PATRIOT NATIONAL BANCORP INC - Quarter Report: 2017 March (Form 10-Q)

pnbk20170331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 000-29599

PATRIOT NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut		06-1559137
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

900 Bedford Street, Stamford, Connecticut		06901
(Address of principal executive offices)		(Zip Code)

(203) 324-7500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 10, 2017, there were 3,894,128 shares of the registrant’s common stock outstanding.

Table of Contents

Table of Contents			2
PART I- FINANCIAL INFORMATION			3
	Item 1: Consolidated Financial Statements		3
		Consolidated Balance Sheets (Unaudited)	3
		Consolidated Statements of Operations (Unaudited)	4
		Consolidated Statements of Comprehensive Income (Unaudited)	5
		Consolidated Statements of Shareholder's Equity (Unaudited)	6
		Consolidated Statements of Cash Flows (Unaudited)	7
		Note to Consolidated Financial Statements (Unaudited)	8
	Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations		37
	Item 3: Quantitative and Qualitative Disclosures about Market Risk		48
	Item 4: Disclosure Controls and Procedures		49
PART II - OTHER INFORMATION			51
	Item 1: Legal Proceedings		51
	Item 1A: Risk Factors		51
	Item 6: Exhibits		52
	SIGNATURES		53

PART I- FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)	March 31, 2017			December 31, 2016

ASSETS
Cash and due from banks:
Noninterest bearing deposits and cash	$	5,087			2,596
Interest bearing deposits		55,179			89,693
Total cash and cash equivalents		60,266			92,289
Investment securities:
Available-for-sale securities, at fair value		21,201			24,428
Other Investments, at cost		4,450			4,450
Total investment securities		25,651			28,878

Federal Reserve Bank stock, at cost		2,358			2,109
Federal Home Loan Bank stock, at cost		5,489			5,609
Loans receivable (net of allowance for loan losses: 2017: $5,697, 2016: $4,675)		625,030			576,982
Accrued interest and dividends receivable		3,063			2,726
Premises and equipment, net		33,442			32,759
Other real estate owned		851			851
Deferred tax asset		11,691			12,632
Receivable for securities sold, not settled		4,968			-
Other assets		1,952			1,819
Total assets	$	774,761			756,654

Liabilities
Deposits:
Noninterest bearing deposits	$	78,372			76,772
Interest bearing deposits		482,587			452,552
Total deposits		560,959			529,324

Federal Home Loan Bank and correspondent bank borrowings		124,000			138,000
Senior notes, net		11,647			11,628
Junior subordinated debt owed to unconsolidated trust		8,080			8,079
Note Payable		1,722			1,769
Advances from borrowers for taxes and insurance		1,755			2,676
Accrued expenses and other liabilities		2,157			2,608
Total liabilities		710,320			694,084

Commitments and Contingencies

Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $.01 par value, 100,000,000 shares authorized; 2017: 3,965,538 shares issued; 3,894,128 shares outstanding. 2016: 3,965,538 shares issued; 3,891,897 shares outstanding		40			40
Additional paid-in capital		106,772			106,729
Accumulated deficit		(41,172	)		(42,902	)
Less: Treasury stock, at cost: 2017 and 2016, 73,641 and 73,641 shares, respectively		(1,177	)		(1,177	)
Accumulated other comprehensive loss		(22	)		(120	)
Total shareholders' equity		64,441			62,570
Total liabilities and shareholders' equity	$	774,761			756,654

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended March 31,
(In thousands, except per share amounts)	2017			2016

Interest and Dividend Income
Interest and fees on loans	$	6,607			5,840
Interest on investment securities		171			142
Dividends on investment securities		82			86
Other interest income		64			41
Total interest and dividend income		6,924			6,109

Interest Expense
Interest on deposits		989			473
Interest on Federal Home Loan Bank borrowings		78			121
Interest on senior debt		229			-
Interest on subordinated debt		85			82
Interest on note payable		9			8
Total interest expense		1,390			684

Net interest income		5,534			5,425

(Credit) Provision for Loan Losses		(1,749	)		-

Net interest income after (credit) provision for loan losses		7,283			5,425
Non-interest Income
Loan application, inspection and processing fees		21			67
Deposit fees and service charges		149			151
Rental Income		94			103
Loss on sale of investment securities		(78	)		-
Other income		91			89
Total non-interest income		277			410

Non-interest Expense
Salaries and benefits		2,430			2,550
Occupancy and equipment expense		775			780
Data processing expense		120			285
Professional and other outside services		652			409
Advertising and promotional expense		74			117
Loan administration and processing expense		9			8
Regulatory assessments		179			147
Insurance expense		59			55
Material and communications		87			93
Other operating expense		309			320
Total non-interest expense		4,694			4,764

Income before income taxes		2,866			1,071

Expense for Income Taxes		1,136			418

Net Income	$	1,730			653

Basic earnings per share	$	0.44			0.17
Diluted earnings per share	$	0.44			0.16

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)	Three Months Ended March 31,
	2017			2016

Net income	$	1,730			653
Other comprehensive income
Unrealized holding gains on securities, net of taxes of $93 and $21		146			35
Reclassification for realized losses on sale of investment securities, net of taxes of $30 and $0		(48	)		-
Total other comprehensive income		98			35
Comprehensive income	$	1,828			688

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(In thousands, except shares)	Number of Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Three months ended March 31, 2017

Balance at December 31, 2016		3,891,897	$	40		106,729		(42,902	)		(1,177	)		(120	)		62,570
Comprehensive income:
Net income								1,730									1,730
Other comprehensive income														98			98
Total comprehensive income																	1,828
Share-based compensation expense						43											43
Issuance of restricted stock		2,231															-
Balance at March 31, 2017		3,894,128	$	40		106,772		(41,172	)		(1,177	)		(22	)		64,441

Three months ended March 31, 2016

Balance at December 31, 2015		3,956,207		40		106,568		(44,832	)		(160	)		(152	)		61,464
Comprehensive income:
Net income								653									653
Unrealized holding gain on available-for-sale securities, net of tax														35			35
Total comprehensive income																	688
Share-based compensation expense						154											154
Issuance of restricted stock																	-
Balance at March 31, 2016		3,956,207	$	40		106,722		(44,179	)		(160	)		(117	)		62,306

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended March 31,
(In thousands)	2017			2016

Cash Flows from Operating Activities:
Net income	$	1,730			653
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premiums, net		35			32
Amortization and accretion of purchase loan premiums and discounts, net to loans		127			28
Amortization of debt issuance costs		20			2
(Credit) Provision for loan losses		(1,749	)		-
Depreciation and amortization		272			299
Loss on sales of available-for-sale securities		78			-
Share-based compensation		43			154
Deferred income taxes		878			387
Changes in assets and liabilities:
Increase in accrued interest and dividends receivable		(337	)		(65	)
Increase in other assets		(133	)		(404	)
Decrease in accrued expenses and other liabilities		(451	)		(62	)
Net cash provided by operating activities		513			1,024

Cash Flows from Investing Activities:
Proceeds from sales on available-for-sale securities		9,000			-
Principal repayments on available-for-sale securities		807			666
Purchases of available-for-sale securities		(11,500	)		-
Purchases of Federal Reserve Bank stock		(249	)		(24	)
Redemptions of Federal Home Loan Bank stock		120			-
Decrease (increase) in net originations of loans receivable		26,463			(837	)
Purchase of loan pools receivable		(72,889	)		-
Purchase of premises and equipment		(955	)		(667	)
Net cash used in investing activities		(49,203	)		(862	)

Cash Flows from Financing Activities:
Increase (decrease) in deposits, net		31,635			(21,410	)
(Repayments of) proceeds from FHLB and correspondent bank borrowings		(14,000	)		2,900
Principal repayments of note payable		(47	)		(46	)
Decrease in advances from borrowers for taxes and insurance		(921	)		-
Net cash provided by (used in) financing activities		16,667			(18,556	)

Net decrease in cash and cash equivalents		(32,023	)		(18,394	)

Cash and cash equivalents at beginning of year		92,289			85,400

Cash and cash equivalents at end of year	$	60,266			67,006


Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	1,143			630
Cash paid for income taxes	$	-			-

Supplemental Disclosures of Noncash Investing Activities:
Receivable recorded for securities sold, not settled	$	4,968			-

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 1: Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries including Patriot Bank, N.A. (the “Bank”) (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 Form 10-K for the year ended December 31, 2016.

