PATRIOT NATIONAL BANCORP INC - Quarter Report: 2022 March (Form 10-Q)

pnbk20220331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2022

☐	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)

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

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 ☐

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of May 13, 2022, there were 3,957,269 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)	7
Notes to Consolidated Financial Statements (Unaudited)	9
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3: Quantitative and Qualitative Disclosures about Market Risk	50
Item 4: Disclosure Controls and Procedures	52
PART II - OTHER INFORMATION	53
Item 1: Legal Proceedings	53
Item 5: Other Information	53
Item 6: Exhibits	54
SIGNATURES	55

PART I- FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31,			December 31,
(In thousands, except share data)	2022			2021

Assets
Cash and due from banks:
Noninterest bearing deposits and cash	$	9,026		$	3,264
Interest bearing deposits		35,290			43,781
Total cash and cash equivalents		44,316			47,045
Investment securities:
Available-for-sale securities, at fair value		83,260			94,341
Other investments, at cost		4,450			4,450
Total investment securities		87,710			98,791

Federal Reserve Bank stock, at cost		2,869			2,843
Federal Home Loan Bank stock, at cost		4,184			4,184
Loans receivable (net of allowance for loan losses: 2022: $9,737 and 2021: $9,905)		763,602			729,583
Loans held for sale		5,820			3,129
Accrued interest and dividends receivable		5,596			5,822
Premises and equipment, net		31,269			31,500
Deferred tax asset		13,755			12,146
Goodwill		1,107			1,107
Core deposit intangible, net		284			296
Other assets		14,992			12,035
Total assets	$	975,504		$	948,481

Liabilities
Deposits:
Noninterest bearing deposits	$	237,825		$	226,713
Interest bearing deposits		542,024			521,849
Total deposits		779,849			748,562

Federal Home Loan Bank and correspondent bank borrowings		90,000			90,000
Senior notes, net		12,000			12,000
Subordinated debt, net		9,818			9,811
Junior subordinated debt owed to unconsolidated trust, net		8,121			8,119
Note payable		740			791
Advances from borrowers for taxes and insurance		2,574			1,101
Accrued expenses and other liabilities		9,719			10,753
Total liabilities		912,821			881,137

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 March 31, 2022: 4,030,233 shares issued; 3,956,492 shares outstanding; As of December 31, 2021: 4,030,233 shares issued; 3,956,492 shares outstanding.		106,500			106,479
Accumulated deficit		(36,698	)		(37,498	)
Accumulated other comprehensive loss		(7,119	)		(1,637	)
Total shareholders' equity		62,683			67,344
Total liabilities and shareholders' equity	$	975,504		$	948,481

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended March 31,
(In thousands, except per share amounts)	2022		2021

Interest and Dividend Income
Interest and fees on loans	$	7,664	$	7,743
Interest on investment securities		570		310
Dividends on investment securities		65		34
Other interest income		21		24
Total interest and dividend income		8,320		8,111

Interest Expense
Interest on deposits		409		785
Interest on Federal Home Loan Bank borrowings		737		733
Interest on senior debt		210		229
Interest on subordinated debt		234		234
Interest on note payable and other		4		4
Total interest expense		1,594		1,985

Net interest income		6,726		6,126

Provision for loan losses		-		-

Net interest income after provision for loan losses		6,726		6,126

Non-interest Income
Loan application, inspection and processing fees		87		63
Deposit fees and service charges		64		65
Gains on sales of loans		208		94
Rental income		192		130
Other income		263		90
Total non-interest income		814		442

Non-interest Expense
Salaries and benefits		3,346		2,216
Occupancy and equipment expense		836		920
Data processing expense		330		350
Professional and other outside services		789		852
Project expenses, net		52		10
Advertising and promotional expense		68		62
Loan administration and processing expense		105		24
Regulatory assessments		174		228
Insurance expense, net		77		60
Communications, stationery and supplies		135		145
Other operating expense		517		528
Total non-interest expense		6,429		5,395

Income before income taxes		1,111		1,173

Provision for income taxes		311		319

Net income	$	800	$	854

Basic earnings per share	$	0.20	$	0.22
Diluted earnings per share	$	0.20	$	0.22

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 March 31,
	2022			2021

Net income	$	800		$	854
Other comprehensive loss
Unrealized holding loss on securities		(7,389	)		(229	)
Income tax effect		1,907			59
Total other comprehensive loss		(5,482	)		(170	)
Comprehensive (loss) income	$	(4,682	)	$	684

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

	Three Months Ended March 31, 2022
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balance at December 31, 2021		3,956,492	$	106,479	$	(37,498	)	$	(1,637	)	$	67,344
Comprehensive income (loss):
Net income		-		-		800			-			800
Unrealized holding loss on available-for-sale securities, net of tax		-		-		-			(5,482	)		(5,482	)
Total comprehensive income (loss)		-		-		800			(5,482	)		(4,682	)
Share-based compensation expense		-		21		-			-			21
Balance at March 31, 2022		3,956,492	$	106,500	$	(36,698	)	$	(7,119	)	$	62,683

	Three Months Ended March 31, 2021
(In thousands, except shares)	Number of Shares		Common Stock		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balance at December 31, 2020		3,943,572	$	106,329	$	(42,592	)	$	(518	)	$	63,219
Comprehensive income (loss):
Net income		-		-		854			-			854
Unrealized holding loss on available-for-sale securities, net of tax		-		-		-			(170	)		(170	)
Total comprehensive income (loss)		-		-		854			(170	)		684
Share-based compensation expense		-		34		-			-			34
Vesting of restricted stock		700		-		-			-			-
Balance at March 31, 2021		3,944,272	$	106,363	$	(41,738	)	$	(688	)	$	63,937

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)	Three Months Ended March 31,
	2022			2021
Cash Flows from Operating Activities:
Net income	$	800		$	854
Adjustments to reconcile net income to net cash used in operating activities:
Amortization and accretion of investment premiums and discounts, net		(17	)		89
Amortization and accretion of purchase loan premiums and discounts, net		639			285
Amortization of debt issuance costs		9			28
Amortization of core deposit intangible		12			12
Amortization of servicing assets of sold SBA loans		10			6
Depreciation and amortization		323			384
Share-based compensation		21			34
Decrease in deferred income taxes		298			281
Originations of SBA loans held for sale		(5,057	)		(2,805	)
Proceeds from sale of SBA loans held for sale		2,574			1,006
Gains on sale of SBA loans held for sale, net		(208	)		(94	)
Net gain on sale and write-down of other real estate owned		-			(2	)
Changes in assets and liabilities:
Decrease in accrued interest and dividends receivable		226			350
Increase in other assets		(2,520	)		(1,025	)
Decrease in accrued expenses and other liabilities		(1,430	)		(237	)
Net cash used in operating activities		(4,320	)		(834	)

Cash Flows from Investing Activities:
Proceeds from maturity or sales on available-for-sale securities		2,500			1,886
Principal repayments on available-for-sale securities		2,209			3,066
Purchases of available-for-sale securities		(1,000	)		(13,901	)
(Purchases) redemptions of Federal Reserve Bank stock		(26	)		39
Decrease in originated loans receivable, net		4,312			69,366
Purchases of loans receivable		(39,022	)		(16,041	)
Purchases of premises and equipment		(91	)		(178	)
Proceeds from sale of other real estate owned		-			692
Net cash (used in) provided by investing activities		(31,118	)		44,929

Cash Flows from Financing Activities:
Increase in deposits		31,287			7,222
Principal repayments of note payable		(51	)		(51	)
Decrease (increase) in advances from borrowers for taxes and insurance		1,473			(1,628	)
Net cash provided by financing activities		32,709			5,543

