PATRIOT NATIONAL BANCORP INC - Quarter Report: 2021 September (Form 10-Q)

pnbk20210930_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 September 30, 2021

☐	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) 252-5900

(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, every Interactive Data File required to be submitted 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 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	☒	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 ☐

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		PNBK		NASDAQ Global Market

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 November 10, 2021, there were 3,947,976 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 (Loss) (Unaudited)		5
	Consolidated Statements of Shareholder's Equity (Unaudited)		6
	Consolidated Statements of Cash Flows (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		10
	Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations		44
	Item 3: Quantitative and Qualitative Disclosures about Market Risk		59
	Item 4: Disclosure Controls and Procedures		61
PART II - OTHER INFORMATION			62
	Item 1:	Legal Proceedings	62
	Item 5:	Other Information	62
	Item 6:	Exhibits	63
	SIGNATURES		64

PART I- FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30,			December 31,
(In thousands, except share data)	2021			2020

Assets
Cash and due from banks:
Noninterest bearing deposits and cash	$	5,298		$	3,006
Interest bearing deposits		40,967			31,630
Total cash and cash equivalents		46,265			34,636
Investment securities:
Available-for-sale securities, at fair value		124,103			49,262
Other investments, at cost		4,450			4,450
Total investment securities		128,553			53,712

Federal Reserve Bank stock, at cost		2,843			2,783
Federal Home Loan Bank stock, at cost		5,009			4,503
Loans receivable (net of allowance for loan losses: 2021: $10,079 and 2020: $10,584)		704,459			719,596
Loans held for sale		4,128			1,217
Accrued interest and dividends receivable		6,186			6,620
Premises and equipment, net		32,638			33,423
Other real estate owned		-			1,906
Deferred tax asset, net		10,352			11,496
Goodwill		1,107			1,107
Core deposit intangible, net		308			343
Other assets		10,498			9,387
Total assets	$	952,346		$	880,729

Liabilities
Deposits:
Noninterest bearing deposits	$	207,941		$	158,676
Interest bearing deposits		526,732			526,980
Total deposits		734,673			685,656

Federal Home Loan Bank and correspondent bank borrowings		110,000			90,000
Senior notes, net		11,983			11,927
Subordinated debt, net		9,803			9,782
Junior subordinated debt owed to unconsolidated trust, net		8,116			8,110
Note payable		842			994
Advances from borrowers for taxes and insurance		2,253			3,786
Accrued expenses and other liabilities		7,976			7,255
Total liabilities		885,646			817,510

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; As of September 30, 2021: 4,021,717 shares issued; 3,947,976 shares outstanding; As of December 31, 2020: 4,017,313 shares issued; 3,943,572 shares outstanding;		106,439			106,329
Accumulated deficit		(39,393	)		(42,592	)
Accumulated other comprehensive loss		(346	)		(518	)
Total shareholders' equity		66,700			63,219
Total liabilities and shareholders' equity	$	952,346		$	880,729

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)	2021			2020			2021			2020

Interest and Dividend Income
Interest and fees on loans	$	7,189		$	8,578		$	22,199		$	27,722
Interest on investment securities		692			340			1,422			1,134
Dividends on investment securities		59			85			150			313
Other interest income		20			28			67			187
Total interest and dividend income		7,960			9,031			23,838			29,356

Interest Expense
Interest on deposits		448			2,028			1,856			8,020
Interest on Federal Home Loan Bank borrowings		756			628			2,230			1,963
Interest on senior debt		229			229			686			686
Interest on subordinated debt		233			235			700			756
Interest on note payable and other		4			5			12			15
Total interest expense		1,670			3,125			5,484			11,440

Net interest income		6,290			5,906			18,354			17,916

(Credit) provision for loan losses		(300	)		85			(300	)		1,799

Net interest income after (credit) provision for loan losses		6,590			5,821			18,654			16,117

Non-interest Income
Loan application, inspection and processing fees		79			54			203			147
Deposit fees and service charges		61			73			190			253
Gains on sales of loans		-			380			352			464
Rental income		130			131			400			393
Gain on sale of investment securities		26			-			119			-
Other income		627			66			854			257
Total non-interest income		923			704			2,118			1,514

Non-interest Expense
Salaries and benefits		2,843			3,460			7,506			10,966
Occupancy and equipment expense		832			810			2,530			2,680
Data processing expense		376			433			1,088			1,194
Professional and other outside services		633			627			2,199			2,137
Project expenses, net		4			6			15			154
Advertising and promotional expense		57			107			196			377
Loan administration and processing expense		23			75			61			135
Regulatory assessments		213			355			649			1,159
Insurance expense, net		79			67			214			215
Communications, stationary and supplies		161			118			450			371
Other operating expense		490			560			1,484			1,491
Total non-interest expense		5,711			6,618			16,392			20,879

Income (loss) before income taxes		1,802			(93	)		4,380			(3,248	)

Provision (benefit) for income taxes		479			(6	)		1,181			(811	)

Net income (loss)	$	1,323		$	(87	)	$	3,199		$	(2,437	)

Basic earnings (loss) per share	$	0.34		$	(0.02	)	$	0.81		$	(0.62	)
Diluted earnings (loss) per share	$	0.34		$	(0.02	)	$	0.81		$	(0.62	)

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020

Net income (loss)	$	1,323		$	(87	)	$	3,199		$	(2,437	)
Other comprehensive income (loss)
Unrealized holding (loss) gain on securities		(500	)		553			352			(193	)
Income tax effect		128			(143	)		(92	)		50
Reclassification for realized gain on sale of investment securities		(26	)		-			(119	)		-
Income tax effect		7			-			31			-
		(391	)		410			172			(143	)
Derivative instruments:
Unrealized holding (loss) gain on cash flow hedge		(104	)		-			149			-
Income tax effect		27			-			(39	)		-
Reclassification adjustement for net gain included in net income		(64	)		-			(149	)		-
Income tax effect		17			-			39			-
		(124	)		-			-			-

Total other comprehensive (loss) income		(515	)		410			172			(143	)
Comprehensive income (loss)	$	808		$	323		$	3,371		$	(2,580	)

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

	Three Months Ended September 30, 2021
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balance at June 30, 2021		3,947,276	$	106,409	$	(40,716	)	$	169		$	65,862
Comprehensive income (loss):
Net income		-		-		1,323			-			1,323
Unrealized holding loss on available-for-sale securities, net of tax		-		-		-			(391	)		(391	)
Unrealized holding loss on cash flow hedge, net of tax		-		-		-			(124	)		(124	)
Total comprehensive income (loss)		-		-		1,323			(515	)		808
Share-based compensation expense		-		30		-			-			30
Vesting of restricted stock		700		-		-			-			-
Balance at September 30, 2021		3,947,976	$	106,439	$	(39,393	)	$	(346	)	$	66,700

	Nine Months Ended September 30, 2021
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total

Balance at December 31, 2020		3,943,572	$	106,329	$	(42,592	)	$	(518	)	$	63,219
Comprehensive income:
Net income		-		-		3,199			-			3,199
Unrealized holding gain on available-for-sale securities, net of tax		-		-		-			172			172
Total comprehensive income		-		-		3,199			172			3,371
Share-based compensation expense		-		110		-			-			110
Vesting of restricted stock		4,404		-		-			-			-
Balance at September 30, 2021		3,947,976	$	106,439	$	(39,393	)	$	(346	)	$	66,700

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (Continued)

	Three Month Ended September 30, 2020
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total

Balance at June 30, 2020		3,935,841	$	106,251	$	(41,123	)	$	(956	)	$	64,172
Comprehensive loss:
Net loss		-		-		(87	)		-			(87	)
Unrealized holding gain on available-for-sale securities, net of tax		-		-		-			410			410
Total comprehensive loss		-		-		(87	)		410			323
Share-based compensation expense		-		42		-			-			42
Vesting of restricted stock		1,200		-		-			-			-
Balance at September 30, 2020		3,937,041	$	106,293	$	(41,210	)	$	(546	)	$	64,537

	Nine Months Ended September 30, 2020
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total

Balance at December 31, 2019		3,930,669	$	106,170	$	(38,773	)	$	(403	)	$	66,994
Comprehensive loss:
Net loss		-		-		(2,437	)		-			(2,437	)
Unrealized holding loss on available-for-sale securities, net of tax		-		-		-			(143	)		(143	)
Total comprehensive loss		-		-		(2,437	)		(143	)		(2,580	)
Share-based compensation expense		-		123		-			-			123
Vesting of restricted stock		6,372		-		-			-			-
Balance at September 30, 2020		3,937,041	$	106,293	$	(41,210	)	$	(546	)	$	64,537

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)	Nine Months Ended September 30,
	2021			2020
Cash Flows from Operating Activities:
Net income (loss)	$	3,199		$	(2,437	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization and accretion of investment premiums and discounts, net		253			168
Amortization and accretion of purchase loan premiums and discounts		1,388			589
Amortization of debt issuance costs		83			84
Amortization of core deposit intangible		35			56
Amortization of servicing assets of sold SBA loans		15			15
(Credit) provision for loan losses		(300	)		1,799
Depreciation and amortization		1,135			1,144
Gain on sales of available-for-sale securities		(119	)		-
Share-based compensation		110			123
Decrease (increase) in deferred income taxes		1,083			(883	)
Originations of SBA loans held for sale		(6,505	)		(1,694	)
Proceeds from sale of SBA loans held for sale		3,665			6,096
Gains on sale of SBA loans held for sale, net		(352	)		(464	)
Net gain on sale of other real estate owned		(2	)		21
Changes in assets and liabilities:
Decrease (increase) in accrued interest and dividends receivable		434			(3,231	)
Increase in other assets		(1,833	)		(674	)
Increase (decrease) in accrued expenses and other liabilities		1,516			(1,465	)
Net cash provided by (used in) operating activities		3,805			(753	)

Cash Flows from Investing Activities:
Proceeds from maturity or sales on available-for-sale securities		53,706			-
Principal repayments on available-for-sale securities		7,686			6,674
Purchases of available-for-sale securities		(136,134	)		(6,541	)
(Purchases) redemptions of Federal Reserve Bank stock		(60	)		114
Purchases of Federal Home Loan Bank stock		(506	)		(26	)
Decrease in originated loans receivable, net		94,457			95,464
Purchases of loans receivable		(80,201	)		(31,525	)
Purchases of premises and equipment		(364	)		(158	)
Proceeds from sale of other real estate owned		1,908			425
Net cash (used in) provided by investing activities		(59,508	)		64,427

Cash Flows from Financing Activities:
Increase (decrease) in deposits, net		49,017			(92,102	)
Purchases of deposits		-			49,998
Increase (decrease) in FHLB borrowings		20,000			(10,000	)
Principal repayments of note payable		(152	)		(149	)
Decrease in advances from borrowers for taxes and insurance		(1,533	)		(1,189	)
Net cash provided by (used in) financing activities		67,332			(53,442	)

Net increase in cash and cash equivalents		11,629			10,232

Cash and cash equivalents at beginning of period		34,636			39,404

Cash and cash equivalents at end of period	$	46,265		$	49,636

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(In thousands)	Nine Months Ended September 30,
	2021			2020
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	5,306		$	12,237
Cash paid (refund) for income taxes, net	$	47		$	(193	)

Non-cash transactions:
(Decrease) increase in premises and equipment	$	(119	)	$	50
Reclass of premises and equipment to implementation cost	$	52		$	-
Decrease (increase) in accrued expense and other liabilities	$	67		$	(50	)

Transfers of SBA loans held for sale to loans receivable	$	281		$	9,542

Transfers of loans receivable to loans held for sale	$	-		$	5,022

Operating lease right-of-use assets	$	-		$	57
Operating lease liabilities	$	-		$	(57	)

Capitalized servicing assets	$	74		$	115

(Decrease) increase in interest rate swaps assets	$	(370	)	$	609
Decrease (increase) in interest rate swaps liabilities	$	370		$	(609	)

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 1.

