Patriot National Bancorp Inc: Form 10-Q for the period ended Sep 30, 2023

"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are not guarantees of future performance. Although Patriot believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond Patriot’s control.

Many possible events or factors could affect Patriot’s future financial results and performance and could cause the actual results, performance or achievements of Patriot to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others:

(1) changes in prevailing interest rates which would affect the interest earned on the Company’s interest earning assets and the interest paid on its interest bearing liabilities;

(2) the timing of re-pricing of the Company’s interest earning assets and interest bearing liabilities;

(3) the effect of changes in governmental monetary policy;

(4) the effect of changes in regulations applicable to the Company and the Bank and the conduct of its business;

(5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks;

(6) the ability of competitors that are larger than the Company to provide products and services which it is impracticable for the Company to provide;

(7) the state of the economy and real estate values in the Company’s market areas, and the consequent effect on the quality of the Company’s loans;

(8) demand for loans and deposits in our market area;

(9) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company;

(10) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect the Company;

(11) the application of generally accepted accounting principles in the United States of America (“U.S. GAAP”), consistently applied;

(12) the fact that one period of reported results may not be indicative of future periods;

(13) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in the Company’s other filings with the Securities and Exchange Commission (the “SEC”);

(14) political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism;

(15) possible future outbreaks of infectious diseases, including the ongoing novel coronavirus (COVID-19) outbreak;

(16) changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

(17) our ability to access cost-effective funding;

(18) our ability to implement and change our business strategies;

(19) changes in the quality or composition of our loan or investment portfolios;

(20) technological changes that may be more difficult or expensive than expected;

(21) our ability to manage market risk, credit risk and operational risk in the current economic environment;

(22) our ability to enter new markets successfully and capitalize on growth opportunities;

(23) changes in consumer spending, borrowing and savings habits;

(24) our ability to retain key employees;

(25) our compensation expense associated with equity allocated or awarded to our employees; and

(26) the premiums paid for the guaranteed portion of SBA loans by third party investors

The risks and uncertainties included here are not exhaustive. In addition to those included herein further information concerning our business, including additional factors that could materially affect our financial results, is included in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Further, it is not possible to assess the effect of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

Critical Accounting Policies

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2022 Form 10-K for additional information.

Summary

The Company reported net loss of $3.8 million ($0.95 basic and diluted loss per share) for the quarter ended September 30, 2023, compared to a net income of $2.3 million ($0.59 basic and diluted earnings per share) for the quarter ended September 30, 2022.

For the nine months ended September 30, 2023, net loss was $5.1 million, or $(1.28) basic and diluted loss per share, compared to a net income of $4.4 million, ($1.11 basic and diluted earnings per share) for the nine months ended September 30, 2022.

The financial results for the nine months ended September 30, 2023 were adversely impacted by an elevated provision for credit losses of $8.2 million, compared to provision of $475,000 for loan losses recorded for the first half year of 2022, and the impact of lower net interest margin which was affected by the higher funding costs resulting from the recent uncertainty in the banking sector.

FINANCIAL CONDITION

Total assets increased $93.4 million to $1.1 billion as of September 30, 2023, compared to $1.0 billion at December 31, 2022, primarily due to the increases in cash of $40.4 million and loans receivable of $41.6 million as of September 30, 2023.

Cash and Cash Equivalents

Cash and cash equivalents increased from $38.5 million at December 31, 2022 to $78.9 million at September 30, 2023. The increased in 2023 reflects the intention to boost balance sheet liquidity in connection with recent uncertainty in the banking sector.

Investments

The following table is a summary of the Company’s investment securities portfolio, at fair value, at the dates shown:

(In thousands, except per share amounts)

Total investments increased by $1.2 million, from $89.0 million at December 31, 2022 to $90.1 million at September 30, 2023. The increase in the nine months ended September 30, 2023 was primarily attributable to an increase in purchase of available-for-sale securities of $10.4 million, which was partially offset by repayment of available-for-sale securities totaling $3.4 million. During the nine months ended September 30, 2023, the Bank sold available-for-sale securities of $1.8 million and recognized a net gain of $24,000.