Net (decrease) increase in cash and cash equivalents		(2,729	)		49,638

Cash and cash equivalents at beginning of period		47,045			34,636

Cash and cash equivalents at end of period	$	44,316		$	84,274

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(In thousands)	Three Months Ended March 31,
	2022			2021
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	1,247		$	1,836
Cash paid for income taxes	$	-		$	47

Non-cash transactions:
Increase in premises and equipment	$	-		$	(130	)
Reclass of premises and equipment to implementation cost	$	-		$	52
Increase in accrued expense and other liabilities	$	-		$	78

Transfers of SBA loans held for sale to loans receivable	$	-		$	281

Capitalized servicing assets	$	52		$	17

Operating lease right-of-use assets/ lease liabilites	$	61		$	-

(Decrease) increase in interest rate swaps	$	(405	)	$	396

Capital raise deferred costs	$	863		$	-

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” or “PNBK”) and its wholly-owned subsidiaries, Patriot Bank, N.A. (the “Bank”), Patriot National Statutory Trust I and PinPat Acquisition Corporation (collectively, “Patriot”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on the Annual Report on Form 10-K for the year ended December 31, 2021.

The consolidated balance sheet at December 31, 2021 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 months ended March 31, 2022 are not necessarily indicative of the results of operations that may be expected for the remainder of 2022.

Note 2. Accounting Policies

Please refer to the summary of Significant Accounting Policies included in the Company’s 2021 Annual Report on Form 10-K for a list of all policies in effect as of December 31, 2021.

Recently Issued Accounting Standards

New Accounting Standards Adopted in 2022

There were no applicable material accounting pronouncements adopted by the Company since December 31, 2021.

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. 2020-03, “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.

ASU 2022-02

In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures". ASU 2022-02 updates guidance in Topic 326, to eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty and to require entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period. Management is currently evaluating the impact that the standard will have on its consolidated financial statements. 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 March 31, 2022 and December 31, 2021 are as follows:

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2022:
U. S. Government agency and mortgage-backed securities	$	65,864	$	-	$	(5,974	)	$	59,890
Corporate bonds		17,754		43		(3,065	)		14,732
Subordinated notes		3,108		9		(48	)		3,069
SBA loan pools		5,567		-		(512	)		5,055
Municipal bonds		562		-		(48	)		514
	$	92,855	$	52	$	(9,647	)	$	83,260

December 31, 2021:
U. S. Government agency and mortgage-backed securities	$	67,850	$	24	$	(1,245	)	$	66,629
Corporate bonds		17,754		118		(951	)		16,921
Subordinated notes		4,608		35		(17	)		4,626
SBA loan pools		5,772		-		(169	)		5,603
Municipal bonds		563		1		(2	)		562
	$	96,547	$	178	$	(2,384	)	$	94,341

The following table presents the available-for-sale securities’ gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in a continuous loss position as of March 31, 2022 and December 31, 2021:

(In thousands)	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
March 31, 2022:
U. S. Government agency and mortgage-backed securities	$	52,958	$	(5,216	)	$	6,932	$	(758	)	$	59,890	$	(5,974	)
Corporate bonds		12,931		(3,065	)		-		-			12,931		(3,065	)
Subordinated notes		2,059		(48	)		-		-			2,059		(48	)
SBA loan pools		2,450		(246	)		2,605		(266	)		5,055		(512	)
Municipal bonds		515		(48	)		-		-			515		(48	)
	$	70,913	$	(8,623	)	$	9,537	$	(1,024	)	$	80,450	$	(9,647	)

December 31, 2021:
U. S. Government agency and mortgage-backed securities	$	60,606	$	(1,196	)	$	1,610	$	(49	)	$	62,216	$	(1,245	)
Corporate bonds		15,042		(951	)		-		-			15,042		(951	)
Subordinated notes		-		-			1,092		(17	)		1,092		(17	)
SBA loan pools		5,603		(169	)		-		-			5,603		(169	)
Municipal bonds		406		(2	)		-		-			406		(2	)
	$	81,657	$	(2,318	)	$	2,702	$	(66	)	$	84,359	$	(2,384	)

As of March 31, 2022 and December 31, 2021, thirty-seven of thirty-nine and thirty-two of thirty-nine available-for-sale securities had unrealized losses with an aggregate decline of 10.7% and 2.7% 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. Securities under the U.S. Small Business Administration (“SBA”) government guaranteed loan pools program 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 March 31, 2022.

As of March 31, 2022 and December 31, 2021, available-for-sale securities of $32.8 million and $36.6 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 March 31, 2022 and December 31, 2021. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.

(In thousands)	Amortized Cost								Fair Value
	Due Within 5 years		Due After 5 years through 10 years		Due After 10 years		Total		Due Within 5 years		Due After 5 years through 10 years		Due After 10 years		Total
March 31, 2022:
Corporate bonds	$	17,754	$	-	$	-	$	17,754	$	14,732	$	-	$	-	$	14,732
Subordinated notes		-		3,108		-		3,108		-		3,069		-		3,069
SBA loan pools		-		-		5,567		5,567		-		-		5,055		5,055
Municipal bonds		-		562		-		562		-		514		-		514
Available-for-sale securities with stated maturity dates		17,754		3,670		5,567		26,991		14,732		3,583		5,055		23,370
U. S. Government agency and mortgage-backed securities		9,986		-		55,878		65,864		9,024		-		50,866		59,890
	$	27,740	$	3,670	$	61,445	$	92,855	$	23,756	$	3,583	$	55,921	$	83,260

December 31, 2021:
Corporate bonds	$	17,754	$	-	$	-	$	17,754	$	16,921	$	-	$	-	$	16,921
Subordinated notes		-		4,608		-		4,608		-		4,626		-		4,626
SBA loan pools		-		-		5,772		5,772		-		-		5,603		5,603
Municipal bonds		-		563		-		563		-		562		-		562
Available-for-sale securities with stated maturity dates		17,754		5,171		5,772		28,697		16,921		5,188		5,603		27,712
U. S. Government agency and mortgage-backed securities		13,876		-		53,974		67,850		13,835		-		52,794		66,629
	$	31,630	$	5,171	$	59,746	$	96,547	$	30,756	$	5,188	$	58,397	$	94,341

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

During the three months ended March 31, 2022, the Bank purchased $1.0 million corporate bonds. During the three months ended March 31, 2021, the Bank purchased $10.9 million U.S. Government agency mortgage-backed securities and $3.0 million SBA government guaranteed loan pools securities. There was no sale of available-for-sale securities in the three months ended March 31, 2022 and 2021.

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

As of March 31, 2022 and December 31, 2021, loans receivable, net, consisted of the following:

	March 31,			December 31,
(In thousands)	2022			2021
Loan portfolio segment:
Commercial Real Estate	$	413,104		$	365,247
Residential Real Estate		146,221			158,591
Commercial and Industrial		128,515			122,810
Consumer and Other		71,219			59,364
Construction		12,223			21,781
Construction to Permanent - CRE		2,057			11,695
Loans receivable, gross		773,339			739,488
Allowance for loan and lease losses		(9,737	)		(9,905	)
Loans receivable, net	$	763,602		$	729,583

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 75% of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.

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

Commercial Real Estate Loans

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

During the three months ended March 31, 2022, Patriot purchased $20.7 million of commercial real estate loans. There were no commercial real estate loans purchased during the first quarter of 2021.

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 months ended March 31, 2022, Patriot did not purchase any residential real estate loans. During the three months ended March 31, 2021, $16.0 million of residential real estate loans were purchased.