The Consolidated Balance Sheet at December 31, 2016 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 loan losses, the analysis and valuation of its investment securities, and the valuation of deferred tax assets as certain of Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s 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 Patriot’s Consolidated Financial Statements.

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

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 months ended March 31, 2017 are not necessarily indicative of the results of operations that may be expected for the remainder of 2017.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 2: Available-for Sale Securities

The amortized cost, gross unrealized gains and losses and approximate fair values of available-for-sale securities at March 31, 2017 and December 31, 2016 are as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2017:
U. S. Government agency mortgage-backed securities	$	4,736		6		(86	)		4,656
Corporate bonds		9,000		-		(63	)		8,937
Subordinated Notes		7,500		108		-			7,608
	$	21,236		114		(149	)		21,201

December 31, 2016:
U. S. Government agency mortgage-backed securities	$	10,624		9		(192	)		10,441
Corporate bonds		9,000		-		(39	)		8,961
Subordinated Notes		5,000		26		-			5,026
	$	24,624		35		(231	)		24,428

The following table presents the available-for-sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position as of March 31, 2017 and December 31, 2016:

(In thousands)	Less than 12 Months					12 Months or More					Total
March 31, 2017:	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
U. S. Government agency mortgage-backed securities	$	-		-			3,687		(86	)		3,687		(86	)
Corporate bonds		8,937		(63	)		-		-			8,937		(63	)
	$	8,937		(63	)		3,687		(86	)		12,624		(149	)

December 31, 2016:
U. S. Government agency mortgage-backed securities	$	5,969		(144	)		3,356		(48	)		9,325		(192	)
Corporate bonds		-		-			5,961		(39	)		5,961		(39	)
	$	5,969		(144	)		9,317		(87	)		15,286		(231	)

At March 31, 2017 and December 31, 2016, five of ten and seven out of twelve available-for-sale securities had unrealized losses with an aggregate depreciation of 0.8% and 1.5% from amortized cost, respectively.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Based on its quarterly reviews, management believes that none of the losses on available-for-sale securities noted above constitute an other-than-temporary impairment (“OTTI”). The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, and corporate debt. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. Since Patriot is not more-likely-than-not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of March 31, 2017.

At March 31, 2017 and December 31, 2016, available-for-sale securities of $1.0 million and $4.2 million, respectively, were pledged to the FRB of New York, primarily to secure municipal deposits.

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at March 31, 2017 and December 31, 2016. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.

(In thousands)	Amortized Cost								Fair Value
	Due Within 5 years		Due After 5 years through 10 years		Due After 10 years		Total		Due Within 5 years		Due After 5 years through 10 years		Due After 10 years		Total
March 31, 2017:
Corporate bonds	$	-		9,000		-		9,000		-		8,937		-		8,937
U. S. Government agency bonds		-		-		-		-		-		-		-		-
Subordinated Notes		1,000		6,500		-		7,500		1,025		6,583		-		7,608
Available-for-sale securities with single maturity dates		1,000		15,500		-		16,500		1,025		15,520		-		16,545
U. S. Government agency mortgage-backed securities		-		-		4,736		4,736		-		-		4,656		4,656
	$	1,000		15,500		4,736		21,236		1,025		15,520		4,656		21,201

December 31, 2016:
Corporate bonds	$	9,000		-		-		9,000		8,961		-		-		8,961
Subordinated Notes		1,000		4,000		-		5,000		1,026		4,000		-		5,026
Available-for-sale securities with single maturity dates		10,000		4,000		-		14,000		9,987		4,000		-		13,987
U. S. Government agency mortgage-backed securities		-		2,132		8,492		10,624		-		2,106		8,335		10,441
	$	10,000		6,132		8,492		24,624		9,987		6,106		8,335		24,428

During the three-month periods ended March 31, 2017, there were $9 million sales that were settled and $5 million sales that were remained unsettled as of March 31, 2017; and $11.5 million purchases of available-for-sale securities. A loss on the sale of available-for-sale securities of $78,000 was recorded during the three-months ended March 31, 2017. There were no sales or purchases of available-for sale securities during the three-months ended March 31, 2016.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 3: Loans Receivable and Allowance for Loan Losses

As of March 31, 2017 and December 31, 2016, loans receivable, net, consists of the following:

(In thousands)
Loan portfolio segment:	March 31, 2017			December 31, 2016
Commercial Real Estate	$	265,268			271,229
Residential Real Estate		155,140			86,514
Commercial and Industrial		62,375			60,977
Consumer and Other		95,893			101,449
Construction		44,512			53,895
Construction to permanent - CRE		7,539			7,593
Loans receivable, gross		630,727			581,657
Allowance for loan losses		(5,697	)		(4,675	)
Loans receivable, net	$	625,030			576,982

Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. Patriot originates commercial real estate loans, commercial business loans, residential real estate loans, a variety of consumer loans, and construction loans. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.

Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75% of the market value of the underlying collateral. Patriot’s loan origination policy for multi–family residential real estate is limited to 80% of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.

Risk characteristics of the Company’s portfolio classes include the following

Commercial Real Estate Loans

In underwriting commercial real estate loans, Patriot evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, the value of the property collateralizing the loan substantially decline, or there are declines in general economic conditions. Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Residential Real Estate Loans

The Bank provides both closed-end and revolving home equity loans. In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.

Commercial and Industrial Loans

Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.

Consumer and Other Loans

Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.

Construction Loans

Construction loans are of a short-term nature, generally of eighteen-months or less, that are secured by land intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.

Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Construction to Permanent – CRE

One time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Close of the construction facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate.

The following tables summarize the activity in the allowance for loan losses, allocated to segments of the loan portfolio, for three months ended March 31, 2017 and 2016:

(In thousands)
Three months ended March 31, 2017	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent [CRE]			Unallocated			Total
Allowance for loan losses:
December 31, 2016		1,853			534			740			641			712			69			126			4,675
Charge-offs		-			-			-			-			-			-			-			-
Recoveries		2			-			2,769			-			-			-			-			2,771
Provisions (credits)		343			539			(2,460	)		(58	)		(121	)		8			-			(1,749	)
March 31, 2017		2,198			1,073			1,049			583			591			77			126			5,697

Three months ended March 31, 2016
Allowance for loan losses:
December 31, 2015		1,970			740			1,027			677			486			123			219			5,242
Charge-offs		-			(5	)		-			-			-			-			-			(5	)
Recoveries		-			-			9			1			-			-			-			10
Provisions (credits)		(27	)		(111	)		47			(69	)		164			(2	)		(2	)		-
March 31, 2016		1,943			624			1,083			609			650			121			217			5,247

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of March 31, 2017 and December 31, 2016:

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent [CRE]		Unallocated		Total
March 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	-		-		232		-		-		-		-		232
Collectively evaluated for impairment		2,198		1,073		817		583		591		77		126		5,465
Total allowance for loan losses	$	2,198		1,073		1,049		583		591		77		126		5,697


Loans receivable, gross:
Individually evaluated for impairment	$	6,204		1,908		232		541		-		-		-		8,885
Collectively evaluated for impairment		259,064		153,232		62,143		95,352		44,512		7,539		-		621,842
Total loans receivable, gross		265,268		155,140		62,375		95,893		44,512		7,539		-		630,727

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent [CRE]		Unallocated		Total
December 31, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	-		-		231		-		-		-		-		231
Collectively evaluated for impairment		1,853		534		509		641		712		69		126		4,444
Total allowance for loan losses	$	1,853		534		740		641		712		69		126		4,675

Loans receivable, gross:
Individually evaluated for impairment	$	6,267		1,911		231		542		-		-		-		8,951
Collectively evaluated for impairment		264,962		84,603		60,746		100,907		53,895		7,593		-		572,706
Total loans receivable, gross		271,229		86,514		60,977		101,449		53,895		7,593		-		581,657

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Patriot monitors the credit quality of its loans receivable on an ongoing basis. Credit quality is monitored by reviewing certain indicators, including loan to value ratios, debt service coverage ratios, and credit scores.

Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, lending officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the lending officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed annually by the Credit Department.

Additionally, Patriot retains a third-party objective loan reviewing expert to perform a quarterly analysis of the results of its risk rating process. The quarterly review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans. Any changes to the assigned risk ratings, based on the quarterly review, are required to be approved by the Loan Committee.

When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Bank to sufficient risk to warrant classification in one of the following categories:

●

Sub-standard: An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Sub-standard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected.

●

Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified “sub-standard”, with the added characteristic that the weaknesses present make collection or liquidation-in–full improbable, on the basis of currently existing facts, conditions, and values.

Charge–offs, to reduce the loan to its recoverable value, generally commence after the loan is classified as “doubtful”.

In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and120 days delinquent, respectively.

If an account is classified as “Loss”, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold.

In March 2017, the Bank reached a settlement agreement with its insurance carrier for a loss related to a single Commercial and Industrial loan in 2016, resulting in cash receipts of $2.8 million, net of related deductibles and other amounts excluded pursuant to the insurance policy.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of March 31, 2017 and December 31, 2016:

(In thousands)	Non-accruing Loans
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Non-accruing Loans
As of March 31, 2017:
Loan portfolio segment:
Residential Real Estate:
Sub-standard	$	-		-		1,590		1,590		-		1,590
Commercial and Industrial:
Sub-standard		-		-		232		232		-		232
Total non-accruing loans	$	-		-		1,822		1,822		-		1,822

As of December 31, 2016:
Loan portfolio segment:
Residential Real Estate:
Sub-standard	$	-		-		1,590		1,590		-		1,590
Commercial and Industrial:
Sub-standard		-		-		231		231		-		231
Total non-accruing loans	$	-		-		1,821		1,821		-		1,821

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income of $21,000 and $17,000 would have been recognized in income during the three months ended March 31, 2017 and 2016, respectively.

Additionally, certain loans for which the borrower cannot demonstrate sufficient cash flow to continue loan payments in the future and certain troubled debt restructurings (“TDRs”) are placed on non-accrual status. During the three months ended March 31, 2017 and 2016, no interest income was collected and recognized on non-accruing loans.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, and there is six months of performance. Management considers all non-accrual loans and troubled debt restructurings to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are considered collection delays and not an indication of loan impairment. The Bank considers consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following tables summarize performing and non-performing loans receivable by portfolio segment, by aging category, by delinquency status as of March 31, 2017 and December 31, 2016.

(In thousands)	Performing (Accruing) Loans
As of March 31, 2017:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	1,623		1,725		-		3,348		253,498		256,846		-		256,846
Special Mention		-		-		-		-		6,987		6,987		-		6,987
Substandard		-		-		-		-		1,435		1,435		-		1,435
		1,623		1,725		-		3,348		261,920		265,268		-		265,268
Residential Real Estate:
Pass		352		140		1,447		1,939		151,611		153,550		-		153,550
Substandard		-		-		-		-		-		-		1,590		1,590
		352		140		1,447		1,939		151,611		153,550		1,590		155,140
Commercial and Industrial:
Pass		1,776		1,450		-		3,226		58,878		62,104		-		62,104
Substandard		38		-		-		38		1		39		232		271
		1,814		1,450		-		3,264		58,879		62,143		232		62,375
Consumer and Other:
Pass		63		27		13		103		95,790		95,893		-		95,893
Construction:
Pass		-		-		-		-		44,512		44,512		-		44,512
Construction to permanent - CRE:
Pass		-		-		-		-		7,539		7,539		-		7,539
Loans receivable, gross:
Pass		3,814		3,342		1,460		8,616		611,828		620,444		-		620,444
Special Mention		-		-		-		-		6,987		6,987		-		6,987
Substandard		38		-		-		38		1,436		1,474		1,822		3,296
Loans receivable, gross	$	3,852		3,342		1,460		8,654		620,251		628,905		1,822		630,727

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

(In thousands)	Performing (Accruing) Loans
As of December 31, 2016:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	-		-		-		-		265,246		265,246		-		265,246
Special Mention		-		-		-		-		4,531		4,531		-		4,531
Substandard		-		-		-		-		1,452		1,452		-		1,452
		-		-		-		-		271,229		271,229		-		271,229
Residential Real Estate:
Pass		131		9		1,449		1,589		83,335		84,924		-		84,924
Substandard		-		-		-		-		-		-		1,590		1,590
		131		9		1,449		1,589		83,335		84,924		1,590		86,514
Commercial and Industrial:
Pass		47		4		-		51		60,692		60,743		-		60,743
Substandard		-		-		-		-		3		3		231		234
		47		4		-		51		60,695		60,746		231		60,977
Consumer and Other:
Pass		75		-		3		78		101,371		101,449		-		101,449
Construction:
Pass		-		-		-		-		53,895		53,895		-		53,895
Construction to permanent - CRE:
Pass		-		-		-		-		7,593		7,593		-		7,593
Loans receivable, gross:
Pass		253		13		1,452		1,718		572,132		573,850		-		573,850
Special Mention		-		-		-		-		4,531		4,531		-		4,531
Substandard		-		-		-		-		1,455		1,455		1,821		3,276
Loans receivable, gross	$	253		13		1,452		1,718		578,118		579,836		1,821		581,657

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Troubled Debt Restructurings (“TDR”)

On a case-by-case basis, Patriot may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a TDR.

There were no loans modified as TDRs and no defaults of TDRs during the three months ended March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, there were no commitments to advance additional funds under TDRs.

Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below the contract rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may result in the forgiveness of principal or accrued interest. In addition, when modifying commercial loans, Patriot frequently obtains additional collateral or guarantor support. If the borrower has performed under the existing contractual terms of the loan and Patriot’s underwriters determine that the borrower has the capacity to continue to perform under the terms of the TDR, the loan continues accruing interest. Non-accruing TDRs may be returned to accrual status when there has been a sustained period of performance (generally six consecutive months of payments) and both principal and interest are reasonably assured of collection.

Impaired Loans

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of March 31, 2017 and December 31, 2016, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $8.9 million and $8.9 million were identified, for which $232,000 and $231,000 specific reserves were established, respectively. Loans not requiring specific reserves had sufficient collateral values, less costs to sell, supporting the carrying amount of the loans. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.

At March 31, 2017 exposure to the $8.9 million of impaired loans was related to 10 borrowers. In all cases, appraisal reports of the underlying collateral, if any, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were reduced by an estimate of the costs to sell the assets, in order to estimate the potential loss, if any, that may eventually be realized. Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following summarizes the investment in, outstanding principal balance of, and the related allowance, if any, for impaired loans as of March 31, 2017 and December 31, 2016:

(In thousands)
	March 31, 2017						December 31, 2016
	Recorded Investment		Principal Outstanding		Related Allowance		Recorded Investment		Principal Outstanding		Related Allowance
With no related allowance recorded:
Commercial Real Estate	$	6,204		6,656		-		6,267		6,721		-
Residential Real Estate		1,908		1,941		-		1,911		2,915		-
Commercial and Industrial		-		-		-		-		-		-
Consumer and Other		541		630		-		542		631		-
Construction		-		287		-		-		-		-
		8,653		9,514		-		8,720		10,267		-
With a related allowance recorded:
Commercial Real Estate		-		-		-		-		-		-
Residential Real Estate		-		-		-		-		-		-
Commercial and Industrial		232		232		232		231		231		231
Consumer and Other		-		-		-		-		-		-
Construction		-		-		-		-		-		-
		232		232		232		231		231		231
Impaired Loans, Total:
Commercial Real Estate		6,204		6,656		-		6,267		6,721		-
Residential Real Estate		1,908		1,941		-		1,911		2,915		-
Commercial and Industrial		232		232		232		231		231		231
Consumer and Other		541		630		-		542		631		-
Construction		-		287		-		-		-		-
Impaired Loans, Total	$	8,885		9,746		232		8,951		10,498		231

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following tables summarize additional information regarding impaired loans for the three months ended March 31, 2017 and 2016.

