What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-24 compared with 2021-03-30 · 1696 added, 663 removed, 1392 unchanged (63% of the section changed)

1 unchanged sentence

The Financial Statements required by this item are presented in the order shown below:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2020

Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 31, 2020

Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended December 31, 2020

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2020

Consolidated Supplemental Statements of Non-Cash Activity for each of the years in the three-year period ended December 31, 2020

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2021

Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 31, 2021

Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended December 31, 2021

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2021

Consolidated Supplemental Statements of Non-Cash Activity for each of the years in the three-year period ended December 31, 2021

Notes to Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of Patriot National Bancorp, Inc.

and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements).

and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders’

equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

3 unchanged sentences

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

8 unchanged sentences

Qualitative Adjustments to the Allowance for Loan and Lease Losses

As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for loan and lease losses (allowance) totaled $10.6 million as of December 31, 2020.

As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for loan and lease losses (allowance) totaled $9.9 million as of December 31, 2021.

The recorded allowance was established based on an allowance of $7.6 million related to loans collectively evaluated for impairment and on an allowance of $2.3 million relating to loans individually evaluated for impairment as of December 31, 2021.

3 unchanged sentences

The Company has determined qualitative factors to include:

1) changes in lending policies and procedures;

2) changes in international, national, regional, and local economic and business conditions and developments;

1) changes in lending policies and procedures including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

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

3) changes in the nature and volume of the portfolio and in the terms of loans;

1 unchanged sentence

5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans;

6) changes in the quality of the Company’s loan review system;

7) changes in the value of underlying collateral for collateral-dependent loans;

8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

9) the effect of other external factors;

and 10) an additional factor allocated to special mention and substandard rated loans.

In addition and as a response to the COVID-19 pandemic, the Company also applied a qualitative factor related to this event, which is designed to absorb probable incurred loan losses that are negatively affected by the COVID-19 pandemic.

and 9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in its current loan portfolio.

Evaluation of the allowance, in particular the qualitative factor adjustments, requires considerable judgment in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.

2 unchanged sentences

We tested the completeness and accuracy of data used by management in determining the qualitative factor adjustments by agreeing them to their appropriate internal or external sources.

We evaluated the reasonableness of the directional consistency of changes in qualitative factor adjustments as well as the overall magnitude of management’s qualitative factor adjustments applied to each pool based on the data used by management.

Goodwill Impairment Assessment

As described in Notes 1 and 8 of the consolidated financial statements, the Company’s goodwill balance totaled $1.1 million as of December 31, 2020.

As described in Notes 1 and 8 of the consolidated financial statements, the Company’s goodwill balance totaled $1.1 million as of December 31, 2021.

The Company performs a goodwill impairment test annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified.

Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used.

We identified the impairment assessment of goodwill as a critical audit matter due to the high degree of auditor judgement and subjectivity in order to evaluate the fair value of the reporting unit due to the judgements made by management in the estimation of the Company’s reporting unit fair value, including those related to future cash flows, the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate.

In addition, the increased audit effort involved the use of internal professionals with specialized skill and knowledge in the field of business valuation.

Our audit procedures related to goodwill impairment assessment included the following for the impairment test performed for the year:

We evaluated management’s process for developing the fair value estimates of the reporting unit including an assessment of the appropriateness of the valuation techniques used.

We evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the Company, the Company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit.

We evaluated management’s process for developing the fair value estimates of the reporting unit, including an assessment of the appropriateness of the valuation techniques used.

We used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology.

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Realizability of the Deferred Tax Assets

As discussed in Notes 1 and 14 to the consolidated financial statements, the Company has recorded $11.3 million in deferred tax assets, net of a $1.9 million state net operating loss valuation allowance, as of December 31, 2020.

As discussed in Notes 1 and 14 to the consolidated financial statements, the Company has recorded $12.1 million in deferred tax assets and released a valuation allowance of $1.9 million as of and for the period ending December 31, 2021.

Management applied significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future.

In evaluating the need, or continued need, for a valuation allowance, management considers the weighting of the positive and negative evidence, which included, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, forecasts of future profitability, the duration of statutory carryforward periods, as well as the Company’s intent and ability to implement tax strategies.

We identified the realizability of deferred tax assets as a critical audit matter because of the significant assumptions and judgments use by management in determining the amount of deferred tax assets that were more-likely-than-not to be realized in the future, which in turn led to a high degree of auditor judgment and subjectivity in applying procedures relating to assessing the positive and negative evidence considered by management.

In evaluating the need or lack of need, for a valuation allowance, management considered the weighting of the positive and negative evidence, which included, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, forecasts of future profitability, the duration of statutory carryforward periods, as well as the Company’s intent and ability to implement tax strategies.

We identified the realizability of deferred tax assets as a critical audit matter because of the significant assumptions and judgments used by management in determining the amount of deferred tax assets that were more-likely-than-not to be realized in the future, which in turn led to a high degree of auditor judgment and subjectivity in applying procedures relating to assessing the positive and negative evidence considered by management.

Additionally, there was significant audit effort necessary in evaluating the weighting of the positive and negative evidence, including the use of internal professionals with specialized skill and knowledge in the field of income tax accounting.

Our audit procedures related to the realizability of the Company’s deferred tax assets included the following, among others:

We obtained an understanding and evaluated management’s process over the assessment of the realizability of deferred tax assets, including how it incorporates positive and negative evidence into its evaluation.

We evaluated the positive and negative evidence in assessing whether the deferred tax assets are more-likely-than-not to be realized in the future, including evaluating the trends of both the historical financial results and the projected sources of taxable income, as well as other qualitative factors.

With the assistance of our internal tax professionals, we evaluated the Company’s application of income tax accounting guidance and regulations used in its realizability analysis.

We evaluated the Company’s consideration of cumulative pre-tax losses and the net deferred tax position in assessing whether deferred tax assets were more-than-not to be realized in the future, which included:

Our audit procedures related to the realizability of the Company’s deferred tax assets included the following, among others:

With the assistance of our internal tax professionals, we evaluated the Company’s application of income tax accounting guidance and regulations used in its realizability analysis.

We evaluated the Company’s consideration of cumulative pre-tax losses and the deferred tax position in assessing whether deferred tax assets were more-likely-than-not to be realized in the future, which included:

Testing the completeness and accuracy of the data used by management in their analyses.

Evaluating the reasonableness of management’s evaluation of whether tax planning strategies were prudent and feasible.

Evaluating management’s intent and ability to implement tax strategies in order to realize state net operating losses before expiration.

Evaluating the reasonableness of management’s evaluation of whether tax planning strategies were prudent and feasible.

Evaluating management’s intent and ability to implement tax strategies in order to realize state net operating losses before expiration.

/s/ RSM US LLP

We have served as the Company’s auditor since 2017.

New Haven, Connecticut

We have served as the Company’s auditor since 2017.

Hartford, Connecticut

March 24, 2022

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Noninterest bearing deposits and cash

$ 3,264  

$ 3,006  

Interest bearing deposits

43,781  

31,630  

Total cash and cash equivalents

47,045  

34,636  

Investment securities:

Available-for-sale securities, at fair value

94,341  

49,262  

Other investments, at cost

Total investment securities

98,791  

53,712  

Federal Reserve Bank stock, at cost

2 unchanged sentences

$ 9,905 and 2020:

729,583  

719,596  

Loans held for sale

1 unchanged sentence

Premises and equipment, net

31,500  

33,423  

Other real estate owned

Deferred tax asset, net

Deferred tax asset

12,146  

11,496  

Core deposit intangible, net

12,035  

$ 948,481  

$ 880,729  

Noninterest bearing deposits

$ 226,713  

$ 158,676  

Interest bearing deposits

521,849  

526,980  

Total deposits

748,562  

685,656  

Federal Home Loan Bank and correspondent bank borrowings

90,000  

Senior notes, net

12,000  

11,927  

Subordinated debt, net

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Accrued expenses and other liabilities

10,753  

Total liabilities

881,137  

817,510  

Commitments and Contingencies

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3,943,572 shares outstanding;

106,479  

106,329  

Accumulated deficit

( 37,498 )  

Accumulated other comprehensive loss

( 1,637 )  

Total shareholders' equity

67,344  

63,219  

Total liabilities and shareholders' equity

$ 948,481  

$ 880,729  

See Accompanying Notes to Consolidated Financial Statements.

6 unchanged sentences

Interest and fees on loans

$ 30,115  

$ 35,835  

$ 40,568  

Interest on investment securities

2 unchanged sentences

Total interest and dividend income

32,351  

37,903  

43,644  

Interest Expense

Interest on deposits

13,985  

Interest on Federal Home Loan Bank borrowings

3 unchanged sentences

Total interest expense

13,750  

18,218  

Net interest income

Provision for Loan Losses

Net interest income after provision for loan losses

25,261  

24,153  

25,426  

(Credit) provision for loan losses

( 500 )  

Net interest income after (credit) provision for loan losses

25,761  

21,983  

20,455  

Non-interest Income

3 unchanged sentences

Rental income

Gain on sale of investment securities

Total non-interest income

1 unchanged sentence

Salaries and benefits

11,089  

14,323  

13,681  

Occupancy and equipment expense

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Total non-interest expense

(Loss) income before income taxes

(Benefit) provision for income taxes

Net (loss) income

Basic (loss) earnings per share

Diluted (loss) earnings per share

25,171  

28,118  

26,654  

Income (loss) before income taxes

( 4,156 )  

Benefit for income taxes

( 81 )  

( 337 )  

Net income (loss)

$ 5,094  

$ ( 3,819 )  

Basic earnings (loss) per share

$ 1.29  

$ ( 0.97 )  

Diluted earnings (loss) per share

$ 1.29  

$ ( 0.97 )  

See Accompanying Notes to Consolidated Financial Statements.

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Year Ended December 31,

Net (loss) income

Net income (loss)

$ 5,094  

$ ( 3,819 )  

Other comprehensive (loss) income

Unrealized holding (loss) gain on securities

( 1,432 )  

( 155 )  

Income tax effect

Reclassification for realized gain on sale of investment securities

( 76 )  

Income tax effect

( 1,119 )  

( 115 )  

Derivative instruments:

Unrealized holding gain on cash flow hedge

Income tax effect

( 39 )  

Reclassification adjustement for net gain included in net income

( 149 )  

Income tax effect

Total other comprehensive (loss) income

Comprehensive (loss) income

( 1,119 )  

( 115 )  

Comprehensive income (loss)

$ 3,975  

$ ( 3,934 )  

See Accompanying Notes to Consolidated Financial Statements.

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’

(In thousands, except shares)

Accumulated Other

Comprehensive

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Balance at January 1, 2019

Comprehensive income:

Unrealized holding loss on available-for-sale securities, net of tax

Total comprehensive income

3,910,674  

$ 105,956  

$ ( 35,790 )  

$ ( 826 )  

$ 69,340  

Comprehensive (loss) income:

( 2,817 )  

Unrealized holding gain on available-for-sale securities, net of tax

Total comprehensive (loss) income

( 2,817 )  

Common stock dividends

( 155 )  

Share-based compensation expense

Transition adjustment related to adoption of ASC 842, net of tax

( 11 )  

Vesting of restricted stock

19,995  

Balance at December 31, 2019

Comprehensive income:

Unrealized holding gain on available-for-sale securities, net of tax

Total comprehensive income

Common stock dividends

3,930,669  

$ 106,170  

$ ( 38,773 )  

$ ( 403 )  

$ 66,994  

Comprehensive loss:

( 3,819 )  

Unrealized holding loss on available-for-sale securities, net of tax

( 115 )  

Total comprehensive loss

( 3,819 )  

( 115 )  

Share-based compensation expense

Transition adjustment related to adoption of ASC 842, net of tax

Vesting of restricted stock

12,903  

Balance at December 31, 2020

Comprehensive income:

Unrealized holding gain on available-for-sale securities, net of tax

Total comprehensive income

3,943,572  

$ 106,329  

$ ( 42,592 )  

$ ( 518 )  

$ 63,219  

Comprehensive income (loss):

Unrealized holding loss on available-for-sale securities, net of tax

( 1,119 )  

Total comprehensive income (loss)

( 1,119 )  

Share-based compensation expense

Vesting of restricted stock

12,920  

Balance at December 31, 2021

3,956,492  

$ 106,479  

$ ( 37,498 )  

$ ( 1,637 )  

$ 67,344  

See Accompanying Notes to Consolidated Financial Statements.

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Cash Flows from Operating Activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Amortization (accretion) of investment premiums (discounts), net

Amortization and accretion of purchase loan premiums and discounts

Net income (loss)

$ 5,094  

$ ( 3,819 )  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Amortization and accretion of investment premiums and discounts, net

Amortization and accretion of purchase loan premiums and discounts, net

Amortization of debt issuance costs

3 unchanged sentences

Purchase price adjustment expense related to acquisition activity

Provision for loan losses

(Credit) provision for loan losses

( 500 )  

Depreciation and amortization

Gain on sales of available-for-sale securities

( 76 )  

Gain on sale of premises and equipment

( 550 )  

Share-based compensation

Increase in deferred income taxes

Increase in deferred income taxes, net

( 261 )  

( 323 )  

Originations of SBA loans held for sale

( 16,574 )  

( 2,049 )  

Proceeds from sale of SBA loans held for sale

16,267  

12,160  

12,556  

Gains on sale of SBA loans held for sale, net

Net loss on sale and write-down of other real estate owned

( 1,886 )  

( 566 )  

Net (gain) loss on sale and write-down of other real estate owned

Changes in assets and liabilities:

(Increase) decrease in accrued interest and dividends receivable

Decrease (increase) in accrued interest and dividends receivable

( 3,017 )  

Increase in other assets

(Decrease) increase in accrued expenses and other liabilities

( 2,124 )  

( 331 )  

Increase (decrease) in accrued expenses and other liabilities

( 1,732 )  

Net cash provided by (used in) operating activities

1 unchanged sentence

Proceeds from maturity or sales on available-for-sale securities

77,690  

Principal repayments on available-for-sale securities

11,667  

Purchases of available-for-sale securities

Purchases of other investments

( 136,135 )  

( 11,248 )  

Proceeds from maturity of other investments

Redemption (purchases) of Federal Reserve Bank stock

(Purchases) redemptions of Federal Home Loan Bank stock

(Purchases) redemptions of Federal Reserve Bank stock

( 60 )  

Redemptions (purchases) of Federal Home Loan Bank stock

( 26 )  

Decrease in originated loans receivable, net

77,710  

116,635  

18,728  

Purchases of loans receivable

( 89,338 )  

( 32,785 )  

Purchases of premises and equipment

( 430 )  

( 70 )  

Proceeds from sale of premises and equipment

Proceeds from sale of other real estate owned

Refund of (payment for) escrow deposit related to acquisition activity

Net cash used in business combination

Net cash provided by (used in) investing activities

Refund of escrow deposit related to acquisition activity

Net cash (used in) provided by investing activities

( 55,205 )  

82,924  

Cash Flows from Financing Activities:

(Decrease) increase in deposits, net

Increase (decrease) in deposits, net

62,906  

( 133,877 )  

26,254  

Purchases of deposits

49,998  

Repayments of FHLB borrowings

Proceeds from issuance of subordinated note, net

( 10,000 )  

Principal repayments of note payable

Decrease in advances from borrowers for taxes and insurance

( 203 )  

( 199 )  

(Increase) decrease in advances from borrowers for taxes and insurance

( 2,685 )  

Dividends paid on common stock

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash provided by (used in) financing activities

60,018  

( 93,973 )  

26,659  

Net increase (decrease) in cash and cash equivalents

12,409  

( 4,768 )  

Cash and cash equivalents at beginning of period

34,636  

39,404  

66,437  

Cash and cash equivalents at end of period

$ 47,045  

$ 34,636  

$ 39,404  

PATRIOT NATIONAL BANCORP, INC.