Basis of Financial Statement Presentation

The accompanying unaudited interim condensed consolidated financial statements of Patriot National Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries Patriot Bank, N.A. (the “Bank”), Patriot National Statutory Trust I and PinPat Acquisition Corporation (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on the Annual Report on Form 10-K for the year ended December 31, 2020.

The consolidated balance sheet at December 31, 2020 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 and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s more significant accounting policies and estimates, in that they are critical to the presentation of the Company’s consolidated financial condition and results of operations. As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of the Company’s consolidated financial statements.

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations that may be expected for the remainder of 2021.

COVID-19 Impact

In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic. The COVID-19 pandemic has negatively impacted the global and U.S. economies. Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue.

The consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses. The assumptions and estimates used in the financial statements were impacted by the COVID-19 pandemic.

The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve. As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun. However, the extent of the remaining impact will depend on future developments, which are uncertain. While not expected, a surge in the impact of the pandemic on business conditions could cause us to experience higher credit losses in our loan portfolio, impairment of our goodwill, additional valuation allowance associated with our net deferred tax assets, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

On August 3, 2020, the Federal Financial Institutions Council issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. The joint statement specifically encourages financial institutions to provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Patriot is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers.

The Federal Reserve System (the “Fed”) has taken, and continues to take, steps to support markets and the economy. Stimulus from Washington and the federal government, in spite of political hurdles and a change in presidential administrations, has also provided meaningful support while the Biden administration adopted another $1.9 trillion stimulus package in March 2021.

Note 2.

Accounting Policies

Please refer to the summary of Significant Accounting Policies included in the Company’s 2020 Annual Report on Form 10-K for a list of all policies in effect as of December 31, 2020. The below summary is intended to provide updates or new policies required as a result of a new accounting standard or a change to the Company’s operations or assets that require a new or amended policy.

Employee Retention Credit

The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers for 2020. In 2021, the tax credit is up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter. The Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as a reduction to compensation and benefits expense on the Company’s consolidated statements of operations. Accordingly, the Company recorded an employee retention credit of $906,000 and $2.9 million for the three and nine months ended September 30, 2021, respectively, which is included in non-interest expense on the consolidated statements of operations.

Derivative Instruments and Hedging Activities

Derivatives are recognized at fair value and included in other assets and other liabilities in the accompanying consolidated balance sheets. The value of exchange-traded contracts is based on quoted market prices while non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities. Cash flows from derivative financial instruments are included in net cash provided by operating activities in the accompanying consolidated statements of cash flows.

Derivatives Designated in Hedge Relationships. The Company uses derivatives to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships as cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge and remain highly effective in offsetting changes in the cash flows attributable to the risk being hedged both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued. The gain or loss on a derivative designated and qualifying as a cash flow hedge is initially recorded as a component of accumulated other comprehensive income or loss, net of tax and subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made in the same period during which the hedged transaction affects earnings.

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

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted During 2021

Effective January 1, 2021, the following new Accounting Standards Updates (ASU) were adopted by the Company:

ASU 2019-12

ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU is effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have any impact on our consolidated financial statements.

ASU Update 2020-04

ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships, to continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. The application of this guidance did not have a material impact on the Company's financial statements.

ASU 2021-01

In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848)”. This ASU clarifies certain optional expedients and exceptions in Topic 848 when accounting for derivative contracts and certain hedging relationships affected by changes in interest rates. The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021. The Company adopted the Update on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Accounting Standards Issued But Not Yet Adopted

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. In November 2019, the FASB issued ASU 2019-10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay will be applicable to the Company. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.

ASU Update 2020-02

In January 2020, the FASB issued ASU No. 2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016-13 above.

ASU Update 2020-03

In March 2020, the FASB issued ASU No. 2020-3, “Codification Improvements to Financial Instruments.” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 3.

Available-for-Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available-for-sale securities at September 30, 2021 and December 31, 2020 are as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
September 30, 2021:
U. S. Government agency and mortgage-backed securities	$	89,557	$	154	$	(693	)	$	89,018
Corporate bonds		20,005		308		(91	)		20,222
Subordinated notes		4,608		67		(5	)		4,670
SBA loan pools		9,836		3		(205	)		9,634
Municipal bonds		562		1		(4	)		559
	$	124,568	$	533	$	(998	)	$	124,103

December 31, 2020:
U. S. Government agency and mortgage-backed securities	$	16,719	$	131	$	(17	)	$	16,833
Corporate bonds		18,014		260		(984	)		17,290
Subordinated notes		9,036		97		(128	)		9,005
SBA loan pools		5,627		-		(60	)		5,567
Municipal bonds		564		3		-			567
	$	49,960	$	491	$	(1,189	)	$	49,262

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 September 30, 2021 and December 31, 2020:

(In thousands)	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
September 30, 2021:
U. S. Government agency and mortgage-backed securities	$	49,299	$	(693	)	$	-	$	-		$	49,299	$	(693	)
Corporate bonds		1,903		(91	)		-		-			1,903		(91	)
Subordinated notes		-		-			1,103		(5	)		1,103		(5	)
SBA loan pools		5,815		(169	)		3,268		(36	)		9,083		(205	)
Municipal bonds		404		(4	)		-		-			404		(4	)
	$	57,421	$	(957	)	$	4,371	$	(41	)	$	61,792	$	(998	)

December 31, 2020:
U. S. Government agency and mortgage-backed securities	$	5,797	$	(14	)	$	1,476	$	(3	)	$	7,273	$	(17	)
Corporate bonds		-		-			13,015		(984	)		13,015		(984	)
Subordinated notes		1,878		(122	)		1,103		(6	)		2,981		(128	)
SBA loan pools		1,533		(12	)		4,034		(48	)		5,567		(60	)
	$	9,208	$	(148	)	$	19,628	$	(1,041	)	$	28,836	$	(1,189	)

At September 30, 2021 and December 31, 2020, 31 of 50 and 22 of 37 available-for-sale securities had unrealized losses with an aggregate decline of 1.6% and 4.0% from the amortized cost of those securities, respectively.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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 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, subordinated notes, corporate debt, and municipal bonds. 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. SBA government guaranteed loan pools securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. 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 September 30, 2021.

As of September 30, 2021 and December 31, 2020, available-for-sale securities of $60.9 million and $6.1 million, respectively, were pledged to the Federal Reserve Bank (“FRB”). The securities were pledged primarily to secure borrowings from the Federal Home Loan Bank and municipal deposits.

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held as of September 30, 2021 and December 31, 2020. 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
September 30, 2021:
Corporate bonds	$	20,005	$	-	$	-	$	20,005	$	20,222	$	-	$	-	$	20,222
Subordinated notes		-		4,608		-		4,608		-		4,670		-		4,670
SBA loan pools		1,353		2,498		5,985		9,836		1,340		2,478		5,816		9,634
Municipal bonds		-		562		-		562		-		559		-		559
Available-for-sale securities with stated maturity dates		21,358		7,668		5,985		35,011		21,562		7,707		5,816		35,085
U. S. Government agency and mortgage-backed securities		18,789		287		70,481		89,557		18,707		289		70,022		89,018
	$	40,147	$	7,955	$	76,466	$	124,568	$	40,269	$	7,996	$	75,838	$	124,103

December 31, 2020:
Corporate bonds	$	4,014	$	14,000	$	-	$	18,014	$	4,274	$	13,016	$	-	$	17,290
Subordinated notes		2,000		7,036		-		9,036		2,003		7,002		-		9,005
SBA loan pools		1,921		3,706		-		5,627		1,899		3,668		-		5,567
Municipal bonds		-		564		-		564		-		567		-		567
Available-for-sale securities with stated maturity dates		7,935		25,306		-		33,241		8,176		24,253		-		32,429
U. S. Government agency and mortgage-backed securities		3,364		1,466		11,889		16,719		3,363		1,491		11,979		16,833
	$	11,299	$	26,772	$	11,889	$	49,960	$	11,539	$	25,744	$	11,979	$	49,262

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

During the nine months ended September 30, 2021, the Bank purchased $112.0 million U.S. Government agency debt and mortgage-backed securities, $18.2 million Corporate bonds, and $5.9 million SBA government guaranteed loan pools securities. In 2021, the Bank sold $32.4 million U.S. Government agency mortgage-backed securities, $16.3 million corporate bonds, $4.5 million subordinated notes, and $535,000 SBA loan pools securities, and recognized a net gain on sale of securities of $26,000 and $119,000 during the three and nine months ended September 30, 2021, respectively. During the nine months ended September 30, 2020, the Bank purchased $4.9 million U.S. Government agency mortgage-backed securities, $988,000 SBA government guaranteed loan pools securities and $565,000 municipal bonds. There was no sale of available-for-sale securities in the nine months ended September 30, 2020.

Note 4. Loans Receivable and Allowance for Loan and Lease Losses

As of September 30, 2021 and December 31, 2020, loans receivable, net, consisted of the following:

	September 30,			December 31,
(In thousands)	2021			2020
Loan portfolio segment:
Commercial Real Estate	$	315,853		$	282,378
Residential Real Estate		171,800			153,851
Commercial and Industrial		119,688			144,297
Consumer and Other		53,676			67,635
Construction		41,609			66,984
Construction to Permanent - CRE		11,912			15,035
Loans receivable, gross		714,538			730,180
Allowance for loan and lease losses		(10,079	)		(10,584	)
Loans receivable, net	$	704,459		$	719,596

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, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. 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 65% 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 SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Residential Real Estate 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.

During the three and nine months ended September 30, 2021, Patriot purchased $29.6 million and $72.3 million of residential real estate loans, respectively. During the three and nine months ended September 30, 2020, Patriot purchased $2.5 million and $16.6 million of residential real estate loans, respectively.

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.

