Executive Officer of the Company and the Bank in July 2020 and Director in September 2020. Mr. Russell has more than 30 years of community banking experience. Prior to joining the Company and the Bank, Mr. Russell served as Executive Vice President and Chief Operating Officer of Millington Bank of Morris and Somerset Counties of New Jersey from 2015 to 2020. Previously, he served as President and Chief Executive Officer of NJM Bank from 2013 to 2014, and before that, as its Chief Financial and Investment Officer from 2003 to 2013. Mr. Russell has led both institutions to achieve significant growth and increases in profitability. During the period of 1990 to 2003, Mr. Russell has also spent part of his career as an Internal Auditor and as a Controller for banking institutions of various asset sizes throughout the state of New Jersey. Mr. Russell earned his bachelor’s degree from Montclair State University and a is a graduate of the Graduate School of Banking at Colorado. Mr. Russell is qualified to be a director as he has over 30 years of banking experience, including Chief Executive and Chief Operating Officer roles and serves as President and CEO of Patriot Bank.
* On March 23, 2023, Mr. Russell tendered his resignation as Director, President and Chief Executive Officer of the Company and the Bank, since May 2017. He servedto be effective as a senior executive consultant for several months beginning in January 2017, tasked with assessing the finance department’s processes and improving operations and internal controls. Mr. Perillo is a recognized finance industry leader with over two decades of experience in the banking industry, having served as Chief Accounting Officer and Chief Financial Officer for iQor Inc., a $1.5 billion global leader in business process outsourcing. He began in public accounting with KPMG and then spent over 20 years in banking with Citibank, NatWest and as Senior Vice President & Controller for GreenPoint Financial, then one of the 50 largest banking companies in the U.S. Mr. Perillo earned his Bachelor of Science in accounting from St. John’s University and is a Certified Public Accountant.
Frederick K. Staudmyer
Mr. Staudmyer has served as the Company’s Secretary and Chief Human Resources Officer since November 2014. He is also the Executive Vice President and Chief Administrative Officer of Patriot Bank, N.A., overseeing retail banking, human resources, retail and deposit operations, corporate governance, the customer support center, property development, OREO, facilities management, and marketing. Mr. Staudmyer previously served as Assistant Dean at Cornell University’s Johnson Graduate School of Management. Bringing more than 30 years of human resources, general management and corporate leadership experience, he has served at leading financial institutions where he directed talent acquisition and development, including this role at Chase Manhattan Bank, now JPMorgan Chase. He also served as President and COO at a national legal services and staffing company for over seven years. Mr. Staudmyer earned his MBA from the Johnson Graduate School of Management at Cornell and his Bachelor of Science at Cornell’s School of Industrial & Labor Relations. He has served on the board of directors of the MBA Career Services Council and as an Advisory Council Member of Cornell University’s Entrepreneurial and Personal Enterprise Program.
David W. Christiansen
Mr. Christiansen became Executive Vice President and Chief Credit Officer of the Bank in June 2018, overseeing the Bank’s loan portfolio, lending activities and compliance as well as ensuring operating policies, procedures, objectives and goals. He joined the Bank from First American International Bank of New York, where he was also Executive Vice President & Chief Credit Officer from 2017 to 2018. His experience in credit administration, credit risk management, underwriting, closing, loan servicing and portfolio management provides a useful foundation for his role at the Bank. From 2006 to 2016, he previously held senior roles at National Cooperative Bank, Credit Agricole and JPMorgan Chase. As a strategic senior credit risk management officer with extensive commercial banking, capital markets, corporate finance, regulatory & compliance, and business development experience, he has led a strong credit culture while providing excellent customer service for industry-leading multinational companies. His key strengths include strategic leadership, global perspective, and consultative credit risk management leadership, yielding a broad and deep understanding of the business, management, financial, and competitive risks faced by clients. Mr. Christiansen holds a Bachelor of Arts Degree in Economics from the University of Virginia.
Judith P. Corprew
Ms. Corprew has served as Executive Vice President and Chief Compliance & Risk Officer of the Bank since March 2015, ensuring compliance with local, state and federal regulations, and risk management. She serves on management committees of the Bank for: Regulatory Compliance, Enterprise Risk, Steering and Compliance Risk Assessment. She holds a Certified Regulator Compliance Manager certification, a highly regarded recognition by the American Bankers Association. With three decades of credit and risk management experience, she has held leadership positions at community-focused financial institutions and mortgage companies throughout the Tri-State area. Early in her banking career, Ms. Corprew was awarded honors for establishing a profitable mortgage center. A staunch advocate for teaching financial literacy skills, Ms. Corprew has led educational seminars and events at local schools, clubs and community organizations. She has also held workshops on first-time home buying, credit and budgeting. She is a member of the United Way and Stamford Financial Stability Collaborative, and has served as a financial coach for United Way. She is a member of the Bank Compliance Association of Connecticut, Institute of Certified Bankers and Regulatory Compliance Group of Fairfield County. She is also a board member of The Helpers Club Scholarship Foundation of Stamford. Ms. Corprew earned her bachelor’s degree from Rutgers University and a master’s degree in finance from Post University in Waterbury, CT.
Edward N. Constantino
Mr. Constantino has been a director of the Company since October 2010 and the Lead Independent Director since October 2018. He has over 40 years of audit, advisory and tax experience working for two major accounting firms, Arthur Anderson LLP and KPMG LLP. Mr. Constantino retired from KPMG in late 2009, where he was an Audit Partner in charge of the Firm’s real estate and asset management businesses. Mr. Constantino is a member of the Board of Directors and Chairman of the Special Committee of ARC Property Trust and a member of the Board of Directors and Chairman of the Audit Committee of VineBrook Trust and NexPoint Residential Trust. He also is the Chairman of the Real Estate and Facilities Committee and member of the Investment Committee at St. Francis College. Mr. Constantino also serves as a consultant for the law firm of Skadden Arps. Mr. Constantino’s specific skills include auditing national and multinational organizations, internal control and compliance, financial reporting, regulatory reporting, risk management, asset valuation, accounting and finance and transaction structuring. He is a licensed CPA, a Member of the American Institute of Certified Public Accountants and a Member of the New York State Society of Public Accountants.
Raymond Smyth
Mr. Smyth served asConstantino received a Bachelor of Business Administration degree from St. Francis University. Mr. Constantino is qualified to be a director as he has extensive audit, advisory and tax experience as an Audit Partner with KPMG.