(In thousands)	Three Months Ended March 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	6,236		73		7,270		91
Residential Real Estate		1,910		3		4,542		31
Commercial and Industrial		-		-		-		-
Consumer and Other		541		5		546		5
		8,687		81		12,358		127
With a related allowance recorded:
Commercial Real Estate		-		-		-		-
Residential Real Estate		-		-		-		-
Commercial and Industrial		231		-		2,977		-
Consumer and Other		-		-		2		-
		231		-		2,979		-
Impaired Loans, Total:
Commercial Real Estate		6,236		73		7,270		91
Residential Real Estate		1,910		3		4,542		31
Commercial and Industrial		231		-		2,977		-
Consumer and Other		541		5		548		5
Impaired Loans, Total	$	8,918		81		15,337		127

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 4: Deposits

The following table presents the balance of deposits held, by category as of March 31, 2017 and December 31, 2016.

(In thousands)	March 31, 2017		December 31, 2016

Non-interest bearing	$	78,372	$	76,772
Interest bearing:
NOW		26,156		29,912
Savings		140,352		131,429
Money market		15,304		15,593
Certificates of deposit, less than $250,000		182,499		160,609
Certificates of deposit, $250,000 or greater		59,684		51,077
Brokered deposits		58,592		63,932
Interest bearing, Total		482,587		452,552

Total Deposits	$	560,959	$	529,324

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 5: Share-Based Compensation and Employee Benefit Plan

The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan (the “Plan”) to provide an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”), options, or phantom stock units. Since 2013, the Company’s practice is to grant RSAs; as of March 31, 2017 and December 31, 2016, there are no options or phantom stock units outstanding or that have been exercised.

The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain limitations. As of March 31, 2017, 2,885,516 shares of stock are available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs and stock option grants. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three, four or five year period from the date of grant. During the three months ended March 31, 2017, the Company did not grant any RSAs to directors and employees. During the three months ended March 31, 2016, the Company granted 52,200 restricted shares to employees and 5,884 restricted shares to directors, respectively. During the three months ended March 31, 2017, 2,231 shares of restricted stock became vested. All RSAs are non- participating grants.

The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value. For the three months ended March 31, 2017 and March 31, 2016, the Company recognized share-based compensation expense of $43,000 and $154,000, respectively.

For the three months ended March 31, 2017 and March 31, 2016, share-based compensation attributable to employees of Patriot amounted to $28,000 and $140,000, respectively.

Included in share-based compensation expense for the three months ended March 31, 2017 and March 31, 2016 were $15,000 and $14,000 attributable to Patriot’s external Directors, who received total compensation of $69,000 and $72,000 for each of those periods, respectively, which amounts are included in Other Operating Expenses in the Consolidated Statements of Operations.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following is a summary of the status of the Company’s restricted shares as of March 31, 2017 and 2016 and changes therein during the periods indicated:

Three months ended March 31, 2017:	Number of Shares Awarded			Weighted Average Grant Date Fair Value
Unvested at December 31, 2016		35,264		$	12.84
Vested		(2,231	)	$	(13.03	)
Unvested at March 31, 2017		33,033		$	12.55

Three months ended March 31, 2016:
Unvested at December 31, 2015		55,854		$	12.83
Granted		58,084		$	15.25
Unvested at March 31, 2016		113,938		$	14.06

Compensation expense attributable to the unvested restricted shares outstanding as of March 31, 2017 amounts to $412,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 2.7 years.

RSA Grant - Non-executive Employees

On January 4, 2016, the Company granted 100 restricted shares of common stock to each of eighty-seven full- and part-time non-executive employees as of December 31, 2015. The total number of shares granted was 8,700 at a grant date fair value of $15.50 per share, resulting in expected future employee compensation of $135,000. The shares granted vest in three-years on January 2, 2019 and are non-participating during the vesting period.

During the three months ended March 31, 2017, none of the shares granted were forfeited. The remaining 6,900 shares continue to vest and $71,000 of compensation expense is expected to be recognized through the January 2019 vesting date.

The Company offers a 401K retirement plan (the “401K”), which provides for tax-deferred salary deductions for eligible employees. Employees may choose to make voluntary contributions to the 401K, limited to an annual maximum amount as set forth periodically by the Internal Revenue Service. The Company matches 50% of such contributions, up to a maximum of six percent. During the three months ended March 31, 2017 and March 31, 2016, compensation expense under the 401K aggregated $34,000 and $43,000, respectively.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 6: Earnings per share

The Company is required to present basic earnings per share and diluted earnings per share in its Consolidated Statements of Operations. Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings per share.

The computation of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016 follows:

(Net income in thousands)	Three Months Ended March 31,
	2017		2016
Basic earnings per share:
Net income attributable to Common shareholders	$	1,730		653

Divided by:
Weighted average shares outstanding		3,892,726		3,956,207

Basic earnings per common share	$	0.44		0.17


Diluted earnings per share:
Net income attributable to Common shareholders	$	1,730		653

Weighted average shares outstanding		3,892,726		3,956,207

Effect of potentially dilutive restricted common shares		3,368		32,479

Divided by:
Weighted average diluted shares outstanding		3,896,094		3,988,686

Diluted earnings per common share	$	0.44		0.16

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 7: Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.

The contractual amount of commitments to extend credit and standby letters of credit represents the maximum amount of potential accounting loss should the contract be fully drawn upon; the customer default; and the value of any existing collateral becomes worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activates, evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.

Financial instruments with credit risk at March 31, 2017 are as follows:

(In thousands)
	As of March 31, 2017
Commitments to extend credit:
Unused lines of credit	$	52,322
Undisbursed construction loans		19,064
Home equity lines of credit		20,300
Future loan commitments		15,422
Financial standby letters of credit		1,482
	$	108,590

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit 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, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits and securities. The Bank has established a $5,000 reserve for credit loss as of March 31, 2017, which is included in accrued expenses and other liabilities.

Standby letters of credit are written commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the Consolidated Balance Sheet.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 8: Regulatory and Operational Matters

Federal and State regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, Federal banking agencies imposed four minimum capital requirements on community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 5.0%. However, regardless of a financial institution’s ratios, the OCC may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.

Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The Company’s and the Bank’s regulatory capital amounts and ratios at March 31, 2017 and December 31, 2016 are summarized as follows:

(In thousands)	Patriot National Bancorp, Inc.								Patriot Bank, N.A.
	March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016
	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)
Total Capital (to risk weighted assets):
Actual		69,991		10.590		66,254		10.603		78,362		11.964		74,303		11.928
To be Well Capitalized⁽¹⁾		-		-		-		-		65,497		10.000		62,292		10.000
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		60,585		9.250		53,727		8.625
For capital adequacy		52,872		8.000		49,989		8.000		52,398		8.000		49,834		8.000

Tier 1 Capital (to risk weighted assets):
Actual		64,286		9.727		61,571		9.854		72,657		11.093		69,620		11.176
To be Well Capitalized⁽¹⁾		-		-		-		-		52,398		8.000		49,834		8.000
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		47,485		7.250		41,269		6.625
For capital adequacy		39,654		6.000		37,491		6.000		39,298		6.000		37,375		6.000

Common Equity Tier 1 Capital (to risk weighted assets):
Actual		56,286		8.517		53,571		8.573		72,657		11.093		69,620		11.176
To be Well Capitalized⁽¹⁾		-		-		-		-		42,573		6.500		40,490		6.500
For capital adequacy with Capital Buffer⁽²⁾		-		-		-		-		37,661		5.750		31,925		5.125
For capital adequacy		29,740		4.500		28,119		4.500		29,474		4.500		28,031		4.500

Tier 1 Leverage Capital (to average assets):
Actual		64,286		9.416		61,571		9.296		72,657		10.645		69,620		10.518
To be Well Capitalized⁽¹⁾		-		-		-		-		34,129		5.000		33,096		5.000
For capital adequacy		27,308		4.000		26,494		4.000		27,303		4.000		26,477		4.000

⁽¹⁾

Designation as "Well Capitalized" does not apply to bank holding companies - - the Company. Such categorization of capital adequacy only applies to insured depository institutions - - the Bank.

⁽²⁾

The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016. It was not applicable to periods prior to that date and does not apply to bank holding companies - - the Company.

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement is being phased in over three years beginning in 2016. The 0.625% capital conversation buffer for 2016 has been included in the minimum capital adequacy ratios in the 2016 column in the table above. The capital conversation buffer increased to 1.25% for 2017, which has been included in the minimum capital adequacy ratios in the 2017 column above.

