What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-04-01 compared with 2023-03-29 · 183 added, 135 removed, 315 unchanged (50% of the section changed)

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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.

Unrealized Gains and Losses on Securities Available-for-sale

Allowance for Credit Losses (ACL)

The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, Accounting Standard Codification (“ASC”) 326, effective January 1, 2023, which introduced the current expected credit loss (“CECL”) methodology for estimating all expected losses over the life of a financial asset.

The allowance for credit losses represents management’s estimate of expected credit losses over the life of a financial asset carried at amortized cost.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the fair value of the underlying collateral and amount and timing of expected future cash flows on individually assessed financial assets, estimated credit losses on pools of loans with similar risk characteristics, and consideration of reasonable and supportable forecasts of macroeconomic conditions, all of which are susceptible to significant change.

The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments, which relates to certain amounts the Company is committed to lend (not unconditionally cancellable) but for which funds have not yet been disbursed.

Loans deemed uncollectible are charged against and reduce the allowance.

A provision for credit losses is charged to current expense and acts to replenish the ACL in order to maintain the allowance at a level that management deems adequate.

Determining the allowance involves significant judgments and assumptions by management.

Because of the nature of the judgments and assumptions made by management, actual results may differ from these judgments and assumptions.

Allowance for Credit Losses - Debt Securities Available for Sale

The Company receives estimated fair values of debt securities from independent valuation services and brokers.

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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.

Effective January1, 2023, as a result of adopting ASU No.

2016-13, quarterly assessments are conducted to evaluate impairment credit losses on available-for-sale debt securities.

These evaluations consider factors like fair value deviation from cost, issuer financial health, and the Company's intent to hold securities for fair value recovery.

Impairments due to non-credit factors are recorded in other comprehensive income, while credit-related impairments are recognized as allowances for credit losses on the balance sheet.

If a security is likely to be sold before amortized cost basis recovery, the entire impairment is recognized in net income with an adjustment to the security's basis.

No allowance for ALC-Securities was recorded for available -for-sale securities as of December 31, 2023.

Deferred Income Taxes

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Any impairment, if temporary, would be reported as a valuation allowance.

Derivatives Instruments and Hedging Activities

Derivatives Instruments

The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy.

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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.

FINANCIAL CONDITION

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 total assets increased $50.1 million, or 4.8%, from $1.04 billion at December 31, 2022 to $1.09 billion at December 31, 2023.

The increase was primarily driven by a rise in cash, cash equivalents and restricted cash of $28.0 million, and an increase in loans held for sale of $15.6 million.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash increased $28.0 million or 72.9%, from $38.5 million at December 31, 2022 to $66.5 million as of December 31, 2023.

The increase in cash reflects the intention to boost balance sheet liquidity in connection with recent uncertainty in the banking sector.

The Company’s liquidity position is strong with liquid assets to total assets of 8.7% as of December 31, 2023.

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The following table is a summary of the Company’s available-for-sale securities portfolio and other investments at the dates shown:

(In thousands, except per share amounts) 2022 2021 2020

(In thousands) 2023 2022 2021

Government agency and mortgage-backed securities $ 65,671 $ 59,046 $ 66,629

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$ 93,637 $ 88,970 $ 98,791

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.

Total investments increased $4.6 million or 5.2%, from $89.0 million at December 31, 2022 to $93.6 million at December 31, 2023.

This increase was primarily attributable to the purchases of available-for-sale securities of $10.4 million in 2023, which was partially offset by $4.3 million in repayments and maturity of principal on available-for-sale securities, and net unrealized loss of $216,000 for the available-for-sale securities, associated with rising market interest rates.

During the year ended December 31, 2023, the Bank sold $1.8 million available-for-sale securities and recognized $24,000 net gain on sale.

There was no sale of available-for-sales securities during the year ended December 31, 2022.

In 2021, the Bank sold $58.8 million available-for-sale securities and recognized net gain on sale of securities of $76,000.