Patriot’s syndicated and leveraged loan portfolio, which totaled $27.8 million and $55.0 million at September 30, 2021 and December 31, 2020, respectively, are included in the commercial and industrial loan classification and are primarily comprised of loan transactions led by major financial institutions and regional banks, which are the Agent Bank or Lead Arranger, and are referred to as syndicated loans or "Shared National Credits (SNC)". SNC loans were determined to be complementary to the Bank’s existing commercial and industrial loan portfolio and product offerings and provide diversification from Patriot’s typical direct-to-business lines of credit and term facilities. However, since 2020, Patriot has discontinued participating in SNC loans and allowed the existing portfolio to run off.

Consumer and Other Loans

Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans 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.

During the three and nine months ended September 30, 2021, Patriot purchased $5.8 million and $7.9 million unsecured consumer loans, respectively. During the three and nine months ended September 30, 2020, Patriot purchased $0 and $14.9 million of education loans, respectively.

Construction Loans

Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements 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.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

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.

Construction to Permanent - Commercial Real Estate (“CRE”)

Loans in this category represent a one-time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 10 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.

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.

SBA Loans

Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% to 90% of the principal balance. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory, or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $26.8 million and $21.6 million as of September 30, 2021 and December 31, 2020, respectively. During the nine-month period ended September 30, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.

Small Business Administration Paycheck Protection Program

The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, $669 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions that process loan applications and service the loans. The Bank started participating in the SBA’s Paycheck Protection Program in January 2021.

Paycheck Protection Program loans totaled $1.9 million as of September 30, 2021, which are included in the commercial and industrial loan classifications.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Allowance for Loan and Lease Losses

The following tables summarize the activity in the allowance for loan and lease losses, allocated to segments of the loan portfolio, for the three and nine months ended September 30, 2021 and 2020:

(In thousands)	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent - CRE			Unallocated		Total
Three months ended September 30, 2021
*Allowance for loan and lease losses:*
June 30, 2021	$	4,079		$	2,003		$	3,212		$	390		$	369		$	144		$	165	$	10,362
Charge-offs		-			-			(3	)		(3	)		-			-			-		(6	)
Recoveries		-			2			20			1			-			-			-		23
Provisions (credits)		607			130			(861	)		(53	)		(138	)		(82	)		97		(300	)
September 30, 2021	$	4,686		$	2,135		$	2,368		$	335		$	231		$	62		$	262	$	10,079

Three months ended September 30, 2020
*Allowance for loan and lease losses:*
June 30, 2020	$	4,274		$	1,910		$	3,526		$	534		$	666		$	149		$	89	$	11,148
Charge-offs		(35	)		-			(34	)		(6	)		-			-			-		(75	)
Recoveries		-			1			11			1			-			-			-		13
Provisions (credits)		158			(374	)		(33	)		11			152			40			131		85
September 30, 2020	$	4,397		$	1,537		$	3,470		$	540		$	818		$	189		$	220	$	11,171

(In thousands)	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent - CRE			Unallocated		Total
*Nine months ended September 30, 2021*
*Allowance for loan and lease losses:*
December 31, 2020	$	4,485		$	1,379		$	3,284		$	295		$	739		$	162		$	240	$	10,584
Charge-offs		(51	)		(3	)		(212	)		(23	)		(69	)		-			-		(358	)
Recoveries		-			2			44			107			-			-			-		153
Provisions (credits)		252			757			(748	)		(44	)		(439	)		(100	)		22		(300	)
September 30, 2021	$	4,686		$	2,135		$	2,368		$	335		$	231		$	62		$	262	$	10,079

*Nine months ended September 30, 2020*
*Allowance for loan and lease losses:*
December 31, 2019	$	3,789		$	1,038		$	4,340		$	341		$	477		$	130		$	-	$	10,115
Charge-offs		(400	)		(13	)		(352	)		(45	)		-			-			-		(810	)
Recoveries		-			1			62			4			-			-			-		67
Provisions (credits)		1,008			511			(580	)		240			341			59			220		1,799
September 30, 2020	$	4,397		$	1,537		$	3,470		$	540		$	818		$	189		$	220	$	11,171

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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 September 30, 2021 and December 31, 2020:

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
September 30, 2021
*Allowance for loan and lease losses:*
Individually evaluated for impairment	$	1,178	$	4	$	638	$	-	$	-	$	-	$	-	$	1,820
Collectively evaluated for impairment		3,508		2,131		1,730		335		231		62		262		8,259
Total allowance for loan and lease losses	$	4,686	$	2,135	$	2,368	$	335	$	231	$	62	$	262	$	10,079

Loans receivable, gross:
Individually evaluated for impairment	$	19,223	$	4,329	$	4,084	$	525	$	-	$	-	$	-	$	28,161
Collectively evaluated for impairment		296,630		167,471		115,604		53,151		41,609		11,912		-		686,377
Total loans receivable, gross	$	315,853	$	171,800	$	119,688	$	53,676	$	41,609	$	11,912	$	-	$	714,538

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
December 31, 2020
*Allowance for loan and lease losses:*
Individually evaluated for impairment	$	1,398	$	4	$	-	$	10	$	-	$	-	$	-	$	1,412
Collectively evaluated for impairment		3,087		1,375		3,284		285		739		162		240		9,172
Total allowance for loan losses	$	4,485	$	1,379	$	3,284	$	295	$	739	$	162	$	240	$	10,584

Loans receivable, gross:
Individually evaluated for impairment	$	14,534	$	3,962	$	4,700	$	1,187	$	-	$	-	$	-	$	24,383
Collectively evaluated for impairment		267,844		149,889		139,597		66,448		66,984		15,035		-		705,797
Total loans receivable, gross	$	282,378	$	153,851	$	144,297	$	67,635	$	66,984	$	15,035	$	-	$	730,180

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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 cash flow from business operations, 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 no less than bi-annually by the Credit Department.

Additionally, Patriot retains an independent third-party loan review expert to perform a semi-annual analysis of the results of its risk rating process. The 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 Company to sufficient risk to warrant classification in one of the following categories:

●

Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard 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 as “substandard”, with the added characteristic that the identified weaknesses make collection or liquidation-in-full improbable, on the basis of currently existing facts, conditions, and values.

Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.

If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, 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 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 and 120 days delinquent, respectively.

Due to the economic disruption and uncertainty caused by the pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment. This may result in increases in loan delinquencies, down-grades of loan credit ratings and charge-offs in future periods. The allowance for loan losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Allowance for loan losses methodology

In 2021, the Company refined its methodology in determining the qualitative factors within the allowance for loan losses. Qualitative adjustments are aggregated into nine categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators. Within the statement, the following qualitative factors are considered:

● Changes in lending policies and procedures, including underwriting standards, collection,

charge-off, and recovery practices not considered elsewhere in estimating credit losses;

● Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments;

● Changes in the nature and volume of the loan portfolio and terms of loans;

● Changes in the experience, ability and depth of lending management and staff;

● Changes in the volume and loss severity of past due loans, the volume of non-accrual loans,

and the volume and loss severity of adversely classified or graded loans;

● Changes in the quality of the loan review system;

● Changes in the value of the underlying collateral for collateral-dependent loans;

● The existence and effect of any concentrations of credit and changes in the level of such concentrations;

● The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio;

The additional risk factor for special mention loans and substandard loans and the risk factor related to COVID-19 pandemic were eliminated. The separate adjustment for Special Mention and Substandard loans within each pool is now incorporated into the factor for “Changes in the volume and loss severity of past due loans, the volume of non-accrual, and the volume and loss severity of adversely classified or graded loans”, which now includes adjustments for the percentage of Special Mention and Substandard loans in each portfolio segment. The COVID-19 factor was eliminated since, after more than a year into the pandemic, we consider that the impact on both the economy and our portfolio is now manifest in economic data (GDP, unemployment, retail sales, manufacturing output, etc.) and in our portfolio, as reflected by the volume of Special Mention and Substandard loans that have resulted from deterioration in borrower performance as a direct result of the pandemic.

The refining in methodology resulted in better alignment of the credit characteristics of the various risk grades and loan types with the calculated allowance, and did not have any impact on the provision in the nine months of 2021.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Loan Portfolio Aging Analysis

The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of September 30, 2021.

(In thousands)	Performing (Accruing) Loans
As of September 30, 2021:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	428	$	-	$	-	$	428	$	268,177	$	268,605	$	-	$	268,605
Special mention		-		-		-		-		16,751		16,751		-		16,751
Substandard		-		-		-		-		11,274		11,274		19,223		30,497
		428		-		-		428		296,202		296,630		19,223		315,853
Residential Real Estate:
Pass	$	50	$	-	$	-		50	$	163,501		163,551		-		163,551
Special mention		-		-		-		-		3,776		3,776		-		3,776
Substandard		-		-		-		-		-		-		4,473		4,473
		50		-		-		50		167,277		167,327		4,473		171,800
Commercial and Industrial:
Pass	$	900	$	582	$	-		1,482	$	110,409		111,891		-		111,891
Special mention		-		-		-		-		1,414		1,414		-		1,414
Substandard		657		688		-		1,345		834		2,179		4,204		6,383
		1,557		1,270		-		2,827		112,657		115,484		4,204		119,688
Consumer and Other:
Pass	$	18	$	2	$	-		20	$	53,487		53,507		-		53,507
Substandard		-		-		-		-		23		23		146		169
		18		2		-		20		53,510		53,530		146		53,676
Construction:
Pass	$	-	$	-	$	-		-	$	41,609		41,609		-		41,609
		-		-		-		-		41,609		41,609		-		41,609
Construction to Permanent - CRE:
Pass	$	604	$	-	$	-		604	$	11,308		11,912		-		11,912
		604		-		-		604		11,308		11,912		-		11,912

Total	$	2,657	$	1,272	$	-	$	3,929	$	682,563	$	686,492	$	28,046	$	714,538

Loans receivable, gross:
Pass	$	2,000	$	584	$	-	$	2,584	$	648,491	$	651,075	$	-	$	651,075
Special mention		-		-		-		-		21,941		21,941		-		21,941
Substandard		657		688		-		1,345		12,131		13,476		28,046		41,522
Loans receivable, gross	$	2,657	$	1,272	$	-	$	3,929	$	682,563	$	686,492	$	28,046	$	714,538

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The following tables summarize performing and non-performing loans (i.e., non-accruing) receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2020.