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 totaled $20.8 million and $19.6 million at March 31, 2022 and December 31, 2021, respectively. The syndicated and leveraged loans 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. Further originations in this loan class are not expected.

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 months ended March 31, 2022, Patriot purchased $18.4 million unsecured consumer loans. During the three months ended March 31, 2021, no consumer loans were purchased.

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

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 commercial real estate loan typically 20-25 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% of the principal balance. However, during the pandemic in 2021, the SBA temporarily increased the guarantees to 90% and reverted to 75% on October 1, 2021. 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 $28.6 million and $27.1 million as of March 31, 2022 and December 31, 2021, respectively. During the first quarter of 2022, no SBA loans previously classified as held for sale were transferred to held for investment. During the three-month period ended March 31, 2021, $281,000 SBA loans were transferred from held for sale 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 $380,000 and $919,000 as of March 31, 2022 and December 31, 2021, respectively, 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 months ended March 31, 2022 and 2021:

(In thousands)	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Construction			Construction to Permanent - CRE			Unallocated			Total
Three months ended March 31, 2022
Allowance for loan and lease losses:
December 31, 2021	$	5,063		$	1,700		$	2,532		$	253		$	78		$	41		$	238		$	9,905
Charge-offs		-			-			(68	)		(47	)		(70	)		-			-			(185	)
Recoveries		-			1			15			1			-			-			-			17
Provisions (credits)		(174	)		(189	)		381			112			48			(32	)		(146	)		-
March 31, 2022	$	4,889		$	1,512		$	2,860		$	319		$	56		$	9		$	92		$	9,737

Three months ended March 31, 2021
Allowance for loan and lease losses:
December 31, 2020	$	4,485		$	1,379		$	3,284		$	295		$	739		$	162		$	240		$	10,584
Charge-offs		(42	)		(3	)		(209	)		(18	)		-			-			-			(272	)
Recoveries		-			-			12			102			-			-			-			114
Provisions (credits)		(289	)		533			537			3			(459	)		(85	)		(240	)		-
March 31, 2021	$	4,154		$	1,909		$	3,624		$	382		$	280		$	77		$	-		$	10,426

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of March 31, 2022 and December 31, 2021:

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
March 31, 2022
Allowance for loan and lease losses:
Individually evaluated for impairment	$	1,752	$	3	$	954	$	-	$	-	$	-	$	-	$	2,709
Collectively evaluated for impairment		3,137		1,509		1,906		319		56		9		92		7,028
Total allowance for loan and lease losses	$	4,889	$	1,512	$	2,860	$	319	$	56	$	9	$	92	$	9,737

Loans receivable, gross:
Individually evaluated for impairment	$	15,643	$	2,940	$	4,544	$	521	$	-	$	-	$	-	$	23,648
Collectively evaluated for impairment		397,461		143,281		123,971		70,698		12,223		2,057		-		749,691
Total loans receivable, gross	$	413,104	$	146,221	$	128,515	$	71,219	$	12,223	$	2,057	$	-	$	773,339

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

(In thousands)	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Construction		Construction to Permanent - CRE		Unallocated		Total
December 31, 2021
Allowance for loan and lease losses:
Individually evaluated for impairment	$	1,567	$	3	$	722	$	-	$	-	$	-	$	-	$	2,292
Collectively evaluated for impairment		3,496		1,697		1,810		253		78		41		238		7,613
Total allowance for loan losses	$	5,063	$	1,700	$	2,532	$	253	$	78	$	41	$	238	$	9,905

Loans receivable, gross:
Individually evaluated for impairment	$	15,704	$	2,954	$	4,031	$	523	$	-	$	-	$	-	$	23,212
Collectively evaluated for impairment		349,543		155,637		118,779		58,841		21,781		11,695		-		716,276
Total loans receivable, gross	$	365,247	$	158,591	$	122,810	$	59,364	$	21,781	$	11,695	$	-	$	739,488

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, credit 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 credit 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 by the Credit Department either annually or biannually, depending upon the amount of the bank’s exposure.

Additionally, Patriot retains an independent third-party loan review expert to perform a quarterly analysis of the results of its risk rating process. The semi-annual 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 semi-annual review, are required to be reported to the Board Audit 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.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

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.

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 March 31, 2022.

(In thousands)	Performing (Accruing) Loans
As of March 31, 2022:	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	$	849	$	-	$	-	$	849	$	373,639	$	374,488	$	-	$	374,488
Special mention		-		-		-		-		20,384		20,384		-		20,384
Substandard		339		-		-		339		2,250		2,589		15,643		18,232
		1,188		-		-		1,188		396,273		397,461		15,643		413,104
Residential Real Estate:
Pass		-		-		-		-		141,695		141,695		-		141,695
Substandard		-		-		-		-		1,392		1,392		3,134		4,526
		-		-		-		-		143,087		143,087		3,134		146,221
Commercial and Industrial:
Pass		997		-		-		997		119,292		120,289		-		120,289
Special mention		-		-		-		-		1,435		1,435		-		1,435
Substandard		573		-		-		573		1,674		2,247		4,544		6,791
		1,570		-		-		1,570		122,401		123,971		4,544		128,515
Consumer and Other:
Pass		-		-		-		-		71,051		71,051		-		71,051
Substandard		-		-		-		-		23		23		145		168
		-		-		-		-		71,074		71,074		145		71,219
Construction:
Pass		-		-		-		-		12,223		12,223		-		12,223
		-		-		-		-		12,223		12,223		-		12,223
Construction to Permanent - CRE:
Pass		-		-		-		-		2,057		2,057		-		2,057
		-		-		-		-		2,057		2,057		-		2,057

Total	$	2,758	$	-	$	-	$	2,758	$	747,115	$	749,873	$	23,466	$	773,339

Loans receivable, gross:
Pass	$	1,846	$	-	$	-	$	1,846	$	719,957	$	721,803	$	-	$	721,803
Special mention		-		-		-		-		21,819		21,819		-		21,819
Substandard		912		-		-		912		5,339		6,251		23,466		29,717
Loans receivable, gross	$	2,758	$	-	$	-	$	2,758	$	747,115	$	749,873	$	23,466	$	773,339

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, 2021.

(In thousands)	Performing (Accruing) Loans
As of December 31, 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	$	696	$	-	$	-	$	696	$	324,858	$	325,554	$	-	$	325,554
Special mention		-		-		-		-		16,625		16,625		-		16,625
Substandard		-		-		-		-		7,364		7,364		15,704		23,068
		696		-		-		696		348,847		349,543		15,704		365,247
Residential Real Estate:
Pass		-		-		-		-		154,044		154,044		-		154,044
Special mention		-		-		-		-		1,399		1,399		-		1,399
Substandard		-		-		-		-		-		-		3,148		3,148
		-		-		-		-		155,443		155,443		3,148		158,591
Commercial and Industrial:
Pass		243		-		-		243		114,306		114,549		-		114,549
Special mention		-		-		-		-		1,951		1,951		-		1,951
Substandard		-		-		-		-		2,209		2,209		4,101		6,310
		243		-		-		243		118,466		118,709		4,101		122,810
Consumer and Other:
Pass		-		26		2		28		59,171		59,199		-		59,199
Substandard		-		-		-		-		23		23		142		165
		-		26		2		28		59,194		59,222		142		59,364
Construction:
Pass		-		-		-		-		21,781		21,781		-		21,781
		-		-		-		-		21,781		21,781		-		21,781
Construction to Permanent - CRE:
Pass		-		-		-		-		11,695		11,695		-		11,695
		-		-		-		-		11,695		11,695		-		11,695