The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 capital ratio to 8.5% and the CET1 capital ratio to 7.0% on a fully phased-in basis, which will be effective beginning on January 1, 2019. Management believes that, as of March 31, 2017, Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Note 9: Fair Value and Interest Rate Risk

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value, requiring entities to maximize the use of observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs generally require significant management judgment.

The three levels of the fair value hierarchy consist of:

Level 1	Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).

Level 2	Observable inputs other than quoted prices included in Level 1, such as:
	-	Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)
	-	Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)
	-	Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).

Level 3	Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).

A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable and payable

The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.

Available-for-Sale Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).

Other Investments

The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded and therefore have no readily determinable market value. The investment in the Fund is reported in the Consolidated Financial Statements at cost.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Loans

For variable rate loans, which periodically reprice with no apparent change in credit risk, carrying values, adjusted for credit losses inherent in the portfolios, are a reasonable estimate of fair value.

The fair value of fixed rate loans is estimated by discounting the future cash flows using the period-end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios.

Since individual loans do not trade on an open market and transfer of individual loans are private transactions that are not publicized, the fair value of the loan portfolio is classified within Level 3 of the fair value hierarchy. Patriot does not record loans at fair value on a recurring basis; however, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect the net realizable value expected to be collected on default by the borrower based on observable market inputs or current appraised value of collateral held. Fair values estimated in this manner do not fully incorporate an exit-price approach, but instead are based on a comparison to current market rates for comparable loans, adjusted by management based on the best information available.

OREO

The fair value of other OREO the Bank may obtain is based on current appraised property value less estimated costs to sell. When the fair value is based on unadjusted current appraised values, OREO is classified within Level 2 of the fair value hierarchy. Patriot classifies OREO within Level 3 of the fair value hierarchy when unobservable inputs are used to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value and then monitors property and market conditions that may indicate a change in value is warranted.

Deposits

The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.

The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits.

The Company does not record deposits at fair value on a recurring basis.

Senior Notes and Junior Subordinated Debt

The senior notes were issued in December 2016 and therefore the carrying value is considered comparable to fair value. Management does not intend to measure the senior notes at fair value on a recurring basis.

Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

Federal Home Loan Bank Borrowings

The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Off-balance sheet instruments

Off-balance sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value (i.e., commitments to extend credit) on a recurring basis.

The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of March 31, 2017 and December 31, 2016:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2017:
U. S. Government agency mortgage-backed securities	$	-		4,656		-		4,656
Corporate bonds		-		8,937		-		8,937
Subordinated Notes		-		5,608		2,000		7,608

Available-for-sale securities	$	-		19,201		2,000		21,201

December 31, 2016:
U. S. Government agency mortgage-backed securities	$	-		10,441		-		10,441
Corporate bonds		-		8,961		-		8,961
Subordinated Notes		-		3,026		2,000		5,026

Available-for-sale securities	$	-		22,428		2,000		24,428

As of March 31, 2017, there were no financial assets measured at fair value on a on a non-recurring basis. The following tables reflect financial assets measured at fair value on a non-recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of December 31, 2016:

(In thousands)

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total

December 31, 2016:

Other real estate owned ("OREO")

851

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

Unobservable Inputs used in Fair Value Measurement - Quantitative Information

	December 31, 2016
	Other Real Estate Owned (“OREO”)
Fair Value	$	851

Valuation technique⁽¹⁾	Independent appraised value of collateral
Unobservable Input⁽²⁾	Liquidation cost
Weighting of qualitative factors⁽³⁾	22.6% and (22.6)%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral (in the case of impaired loans) or property (in the case of OREO), which include Level 3 inputs that are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)

The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

The Company discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of the financial instruments included in the Consolidated Financial Statements.

The estimated fair value amounts have been measured as of March 31, 2017 and December 31, 2016 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.

The information presented should not be interpreted as an estimate of the total fair value of the Company’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other bank holding companies may not be meaningful.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of March 31, 2017 and December 31, 2016:

(In thousands)		March 31, 2017				December 31, 2016
	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and noninterest bearing balances due from banks	Level 1	$	5,087		5,087		2,596		2,596
Interest-bearing deposits due from banks	Level 1		55,179		55,179		89,693		89,693
U. S. Government agency mortgage-backed securities	Level 2		4,656		4,656		10,441		10,441
Corporate bonds	Level 2		8,937		8,937		8,961		8,961
Subordinated Notes	Level 2		5,608		5,608		3,026		3,026
Subordinated Notes	Level 3		2,000		2,000		2,000		2,000
Other investments	Level 2		4,450		4,450		4,450		4,450
Federal Reserve Bank stock	Level 2		2,358		2,358		2,109		2,109
Federal Home Loan Bank stock	Level 2		5,489		5,489		5,609		5,609
Loans receivable, net	Level 3		625,030		623,915		576,982		576,757
Accrued interest receivable	Level 2		3,063		3,063		2,726		2,726

Financial assets, total			721,857		720,742		708,593		708,368

Financial Liabilities:
Demand deposits	Level 2		78,372		78,372		76,772		76,772
Savings deposits	Level 2		140,352		140,352		131,429		131,429
Money market deposits	Level 2		15,304		15,304		15,593		15,593
NOW accounts	Level 2		26,156		26,156		29,912		29,912
Time deposits	Level 2		242,183		242,023		211,686		210,321
Brokered deposits	Level 1		58,592		58,539		63,932		63,897
FHLB and correspondent bank borrowings	Level 2		124,000		124,120		138,000		138,149
Senior notes	Level 2		11,647		11,647		11,628		11,628
Subordinated debentures	Level 2		8,080		8,080		8,079		8,079
Note payable	Level 3		1,722		1,570		1,769		1,565
Accrued interest payable	Level 2		343		343		118		118

Financial liabilities, total			706,751		706,506		688,918		687,463

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances. These amounts are included in the table above for informational purposes.

In the normal course of its operations, the Company assumes interest rate risk (the risk that general interest rate levels will change). As a result, the fair values of the Company’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and maturities of its financial assets and liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.

Off-balance sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2017 and December 31, 2016. The estimated fair value of fee income on letters of credit at March 31, 2017 and December 31, 2016 was insignificant.

Note 10: Recent Accounting Pronouncements

Recently Issued Accounting Standards Updates

ASU 2014-09

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This update will replace all current U.S. GAAP related to revenue recognition and will eliminate all industry-specific guidance. During 2016, the update was further clarified by ASU 2016-08 Revenue from Contracts with Customers: Principle versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing and ASU 2016-12 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. In July 2015, the FASB affirmed its proposal to defer the effective date of this new standard. As a result, public companies will apply the new revenue standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Management continues to assess the impact that this guidance may have on its Consolidated Financial Statements with respect to new transactions entered into through the course of normal operations. Except for additional disclosures that are required, management has determined that ASU 2014-09 will not have a material impact on its financial condition or results of operations with respect to its normal and customary operations, but continues to monitor potential impacts that may occur as it explores additional transactions and opportunities.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

ASU 2016-01

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall. ASU 2016-01 requires equity investments, excluding equity investments that are consolidated or accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income. The ASU simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and a measurement of the investment at fair value only when impairment is qualitatively identified to exist. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted. Management is currently assessing the potential impact ASU 2016-01 will have on its financial statements, but does not expect a material impact on its financial condition or results of operations.

ASU 2016-02

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU increases transparency and comparability among organizations by requiring the recognition of leased assets and lease liabilities on the balance sheet, and the disclosure of key information about leasing arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of the new standard on its Consolidated Financial Statements.

ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a current expected loss (“CECL”) model. Under the CECL model, entities will estimate credit losses over the entire contractual term of a financial instrument from the date of initial recognition of the instrument. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016-13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. Management is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.