(In thousands)	Performing (Accruing) Loans
As of December 31, 2020:	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Performing Loans		Non-accruing Loans		Loans Receivable Gross
Loan portfolio segment:
Commercial Real Estate:
Pass	$	-	$	-	$	-	$	-	$	230,824	$	230,824	$	-	$	230,824
Special mention		-		-		-		-		25,658		25,658		-		25,658
Substandard		354		-		9		363		10,999		11,362		14,534		25,896
		354		-		9		363		267,481		267,844		14,534		282,378
Residential Real Estate:
Pass		478		361		-		839		145,298		146,137		-		146,137
Special mention		-		-		-		-		3,860		3,860		-		3,860
Substandard		-		-		-		-		-		-		3,854		3,854
		478		361		-		839		149,158		149,997		3,854		153,851
Commercial and Industrial:
Pass		-		209		-		209		102,131		102,340		-		102,340
Special mention		-		4,000		-		4,000		8,881		12,881		-		12,881
Substandard		603		113		-		716		27,660		28,376		700		29,076
		603		4,322		-		4,925		138,672		143,597		700		144,297
Consumer and Other:
Pass		1		-		7		8		66,589		66,597		-		66,597
Substandard		-		-		-		-		121		121		917		1,038
		1		-		7		8		66,710		66,718		917		67,635
Construction:
Pass		-		2,351		-		2,351		64,633		66,984		-		66,984
		-		2,351		-		2,351		64,633		66,984		-		66,984
Construction to Permanent - CRE:
Pass		-		-		-		-		15,035		15,035		-		15,035
		-		-		-		-		15,035		15,035		-		15,035

Total	$	1,436	$	7,034	$	16	$	8,486	$	701,689	$	710,175	$	20,005	$	730,180

Loans receivable, gross:
Pass	$	479	$	2,921	$	7	$	3,407	$	624,510	$	627,917	$	-	$	627,917
Special mention		-		4,000		-		4,000		38,399		42,399		-		42,399
Substandard		957		113		9		1,079		38,780		39,859		20,005		59,864
Loans receivable, gross	$	1,436	$	7,034	$	16	$	8,486	$	701,689	$	710,175	$	20,005	$	730,180

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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 September 30, 2021 and December 31, 2020:

(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 September 30, 2021:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	8,950	$	6,831	$	15,781	$	3,442	$	19,223
Residential Real Estate:
Substandard		-		-		2,320		2,320		2,153		4,473
Commercial and Industrial:
Substandard		497		-		2,478		2,975		1,229		4,204
Consumer and Other:
Substandard		-		96		29		125		21		146
Total non-accruing loans	$	497	$	9,046	$	11,658	$	21,201	$	6,845	$	28,046

As of December 31, 2020:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	-	$	5,723	$	5,723	$	8,811	$	14,534
Residential Real Estate:
Substandard		-		-		2,884		2,884		970		3,854
Commercial and Industrial:
Substandard		-		-		700		700		-		700
Consumer and Other:
Substandard		22		-		91		113		804		917
Total non-accruing loans	$	22	$	-	$	9,398	$	9,420	$	10,585	$	20,005

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $230,000 and $689,000 would have been recognized during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, additional interest income (net of cash collected) of approximately $216,000 and $691,000 would have been recognized, respectively.

Interest income collected and recognized on non-accruing loans for the three and nine months ended September 30, 2021 and 2020 was $174,000 and $313,000, respectively. During the three and nine months ended September 30, 2020, interest income collected and recognized on non-accruing loans was $21,000 and $106,000, respectively

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, after at least six months of timely payment history. Management considers all non-accrual loans and Trouble Debt Restructurings (“TDR”) for impaired loans. In most cases, loan payments that are past due less than 90 days, well-secured, and in the process of collection are not considered impaired. The Bank considers loans under $100,000 and consumer installment loans to be pools of smaller homogeneous loan balances, and therefore are collectively evaluated for impairment, and not individually measured for impairment.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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.

Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may also 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.

The following table summarizes the recorded investment in TDRs as of September 30, 2021 and December 31, 2020:

(In thousands)	September 30, 2021					December 31, 2020
Loan portfolio segment:	Number of Loans		Recorded Investment			Number of Loans		Recorded Investment
Commercial Real Estate		1	$	8,950			2	$	9,884
Residential Real Estate		3		883			3		928
Commercial and Industrial		0		-			1		4,000
Consumer and Other		3		644			5		1,074
Total TDR Loans		7		10,477			11		15,886
Less:
TDRs included in non-accrual loans		3		(9,769	)		6		(11,508	)
Total accrual TDR Loans		4	$	708			5	$	4,378

During the three and nine months ended September 30, 2021, no loans were modified as TDRs.

No loans were modified as TDR for the three-month period ended September 30, 2020. The following loans were modified as TDRs during the nine months ended September 30, 2020:

(In thousands)			Outstanding Recorded Investment
Nine Months Ended September 30, 2020	Number of Loans		Pre-Modification		Post-Modification
Loan portfolio segment:
Commercial Real Estate		1	$	57	$	56
Consumer and Other		2		121		121
Total TDR Loans		3	$	178	$	177

The loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, extending the interest-only payment period, or substituting or adding a co-borrower or guarantor. There were no defaults of TDRs during the three and nine months ended September 30, 2021 and 2020. At September 30, 2021 and December 31, 2020, there were no commitments to advance additional funds under TDRs.

The balances reflected here as TDR’s are also included in the non-accruing loan balance included in the prior table - Loan Portfolio Aging Analysis.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2021 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs. The Bank had modified $232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days. The vast majority all of those loans deferred have now resumed normal payments. Approximately fourteen loans with balances totaling $6.8 million have not been provided addition deferrals and are now delinquent on payment. Only three loans remaining on deferral totaled $7.3 million at September 30, 2021. According to regulatory guidance and CARES Act, these modified loans were not TDRs as of September 30, 2021.

Impaired Loans

The following table reflects information about the impaired loans by class as of September 30, 2021 and December 31, 2020:

(In thousands)	September 30, 2021						December 31, 2020
	Recorded Investment		Principal Outstanding		Related Allowance		Recorded Investment		Principal Outstanding		Related Allowance
With no related allowance recorded:
Commercial Real Estate	$	10,273	$	11,306	$	-	$	5,723	$	6,644	$	-
Residential Real Estate		4,221		4,179		-		3,853		3,900		-
Commercial and Industrial		648		772		-		4,700		4,816		-
Consumer and Other		525		525		-		1,177		1,332		-
		15,667		16,782		-		15,453		16,692		-
With a related allowance recorded:
Commercial Real Estate	$	8,950	$	8,811	$	1,178		8,811		8,811		1,398
Residential Real Estate		412		436		8		109		109		4
Commercial and Industrial		3,556		4,040		640		-		-		-
Consumer and Other		171		203		2		10		10		10
		13,089		13,490		1,828		8,930		8,930		1,412

Impaired Loans, Total:
Commercial Real Estate		19,223		20,117		1,178		14,534		15,455		1,398
Residential Real Estate		4,633		4,615		8		3,962		4,009		4
Commercial and Industrial		4,204		4,812		640		4,700		4,816		-
Consumer and Other		696		728		2		1,187		1,342		10
Impaired Loans, Total	$	28,756	$	30,272	$	1,828	$	24,383	$	25,622	$	1,412

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The following tables summarize additional information regarding impaired loans by class for the three and nine months ended September 30, 2021 and 2020.

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2021				2020				2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	8,671	$	95	$	6,975	$	13	$	7,538	$	133	$	5,702	$	39
Residential Real Estate		3,752		15		3,641		12		4,088		45		3,603		45
Commercial and Industrial		2,657		4		1,716		2		3,122		9		1,936		4
Consumer and Other		526		4		1,321		10		755		10		1,101		26
		15,606		118		13,653		37		15,503		197		12,342		114
With a related allowance recorded:
Commercial Real Estate		8,916		-		8,975		-		8,854		-		8,876		35
Residential Real Estate		824		7		55		1		427		14		33		4
Commercial and Industrial		3,231		55		-		-		1,856		113		-		-
Consumer and Other		169		1		74		1		87		5		50		4
		13,140		63		9,104		2		11,224		132		8,959		43
Impaired Loans, Total:
Commercial Real Estate		17,587		95		15,950		13		16,392		133		14,578		74
Residential Real Estate		4,576		22		3,696		13		4,515		59		3,636		49
Commercial and Industrial		5,888		59		1,716		2		4,978		122		1,936		4
Consumer and Other		695		5		1,395		11		842		15		1,151		30
Impaired Loans, Total	$	28,746	$	181	$	22,757	$	39	$	26,727	$	329	$	21,301	$	157

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. As of September 30, 2021, based on the ongoing monitoring and analysis of the loan portfolio, thirty-six loans were identified as impaired, with a total recorded balance of $28.8 million for which $1.8 million specific reserves were established. Twenty-five out of thirty-six impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $100,000, were collectively evaluated, and not individually evaluated for impairment.

At December 31, 2020, exposure to the impaired loans was related to twenty-six borrowers. Total recorded balance was $24.4 million, for which $1.4 million special reserves were established. All impaired loans were evaluated individually.

For collateral dependent loans, appraisal reports of the underlying collateral, have been obtained from independent licensed appraisal firms. For non-performing loans, the independently determined appraised values were first reduced by a 5.8% discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8% in selling costs, 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. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.

Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 5.

Loans Held for Sale

Loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. As of September 30, 2021, SBA loans held for sale, consisted of $2.9 million SBA commercial real estate loans and $1.2 million SBA commercial and industrial loans, respectively. As of December 31, 2020, SBA loans held for sale only consisted of $1.2 million of SBA commercial and industrial loans. During the nine months ended September 30, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.

The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.

Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $18.8 million and $19.4 million at September 30, 2021 and December 31, 2020, respectively. The servicing asset has a carrying value of $375,000 and fair value of $351,000 at September 30, 2021. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets. The servicing asset is included in other assets on the consolidated balance sheets.

The following table presents an analysis of the activity in the SBA servicing assets for the three and nine months ended September 30, 2021 and 2020:

(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	380		$	221		$	316		$	201
Servicing rights capitalized		-			86			74			115
Servicing rights amortized		(5	)		(6	)		(15	)		(15	)
Ending balance	$	375		$	301		$	375		$	301

Note 6.

Goodwill and Other Intangible Assets

On May 10, 2018 the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.

The assets acquired and liabilities assumed from Prime Bank were recorded at their fair value as of the closing date of the acquisition. Goodwill of $2.1 million was recorded at the time of the acquisition, and was adjusted to $1.7 million as of December 31, 2018, primarily due to updating of fair value of the core deposit intangible and adjustment of cash and contingent consideration. The goodwill was further adjusted to $1.1 million as a result of reducing the estimated amount to be paid pursuant to certain problem loans pending resolution by $621,000 as of May 10, 2019. As of December 31, 2020, a purchase price adjustment of $556,000 was recognized to project expenses on the consolidated statements of operations. The charge represented an adjustment to the earlier estimate of the final purchase price upon preliminary settlement of the litigation related to a dispute over the final purchase price in 2020. The goodwill is all deductible for income taxes over 15 years.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Goodwill is evaluated for impairment annually, in the fourth quarter of the year, or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.

The Company did not perform an interim goodwill test in the first three quarters of 2021 as no events occurred which would trigger an impairment assessment.

Note 7.

Deposits

The following table presents the balance of deposits held, by category as of September 30, 2021 and December 31, 2020.