Total	$	939	$	26	$	2	$	967	$	715,426	$	716,393	$	23,095	$	739,488

Loans receivable, gross:
Pass	$	939	$	26	$	2	$	967	$	685,855	$	686,822	$	-	$	686,822
Special mention		-		-		-		-		19,975		19,975		-		19,975
Substandard		-		-		-		-		9,596		9,596		23,095		32,691
Loans receivable, gross	$	939	$	26	$	2	$	967	$	715,426	$	716,393	$	23,095	$	739,488

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 March 31, 2022 and December 31, 2021:

(In thousands)	Non-accruing Loans
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Non-accruing Loans
As of March 31, 2022:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	-	$	6,787	$	6,787	$	8,856	$	15,643
Residential Real Estate:
Substandard		696		-		2,419		3,115		19		3,134
Commercial and Industrial:
Substandard		-		118		3,292		3,410		1,134		4,544
Consumer and Other:
Substandard		-		-		121		121		24		145
Total non-accruing loans	$	696	$	118	$	12,619	$	13,433	$	10,033	$	23,466

As of December 31, 2021:
Loan portfolio segment:
Commercial Real Estate:
Substandard	$	-	$	-	$	15,704	$	15,704	$	-	$	15,704
Residential Real Estate:
Substandard		-		-		2,419		2,419		729		3,148
Commercial and Industrial:
Substandard		-		491		2,458		2,949		1,152		4,101
Consumer and Other:
Substandard		-		94		28		122		20		142
Total non-accruing loans	$	-	$	585	$	20,609	$	21,194	$	1,901	$	23,095

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $115,000 and $255,000 would have been recognized during the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2022 and 2021, interest income collected and recognized on non-accruing loans was $90,000 and $48,000, 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 March 31, 2022 and December 31, 2021:

(In thousands)	March 31, 2022					December 31, 2021
Loan portfolio segment:	Number of Loans		Recorded Investment			Number of Loans		Recorded Investment
Commercial Real Estate		1	$	8,856			1	$	8,884
Residential Real Estate		3		856			3		870
Consumer and Other		3		637			3		640
Total TDR Loans		7		10,349			7		10,394
Less:
TDRs included in non-accrual loans		3		(9,646	)		3		(9,688	)
Total accrual TDR Loans		4	$	703			4	$	706

During the three months ended March 31, 2022 and 2021, no loans were modified as TDRs, and there were no defaults of TDRs.

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 months ended March 31, 2022 and 2021. At March 31, 2022 and December 31, 2021, 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)

Impaired Loans

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs. Based on the on-going monitoring and analysis of the loan portfolio, thirty-five impaired loans totaling $24.2 million, were identified as of March 31, 2022. Twenty-five out of thirty-five impaired loans totaling $23.6 million, were individually evaluated for impairment, for which $2.7 million specific reserves were established. The remaining ten impaired loans with balances under $100,000, totaling $521,000, with a general reserve of $6,000 were collectively evaluated, and not individually evaluated for impairment.

At December 31, 2021, exposure to the impaired loans was related to thirty-four borrowers. Twenty-three out of thirty-four impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $100,000, totaling $590,000, with a general reserve of $7,000 were collectively evaluated, and not individually evaluated for impairment.

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.

The following table reflects information about the impaired loans by class as of March 31, 2022 and December 31, 2021:

(In thousands)	March 31, 2022						December 31, 2021
	Recorded Investment		Principal Outstanding		Related Allowance		Recorded Investment		Principal Outstanding		Related Allowance
With no related allowance recorded:
Commercial Real Estate	$	6,787	$	7,765	$	-	$	6,820	$	7,776	$	-
Residential Real Estate		2,834		2,758		-		2,847		2,763		-
Commercial and Industrial		612		743		-		630		758		-
Consumer and Other		521		521		-		523		523		-
		10,754		11,787		-		10,820		11,820		-
With a related allowance recorded:
Commercial Real Estate	$	8,856	$	8,805	$	1,752		8,884		8,811		1,567
Residential Real Estate		3,932		4,592		954		461		488		8
Commercial and Industrial		460		486		7		3,471		3,916		723
Consumer and Other		167		201		2		166		201		1
		13,415		14,084		2,715		12,982		13,416		2,299

Impaired Loans, Total:
Commercial Real Estate		15,643		16,570		1,752		15,704		16,587		1,567
Residential Real Estate		6,766		7,350		954		3,308		3,251		8
Commercial and Industrial		1,072		1,229		7		4,101		4,674		723
Consumer and Other		688		722		2		689		724		1
Impaired Loans, Total	$	24,169	$	25,871	$	2,715	$	23,802	$	25,236	$	2,299

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The following table summarizes additional information regarding impaired loans by class for the three months ended March 31, 2022 and 2021.

	Three Months Ended March 31,
(In thousands)	2022				2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	6,806	$	32	$	6,078	$	-
Residential Real Estate		2,840		8		4,248		13
Commercial and Industrial		621		4		2,745		46
Consumer and Other		522		4		945		6
		10,789		48		14,016		65
With a related allowance recorded:
Commercial Real Estate		8,873		25		8,813		-
Residential Real Estate		1,328		21		190		3
Commercial and Industrial		2,738		2		462		26
Consumer and Other		165		1		47		2
		13,104		49		9,512		31
Impaired Loans, Total:
Commercial Real Estate		15,679		57		14,891		-
Residential Real Estate		4,168		29		4,438		16
Commercial and Industrial		3,359		6		3,207		72
Consumer and Other		687		5		992		8
Impaired Loans, Total	$	23,893	$	97	$	23,528	$	96

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 March 31, 2022, SBA loans held for sale was $5.8 million, consisting of $1.3 million SBA commercial real estate loans and $4.5 million SBA commercial and industrial loans, respectively. There were $3.1 million of SBA loans held for sale at December 31, 2021, consisting of $2.6 million SBA commercial and industrial loans and $562,000 SBA commercial real estate loans. No SBA loans previously classified as held for sale were transferred to held for investment in the first quarter of 2022. During the three months ended March 31, 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.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

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 $31.2 million and $29.6 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the servicing asset has a carrying value of $626,000 and $584,000, respectively, and fair value of $660,000 and $617,000, respectively. 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 months ended March 31, 2022 and 2021:

(In thousands)	Three Months Ended March 31,
	2022			2021
Beginning balance	$	584		$	316
Servicing rights capitalized		52			17
Servicing rights amortized		(8	)		(6	)
Servicing rights disposed		(2	)		-
Ending balance	$	626		$	327

Note 6. Business Combination, Goodwill and Other Intangible Assets

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. In December 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. There was no further adjustment to goodwill as of March 31, 2022.

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 quarter of 2022 as no events occurred which would trigger an impairment assessment.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Merger and acquisition with American Challenger

On November 15, 2021, the Company and American Challenger Development Corp., a Delaware corporation (“American Challenger”), entered into an Agreement and Plan of Merger (the “Original Merger Agreement”), which was subsequently amended on January 26, 2022 and February 28, 2022 (the Original Merger Agreement, as amended, referred to as the “Merger Agreement”). Pursuant to the Merger Agreement, American Challenger will merge with and into PNBK (the "Merger"). Following the Merger, Patriot Bank will adopt a consolidated business plan and will operate as two divisions. The Patriot Bank Division will continue to operate the existing business model. The American Challenger Division will execute the high-growth component of the consolidated business plan. To date, the Company incurred $1.9 million of project expenses in connection with the Merger.

The pending acquisition is subject to several material conditions including obtaining regulatory and shareholder approval.

Note 7. Deposits

The following table presents the balance of deposits held, by category as of March 31, 2022 and December 31, 2021.