ASU 2016-15

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the classification of certain specific transactions presented on the Statement of Cash Flows, in order to improve consistency across entities. Debt prepayment or extinguishment, debt-instrument settlement, contingent consideration payments post-business combination, and beneficial interests in securitization transactions are specific items addressed by this ASU that may affect the Bank. Additionally, the ASU codifies the predominance principle for classifying separately identifiable cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact that the standard will have on its Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to consolidated financial statements (Unaudited)

ASU 2016-18

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. The purpose of the standard is to improve consistency and comparability among companies with respect to the reporting of changes in restricted cash and cash equivalents on the Statement of Cash Flows. The ASU requires the Statement of Cash Flows to include all changes in total cash and cash equivalents, including restricted amounts, and to the extent restricted cash and cash equivalents are presented in separate line items on the Balance Sheet, disclosure reconciling the change in total cash and cash equivalents to the amounts shown on the Balance Sheet are required. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. As of March 31, 2017 and December 31, 2016, Patriot does not have restricted cash and cash equivalents separately disclosed on its Balance Sheet. In the future, if Patriot’s activities warrant presenting separate line items on its Balance Sheet for restricted cash and cash equivalents, management does not envision any difficulties implementing the requirements of ASU 2016-18, as applicable.

ASU 2017-08

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has not yet determined the impact the adoption of ASU 2017-08 will have on the consolidated financial statements.

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in the Company’s public statements, including this one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to: (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 repricing 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) 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; (9) 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; (10) the application of generally accepted accounting principles, consistently applied; (11) the fact that one period of reported results may not be indicative of future periods; (12) 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 (13) other such factors, including risk factors, as may be described in the Company’s other filings with the SEC.

Although the Company believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles 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 losses, the analysis and valuation of its investment securities and the valuation of deferred tax assets, as 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 Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017 for additional information.

Summary

The Company reported net income for the first quarter of 2017 of $1.7 million ($0.44 basic and diluted earnings per share) compared to net income of $653,000 ($0.17 basic and $0.16 diluted earnings per share) for the quarter ended March 31, 2016, an increase of 165%. On a pre-tax basis, the Company earned $2.9 million for the three month period ended March 31, 2017, an increase of $1.8 million, or 168% over the first quarter of 2016.

Total assets increased $18.1 million or 2%, from $756.7 million at December 31, 2016 to $774.8 million at March 31, 2017.

●

Cash and cash equivalents decreased $32.0 million or 35%, from $92.3 million at December 31, 2016 to $60.3 million at March 31, 2017.

●

The net loan portfolio increased $48.0 million or 8%, from $577.0 million at December 31, 2016 to $625.0 million at March 31, 2017.

Total liabilities increased $16.2 million or 2%, from $694.1 million at December 31, 2016 to $710.3 million at March 31, 2017.

●

Deposits increased $31.7 million or 6%, from $529.3 million to $561.0 million.

●

Following historical seasonal trends, non-interest bearing deposits increased by $1.6 million or 2%.

●

Interest bearing deposits increased $30.0 million or 7%, mostly relating to increases of $30.4 million or 30% in Certificates of deposits, $8.9 million or 7% in Savings accounts, partially offset by decreases of $5.3 million or 7% in brokered deposits, and $4.0 million or 14% in NOW and Money Market accounts, respectively.

Equity increased $1.8 million or 3%, from $62.6 million at December 31, 2016 to $64.4 million at March 31, 2017, primarily due to $1.7 million of year-to-date net income, $43,000 of equity compensation, and $98,000 of investment portfolio unrealized gains.

FINANCIAL CONDITION

Cash and Cash Equivalents

●

Cash and cash equivalents decreased $32.0 million, from $92.3 million at December 31, 2016 to $60.3 million at March 31, 2017. The Company funded $72.9 million in purchases of loans, $14.0 million in repayments of FHLB and correspondent bank borrowings, $11.5 million in purchases of available-for sale securities. The effect of these outlays was partially offset by a $31.6 million increase in deposits, $26.5 million decrease in net originations of loans receivable, and $9.8 million of proceeds from sales and principal repayments on available for sale securities, and $513,000 in net cash provided by operations during the period.

Investments

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

	March 31,		December 31,		Inc/(Dec)			Inc/(Dec)
(In thousands)	2017		2016			($)			(%)
U. S. Government agency mortgage-backed securities	$	4,656		10,441		(5,785	)		(55.41	)%
Corporate bonds		8,937		8,961		(24	)		(0.27	)%
Subordinated Notes		7,608		5,026		2,582			51.37	%
Total Available-for-Sale Securities	$	21,201		24,428		(3,227	)		(13.21	)%

Available-for-sale securities decreased $3.2 million or 13%, from $24.4 million at December 31, 2016 to $21.2 million at March 31, 2017. This decrease was primarily attributable to the sale of approximate $5.0 million of Government agency mortgage-backed securities and repayments of principal on the same securities. The Company received $9.0 million from sales of corporate bonds, which was offset by purchase of a different set of $9.0 million corporate bonds with superior rates of return. In addition $2.5 million subordinated notes were purchased.

Loans

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

(In thousands)	March 31,			December 31,			Inc/(Dec)			Inc/(Dec)
Loan portfolio segment:	2017			2016				($)			(%)
Commercial Real Estate	$	265,268			271,229			(5,961	)		(2.20	)%
Residential Real Estate		155,140			86,514			68,626			79.32	%
Commercial and Industrial		62,375			60,977			1,398			2.29	%
Consumer and Other		95,893			101,449			(5,556	)		(5.48	)%
Construction		44,512			53,895			(9,383	)		(17.41	)%
Construction to permanent - CRE		7,539			7,593			(54	)		(0.71	)%
Loans receivable, gross		630,727			581,657			49,070			8.44	%
Allowance for loan losses		(5,697	)		(4,675	)		(1,022	)		21.86	%
Loans receivable, net	$	625,030			576,982			48,048			8.33	%

The Company’s gross loan portfolio increased $49.0 million, or 8%, from $581.7 million at December 31, 2016 to $630.7 million at March 31, 2017. The increase in loans was primarily attributable to purchases of $72.9 million residential real estate loans, which was offset by $23.0 million decrease in net origination of loans receivable.

At March 31, 2017, the net loan to deposit ratio was 111% and the net loan to total assets ratio was 81%. At December 31, 2016, these ratios were 108% and 76%, respectively.

Allowance for Loan Losses

The allowance for loan losses increased $1.0 million or 22% from $4.7 million at December 31, 2016 to $5.7 million at March 31, 2017. The increase was primarily attributable to a $2.8 million increase in recoveries within our Commercial and Industrial category that was offset by $1.7 million provision (credit) for all loan categories.

The overall credit quality of the loan portfolio continues to be strong and stable. Based upon the overall assessment and evaluation of the loan portfolio at March 31, 2017, management believes the allowance for loan losses of $5.7 million, which represents 0.9% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.

Non-Accrual, Past Due and Restructured Loans

The following table presents non-accruing loans and loans past due 90 days or more and still accruing:

(In thousands)	March 31,			December 31,
	2017			2016
Loans past due over 90 days and still accruing	$	1,460			1,452
Non-accruing loans		1,822			1,821
Total	$	3,282			3,273

% of Total Loans		0.53	%		0.57	%
% of Total Assets		0.42	%		0.43	%

The $1.8 million of non-accrual loans at March 31, 2017 is comprised of four relationships, for which a specific reserve of $232,000 has been established.

The Company has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment.

The $1.8 million of non-accrual loans at December 31, 2016 was comprised of three borrowers, for which a specific reserve of $231,000 had been established.

Other Real Estate Owned

As of March 31, 2017 and December 31, 2016, OREO of $851,000, consisting of a single undeveloped property (i.e., raw land) zoned for multi-use construction, was reported on the Balance Sheet. The carrying amount was comprised of $840,000 representing the value of the loan receivable due from the mortgagor of the foreclosed property and a gain of $11,000 recognized upon taking possession of the property in May 2016. The gain was the excess of the fair value of the property at the date of possession over the loan receivable's carrying amount, after deducting an estimate of costs to liquidate the property.

Deferred Taxes

Deferred tax assets decreased $941,000, from $12.6 million at December 31, 2016 to $11.7 million at March 31, 2017. This decrease was primarily due to net operating loss carry forwards applied to the tax liability on current year taxable income and net unrealized gains on the investment portfolio.

The Company will continue to evaluate its ability to realize its net deferred tax asset. If future evidence suggests that it is more likely than not that a portion of the deferred tax asset will not be realized, the valuation allowance may be increased.