Loans held for investment

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Loans receivable, gross 848,859 100.00 % 848,316 100.00 % 739,488 100.00 %

Allowance for loan losses (10,310) (9,905) (10,584)

Allowance for credit losses (15,925) (10,310) (9,905)

Loans receivable, net $ 832,934 $ 838,006 $ 729,583

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 gross loans receivable increased $543,000 or 0.1%, from $848.3 million at December 31, 2022 to $848.9 million at December 31, 2023.

The increase in loans was primarily attributable to $145.5 million in loan origination and $21.1 million in purchases of loans receivable which was partially offset by a net decrease in loan payoffs of $144.0 million for the year ended December 31, 2023.

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.

During the second half of 2023 the Bank limited new loan originations to a minimal amount to bring down total assets in line with the objective to enhance its capital ratios.

During the second half of 2023, loans held for investment declined $80 million (9%) resulting in an improvement in the Bank’s year end capital ratios.

This trend is expected to continue during 2024.

SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above.

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These loans generally are collateralized by the underlying real estate and supported by personal guarantees of the borrowers.

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:

Allowance for credit losses

The Company adopted ASU 2016-13 effective January 1, 2023.

ASU 2016-13 requires the measurement of expected credit losses for financial assets, including loans and certain off-balance-sheet credit exposures, measured at amortized cost.

See Note 1 - Summary of Significant Accounting Policies to the Company's financial statements for a description of the adoption of ASU 2016-13 and the Company's allowance methodology.

The allowance for credit losses was $15.9 million at December 31, 2023, compared to allowance for loans and lease losses of $10.3 million at December 31, 2022.

The increase was primarily due to the adoption of CECL as the Company recorded a transition adjustment of $13.0 million effective January 1, 2023 and a provision for credit losses on loans of $9.9 million, which was partially offset by net charge-offs of $17.3 million for the year ended December 31, 2023.

Based upon the overall assessment and evaluation of the loan portfolio at December 31, 2023, management believes the allowance for credit losses of $15.9 million, which represents 1.9% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.

The following table provides detail of activity in the allowance for credit losses.

The Company used the CECL methodology in 2023 while the incurred loss methodology was used in prior years:

Year Ended December 31,

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Balance at beginning of the period $ 10,310 $ 9,905 $ 10,584

Impact of ASC 326 adoption 13,001 — —

Commercial Real Estate (6,346) — (51)

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Net charge-offs (17,289) (1,480) (179)

Provision (credit) for loan losses 1,885 (500) 2,170

Provision (credit) for credit losses 9,903 1,885 (500)

Balance at end of the period $ 15,925 $ 10,310 $ 9,905

Net charge-offs to average loans (1.93) % (0.18) % (0.03) %

Allowance for loan losses to total loans 1.22 % 1.34 % 1.45 %

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:

Allowance for credit losses to total loans 1.88 % 1.22 % 1.34 %

The following table provides an allocation of allowance for credit losses by portfolio segment and the percentage of the loans to total loans:

(In thousands) 2023 2022 2021

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

Allowance for credit 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 $ 6,089 55.62 % $ 6,966 51.57 % $ 5,063 49.38 %

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Unallocated — N/A 35 N/A 238 N/A

Total Allowance for loan losses $ 10,310 100.00 % $ 9,905 100.00 % $ 10,584 100.00 %

Total Allowance for credit losses $ 15,925 100.00 % $ 10,310 100.00 % $ 9,905 100.00 %

Nonperforming Assets

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Nonperforming loans to total loans, net 2.22 % 2.36 % 3.17 %

Non-accrual loans decreased $4.5 million, from $23.1 million at December 31, 2021 to $18.6 million at December 31, 2022.

Non-accrual loans decreased $466,000, from $18.6 million at December 31, 2022 to $18.1 million at December 31, 2023.

The $18.1 million of non-accrual loans at December 31, 2023 was comprised of 139 borrowers.

Two TDR loans totaling $9.5 million were included in the non-accrual loans.

Of these, 19 loans were individually evaluated and a specific reserve of $4.2 million was established as of December 31, 2023.

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.

As of December 31, 2022, the $18.6 million of non-accrual loans was comprised of twenty-eight borrowers, for which a specific reserve of $6.0 million was established.

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.