(In thousands)	September 30,		December 31,
	2021		2020
Non-interest bearing	$	207,941	$	158,676
Interest bearing:
Negotiable order of withdrawal		34,528		30,529
Savings		102,365		98,635
Money market		165,671		146,389
Certificates of deposit, less than $250,000		142,141		160,968
Certificates of deposit, $250,000 or greater		54,991		49,172
Brokered deposits		27,036		41,287
Interest bearing, Total		526,732		526,980

Total Deposits	$	734,673	$	685,656

On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $142.4 million and $74.3 million as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, contractual maturities of Certificates of Deposit (“CDs”), and brokered deposits is summarized as follows:

(In thousands)	CDs less than $250,000		CDs $250,000 or greater		Brokered Deposits		Total
1 year or less	$	110,228	$	29,570	$	24,544	$	164,342
More than 1 year through 2 years		22,264		24,898		1,495		48,657
More than 2 years through 3 years		1,375		-		748		2,123
More than 3 years through 4 years		2,608		523		249		3,380
More than 4 years through 5 years		5,666		-		-		5,666
	$	142,141	$	54,991	$	27,036	$	224,168

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 8.

Derivatives

Derivatives Not Designated in Hedge Relationships

Patriot is a party to four interest rate swaps derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.

Patriot entered two initial interest rate swaps under the program in November 2018, and another two swaps were entered into in May 2019. As of September 30, 2021 and December 31, 2020, Patriot had cash pledged for collateral on its interest rate swaps of $1.4 million and $1.4 million, respectively. This collateral is included in other assets on the consolidated balance sheets.

The company did not recognize any net gain or loss in other noninterest income on the consolidated statements of operations during the three and nine months ended September 30, 2021 and 2020.

Derivatives Designated in Hedge Relationships

Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

In August 2021, the cash flow hedge interest rate swap contract was terminated. During the three and nine month ended September 30, 2021, the Company recognized $64,000 and $149,000 of accumulated other comprehensive income that was reclassified into interest income, respectively. The swap interest income is included in interest and fees on loans on the consolidated statements of operations. In addition, a gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the three and nine months ended September 30, 2021, which is included in other income on the consolidated statements of operations.

The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.

Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 13 to the consolidated financial statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):

(In thousands)	Notional Amount		Maturity (Years)		Fixed Rate			Variable Rate	Fair Value
September 30, 2021
Classified in Other Assets:
Customer interest rate swap	$	4,869		7.6		5.25	%	1 Mo. LIBOR + 1.96%	$	702
Customer interest rate swap		1,406		7.8		4.38	%	1 Mo. LIBOR + 2.00%		115

Classified in Other Liabilities:
3rd party interest rate swap	$	4,869		7.6		5.25	%	1 Mo. LIBOR + 1.96%	$	(702	)
3rd party interest rate swap		1,406		7.8		4.38	%	1 Mo. LIBOR + 2.00%		(115	)

December 31, 2020
Classified in Other Assets:
Customer interest rate swap	$	4,911		8.3		5.25	%	1 Mo. LIBOR + 1.96%	$	997
Customer interest rate swap		1,431		8.5		4.38	%	1 Mo. LIBOR + 2.00%		190

Classified in Other Liabilities:
3rd party interest rate swap	$	4,911		8.3		5.25	%	1 Mo. LIBOR + 1.96%	$	(997	)
3rd party interest rate swap		1,431		8.5		4.38	%	1 Mo. LIBOR + 2.00%		(190	)

Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the three and nine months ended September 30, 2021:

	Three Months Ended			Nine Months Ended
(In thousands)	September 30, 2021			September 30, 2021
Interest rate swap designated as cash flow hedge:
Unrealized (loss) gain recognized in accumulated other comprehensive income before reclassifications	$	(104	)	$	149
Amounts reclassified from accumulated other comprehensive income		(64	)		(149	)
Income tax effect on items recognized in accumulated other comprehensive income		44			-

Other comprehensive income	$	(124	)	$	-

The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 9.

Share-Based Compensation and Employee Benefit Plan

In 2011, the Company adopted the Patriot National Bancorp, Inc. 2012 Stock Plan (the “2012 Plan”). The 2012 Plan was amended in 2020 and renamed as the Patriot National Bancorp, Inc. 2020 Stock Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 on Form 10-K/A filed on April 30, 2021. The 2020 Plan provides an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”).

The 2020 Plan authorizes 3,000,000 shares of the Company’s Common Stock for issuance. As of September 30, 2021, 2,834,617 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. 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.

The following is a summary of the status of the Company’s restricted shares and changes for the three and nine months ended September 30, 2021 and 2020:

Three months ended September 30, 2021:	Number of Shares Awarded			Weighted Average Grant Date Fair Value
Unvested at June 30, 2021		35,270		$	8.12
Vested		(700	)	$	17.85
Forfeited		(4,586	)		9.39
Unvested at September 30, 2021		29,984		$	7.69

Nine months ended September 30, 2021:
Unvested at December 31, 2020		18,498		$	7.29
Granted		20,476		$	10.48
Vested		(4,404	)	$	17.21
Forfeited		(4,586	)	$	9.39
Unvested at September 30, 2021		29,984		$	7.69

Three months ended September 30, 2020:	Number of Shares Awarded			Weighted Average Grant Date Fair Value
Unvested at June 30, 2020		26,597		$	8.89
Vested		(1,200	)	$	17.41
Unvested at September 30, 2020		25,397		$	8.49

Nine months ended September 30, 2020:
Unvested at December 31, 2019		21,470		$	12.91
Granted		12,484		$	6.12
Vested		(6,372	)	$	16.20
Forfeited		(2,185	)	$	15.92
Unvested at September 30, 2020		25,397		$	8.49

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 and nine months ended September 30, 2021, the Company recognized total share-based compensation expense of $30,000 and $110,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $25,000 and $65,000, respectively. Included in share-based compensation expense were $5,000 and $45,000 attributable to Patriot’s external directors, who received total compensation of $68,000 and $252,000 for each of those periods, respectively, which amounts are included in other operating expenses in the consolidated statements of operations.

For the three and nine months ended September 30, 2020, the Company recognized total share-based compensation expense of $42,000 and $123,000, respectively. The share-based compensation attributable to employees of Patriot amounted to $21,000 and $64,000, respectively. Included in share-based compensation expense were $21,000 and $59,000 attributable to Patriot’s external directors, who received total compensation of $87,000 and $342,000 for each of those periods, respectively, which amounts are included in other operating expenses in the consolidated statements of operations.

Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of September 30, 2021 amounted to $244,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 3.27 years.

Dividends

The Company has not paid any dividends since 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic.

Retirement Plan

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 nine percent of an employee's annual compensation. During the three and nine months ended September 30, 2021, compensation expense under the 401K aggregated $46,000 and $157,000, respectively. During the three and nine months ended September 30, 2020, compensation expense under the 401K aggregated $48,000 and $199,000, respectively.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 10.

Earnings (loss) per share

The Company is required to present basic earnings (loss) per share and diluted earnings (loss) per share in its Consolidated Statements of Operations. Basic earnings (loss) per share amounts are computed by dividing net (loss) income by the weighted average number of common shares outstanding. Diluted earnings (loss) 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 (loss) per share.

The following table summarizes the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020:

(Net income (loss) in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2021		2020				2021		2020
Basis earnings (loss) per share:
Net income (loss) attributable to Common shareholders	$	1,323	$	(87	)		$	3,199	$	(2,437	)
Divided by:
Weighted average shares outstanding		3,947,284		3,935,898				3,945,816		3,934,138

Basic earnings (loss) per common share	$	0.34	$	(0.02	)		$	0.81	$	(0.62	)

Diluted earnings (loss) per share:
Net income (loss) attributable to Common shareholders	$	1,323	$	(87	)		$	3,199	$	(2,437	)

Weighted average shares outstanding		3,947,284		3,935,898				3,945,816		3,934,138

Effect of potentially dilutive restricted common shares		1,141		-		⁽¹⁾		9,019		-		⁽²⁾

Divided by:
Weighted average diluted shares outstanding		3,948,425		3,935,898				3,954,835		3,934,138

Diluted earnings (loss) per common share	$	0.34	$	(0.02	)		$	0.81	$	(0.62	)

⁽¹⁾

The weighted average diluted shares outstanding does not include 13,093 anti-dilutive restricted common shares for the three months ended September 30, 2020.

⁽²⁾

The weighted average diluted shares outstanding does not include 1,630 anti-dilutive restricted common shares for the nine months ended September 30, 2020.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 11.

Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, Patriot 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 become 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 September 30, 2021 and December 31, 2020 are as follows:

	September 30,		December 31,
(In thousands)	2021		2020
Commitments to extend credit:
Unused lines of credit	$	61,289	$	61,622
Undisbursed construction loans		16,870		25,232
Home equity lines of credit		18,386		19,240
Future loan commitments		44,027		15,696
Financial standby letters of credit		564		604
	$	141,136	$	122,394

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. Patriot has established a reserve for credit loss of $8,000 and $8,000 as of September 30, 2021 and December 31, 2020, respectively, which is included in accrued expenses and other liabilities.

Standby letters of credit are written commitments issued by Patriot 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 SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 12.

Regulatory and Operational Matters

In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC. The Agreement stated that the Board of the Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model. Under the Agreement, the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank. The Bank provided the documents and policies requested in the Agreement.

On September 1, 2021, the OCC terminated the Agreement concluding that the safety and soundness of the Bank and its now established compliance with laws and regulations does not require continued existence of the Agreement.

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 a 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.

In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022.

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.”

At September 30, 2021, the Bank elected to adopt the CBLR framework. The Bank’s Tier 1 leverage ratio as of September 30, 2021 and December 31, 2020 was 9.9% and 9.8%, respectively, which satisfied the “greater than 9 percent” leverage ratio requirement under the CBLR framework. Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.

The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at September 30, 2021 and December 31, 2020 are summarized as follows:

(In thousands)

Patriot Bank, N.A.

September 30, 2021

December 31, 2020

Amount
($)

Ratio
(%)

Amount
($)

Ratio
(%)

Tier 1 Leverage Capital (to average assets):

Actual

92,719

9.878

87,844

9.794

To be Well Capitalized

84,476

9.000

⁽¹⁾

80,721

9.000

⁽¹⁾

Leverage Capital Ratio greater than 9% is considered well-capitalized under the CBLR Framework.

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.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 13.

Fair Value and Interest Rate Risk

Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.

Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements.

The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.

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 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) 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).

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Other Investments

The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.45 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 but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both September 30, 2021 and December 31, 2020 due to its short-term nature.

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

Shares in the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) are purchased and redeemed based upon their $100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.

Loans

The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.

Loans Held for Sale

The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.

SBA Servicing Asset

Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.

Other Real Estate Owned

The fair value of OREO the Bank may obtain is based on current appraised property value less estimated costs to sell. When fair value is based on unadjusted current appraised value, 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 on a non-recurring basis and then monitors property and market conditions that may indicate a change in value is warranted.