5 unchanged sentences

Cash paid for interest

Cash (refund) paid for income taxes, net

Cash paid (refund) for income taxes, net

Non-cash transactions:

Purchase of premises and equipment

Increase in accrued expense and other liabilities

Increase in premises and equipment

Reclass of premises and equipment to implementation cost

Increase in accrued expense and other liabilities

Purchases of available-for-sale securities

7 unchanged sentences

Capitalized servicing assets

Increase in interest rate swaps assets

Increase in interest rate swaps liabilities

(Decrease) increase in interest rate swaps assets

Decrease (increase) in interest rate swaps liabilities

Deferred cost related to capital raise

Accrued expense related to capital raise

Business Combination Non-Cash Disclosures:

Assets acquired in business combination (net of cash received)

Liabilities acquired in business combination

Contingent liability assumed in business combination

8 unchanged sentences

Patriot National Bancorp, Inc.

(the "Company"), a Connecticut corporation, is a bank holding company that was organized in 1999.

(the "Company" or "PNBK"), a Connecticut corporation, is a bank holding company that was organized in 1999.

Patriot Bank, N.A.

(the "Bank") (collectively, “Patriot”) is a wholly owned subsidiary of the Company.

The Bank is a nationally chartered commercial bank whose deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.

1 unchanged sentence

The Bank's customers are concentrated in Fairfield and New Haven Counties in Connecticut and Westchester County in New York.

On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company, and on March 26, 2003, the first series of trust preferred securities were issued.

In accordance with accounting principles generally accepted in the United States of America (“US GAAP”), the Trust is not included in the Company’s consolidated financial statements.

On May 10, 2018, the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”).

In accordance with accounting principles generally accepted in the United States of America (“US GAAP”), the Trust is not included in the Company’s consolidated financial statements.

On May 10, 2018, the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”).

The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.

The results of Prime Bank’s operations are included in the Company’s consolidated financial statements from the date of acquisition.

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 Patriot’s more significant accounting policies and estimates, in that they are critical to the presentation of Patriot’s financial condition and results of operations.

As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of Patriot’s consolidated financial statements.

COVID-19 Impact:

In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic.

The COVID-19 pandemic has negatively impacted the global and U.S.

Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue.

The consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses.

The assumptions and estimates used in the financial statements were impacted by the COVID-19 pandemic.

The COVID-19 pandemic did have an adverse impact on our earnings and resulted in an increase to the allowance for loan losses when compared to the same period in 2019.

We are unable to estimate the full impact of COVID-19 on our business and operations at this time.

The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened.

The pandemic could cause us to experience higher credit losses in our loan portfolio, impairment of our goodwill, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic.

This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The Fed has taken, and continues to take, steps to support markets and the economy.

Stimulus from Washington and the federal government, in spite of political hurdles and a change in presidential administrations, has also provided meaningful support.

The new Biden administration has proposed another $1.9 trillion stimulus package that is currently making its way through Congress.

The market expects the Fed Funds rate to remain at the effective lower bound near zero for an extended period of time.

Henceforth, the Fed appears to be willing to let inflation run above the 2% target level, even when unemployment is very low, before removing accommodation.

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in ASC 310-40 for certain loan modifications.

Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019.

The Company has assessed which loans qualify for this treatment.

The CARES Act also permits the Bank to continue to accrue interest on loans that have received deferral treatment as a result of the pandemic.

In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.

On August 3, 2020, the Federal Financial Institutions Council issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period.

The joint statement specifically encourages financial institutions to provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term.

These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower.

Patriot is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers.

As they concern matters that are inherently uncertain, these estimates require management to make subjective and complex judgments in the preparation of Patriot’s consolidated financial statements.

Significant Changes in the Fourth Quarter of 2021:

During the fourth quarter of 2021, Patriot announced a merger transaction with American Challenger Development Corp.

(“American Challenger”).

As a result of the proposed merger transaction, material, non-recurring acquisition-related expenses of $ 1.9  million were incurred for the quarter ended December 31, 2021.

The increase in project expenses had the effect of reducing pre-tax income for the fourth quarter of 2021 from $ 2.5 million to $ 633,000 .

In addition, the Company fully reversed the valuation allowance of $ 1.9 million recorded as of December 31, 2020, which had effect of reducing the provision for income tax of $ 1.9 million.

The net income was increased from $ 1.8  million to $ 1.9  million for the fourth quarter of 2021.

Summary of Significant Accounting Policies:

7 unchanged sentences

Patriot has not experienced any losses from such concentrations.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Federal Reserve Bank and Federal Home Loan Bank stock

The Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLB-B”), as collateral, in an amount equal to a percentage of its outstanding mortgage loans and loans secured by residential properties, including mortgage-backed securities.

Additionally, the Bank is required to maintain an investment in the capital stock of the Federal Reserve Bank (“FRB”), as collateral, in an amount equal to one percent of six percent of the Bank’s total equity capital as per its latest Report of Condition (“Call Report”) filed with the Federal Deposit Insurance Corporation.

The FRB requires that one -half of the investment in its stock be funded currently, with the remaining amount subject to call when deemed necessary by the FRB Board of Governors.

1 unchanged sentence

The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost, and evaluated for impairment in accordance with relevant accounting guidance.

In accordance with this guidance, the stocks’ values are determined by the ultimate recoverability of the par value rather than by recognizing temporary declines.

In accordance with this guidance, the stocks’

values are determined by the ultimate recoverability of the par value rather than by recognizing temporary declines.

The determination of whether the par value will ultimately be recovered is influenced by criteria such as:

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and (d) the regulatory capital ratios and liquidity position of the FHLB-B or FRB, as applicable.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Included in the Bank’s investment portfolio are shares in the FHLB-B and FRB of $7.3 million and $7.4 million as of December 31, 2020 and 2019, respectively.

Management has evaluated its investment in the capital stock of the FHLB-B and FRB for impairment, based on the aforementioned criteria, and has determined that as of December 31, 2020 and 2019 there is no impairment of its investment in either the FHLB-B or FRB.

Included in the Bank’s investment portfolio are shares in the FHLB-B and FRB of $ 7.0  million and $ 7.3  million as of December 

2021 and 2020, respectively.

Management has evaluated its investment in the capital stock of the FHLB-B and FRB for impairment, based on the aforementioned criteria, and has determined that as of December 

2021 and 2020 there is no impairment of its investment in either the FHLB-B or FRB.

Investment Securities

Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.

Debt securities, if any, that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost.

“Trading” securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings.

Securities classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

Debt securities, if any, that management has the positive intent and ability to hold to maturity are classified as “held to maturity”

and are recorded at amortized cost.

“Trading”

securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings.

Securities classified as “available-for-sale”

are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

Purchase premiums and discounts are recognized in interest income using the interest method of accounting, in order to achieve a constant effective yield over the contractual term of the securities.

Patriot conducts a quarterly review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is an other-than-temporary impairment (“OTTI”).

Our evaluation of OTTI considers the duration and severity of the impairment, our intent to hold the securities, whether or not we will be required to sell the securities, and our assessments of the reason for the decline in value and the likelihood of a near-term recovery.

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Realized gains and losses on the sale of securities are determined using the specific identification method, recorded on the trade date, and reported in non-interest income for the period.

At December 31, 2020 and 2019, the Bank’s investment portfolio includes a $4.5 million investment in the Solomon Hess SBA Loan Fund (“SBA Fund”).

At December 

2021 and 2020, the Bank’s investment portfolio includes a $ 4.5 million investment in the Solomon Hess SBA Loan Fund (“SBA Fund”).

The Bank uses this investment to satisfy its Community Reinvestment Act lending requirements.

At December 31, 2020 and 2019, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value.

At December 

2021 and 2020, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Loans receivable

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Past due status is based on the contractual terms of the loan.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Accrued uncollected interest income on loans that are placed on non-accrual status or have been charged off is reversed against interest income.

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The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status.

Patriot’s real estate loans are collateralized by real estate located principally in Fairfield and New Haven Counties in Connecticut and Westchester County, New York.

Accordingly, the ultimate collectability of a substantial portion of Patriot’s loan portfolio is susceptible to regional real estate market conditions.

A loan is considered impaired when, based on current information and events, it is probable that Patriot will be unable to collect the scheduled payments of principal or interest when due, according to the loan’s contractual terms.

Patriot’s real estate loans are collateralized by real estate located principally in Fairfield and New Haven Counties in Connecticut, and Westchester County and New York City in New York.

Accordingly, the ultimate collectability of a substantial portion of Patriot’s loan portfolio is susceptible to regional real estate market conditions.

Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration the circumstances contributing to the borrower’s loan performance issues, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of the shortfall in relation to the principal and interest owed.

For commercial and real estate loans, impairment is measured for each individual loan based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or, for collateral dependent loans, the fair value of the collateral less applicable selling costs.

Impaired loans also include loans modified in troubled debt restructurings (“TDR”), where concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest rate on the loan, payment or maturity date extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

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Accordingly, Patriot does not separately identify individual consumer installment loans for impairment, unless such loans are individually evaluated for impairment due to financial difficulties of the borrower.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

In response to the COVID- 19 pandemic, financial institutions were provided relief from certain TDR accounting and disclosure requirements for qualifying loan modifications through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Specifically, Section 4013 of the CARES Act, which was extended by the Consolidated Appropriations Act, 2021, provided temporary relief from certain GAAP requirements for loan modifications related to COVID- 19.

In addition, a group of banking regulatory agencies issued a revised Interagency Statement that offered practical expedients for evaluating whether COVID- 19 loan modifications were TDRs.

Acquired Loans

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Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Acquired Impaired Loans- Purchase Credit Impaired “PCI” Loans

Acquired loans that exhibit evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as PCI loans under Accounting Standards Codification (“ASC”) 310-30.

Acquired Impaired Loans- Purchase Credit Impaired “PCI”

The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is accreted into interest income over the remaining life of the loans using the interest method.

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The difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan and includes both credit and interest rate considerations.

Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life in accordance with ASC 310-20.

Fair value adjustments for revolving loans are accreted (or amortized) using a straight-line method.

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Subsequent to the purchase date, the methods used to estimate the allowance for loan and lease losses for the acquired non-impaired loans are consistent with the policy for allowance for loan and lease losses described below.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Allowance for loan and lease losses

The allowance for loan and lease losses (“ALLL”) is regularly evaluated by management, based upon the nature and volume of the loan portfolio, periodic review of loan collectability using historical experience rates, adverse situations potentially affecting individual borrowers’ ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions on overall segments of the loan portfolio.

ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions on overall segments of the loan portfolio.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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The model is comprised of six distinct loan portfolio segments:

Commercial Real Estate, Residential Real Estate, Commercial and Industrial, Consumer and Other, Construction, and Construction to Permanent – Commercial Real Estate (“Construction to permanent – CRE”).

Commercial Real Estate, Residential Real Estate, Commercial and Industrial, Consumer and Other, Construction, and Construction to Permanent –

Commercial Real Estate (“Construction to permanent –

CRE”).

Management monitors a distinct set of risk characteristics for each loan segment.

Additionally, management assesses and monitors risk and performance on a disaggregated basis, including an internal risk rating system for loans included in the Commercial loan segment and analyzing the type of collateral, lien position, and loan-to-value (i.e., LTV) ratio for loans included in the Consumer loan segment.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Management’s ALLL process first applies historical loss rates to pools of loans with homogeneous risk characteristics.

Loss rates are calculated by historical charge-off rates that have occurred within each pool of homogenous loans over its loss emergence period (“LEP”).

Management’s ALLL process first applies historical loss rates to pools of loans with homogeneous risk characteristics.

Loss rates are calculated by historical charge-off rates that have occurred within each pool of homogenous loans over its loss emergence period (“LEP”).

The LEP is an estimate of the average amount of time from the point at which a loan loss is incurred to the point in time at which the loan loss is confirmed.

In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, when adverse conditions are not generally applicable across a class of borrowers and individual customers are better able to manage deteriorating conditions.

Another key assumption is the look-back period (“LBP”), which represents the historical data period utilized to calculate loss rates.

A three -year LBP is used for each loan segment, in order to capture relevant historical data believed to reflect losses inherent in the loan segment portfolios.

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Evaluation of the ALLL requires considerable judgment, in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.

Qualitative adjustments are aggregated into the eleven categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators.

In 2021, the Company refined its methodology in determining the qualitative factors within the allowance for loan losses.

Qualitative adjustments are aggregated into nine categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators.

Within the statement, the following qualitative factors are considered:

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

An additional risk factor for special mention loans and substandard loans, which is designed to approximate the additional risk of these assets and is based on industry data;

An additional risk factor related to COVID-19 pandemic, which is designed to absorb probable incurred loan losses that are negatively affected by the COVID-19 pandemic.

This factor is derived from an analysis of total loans currently deferred under the COVID-19 deferral policies and their related collateral position.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

The additional risk factor for special mention loans and substandard loans and the risk factor related to COVID- 19 pandemic were eliminated.

The separate adjustment for Special Mention and Substandard loans within each pool is now incorporated into the factor for “Changes in the volume and loss severity of past due loans, the volume of non-accrual, and the volume and loss severity of adversely classified or graded loans”, which now includes adjustments for the percentage of Special Mention and Substandard loans in each portfolio segment.

The COVID- 19 factor was eliminated since, after more than a year into the pandemic, we consider that the impact on both the economy and our portfolio is now manifest in economic data (GDP, unemployment, retail sales, manufacturing output, etc.) and in our portfolio, as reflected by the volume of Special Mention and Substandard loans that have resulted from deterioration in borrower performance as a direct result of the pandemic.

The refining in methodology resulted in better alignment of the credit characteristics of the various risk grades and loan types with the calculated allowance, and did not have any impact on the provision for the year ended December 31, 2021.

Patriot provides for loan losses by consistently applying the documented ALLL methodology.

Loan losses are charged to the allowance as incurred and recoveries are credited to the ALLL.

Additions to the ALLL are charged against income, based on various factors which, in management’s judgment, deserve current recognition in estimating probable losses.

Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible.

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Patriot regularly reviews the loan portfolio and makes adjustments for loan losses, in order to maintain the allowance for loan and lease losses in accordance with US GAAP.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

The allowance for loan and lease losses consists primarily of the following three components:

Allowances are established for impaired loans (generally defined by Patriot as non-accrual loans and troubled debt restructured loans).

The amount of impairment provided as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the loan’s original effective interest rate or the underlying collateral value, less estimated costs to sell, if the loan is collateral dependent, and the carrying value of the loan.

Allowances are established for impaired loans (generally defined by Patriot as non-accrual loans, troubled debt restructured loans, and loans that were previously classified as troubled debt restructurings but have been upgraded).

Impaired loans that have no discounted cash flow or collateral deficiency, if applicable, are not considered for general valuation allowances described below.

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired.