As of December 31, 2023, loans held for sale totaled $20.8 million, consisting of $9.9 million of SBA loans and $10.8 million loans held for sale for digital payments of credit cards.

In comparison, at December 31, 2022, loans held for sale solely for SBA loans amounted to $5.2 million.

SBA 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.

SBA loans held for sale at December 31, 2023 consisted of $3.5 million SBA commercial and industrial loans and $6.4 million SBA commercial real estate.

SBA 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.

The Company sold $4.6 million SBA loans during the year ended December 31, 2023, compared to $21.6 million for the year ended December 31, 2022.

During 2023, 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.

Other consumer loans held for sale

In July 2023, Patriot Bank's Digital Payments Division has entered into a Program Management Agreement with a buyer.

Under the agreement, Patriot originates various types of consumer loans that are marketed by the buyer.

As of December 31, 2023 , the Bank had credit card loans held for sale totaling $10.8 million.

The credit card loans expected to be held for no longer than three days before being sold to the buyer.

The credit card receivable are fully cash-secured by deposits at Patriot.

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.

As of December 31, 2023 and 2022, Patriot recorded premises and equipment of $29.9 million and $30.6 million, respectively.

The decreases in premises and equipment were normal depreciation of the active premises and equipment during the year ended December 31, 2023.

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.

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.

As of December 31, 2023, the Bank recorded one OREO of $2.8 million.

The OREO balance represents the lower of the carrying value of loan receivable due from the mortgage of the foreclosed residential property or the estimated net realized value of the underlying property acquired through foreclosure.

As of December 31, 2022, no OREO balance was record on the balance sheet.

In 2021, Patriot sold one OREO of $1.9 million and recognized a gain of $2,000.

The Company performed its annual impairment analysis of goodwill as of October 31, 2023.

The analysis determined that the estimated fair value of the reporting unit was less than its carrying value as of October 31, 2023.

As a result, the goodwill was considered impaired, leading to a $1.1 million impairment charge recorded in the other non-interest expense on the Consolidated Statements of Operations for the year ended December 31, 2023.

As of December 31, 2022, the Company’s goodwill remained unchanged at $1.1 million.

Core deposit intangible (“CDI”)

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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, 2023 and determined that there was no impairment of the CDI as of December 31, 2023.

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As of December 31, 2023, Patriot had available approximately $15.5 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.

After applying the limitation, at December 31, 2022, Patriot has no post-change net operating loss carry-forwards.

For the years ended December 31, 2023 and 2022, the Bank did not record any uncertain tax position (“UTP”) related to the utilization of certain federal net operating losses.

Additionally, Patriot has approximately $47.3 million of NOLs available for Connecticut tax purposes at December 31, 2023, which may be used to offset up to 50% of taxable income in any year.

The NOLs expire between 2030 and 2040.

The NOLs will expire between 2030 and 2040.

As of December 31, 2023, Patriot had a $24.1 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;

• Net operating loss carry-forwards that do not begin to expire until 2030.

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 from the last three years, forecasted taxable income for 2024 and future periods, 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.

In 2023, management noted 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, 2023.

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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.

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.

In December 2023, two back to back interest rate swaps were terminated.

As of December 31, 2023, total two interest rate swaps remained outstanding.

One swap is held with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan.

The other swaps is with an outside third party.

The customer interest rate swap is matched in offsetting terms to the third-party interest rate swaps.

These 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, 2023, 2022 and 2021.

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.

The Company did not recognize any unrealized and realized gain or loss for the year ended December 31, 2023 and 2022.

During the year ended December 31, 2021, the Company recognized $149,000 of accumulated other comprehensive income that was reclassified into interest income.

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Non-interest bearing $ 95,109 $ 118,541 $ 140,384

Prepaid DDA 151,095 86,329 59,332

Non-interest bearing DDA- Digital Payments 14,947 151,095 86,329

Total non-interest bearing 110,056 269,636 226,713

Interest bearing:

Negotiable order of withdrawal accounts 34,440 34,741 30,529

Negotiable order of withdrawal accounts (NOW) 42,416 34,440 34,741

Savings 44,104 71,002 109,744

Interest bearing DDA - Digital Payments 162,196 — —

Money market 166,294 164,827 111,957

Money market - prepaid deposits 46,173 52,561 15,011

Money market - Digital Payments 33,986 46,173 52,561

Certificates of deposit, less than $250,000 175,988 165,793 142,246

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Total Deposits $ 840,311 $ 860,446 $ 748,562

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.