Loans held for investment

The following table provides the composition of the Company’s loan held for investment portfolio as of September 30, 2023, and December 31, 2022:

(In thousands)

The Company’s loan portfolio increased $41.6 million, from $848.3 million at December 31, 2022 to $889.9 million at September 30, 2023. The increase in loans was attributable to $152.8 million of new loan origination and $19.8 million in purchases of loans receivable which was partially offset by $122.0 million pay-down of the loans.

SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of September 30, 2023 and December 31, 2022, SBA loans included in the commercial and industrial loan were $19.4 million and $20.3 million, respectively. SBA loans included in the commercial real estate loans were $12.9 million and $12.2 million, respectively.

At September 30, 2023, the net loan to deposit ratio was 103.2% and the net loan to total assets ratio was 76.0%. At December 31, 2022, these ratios were 100.4% and 80.3%, respectively.

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

The allowance for credit losses on loans was $25.7 million as of September 30, 2023, compared to allowance for loans and lease losses of $10.3 million as of December 31, 2022. The increase in allowance was mainly due to the adoption of CECL as the Company recorded a transition adjustment of $13.0 million effective January 1, 2023. Based upon the overall assessment and evaluation of the loan portfolio at September 30, 2023, management believes $25.7 million in the allowance for credit losses, which represented 2.88% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio. A provision for loan losses of $4.8 million and $9.6 million was recorded for the three and nine months ended September 30, 2023, respectively.

The following table provides detail of activity in the allowance for credit losses. During the three and nine months ended September 30, 2023, the Company used the CECL methodology while the incurred loss methodology was used in prior years:

(In thousands)

47

The following table provides an allocation of allowance for credit losses by portfolio segment:

(In thousands)

Non-performing Assets

The following table presents non-performing assets as of September 30, 2023 and December 31, 2022:

As of September 30, 2023, the $30.8 million of non-accrual loans was comprised 169 borrowers. Of these, 24 loans were individually evaluated for impairment, and a specific reserve of $11.2 million was established for them. 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.

Loans held for sale

SBA loans held for sale totaled $8.7 million and $5.2 million as of September 30, 2023 and December 31, 2022, respectively. SBA 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 September 30, 2023, consisted of $5.5 million SBA commercial real estate and $3.2 million SBA commercial and industrial loans, respectively. 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, respectively.

Patriot Bank's Digital Payments Group 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 September 30, 2023, the Bank had credit card loans held for sale totaling $13.2 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. The credit card loans are sold to the third party as a whole loan sale transaction, priced at Par, thus there is no servicing asset or gain or loss on sale.

Goodwill

The Company completed its acquisition of Prime Bank in May 2018 and recorded $1.1 million of goodwill after adjustments as of May 10, 2019. No further adjustment to the goodwill was made as of September 30, 2023.

The Company did not perform an interim goodwill test for the three and nine months ended September 30, 2023 as no events occurred which would trigger an impairment assessment.

Deferred Taxes

Deferred tax assets were $26.1 million and $15.5 million at September 30, 2023 and December 31, 2022, respectively. Deferred tax assets consist predominately of state net operating losses, capitalized costs and allowances for loan losses.

The effective tax benefit rate for the three and nine months ended September 30, 2023 was 26.12% and 26.37%, respectively, compared to the effective tax provision rate of 6.32% and 17.69% for the three and nine months ended September 30, 2022, respectively. The Company’s effective rates for both periods was affected by state taxes and non-deductible expenses.

Patriot anticipates utilizing the state net operating loss carry forwards to reduce income taxes otherwise payable on future years taxable income.

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 addition, management assesses tax attributes including available tax planning strategies and state net operating loss carry-forwards that do not begin to expire until the year of 2030. No valuation allowance was recorded as of September 30, 2023 and December 31, 2022. The Company 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 additional deferred tax assets will not be realized, the valuation allowance will be adjusted.

Deposits

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

(In thousands)

Borrowings

Total borrowings were $245.1 million and $115.2 million as of September 30, 2023 and December 31, 2022, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable. The senior notes, subordinated notes and junior subordinated debentures contain affirmative covenants that require the Company to maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements.

Federal Home Loan Bank borrowings

The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes.

FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. Outstanding advances from the FHLB-B increased from $85.0 million at December 31, 2022 to $145.0 million at September 30, 2023.

At September 30, 2023, the FHLB-B advances bore fixed rates of interest ranging from 2.40% to 5.53% with maturities ranging from 2 days to 0.96 years, and have a weighted average interest rate of 4.89%.

At September 30, 2023, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $271.0 million. Remaining unused borrowing capacity under this line totaled $30.9 million at September 30, 2023.

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three and nine months ended September 30, 2023 and 2022, no funds had been borrowed under the line of credit.

Interest expense incurred for the three and nine months ended September 30, 2023 were $748,000 and $3.8 million, respectively. Interest expense incurred for the three and nine months ended September 30, 2022 were $806,000 and $2.3 million, respectively.

Correspondent Bank - Line of Credit

Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent banks. Borrowings available under the agreements totaled $17.0 million at both September 30, 2023 and December 31, 2022. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, Automated Clearing House (ACH), and other clearinghouse transactions.

There was no outstanding balance under the agreements at September 30, 2023 and December 31, 2022. Interest expense incurred for the three and nine months ended September 30, 2023 was $0 and $117,000, respectively, and none for three and nine months ended September 30, 2022.

Other Borrowing

The Federal Reserve Bank of New York (“FRBNY”) accepts loan pledges from qualifying depository institutions to secure borrowings from the Discount Window. Patriot has pledged eligible loans as collateral to support its borrowing capacity at the FRBNY. As of September 30, 2023, the book value of the pledged loans totaled $18.1 million, with a collateral value of $12.9 million. A total of $12.0 million was borrowed from the Discount Window under the FRBNY's Borrower-in-Custody ('BIC") program and fully repaid during the nine months ended September 30, 2023. Interest expense incurred for the three and nine months ended September 30, 2023 was $43,000 and $48,000, respectively. In 2022, no funds was borrowed under the BIC program, and no interest expense was incurred for the three and nine months ended September 30, 2022.

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 September 30, 2023, the collateral value of the pledged securities was $73.1 million. Patriot borrowed a total of $70.0 million under the BTFP program. Interest expense incurred for the three and nine months ended September 30, 2023 was $833,000.

Senior notes

On December 22, 2016, the Company issued $12 million of senior notes ("2016 Senior Notes") bearing interest at 7% per annum. On November 17, 2021, the original maturity date of the 2016 Senior Notes was extended from December 22, 2021 to June 30, 2022.

On June 22, 2022, the Company amended and restated the 2016 Senior Notes. The maturity date of the Senior Notes was further extended to December 31, 2022, and the interest rate increased from (i) 7% to 7.25% from July 1, 2022 until September 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The 2016 Senior Notes was repaid in December 2022.

On December 21, 2022, the Company completed an issuance and sale of $12 million in aggregate principal amount of 8.50% fixed rate senior notes due January 15, 2026 (“2022 Senior Notes”). In connection with the issuance of the 2022 Senior Notes, the Company incurred $326,000 of costs, which are being amortized over the term of the 2022 Senior Notes to recognize a constant rate of interest expense. The unamortized debt issuance cost of was deducted from the face amount of the 2022 Senior Notes included in the Consolidated Balance Sheet.

The 2022 Senior Note Purchase Agreement contains certain customary representations, warranties, and covenants made by each of the Company and the Purchasers. The 2022 Senior Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2022 Senior Notes are not subject to redemption at the option of the holders. Principal and interest on the 2022 Senior Notes are subject to acceleration only in limited circumstances. The 2022 Senior Notes are an unsecured, unsubordinated obligation and ranks equally in right of payment to all of the Company’s existing and future unsecured indebtedness, liabilities and other obligations that are not subordinated in right of payment to the Senior Note, and will be effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The 2022 Senior Notes are the obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s affiliates. At September 30, 2023 and December 31, 2022, $312,000 and $360,000 of unamortized debt issuance costs were deducted from the face amount of the 2022 Subordinated Notes included in the Consolidated Balance Sheet, respectively.

For the three and nine months ended September 30, 2023, the Company recognized interest expense of $290,000 and $869,000, respectively. Interest expense incurred for the three and nine months ended September 30, 2022 was $218,000 and $638,000, respectively.