The portfolio is grouped into homogeneous risk characteristics, primarily loan type and, if collateral dependent, LTV ratio.

The portfolio is grouped into homogeneous risk characteristics, primarily loan type.

Management applies an estimated loss rate to each pool of homogeneous loans.

The loss rates applied are based on Patriot’s three-year loss LBP adjusted, as appropriate, for the factors discussed above.

The loss rates applied are based on Patriot’s three -year loss LBP adjusted, as appropriate, for the factors discussed above.

The evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

Actual loan losses may be more or less than the ALLL management established which could have an effect on Patriot’s financial results.

In addition, a risk rating system is utilized to evaluate the general component of the ALLL.

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Risk ratings are assigned based upon the recommendation of the credit analyst and the originating loan officer.

The risk ratings are reviewed and confirmed by the management loan committee of the Board of Directors (the “Loan Committee”).

Risk ratings are established at the initiation of transactions and are reviewed and changed, when necessary, during the life of the loan.

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The unallocated component of the ALLL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies applied to estimating specific and general losses in the loan portfolio.

In underwriting a loan secured by real property, a property appraisal is required to be performed by an independent licensed appraiser that has been approved by Patriot’s Board of Directors.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

In underwriting a loan secured by real property, a property appraisal is required to be performed by an independent licensed appraiser that has been approved by Patriot’s Board of Directors.

Appraisals are subject to review by independent third parties hired by Patriot.

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These appraisals may be more limited than those prepared for the underwriting of a new loan.

Additionally, Management reviews and inspects properties before disbursing funds, during the term of a construction loan.

Additionally, the Bank hires an outside engineering consultant perform the inspection on properties and Management reviews and inspection reports before disbursing funds, during the term of a construction loan.

The Bank further segmented its loan pools by Pass, Special Mention, and Substandard risk ratings and assigned additional risk premiums to each group.

The qualitative and economic factors for all of the pools and subsegments were also evaluated, with Pass loans receiving adjustments to reflect their credit profile relative to the non-impaired criticized assets.

These adjustments generally flow through the qualitative factors addressing severity of past due loans and other similar conditions and the nature and volume of the portfolio and terms of the loans.

The Bank’s leveraged lending portfolio was evaluated relative to the rest of the Commercial & Industrial (“C&I”) pool, and an additional risk premium was assigned to those loans in aggregate, and is reflected in the commercial and industrial category in the ALLL calculation.

These loans were isolated due their risk parameters and profile, including higher leverage than the rest of the Bank’s C&I portfolio.

The Bank’s SBA loan portfolio consists of the unguaranteed portion of certain C&I and Owner-Occupied CRE loans.

An additional risk premium was assigned to those loans due to their risk parameters and profile, including higher historical loss rates (based on historical SBA data) than the rest of the C&I and Owner-Occupied CRE portfolio.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

In 2020, the Company changed its methodology to estimate its allowance for loan losses.

Management has added a qualitative risk factor adjustment related to COVID-19 pandemic to absorb probable incurred loan losses that are inherent in the pooled loans portfolio.

The change in methodology resulted in better alignment of the credit characteristics of the various risk grades and loan types with the calculated allowance.

The provision of $2.2 million in 2020 incorporated these changes.

Acquired loans are marked to fair value on the date of acquisition and are evaluated on a quarterly basis to ensure the necessary purchase accounting updates are made in parallel with the allowance for loan loss calculation.

Acquired loans that have been renewed since acquisition are included in the allowance for loan loss calculation since these loans have been underwritten to the Bank’s guidelines.

Acquired loans that have not been renewed since acquisition, or that have a PCI mark, are excluded from the allowance for loan loss calculation.

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Loans Held for Sale

Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans and are reflected at the lower of aggregate cost or market value.

Patriot originates loans to customers under a SBA program that historically has provided for SBA guarantees of 75 percent of the principal balance of each loan.

Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value.

Patriot originates loans to customers under the SBA program that historically has provided for SBA guarantees of 75% of the principal balance of each loan.

As a result of the pandemic, in 2021, the SBA increased the guaranteed percentage to 90% during one of the rounds of stimulus.

As of October 1, 2021, the guaranteed percentage reverted back to 75% of the loan.

Patriot generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio.

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All criteria for sale accounting must be met in order for the loan sales to occur;

see details under the “Transfers of Financial Assets” heading above.

see details under the “Transfers of Financial Assets”

heading above.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Servicing Assets

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Assets acquired through, loan foreclosure or in lieu of, are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.

In addition, when Patriot acquires other real estate owned (“OREO”), it obtains a current appraisal to substantiate the net carrying value of the asset.

Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.

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Gains or losses are included in non-interest expenses upon disposal.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Write-downs of foreclosed properties that are required upon transfer to OREO are charged to the ALLL.

Thereafter, an allowance for OREO losses is established for any further declines in the property’s value.

These losses are included in non-interest expenses in the consolidated statements of operations.

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Intangible Assets

Intangible assets include core deposit intangibles (“CDI”) and goodwill arising from acquisitions.

The initial and ongoing carrying value of intangible assets is based upon modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows.

It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.

CDI is amortized on straight-line basis over a 10-year period because that is managements’ estimate of the period Patriot will benefit from Prime Bank’s deposit base comprised of funds associated with long-term customer relationships.

CDI is amortized on straight-line basis over a 10 -year period because that is managements’

estimate of the period Patriot will benefit from Prime Bank’s deposit base comprised of funds associated with long-term customer relationships.

CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

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The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.

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Notes to consolidated financial statements

Contingent Consideration

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Resolution of the contingent consideration was finalized as of December 31, 2020 and no further adjustments are expected.

Patriot enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan.

Derivatives are recognized at fair value and included in other assets and other liabilities in the accompanying consolidated balance sheets.

The value of exchange-traded contracts is based on quoted market prices while non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities.

Cash flows from derivative financial instruments are included in net cash provided by operating activities in the accompanying consolidated statements of cash flows.

Derivatives Not Designated in Hedge Relationships Patriot enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan.

The customer swaps are simultaneously hedge by offsetting derivatives that Patriot entered into with an outside third party.

The swaps are reported at fair value in other assets or other liabilities.

Patriot’s swaps qualify as 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.

These swaps qualify as 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 credit risk associated with derivatives executed with customers is similar as that involved in extending loans and is subject to normal credit policies.

Collateral is obtained based on management’s assessment of the customer.

The positions of customer derivatives are recorded at fair value and changes in value are included in noninterest income on the consolidated statement of operations.

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Notes to consolidated financial statements

Derivatives Designated in Hedge Relationships.

The Company uses derivatives to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy.

The Company designates derivatives in qualifying hedge relationships as cash flow hedges for accounting purposes.

Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge and remain highly effective in offsetting changes in the cash flows attributable to the risk being hedged both at hedge inception and on an ongoing basis throughout the life of the hedge.

Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective.

If a hedge relationship were no longer highly effective, hedge accounting would be discontinued.

The gain or loss on a derivative designated and qualifying as a cash flow hedge is initially recorded as a component of accumulated other comprehensive income or loss, net of tax and subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made in the same period during which the hedged transaction affects earnings.

Patriot recognizes income taxes under the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and loss carry forwards.

Deferred tax assets (“DTA”s) and liabilities (“DTL”s) are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on DTAs and DTLs of a change in tax rates is recognized in income in the period that includes the enactment date.

In certain circumstances DTAs are subject to reduction by a valuation allowance.

A valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset.

Adjustments to increase or decrease the valuation allowance are charged or credited to the deferred tax component of the income tax provision or benefit.

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Notes to consolidated financial statements

Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis.

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In addition, management assesses tax attributes including available tax planning strategies and net operating loss carry-forwards that do not begin to expire until the year 2030.

Based upon this evidence, management recorded a valuation allowance of $1.9 million as of December 31, 2020.

As of December 31, 2021, based upon this evidence, management fully reversed the valuation allowance of $ 1.9 million recorded at December 

See Note 14 for more information on the deferred tax valuation allowance.

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Future evidence may indicate that it is more likely than not that a portion of the net deferred tax asset will not be realized at which point the valuation allowance may need to be increased.

Patriot had a net deferred tax asset of $11.5 million at December 31, 2020 as compared to a net deferred tax asset of $11.1 million at December 31, 2019.

Patriot had a net deferred tax asset of $ 12.1  million at December 

2021 as compared to a net deferred tax asset of $ 11.5  million at December 31, 2020.

On March 27, 2020, the CARES Act was signed into law.

The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, and modifications to the net interest deduction limitations.

While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.

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Notes to consolidated financial statements

While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.

Unrecognized tax benefits

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The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

Patriot’s returns for tax years 2018 through 2020 are subject to examination by the Internal Revenue Service (“IRS”) for U.S.

Patriot’s returns for tax years 2018 through 2021 are subject to examination by the Internal Revenue Service (“IRS”) for U.S.

Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.

As of December 31, 2020 and 2019, the Bank recorded an uncertain tax position (“UTP”) related to the utilization of certain federal net operating losses of $0 and $1.2 million, respectively.

As of December 

2021 and 2020, the Bank did not record any uncertain tax position (“UTP”).

Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

Earnings per Share

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Non-employee members of the Board of Directors are treated as employees for any share-based compensation granted in exchange for their service on the Board of Directors.

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Notes to consolidated financial statements

Patriot does not currently have, nor has it had in the past, any grants of share-based compensation to non-employees.

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Segment reporting

Patriot’s only business segment is Community Banking.

During the years ended December 31, 2020, 2019 and 2018, this segment represented all the revenues and income of Patriot.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Patriot’s only business segment is Community Banking.

During the years ended December 

2021, 2020 and 2019, this segment represented all the revenues and income of Patriot.

Reserve for Unfunded Commitments

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The reserve for unfunded commitments is included within other liabilities in the accompanying consolidated balance sheets, and changes in the reserve are reported as a component of other expense in the accompanying consolidated statements of operations.

See Note 

Financial Instruments with Off-Balance-Sheet Risk for further information.

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Accordingly, the fair value estimates may not be realized in an immediate sale or settlement of the asset or liability, respectively.

Provided in these notes to the consolidated financial statements is a detailed summary of Patriot’s application of fair value measurements and the effect on the assets and liabilities presented in the consolidated financial statements.

Advertising Costs

Patriot's policy is to expense advertising costs in the period in which they are incurred.

Project expenses

Project expenses represent non-recurring expenses, primarily legal and consulting not directly related to the core business of Community Banking.

In 2020, the project expenses consist of a final purchase price adjustment expense of $556,000 related to the Prime acquisition in May 2018.

In 2019, the project expenses principally were the result of third party costs related to a formal written agreement (the “Formal Agreement”) with the OCC entered in November 2018, and of a non-recurring nature and primarily consultants and legal.

In prior years, the expenses were primarily for merger, tax analysis strategy and planning.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Project expenses

Project expenses represent non-recurring expenses, primarily legal and consulting not directly related to the core business of Community Banking.

In 2021, the project expenses consist of material non-recurring costs of $ 1.9  million related to the pending merger with American Challenger.

In 2020, the project expenses consist of an adjustment of goodwill after measurement period of the Prime acquisition in May 2018.

In 2019, the project expenses principally were the result of third -party costs related to a formal written agreement (the “Formal Agreement”) with the OCC entered in November 2018, and of a non-recurring nature and primarily consultants and legal.

In prior years, the expenses were primarily for merger, tax analysis strategy and planning.

Employee Retention Credit

The CARES Act also provided for an employee retention credit (“Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers for 2020.

In 2021, the tax credit is up to $7,000 for each quarter, equal to 70% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee per quarter.

The Company adopted a policy to recognize the employee retention credit when earned and to recognize the credit as a reduction to compensation and benefits expense on the Company’s consolidated statements of operations.

Accordingly, the Company recorded an employee retention credit of $ 2.9 million for the year ended December 31, 2021, which is included in salaries and benefits non-interest expense on the consolidated statements of operations.

Revenue Recognition

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The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other U.S.

GAAP discussed elsewhere within our disclosures.

Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:

2 unchanged sentences

Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Recently Adopted and Issued Accounting Standards

1 unchanged sentence

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

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements.

This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements.

ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date.

ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

The amendments related to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented upon their effective date.

ASU 2019 - 12

ASU 2019 - 12, “

Income Taxes (Topic 740 ) - Simplifying the Accounting for Income Taxes.

The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences.

ASU 2019 - 12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The ASU is effective for the Company on January 1, 2021.

The adoption of ASU 2019 - 12 did not have any impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer ’ s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015.

Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

For public business entities, the ASU was effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.

The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.

The amendments in this ASU also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.

The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor.

The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.

The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.

The entity is also required to present the capitalized implementation costs in the consolidated balance sheets in the same line item that a repayment for the fees of the associated hosting arrangement would be presented.

The adoption of ASU 2018-15 did not have a significant impact on our consolidated financial statements.

ASU Update 2020 - 04

2020 - 04, Reference Rate Reform (Topic 848 ):

"Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022.

Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments.

This ASU also provides many practical expedients for derivative accounting.

In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020.

In particular, the Company made the following elections as it relates to hedging relationships, to continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848 - 50 - 35 - 17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument.

The application of this guidance did not have a material impact on the Company's financial statements.

ASU 2021 - 01

In January 2021, the FASB issued ASU 2021 - 01, “

Reference Rate Reform (Topic 848 ) ”.

This ASU clarifies certain optional expedients and exceptions in Topic 848 when accounting for derivative contracts and certain hedging relationships affected by changes in interest rates.

The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.

The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021.

The Company adopted the Update on a prospective basis.

The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.

The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets.

The adoption of ASU 2018-15 did not have a significant impact on our consolidated financial statements.

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.

6 unchanged sentences

Management is currently evaluating the impact that the standard will have on its consolidated financial statements.

ASU 2019-12, “ Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes .” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences.

ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The ASU is effective for the Company on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to 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 ):

8 unchanged sentences

In March 2020, the FASB issued ASU No.

2020 - 3, “

Codification Improvements to Financial Instruments.

1 unchanged sentence

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.

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 Update 2020-04

In March 2020, the FASB issued ASU No.

2020-4 , "Reference Rate Reform" .

This ASU provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022.

As of December 31, 2020, the Company has not made any elections under ASU 2020-04 but continues to evaluate the impact of reference rate reform and which optional expedients and exceptions might be elected.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Restrictions on Cash and Due from Banks

3 unchanged sentences

In March of 2020, the Federal Reserve Bank eliminated reserve requirements for all depository institution.

Therefore, the Company was not required to have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements as of December 31, 2020.

In 2019, the Bank was not subject to a reserve requirement.

Therefore, the Company was not required to have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements as of December 31, 2021 and 2020.