Total Digital Payments deposits $ 213,383 $ 197,268 $ 138,890

Total retail bank deposits $ 394,819 $ 430,650 $ 493,066

As of December 31, 2023, total deposits decreased $20.1 million, primarily due to a decline in retail branch deposits partially offset by a growth in digital payments deposits.

The decline in non-interest bearing deposits was the result of the transfer of most of the digital payments deposits from non-interest bearing to interest bearing due to the growth of that business and decrease in savings.

As of December 31, 2023 and 2022, total borrowings were $201.1 million and $115.2 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.

Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, FRB borrowing, 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 $15.2 million from $59.6 million at December 31, 2022 to $44.4 million at December 31, 2023.

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.

The decrease was primarily due to a cumulative adjustment to the opening balance of accumulated deficit of $11.5 million upon adoption of CECL effective January 1, 2023, and $4.2 million net loss for the year ended December 31, 2023.

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, 2023.

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Investments 99,546 3,157 3.17 % 96,770 2,691 2.78 % 102,466 2,147 2.10 %

Cash equivalents and other 32,229 498 1.55 % 57,753 89 0.15 % 49,071 209 0.42 %

Cash equivalents and restricted cash 25,140 1,490 5.93 % 32,229 498 1.55 % 57,753 89 0.15 %

Total interest earning assets 1,021,186 58,957 5.77 % 960,633 44,012 4.58 % 865,572 32,351 3.74 %

Cash and due from banks 3,172 8,091 4,016

Allowance for loan losses (9,762) (10,384) (10,896)

Allowance for credit losses (22,596) (9,762) (10,384)

OREO 138 — 893

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Comparison of Results of Operations for the years 2023 and 2022

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.

For the year ended December 31, 2023, the Company recorded net loss of $4.2 million ($(1.05) basic and diluted loss per share) compared to net income of $6.2 million ($1.56 basic and diluted loss per share) for the year ended December 31, 2022.

Pre-tax loss was $5.6 million for the year ended December 31, 2023, compared to pre-tax income of $7.8 million for the year ended December 31, 2022.

Significant variances are summarized below and discussed in detail subsequently:

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• Interest expense increased $19.7 million;

• Net interest income increased $8.0 million;

• Provision for loan losses increased $2.4 million;

• Non-interest income decreased $818,000;

• Net interest income decreased $4.8 million;

• Provision for credit losses increased $5.5 million;

• Non-interest income increased $2.4 million;

• Non-interest expense increased $5.5 million.

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Net interest income for the years ended December 31, 2023 and 2022 was $28.5 million and $33.3 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.

The Bank’s net interest margin decreased to 2.8% for the year ended December 31, 2023, compared with 3.5% for the year ended December 31, 2022.

The decline in net interest margin was primarily associated with an increase in the cost of deposits and other borrowings due to the significant rise in market interest rates, only partially mitigated by the rise in variable rate interest earning assets.

Provision (Credit) for credit losses

Beginning January 1, 2023, the Company adopted the CECL accounting standard.

For the year ended December 31, 2023, the Bank recorded total provision for credit losses of $7.4 million, consisting of a $9.9 million provision for credit loss on loans and a credit in reserve for the off-balance sheet exposure of $(2.5) million.

For the year ended December 31, 2022, a provision for loan losses of $1.9 million was recorded, with no recorded reserve for the off-balance-sheet exposure .

The increase in the provision for credit losses for the year ended December 31, 2023 was primarily due to an additional reserve of $4.0 million associated with a single loan balance while the higher provisions also included additional charges associated with the unsecured consumer loan and SBA portfolios.

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.

For the year ended December 31, 2023, non-interest income increased to $6.0 million, as compared to $3.6 million in 2022.