Deposits

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

(In thousands)	March 31,		December 31,		Inc/(Dec)			Inc/(Dec)
	2017		2016			($)			(%)
Non-interest bearing	$	78,372		76,772		1,600			2.08	%
Interest bearing:
NOW		26,156		29,912		(3,756	)		(12.56	)%
Savings		140,352		131,429		8,923			6.79	%
Money market		15,304		15,593		(289	)		(1.85	)%
Certificates of deposit, less than $250,000		182,499		160,609		21,890			13.63	%
Certificates of deposit, $250,000 or greater		59,684		51,077		8,607			16.85	%
Brokered deposits		58,592		63,932		(5,340	)		(8.35	)%
Total Interest bearing		482,587		452,552		30,035			6.64	%

Total Deposits	$	560,959		529,324		31,635			5.98	%

Deposits increased $31.6 million or 6%, from $529.3 million at December 31, 2016 to $561.0 million at March 31, 2017. The increase was substantially the result of an effort to attract new deposits and strengthen the loyalty of the existing customer base by offering attractive rates compared to market since fourth quarter of 2016. The effort was part of a strategy to establish long-term relationships for sustained growth and profitability. The increase in deposits, most notably in the category of time certificates, signifies the success in strengthening the Bank’s liquidity by refocusing its operations on its customer base. The Company continues to implement deposit growth initiatives.

Borrowings

Total borrowings reduced by $14.0 million or 10%, from $159.4 million at December 31, 2016 to $145.4 million at March 31, 2017. Borrowings consist primarily of Federal Home Loan Bank (“FHLB”) advances, senior notes, junior subordinated debentures and a note payable. The decrease was primarily attributable to repayment of $15.0 million Zions Bank borrowings, as the short term borrowings were in place for liquidity needs at year end December 31, 2016.

Federal Home Loan Bank borrowings

The Company is a member of the Federal Home Loan Bank of Boston ("FHLB"). Borrowings from the FHLB are limited to a percentage of the value of qualified collateral, as defined on the FHLB 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. As of March 31, 2017, the Bank had $13.2 million of available borrowing capacity from the FHLB.

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB. At March 31, 2017 and December 31, 2016, no funds had been borrowed under the line of credit.

Correspondent Bank - Line of Credit

Effective July 2016, Patriot entered into a Federal funds sweep and Federal funds line of credit facility agreement (the “Correspondent Bank Agreement”) with ZB, N.A. (“Zions Bank”). The purpose of the agreement is to provide a credit facility intended to satisfy overnight Fed account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions.

The Correspondent Bank Agreement provides for up to $16 million in funds of which no funds was outstanding as of March 31, 2017. The Correspondent Bank Agreement is unsecured, currently requires a compensating balance of $250,000 to remain on account with Zions Bank at all times, pays interest on funds on account (e.g., Fed funds sweep, compensating balance) at variable rates depending on the total deposit, and charges interest on advances at Zions Bank’s daily Fed funds rate, which is variable.

Senior notes

On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior notes”). Interest on the Senior notes is payable semi-annually on June 22 and December 22 of each year beginning on June 22, 2017.

In connection with the issuance of the Senior notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior notes to recognize a constant rate of interest expense. At March 31, 2017 and December 31, 2016, $353,000 and $372,000 of unamortized debt issuance costs have been deducted from the face amount of the Senior notes included in the Consolidated Balance Sheet.

The Senior Notes 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. The 7% Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity.

Junior subordinated debt owed to unconsolidated trust

In 2003, 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.

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 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 March 31, 2017 and December 31, 2016, the note had a balance outstanding of $1.7 million and $1.8 million, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.

Equity

Equity increased $1.8 million from $62.6 million at December 31, 2016 to $64.4 million at March 31, 2017, primarily due to $1.7 million of year-to-date net income, $43,000 of equity compensation, and $98,000 of investment portfolio unrealized gains.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements, which primarily consist of commitments to lend, increased $10.2 million from $98.4 million at December 31, 2016 to $108.6 million at March 31, 2017.

RESULTS OF OPERATIONS

Net Interest Income

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended March 31, 2017 and 2016:

(In thousands)
	Three months ended March 31,
	2017							2016
	Daily Average Balance ($)			Interest ($)		Yield (%)		Daily Average Balance ($)			Interest ($)		Yield (%)
ASSETS
Interest Earning Assets:
Loans	$	569,463			6,607		4.71		485,359			5,840		4.83
Cash equivalents		36,030			64		0.72		51,524			41		0.32
Investments		34,843			253		2.92		42,200			228		2.17

Total interest earning assets		640,336			6,924		4.38		579,083			6,109		4.23

Cash and due from banks		4,515							3,027
Premised and equipment, net		32,881							29,633
Allowance for loan losses		(4,748	)						(5,245	)
OREO		499							-
Other assets		17,301							17,027

Total Assets	$	690,784							623,525

Liabilities
Interest bearing liabilities:
Deposit	$	464,516			989		0.86		358,871			473		0.53
Borrowings		67,437			78		0.47		113,823			121		0.43
Senior notes		11,635			229		7.97		-			-		-
Subordinated debt		8,248			85		4.16		8,248			82		3.97
Note Payable		1,737			9		1.77		1,923			8		1.67

Total interest bearing liabilities		553,573			1,390		1.02		482,865			684		0.57

Demand deposits		71,055							75,471
Other liabilities		2,689							2,798

Total Liabilities		627,317							561,134

Shareholders' equity		63,467							62,391

Total Liabilities and Shareholders' Equity	$	690,784							623,525

Net interest income					5,534							5,425
Interest margin							3.50							3.76
Interest spread							3.36							3.66

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-bearing assets and interest-bearing liabilities for the three months ended March 31, 2017 and 2016:

(In thousands)
	Three Months Ended March 31,
	2017 compared to 2016
	Increase/(Decrease)
	Volume			Rate			Total
Interest Earning Assets:
Loans	$	964			(197	)		767
Cash equivalents		(12	)		35			23
Investments		(41	)		66			25

Total interest earning assets		911			(96	)		815

Interest bearing liabilities:
Deposit		165			351			516
Borrowings		(50	)		7			(43	)
Senior notes		229			-			229
Subordinated debt		-			3			3
Note Payable		1			-			1

Total interest bearing liabilities		345			361			706

Net interest income	$	566			(457	)		109

For the quarter ended March 31, 2017, interest income increased $815,000 or 13% as compared to the quarter ended March 31, 2016, as focused growth and diversification in the loan portfolio yielded an increase in interest income. Average loan balances increased $84.1 million as compared to the quarter ended March 31, 2016 primarily driven by $72.9 million purchases of loan pools during the first quarter of 2017.

Average yields on investment securities improved from 2.17% in 2016 to 2.92% in 2017, resulting in higher interest income of $23,000. This increase was primarily due to the purchase of corporate bonds and subordinated bonds from two creditworthy financial institutions during the first quarter of 2017.

As the loan pipeline continues to grow in 2017, so did the need to increase the Bank’s deposit base and liquidity sources. Since the second half of 2016, the Bank has adopted a certificate of deposits (CD) program to attract term deposits at competitive rates. The program was successful and total CD increased $31 million during the first quarter of 2017.

Total interest expense increased $706,000 or 103% as compared to the quarter ended March 31, 2016, primarily driven by $516,000 increase in interest on deposits as the result of an increase in deposit rates, and $ 229,000 increase in interest expense on senior debt that was issued in December 2016. These increases were offset by a reduction of $43,000 in interest on FHLB borrowings.

Net interest margin for the quarter ended March 31, 2017 was 3.50% as compared to 3.76% for the quarter ended March 31, 2016. The results primarily from a 0.5% increase in the average yield on interest bearing liabilities.

Credit for Loan Losses

For the three months ended March 31, 2017, credit for loan losses of $1.7 million was recorded. No credit or provision was recorded in the three months ended March 31, 2016. This is primarily attributable to a single recovery in its Commercial and Industrial portfolio segment. Potential loss on the loan was fully reserved against during 2016 and the loan was charged off during the fourth quarter of 2016. In March 2017, the Bank received $2.8 million of insurance recovery.