Available-for-sale securities

At December 31, 2020 and 2019, the amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of available-for-sale securities was as follows:

At December 

2021 and 2020, the amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of available-for-sale securities was as follows:

(In thousands)

December 31, 2021:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 67,850  

$ ( 1,245 )  

$ 66,629  

Corporate bonds

17,754  

( 951 )  

16,921  

Subordinated notes

( 17 )  

SBA loan pools

( 169 )  

Municipal bonds

$ 96,547  

$ ( 2,384 )  

$ 94,341  

December 31, 2020:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 16,719  

$ ( 17 )  

$ 16,833  

Corporate bonds

18,014  

( 984 )  

17,290  

Subordinated notes

( 128 )  

SBA loan pools

( 60 )  

Municipal bonds

$ 49,960  

$ ( 1,189 )  

$ 49,262  

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following table presents 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 December 31, 2020 and 2019:

The following table presents 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 December 

2021 and 2020:

(In thousands)

2 unchanged sentences

December 31, 2021:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 60,606  

$ ( 1,196 )  

$ 1,610  

$ ( 49 )  

$ 62,216  

Corporate bonds

15,042  

( 951 )  

15,042  

Subordinated notes

( 17 )  

SBA loan pools

( 169 )  

Municipal bonds

$ 81,657  

$ ( 2,318 )  

$ 2,702  

$ ( 66 )  

$ 84,359  

December 31, 2020:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 5,797  

$ ( 14 )  

$ 1,476  

$ ( 3 )  

$ 7,273  

Corporate bonds

13,015  

( 984 )  

13,015  

Subordinated notes

( 122 )  

SBA loan pools

At December 31, 2020 and 2019, twenty-two of thirty-seven and fifteen of twenty-seven available-for-sale securities had unrealized losses with an aggregate depreciation of 4.0% and 3.7% from amortized cost, respectively.

( 12 )  

( 48 )  

$ 9,208  

$ ( 148 )  

$ 19,628  

$ ( 1,041 )  

$ 28,836  

At December 

2021 and 2020, thirty-two of thirty-nine and twenty-two of thirty-seven available-for-sale securities had unrealized losses with an aggregate depreciation of 2.7 % and 4.0 % from amortized cost, respectively.

Management believes that none of the losses on available-for-sale securities noted above constitute OTTI.

1 unchanged sentence

Government agency debt, mortgage-backed securities issued by U.S.

Government agencies, subordinated notes, corporate debt.

Government agencies, subordinated notes, corporate debt, and municipal bonds.

Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected.

SBA government guaranteed loan pools securities were purchased at a premium and the unrealized loss was attributable primarily to increased prepayment speeds.

SBA government guaranteed loan pools securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds.

The timely payment of principal and interest on these securities is guaranteed by the U.S.

3 unchanged sentences

As of December 31, 2021 and 2020, available-for-sale securities of $ 36.6 million and $ 6.1 million were pledged primarily to secure municipal deposits, respectively.

The securities were pledged to the Federal Reserve Bank (“FRB”).

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at December 31, 2020 and 2019.

The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at December 

2021 and 2020.

The mortgages underlying the mortgage-backed securities are not due at a single maturity date.

5 unchanged sentences

Corporate bonds

$ 17,754  

$ 16,921  

Subordinated notes

2 unchanged sentences

Available-for-sale securities with stated maturity dates

Government agency mortgage-backed securities

17,754  

28,697  

16,921  

27,712  

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  

December 31, 2020:

Corporate bonds

$ 4,014  

$ 14,000  

$ 18,014  

$ 4,274  

$ 13,016  

$ 17,290  

Subordinated notes

SBA loan pools

Municipal bonds

Available-for-sale securities with stated maturity dates

Government agency mortgage-backed securities

25,306  

33,241  

24,253  

32,429  

Government agency and mortgage-backed securities

11,889  

16,719  

11,979  

16,833  

$ 11,299  

$ 26,772  

$ 11,889  

$ 49,960  

$ 11,539  

$ 25,744  

$ 11,979  

$ 49,262  

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Loan Receivables and Allowance for Loan and Lease Losses

As of December 31, 2020 and 2019, loans receivable, net, consisted of the following:

As of December 

2021 and 2020, loans receivable, net, consisted of the following:

(In thousands)

1 unchanged sentence

Commercial Real Estate

$ 365,247  

$ 282,378  

Residential Real Estate

158,591  

153,851  

Commercial and Industrial

122,810  

144,297  

Consumer and Other

59,364  

67,635  

21,781  

66,984  

Construction to Permanent - CRE

11,695  

15,035  

Loans receivable, gross

739,488  

730,180  

Allowance for loan and lease losses

( 9,905 )  

Loans receivable, net

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

$ 729,583  

$ 719,596  

Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City.

5 unchanged sentences

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.

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.

2 unchanged sentences

A subset of these loans was determined to have evidence of credit deterioration at the acquisition date, which was accounted for in accordance with ASC 310 - 30.

The purchased credit impaired (“PCI”) loans presently maintain a carrying value of zero as of December 31, 2020 and $176,000 as of December 31, 2019, respectively.

The purchased credit impaired (“PCI”) loans presently maintain a carrying value of zero as of December 

2021 and 2020.

The loans were evaluated for impairment through the periodic reforecasting of expected cash flows.

2 unchanged sentences

The remaining non-accretable difference represents cash flows not expected to be collected.

A summary of changes in the accretable discount for PCI loans for the year ended December 31, 2020, 2019 and 2018 follows:

There were no PCI loans transactions in 2021.

A summary of changes in the accretable discount for PCI loans for the year ended December 

2020 and 2019 follows:

(In thousands)

1 unchanged sentence

Accretable discount, beginning of period

$ ( 47 )  

Other changes, net

Accretable discount, end of period

The accretion of the accretable discount for PCI loans for the year end December 31, 2020, 2019 and 2018 was $2,000, $47,000 and $92,000, respectively.

The other changes represent primarily loans that were either fully paid-off or totally charged off.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

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

The accretion of the accretable discount for PCI loans for the year end December 31, 2020 and 2019 was $ 2,000 and $ 47,000 , respectively.

The other changes represent primarily loans that were either fully paid-off or totally charged off.

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.

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.

Residential Real Estate Loans

In 2013, Patriot discontinued offering primary mortgages on personal residences.

Repayment of residential real estate loans and the loans secured by residential real estate 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.

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.

In 2021 and 2020, Patriot purchased $ 72.3 million and $ 17.9 million of residential real estate loans, respectively.

Commercial and Industrial Loans

Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals.

These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes.

These loans are generally secured by business assets but are also occasionally offered on an unsecured basis.

In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable.

Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel.

Patriot’s syndicated and leveraged loan portfolios totaled $55.0 million and $71.5 million at December 31, 2020 and 2019, respectively.

Patriot’s syndicated and leveraged loan portfolios totaled $ 19.6 million and $ 55.0 million at December 

2021 and 2020, 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 and provide diversification from Patriot’s typical direct-to-business lines of credit and term facilities.

The Bank will participate in senior secured financings for public and privately-owned companies for acquisitions, working capital, recapitalizations, and general corporate purposes.

The Bank’s strategy is to participate in these types of loan transaction in accordance with its internal policies.

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

4 unchanged sentences

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 2020 and 2019, $14.9 million and $7.3 million education loans were purchased, respectively.

During 2021, Patriot purchased $ 17.0 million unsecured consumer loans, and no education loans were purchased.

For the year ended December 31, 2020, $ 14.9 million education loans were purchased.

PATRIOT NATIONAL BANCORP, INC.

7 unchanged sentences

Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.

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

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

Loans in this category represent a one -time close of a construction facility with simultaneous conversion to an amortizing mortgage loan.

Construction to Permanent loans combine a short term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 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 to Permanent loans combine a short-term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 20 - 25 years, resetting every five years to the Federal Home Loan Bank (“FHLB”) rate.

Close of the permanent 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.

Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75 percent of the principal balance.

The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment.

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.

1 unchanged sentence

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 $21.6 million and $9.6 million at December 31, 2020 and 2019, respectively.

SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $ 27.1 million and $ 21.6 million at December 

2021 and 2020, respectively.

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 $ 919,000 as of December 31, 2021, which are included in the commercial and industrial loan classifications.

PATRIOT NATIONAL BANCORP, INC.

2 unchanged sentences

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 each year in the three-year period ended December 31, 2020:

The following tables summarize the activity in the allowance for loan and lease losses, allocated to segments of the loan portfolio, for each year in the three -year period ended December 

(In thousands)

Construction to

As of and for the year ended December 31, 2021

1 unchanged sentence

December 31, 2020

$ 4,485  

$ 1,379  

$ 3,284  

$ 10,584  

( 51 )  

( 212 )  

( 23 )  

( 69 )  

Provisions (credits)

( 605 )  

( 130 )  

( 592 )  

( 121 )  

December 31, 2021

$ 5,063  

$ 1,700  

$ 2,532  

$ 9,905  

As of and for the year ended December 31, 2020

1 unchanged sentence

December 31, 2019

$ 3,789  

$ 1,038  

$ 4,340  

$ 10,115  

( 1,032 )  

( 24 )  

( 677 )  

( 45 )  

Provisions (credits)

( 449 )  

December 31, 2020

$ 4,485  

$ 1,379  

$ 3,284  

$ 10,584  

As of and for the year ended December 31, 2019

1 unchanged sentence

December 31, 2018

$ 1,866  

$ 1,059  

$ 3,558  

$ 7,609  

( 118 )  

( 2,418 )  

( 123 )  

Provisions (credits)

( 187 )  

( 27 )  

December 31, 2019

$ 3,789  

$ 1,038  

$ 4,340  

$ 10,115  

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for impairment as of December 31, 2020 and 2019:

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

2021 and 2020:

(In thousands)

Construction to

December 31, 2021

1 unchanged sentence

Individually evaluated for impairment

$ 1,567  

$ 2,292  

Collectively evaluated for impairment

Total allowance for loan and lease losses

$ 5,063  

$ 1,700  

$ 2,532  

$ 9,905  

Loans receivable, gross:

Individually evaluated for impairment

$ 15,704  

$ 2,954  

$ 4,031  

$ 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  

(In thousands)

Construction to

December 31, 2020

1 unchanged sentence

Individually evaluated for impairment

$ 1,398  

$ 1,412  

Collectively evaluated for impairment

Total allowance for loan losses

$ 4,485  

$ 1,379  

$ 3,284  

$ 10,584  

Loans receivable, gross:

Individually evaluated for impairment

PCI loans individually evaluated for impairment

$ 14,534  

$ 3,962  

$ 4,700  

$ 1,187  

$ 24,383  

Collectively evaluated for impairment

267,844  

149,889  

139,597  

66,448  

66,984  

15,035  

705,797  

Total loans receivable, gross

$ 282,378  

$ 153,851  

$ 144,297  

$ 67,635  

$ 66,984  

$ 15,035  

$ 730,180  

Patriot monitors the credit quality of its loans receivable on an ongoing basis.

4 unchanged sentences

Patriot employs a risk rating system as part of the risk assessment of its loan portfolio.

At origination, lending officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval.

If financial developments occur on a loan in the lending officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable.

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 annually by the Credit Department.

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 quarterly review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans.

Any changes to the assigned risk ratings, based on the quarterly review, are required to be approved by the Loan Committee.

When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system.

An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:

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.

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:

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.

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.

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.

2 unchanged sentences

Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.

If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral.

Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold.

In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and 120 days delinquent, respectively.

Due to the economic disruption and uncertainty caused by the pandemic, the allowance for loan losses may increase in future periods as borrowers are affected by the expected severe contraction of economic activity and the dramatic increase in unemployment.

This may result in increases in loan delinquencies, down-grades of loan credit ratings and charge-offs in future periods.

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.

and “Closed-end”

credits are charged off when 180 days and 120 days delinquent, respectively.

The allowance for loan losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses.

3 unchanged sentences

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 December 31, 2020.

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 December 

(In thousands)

Performing (Accruing) Loans

2 unchanged sentences

Commercial Real Estate:

$ 324,858  

$ 325,554  

Special mention

16,625  

15,704  

23,068  

348,847  

349,543  

15,704  

365,247  

Residential Real Estate:

$ 154,044  

154,044  

Special mention

155,443  

158,591  

Commercial and Industrial:

$ 114,306  

114,549  

Special mention

118,466  

118,709  

122,810  

Consumer and Other:

$ 59,171  

59,199  

59,194  

59,222  

59,364  

Construction:

$ 21,781  

21,781  

Construction to Permanent -CRE:

$ 11,695  

11,695  

$ 715,426  

$ 716,393  

$ 23,095  

$ 739,488  

Loans receivable, gross:

$ 685,855  

$ 686,822  

Special mention

19,975  

23,095  

32,691  

Loans receivable, gross

$ 715,426  

$ 716,393  

$ 23,095  

$ 739,488  

PATRIOT NATIONAL BANCORP, INC.

7 unchanged sentences

Commercial Real Estate:

$ 230,824  

Special mention

25,658  

10,999  

11,362  

14,534  

25,896  

267,481  

267,844  

14,534  

282,378  

Residential Real Estate:

145,298  

146,137  

Special mention

149,158  

149,997  

153,851  

Commercial and Industrial:

102,131  

102,340  

Special mention

12,881  

27,660  

28,376  

29,076  

138,672  

143,597  

144,297  

Consumer and Other:

66,589  

66,597  

66,710  

66,718  

67,635  

Construction:

64,633  

66,984  

64,633  

66,984  

Construction to Permanent - CRE:

15,035  

$ 1,436  

$ 7,034  

$ 8,486  

$ 701,689  

$ 710,175  

$ 20,005  

$ 730,180  

Loans receivable, gross:

$ 2,921  

$ 3,407  

$ 624,510  

$ 627,917  

Special mention

38,399  

42,399  

38,780  

39,859  

20,005  

59,864  

Loans receivable, gross

$ 1,436  

$ 7,034  

$ 8,486  

$ 701,689  

$ 710,175  

$ 20,005  

$ 730,180  

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of December 31, 2020 and 2019:

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

2021 and 2020:

(In thousands)

3 unchanged sentences

Commercial Real Estate:

$ 15,704  

Residential Real Estate:

2 unchanged sentences

Total non-accruing loans

$ 20,609  

$ 21,194  

$ 1,901  

$ 23,095  

As of December 31, 2020:

1 unchanged sentence

Commercial Real Estate:

$ 5,723  

$ 8,811  

$ 14,534  

Residential Real Estate:

2 unchanged sentences

Total non-accruing loans

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $904,000, $302,000, and $503,000 would have been recognized in income for the years ended December 31, 2020, 2019, and 2018, respectively.

Interest income collected and recognized on non-accruing loans for the year ended December 31, 2020 and 2019 was $156,000 and $671,000, respectively.

No interest income was collected and recognized on non-accruing loans during 2018.

$ 9,398  

$ 9,420  

$ 10,585  

$ 20,005  

If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $ 802,000 , $ 904,000 , and $ 302,000 would have been recognized in income for the years ended December 

2021, 2020, and 2019, respectively.

Interest income collected and recognized on non-accruing loans for the year ended December 

2021, 2020 and 2019 was $ 377,000 , $ 156,000 and $ 671,000 , 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.

8 unchanged sentences

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 consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for impairment.

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.

Troubled Debt Restructurings ( “

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.

2 unchanged sentences

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 recorded investment in TDRs as of December 31, 2020 and 2019 were $11.9 million and $11.0 million, respectively.

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

(In thousands)

3 unchanged sentences

Commercial Real Estate

$ 8,884  

$ 9,884  

Residential Real Estate

2 unchanged sentences

Total TDR Loans

10,394  

15,886  

TDRs included in non-accrual loans

( 9,688 )  

Total accrual TDR Loans

The following loans were modified as TDR during the year ended December 31, 2020 and 2019.

$ 4,378  

During the year ended December 31, 2021, no loans were modified as TDRs, and no defaults of TDRs.

The following loans were modified as TDR during the year ended December 

2020 and 2019.