(In thousands)	March 31, 2022		December 31, 2021
Non-interest bearing	$	237,825	$	226,713

Interest bearing:
Negotiable order of withdrawal accounts		42,272		34,741
Savings		105,871		109,744
Money market		146,819		164,518
Certificates of deposit, less than $250,000		158,625		142,246
Certificates of deposit, $250,000 or greater		53,513		53,584
Brokered deposits		34,924		17,016

Interest bearing, Total		542,024		521,849

Total Deposits	$	779,849	$	748,562

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 $146.8 million and $150.4 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, 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	$	96,349	$	41,582	$	1,498	$	139,429
More than 1 year through 2 years		39,836		8,668		28,320		76,824
More than 2 years through 3 years		8,710		2,503		5,106		16,319
More than 3 years through 4 years		3,936		760		-		4,696
More than 4 years through 5 years		9,794		-		-		9,794
	$	158,625	$	53,513	$	34,924	$	247,062

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 March 31, 2022 and December 31, 2021, Patriot had cash pledged for collateral on its interest rate swaps of $1.1 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 months ended March 31, 2022 and 2021.

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.

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.

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
March 31, 2022
Classified in Other Assets:
Customer interest rate swap	$	4,816		7.1		5.25	%	1 Mo. LIBOR + 1.96%	$	318
Customer interest rate swap		1,389		7.3		4.38	%	1 Mo. LIBOR + 2.00%		15

Classified in Other Liabilities:
3rd party interest rate swap	$	4,816		7.1		5.25	%	1 Mo. LIBOR + 1.96%	$	(318	)
3rd party interest rate swap		1,389		7.3		4.38	%	1 Mo. LIBOR + 2.00%		(15	)

December 31, 2021
Classified in Other Assets:
Customer interest rate swap	$	4,843		7.3		5.25	%	1 Mo. LIBOR + 1.96%	$	638
Customer interest rate swap		1,398		7.5		4.38	%	1 Mo. LIBOR + 2.00%		100

Classified in Other Liabilities:
3rd party interest rate swap	$	4,843		7.3		5.25	%	1 Mo. LIBOR + 1.96%	$	(638	)
3rd party interest rate swap		1,398		7.5		4.38	%	1 Mo. LIBOR + 2.00%		(100	)

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 Restricted Stock Award Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 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 March 31, 2022, 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 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 months ended March 31, 2022 and 2021:

Three months ended March 31, 2022:	Number of Shares Awarded			Weighted Average Grant Date Fair Value
Unvested at December 31, 2021		21,468		$	6.48
Unvested at March 31, 2022		21,468		$	6.48

Three months ended March 31, 2021:
Unvested at December 31, 2020		18,498		$	7.29
Vested		(700	)	$	17.85
Unvested at March 31, 2021		17,798		$	6.88

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value.

For the three months ended March 31, 2022, the Company recognized total share-based compensation expense of $21,000. The share-based compensation attributable to employees of Patriot amounted to $8,000. Included in share-based compensation expense were $13,000 attributable to Patriot’s external directors, who received total compensation of $63,000, which amounts are included in other operating expenses in the consolidated statements of operations.

For the three months ended March 31, 2021, the Company recognized total share-based compensation expense of $34,000. The share-based compensation attributable to employees of Patriot amounted to $15,000. Included in share-based compensation expense were $19,000 attributable to Patriot’s external directors, who received total compensation of $94,000, 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 March 31, 2022 amounted to $184,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 3.14 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 months ended March 31, 2022 and 2021, compensation expense under the 401K aggregated $74,000 and $48,000, respectively.

PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to consolidated financial statements (Unaudited)

Note 10. Earnings per share

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

The following table summarizes the computation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:

(Net income in thousands)	Three Months Ended March 31,
	2022		2021
Basis earnings per share:
Net income attributable to Common shareholders	$	800	$	854
Divided by:
Weighted average shares outstanding		3,956,492		3,943,580

Basic earnings per common share	$	0.20	$	0.22

Diluted earnings per share:
Net income attributable to Common shareholders	$	800	$	854

Weighted average shares outstanding		3,956,492		3,943,580

Effect of potentially dilutive restricted common shares		9,510		1,540

Divided by:
Weighted average diluted shares outstanding		3,966,002		3,945,120

Diluted earnings per common share	$	0.20	$	0.22

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 March 31, 2022 and December 31, 2021 are as follows:

(In thousands)	March 31, 2022		December 31, 2021
Commitments to extend credit:
Unused lines of credit	$	76,691	$	68,341
Undisbursed construction loans		16,314		18,594
Home equity lines of credit		16,520		16,396
Future loan commitments		41,427		23,486
Financial standby letters of credit		164		164
	$	151,116	$	126,981

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 March 31, 2022 and December 31, 2021, 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

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 Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“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.”

In September 2021, the Bank elected to adopt the CBLR framework. The Bank’s Tier 1 leverage ratio as of March 31, 2022 and December 31, 2021 was 9.94% and 9.86%, 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 March 31, 2022 and December 31, 2021 are summarized as follows:

(In thousands)
	March 31, 2022						December 31, 2021
Patriot Bank, N.A.	Amount		Ratio				Amount		Ratio
Tier 1 Leverage Capital (to average assets):
Actual	$	95,094		9.94	%		$	93,923		9.86	%
To be Well Capitalized		86,133		9.00	%	⁽¹⁾		85,773		9.00	%	⁽¹⁾

⁽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, which 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 March 31, 2022 and December 31, 2021 due to its short-term nature.

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

Shares in the 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 loan portfolio is 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 Note 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 March 31, 2022 and December 31, 2021:

(In thousands)		March 31, 2022				December 31, 2021
	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	$	9,026	$	9,026	$	3,264	$	3,264
Interest-bearing deposits due from banks	Level 1		35,290		35,290		43,781		43,781
Available-for-sale securities	Level 2		72,023		72,023		81,161		81,161
Available-for-sale securities	Level 3		11,237		11,237		13,180		13,180
Other investments	Level 2		4,450		4,450		4,450		4,450
Federal Reserve Bank stock	Level 2		2,869		2,869		2,843		2,843
Federal Home Loan Bank stock	Level 2		4,184		4,184		4,184		4,184
Loans receivable, net	Level 3		763,602		754,217		729,583		727,733
Loans held for sale	Level 2		5,820		6,506		3,129		3,506
SBA servicing assets	Level 3		626		660		584		617
Accrued interest receivable	Level 2		5,596		5,596		5,822		5,822
Interest rate swap receivable	Level 2		333		333		738		738

*Financial assets, total*		$	915,056	$	906,391	$	892,719	$	891,279

Financial Liabilities:
Demand deposits	Level 2	$	237,825	$	237,825	$	226,713	$	226,713
Savings deposits	Level 2		105,871		105,871		109,744		109,744
Money market deposits	Level 2		146,819		146,819		164,518		164,518
NOW accounts	Level 2		42,272		42,272		34,741		34,741
Time deposits	Level 2		212,138		209,462		195,830		195,048
Brokered deposits	Level 1		34,924		34,267		17,016		17,003
FHLB borrowings	Level 2		90,000		91,087		90,000		93,643
Senior notes	Level 2		12,000		12,002		12,000		12,045
Subordinated debt	Level 2		9,818		9,758		9,811		9,947
Junior subordinated debt owed to unconsolidated trust	Level 2		8,121		8,121		8,119		8,119
Note payable	Level 3		740		706		791		775
Accrued interest payable	Level 2		680		680		343		343
Interest rate swap liability	Level 2		333		333		738		738

*Financial liabilities, total*		$	901,541	$	899,203	$	870,364	$	873,377

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 March 31, 2022 and December 31, 2021:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2022
U. S. Government agency and mortgage-backed securities	$	-	$	59,890	$	-	$	59,890
Corporate bonds		-		3,495		11,237		14,732
Subordinated notes		-		3,069		-		3,069
SBA loan pools		-		5,055		-		5,055
Municipal bonds		-		514		-		514
Available-for-sale securities	$	-	$	72,023	$	11,237	$	83,260

Interest rate swap receivable	$	-	$	333	$	-	$	333

Interest rate swap liability	$	-	$	333	$	-	$	333

December 31, 2021:
U. S. Government agency and mortgage-backed securities	$	-	$	66,629	$	-	$	66,629
Corporate bonds		-		3,741		13,180		16,921
Subordinated notes		-		4,626		-		4,626
SBA loan pools		-		5,603		-		5,603
Municipal bonds		-		562		-		562
Available-for-sale securities	$	-	$	81,161	$	13,180	$	94,341

Interest rate swap receivable	$	-	$	738	$	-	$	738

Interest rate swap liability	$	-	$	738	$	-	$	738

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.