Derivative asset (liability) - Interest Rate Swaps

The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Notes 1 and 8 for additional disclosures on derivatives.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

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

Senior Notes, Subordinated Notes, and Junior Subordinated Debt and Note Payable

Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.

Patriot does not record subordinated notes issued in September 2018 at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.

Patriot does not record junior subordinated debt 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 considers its own credit worthiness in determining the fair value of its Senior Notes, Subordinated Notes, Notes Payable and Junior Subordinated Debt.

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. Patriot does not record FHLB advances at fair value on a recurring basis.

Off-balance sheet financial 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 off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

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 September 30, 2021 and December 31, 2020:

(In thousands)		September 30, 2021				December 31, 2020
	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	$	5,298	$	5,298	$	3,006	$	3,006
Interest-bearing deposits due from banks	Level 1		40,967		40,967		31,630		31,630
Available-for-sale securities	Level 2		124,103		124,103		49,262		49,262
Other investments	Level 2		4,450		4,450		4,450		4,450
Federal Reserve Bank stock	Level 2		2,843		2,843		2,783		2,783
Federal Home Loan Bank stock	Level 2		5,009		5,009		4,503		4,503
Loans receivable, net	Level 3		704,459		705,272		719,596		716,822
Loans held for sale	Level 2		4,128		4,761		1,217		1,343
SBA servicing assets	Level 3		375		351		316		375
Other real estate owned	Level 2		-		-		1,906		1,906
Accrued interest receivable	Level 2		6,186		6,186		6,620		6,620
Interest rate swap receivable	Level 2		817		817		1,187		1,187

Financial assets, total		$	898,635	$	900,057	$	826,476	$	823,887

Financial Liabilities:
Demand deposits	Level 2	$	207,941	$	207,941	$	158,676	$	158,676
Savings deposits	Level 2		102,365		102,365		98,635		98,635
Money market deposits	Level 2		165,671		165,671		146,389		146,389
NOW accounts	Level 2		34,528		34,528		30,529		30,529
Time deposits	Level 2		197,132		197,143		210,140		210,882
Brokered deposits	Level 1		27,036		27,075		41,287		41,643
FHLB borrowings	Level 2		110,000		115,014		90,000		97,293
Senior notes	Level 2		11,983		12,009		11,927		12,028
Subordinated debt	Level 2		9,803		10,030		9,782		10,125
Junior subordinated debt owed to unconsolidated trust	Level 2		8,116		8,116		8,110		8,110
Note payable	Level 3		842		825		994		997
Accrued interest payable	Level 2		666		666		572		572
Interest rate swap liability	Level 2		817		817		1,187		1,187

*Financial liabilities, total*		$	876,900	$	882,200	$	808,228	$	817,066

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.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of the Patriot’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 the maturities of its financial assets and financial 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.

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 September 30, 2021 and December 31, 2020:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2021:
U. S. Government agency and mortgage-backed securities	$	-	$	89,018	$	-	$	89,018
Corporate bonds		-		20,222		-		20,222
Subordinated notes		-		4,670		-		4,670
SBA loan pools		-		9,634		-		9,634
Municipal bonds		-		559		-		559
Available-for-sale securities	$	-	$	124,103	$	-	$	124,103

Interest rate swap receivable	$	-	$	817	$	-	$	817

Interest rate swap liability	$	-	$	817	$	-	$	817

December 31, 2020:
U. S. Government agency mortgage-backed securities	$	-	$	16,833	$	-	$	16,833
Corporate bonds		-		17,290		-		17,290
Subordinated notes		-		9,005		-		9,005
SBA loan pools		-		5,567		-		5,567
Municipal bonds		-		567		-		567
Available-for-sale securities	$	-	$	49,262	$	-	$	49,262

Interest rate swap receivable	$	-	$	1,187	$	-	$	1,187

Interest rate swap liability	$	-	$	1,187	$	-	$	1,187

Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.

During the three and nine months ended September 30, 2021 and 2020, the Company had no transfers into or out of Levels 1, 2 or 3.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020:

(In thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
September 30, 2021:
Impaired loans, net	$	26,341	Real Estate Appraisals	Discount for appraisal type		5.8%	-	20%

SBA servicing assets		351	Discounted Cash Flows	Market discount rates		14.73%	-	14.90%

December 31, 2020:
Impaired loans, net	$	22,971	Real Estate Appraisals	Discount for appraisal type		5.8%	-	20%

Other Real Estate Owned		1,906	Real Estate Appraisals	Discount for appraisal type			5.84%

SBA servicing assets		375	Discounted Cash Flows	Market discount rates		14.73%	-	14.90%

Patriot 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 financial instruments included in the consolidated financial statements.

The estimated fair value amounts have been measured as of September 30, 2021 and December 31, 2020, 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 Patriot’s assets and liabilities, since only a portion of Patriot’s assets and 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 Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.

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 re-pricing of the Company’s interest earning assets and interest bearing liabilities;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(24) our ability to retain key employees; and

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

The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 30, 2021 (the “2020 Form 10-K”) and the consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q.

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.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

●

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;

●

declines in collateral values;

●

third party disruptions, including outages at network providers and other suppliers;

●

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

●

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2020 Form 10-K for additional information.

Summary

The Company reported net income for the third quarter of 2021 of $1.3 million ($0.34 basic and diluted earnings per share), compared to a net loss of $87,000 ($0.02 basic and diluted loss per share) for the third quarter of 2020. The income before income taxes was $1.8 million for third quarter of 2021, compared to $93,000 loss before income taxes for the third quarter of 2020.

For the nine months ended September 30, 2021, the Company reported net income of $3.2 million ($0.81 basic and diluted earnings per share), compared to a net loss of $2.4 million ($0.62 basic and diluted loss per share) for the nine months ended September 30, 2020. The income before income taxes was $4.4 million for the nine months ended September 30, 2021, compared to $3.2 million loss before taxes for the nine months ended September 30, 2020. The Bank continued to show improved net interest margins and core deposit growth. The prepaid debit card program continues to be an increasing, low-cost funding source for the Bank and has increased substantially to $142.4 million as of September 30, 2021 from $50.0 million acquired in July 2020. The portfolio growth provides a substantial improvement to the Bank’s net interest margin and overall funding costs.

During the three and nine months ended September 30, 2021, the Bank recognized payroll tax credits of $906,000 and $2.9 million under the Employee Retention Credit program of the CARES Act.

Financial Condition

As of September 30, 2021, total assets increased to $952.3 million, as compared to $880.7 million at December 31, 2020, primarily due to increase in available-for-sale securities of $74.8 million. Net loan portfolio decreased $15.1 million or 2.1% from $719.6 million at December 31, 2020 to $704.5 million at September 30, 2021. Deposits increased $49.0 million or 7.1% from $685.7 million at December 31, 2020 to $734.7 million at September 30, 2021.

Cash and Cash Equivalents

Cash and cash equivalents increased $11.7 million, from $34.6 million at December 31, 2020 to $46.3 million at September 30, 2021. The increase in 2021 was primarily attributable to increasing retail deposits and net decrease in loan portfolio through paydown of the loans. These factors also resulted in an increase in available for sale securities, which increased $74.8 million to $124.1 million at September 30, 2021. The Company’s liquidity position is strong with liquid assets rising to 12.0% of total assets at September 30, 2021.

Investments

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

(In thousands)	September 30,		December 31,		Increase / (Decrease)
	2021		2020		($)			(%)
U. S. Government agency and mortgage-backed securities	$	89,018	$	16,833	$	72,185			428.83	%
Corporate bonds		20,222		17,290		2,932			16.96	%
Subordinated notes		4,670		9,005		(4,335	)		-48.14	%
SBA loan pools		9,634		5,567		4,067			73.06	%
Municipal bonds		559		567		(8	)		-1.41	%
Total Available-for-Sale Securities, at fair value		124,103		49,262		74,841			151.92	%

Other Investments, at cost		4,450		4,450		-			0.00	%

	$	128,553	$	53,712	$	74,841			139.34	%

Total investments increased by $74.8 million, from $53.7 million at December 31, 2020 to $128.6 million at September 30, 2021. The increase in 2021 was primarily attributable to purchases of $112.0 million U.S. Government agency and mortgage-backed securities, $18.2 million corporate bonds and $5.9 million SBA loan pools, which was offset by repayments of $7.7 million principal and maturity of $18.9 million of available-for-sale securities. In addition, the Bank sold $34.8 million available for sale securities and recognized a net gain of $26,000 and $119,000 in the three and nine months ended September 30, 2021, respectively. There were no sales of available-for-sale securities in the three and nine months ended September 30, 2020.

Loans held for investment

The following table provides the composition of the Company’s loan held for investment portfolio as of September 30, 2021 and December 31, 2020:

(In thousands)	September 30, 2021						December 31, 2020
	Amount			%			Amount			%
Loan portfolio segment:
Commercial Real Estate	$	315,853			44.21	%	$	282,378			38.68	%
Residential Real Estate		171,800			24.04	%		153,851			21.07	%
Commercial and Industrial		119,688			16.75	%		144,297			19.76	%
Consumer and Other		53,676			7.51	%		67,635			9.26	%
Construction		41,609			5.82	%		66,984			9.17	%
Construction to permanent - CRE		11,912			1.67	%		15,035			2.06	%
Loans receivable, gross		714,538			100.00	%		730,180			100.00	%
Allowance for loan losses		(10,079	)					(10,584	)
Loans receivable, net	$	704,459					$	719,596

The Company’s gross loan portfolio decreased $15.7 million, from $730.2 million at December 31, 2020 to $714.5 million at September 30, 2021. The decrease in loans was primarily attributable to $202.7 million paydown of the loans, which was partially offset by $117.2 million of new loan origination and $80.2 million in purchases of loans receivable.

SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of September 30, 2021 and December 31, 2020, SBA loans included in the commercial and industrial loan were $16.6 million and $15.9 million, respectively. SBA loans included in the commercial real estate loans were $10.2 million and $5.7 million, respectively.

At September 30, 2021, the net loan to deposit ratio was 96% and the net loan to total assets ratio was 74%. At December 31, 2020, these ratios were 105% and 82%, respectively.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses decreased $505,000 or 4.7% from $10.6 million at December 31, 2020 to $10.1 million at September 30, 2021. The decrease was primarily attributable to the recovering economy, lower loan balances and reduction in the number of classified loans resulting in a $300,000 credit of provision for loan losses for the three and nine months ended September 30, 2021.

Based upon the overall assessment and evaluation of the loan portfolio at September 30, 2021, management believes $10.1 million in the allowance for loan and lease losses, which represented 1.4% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.