Outstanding Recorded Investment

6 unchanged sentences

Commercial Real Estate

$ 8,912  

$ 8,911  

Commercial and Industrial

1 unchanged sentence

Total TDR Loans

$ 5,235  

$ 8,912  

$ 5,233  

$ 8,911  

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following table provides information on how loans were modified as TDRs during the year ended December 31, 2020 and 2019.

Year Ended December 31,

The following table provides information on how loans were modified as TDRs during the year ended December 

2020 and 2019.

(In thousands)

Year Ended December 31,

Rate reduction

$ 4,819  

Extension of interest only period

1 unchanged sentence

Maturity and rate reduction

During the years ended December 31, 2018, no loans were modified as TDRs, and no defaults of TDRs.

$ 5,233  

$ 8,911  

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 payment periods for the interest and /or principal, or substituting or adding a co-borrower or guarantor.

At December 31, 2020 and 2019, 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.

At December 

2021 and 2020, there were no commitments to advance additional funds under TDRs.

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

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID- 19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019.

The Bank had modified $232.4 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days, and approximately $52.6 million of loans remained on deferment as of December 31, 2020.

According to regulatory guidance and CARES Act, these modified loans were not TDRs as of December 31, 2020, other than those that had been classified as TDRs prior to the deferral provided under the CARES Act.

The Bank had modified $ 232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days.

The vast majority all of those loans deferred have now resumed normal payments.

As of December 31, 2021, seven loans remaining on deferral totaled $ 6.5 million.

According to regulatory guidance and CARES Act, these modified loans were not TDRs as of December 31, 2021.

Impaired Loans

Impaired loans may consist of non-accrual loans and/or performing and non-performing TDRs.

As of December 31, 2020 and 2019, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $24.4 million and $19.6 million, respectively, were identified, for which $1.4 million and $1.5 million specific reserves were established, respectively.

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.

At December 31, 2020 and 2019, exposure to the impaired loans was related to 26 and 27 borrowers, respectively.

As of December 

2021 and 2020, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $ 23.8 million and $ 24.4 million, respectively, were identified, for which $ 2.3 million and $ 1.4 million specific reserves were established, respectively.

At December 

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.

At December 31, 2020, exposure to the impaired loans was related to twenty-six borrowers.

All impaired loans were evaluated individually.

For collateral dependent loans, appraisal reports of the underlying collateral, have been obtained from independent licensed appraisal firms.

For non-performing loans, the independently determined appraised values were first reduced by a 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.

As of December 31, 2020, the discount rate was reduced to 5.8% as compared to 12% in 2019.

The change in accounting estimate reduced loan charge-offs by $266,000 for the year ended December 31, 2020.

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.

PCI loans acquired from Prime Bank acquisition were originally recorded at fair value by the Bank on the date of acquisition.

As of December 31, 2020 and December 31, 2019, PCI loans remaining balance was $0 and $179,000, respectively.

Those loans were considered individually evaluated for impairment, with no allowance recorded.

Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The following table reflects information about the impaired loans, excluding PCI loans, by class as of December 31, 2020 and 2019:

The following table reflects information about the impaired loans by class as of December 

2021 and 2020:

(In thousands)

3 unchanged sentences

Commercial Real Estate

$ 6,820  

$ 7,776  

$ 5,723  

$ 6,644  

Residential Real Estate

1 unchanged sentence

Consumer and Other

10,820  

11,820  

15,453  

16,692  

With a related allowance recorded:

Commercial Real Estate

$ 8,884  

$ 8,811  

$ 1,567  

Residential Real Estate

Commercial and Industrial

Consumer and Other

12,982  

13,416  

Impaired Loans, Total:

Commercial Real Estate

15,704  

16,587  

14,534  

15,455  

Residential Real Estate

2 unchanged sentences

Impaired Loans, Total

For each year in the three-year period ended December 31, 2020, the average recorded investment in and interest income recognized on impaired loans without and with a related allowance, by loan portfolio segment, was as follows:

$ 23,802  

$ 25,236  

$ 2,299  

$ 24,383  

$ 25,622  

$ 1,412  

For each year in the three -year period ended December 

2021, the average recorded investment in and interest income recognized on impaired loans without and with a related allowance, by loan portfolio segment, was as follows:

Year Ended December 31,

2 unchanged sentences

Commercial Real Estate

$ 7,636  

$ 5,859  

$ 9,829  

Residential Real Estate

1 unchanged sentence

Consumer and Other

14,900  

12,783  

19,123  

With a related allowance recorded:

3 unchanged sentences

Consumer and Other

11,642  

Impaired Loans, Total:

Commercial Real Estate

16,505  

14,720  

10,717  

Residential Real Estate

2 unchanged sentences

Impaired Loans, Total

$ 26,542  

$ 21,717  

$ 22,695  

PATRIOT NATIONAL BANCORP, INC.

3 unchanged sentences

SBA loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value.

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.

As of December 31, 2020, SBA loans held for sale consisted of $ 1.2 million of SBA commercial and industrial loans.

There were $15.3 million of SBA loans held for sale at December 31, 2019, consisting of $10.2 million SBA commercial and industrial loans and $5.1 million SBA commercial real estate loans.

During 2020, $9.5 million SBA loans previously classified as held for sale were transferred to held for investment.

During 2021 and 2020, $ 281,000 and $ 9.5 million SBA loans previously classified as held for sale were transferred to held for investment, respectively.

In September 2020, one commercial and industrial loan of $ 5.0 million was reclassed from loans held for investment to loans held for sale.

The loan was sold in October 2020 which resulted in proceeds of $ 5.0 million.

No held of investment loan was reclassed to held of sale during 2021.

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.

6 unchanged sentences

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 $19.4 million and $13.6 million at December 31, 2020 and 2019, respectively.

The total amount of such loans serviced, but owned by third party, amounted to approximately $ 29.6 million and $ 19.4 million at December 

2021 and 2020, respectively.

As of December 31, 2021 and 2020, the servicing asset has a carrying value of $ 584,000 and $ 316,000 , respectively, and fair value of $ 617,000 and $ 375,000 , respectively.

Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2020, 2019 and 2018:

The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 

2021, 2020 and 2019:

(In thousands)

3 unchanged sentences

Servicing rights amortized

( 22 )  

Servicing rights disposed

( 45 )  

Ending balance

The servicing assets are included in the other assets on the consolidated balance sheets.

The servicing assets are included in the other assets on the consolidated balance sheet.

PATRIOT NATIONAL BANCORP, INC.

2 unchanged sentences

Premises and Equipment

At December 31, 2020 and 2019, premises and equipment consisted of the following:

At December 

2021 and 2020, premises and equipment consisted of the following:

(In thousands)

$ 12,819  

19,046  

20,287  

Leasehold Improvements

Furniture, equipment, and software

12,264  

12,010  

Construction-in-progress

Premises and equipment, gross

47,252  

49,202  

Accumulated depreciation and amortization

( 15,752 )  

Premises and equipment, net

For the years ended December 31, 2020, 2019 and 2018, depreciation and amortization expense related to premises and equipment totaled $1.5 million, $1.6 million, and $1.5 million, respectively.

Other Real Estate Owned ( “ OREO ” )

As of December 31, 2020 and 2019, OREO aggregated of $1.9 million and $2.4 million, respectively.

The 2020 OREO balance consists of foreclosed residential properties from one loan receivable that is currently being marketed for sale as two properties.

In 2020, Patriot sold one residential property of $446,000 and recognized a loss of $21,000.

There was a write-down of $48,000 for the remaining OREO as of December 31, 2020, which is included in the non-interest expense on the consolidated statements of operations.

In 2019, Patriot sold one residential property of $991,000 acquired in connection with the acquisition of Prime Bank and recognized a loss of $94,000.

The recognized loss is included in the other operating expenses on the consolidated statements of operations.

$ 31,500  

$ 33,423  

In December 2021, the Bank sold a building located in the City New Haven, Connecticut for a cash proceed of $ 1.5 million, and recognized a gain of $ 550,000 , which is included in other income of the consolidated statements of operations.

For the years ended December 

2021, 2020 and 2019, depreciation and amortization expense related to premises and equipment totaled $ 1.4 million, $ 1.5 million, and $ 1.6 million, respectively.

Other Real Estate Owned ( “

OREO ”

The OREO balance consists of foreclosed residential properties from loan receivable that were marketed for sale.

As of December 

31, 2021 and 2020, OREO aggregated of $ 0 and $ 1.9 million, respectively.

The following table presents an analysis of the activity in OREO for the years ended December 

2021, 2020 and 2019:

(In thousands)

Year Ended December 31,

Beginning balance

$ 1,906  

$ 2,400  

$ 2,945  

( 1,906 )  

( 446 )  

( 48 )  

Ending balance

$ 1,906  

$ 2,400  

All OREO were sold as of December 31, 2021.

Patriot recognized a gain of 2,000 on the sale of OREO for the year ended December 31, 2021.

For the year ended December 31, 2020 and 2019, Patriot recorded losses on sales of OREO properties of $ 69,000 and $ 94,000 , respectively.

The recognized gain and losses are included in the other operating expenses on the consolidated statements of operations.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Business Combination, Goodwill and Other Intangible Assets

Acquisition of Prime Bank

The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations.

The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 

805, Business Combinations.

Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values.

7 unchanged sentences

For the year ended December 31, 2020, a purchase price adjustment of $ 556,000 was recognized to project expenses on the consolidated statements of operations.

The charge represented an adjustment to the earlier estimate of the final purchase price upon final settlement of the litigation related to a dispute over the final purchase price.

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 were no income statement effects resulting from the recorded measurement period adjustments for the year ended December 31, 2019.

There was no further adjustment for Goodwill in 2021.

The goodwill is all deductible for income taxes over 15 years.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Information on goodwill for the year ended December 31, 2020, 2019 and 2018 is as follows:

Information on goodwill for the year ended December 

2021, 2020 and 2019 is as follows:

Year Ended December 31,

1 unchanged sentence

Balance, beginning of period

Mesurement period adjustments

$ 1,107  

$ 1,728  

Measurement period adjustments

Balance, end of period

$ 1,107  

Goodwill is evaluated for impairment annually 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.

2 unchanged sentences

The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.

The Company identified the COVID-19 pandemic and related reported losses as a triggering event in the first quarter of 2020.

Due to this triggering event, the Company performed a quantitative assessment of the goodwill, and concluded it was more likely than not that the fair value of the reporting unit exceeded its carrying value, and goodwill was not impaired.

The Company performed a quantitative assessment as of October 31, 2020, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was not impaired as of December 31, 2020.

The Company performed a quantitative assessment as of October 31, 2021, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was not impaired as of December 

CDI was recorded as part of the Prime Bank business combination in May 2018.

The CDI is amortized over a 10 -year period using the straight-line method.

For the year ended December 31, 2020, 2019 and 2018, the amortization was $74,000, $75,000 and $50,000, respectively.

The CDI was evaluated for impairment as of October 31, 2020, and an impairment charge of $206,000 was recorded for the year ended December 31, 2020.

For the year ended December 

2021, 2020 and 2019  the amortization was $ 47,000 , $ 74,000 and 75,000 , respectively.

An impairment charge of $ 206,000 was recorded for the year ended December 31, 2020 due to impairment test performed in 2020.

The Company performed a quantitative assessment for CDI as of October 31, 2021, and concluded that the CDI was not impaired as of December 31, 2021.

The amortization expense and impairment charge were included in the other operating expenses on the consolidated statements of operations.

The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.

Year Ended December 31,

(In thousands)

Gross Intangible asset

Accumulated amortization

Core deposit intangible, net

Acquisition of Hana Small Business Lending and Subsequent Termination

On February 6, 2018, the Company, Hana Small Business Lending, Inc.

(“Hana SBL”), a wholly-owned subsidiary of Hana Financial, Inc.

(“Hana Financial”), and three wholly-owned subsidiaries of Hana SBL entered into a definitive purchase agreement pursuant to which Patriot would acquire Hana SBL’s small business administration (“SBA”) lending business.

On August 2, 2018, the Company, Hana SBL and three wholly-owned subsidiaries of Hana SBL, entered into an amendment to the purchase agreement, pursuant to which, the closing date of the above referenced transaction had been extended from August 2, 2018 to August 1, 2019.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

On October 29, 2018 the Company withdrew its initial application to the OCC requesting approval of the acquisition of Hana SBL.

As of March 30, 2019, the Company did not receive regulatory non-objection.

On March 30, 2019 the Company and Hana SBL mutually agreed to terminate the purchase agreement as amended between the parties.

The termination agreement provided for the release of escrowed funds back to the Company.

For the year ended December 31, 2018, the Company incurred $1.15 million of merger and acquisition expenses related to the Hana SBL acquisition.

The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December 31, 2020 and 2019.

The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.

(In thousands)

Interest Rate

As of December 31,

Gross carrying amount

Accumulated amortization

( 246 )  

( 206 )  

Net carrying amount

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.

In connection with the merger, the Company incurred $ 1.9  million of project expenses for the year ended December 31, 2021.

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

The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December 

2021 and 2020.

December 31, 2021

December 31, 2020

(In thousands)

Weighted Avg.

Stated Interest Rate

Weighted Avg.

Stated Interest Rate

Non-interest bearing

$ 226,713  

$ 158,676  

Interest bearing:

Negotiable order of withdrawal accounts

34,741  

0.07 %  

30,529  

109,744  

0.13 %  

98,635  

164,518  

0.23 %  

146,389  

Certificates of deposit, less than $250,000

142,246  

0.35 %  

160,968  

Certificates of deposit, $250,000 or greater

53,584  

0.40 %  

49,172  

Brokered deposits

17,016  

1.05 %  

41,287  

Interest bearing, Total

521,849  

0.27 %  

526,980  

Total Deposits

$ 748,562  

0.19 %  

$ 685,656  

On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $ 50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients.

The prepaid debit card deposits totaled approximately $59.3 million as of December 31, 2020, which is included in the non-interest bearing deposits.

The following table presents interest expense, by deposit category, and the related weighted average effective interest rate for each of the years in the three-year period ended December 31, 2020.

The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $ 138.9  million and $ 74.3  million as of December 31, 2021 and 2020, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The following table presents interest expense, by deposit category, and the related weighted average effective interest rate for each of the years in the three -year period ended December 

(In thousands)

3 unchanged sentences

Interest Rate

Negotiable order of withdrawal accounts

0.07 %  

0.22 %  

0.54 %  

0.30 %  

1.05 %  

Certificates of deposit, less than $250,000

0.61 %  

1.75 %  

Certificates of deposit, $250,000 or greater

0.49 %  

1.95 %  

Brokered deposits

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2020, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:

1.83 %  

1.88 %  

$ 2,243  

0.43 %  

$ 9,154  

1.43 %  

$ 13,985  

As of December 

2021, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:

(In thousands)

1 year or less

$ 104,971  

$ 28,050  

$ 15,023  

$ 148,044  

More than 1 year through 2 years

23,259  

24,274  

48,529  

More than 2 years through 3 years

1 unchanged sentence

More than 4 years through 5 years

As of December 31, 2020 and 2019, total borrowings were $120.8 million and $130.9 million, respectively.

$ 142,246  

$ 53,584  

$ 17,016  

$ 212,846  

As of December 

2021 and 2020, total borrowings were $ 120.7 million and $ 120.8 million, respectively.

Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable.

The senior notes, subordinated notes, 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.

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

2 unchanged sentences

Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes.

As of December 31, 2020, the Bank had $63.9 million of available borrowing capacity from the FHLB-B.

FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements.

At December 31, 2020 and 2019, outstanding advances from the FHLB-B aggregated $90.0 million and $100.0 million, respectively.

At December 31, 2020, advances of $90.0 million outstanding bore fixed rates of interest ranging from 2.40% to 4.23% with maturities ranging from 2.5 years to 3.7 years.

The FHLB-B advances with fixed interest rates have a weighted average interest rate of 3.26%.

At December 31, 2020, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $267.5million.

Borrowing capacity under this line totaled $78.4 million at December 31, 2020.

In addition, Patriot has a $2.0 million revolving line of credit with the FHLB-B.

At December 31, 2020 and 2019, no funds had been borrowed under the line of credit.

Interest expense incurred for FHLB-B borrowing for the year ended December 31, 2020, 2019 and 2018 were $2.7 million, $2.2 million and $1.6 million respectively.

As of December 

2021, the Bank had $ 73.6 million of available borrowing capacity from the FHLB-B.

FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements.

At December 

2021 and 2020, outstanding advances from the FHLB-B aggregated $ 90.0 million and $ 90.0 million, respectively.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

At December 

2021, advances of $ 90.0 million outstanding bore fixed rates of interest ranging from 2.40 % to 4.23 % with maturities ranging from 1.5 years to 2.7 years.

The FHLB-B advances with fixed interest rates have a weighted average interest rate of 3.26 %.

Included in the fixed rate advances are three  advances totaling $ 60.0 million, callable by the FHLB quarterly through October 2023.

At December 

2021, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $ 240.0 million.

Borrowing capacity under this line totaled $ 73.6 million at December 31, 2021.

In addition, Patriot has a $ 2.0 million revolving line of credit with the FHLB-B.

At December 

2021 and 2020, no funds had been borrowed under the line of credit.

Interest expense incurred for FHLB-B borrowing for the year ended December 

2021, 2020 and 2019 were $ 3.0 million, $ 2.7 million and $ 2.2 million, respectively.

Correspondent Bank - Lines of Credit

Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent Banks.

As of December 31, 2020 and 2019, borrowings available under the agreements totaled $5 million and $5 million, respectively.

As of December 

2021 and 2020, borrowings available under the agreements totaled $ 5  million and $ 5  million, respectively.

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, ACH, and other clearinghouse transactions.

There was no outstanding balance under the agreements at December 31, 2020 and 2019.

Interest expense incurred for the year ended December 31, 2019 and 2018 was $2,000 and $13,000, respectively.

No interest expense incurred in 2020.

There was no outstanding balance under the agreements at December 

2021 and 2020.

No interest expense incurred in 2021 and 2020.

Interest expense incurred for the year ended December 

31, 2019 was $ 2,000 .

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.

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 December 31, 2021, Patriot had pledged eligible loans with a book value of $ 25.1 million and a collateral value of $ 16.9 million as collateral to support borrowing capacity at the FRBNY.

There was no outstanding balance under the agreements as of December 31, 2021.

On December 22, 2016, the Company issued $12 million of senior notes bearing interest at 7% per annum and maturing on December 22, 2021 (the “Senior Notes”).

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 June 22 and December 22 of each year beginning on June 22, 2017.

In connection with the issuance of the Senior Notes, the Company incurred $ 374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense.

At December 31, 2020 and 2019, $73,000 and $147,000 of unamortized debt issuance costs have been deducted from the face amount of the Senior Notes included in the consolidated balance sheet.

At December 

2021, the debt issuance cost was fully amortized.

As of December 31, 2020, unamortized debt issuance cost of $ 73,000 was deducted from the face amount of the Senior Notes included in the consolidated balance sheet.

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 year ended December 31, 2020, 2019 and 2018, the Company recognized interest expense of $915,000 for each of the three years, at an effective rate of 7.6%, which amount is greater than the stated interest rate on the Senior Notes due to debt issuance cost amortization expense of $75,000 for each of the three years.

As of December 31, 2020 and 2019, $23,000 and $23,000 of interest has been included in the consolidated balance sheet in accrued expenses and other liabilities, 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 bear 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.

Interest on the Subordinated Notes is payable beginning on December 30, 2018.

For the year ended December 

2021, 2020 and 2019, the Company recognized interest expense of $ 913,000 , $ 915,000 and $ 915,000 , respectively, at an effective rate of 7.6 %, which amount is greater than the stated interest rate on the Senior Notes due to debt issuance cost amortization expense of $ 73,000 , $ 75,000 and $ 75,000 , respectively.

As of December 

2021 and 2020, $ 23,000 and $ 23,000 of interest has been included in the consolidated balance sheet in accrued expenses and other liabilities, respectively.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

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 December 31, 2020 and 2019, $218,000 and $248,000 of unamortized debt issuance costs have been deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.

For the year ended December 31, 2020, 2019 and 2018, the Company recognized interest expense of $654,000, $656,000 and $327,000, respectively.

Subordinated notes

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 bear interest at 6.25 % per annum, from and including June 

2018, to but excluding, June 

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.

Interest on the Subordinated Notes is payable beginning on December 30, 2018.

In connection with the issuance of the Subordinated Notes, the Company incurred $ 291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense.

December 

2021 and 2020, $ 189,000 and $ 218,000 of unamortized debt issuance costs have been deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively.

For the year ended December 

2021, 2020 and 2019, the Company recognized interest expense of $ 654,000 , $ 654,000 and $ 656,000 , 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.

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.

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.

1 unchanged sentence

In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.

The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (3.4% at December 31, 2020) and mature on March 26, 2033, at which time the principal amount borrowed will be due.

The junior subordinated debentures bear interest at three -month LIBOR plus 3.15 % ( 3.37 % at December 

2021 ) and mature on March 26, 2033, at which time the principal amount borrowed will be due.

Beginning in the second quarter of 2009, the Company opted to defer payment of quarterly interest on the junior subordinated debentures for 20 consecutive quarters.

2 unchanged sentences

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.

For the years ended December 31, 2020 and 2019, $8,000 and $8,000 of debt placement fee amortization has been included in interest expense recognized of $337,000 and $462,000, respectively.

As of December 31, 2020, 2019 and 2018, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $138,000, $146,000 and $154,000, respectively, and accrued interest on the junior subordinated debentures was $5,000 and $6,000, respectively.

For the years ended December 

2021, 2020 and 2019, $ 9,000 , $ 8,000 and $ 8,000 of debt placement fee amortization has been included in interest expense recognized of $ 279,000 , $ 337,000 and $ 462,000 , respectively.

As of December 

2021 and 2020, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $ 129,000 and $ 138,000 , respectively, and accrued interest on the junior subordinated debentures was $ 4,000 and $ 5,000 , 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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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 December 31, 2020 and 2019, the note had a balance outstanding of $994,000 and $1.2 million, respectively.

As of December 

2021 and 2020, the note had a balance outstanding of $ 791,000 and $ 994,000 , respectively.

The note matures in August 2024 and requires a balloon payment of approximately $ 234,000 .

The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.

Interest expenses incurred for the year ended December 31, 2020, 2019 and 2018 were $19,000, $23,000 and $26,000, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Interest expenses incurred for the year ended December 

2021, 2020 and 2019 were $ 15,000 , $ 19,000 and $ 23,000 , respectively.

Maturity of borrowings

At December 31, 2020, the contractual maturities of the Company’s borrowings in future periods were as follows:

At December 

2021, the contractual maturities of the Company’s borrowings in future periods were as follows:

(In thousands)

Year ending December 31,

$ 12,000  

12,206  

60,000  

60,210  

30,000  

30,375  

10,000  

18,248  

Total contractual maturities of borrowings

90,000  

12,000  

10,000  

121,039  

Unamortized debt issuance costs

( 189 )  

( 129 )  

Balance of borrowings as of December 31, 2021

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

$ 90,000  

$ 12,000  

$ 9,811  

$ 8,119  

$ 120,721  

Derivatives Not Designated in Hedge Relationships

Patriot is a party to interest rate swaps;

6 unchanged sentences

and another two swaps were entered into in May 2019.

As of December 31, 2020 and 2019, Patriot had cash pledged for collateral on its interest rate swaps of $1.4 million and $1.1 million, respectively.

As of December 

2021 and 2020, Patriot had cash pledged for collateral on its interest rate swaps of $ 1.4 million and $ 1.4 million, respectively.

This collateral is included in other assets on the consolidated balance sheets.

The Company recognized $30,000 gain on the swaps for the year ended December 31, 2019.

No gain on the swaps was recognized for the year ended December 31, 2020 and 2018.

Patriot did not recognize any net gain or loss in other noninterest income on the consolidated statements of operations during the year ended December 31, 2021 and 2020.

The Company recognized $ 30,000 gain on the swaps for the year ended December 31, 2019. 

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Derivatives Designated in Hedge Relationships

Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount.

In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable.

The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements.

Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1 -month LIBOR floating rate loans by converting a $ 50 million portion of that pool of loans into fixed rates with the swap.

The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7 -year rolling period beginning April 29, 2021.

A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk.

Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

In August 2021, the cash flow hedge interest rate swap contract was terminated.

During the year ended December 31, 2021, the Company recognized $ 149,000 of accumulated other comprehensive income that was reclassified into interest income.

The swap interest income is included in interest and fees on loans on the consolidated statements of operations.

In addition, a gain of $ 512,000 was recognized from the termination of the interest rate swap cash flow hedge for the year ended December 31, 2021, which is included in other income on the consolidated statements of operations.

The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction.

The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.

Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 21 to the consolidated financial statements.

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

3 unchanged sentences

Customer interest rate swap

$ 4,843  

LIBOR + 1.96%

3 unchanged sentences

3rd party interest rate swap

$ 4,843  

LIBOR + 1.96%

4 unchanged sentences

Customer interest rate swap

$ 4,911  

LIBOR + 1.96%

3 unchanged sentences

3rd party interest rate swap

$ 4,911  

LIBOR + 1.96%

4 unchanged sentences

Notes to consolidated financial statements

For the year ended December 31, 2021, changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows:

(In thousands)

December 31, 2021

Interest rate swap designated as cash flow hedge:

Unrealized gain recognized in accumulated other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income

Other comprehensive income

The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates.

Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income.

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

On January 1, 2019, the Company adopted ASU No.

2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842.

2016 - 02 “Leases”

(Topic 842 ) and all subsequent ASUs that modified Topic 842.

For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Patriot has ten non-cancelable operating leases, including four Bank branch locations and four for administrative and operational space, one ITM location, and one equipment lease.

Patriot has eleven non-cancelable operating leases, including four Bank branch locations and four for administrative and operational space, two locations for ITM and ATM, and one equipment lease.

The leases expire on various dates through 2032 and some include renewal options.

1 unchanged sentence

The last potential year the leases can be extended through 2037.

All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets.

With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.

All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets.

With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.

Renew periods were included in the future cashflows for purposes of calculating the ROU and lease liability.

The Company has no finance leases (previously referred to as a capital lease).

Operating leases are recorded as a ROU lease assets and are included in other assets on the consolidated balance sheet.

The Company’s corresponding lease obligations are included in accrued expenses and other liabilities on the consolidated balance sheet.

ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease.

Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

As of December 31, 2020 and 2019, the Company recognized ROU assets of $2.7 million and $3.2 million, respectively, and lease liabilities of $2.9 million and $3.3 million, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

At the time of adoption on January 1, 2019, a cumulative-effect adjustment of $11,000 was recorded to the accumulated deficit on the consolidated balance sheets.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

As of December 

2021 and 2020, the Company recognized ROU assets of $ 2.6 million and $ 2.7 million, respectively, and lease liabilities of $ 2.8 million and $ 2.9 million, respectively.

ROU lease assets are included in other assets on the consolidated balance sheet.

The lease liabilities are included in accrued expenses and other liabilities on the consolidated balance sheet.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

4 unchanged sentences

The variable lease cost primarily represents variable payments such as common area maintenance and utilities, which are included in the occupancy and equipment expenses on the consolidated statements of operations.

For the year ended December 31, 2020, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $565,000 and $38,000, respectively.

For the year ended December 

2021, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 571,000 and $ 38,000 , respectively.

For the year ended December 

2020, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 565,000 and $ 38,000 , respectively.

For the year ended December 31, 2019, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 517,000 and $ 27,000 , respectively.

2 unchanged sentences

Notes to consolidated financial statements

The following is a maturity analysis of the operating lease liabilities as of December 31, 2020:

The following is a maturity analysis of the operating lease liabilities as of December 

(in thousands)

2 unchanged sentences

Total undiscounted lease payments

$ 3,238  

Less imputed interest

Present value of operating lease liabilities

$ 2,777  

Operating lease right-of-use asset

$ 2,639  

Year Ended December 31,

6 unchanged sentences

Weighted -average discount rate - operating leases

3.30 %  

As of December 31, 2021 and 2020, the undiscounted lease payments were $ 3.2 million and $ 3.4 million, respectively.

The lease payments were not reduced by minimum sublease rentals of $1.7 million and $2.0 million due in the future under non-cancelable subleases, respectively.

The lease payments were not reduced by minimum sublease rentals of $ 812,000 and $ 1.7 million due in the future under non-cancelable subleases, respectively.

Rent expense for operating leases is recognized in earnings on a straight-line basis over the base term of the respective lease and is included in the consolidated statement of operations as a component of Occupancy and Equipment expense.

For the years ended December 31, 2020, 2019 and 2018, total rent expense for cancellable and non-cancellable operating leases was $583,000, $636,000, and $593,000, respectively.

For the years ended December 31, 2020, 2019 and 2018, Patriot recognized gross rental income of $523,000, $589,000, and $413,000 offset by rental costs of $5,000, $5,000, and $5,000, respectively.

For the years ended December 

2021, 2020 and 2019, total rent expense for cancellable and non-cancellable operating leases was $ 583,000 , $ 583,000 , and $ 636,000 , respectively.

For the years ended December 

2021, 2020 and 2019, Patriot recognized gross rental income of $ 543,000 , $ 523,000 , and $ 589,000 offset by rental costs of $ 5,000 , $ 5,000 , and $ 5,000 , respectively.

PATRIOT NATIONAL BANCORP, INC.

3 unchanged sentences

Employment Agreements

The Company has a severance agreement for certain Executive Vice Presidents that provides for severance equal to 12 months of current salary, if the EVP is terminated within 12 months of a change of control of Patriot.

The Company has a severance agreement for two Executive Vice Presidents that provides for severance equal to 12 months of current salary, if the EVP is terminated within 12 months of a change of control of Patriot.

Legal Matters

1 unchanged sentence

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.

Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the three-year period ended December 31, 2020.

Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the three -year period ended December 

(In thousands)

Year Ended December 31,

Income tax (benefit) expense

For each of the years in the three-year period ended December 31, 2020, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:

$ ( 100 )  

( 14 )  

( 2,448 )  

( 2,121 )  

( 261 )  

( 323 )  

Income tax benefit

$ ( 81 )  

$ ( 337 )  

For each of the years in the three -year period ended December 

2021, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:

(In thousands)

1 unchanged sentence

Income taxes at statutory Federal rate

$ 1,053  

$ ( 873 )  

State taxes, net of Federal benefit

( 191 )  

Deferred tax valuation allowance

( 1,938 )  

Reversal UTP on Federal DTA

( 1,132 )  

Nondeductible expenses

Benefit of change in Sec 382 classification

Deferred tax adjustment resulting from tax rate change

Income tax (benefit) expense

( 10 )  

Project expenses for merger and acquisition

( 87 )  

Income tax benefit

$ ( 81 )  

$ ( 337 )  

The effective tax rate for the years ended December 

2021, 2020 and 2019 was ( 1.6 %), 8.1 %, and 24.2 %, respectively.