The increase was primarily attributable to higher non-interest income from the digital payments program in 2023, partially offset by a lower gain on sale of SBA loans.

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.

For the year ended December 31, 2023, non-interest expense increased to $32.7 million, as compared to $27.2 million for the year ended December 31, 2022.

The primary drivers of this increase in 2023 were a $1.1 million goodwill impairment recorded in the fourth quarter of 2023, and increased salaries and benefit expenses in 2023, some of which related to the build up of the mortgage origination business expected to begin operations in the first quarter of 2024.

Other financial measures and ratios:

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2023 2022 2021

Return on average assets 0.60 % 0.55 % (0.40) %

Return on average equity 9.87 % 7.75 % (5.82) %

(Loss) return on average assets (0.39) % 0.60 % 0.55 %

(Loss) return on average equity (8.99) % 9.87 % 7.75 %

Average equity to average assets 4.34 % 6.09 % 7.13 %

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Average balances have been computed using daily averages.

Selected Quarterly Financial Data:

The following tables present the summarized quarterly results of operations (unaudited) to the Consolidated Financial Statements for the calendar year 2023:

(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter

Interest and dividend income $ 13,646 $ 15,309 $ 15,070 $ 14,932

Interest expense 5,633 7,596 8,545 8,683

Net interest income 8,013 7,713 6,525 6,249

Provision (credit) for credit losses 2,220 1,325 4,688 (804) (1)

Non-interest income 835 829 1,169 3,172 (2)

Non-interest expense 7,584 8,063 8,109 8,953 (3)

(Loss) income before income taxes (956) (846) (5,103) 1,272

(Benefit) provision for income taxes (257) (231) (1,333) 367

Net (loss) income $ (699) $ (615) $ (3,770) $ 905 (4)

(Loss) earnings per share

Basic $ (0.18) $ (0.16) $ (0.95) $ 0.23

Diluted $ (0.18) $ (0.16) $ (0.95) $ 0.23 (5)

Weighted average shares outstanding - Basic 3,965,186 3,965,186 3,965,186 3,965,733 (6)

Weighted average shares outstanding - Diluted 3,965,186 3,965,186 3,965,186 3,965,733 (6)

(1) I n the fourth quarter of 2023, the provision for credit loss decreased to a credit , primarily due to decrease in loan balance and the reversal of a commitment reserve associated with its consumer loan portfolio that was no longer needed as the result of the termination of the commitments.

(2) The non-interest income was primarily attributable to an income of $1.3 million resulted from a credit loss sharing agreement entered with a seller/servicer of consumer loans.

(3) During the fourth quarter of 2023, the increase in non-interest expense was primarily attributable to an impairment charge for goodwill totaled $1.1 million.

(4) Due to significant changes above, the net income increased to $905,000, compared to net losses in the first three quarters of 2023.

(5) The sum of Earnings (loss) per share - Basic and Diluted of each of the quarters in the year ended December 31, 2023 does not agree to the amount of Basic and Diluted earnings per share presented on the Consolidated Statement of Operations for the year ended December 31, 2023, due to the impact of rounding to the nearest cent on the amount of Earnings per share - Basic and Diluted for the three months ended December 31, 2023 (i.e., the "Fourth Quarter").

(6) The weighted average diluted shares outstanding did not include 491, 1,528, 1,651, and 15,622 anti-dilutive restricted common shares as of March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023, respectively.

The following tables present the summarized quarterly results of operations (unaudited) to the Consolidated Financial Statements for the calendar year 2022:

(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter

Interest and dividend income $ 8,320 $ 9,687 $ 12,039 $ 13,966

Interest expense 1,594 1,967 2,796 4,396

Net interest income 6,726 7,720 9,243 9,570

Provision for loan losses — 275 200 1,410

Non-interest income 814 798 654 1,339

Non-interest expense 6,429 6,502 7,214 7,077

Income before income taxes 1,111 1,741 2,483 2,422

Provision for income taxes 311 476 157 652

Net income $ 800 $ 1,265 $ 2,326 $ 1,770

Earnings per share

Basic $0.20 $ 0.32 $ 0.59 $ 0.45

Diluted $0.20 $ 0.32 $ 0.59 $ 0.45 (1)