The following table provides detail of activity in the allowance for loan and lease losses:

	Three Month Ended September 30,						Nine Month Ended September 30,
(In thousands)	2021			2020			2021			2020

Balance at beginning of the period	$	10,362		$	11,148		$	10,584		$	10,115
Charge-offs:
Commercial Real Estate		-			(35	)		(51	)		(400	)
Residential Real Estate		-			-			(3	)		(13	)
Commercial and Industrial		(3	)		(34	)		(212	)		(352	)
Consumer and Other		(3	)		(6	)		(23	)		(45	)
Construction		-			-			(69	)		-
Total charge-offs		(6	)		(75	)		(358	)		(810	)
Recoveries:
Residential Real Estate		2			1			2			1
Commercial and Industrial		20			11			44			62
Consumer and Other		1			1			107			4
Total recoveries		23			13			153			67

Net recoveries (charge-offs)		17			(62	)		(205	)		(743	)
(Credit) provision charged to earnings		(300	)		85			(300	)		1,799
Balance at end of the period	$	10,079		$	11,171		$	10,079		$	11,171

Ratios:
Net charge-offs to average loans		0.002	%		(0.008	)%		(0.029	)%		(0.092	)%
Allowance for loan losses to total loans		1.41	%		1.49	%		1.41	%		1.49	%

The following table provides an allocation of allowance for loan and lease losses by portfolio segment:

(In thousands)	September 30, 2021					December 31, 2020
Allowance for loan and lease losses	Amount		%			Amount		%
Commercial Real Estate	$	4,686		46.50	%	$	4,485		42.37	%
Residential Real Estate		2,135		21.18	%		1,379		13.03	%
Commercial and Industrial		2,368		23.49	%		3,284		31.03	%
Consumer and Other		335		3.32	%		295		2.79	%
Construction		231		2.29	%		739		6.98	%
Construction to permanent - CRE		62		0.62	%		162		1.53	%
Unallocated		262		2.60	%		240		2.27	%
Total	$	10,079		100.00	%	$	10,584		100.00	%

Non-performing Assets

The following table presents non-performing assets as of September 30, 2021 and December 31, 2020:

(In thousands)
	September 30, 2021			December 31, 2020
Non-accruing loans:
Commercial Real Estate	$	19,223		$	14,534
Residential Real Estate		4,473			3,854
Commercial and Industrial		4,204			700
Consumer and Other		146			917
Total non-accruing loans		28,046			20,005

Loans past due over 90 days and still accruing		-			16
Other real estate owned		-			1,906
Total nonperforming assets	$	28,046		$	21,927

Nonperforming assets to total assets		2.94	%		2.49	%
Nonperforming loans to total loans, net		3.98	%		2.78	%

The $28.0 million of non-accrual loans at September 30, 2021 was comprised of 32 borrowers, for which a specific reserve of $1.8 million was established. Three TDR loans of total $9.8 million were included in the non-accrual loans. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank’s experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate. Non-accrual loans are included in the impaired loans. The Bank evaluated the impaired loans and determined that a specific reserve of $1.8 million was established as of September 30, 2021.

As of December 31, 2020, the $20.0 million of non-accrual loans was comprised of 21 borrowers, for which a specific reserve of $1.4 million was established. Six TDR loans of total $11.5 million were included in the non-accrual loans as of December 31, 2020.

Loans held for sale

SBA loans held for sale totaled $4.1 million and $1.2 million as of September 30, 2021 and December 31, 2020, respectively. SBA loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. SBA loans held for sale at September 30, 2021, consisted of $2.9 million commercial real estate and $1.2 million commercial and industrial loans, respectively. SBA loans held for sale at December 31, 2020, consisted entirely of $1.2 million commercial and industrial loans.

Goodwill

The Company completed its acquisition of Prime Bank in May 2018 and recorded $1.1 million of goodwill after adjustments as of May 10, 2019. No further adjustment to the goodwill was made as of September 30, 2021.

The Company did not perform an interim goodwill test for the nine months ended September 30,2021 as no events occurred which would trigger an impairment assessment.

Deferred Taxes

Deferred tax assets were $10.4 million and $11.5 million at September 30, 2021 and December 31, 2020, respectively. Deferred tax assets consist predominately of net operating losses, capitalized costs and allowances for loan losses.

The effective tax rate for the three and nine months ended September 30, 2021 was 26.6% and 27.0%, respectively, compared to the effective tax (benefit) rate of (6.5%) and (25.0%) for the three and nine months ended September 30, 2020, respectively. The Company’s effective rates for both periods were affected primarily by states taxes and non-deductible expenses.

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

Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and net operating loss carry-forwards that do not begin to expire until the year of 2030. Based upon this evidence, management recorded a valuation allowance of $1.9 million as of December 31, 2020. Patriot continues to maintain the valuation allowance of $1.9 million as of September 30, 2021.

The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that additional deferred tax assets will not be realized, the valuation allowance will be adjusted.

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. On March 11, 2021, the American Rescue Plan Act of 2021 (the “APRA”) was signed into law in the U.S. to provide relief as a result of the COVID-19 pandemic. The APRA, among other things, extended and modified the employee retention credit. As of September 30, 2021, the Company has determined that the APRA had no significant impact on the Company’s effective tax rate.

Deposits

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

(In thousands)					Increase/(Decrease)
	September 30, 2021		December 31, 2020		$			%
Non-interest bearing:
Non-interest bearing	$	114,850	$	99,344	$	15,506			15.61	%
Prepaid DDA		93,091		59,332		33,759			56.90	%
Total non-interest bearing		207,941		158,676		49,265			31.05	%

Interest bearing:
Negotiable order of withdrawal		34,528		30,529		3,999			13.10	%
Savings		102,365		98,635		3,730			3.78	%
Money market		116,318		131,378		(15,060	)		(11.46	)%
Money market - prepaid deposits		49,353		15,011		34,342			228.78	%
Certificates of deposit, less than $250,000		142,141		160,968		(18,827	)		(11.70	)%
Certificates of deposit, $250,000 or greater		54,991		49,172		5,819			11.83	%
Brokered deposits		27,036		41,287		(14,251	)		(34.52	)%
Total Interest bearing		526,732		526,980		(248	)		(0.05	)%

Total Deposits	$	734,673	$	685,656	$	49,017			7.15	%

The Bank has substantially improved its deposit and funding mix over the past year, while reducing its aggregate cost of funds. During the past nine months, total deposits increased $49.0 million, primarily due to growth in prepaid deposits of $68.1 million, which was partially offset by decline of $27.3 million in brokered deposits and certificates of deposits. Excluding brokered deposits, total deposits increased 9.8% during the first nine months of 2021.

Borrowings

Total borrowings were $140.7 million and $120.8 million at September 30, 2021 and December 31, 2020, respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable. The senior notes, subordinated notes and junior subordinated debentures contain affirmative covenants that require the Company to maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements.

Federal Home Loan Bank borrowings

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

FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. At September 30, 2021 and December 31, 2020, outstanding advances from the FHLB-B aggregated $110.0 million and $90.0 million, respectively.

At September 30, 2021, advances of $110.0 million outstanding bore fixed rates of interest ranging from 0.32% to 4.23% with maturities ranging from 13 days to 2.9 years. The FHLB-B advances with fixed interest rates have a weighted average interest rate of 2.72%.

At September 30, 2021, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $248.3 million. Remaining unused borrowing capacity under this line totaled $67.0 million at September 30, 2021.

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three and nine months ended September 30, 2021 and 2020, no funds had been borrowed under the line of credit.

Interest expense incurred for the three and nine months ended September 30, 2021 were $756,000 and $2.2 million, respectively. Interest expenses incurred for the three and nine months ended September 30, 2020 were $628,000 and $2.0 million, respectively.

Correspondent Bank - Line of Credit

Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent banks. Borrowings available under the agreements totaled $5 million at September 30, 2021 and $5 million at December 31, 2020. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, Automated Clearing House (ACH), and other clearinghouse transactions.

There was no outstanding balance under the agreements at September 30, 2021 and December 31, 2020. No interest expense incurred for the three and nine months ended September 30, 2021 and 2020.

Other Borrowing

In August 2020, Patriot was approved to pledge commercial and industrial loans and leases, commercial real estate, construction loans and one-to-four family first lien loans under the Federal Reserve Bank of New York’s (“FRBNY”) Borrower-in-Custody program. As of September 30, 2021, Patriot had pledged eligible loans with a book value of $27.0 million and a collateral value of $18.9 million as collateral to support borrowing capacity at the FRBNY. There was no outstanding balance under the agreements at September 30, 2021.

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 September 22 and December 22 of each year beginning on September 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 September 30, 2021 and December 31, 2020, $17,000 and $73,000 of unamortized debt issuance costs were deducted from the face amount of the Senior Notes included in the consolidated balance sheet, respectively.

The 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.

For the three and nine months ended September 30, 2021, the Company recognized interest expense of $229,000 and $686,000, respectively. For the three and nine months ended September 30, 2020, the Company recognized interest expense of $229,000 and $686,000, respectively.

Subordinated notes

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

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

In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At September 30, 2021 and December 31, 2020, $197,000 and $218,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.

For the three and nine months ended September 30, 2021, the Company recognized interest expense of $165,000 and $491,000, respectively. For the three and nine months ended September 30, 2020, the Company recognized interest expense of $163,000 and $490,000, respectively.

Junior subordinated debt owed to unconsolidated trust

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

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

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

The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (3.28% at September 30, 2021) and mature on March 26, 2033, at which time the principal amount borrowed will be due. The placement fee of $240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As of September 30, 2021 and December 31, 2020, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $132,000 and $138,000, respectively, and accrued interest on the junior subordinated debentures was $4,000 and $5,000, respectively.

For the three and nine months ended September 30, 2021, the Company recognized interest expense of $69,000 and $209,000, respectively. For the three and nine months ended September 30, 2020, the Company recognized interest expense of $72,000 and $266,000 respectively.

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

Note Payable

In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $2.0 million, nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As of September 30, 2021 and December 31, 2020, the note had a balance outstanding of $842,000 and $994,000, respectively. The note matures in August 2024 and requires a balloon payment of approximately $234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.

For the three and nine months ended September 30, 2021, the Company recognized interest expense of $4,000 and $12,000, respectively. For the three and nine months ended September 30, 2020, the Company recognized interest expense of $5,000 and $15,000 respectively.

Derivatives

As of September 30, 2021, Patriot had entered into four interest rate swaps (“swaps”). Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot’s swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized no gain on the swaps for the three and nine months ended September 30, 2021 and 2020, respectively.

In April 2021, Patriot entered into a receive fixed/pay variable interest rate swap, intended to reduce the Company’s exposure to interest rate movements. This contractual agreement was designated as a cash flow hedge. Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid float swap for a 7-year rolling period beginning April 29, 2021.

In August 2021, the cash flow hedge interest rate swap contract was terminated. During the three and nine months ended September 30, 2021, the Company recognized $64,000 and $149,000 of accumulated other comprehensive income that was reclassified into interest income, respectively. The interest swap interest income is included in interest and fees on loans on the consolidated statements of operations. A gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the three and nine months ended September 30, 2021, which is included in other income on the consolidated statements of operations.