The decrease in the effective tax rate for 2021 was primarily due to the full reversal of $ 1.9 million deferred tax asset valuation allowance recorded at December 31, 2020.

There were no significant changes to the effective tax rate in 2019.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The effective tax rate for the years ended December 31, 2020, 2019 and 2018 was 8.1%, 24.2%, and 21.8%, respectively.

The decrease in the effective tax rate for 2020 was primarily due to the recoding of a deferred tax asset valuation allowance.

There were no significant changes to the effective tax rate for 2019 and 2018.

The effective tax rate for 2018 was impacted by the reduction in the statutory Federal corporate tax rate to 21% from 34% that was effective January 1, 2018.

Deferred Tax Assets and Liabilities

The significant components of Patriot’s net deferred tax assets at December 31, 2020 and 2019 are presented below.

The significant components of Patriot’s net deferred tax assets at December 

2021 and 2020 are presented below.

(In thousands)

1 unchanged sentence

Federal NOL carryforward benefit

$ 3,605  

$ 4,576  

NOL write-off for Sec 382 Limit

( 3,258 )  

Capitalized cost temporary item

6 unchanged sentences

Unrealized loss AFS securities

Goodwill and intangible

Depreciation of premises and equipment

Share based compensation

Gross deferred tax assets

12,862  

14,231  

Less deferred taxasset valuation allowance

Total deferred tax assets

$ 12,862  

$ 12,294  

Deferred tax liabilities:

UTP (NOLs used)

Right-of-use assets

Goodwill and intangible

Depreciation of premises and equipment

( 709 )  

Depreciation of premises and equipment  

Gross deferred tax liabilities

( 716 )  

Net deferred tax asset

As of December 31, 2020, Patriot had available approximately $21.8 million of Federal net operating loss carryforwards (“NOL”) that is offset by $15.5 million in §382 limitations imposed by the Internal Revenue Code.

Of the NOL of $21.8 million, approximately $20.2 million will expire between 2030 and 2033 and $1.6 million which do not expire.

Patriot has approximately $55.8 million of NOLs available for Connecticut tax purposes at December 31, 2020, which may be used to offset up to 50% of taxable income in any year.

The NOLs expire between 2030 and 2039.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

12,146  

11,496  

As of December 

2021, Patriot had available approximately $ 17.2 million of Federal net operating loss carryforwards (“NOL”) that is offset by $ 15.5 million in §382 limitations imposed by the Internal Revenue Code.

Of the NOL of $ 17.2  million, approximately $ 15.8 million will expire between 2030 and 2033 and $ 1.4 million do not expire.

Patriot has approximately $ 53.5 million of NOLs available for Connecticut tax purposes at December 

2021, which may be used to offset up to 50 % of taxable income in any year.

The NOLs will expire between 2030 and 2040.

Valuation Allowance against net Deferred Tax Assets

2 unchanged sentences

The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence.

1 unchanged sentence

The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and prudent and feasible tax planning strategies.

The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans.

Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.

The valuation allowance at December 31, 2020 was primarily related to state net operating losses.

Patriot will continue to evaluate the need for valuation allowances for its deferred tax assets.

During December 31, 2020, Patriot recorded a partial valuation allowance of $1.9 million primarily against its deferred tax asset related to state net operating loss carryforwards.

For the year ended December 31, 2020 Patriot was in a cumulative loss position.

In order to overcome this negative evidence Patriot reviewed its accumulated pre-tax income(loss) for the current and prior two- and three-year periods and adjusted for non-recurring items.

After the adjustments, Patriot was no longer in a cumulative loss position.

During December 31, 2021, Patriot fully reversed the valuation allowance of $ 1.9 million primarily against its deferred tax asset related to state net operating loss carryforwards.

For the year ended December 31, 2021 Patriot was in a cumulative income position.

Patriot reviewed its accumulated pre-tax income(loss) for the current and prior two - and there-year periods and adjusted for non-recurring items.

After the adjustments, Patriot remained in a cumulative income position.

Patriot used the average adjusted pre-tax income for the current and prior three years as the basis for objectively estimating future taxable income.

Patriot will continue to evaluate the need for valuation allowances

Secondly, Patriot has a tax planning strategy available under ASC 740 that would be implemented to prevent a carry-forward state net operating losses from expiring.

The strategy consists of capitalizing loan costs to increase income and avoid state net operating losses from expiring unused.

As deferred tax assets associated with NOL carryforwards are already a direct reduction to Tier 1 Capital, the valuation allowance at December 31, 2020 had no impact on the Bank's regulatory capital position.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2021, based on Patriot’s objective projection of future taxable income and tax planning, Patriot fully reversed the partial valuation allowance of $1.9 million recorded at December 31, 2020.

Patriot will review the valuation allowance quarterly to determine if an adjustment, to either increase or decrease, the allowance is required.

Unrecognized tax benefits

1 unchanged sentence

As of December 31, 2020 and 2019, the Bank recorded an uncertain tax position related to the utilization of certain federal net operating losses of $0 and $1.2 million, respectively.

At December 31, 2020 Patriot no longer has a liability for unrecognized tax benefits.

As of December 

2021 and 2020, the Bank did not record any uncertain tax position related to the utilization of certain federal net operating losses. At December 31, 2021 Patriot no longer has a liability for unrecognized tax benefits.

Additionally, Patriot has no pending or on-going audits in any tax jurisdiction.

3 unchanged sentences

Balance, beginning of year

$ 1,220  

$ 1,132  

Increases due to tax positions related to a prior year

Decreases to tax positions as a result of a lapse of statute

( 1,285 )  

Balance, end of year

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

Patriot’s returns for tax years 2017 through 2020 are subject to examination by the IRS for U.S.

$ 1,220  

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

Patriot’s returns for tax years 2018 through 2021 are subject to examination by the IRS for U.S.

Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance.

3 unchanged sentences

Share-based Compensation

The Company maintains the Patriot National Bancorp, Inc.

2012 Stock Plan (the “Plan”) to provide an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”), options, or phantom stock units.

Since 2013, the Company’s practice is to grant RSAs;

as of December 31, 2020, there are no options or phantom stock units outstanding or that have been exercised.

The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain Plan limitations.

As of December 31, 2020, 2,850,507 shares of stock remain available for issuance under the Plan.

In accordance with the terms of the Plan, the vesting of RSAs and options may be accelerated at the discretion of the Compensation Committee of the Board of Directors.

The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs and stock option grants.

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 December 

2021, 2,834,617 shares of stock are available for issuance under the Plan.

In accordance with the terms of the Plan, the vesting of RSAs 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 share awards as of and for each of the years in the three-year period ended December 31, 2020.

The following is a summary of the status of the Company’s restricted share awards as of and for each of the years in the three -year period ended December 

Shares Awarded

1 unchanged sentence

Unvested at December 31, 2018

31,790  

$ 14.06  

$ 15.52  

( 19,995 )  

$ 15.99  

Unvested at December 31, 2019

21,470  

$ 12.91  

12,484  

$ 6.12  

( 12,903 )  

$ 13.82  

( 2,553 )  

$ 15.86  

Unvested at December 31, 2020

18,498  

$ 7.29  

20,476  

$ 10.48  

( 12,920 )  

$ 12.95  

( 4,586 )  

$ 9.39  

Unvested at December 31, 2021

21,468  

$ 6.48  

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 years ended December 31, 2020, 2019 and 2018, the Company recognized share-based compensation expense of $159,000, $214,000, and $220,000, respectively.

For the years ended December 31, 2020, 2019 and 2018, share-based compensation attributable to employees of Patriot amounted to $80,000, $117,000, and $135,000, respectively.

The share-based compensation expense attributable to Patriot’s external Directors for the years ended December 31, 2020, 2019, and 2018 was $79,000, $97,000, and $85,000, respectively.

For the years ended December 

2021, 2020 and 2019, the Company recognized share-based compensation expense of $ 150,000 , $ 159,000 , and $ 214,000 , respectively.

For the years ended December 

2021, 2020 and 2019, share-based compensation attributable to employees of Patriot amounted to $ 90,000 , $ 80,000 , and $ 117,000 , respectively.

The share-based compensation expense attributable to Patriot’s external Directors for the years ended December 

2021, 2020, and 2019 was $ 60,000 , $ 79,000 , and $ 97,000 , respectively.

For each of those years, the Directors received total compensation of $ 325,000 , $ 429,000 , and $ 547,000 , respectively, which amounts are included in Other Operating Expenses in the consolidated statements of operations.

Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of December 31, 2020 amounted to $183,000, which amount is expected to be recognized over the weighted average remaining life of the awards of 1.85 years.

Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of December 

2021 amounted to $ 205,000 , which amount is expected to be recognized over the weighted average remaining life of the awards of 3.29 years.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

RSA Grant - Non-executive Employees

On January 4, 2016, the Company granted 100 restricted shares to eighty-seven full- and part-time non-executive employees as of December 31, 2015.

The total number of shares granted was 8,700 at a grant date fair value of $15.50 per share.

Total 2,700 granted shares granted were forfeited.

The remaining 6,000 shares were vested through the January 2019 vesting date.

Shareholders ’ Equity

On December 16, 2009, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with PNBK Holdings, LLC, a limited liability company controlled by Michael Carrazza (“Holdings”).

Shareholders ’

Pursuant to the Securities Purchase Agreement, on October 15, 2010, the Company issued 3.36 million shares of common stock to Holdings at $ 15.00 per share, for an aggregate issuance value of $ 50.4 million.

The shares issued to Holdings represented 87.6% of the Company’s then issued and outstanding common stock.

In connection with the equity interest obtained by Holdings, Michael Carrazza became Patriot’s Chairman of the Board and nominees of Holdings replaced certain directors and officers who resigned.

Holdings currently owns 56.7% of the Company’s issued and outstanding common stock.

Additionally, the Company reduced the par value of its common stock from $2 to $0.01 per share, increased the number of its authorized common shares to 100 million, and entered into a Registration Rights Agreement with Holdings.

The Registration Rights Agreement provides Holdings with customary demand, shelf, and piggyback registration rights.

The Company did not pay any dividends for the year ended December 31, 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic.

For the year ended December 31, 2019 and 2018, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $155,000 and $154,000, respectively.

The shares issued to Holdings represented 87.6 % of the Company’s then issued and outstanding common stock.

In connection with the equity interest obtained by Holdings, Michael Carrazza became Patriot’s Chairman of the Board and nominees of Holdings replaced certain directors and officers who resigned.

Additionally, the Company reduced the par value of its common stock from $ 2 to $ 0.01 per share, increased the number of its authorized common shares to 100 million.

Pursuant to its Operating Agreement, on March 31, 2021, Holdings completed a pro-rata in-kind distribution of shares of restricted common stock of Patriot.

Following these distributions, Holdings no longer owns any shares of Patriot.

The Company did not pay any dividends for the year ended December 31, 2021 and 2020 and has temporarily suspended dividend payments pending resolution of the economic uncertainties associated with the Coronavirus pandemic.

For the year ended December 

2019, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $ 155,000 .

Earnings per Share

8 unchanged sentences

Notes to consolidated financial statements

The following is a summary of the computation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 2020.

The following is a summary of the computation of basic and diluted earnings per share for each of the years in the three -year period ended December 

(Net income in thousands)

Year ended December 31,

Basic (loss) earnings per share:

Net (loss) income attributable to Common shareholders

Basic earnings (loss) per share:

Net income (loss) attributable to Common shareholders

$ 5,094  

$ ( 3,819 )  

Weighted average shares outstanding

Basic (loss) earnings per common share

Diluted (loss) earnings per share:

Net (loss) income attributable to Common shareholders

3,946,384  

3,934,886  

3,921,783  

Basic earnings (loss) per common share

$ 1.29  

$ ( 0.97 )  

Diluted earnings (loss) per share:

Net income (loss) attributable to Common shareholders

( 3,819 )  

Weighted average shares outstanding

3,946,384  

3,934,886  

3,921,783  

Effect of potentially dilutive restricted common shares

Weighted average diluted shares outstanding

Diluted (loss) earnings per common share

3,952,654  

3,934,886  

3,921,783  

Diluted earnings (loss) per common share

$ 1.29  

$ ( 0.97 )  

The weighted average diluted shares outstanding does not include 3,039 anti-dilutive restricted common shares for the year ended December 31, 2020.

5 unchanged sentences

Under the terms of the 401 (k) Plan, participants can contribute up to the maximum amount allowed, subject to Federal limitations.

At its discretion, Patriot may match eligible participating employee contributions at the rate of 50% of the first 6% of the participants’ salary contributed to the 401(k) Plan.

Eligibility for matching contributions is dependent on an employee’s completing 6 consecutive month(s) of service or 500 hours of employment.

Participants immediately vest in Patriot’s matching contributions, if applicable.

During the years ended December 31, 2020, 2019, and 2018, Patriot made matching contributions to the 401(k) Plan of $253,000, $251,000, and $204,000, respectively.

At its discretion, Patriot may match eligible participating employee contributions at the rate of 50 % of the first 6 % of the participants’

salary contributed to the 401 (k) Plan.

Eligibility for matching contributions is dependent on an employee’s completing 6 consecutive month(s) of service or 500 hours of employment.

Participants immediately vest in Patriot’s matching contributions, if applicable.

During the years ended December 

2021, 2020, and 2019, Patriot made matching contributions to the 401 (k) Plan of $ 215,000 , $ 253,000 , and $ 251,000 , respectively.

PATRIOT NATIONAL BANCORP, INC.

11 unchanged sentences

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.

At December 31, 2020 and 2019, financial instruments with credit risk are as follows:

At December 

2021 and 2020, financial instruments with credit risk are as follows:

(In thousands)

1 unchanged sentence

Unused lines of credit

$ 68,341  

$ 61,622  

Undisbursed construction loans

18,594  

25,232  

Home equity lines of credit

16,396  

19,240  

Future loan commitments

23,486  

15,696  

Financial standby letters of credit

$ 126,981  

$ 122,394  

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

3 unchanged sentences

Collateral held varies, but may include commercial property, residential property, deposits, and securities.

The Bank has established a reserve for credit loss of $8,000 and $8,000 as of December 31, 2020 and 2019, respectively.

The Bank has established a reserve for credit loss of $ 8,000 and $ 8,000 as of December 

2021 and 2020, respectively.

Standby letters of credit are written commitments issued by the Bank to guarantee the performance of a customer to a third party.

The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheets.

Guarantees that are not derivative contracts are recorded at fair value and included in the consolidated balance sheet.

PATRIOT NATIONAL BANCORP, INC.

2 unchanged sentences

Regulatory and Operational Matters

In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC.

Pursuant to the terms of the Agreement, the Bank has appointed a Compliance Committee of three independent outside directors and one member of management responsible for monitoring adherence to the Agreement and has appointed a Lead Independent Director.

