Patriot National Bancorp, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Patriot is a Connecticut bank holding company whose principal subsidiary, Patriot Bank, operates nine branches in Connecticut and New York and focuses on community banking, commercial lending, SBA lending, deposits and digital payments.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets | $1.093 billion | $1.043 billion |
| Total deposits | $840.3 million | $860.4 million |
| Gross loans held for investment | $848.9 million | $848.3 million |
| Net interest income | $28.5 million | $33.3 million |
| Net interest margin | 2.79% | 3.46% |
| Provision for credit losses | $7.4 million | $1.9 million |
| Non-interest income | $6.0 million | $3.6 million |
| Non-interest expense | $32.7 million | $27.2 million |
| Net income (loss) | $(4.2) million; $(1.05) per share | $6.2 million; $1.56 per share |
| Cash, cash equivalents and restricted cash | $66.5 million | $38.5 million |
| Total borrowings | $201.1 million | $115.2 million |
| Shareholders’ equity | $44.4 million | $59.6 million |
- Interest income rose $14.9 million, but interest expense increased $19.7 million as deposit and borrowing costs reset higher. Net interest margin contracted to 2.79%.
- Operating cash flow was $(10.7) million, compared with $7.0 million provided in 2022. Investing activities used $27.2 million; financing activities provided $65.9 million. Year-end cash increased by $28.0 million.
- Management reported balance-sheet liquidity of $94.9 million, or 8.7% of assets; including available off-balance-sheet funding, liquidity was 18.6%. The Bank had $171.0 million in FHLB, FRB and correspondent borrowings, including $70.0 million outstanding under the Bank Term Funding Program.
- At year-end, the Bank’s total risk-based capital ratio was 11.22%, CET1 ratio 10.50%, and Tier 1 leverage ratio 8.70%. It was classified as well capitalized. The Bank changed from the community bank leverage ratio framework to risk-based capital reporting in Q4 2023.
Material changes and notable items
- The Company adopted CECL on January 1, 2023. The transition reduced opening retained earnings by $11.5 million, net of tax. The year-end loan allowance was $15.9 million, or 1.88% of gross loans, versus $10.3 million and 1.22% in 2022. The 2023 allowance included $17.3 million of net charge-offs and a $9.9 million loan-loss provision.
- Net charge-offs increased to 1.93% of average loans from 0.18%. The filing attributes much of the increase to consumer and other loans; the portfolio includes purchased unsecured consumer loans, whose outstanding balance fell to $48.5 million from $78.9 million.
- Nonperforming assets were $21.3 million, or 1.95% of assets, compared with $19.7 million, or 1.89%, in 2022. Non-accrual loans were $18.1 million; the Bank also recorded one foreclosed residential property of $2.8 million as other real estate owned.
- Deposits declined $20.1 million overall. Digital Payments deposits increased to $213.4 million from $197.3 million, while non-interest-bearing deposits fell substantially, in part as digital balances shifted to interest-bearing accounts. Average deposit cost rose to 3.05% from 0.93%.
- Goodwill was fully impaired, resulting in a $1.1 million fourth-quarter charge. The company also recorded $1.3 million of fourth-quarter income from a credit-loss-sharing agreement with a consumer-loan seller/servicer.
- Shareholders’ equity decreased by $15.2 million, reflecting the CECL transition adjustment and the annual net loss. The Company has not paid dividends since 2020.
Outlook, risks and contingencies
- Management said loan originations were kept minimal in the second half of 2023 to support capital ratios and reduce assets. It expected this approach to continue during 2024. The Bank was building a national mortgage origination business, with originations expected to begin in early 2024.
- Management stated that available liquidity was sufficient for anticipated operational needs, loan demand and potential deposit fluctuations over the next 12 months and beyond. This is a forward-looking assessment, not a guarantee.
- Key risks include rising funding costs and interest-rate sensitivity; deposit volatility, particularly in Digital Payments balances; concentration in regional commercial real estate and commercial lending; credit deterioration and collateral-value declines; reliance on wholesale funding; and competition, regulatory requirements and cybersecurity threats.
- Available-for-sale securities had $20.9 million of gross unrealized losses at year-end, primarily attributed to higher market rates. Management stated it did not intend, and was not more likely than not required, to sell them before recovery; no credit-loss allowance was recorded on those securities.
- The Bank’s 2018 OCC written agreement was terminated in 2021. The filing says SBA preferred lender status was renewed in 2022 through November 15, 2023 and that the Bank expected renewal; the provided text does not clearly confirm the subsequent renewal.
- The 10-K reports no material pending litigation or material subsequent events. The auditor issued an unqualified opinion on the financial statements and identified the loan allowance and goodwill impairment assessments as critical audit matters. The auditor did not attest to internal control over financial reporting.
- Management reported that Q1 and Q2 2023 quarterly reports were restated following accounting errors related to allowance-for-credit-loss recognition. It said controls were changed and internal control over financial reporting was effective as of December 31, 2023.
Important facts for investors to verify
- Whether deposit and funding costs stabilize enough to reverse the decline in net interest margin, and how much reliance on FHLB and Federal Reserve funding continues.
- Subsequent credit performance, charge-offs and reserve adequacy—especially in purchased unsecured consumer loans, commercial real estate and individually evaluated credits.
- Whether the Bank renewed SBA preferred lender status after the stated November 2023 expiration and whether mortgage originations began as expected in early 2024.
- The progress of remediation following the quarterly restatements, including the effectiveness of controls over credit-loss accounting.
- The assumptions supporting realization of the $24.1 million net deferred tax asset, for which no valuation allowance was recorded.