Patriot National Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. Patriot is a one-bank holding company operating nine branches in Connecticut and New York, focused on commercial real estate, commercial business, SBA, consumer and purchased residential lending.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets | $1.043 billion | $948.5 million |
| Gross loans / net loans | $848.3 million / $838.0 million | $739.5 million / $729.6 million |
| Total deposits | $860.4 million | $748.6 million |
| Net interest income | $33.3 million | $25.3 million |
| Net interest margin | 3.46% | 2.92% |
| Provision (credit) for loan losses | $1.9 million | $(0.5) million |
| Pre-tax income | $7.8 million | $5.0 million |
| Net income / diluted EPS | $6.2 million / $1.55 | $5.1 million / $1.29 |
| Operating cash flow | $7.0 million | $7.6 million |
| Cash and cash equivalents | $38.5 million | $47.0 million |
| Total borrowings | $115.2 million | $120.7 million |
| Shareholders’ equity | $59.6 million | $67.3 million |
- Higher average loan balances and increased yields lifted interest income; higher deposit balances and market rates raised interest expense. Net interest income grew 31.7%.
- Net cash used in investing was $122.1 million, mainly reflecting loan originations and purchases; financing provided $106.5 million, principally from $111.9 million of deposit growth. Cash declined $8.6 million over the year.
- Balance-sheet liquidity was $97.4 million, or 9.3% of assets; including available off-balance-sheet funding, liquidity was 18.0%, down from 21.7%. Management stated liquidity was sufficient for anticipated requirements over the next 12 months and beyond.
- The Bank’s Tier 1 leverage ratio was 9.27%, above the 9.0% well-capitalized threshold under the community bank leverage ratio framework. The net loan-to-deposit ratio was 97.4%.
Material changes and unusual items
- Gross loans rose 14.7%. Commercial real estate increased to $437.4 million; consumer and other loans increased to $141.1 million, including a purchased unsecured consumer portfolio with $78.9 million outstanding at year-end. That portfolio generated $1.6 million of net charge-offs in 2022.
- Nonperforming assets declined to $19.7 million, or 1.89% of assets, from $23.1 million, or 2.44%. Non-accrual loans were $18.6 million. The allowance was $10.3 million, 1.22% of gross loans, including approximately $6.0 million of specific reserves.
- Available-for-sale securities fell to $84.5 million from $94.3 million. The portfolio had $21.1 million of gross unrealized losses at year-end, largely attributed by management to higher interest rates; the after-tax unrealized loss recorded in other comprehensive income was $14.0 million. Management concluded the losses were temporary and recorded no other-than-temporary impairment.
- Equity fell by $7.8 million, principally from the securities-related unrealized loss, partly offset by net income. The Company has suspended dividends and paid none in 2022.
- The proposed American Challenger merger was terminated by mutual agreement in July 2022 after the parties determined not all closing conditions could be satisfied. Patriot recorded $112,000 of related expenses in 2022, following $1.9 million in 2021. The 2021 results also included a $2.9 million employee retention credit.
- In December 2022, Patriot issued $12 million of senior notes bearing 8.50%, due January 2026, and repaid its prior $12 million senior notes. FHLB advances were $85.0 million, with $55.0 million contractually due in 2023.
Outlook, risks and contingencies
- No formal financial guidance was provided. Management described liquidity as adequate and stated its goal was to maintain the Bank’s well-capitalized status.
- CECL became effective for Patriot on January 1, 2023. The filing estimated a pre-tax increase of $2.0–$4.0 million in the loan-loss allowance and $0.5–$1.0 million in the unfunded-commitment reserve, with a $1.8–$3.7 million increase to opening accumulated deficit. Actual adoption amounts should be checked against subsequent reporting.
- Key risks include commercial real estate and regional economic concentration, rising rates and inflation, deposit competition and funding costs, credit losses, and cybersecurity/vendor exposure. The portfolio is concentrated in the Connecticut and New York metropolitan area; commercial real estate and commercial/industrial loans represented approximately 67.9% of gross loans.
- Regulatory history improved: the OCC terminated its 2018 formal agreement in September 2021, and the SBA renewed Patriot’s Preferred Lender Program status in October 2022 through November 15, 2023. Management expected another renewal, subject to SBA action.
- After year-end, the filing reported the March 2023 closure of Silicon Valley Bank and stated Patriot had no direct investment in or contractual relationship with that bank or its holding company. CEO Robert Russell tendered his resignation effective April 21, 2023; David Lowery was designated as his successor effective that date.
- The financial statements received an unqualified audit opinion. The auditor identified qualitative adjustments to the loan-loss allowance and goodwill impairment assessment as critical audit matters. The auditor did not provide an opinion on internal-control effectiveness; management reported its controls were effective.
Important facts for investors to verify
- Actual CECL adoption impact and subsequent allowance levels, especially after the consumer-loan portfolio’s rapid expansion and charge-offs.
- Deposit stability, funding costs, and available borrowing capacity as deposits and short-term FHLB advances mature.
- Performance and collateral coverage of non-accrual and impaired loans, including the specific-reserve assumptions and commercial real estate exposures.
- Subsequent fair-value changes or realized losses in the securities portfolio and any effect on capital.
- Completion of the CEO transition, SBA lender-status renewal, and any updates to dividend or capital-distribution restrictions.