The Agreement states the Board and Bank would develop, implement and revise written documents and policies related to executive compensation, conflict of interest, internal audit, liquidity and asset/liability management, commercial loan administration, leveraged lending, practices relating to the allowance for loan and lease losses, and assumptions used in the Bank’s interest rate risk model.

Under the Agreement the Bank agreed to provide a revised written 3-year strategic and capital plan for the Bank.

In November 2018, the Bank entered into a formal written agreement (the “Agreement”) with the OCC.  Pursuant to the terms of the Agreement, the Bank has appointed a Compliance Committee of three independent outside directors and one member of management responsible for monitoring adherence to the Agreement and has appointed a Lead Independent Director.

Under the Agreement the Bank agreed to provide a revised written 3 -year strategic and capital plan for the Bank. 

The Bank provided the documents and policies requested in the Agreement.

To date, the Bank has addressed each of the items identified in the Agreement and is currently working collaboratively with the OCC to bring all matters to full resolution.

Further details pertaining to the Agreement were provided in Part II Item 9B:

Other information included on the Annual Report on Form 10-K for the year ended December 31, 2018.

The existence of this agreement also resulted in increased supervision from the SBA with respect to the Bank’s SBA division and the loss of its preferred lender status.

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

Shortly after the termination of the formal agreement, the SBA removed increased supervision.

The Bank applied for reinstatement of its preferred lender status which was granted before December 31, 2021.

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.

) 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.

4 unchanged sentences

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 Bank did not adopt the CBLR framework at December 31, 2020 but retains the option to adopt the framework in a future period.

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.

Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 9.0%.

However, regardless of a financial institution’s ratios, the OCC may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The Company’s and the Bank’s regulatory capital amounts and ratios at December 31, 2020 and 2019 are summarized as follows:

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 December 31, 2021 and 2020 was 9.9 % and 9.8 %, respectively, which satisfied the “greater than 9 percent”

leverage ratio requirement under the CBLR framework.

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

The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at December 

2021 and 2020 are summarized as follows:

(In thousands)

Patriot National Bancorp, Inc.

Patriot Bank, N.A.

December 31, 2020

December 31, 2019

December 31, 2020

December 31, 2019

Total Capital (to risk weighted assets):

To be Well Capitalized (1)

For capital adequacy with Capital Buffer (2)

For capital adequacy

Tier 1 Capital (to risk weighted assets):

To be Well Capitalized (1)

For capital adequacy with Capital Buffer (2)

For capital adequacy

Common Equity Tier 1 Capital (to risk weighted assets):

To be Well Capitalized (1)

For capital adequacy with Capital Buffer (2)

For capital adequacy

Tier 1 Leverage Capital (to average assets):

$ 93,923  

9.86 %  

$ 87,844  

9.79 %  

To be Well Capitalized

For capital adequacy

85,773  

9.00 %  

80,721  

9.00 %  

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.

The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016.

It was not applicable to periods prior to that date and does not apply to bank holding companies - the Company.

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule.

Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital conversation buffer of 2.5% has been included in the minimum capital adequacy ratios in the 2020 and 2019 column above.

The capital buffer requirement effectively raises the minimum required Total Capital ratio to 10.5%, the Tier 1 capital ratio to 8.5% and the CET1 capital ratio to 7.0% on a fully phased-in basis, which was effective on January 1, 2019.

As of December 31, 2020, Patriot satisfies all regulatory capital adequacy requirements on a fully phased-in basis.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

On January 22, 2019, based on its supervisory profile, the Bank was notified by the OCC that it established individual minimum capital ratios for the Bank.

Specifically, the Bank is required to maintain a Tier 1 leverage ratio of 9.0% and a total risk-based capital to risk-weighted assets of 11.0%.

At December 31, 2020, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $87.8 million, or 9.8% of adjusted total assets, which is above the well-capitalized required level of 9.0%;

total risk-based capital of $97.6 million, or 12.5% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk-weighted assets;

At December 31, 2019, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of 9.3% of adjusted total assets of $90.8 million, which is above the well-capitalized required level of 9.0%;

and total risk-based capital of $101.0 million, or 11.8% of risk-weighted assets, which is above the well-capitalized required level of 11.0% of risk weighted assets.

Accordingly, the Bank was categorized as well capitalized as of December 31, 2020 and 2019.

Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.

Related Party Transactions

1 unchanged sentence

The transactions are completed under the same terms applied to transaction with unrelated third parties.

There was one loan granted to a related party with an outstanding balance of $100,000 as of December 31, 2019.

No loan was granted or repaid during 2020.

Therefore, the outstanding balance of the loan remained $100,000 as of December 31, 2020.

As of December 31, 2020 and 2019, deposits by related parties aggregated $189,000 and $469,000, respectively.

For the year ended December 31, 2019, service fees for credit analysis paid to affiliates of members of the Board of Directors aggregated $39,000.

No related party loan was outstanding as of December 31, 2021.

As of December 31, 2020 one loan of $ 100,000 was outstanding for one member of Board of Director.

As of December 

2021 and 2020, deposits by related parties aggregated $ 58,000 and $ 189,000 , respectively.

Fair Value and Interest Rate Risk

1 unchanged sentence

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.

2 unchanged sentences

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The three levels of the fair value hierarchy consist of:

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interest rates, yield curves, prepayment speeds, default rates, etc.).

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).

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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.

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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 December 31, 2020 and 2019.

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 December 

2021 and 2020 due to its short-term nature.

Federal Reserve Bank Stock and Federal Home Loan Bank Stock

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The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

We refined our methodology to estimate the fair value of our loan portfolio using an exit price notion.

We estimate the fair value of our loan portfolio using an exit price notion.

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Loans Held for Sale

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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.

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Derivative asset (liability) - Interest Rate Swaps

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 Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk.

The valuation of interest rate swap agreements does not contain any counterparty risk.

The valuation of the Company’s interest rate swaps is obtained from a third -party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative.

The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

See Notes 1 and 11 for additional disclosures on derivatives.

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

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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.

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Notes to consolidated financial statements

Contingent Consideration Liability

The Company estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on interest income related to the acquired PCI loans.

The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on interest income of the acquired PCI loans affecting the contingent consideration liability will be recorded through noninterest expense.

Due to the significant unobservable input related to the interest income, the contingent consideration liability is classified within Level 3 of the valuation hierarchy.

An increase in the interest income may result in a higher fair value of the contingent consideration liability.

Alternatively, a decrease in the interest income may result in a lower estimated fair value of the contingent consideration liability.

Off-balance-sheet financial instruments

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

The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of December 31, 2020 and 2019:

The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of December 

2021 and 2020:

(In thousands)

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Cash and noninterest bearing balances due from banks

$ 3,264  

$ 3,006  

Interest-bearing deposits due from banks

43,781  

31,630  

Available-for-sale securities

81,161  

49,262  

Available-for-sale securities

13,180  

Other investments

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Loans receivable, net

729,583  

727,733  

719,596  

716,822  

Loans held for sale

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Financial assets, total

$ 892,719  

$ 891,279  

$ 826,476  

$ 823,887  

Financial Liabilities:

Demand deposits

$ 226,713  

$ 158,676  

Savings deposits

109,744  

98,635  

Money market deposits

164,518  

146,389  

34,741  

30,529  

Time deposits

195,830  

195,048  

210,140  

210,882  

Brokered deposits

17,016  

17,003  

41,287  

41,643  

FHLB borrowings

90,000  

93,643  

90,000  

97,293  

12,000  

12,045  

11,927  

12,028  

Subordinated debt

10,125  

Junior subordinated debt owed to unconsolidated trust

Accrued interest payable

Contingent consideration liability

Interest rate swap liability

Financial liabilities, total

$ 870,364  

$ 873,377  

$ 808,228  

$ 817,066  

The carrying amount of cash and noninterest bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances.

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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 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.

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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 December 31, 2020 and 2019.

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 December 

2021 and 2020.

(In thousands)

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December 31, 2021:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 66,629  

Corporate bonds

13,180  

16,921  

Subordinated notes

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Available-for-sale securities

$ 81,161  

$ 13,180  

$ 94,341  

Interest rate swap receivable

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December 31, 2020:

Government agency mortgage-backed securities

Government agency and mortgage-backed securities

$ 16,833  

Corporate bonds

17,290  

Subordinated notes

SBA loan pools

Municipal bonds

Available-for-sale securities

Impaired PCI Loans, net

Contingent consideration liability

$ 49,262  

Interest rate swap receivable

$ 1,187  

Interest rate swap liability

$ 1,187  

Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis.

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

During the year ended December 31, 2020 and 2019, the Company had no transfers into or out of Levels 1, 2 or 3.

As of December 31, 2021, four corporate bonds purchased in the fourth quarter of 2021, 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 year ended December 

2021 and 2020, the Company had no transfers into or out of Levels 1, 2 or 3.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

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 December 31, 2020 and 2019:

The reconciliation of the beginning and ending balances during 2021 for Level 3 available-for-sale securities is as follows:

(In thousands)

December 31, 2021

Level 3 fair value, beginning of year

14,000  

Realized gain (loss)

Unrealized loss

Transfers in and /or out of Level 3

Level 3 fair value, end of year

$ 13,180  

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 December 

2021 and 2020:

(In thousands)

Unobservable Inputs

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Impaired loans, net

Real Estate Appraisals

Discount for appraisal type

Other Real Estate Owned

$ 20,920  

Real Estate Appraisals

Discount for appraisal type

5.8 % - 20 %  

SBA servicing assets

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Market discount rates

14.73 % - 14.90 %  

December 31, 2020:

Impaired loans, net

$ 22,971  

Real Estate Appraisals

Discount for appraisal type

5.8 % - 20 %  

Other Real Estate Owned

1 unchanged sentence

Discount for appraisal type

5.84 %  

SBA servicing assets

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Market discount rates

Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value.

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 December 31, 2020 and 2019 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.

The estimated fair value amounts have been measured as of December 

2021 and 2020 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.

As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued.

The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes.

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful.

PATRIOT NATIONAL BANCORP, INC.

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Investment in subsidiary

96,799  

91,836  

$ 97,325  

$ 93,488  

LIABILITIES AND SHAREHOLDERS' EQUITY

$ 29,930  

$ 29,819  

Accrued expenses and other liabilities

Shareholders' equity

67,344  

63,219  

Total liabilities and shareholders' equity

$ 97,325  

$ 93,488  

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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Benefit for income taxes

( 540 )  

( 532 )  

Loss before equity in undistributed net income of subsidiary

Equity in undistributed net income of subsidiary

Net (loss) income

Equity in undistributed net income (loss) of subsidiary

( 2,276 )  

Net income (loss)

( 3,819 )  

Equity in subsidiary other comprehensive income, net of subsidiary

Total comprehensive (loss) income

( 1,119 )  

( 115 )  

Total comprehensive income (loss)

$ 3,975  

$ ( 3,934 )  

PATRIOT NATIONAL BANCORP, INC.

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Cash Flows from Operating Activities:

Net (loss) income

Net income (loss)

$ 5,094  

$ ( 3,819 )  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Equity in undistributed income of subsidiary

( 6,581 )  

Dividends received from Patriot Bank, N.A.

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Change in assets and liabilities:

Increase in other assets

(Decrease) increase in accrued expenses and other liabilities

Decrease (increase) in other assets

( 540 )  

(Increased) decrease in accrued expenses and other liabilities

( 399 )  

( 315 )  

Net cash used in operating activities

( 170 )  

( 127 )  

Cash Flows from Investing Activities:

Net decrease (increase) in investment in Patriot Bank N.A.

Net cash provided by (used in) investing activities

Net (increase) decrease in investment in Patriot Bank N.A.

Net cash (used in) provided by investing activities

Cash Flows from Financing Activities:

Proceeds from issuance of senior notes, net of expenses

Dividends paid on common stock

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash used in financing activities

Net decrease in cash and cash equivalents

( 171 )  

( 119 )  

Cash and cash equivalents at beginning of year

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Cash paid for interest

$ 1,570  

$ 1,776  

$ 1,593  

Cash paid for income taxes

3 unchanged sentences

Subsequent Event

The Company evaluated its December 31, 2020 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued.

As noted in Note 4, the Bank had modified loans to defer the payment of interest and/or principal for up to 180 days pursuant to the CARES Act.

The majority of the modifications granted to customers expired as of March 30, 2021, the balance of loans modified in conjunction with the CARES Act had declined to $37.7 million.

As noted in Note 8, PNBK entered into an Agreement and Plan of Merger dated November 14, 2021 ( the “Original Merger Agreement”), with American Challenger, and Next Special, Inc., a Delaware corporation and wholly owned subsidiary of PNBK (“Merger Sub”) (“American Challenger”, and together with PNBK and Merger Sub, the “Parties”).

On January 28, 2022, the Parties entered into Amendment No.

1 (“Amendment No.

) to the Original Merger Agreement, in connection with a commercial loan portfolio acquisition.

Under a loan purchase agreement, American Challenger agreed to acquire a commercial loan portfolio, with at least $650 million in unpaid principal balance, from a financial services firm and certain of its affiliates (“Sellers”).

Under Amendment No.

1, PNBK agreed that immediately following (a) the Merger, (b) the consummation of the Capital Raise, and (c) the time that all conditions precedent related to the consummation of the commercial loan portfolio acquisition, shall have been satisfied or waived, that it will pay to Sellers:

(i) the purchase price for the commercial loan portfolio using cash proceeds received in the Capital Raise and (ii) a structuring and advisory fee estimated to be $ 6.5 million plus a reimbursement fee for cash compensation to be paid by Sellers to certain specified employees not to exceed $ 7.8 million plus certain deferred compensation forfeited by such employees with the Sellers in connection with the loan portfolio acquisition not to exceed $ 4.7 million (collectively, the “Additional Payment Amount”), either in cash or by issuing to Sellers warrants for the purchase of PNBK non-voting common stock up to 1,132,000 shares, with one share of PNBK non-voting common stock for every $ 17.69 of the Additional Payment Amount being allocated to the warrants issuable to Sellers.

In addition, to the extent that any such employee does not accept employment with American Challenger, following the closing of the Merger, PNBK agreed to pay a monthly fee for up to 18 months equal, for each such employee who does not accept employment with American Challenger, to the total annual deferred compensation offered to such employee by American Challenger divided by eighteen.

On February 28, 2022, the Parties entered into Amendment No.

2 (“Amendment No.

2 ) to the Original Merger Agreement.

Amendment No.

2 revised the Merger structure to provide that (i) American Challenger will merge with and into PNBK, so that PNBK is the surviving entity in the Merger and American Challenger ceases to exist, (ii) Next Special, Inc.

ceased to be a party to the Merger Agreement and (iii) all references to Next Special, Inc.

as the “Merger Sub”

were removed from the Merger Agreement.

federal income tax purposes, it is intended that the Merger qualify as a “reorganization”

described in Section 368 (a) of the Internal Revenue Code of 1986, as amended (the “Code”) and, taken together with the Capital Raise as an “exchange”

described in Section 351 of the Code.

As a result of the proximity of the definitive purchase to the date these consolidated financial statements are available to be issued, Patriot is still evaluating the estimated fair values of the assets to be acquired and the liabilities to be assumed.

Accordingly, the amount of any goodwill and other intangible assets to be recognized in the connection with this transaction, as well as acquisition costs incurred and expected to be incurred, are also yet to be determined.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data