Non-interest income

Non-interest income decreased $133,000 from $410,000 for the quarter ended March 31, 2016 to $277,000 for the quarter ended March 31, 2017. The decrease is primarily attributable to decrease of $46,000 in loan activity fees and a $78,000 loss on sale of investment securities.

Non-interest expense

Non-interest expense decreased $70,000 from $4.8 million for the quarter ended March 31, 2016 to $4.7 million for the quarter ended March 31, 2017. The decrease is primarily attributable to reduction of $165,000 data processing expense and reduction of $120,000 salaries and benefits, which was offset by $243,000 increase in professional and other outside services and $32,000 increase in regulatory assessments. The reduction in data processing expense is primarily the result of a broad-based operational improvement initiative. The increase in professional and other outside services results primarily from increased consulting fees incurred in the operational improvement initiative.

Liquidity

The Company’s liquidity ratio was 10.4% at March 31, 2017 compared to 14.9% at December 31, 2016. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets, as described in the accompanying Consolidated Balance Sheets, are considered liquid assets: cash and cash due from banks, federal funds sold (if any), short-term investments (if any) and unpledged available-for-sale securities. 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.

Capital

The following table illustrates the Company’s and the Bank’s regulatory capital ratios as of March 31, 2017 and December 31, 2016:

	Patriot National Bancorp, Inc.								Patriot Bank, N.A.
(In thousands)	March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016
	Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)		Amount ($)		Ratio (%)
Total Capital (to risk weighted assets)		69,991		10.590		66,254		10.603		78,362		11.964		74,303		11.928
Tier 1 Capital (to risk weighted assets)		64,286		9.727		61,571		9.854		72,657		11.093		69,620		11.176
Common Equity Tier 1 Capital (to risk weighted assets)		56,286		8.517		53,571		8.573		72,657		11.093		69,620		11.176
Tier 1 Leverage Capital (to average assets)		64,286		9.416		61,571		9.296		72,657		10.645		69,620		10.518

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. 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%, Common Equity Tier 1 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.

Under the final capital rules that became effective on January 1, 2015, there is a requirement for a CET1 Capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement is being phased in over three years beginning in 2016. The 0.625% capital conservation buffer for 2016 has been included in the minimum capital adequacy ratios in 2016 column in the table above. The capital conversation buffer increased to 1.25% for 2017, which has been included in the minimum capital adequacy ratios in the 2017 column above.

The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 Capital ratio to 8.5%, and the CET1 Capital ratio to 7.0% on a fully phased-in basis, which will be effective beginning on January 1, 2019. Management believes that, as of March 31, 2017, Patriot satisfies all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis, as if all such requirements were currently in effect.

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.

Stock Repurchase Program

The following table presents share repurchases of Patriot’s common stock during the three months ended December 31, 2016.

Period Beginning	Period Ending	No. of Shares Purchased⁽¹⁾		Average Price Paid per Share		No. of Shares Purchased as part of Publicly Announced Plans⁽¹⁾		Maximum No. of Shares that may yet be Purchased Under the Plans⁽¹⁾
November 1, 2016	November 30, 2016		629	$	13.73		629		498,853
December 1, 2016	December 31, 2016		71,324	$	14.04		71,324		427,529

Three-months ended December 31, 2016		$	71,953	$	14.04		0		0

⁽¹⁾

All shares have been repurchased in connection with the stock repurchase program (the "Program") authorized by the Company's Board of Directors on July 29, 2016. The Program authorizes the Company's chairman to direct the Company to repurchase up to 500,000 shares of Patriot's common stock on the open-market or in private transactions, through July 31, 2017.

There were no Patriot’s common stock share repurchased during the three-month period ended March 31, 2017 and 2016.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

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. As a result of the historically low interest rate environment, 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)
	Net Portfolio Value - Performance Summary
	As of March 31, 2017							As of December 31, 2016
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)		Estimated Value		Change from Base ($)			Change from Base (%)
+200		98,791		(7,748	)		(7.3)		102,546		(1,629	)		(1.6)
+100		103,345		(3,195	)		(3.0)		104,044		(130	)		(0.1)
BASE		106,540		-			-		104,174		-			-
-100		108,896		2,356			2.2		105,408		1,233			1.2
-200		111,658		5,119			4.8		107,152		2,977			2.9

	Net Interest Income - Performance Summary
	March 31, 2017							Year ended December 31, 2016
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)		Estimated Value		Change from Base ($)			Change from Base (%)
+200		25,654		(153	)		0.6		25,588		976			4.0
+100		25,747		(60	)		0.2		25,149		538			2.2
BASE		25,807		-			-		24,611		-			-
-100		25,263		(544	)		(2.1)		23,956		(655	)		(2.7)
-200		25,260		(547	)		(2.1)		24,073		(538	)		(2.2)

Item 4: Disclosure Controls and Procedures

The Bank maintains disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures.

An evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report. As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the aforementioned officers concluded that, as of March 31, 2017, The Company’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting

A material weakness in the Company’s internal control over financial reporting was disclosed in Item 9A, Controls and Procedures, of the Company’s annual report on Form 10-K, for the year ended December 31, 2016. The Company did not have effective controls over (i) the recording, monitoring and valuation of eligible collateral when calculating specific reserves on impaired loans; and (ii) controls over the development and monitoring of qualitative factors used in calculating the general component of the loan loss reserve in accordance with the approved allowance for loan losses policy. Based on the evaluation, management concluded that, as of December 31, 2016, the Company's disclosure controls and procedures were not effective as a result of the material weakness in internal controls over financial reporting that affected its financial reporting during the second and third quarters of 2016.

In response to the identified material weakness, management implemented changes to its disclosure controls and procedures and its system of internal control over financial reporting in each of the quarters ended December 31, 2016 and March 31, 2017, including changes to the process and procedures for establishing allowances for loan loss and enhancements to create a more robust review process. Other implemented enhancements include strengthened controls over the monitoring and valuation of collateral related to loans deemed to be impaired and for which specific reserves have been established.

Management believes all necessary disclosure controls and procedures needed to provide reasonable assurance that information will be communicated in a timely fashion to management are now in place.

Other than as described in Item 4: Disclosure Controls and Procedures, no other changes in the Company’s internal controls over financial reporting have occurred during the Company’s fiscal quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

Neither the Company nor the Bank has any pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or the Bank is a party or any of its property is subject.

Item 1A: Risk Factors

During the three months ended March 31, 2017, there were no material changes to the risk factors relevant to the Company’s operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2016, except as follows.

Our stockholders may experience dilution upon the repurchase of common shares. On July 26, 2016, our Board of Directors authorized a stock repurchase plan permitting the Company to repurchase up to 500,000 shares of its common stock. The Company may repurchase shares of its common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in the most recently published financial statements. The share repurchase program will be in effect until July 31, 2017, or until suspended, discontinued or replaced. If the Company were to repurchase shares at a price above net asset value per share, such repurchases would result in an immediate dilution in net asset value per share to existing common stockholders.

Item 6: Exhibits

No. Description

3(i) (C)

Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp Inc. (incorporated by reference to Exhibit 3(i) to the Company’s current report Form 8-K dated October 21, 2010)

3(ii)

Amended and Restated By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K dated November 1, 2010 (Commission File No. 000-29599))

10(a) (2)

2012 Stock Plan of Bancorp (incorporated by reference from Annex A to the Proxy Statement on Form 14C filed November 1, 2011)

10(a) (20)

Amended Financial Services Agreement, (incorporated by reference to Exhibit 10(a) (20) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (Commission File No. 000-29599)

14	Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10 -KSB for the year ended December 31, 2004 (Commission File No. 000-29599))

21	Subsidiaries of Bancorp (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1999 (Commission File No. 000-29599))

31(1)

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31(2)

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32	Section 1350 Certifications

101.INS#

XBRL Instance Document

101.SCH#

XBRL Schema Document

101.CAL#

XBRL Calculation Linkbase Document

101.LAB#

XBRL Labels Linkbase Document

101.PRE#

XBRL Presentation Linkbase Document

101.DEF#

XBRL Definition Linkbase Document

The exhibits marked with the section symbol (#) are interactive data files.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 12, 2017
	Patriot National Bancorp, Inc. (Registrant)

	By:	/s/ Joseph D. Perillo
		Joseph D. Perillo
		Executive Vice President and Chief Financial Officer