PATRIOT NATIONAL BANCORP INC (PNBK) FY 2023 MD&A

ITEM 7. Management’s Discussion and Analysis - Financial Condition & Results of Operations

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies

The accounting and reporting policies of Patriot conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the financial services industry. A summary of Patriot’s significant accounting policies is included in the Notes to consolidated financial statements that are referenced in Item 8. Financial Statements and Supplementary Data. Although all of Patriot’s policies are integral to understanding its consolidated financial statements, certain accounting policies involve management to exercise judgment, develop assumptions, and make estimates that may have a material impact on the financial information presented in the consolidated financial statements or Notes thereto. The assumptions and estimates are based on historical experience and other factors representing the best available information to management as of the date of the consolidated financial statements, up to and including the date of issuance or availability for issuance. As the basis for the assumptions and estimates incorporated in the consolidated financial statements may change, as new information comes to light, the consolidated financial statements could reflect different assumptions and estimates.

Due to the judgments, assumptions, and estimates inherent in the following policies, management considers such accounting policies critical to an understanding of the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.

Allowance for 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. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Available-for-sale debt securities consist primarily of U.S. Government agency debt and mortgage-backed securities issued by the U.S. government, corporate bonds, subordinated notes and SBA loan pools. 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.

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Deferred Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.

Intangible assets, other than goodwill and indefinite-lived intangible assets, are amortized to expense over their estimated useful lives in a manner consistent with that in which the related benefits are expected to be realized, and are periodically reviewed by management to assess recoverability. Impairment losses on other intangibles are recognized as a charge to expense if carrying amounts exceed fair values.

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

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 non-interest income.

Further discussion of the derivatives is set forth in Note 1, Note 11, and Note 21 to the consolidated financial statements.

FINANCIAL CONDITION

Assets

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.

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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.

Investment securities

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

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

The following table provides the composition of the Company’s loan held for investment portfolio as of December 31, for each of the years shown:

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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. 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. As of December 31, 2023 and 2022, SBA loans included in the commercial real estate loans were $12.9 million and $12.2 million, respectively. SBA loans included in the commercial and industrial loan were $17.1 million and $20.3 million as of December 31, 2023 and 2022, respectively.

At December 31, 2023, the net loan to deposit ratio was 99.1% and the net loan to total assets ratio was 76.2%. At December 31, 2022, these ratios were 97.4% and 80.3%, respectively.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents loans receivable, gross by portfolio segment, by contractual maturity as of December 31, 2023:

All variable rate loans account for 51.1% of the total loan portfolio. Approximately 24.4% 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, 2023, the investments in Commercial Real Estate and Commercial and Industrial were approximately 74.9% of total loans receivable. These loans generally are collateralized by the underlying real estate and supported by personal guarantees of the borrowers.

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.

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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:

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

Nonperforming Assets

The following table presents non-accrual and accruing loans which were past due by over 90 days for the dates indicated:

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. 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.

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.

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Loans held for sale

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.

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. 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.

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, 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.

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”)

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.

Goodwill

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”)

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. 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. The decrease in CDI of $46,000 from $249,000 at December 31, 2022 to $203,000 at December 31, 2023, was solely due to the amortization of the CDI for the year ended December 31, 2023.

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Deferred Taxes

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 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 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 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 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.

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

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.

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. The interest swap interest income is included in interest and fees on loans on the Consolidated Statements of Operations. A gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the year ended December 31, 2021, which is included in other income on the Consolidated Statements of Operations.

Further discussion of the final derivatives is set forth in Note 11 and Note 21 to the Consolidated Financial Statements.

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Deposits

The following table is a summary of the Company’s deposits at the dates shown:

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.

Borrowings

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, 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 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.

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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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The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the years ended December 31, 2023 to 2022 and December 31, 2022 to 2021.

RESULTS OF OPERATIONS

A discussion regarding the financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented below. Discussions of fiscal 2022 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Form 10-K can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 29, 2023.

Comparison of Results of Operations for the years 2023 and 2022

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:

•Interest and dividend income increased $14.9 million;

•Interest expense increased $19.7 million;

•Net interest income decreased $4.8 million;

•Provision for credit losses increased $5.5 million;

•Non-interest income increased $2.4 million; and

•Non-interest expense increased $5.5 million.

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Net interest income

Net interest income is the difference between interest income on interest earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.

For the year ended December 31, 2023, interest income increased to $59.0 million, as compared to $44.0 million for the year ended December 31, 2022, which was primarily attributable to an increase of $64.9 million in average loan balances, along with an increase in rates earned on loans reflecting the increase in interest rates during 2023.

For the year ended December 31, 2023, total interest expense increased to $30.5 million, as compared to $10.8 million for the year ended December 31, 2022, primarily due to an increase in average deposits balance of $139.2 million. The increase in deposit interest expense reflects higher deposit balances and higher market interest rates.

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

We derived the selected balance sheet measures as of December 31, 2023, 2022 and 2021 and the selected statement of income measures for the years ended December 31, 2023, 2022 and 2021 from our audited Consolidated Financial Statements included elsewhere in this annual report. Average balances have been computed using daily averages.

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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:

(1) In 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.

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

(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, 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.

The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any), unpledged available-for-sale securities, and loans held for sale. In addition, off-balance sheet funding sources include collateral based borrowing available from the FHLB, correspondent bank borrowing lines, and advised borrowing lines through an interbank borrowing network.

Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements for next 12 months and beyond.

The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). At December 31, 2023, the outstanding advances from the FHLB-B aggregated $171.0 million. The additional borrowing capacity available from FHLB-B was $73.4 million, which is comprised of $71.4 million of advances and a $2.0 million overnight line of credit. Additionally, the Bank retains a collateralized borrowing line with the Federal Reserve Bank which totaled $15.5 million at December 31, 2023 and correspondent bank borrowing lines totaling $17.0 million at December 31, 2023.

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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:

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. 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 $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

The Bank’s off-balance sheet commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon or are contingent upon the customer adhering to the terms of the agreements, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 2023 and 2022, the Bank’s off-balance sheet commitments were $92.5 million and $154.3 million, respectively.

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REGULATORY CAPITAL REQUIREMENTS

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

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.

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