Subordinated notes

On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.

The Subordinated Notes initially bears interest at 6.25% per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning on June 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes.

In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At September 30, 2023 and December 31, 2022, $138,000 and $160,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.

For the three and nine months ended September 30, 2023, the Company recognized interest expense of $229,000 and $556,000, respectively. Interest expense incurred for the three and nine months ended September 30, 2022 was $163,000 and $491,000, respectively.

Junior subordinated debt owed to unconsolidated trust

In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $8.0 million of trust preferred securities. The proceeds, net of a $240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.

Trust preferred securities currently qualify for up to 25% of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.

The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.

The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% and mature on March 26, 2033, at which time the principal amount borrowed will be due. The placement fee of $240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As of September 30, 2023 and December 31, 2022, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $113,000 and $120,000, respectively, and accrued interest on the junior subordinated debentures was $10,000 and $9,000, respectively.

For the three and nine months ended September 30, 2023, the Company recognized interest expense of $180,000 and $512,000, respectively. Interest expense incurred for the three and nine months ended September 30, 2022 was $113,000 and $270,000, respectively.

At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.

Note Payable

In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of September 30, 2023 and December 31, 2022, the note had a balance outstanding of $429,000 and $585,000, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.

For the three and nine months ended September 30, 2023, the Company recognized interest expense of $2,000 and $7,000, respectively. Interest expense incurred for the three and nine months ended September 30, 2022 was $3,000 and $9,000, respectively.

Derivatives

As of June 30, 2023, Patriot 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 noninterest income. The Company recognized no gain on the swaps for the three and nine months ended September 30, 2023 and 2022.

Further discussion of the fair value of derivatives is set forth in Note 8 to the consolidated financial statements.

Equity

Equity decreased $19.6 million, from $59.6 million at December 31, 2022 to $40.0 million at September 30, 2023, 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, a net loss of $5.1 million for the nine months ended September 30, 2023, and a net unrealized holding loss for investment portfolio of $3.1 million.

Off-Balance Sheet Commitments

The Company’s off-balance sheet commitments primarily consist of commitments to lend of $134.5 million and $154.3 million as of September 30, 2023 and December 31, 2022, respectively.

Average Balances

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three and nine months ended September 30, 2023 and 2022:

(In thousands)

54

(In thousands)

55

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 three and nine months ended September 30, 2023 and 2022.

(In thousands)

Results of Operations

For the three months ended September 30, 2023, interest income and dividend income was $15.1 million, which increased $3.0 million as compared to $12.0 million for the quarter ended September 30, 2022. Total interest expense was $8.5 million for the three months ended September 30, 2023, which increased $5.7 million as compared to $2.8 million for the quarter ended September 30, 2022. Net interest income was $6.5 million for the quarter ended September 30, 2023, which decreased $2.7 million from $9.2 million for the quarter ended September 30, 2022 to $6.5 million for the quarter ended September 30, 2023 .

For the nine months ended September 30, 2023, interest income and dividend income was $44.0 million, which increased $14.0 million as compared to $30.0 million for the nine months ended September 30, 2022. Total interest expense was $21.8 million, which increased $15.4 million as compared to $6.4 million for the nine months ended September 30, 2022. Net interest income was $22.3 million for the nine months ended September 30, 2023, which decreased $1.4 million from $23.7 million for the nine months ended September 30, 2022.

The net interest margin was 2.48% for the quarter ended September 30, 2023, compared with 3.68% for the quarter September 30, 2022. For the nine months ended September 30, 2023 and 2022, the net interest margin was 2.90% and 3.35%, respectively. The decline in interest margins for the three and nine months ended September 30, 2023 compared to the same periods in 2022, 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 for Credit Losses

Beginning January 1, 2023, the Company adopted the CECL accounting standard. Provision for credit losses for the three and nine months ended September 30, 2023, amounted to $4.7 million and $8.2 million. This encompassed a provision for credit losses on loans of $4.8 million and $9.6 million, respectively, which was partially offset by a credit reserve for the off-balance-sheet exposure of $112,000 and $1.4 million, respectively. For the three and nine months ended September 30, 2022, a loan loss provision of $200,000 and $475,000, respectively,was recorded, with no recorded reserve for the off-balance-sheet exposure.