Weighted average shares outstanding - Basic 3,956,492 3,957,260 3,957,269 3,957,355

Weighted average shares outstanding - Diluted 3,966,002 3,967,079 3,963,708 3,960,631

(1) The sum of Earnings (loss) per share - Basic and Diluted of each of the quarters in the year ended December 31, 2022 does not agree to the amount of Basic and Diluted earnings per share presented on the Consolidated Statement of Operations for the year ended December 31, 2022, due to the impact of rounding to the nearest cent on the amount of Earnings per share - Basic and Diluted for the three months ended December 31, 2022 (i.e., the "Fourth Quarter").

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2023, the Company’s balance sheet liquidity was $94.9 million, which was 8.7% of total assets of $1.09 billion.

At December 31, 2021, the balance sheet liquidity was $108.4 million, which was 11.4% of total assets of $948.5 million.

At December 31, 2022, the balance sheet liquidity was $97.4 million, which was 9.3% of total assets of $1.04 billion.

Liquidity including readily available off-balance sheet funding sources was 18.6% at December 31, 2023 compared to 18.0% at December 31, 2022.

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Additionally, the Bank retains a collateralized borrowing line with the Federal Reserve Bank which totaled $15.5 million at December 31, 2023 and correspondent bank borrowing lines totaling $17.0 million at December 31, 2023.

In July 2023, the Bank established a collateralized funding line of $80.0 million at par value under the Federal Reserve's newly established Bank Term Funding Program ("BTFP").

The program provides additional funding to eligible depository institutions, assuring they can meet the needs of all their depositors.

The program serves as an additional source of liquidity against high-quality securities, eliminating the need of an institution to quickly sell those securities in times of stress.

The line allows for a fixed rate borrowing at market rates, for up to one year, with repayment permitted at any time without penalty.

As of December 31, 2023, the collateral value of the pledged securities was $72.4 million.

As of December 31, 2023, the maturities of Patriot’s contractual obligations are as follows:

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Brokered deposits 33,853 6,673 — — 40,526

Federal Home Loan Bank borrowings 55,000 30,000 — — 85,000

FHB, FRB and correspondent bank borrowings 171,000 — — — 171,000

Senior notes — 12,000 — — 12,000

5 unchanged sentences

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.

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.

Return of Capital payments from the Bank to the Company totaled $2.5 million for the year ended December 31, 2023, $900,000 for the year ended December 31, 2022, and $500,000 for the year ended December 31, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

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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%.

The following tables illustrate the Company’s and the Bank’s regulatory capital ratios at December 31, 2023:

December 31, 2023

Patriot National Bancorp, Inc.

Patriot Bank, N.A.

(Dollar amounts in thousands) Amount Ratio Amount Ratio

Total Capital (to risk weighted assets) $ 89,727 10.00 % $ 100,683 11.22 %

Tier 1 Capital (to risk weighted assets) 73,282 8.17 % 94,238 10.50 %

Common Equity Tier 1 Capital (to risk weighted assets) 65,282 7.27 % 94,238 10.50 %

Tier 1 Leverage Capital (to average assets) 73,282 6.76 % 94,238 8.70 %

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system.

From September 2021 to September 30, 2023, the Company elected to adopt the CBLR framework.

In the fourth quarter of 2023, the Company elected to use the instituted regulatory risk-based capital approach.

Under the regulatory framework for prompt correction action, to be considered “well capitalized,” an institution must generally have a leverage capital ratio of at least 5.0%, CET1 capital ratio at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10%.

However, the OCC has the discretion to require increased capital ratios.

As of December 31, 2023, the Bank established minimum required capital ratios under a Board approved Capital plan which determined those ratios using a Comprehensive Capital Analysis and Review (“CCAR’)-based stress capital buffer.

That plan established the following capital limits which the Bank exceeded at December 31, 2023:

Total Capital to risk weighted assets 10.50%

Tier 1 Capital to Risk weighted assets 9.30%

Common Equity Tier 1 Capital to Risk weighted assets 9.30%

Tier 1 Leverage Capital to average assets 8.10%

Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity