Basis of Financial Statement Presentation

6 Months Ended

Jun. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Financial Statement Presentation and Restatement of Consolidated Financial Statements

Basis of Financial Statement Presentation and Restatement of Consolidated Financial Statements

The accompanying unaudited interim condensed Consolidated Financial Statements of Patriot National Bancorp, Inc. (the “Company” or “PNBK”) and its wholly-owned subsidiaries, Patriot Bank, N.A. (the “Bank”), Patriot National Statutory Trust I and PinPat Acquisition Corporation (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included on the Annual Report on Form 10-K for the year ended December 31, 2022.

The Consolidated Balance Sheet at December 31, 2022 presented herein has been derived from the audited Consolidated Financial Statements of the Company at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

The preparation of consolidated financial statements in accordance with US 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 accounting for the allowance for credit 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 more significant accounting policies and estimates, in that they are critical to the presentation of the Company’s consolidated financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of the Company’s Consolidated Financial Statements.

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations that may be expected for the remainder of 2023.

Certain prior period amounts have been reclassified to conform to current year presentation.

Restatement of Consolidated Financial Statements

The Company has determined an error related to the calculation of the current expected credit loss (“CECL”) transition adjustment and corresponding credit loss provisions relating to a portfolio of unsecured consumer loans (the “portfolio”) purchased by the Company from an originator/servicer mostly during the 2022 calendar year. The error in the Company’s calculations of the CECL transition adjustment was due to the use of unsupported and incorrect data points used in conjunction with data provided by the third-party originator/servicer. The Company identified the following problems with its data and methodology:

1)The original weighted average life, which impacted the calculation of aggregate future losses, was understated.

2)The loss rate applied to the portfolio was applied as a straight percentage with some minor adjustments to account for the vintage/age of the portfolio purchased. While the Company attempted to capture the age impact in its analysis, it did not fully capture such impact on the projected losses of the portfolio.

3)The Company did not adequately adjust for the status of loan delinquencies as of the date of its analysis.

The Company is currently negotiating with the third-party originator/servicer with the intention of recovering all or a portion of the losses incurred. Such potential recoveries would be recognized in future periods.

The Company has restated its previously filed interim financial statements as of and for the quarter ended June 30, 2023. The restatement had the effect of increasing the CECL transition adjustment, effective January 1, 2023. As a result, there was a significant impact on the reported total shareholders’ equity/accumulated deficit, amounting to $5.3 million, net of tax. The restatement also increased the net loss for the three months ended June 30, 2023, from $546,000 to $615,000. Basic and

diluted loss per share were reduced from $(0.14) to $(0.16) for the three months ended June 30, 2023. For the six months the net loss increased from $599,000 to $1.3 million, and basic and diluted loss per share was reduced from $(0.15) to $(0.33).

The increase in the Company’s provision for credit losses has been reflected herein, as well as its impact on net loss, net loss per share, loans receivable, the allowance for credit losses, deferred tax assets, regulatory capital and equity.

The effect of these changes on the consolidated financial statements of the Company is as follows.

(In thousands)	As of January 1, 2023
Adoption of CECL effective January 1, 2023:	Previously Reported		Adjustment		Restated
CECL adoption transition_ ACL on loans	$	(7,371)	$	(5,630)	$	(13,001)
CECL adoption transition_ ACL on Off-BS exposure	(1,094)		(1,643)		(2,737)
CECL adoption transition_ DTA Adjustment	2,274		1,954		4,228
Cumulative change in accounting principle Balance at January 1, 2023 - Adoption of CECL	(6,191)		(5,319)		(11,510)

	As of June 30, 2023
(In thousands)	Previously Reported			Adjustment			Restated
Loans receivable, net of allowance for credit losses	$	913,876		$	(7,240)		$	906,636
Deferred tax asset	18,169			2,217			20,386
Total assets	1,162,731			(5,023)			1,157,708
Accrued expenses and other liabilities	6,693			1,011			7,704
Accumulated deficit	(38,127)			(6,034)			(44,161)
Total shareholders' equity	52,445			(6,034)			46,411
Tier 1 Leverage ratio	8.70		%	(0.16)		%	8.54		%

	Three Months Ended June 30, 2023						Six Months Ended June 30, 2023
(In thousands, except shares and per share amounts)	Previously Reported		Adjustment		Restated		Previously Reported		Adjustment		Restated
Provision for credit losses	$	1,231	$	94	$	1,325	$	2,567	$	978	$	3,545
Net interest income after provision for credit losses	6,482		(94)		6,388		13,159		(978)		12,181
Loss before income taxes	(752)		(94)		(846)		(824)		(978)		(1,802)
Benefit for income taxes	(206)		(25)		(231)		(225)		(263)		(488)
Net loss	(546)		(69)		(615)		(599)		(715)		(1,314)
Total comprehensive loss	(2,187)		(69)		(2,256)		(993)		(715)		(1,708)
Basic and diluted income per share	$	(0.14)	$	(0.02)	$	(0.16)	$	(0.15)	$	(0.18)	$	(0.33)
Consolidated Statement of Cash Flows:
Net loss	N/A		N/A		N/A		$	(599)	$	(715)	$	(1,314)
Provision for credit losses	N/A		N/A		N/A		2,567		978		3,545
Deferred income taxes	N/A		N/A		N/A		(231)		(263)		(494)

The restatement had no impact on the Company's consolidated financial statements as of and for the periods ended June 30, 2022 or December 31, 2022.