As of March 31, 2022 and December 31, 2021, four corporate bonds were classified as Level 3 instruments. The fair values of these securities were determined using a present value approach. The discount rate assumed was determined based on unobservable inputs in a pricing model. During the three months ended March 31, 2022 and 2021, 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 reconciliation of the beginning and ending balances during 2022 for Level 3 available-for-sale securities is as follows:

(In thousands)
	Three Months Ended March 31, 2022
Level 3 fair value, beginning of year	$	13,180
Purchases		-
Realized gain (loss)		-
Unrealized loss		(1,943	)
Transfers in and /or out of Level 3		-
Level 3 fair value, end of year	$	11,237

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 March 31, 2022 and December 31, 2021:

(In thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
March 31, 2022:
Impaired loans, net	$	20,939	Real Estate Appraisals	Discount for appraisal type	5.8%	-	20%

SBA servicing assets		660	Discounted Cash Flows	Market discount rates	14.73%	-	14.90%

December 31, 2021:
Impaired loans, net	$	20,920	Real Estate Appraisals	Discount for appraisal type	5.8%	-	20%

SBA servicing assets		617	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 March 31, 2022 and December 31, 2021, 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(15) 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;

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

(26) the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Merger Agreement, as amended, between the Company and American Challenger, or the Investment Agreements between the Company and the investors in the capital raise in connection with the merger with American Challenger (the “Merger”);

(27) the failure to obtain the necessary approvals of the Company’s shareholders on the proposed Merger;

(28) the outcome of any legal proceedings that may be instituted against the Company and/or American Challenger;

(29) the failure to obtain required governmental approvals on the proposed Merger or a delay in obtaining such approvals;

(30) the failure of any of the closing conditions in the Merger Agreement, as amended or Investment Agreements related to the capital raise, to be satisfied on a timely basis or at all;

(31) delays in closing the proposed Merger or capital raise;

(32) the possibility that the proposed Merger and capital raise may be more expensive to complete than anticipated, including as a result of unexpected factors or event; and

(33) the dilution caused by the Company’s issuance of additional shares of its capital stock in connection with the proposed Merger and the capital raise.

The risks and uncertainties included here are not exhaustive. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2021. Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan and lease losses, the analysis and valuation of its investment securities, the valuation of deferred tax assets, the impairment of goodwill, the valuation of derivatives, and the valuation of servicing assets as certain of the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the 2021 Form 10-K for additional information.

Summary

The Company reported net income for the first quarter of 2022 of $800,000 ($0.20 basic and diluted earnings per share), compared to a net income of $845,000 ($0.22 basic and diluted earnings per share) for the first quarter of 2021. The prior year first quarter results included the recognition of an employee retention tax credit of $843,000, while no retention tax credit was recognized in the first quarter of 2022.

The Bank continued to show improved net interest margins and deposit growth. The prepaid debit card program continues to be a low-cost funding source for the Bank and has increased substantially to $146.8 million as of March 31, 2022 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.

The previously announced pending merger transaction with American Challenger is nearing the final stages of its process. The merger remains subject to regulatory and shareholder approvals.

Financial Condition

As of March 31, 2022, total assets increased $27.0 million to $975.5 million, as compared to $948.5 million at December 31, 2021, primarily due to increase in net loans which increased from $729.6 million at December 31, 2021, to $763.6 million at March 31, 2022. Total deposits increased from $748.6 million at December 31, 2021, to $779.8 million at March 31, 2022.

Cash and Cash Equivalents

Cash and cash equivalents decreased $2.7 million, from $47.0 million at December 31, 2021 to $44.3 million at March 31, 2022. The decrease in 2022 was primarily due to cash used for loan purchases of $39.0 million, which was partially offset by increase in deposits of $31.2 million. The Company’s liquidity position is strong with liquid assets rising to 10.4% of total assets at March 31, 2022.

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)	March 31,		December 31,		Increase / (Decrease)
	2022		2021		($)			(%)
U. S. Government agency and mortgage-backed securities	$	59,890	$	66,629	$	(6,739	)		-10.11	%
Corporate bonds		14,732		16,921		(2,189	)		-12.94	%
Subordinated notes		3,069		4,626		(1,557	)		-33.66	%
SBA loan pools		5,055		5,603		(548	)		-9.78	%
Municipal bonds		514		562		(48	)		-8.54	%
Total available-for-sale securities, at fair value		83,260		94,341		(11,081	)		-11.75	%

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

	$	87,710	$	98,791	$	(11,081	)		-11.22	%

Total investments decreased by $11.1 million, from $98.8 million at December 31, 2021 to $87.7 million at March 31, 2022. The decrease in 2022 was primarily attributable to the net unrealized loss of $9.6 million for the available-for-sale securities. There were no sales of available-for-sale securities in the three months ended March 31, 2022 and 2021.

Loans held for investment

The following table provides the composition of the Company’s loan held for investment portfolio as of March 31, 2022 and December 31, 2021:

(In thousands)	March 31, 2022						December 31, 2021
	Amount			%			Amount			%
Loan portfolio segment:
Commercial Real Estate	$	413,104			53.41	%	$	365,247			49.38	%
Residential Real Estate		146,221			18.91	%		158,591			21.45	%
Commercial and Industrial		128,515			16.62	%		122,810			16.61	%
Consumer and Other		71,219			9.21	%		59,364			8.03	%
Construction		12,223			1.58	%		21,781			2.95	%
Construction to permanent - CRE		2,057			0.27	%		11,695			1.58	%
Loans receivable, gross		773,339			100.00	%		739,488			100.00	%
Allowance for loan losses		(9,737	)					(9,905	)
Loans receivable, net	$	763,602					$	729,583

The Company’s gross loan portfolio increased $33.8 million, from $739.5 million at December 31, 2021 to $773.3 million at March 31, 2022. The increase in loans was primarily attributable to $42.6 million of new loan origination and $39.0 million in purchases of loans receivable which was partially offset by $46.9 million paydown of the loans.

SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of March 31, 2022 and December 31, 2021, SBA loans included in the commercial and industrial loan were $18.6 million and $17.4 million, respectively. SBA loans included in the commercial real estate loans were $10.0 million and $9.7 million, respectively.

At March 31, 2022, the net loan to deposit ratio was 98% and the net loan to total assets ratio was 78%. At December 31, 2021, these ratios were 97% and 77%, respectively.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses decreased $168,000 or 1.7% from $9.9 million at December 31, 2021 to $9.7 million at March 31, 2022. The decrease was primarily attributable to the recovering economy and reduction in the number of classified loans.

Based upon the overall assessment and evaluation of the loan portfolio at March 31, 2022, management believes $9.7 million in the allowance for loan and lease losses, which represented 1.3% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio, and no provision for loan losses was required for the three months ended March 31, 2022.

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

	Three Months Ended March 31,
(In thousands)	2022			2021

Balance at beginning of the period	$	9,905		$	10,584
Charge-offs:
Commercial Real Estate		-			(42	)
Residential Real Estate		-			(3	)
Commercial and Industrial		(68	)		(209	)
Consumer and Other		(47	)		(18	)
Construction		(70	)		-
Total charge-offs		(185	)		(272	)
Recoveries:
Residential Real Estate		1			-
Commercial and Industrial		15			12
Consumer and Other		1			102
Total recoveries		17			114

Net charge-offs		(168	)		(158	)
Provision charged to earnings		-			-
Balance at end of the period	$	9,737		$	10,426

Ratios:
Net charge-offs to average loans		(0.02	)%		(0.02	)%
Allowance for loan losses to total loans		1.26	%		1.54	%

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

(In thousands)	March 31, 2022					December 31, 2021
Allowance for loan and lease losses	Allowance for loan losses		Percent of loans in each category to total loans			Allowance for loan losses		Percent of loans in each category to total loans
Commercial Real Estate	$	4,889		53.41	%	$	5,063		49.38	%
Residential Real Estate		1,512		18.91	%		1,700		21.45	%
Commercial and Industrial		2,860		16.62	%		2,532		16.61	%
Consumer and Other		319		9.21	%		253		8.03	%
Construction		56		1.58	%		78		2.95	%
Construction to permanent - CRE		9		0.27	%		41		1.58	%
Unallocated		92		N/A			238		N/A
Total	$	9,737		100.00	%	$	9,905		100.00	%

Non-performing Assets

The following table presents non-performing assets as of March 31, 2022 and December 31, 2021:

(In thousands)
	March 31, 2022			December 31, 2021
Non-accruing loans:
Commercial Real Estate	$	15,643		$	15,704
Residential Real Estate		3,134			3,148
Commercial and Industrial		4,544			4,101
Consumer and Other		145			142
Total non-accruing loans		23,466			23,095

Loans past due over 90 days and still accruing		-			2
Total nonperforming assets	$	23,466		$	23,097

Nonperforming assets to total assets		2.41	%		2.44	%
Nonperforming loans to total loans, net		3.07	%		3.17	%

As of March 31, 2022, the $23.5 million of non-accrual loans was comprised of 31 borrowers, for which a specific reserve of $2.7 million was established. Three TDR loans of total $9.6 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.

As of December 31, 2021, the $23.1 million of non-accrual loans was comprised of 30 borrowers, for which a specific reserve of $2.3 million was established. Three TDR loans of total $9.7 million were included in the non-accrual loans as of December 31, 2021.

Loans held for sale

SBA loans held for sale totaled $5.8 million and $3.1 million as of March 31, 2022 and December 31, 2021, 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 March 31, 2022, consisted of $1.3 million SBA commercial real estate and $4.5 million SBA commercial and industrial loans, respectively. SBA loans held for sale at December 31, 2021, consisted entirely of $2.6 million SBA commercial and industrial loans and $562,000 SBA commercial real estate, respectively.

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 March 31, 2022.

The Company did not perform an interim goodwill test for the three months ended March 31, 2021 as no events occurred which would trigger an impairment assessment.

Deferred Taxes

Deferred tax assets were $13.8 million and $12.1 million at March 31, 2022 and December 31, 2021, respectively. Deferred tax assets consist predominately of net operating losses, capitalized costs and allowances for loan losses.

The effective tax rate for the three months ended March 31, 2022 was 28.0%, compared to the effective tax rate of 27.2% for the three months ended March 31, 2021. 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 state net operating loss carry-forwards that do not begin to expire until the year of 2030. As of December 31, 2021, after weighing both positive and negative evidence, Patriot fully reversed the valuation allowance of $1.9 million recorded in 2020. No valuation allowance was recorded as of March 31, 2022. The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that additional deferred tax assets will not be realized, the valuation allowance will be adjusted.

Deposits

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

(In thousands)					Increase/(Decrease)
	March 31, 2022		December 31, 2021		$			%
Non-interest bearing:
Non-interest bearing	$	120,835	$	127,420	$	(6,585	)		(5.17	)%
Prepaid DDA		116,990		99,293		17,697			17.82	%
Total non-interest bearing		237,825		226,713		11,112			4.90	%

Interest bearing:
Negotiable order of withdrawal accounts		42,272		34,741		7,531			21.68	%
Savings		105,871		109,744		(3,873	)		(3.53	)%
Money market		117,049		113,428		3,621			3.19	%
Money market - prepaid deposits		29,770		51,090		(21,320	)		(41.73	)%
Certificates of deposit, less than $250,000		158,625		142,246		16,379			11.51	%
Certificates of deposit, $250,000 or greater		53,513		53,584		(71	)		(0.13	)%
Brokered deposits		34,924		17,016		17,908			105.24	%
Total Interest bearing		542,024		521,849		20,175			3.87	%

Total Deposits	$	779,849	$	748,562	$	31,287			4.18	%

The Bank has improved its deposit and funding mix over the past year, while reducing its aggregate cost of funds.

Borrowings

Total borrowings were $120.7 million at both March 31, 2022 and December 31, 2021. 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 March 31, 2022 and December 31, 2021, outstanding advances from the FHLB-B both aggregated $90.0 million.

At March 31, 2022, advances of $90.0 million outstanding bore fixed rates of interest ranging from 2.4% to 4.23% with maturities ranging from 1.3 year to 2.5 years. The FHLB-B advances with fixed interest rates have a weighted average interest rate of 3.26%.

At March 31, 2022, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $233.1 million. Remaining unused borrowing capacity under this line totaled $65.9 million at March 31, 2022.

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B. For the three months ended March 31, 2022 and 2021, no funds had been borrowed under the line of credit.

Interest expense incurred for the three months ended March 31, 2022 and 2021 were $737,000 and $733,000, 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 March 31, 2022 and $5 million at December 31, 2021. 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 March 31, 2022 and December 31, 2021. No interest expense incurred for the three months ended March 31, 2022 and 2021.

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 March 31, 2022, Patriot had pledged eligible loans with a book value of $21.5 million and a collateral value of $15.6 million as collateral to support borrowing capacity at the FRBNY. There was no outstanding balance under the agreements at March 31, 2022.

Senior notes

On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum (the “Senior Notes”). On November 17, 2021, the original maturity date of the Senior Notes was extended from December 22, 2021 to June 30, 2022. Interest on the Senior Notes is payable semi-annually on September 22 and December 22 of each year beginning on June 22, 2017.

In connection with the issuance of the Senior Notes, the Company incurred $374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. At March 31, 2022 and December 31, 2021, the debt issuance costs were fully amortized.

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 months ended March 31, 2022 and 2021, the Company recognized interest expense of $210,000 and $229,000, respectively.

Subordinated notes

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

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

In connection with the issuance of the Subordinated Notes, the Company incurred $291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At March 31, 2022 and December 31, 2021, $182,000 and $189,000 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 months ended March 31, 2022 and 2021, the Company recognized interest expense of $163,000 and $163,000, 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% (4.11% at March 31, 2022) 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 March 31, 2022 and December 31, 2021, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $127,000 and $129,000, respectively, and accrued interest on the junior subordinated debentures was $5,000 and $4,000, respectively.

For the three months ended March 31, 2022 and 2021, the Company recognized interest expense of $71,000 and $70,000, 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 March 31, 2022 and December 31, 2021, the note had a balance outstanding of $740,000 and $791,000, 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 months ended March 31, 2022 and 2021, the Company recognized interest expense of $4,000 and $4,000, respectively.

