PATRIOT NATIONAL BANCORP, INC. 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 inthe 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 ofJanuary 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 ofJanuary 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
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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 ofU.S. Government agency debt and mortgage-backed securities issued by theU.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 ofDecember 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 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
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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.
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Table of Contents FINANCIAL CONDITION Assets
The Company's total assets increased
Cash and cash equivalents
Cash and cash equivalents decreased$8.6 million or 18.2%, from$47.0 million atDecember 31, 2021 to$38.5 million as ofDecember 31, 2022 . The decrease as ofDecember 31, 2022 was primarily attributable to increase in loan origination and purchased loans. The Company's liquidity position is strong with liquid assets to total assets of 9.3% as ofDecember 31, 2022 .
Investment securities
The following table is a summary of the Company's available-for-sale securities portfolio and other investments at the dates shown:
December 31 , (In thousands, except per share amounts) 2022
2021 2020
U. S. Government agency and mortgage-backed securities$ 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 atDecember 31, 2021 to$89.0 million atDecember 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 endedDecember 31, 2022 and 2020. During the year endedDecember 31, 2021 , the Bank sold$58.8 million available-for-sale securities and recognized net gain on sale of securities of$76,000 . 22
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Loans held for investment
The following table provides the composition of the Company's loan held for
investment portfolio as of
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
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% onOctober 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 ofDecember 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 ofDecember 31, 2022 and 2021, respectively. AtDecember 31, 2022 , the net loan to deposit ratio was 97.4% and the net loan to total assets ratio was 80.3%. AtDecember 31, 2021 , these ratios were 97.0% and 77.0%, respectively. 23
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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
Contractual Maturity of Loan Balance
One year or One through After Five
(In thousands) less Five Years 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.
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Allowance for loan and lease losses
The allowance for loan and lease losses increased$405,000 from$9.9 million atDecember 31, 2021 to$10.3 million atDecember 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 endedDecember 31, 2022 . Based upon the overall assessment and evaluation of the loan portfolio atDecember 31, 2022 and based upon the prevailing accounting standard (ASC 310-10-35), management believes the allowance for loan and lease losses of$10.3 million , which represents 1.2% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio. As ofJanuary 1, 2023 , the Company adopted ASU 2016-13 to recognize and measure credit losses on financial assets measured at amortized cost as discussed further in the Summary of Significant Accounting Policies. The following table provides detail of activity in the allowance for loan and lease losses: Year Ended December 31, (In thousands) 2022 2021 2020 Balance at beginning of the period$ 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
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 %
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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
Percent of loans Percent of loans Percent of loans
Allowance for in each category Allowance for in each category Allowance for in each category
loan losses to total loans
loan losses to total loans loan losses to total loans
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
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 atDecember 31, 2021 to$18.6 million atDecember 31, 2022 . The$18.6 million of non-accrual loans atDecember 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 ofDecember 31, 2022 .
As of
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Loans held for sale
Loans held for sale are made up of SBA loans which totaled
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 ofOctober 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 atDecember 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 atDecember 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 endedDecember 31, 2022 , compared to$14.3 million for the year endedDecember 31, 2021 . During 2022 and 2021, no loans held for investment were transferred to loans held for sale. InSeptember 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 inOctober 2020 which resulted in proceeds of$5.0 million .
Premises and equipment
As ofDecember 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 endedDecember 31, 2022 . In 2021, the Bank sold a building inNew Haven, Connecticut , and recognized proceeds from the sale of$1.5 million for the year endedDecember 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
As ofDecember 31, 2022 and 2021, the Company's goodwill was recorded unchanged at$1.1 million , which resulted from the acquisition of Prime Bank inMay 2018 . The Company performed its annual review of goodwill as ofOctober 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 .
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Deferred Taxes
As ofDecember 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, atDecember 31, 2022 , Patriot has post-change net operating loss carry-forwards of approximately$0.3 million which do not expire. For the years endedDecember 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
As ofDecember 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 ofDecember 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 ofDecember 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 endedDecember 31, 2022 , 2021 and 2020. InApril 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 beginningApril 29, 2021 . InAugust 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 endedDecember 31, 2022 . During the year endedDecember 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 endedDecember 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.
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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
160,968
Certificates of deposit,
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
Shareholders' Equity Equity decreased$7.8 million from$67.3 million atDecember 31, 2021 to$59.6 million atDecember 31, 2022 . The decrease was primarily due to$14.0 million unrealized loss in investment portfolio for the year endedDecember 31, 2022 , which was partially offset by$6.2 million of net income for the year endedDecember 31, 2022 . 29 -------------------------------------------------------------------------------- Table of Contents The following table presents average balance sheets, interest income, interest expense and the corresponding yields earned, and rates paid for each of the years in the three-year period endedDecember 31, 2022 . (In thousands) Year Ended December 31, 2022 2021 2020 Average Average Average Balance Interest Yield Balance Interest Yield Balance Interest Yield ASSETS Interest Earning Assets: Loans$ 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
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
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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 endedDecember 31, 2022 to 2021 andDecember 31, 2021 to 2020.
Year ended
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
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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 endedDecember 31, 2021 , as filed with theSEC onMarch 24, 2022 .
Comparison of Results of Operations for the years 2022 and 2021
For the year endedDecember 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 endedDecember 31, 2021 .
Pre-tax income was
•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
For the year endedDecember 31, 2022 , total interest expense increased to$10.8 million , as compared to$7.1 million for the year endedDecember 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 endedDecember 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 endedDecember 31, 2022 , compared with 2.9% for the year endedDecember 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 endedDecember 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 endedDecember 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
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Non-interest expense
For the year endedDecember 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
OnNovember 14, 2021 , the Company and American Challenger entered into a merger agreement, which was subsequently amended onJanuary 28, 2022 andFebruary 28, 2022 . OnJuly 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 endedDecember 31, 2021 and$112,000 for the year endedDecember 31, 2022 .
Other financial measures and ratios:
As of and for
the year ended
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 ofDecember 31, 2022 , the Company's balance sheet liquidity was$97.4 million , which was 9.3% of total assets of$1.0 billion . AtDecember 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% atDecember 31, 2022 compared to 21.7% atDecember 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
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As of
(In thousands)
Contractual Obligations Due
Less than One One to Three Three to Five Over Five
Contractual Obligation Category Year Years Years 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 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 endedDecember 31, 2022 ,$500,000 for the year endedDecember 31, 2021 , and$2.0 million for the year endedDecember 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 ofDecember 31, 2022 and 2021, the Bank's off-balance sheet commitments were$154.3 million and$127.0 million , respectively.
REGULATORY CAPITAL REQUIREMENTS
InSeptember 2019 , the community bank leverage ratio (CBLR) framework was jointly issued by theFDIC , 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 theirMarch 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. InSeptember 2021 , the Bank adopted the CBLR framework. The Bank's Tier 1 leverage ratio as ofDecember 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.
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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 theManagement 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 theManagement Asset and Liability Committee , there is aBoard 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.
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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 Change from Change from Base Change from Change from Base
Rate Scenario Estimated Value Base ($)
(%) Estimated Value 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 %
NetInterest Income - Performance Summary
December 31, 2022 December 31, 2021
Projected Interest Change from Change from Base Estimated Change from Change from
Rate Scenario Estimated Value Base ($) (%) Value Base ($) 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.
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