The increase in the provision for credit losses for the quarter ended September 30, 2023 was primarily due to an additional reserve of $4.0 million associated with a single loan balance while the higher provisions in the year to date period also included additional charges associated with the unsecured consumer loan and SBA portfolios.

Non-interest income

Non-interest income for the three months ended September 30, 2023 was $1.2 million, compared to $654,000 for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, non-interest income was $2.8 million and $2.3 million, respectively. The increase was primarily attributable to higher non-interest income from the digital payments program in 2023.

Non-interest expense

Non-interest expense for the three months ended September 30, 2023 increased to $8.1 million, compared to $7.2 million for the three months ended September 30, 2022. Non-interest expense for the nine months ended September 30, 2023 was $23.8 million, compared to $20.1 million for the nine months ended September 30, 2022. The increase in the first nine months of 2023 was primarily due to increase in salaries and benefits due to staffing increases needed to support continuing business initiatives.

Provision for income taxes

The Company reported a benefit for income taxes of $1.3 million and $1.8 million for the three and nine months ended September 30, 2023, respectively, compared to a provision for income taxes of $157,000 and $944,000 for the three and nine months ended September 30, 2022, respectively.

Liquidity

The Company’s balance sheet liquidity was 10.6% of total assets at September 30, 2023, compared to 9.3% at December 31, 2022. Liquidity including readily available off-balance sheet funding sources was 17.1% of total assets at September 30, 2023, compared to 18.0% at December 31, 2022. The readily available liquidity ratio remained well above the Company's 10% policy minimum.

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), loans held for sale, and unpledged available-for-sale securities. In addition, off balance sheet funding sources include collateral-based borrowing available from the FHLB, correspondent bank borrowing lines, and brokered deposits subject to internal limitations.

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.

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 since 2020 but may resume in future periods.

The primary source of liquidity at the Company is returns 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.

Capital

In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk-based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. In September 2021, the Bank adopted the CBLR framework.

The Bank’s Tier 1 leverage ratio as of September 30, 2023 and December 31, 2022 was 8.34% and 9.27%, respectively. The bank continues to be classified as "well capitalized" under the CBLR framework as the leverage ratio remains above 8% and the Bank has elected to use the two-quarter grace period provided under the framework. Per the CBLR framework, at the conclusion of the grace period (December 31, 2023), it is the bank's intention to either meet all qualifying criteria to remain in the CBLR framework, or to comply with the generally applicable BASEL III capital rules and the associated reporting requirements. Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.

Impact of Inflation and Changing Prices

The Company’s Consolidated Financial Statements have been prepared in terms of historical dollars, without considering changes in the 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 a financial institution’s performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with 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, deflation or disinflation could significantly affect the Company’s earnings in future periods.

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 Company’s market risk is primarily limited to interest rate risk.

The Company’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 Company’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 the Management 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 the Management Asset and Liability Committee, there is a Board 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 Company’s Investment, ALCO and Liquidity policies.

Management analyzes the Company’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.

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 repricings. In certain low interest rate environments, 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)

(In thousands)

59

Evaluation of Disclosure Controls and Procedures

Patriot maintains disclosure controls and procedures that are designed to provide reasonable assurance that information that is required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to management in a timely fashion.

Patriot’s management, with the participation of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of its disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). In connection with this self- evaluation, management references the accounting error which resulted in the restatement of the previously filed March 31, 2023 and June 30, 2023 10Q's and the related 10Q-A's for those reporting periods. Management has since reviewed and improved its controls over the recognition of the ACL, but due to the restatements, Patriot’s Chief Executive Officer and Chief Financial Officer have concluded that, Patriot’s disclosure controls and procedures were not operating effectively in those periods and for the quarter ended September 30, 2023. This assessment will be re-evaluated as of December 31, 2023 in connection with the Company's filing of the Annual Report on Form 10-K for the year so ending as the passage of additional time period is necessary to reassess the effectiveness of the disclosure controls and procedures.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and/or procedures may deteriorate.