Derivatives

As of March 31, 2022, 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 months ended March 31, 2022 and 2021, respectively.

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

Equity

Equity decreased $4.6 million, from $67.3 million at December 31, 2021 to $62.7 million at March 31, 2022, primarily due to $5.5 million of net unrealized loss for investment portfolio, which was partially offset by $800,000 of net income for the three months ended March 31, 2022.

Off-Balance Sheet Commitments

The Company’s off-balance sheet commitments, which primarily consist of commitments to lend, increased $24.1 million from $127.0 million at December 31, 2021 to $151.1 million at March 31, 2022.

Average Balances

The following tables present daily average balance sheets, interest income, interest expense and the corresponding yields earned and rates paid for the three months ended March 31, 2022 and 2021:

(In thousands)	Three Months ended March 31,
	2022								2021
	Average Balance			Interest		Yield			Average Balance			Interest		Yield
ASSETS
Interest Earning Assets:
Loans	$	748,256		$	7,664		4.15	%	$	702,539		$	7,743		4.47	%
Investments		103,325			635		2.46	%		61,811			344		2.23	%
Cash equivalents and other		39,728			21		0.21	%		66,080			24		0.15	%

Total interest earning assets		891,309			8,320		3.79	%		830,430			8,111		3.96	%

Cash and due from banks		12,940								2,874
Allowance for loan losses		(9,883	)							(10,652	)
OREO		-								1,569
Other assets		63,854								60,971

Total Assets	$	958,220							$	885,192

Liabilities
Interest bearing liabilities:
Deposits	$	528,896		$	409		0.31	%	$	529,567		$	785		0.60	%
Borrowings		95,234			737		3.14	%		90,778			733		3.27	%
Senior notes		12,000			210		7.00	%		11,935			229		7.67	%
Subordinated debt		17,933			234		5.29	%		17,895			234		5.30	%
Note Payable and other		757			4		2.14	%		958			4		1.69	%

Total interest bearing liabilities		654,820			1,594		0.99	%		651,133			1,985		1.24	%

Demand deposits		227,074								161,588
Other liabilities		9,901								8,587

Total Liabilities		891,795								821,308

Shareholders' equity		66,425								63,884

Total Liabilities and Shareholders' Equity	$	958,220							$	885,192

Net interest income				$	6,726							$	6,126

Interest margin							3.06	%							2.99	%
Interest spread							2.80	%							2.72	%

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

	Three Months ended March 31,
	2022 compared to 2021
(In thousands)	Increase/(Decrease)
	Volume			Rate			Total
Interest Earning Assets:
Loans	$	437		$	(516	)	$	(79	)
Investments		247			44			291
Cash equivalents and other		(9	)		6			(3	)

Total interest earning assets		675			(466	)		209

Interest bearing liabilities:
Deposit		(30	)		(346	)		(376	)
Borrowings		36			(32	)		4
Senior notes		-			(19	)		(19	)
Subordinated debt		1			(1	)		-
Note payable and other		-			-			-

Total interest bearing liabilities		7			(398	)		(391	)

Net interest income	$	668		$	(68	)	$	600

RESULTS OF OPERATIONS

For the quarter ended March 31, 2022, interest income and dividend income increased $209,000 or 2.6% as compared to the quarter ended March 31, 2021. Total interest expense decreased $391,000 or 19.7% as compared to the quarter ended March 31, 2021. Net interest income was $6.7 million for the quarter ended March 31, 2022, which increased $600,000 or 9.8% from $6.1 million for the quarter ended March 31, 2021, primarily due to increased average loan balances offset by reduction of average deposits balances and lower rates paid on deposits.

The net interest margin showed continued improvement, with an increase to 3.06% for the quarter ended March 31, 2022, compared with 2.99% for the first quarter of 2021. As economic activity continues to expand, loan balances are expected to grow, and the Bank expects further improvements in net interest income.

Provision for Loan Losses

Due to a stable economy and improvement in classified loans, no provision for loan losses was recorded for the three months ended March 31, 2022 and 2021.

Non-interest income

Non-interest income for the three months ended March 31, 2022 was $814,000, as compared to $442,000 for the three months ended March 31, 2021. The increase was primarily attributable to gains from sales of SBA loans totaled $208,000 along with higher non-interest income from the prepaid card program.

Non-interest expense

Non-interest expense for the three months ended March 31, 2022 increased to $6.4 million, as compared to $5.4 million for the three months ended March 31, 2021. The 2021 first quarter included an employee retention credit of $843,000, while no employee retention credit was recognized in the 2022 first quarter.

Provision for income taxes

The Company reported provision for income taxes of $311,000 for three months ended March 31, 2022, as compared to a provision for income taxes of $319,000 for the three months ended March 31, 2021.

Liquidity

The Company’s balance sheet liquidity to total assets ratio was 10.4% at March 31, 2022, compared to 11.4% at December 31, 2021. Liquidity including readily available off-balance sheet funding sources was 19.4% at March 31, 2022, compared to 21.0% at December 31, 2021.

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

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

Management manages its capital resources by seeking to maintain a capital structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses while effectively leveraging capital to enhance profitability and return to shareholders. Dividends have not been paid to shareholders since 2020, but may resume in future periods.

The primary source of liquidity at the Company is returns of capital from the Bank. These capital returns are subject to OCC approval and are needed periodically to provide funds needed to service debt payments at the Company.

Capital

In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. In September 2021, the Bank adopted the CBLR framework. The Bank’s Tier 1 leverage ratio as of March 31, 2022 and December 31, 2021 was 9.94% and 9.86%, 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 March 31, 2022							As of December 31, 2021
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)		Estimated Value		Change from Base ($)			Change from Base (%)
+200	$	155,940	$	(10,562	)		-6.3%	$	116,941	$	(15,137	)		-11.5%
+100		163,752		(2,750	)		-1.7%		126,152		(5,926	)		-4.5%
BASE		166,502		-			-		132,078		-			-
-100		165,913		(589	)		-0.4%		135,803		3,725			2.8%
-200		158,073		(8,429	)		-5.1%		134,277		2,199			1.7%

(In thousands)	Net Interest Income - Performance Summary
	March 31, 2022							December 31, 2021
Projected Interest Rate Scenario	Estimated Value		Change from Base ($)			Change from Base (%)		Estimated Value		Change from Base ($)		Change from Base (%)
+200	$	35,270	$	1,433			4.2%	$	31,521	$	45		0.1%
+100		34,635		798			2.4%		31,575		99		0.3%
BASE		33,837		-			-		31,476		-		-
-100		33,079		(758	)		-2.2%		31,587		111		0.4%
-200		32,884		(953	)		-2.8%		31,548		72		0.2%

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Patriot’s management, with the participation of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of its disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, Patriot’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, Patriot’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

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

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.

Item 5: Other Information

None.

ITEM 6: Exhibits

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

No.	Description

2.1**	Agreement and Plan of Merger, dated as of November 14, 2021, by and among Patriot National Bancorp, Inc., American Challenger Development Corp. and Next Special, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 16, 2021).

2.2	Amendment No. 1 to the Merger Agreement, dated as of January 28, 2022, by and among Patriot National Bancorp, Inc., Next Special, Inc., and American Challenger Development Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 3, 2022).

2.3	Amendment No. 2 to the Merger Agreement, dated as of February 28, 2022, by and among Patriot National Bancorp, Inc., Next Special, Inc., and American Challenger Development Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 1, 2022).

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: May 13, 2022
	Patriot National Bancorp, Inc. (Registrant)


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