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

Equity

Equity increased $3.5 million, from $63.2 million at December 31, 2020 to $66.7 million at September 30, 2021, primarily due to $3.2 million of net income and $110,000 of equity compensation, and $172,000 of net unrealized gain for investment portfolio for the nine months ended September 30, 2021.

Off-Balance Sheet Commitments

The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, increased $18.7 million from $122.4 million at December 31, 2020 to $141.1 million at September 30, 2021.

RESULTS OF OPERATIONS

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three and nine months ended September 30, 2021 and 2020:

(In thousands)	Three Months Ended September 30,
	2021							2020
	Daily Average Balance ($)			Interest ($)		Yield (%)		Daily Average Balance ($)			Interest ($)		Yield (%)
ASSETS
Interest Earning Assets:
Loans	$	707,630		$	7,189		4.03	$	775,172		$	8,578		4.39
Investments		133,723			751		2.25		60,419			425		2.81
Cash equivalents and other		45,202			20		0.18		60,795			28		0.18

Total interest earning assets		886,555			7,960		3.56		896,386			9,031		4.00

Cash and due from banks		(7,529	)						8,158
Allowance for loan losses		(10,141	)						(10,652	)
OREO		2,400							1,569
Other assets		112,453							(10,249	)

Total Assets	$	983,738						$	885,212

Liabilities
Interest bearing liabilities:
Deposits	$	529,127		$	448		0.34	$	618,947		$	2,028		1.30
Borrowings		98,380			756		3.05		90,001			628		2.77
Senior notes		11,972			229		7.65		11,898			229		7.70
Subordinated debt		17,914			233		5.16		17,877			235		5.22
Note Payable and other		857			4		1.87		1,060			5		1.89

Total interest bearing liabilities		658,250			1,670		1.01		739,783			3,125		1.68

Demand deposits		81,600							161,588
Other liabilities		176,229							(80,407	)

Total Liabilities		916,079							820,964

Shareholders' equity		67,659							64,248

Total Liabilities and Shareholders' Equity	$	983,738						$	885,212

Net interest income				$	6,290						$	5,906

Interest margin							2.81							2.61
Interest spread							2.55							2.32

(In thousands)	Nine Month Ended September 30,
	2021							2020
	Daily Average Balance ($)			Interest ($)		Yield (%)		Daily Average Balance ($)			Interest ($)		Yield (%)
ASSETS
Interest Earning Assets:
Loans	$	696,978		$	22,199		4.26	$	809,569		$	27,722		4.56
Investments		96,957			1,572		2.16		59,017			1,447		3.27
Cash equivalents and other		60,234			67		0.15		50,796			187		0.49

Total interest earning assets		854,169			23,838		3.73		919,382			29,356		4.25

Cash and due from banks		3,699							2,287
Allowance for loan losses		(10,483	)						(10,813	)
OREO		1,195							2,367
Other assets		60,750							61,722

Total Assets	$	909,330						$	974,945

Liabilities
Interest bearing liabilities:
Deposits	$	526,969		$	1,856		0.47	$	672,780		$	8,020		1.59
Borrowings		93,101			2,230		3.20		93,298			1,963		2.80
Senior notes		11,954			686		7.65		11,879			686		7.70
Subordinated debt		17,905			700		5.23		17,867			756		5.64
Note Payable and other		906			12		1.77		1,110			15		1.80

Total interest bearing liabilities		650,835			5,484		1.13		796,934			11,440		1.91

Demand deposits		185,167							103,313
Other liabilities		8,081							8,954

Total Liabilities		844,083							909,201

Shareholders' equity		65,247							65,744

Total Liabilities and Shareholders' Equity	$	909,330						$	974,945

Net interest income				$	18,354						$	17,916

Interest margin							2.87							2.60
Interest spread							2.60							2.34

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 September 30, 2021 and 2020:

	Three Month Ended September 30,												Nine Month Ended September 30,
	2021 compared to 2020												2021 compared to 2020
	Increase/(Decrease)												Increase/(Decrease)
	Daily Average Balance			Volume			Rate			Total			Daily Average Balance			Volume			Rate			Total
Interest Earning Assets:
Loans	$	(67,542	)	$	(729	)	$	(660	)	$	(1,389	)	$	(112,591	)	$	(3,702	)	$	(1,821	)	$	(5,523	)
Investments		73,304			499			(173	)		326			37,940			873			(748	)		125
Cash equivalents and other		(15,593	)		(8	)		-			(8	)		9,438			34			(154	)		(120	)

Total interest earning assets		(9,831	)		(238	)		(833	)		(1,071	)		(65,213	)		(2,795	)		(2,723	)		(5,518	)

Interest bearing liabilities:
Deposit		(89,820	)		(533	)		(1,047	)		(1,580	)		(145,811	)		(2,625	)		(3,539	)		(6,164	)
Borrowings		8,379			59			69			128			(197	)		(11	)		278			267
Senior notes		74			-			-			-			75			-			-			-
Subordinated debt		37			-			(2	)		(2	)		38			-			(56	)		(56	)
Note payable and other		(203	)		(1	)		-			(1	)		(204	)		(3	)		-			(3	)

Total interest bearing liabilities		(81,533	)		(475	)		(980	)		(1,455	)		(146,099	)		(2,639	)		(3,317	)		(5,956	)

Net interest income	$	71,702		$	237		$	147		$	384		$	80,886		$	(156	)	$	594		$	438

For the quarter ended September 30, 2021, interest income and dividend income decreased $1.1 million or 11.9% as compared to the quarter ended September 30, 2020. Total interest expense decreased $1.5 million or 46.6% as compared to the quarter ended September 30, 2020. Net interest income was $6.3 million for the quarter ended September 30, 2021, which increased 6.5% from $5.9 million for the quarter ended September 30, 2020 primarily due to reduction of deposits and lower rates paid on deposits offset by lower average loan balances.

For the nine months ended September 30, 2021, interest income and dividend income decreased $5.5 million or 18.8% as compared to the nine months ended September 30, 2020. Total interest expense decreased $6.0 million or 52.1% as compared to the nine months ended September 30, 2020. Net interest income was $18.3 million for the nine months ended September 30, 2021, which decreased 2.4% from $17.9 million for the nine months ended September 30, 2020.

Net interest margin for the three and nine months ended September 30, 2021 were 2.81% and 2.87%, respectively, representing a significant increase from net interest margin for the three and nine months ended September 30, 2020 were 2.61% and 2.60%, respectively. As economic activity continues to expand, loan balances are expected to grow, and coupled with reductions in funding costs, the Bank expects further improvements in net interest income.

(Credit) Provision for Loan Losses

The recovering economy, lower loan balances and improvement in delinquencies of classified loans resulted in a $300,000 credit for loan losses for the three and nine months ended September 30, 2021, as compared to a provision for loan losses of $85,000 and $1.8 million for the three and nine months ended September 30, 2020, respectively. The majority of the provision in 2020 was primarily attributable to conditions and the uncertainty created by the COVID-19 pandemic.

Non-interest income

Non-interest income for the three and nine months ended September 30, 2021 was $923,000 and $2.1 million, respectively, as compared to $704,000 and $1.5 million for the three and nine months ended September 30, 2020, respectively. The increase was primarily attributable to a gain of $512,000 recognized from the termination of an interest rate swap cash flow hedge in the third quarter of 2021.

Non-interest expense

Non-interest expense for the three and nine months ended September 30, 2021 decreased to $5.7 million and $16.4 million, respectively, as compared to $6.6 million and $20.9 million for the three and nine months ended September 30, 2020, respectively. The decrease in non-interest expense in 2021 was primarily driven by an Employee Retention Credit of $906,000 and $2.9 million for the three and nine month ended September 30, 2021, respectively.

Provision (benefit) for income taxes

The Company reported provision for income taxes of $479,000 and $1.2 million for three and nine months ended September 30, 2021, respectively, as compared to a benefit for income taxes of $6,000 and $811,000 for the three and nine months ended September 30, 2020, respectively. The increase mainly reflected the impact of the net income in 2021.

Liquidity

The Company’s balance sheet liquidity to total assets ratio was 12.0% at September 30, 2021, compared to 9.0% at December 31, 2020. Liquidity including readily available off-balance sheet funding sources was 21.5% at September 30, 2021, compared to 21.7% at December 31, 2020.

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

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

Capital

In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. At September 30, 2021, the Bank adopted the CBLR framework. The Bank’s Tier 1 leverage ratio as of September 30, 2021 and December 31, 2020 was 9.9% and 9.8%, respectively, which is above the well-capitalized required level of 9.0%.

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.

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 September 30, 2021								As of December 31, 2020
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)			Estimated Value		Change from Base ($)		Change from Base (%)
+200	$	98,699	$	(19,313	)		(16.4	)	$	111,300	$	2,524		2.3
+100		109,962		(8,050	)		(6.8	)		110,657		1,881		1.7
BASE		118,012		-			-			108,776		-		-
-100		122,459		4,447			3.8			112,229		3,453		3.2
-200		128,729		10,717			9.1			129,821		21,045		19.3

(In thousands)	Net Interest Income - Performance Summary
	Year to Date September 30, 2021								Year ended December 31, 2020
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)			Estimated Value		Change from Base ($)		Change from Base (%)
+200	$	29,549	$	(814	)		(2.7	)	$	28,959	$	1,926		7.1
+100		30,094		(269	)		(0.9	)		27,946		913		3.4
BASE		30,363		-			-			27,033		-		-
-100		30,316		(47	)		(0.2	)		27,162		129		0.5
-200		30,274		(89	)		(0.3	)		27,215		182		0.7

Item 4: Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company 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 based on the criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, 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. Management has concluded that Patriot’s disclosure controls and procedures were effective for the period ended September 30, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting during the Company’s fiscal quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting despite the fact that some of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls over financial reporting to minimize any related impact on their effectiveness.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

From time to time we are a party to various litigation matters incidental to the conduct of our business and otherwise. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 5: Other Information

None.

ITEM 6: Exhibits

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

No.	Description

3(i)	Certificate of Incorporation of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed on December 1, 1999).

3(i)(A)	Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on March 25, 2005).

3(i)(B)	Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 14, 2006).

3(i)(C)	Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp Inc. dated October 6, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report Form 8-K filed on October 21, 2010)

3(ii)	Amended and Restated By-laws of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed on November 1, 2010)

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#	Inline XBRL Instance Document

101.SCH#	Inline XBRL Schema Document

101.CAL#	Inline XBRL Calculation Linkbase Document

101.LAB#	Inline XBRL Labels Linkbase Document

101.PRE#	Inline XBRL Presentation Linkbase Document

101.DEF#	Inline XBRL Definition Linkbase Document

104	Cover Page Interactive Data File (embedded with the Inline XBRL and contained in Exhibit 101)

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

* The certification is being furnished and shall not be deemed filed.

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: November 10, 2021

	Patriot National Bancorp, Inc. (Registrant)


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