PATRIOT NATIONAL BANCORP INC 10-K

ITEM 5. Market for Registrant ’ s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities   Market Information The Company’s Common Stock is traded on the Nasdaq Global Market under the Symbol “PNBK.”   Holders There were approximately 281 shareholders of record of the Company’s Common Stock as of December 31, 2021. This number does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms or other nominees.   Dividends The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends or execute a return of capital to the Company. The Bank can make payments to the Company pursuant to a dividend policy requiring compliance with the Bank's OCC-approved capital program, in compliance with applicable law, and with the prior written determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the capital program, certain other restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the OCC is required to make payments in excess of the Bank’s earnings retained in the current year plus retained net earnings for the preceding two years. The Company is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. OCC regulations impose limitations upon all capital distributions by commercial institutions, like the Bank, such as dividends, returns of capital, and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration and payments would otherwise violate regulatory requirements.   The Company did not pay any dividends in 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 31, 2019, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $155,000. There is no assurance that Company will pay dividends in the future.   For information regarding our equity compensation plans, see PART III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.”   17     Performance Graph   The performance graph compares the Company’s cumulative total shareholder return on its common stock over the last five fiscal years to the NASDAQ Community Bank Total Return Index and the S&P 500 Total Return Index. Total shareholder return is measured by dividing the sum of the cumulative amount of dividends for the measurement period (assuming dividend reinvestment) and the Company’s share price at the end of the measurement period, by the share price at the beginning of the measurement period.               Period Ending       2016     2017     2018     2019     2020     2021   Patriot National Bancorp ("PNBK")     100.00 %     127.05 %     101.42 %     90.82 %     70.75 %     110.68 % Nasdaq Community Bank Index Total Return Index ("XABQ")     100.00 %     103.51 %     84.98 %     103.02 %     92.07 %     128.61 % S&P 500 Total Return Index ("SP500TR")     100.00 %     121.83 %     116.49 %     153.17 %     181.35 %     234.01 %   18     ITEM 6. [Reserved]   ITEM 7. Management ’ s Discussion and Analysis - Financial Condition & Results of Operations   General Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.   Critical Accounting Policies The accounting and reporting policies of Patriot conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the financial services industry. A summary of Patriot’s significant accounting policies is included in the Notes to consolidated financial statements that are referenced in Item 8. Financial Statements and Supplementary Data. Although all of Patriot’s policies are integral to understanding its consolidated financial statements, certain accounting policies involve management to exercise judgment, develop assumptions, and make estimates that may have a material impact on the financial information presented in the consolidated financial statements or Notes thereto. The assumptions and estimates are based on historical experience and other factors representing the best available information to management as of the date of the consolidated financial statements, up to and including the date of issuance or availability for issuance. As the basis for the assumptions and estimates incorporated in the consolidated financial statements may change, as new information comes to light, the consolidated financial statements could reflect different assumptions and estimates.   Due to the judgments, assumptions, and estimates inherent in the following policies, management considers such accounting policies critical to an understanding of the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.   Allowance for Loan and Lease Losses (ALLL) The Company maintains an ALLL at a level management believes is sufficient to absorb estimated credit losses incurred as of the report date. Management’s determination of the adequacy of the ALLL is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by management. As applicable, consideration is given to a variety of factors in establishing these estimates including historical losses, peer and industry data, current economic conditions, the size and composition of the loan portfolio, delinquency statistics, criticized and classified assets and impaired loans, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, and the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change.    To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required, which may adversely affect the Company’s results of operations in the future. Subsequent to acquisition of purchased-credit-impaired loans, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses; subsequent increases in expected cash flows may result in a reversal of the provision for loan losses to the extent of prior charges.   19     Unrealized Gains and Losses on Securities Available-for-sale The Company receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Available-for-sale debt securities consist primarily of U.S. Government agency debt and mortgage-backed securities issued by the U.S. government, corporate bonds, subordinated notes and SBA loan pools. The Company uses various indicators in determining whether a security is other-than-temporarily impaired including, for debt securities, when it is probable that the contractual interest and principal will not be collected, or for equity securities, whether the market value is below its cost for an extended period of time with low expectation of recovery. The debt securities are monitored for changes in credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying collateral or issuer. The Company also considers the volatility of a security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment, as of the balance sheet date, is recognized in earnings, even if the decision to sell the security has not been made.   The fair value of the security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value. Available-for-sale debt securities were not considered to be other-than-temporarily impaired as of December 31, 2021, 2020, or 2019 because the unrealized losses were related to changes in interest rates and did not affect the expected cash flows to be received, or indicate a loss of value on the underlying collateral, or a loss of financial stability on the part of the issuer. Management concluded that the declines in fair value of the investment portfolio as of the reporting dates is temporary and that values would recover by way of increases in market price or positive changes in market interest rates.   Deferred Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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.   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. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. 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 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.   Goodwill and Other Intangible Assets Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.   Intangible assets, other than goodwill and indefinite-lived intangible assets, are amortized to expense over their estimated useful lives in a manner consistent with that in which the related benefits are expected to be realized, and are periodically reviewed by management to assess recoverability. Impairment losses on other intangibles are recognized as a charge to expense if carrying amounts exceed fair values.   20     Servicing Assets A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Any impairment, if temporary, would be reported as a valuation allowance.   Derivatives Instruments and Hedging Activities The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. The Company has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. The swaps are reported at fair value in other assets or other liabilities. The interest rate 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 Company also had derivatives designated as cash flow hedges. Cash flow hedges are used to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued.   Further discussion of the derivatives is set forth in Note 1, Note 11, and Note 21 to the consolidated financial statements.   FINANCIAL CONDITION   Assets The Company’s total assets increased $67.8 million, or 7.7%, from $880.7 million at December 31, 2020 to $948.5 million at December 31, 2021, primarily due to an increase in available-for-sale securities of $45.1 million. Net loans increased from $719.6 million as of December 31, 2020, to $729.6 million at December 31, 2021. Total deposits increased from $685.7 million at December 31, 2020, to $748.6 million at December 31, 2021.   Cash and cash equivalents Cash and cash equivalents increased $12.4 million or 35.8%, from $34.6 million at December 31, 2020 to $47.0 million as of December 31, 2021. The increase as of December 31, 2021 was primarily attributable to increase in deposits. The Company’s liquidity position is strong with liquid assets rising to 11.4% of total assets as of December 31, 2021.   Investment securities The following table is a summary of the Company’s available-for-sale securities portfolio and other investments at the dates shown:   (In thousands)   December 31,       2021     2020     2019   U. S. Government agency and mortgage-backed securities   $ 66,629     $ 16,833     $ 16,685   Corporate bonds     16,921       17,290       17,313   Subordinated notes     4,626       9,005       9,204   SBA loan pools     5,603       5,567       5,115   Municipal bonds     562       567       -   Total available-for-sale securities, at fair value     94,341       49,262       48,317                             Other investments, at cost     4,450       4,450       4,450       $ 98,791     $ 53,712     $ 52,767     21     Total investments increased $45.1 million or 83.9%, from $53.7 million at December 31, 2020 to $98.8 million at December 31, 2021. This increase was primarily attributable to the purchases of $112.0 million U.S. Government agency debt and mortgage-backed securities, $18.2 million corporate bonds, and $5.9 million SBA loan pools, which was offset by $58.8 million sales of available-for-sales securities, $18.9 million maturity, and $11.7 million in repayments of principal on available-for-sale securities. During the year ended December 31, 2021, the Bank recognized net gain on sale of securities of $76,000. There were no sales of available-for-sales securities during the year ended December 31, 2020 and 2019.   Loans held for investment The following table provides the composition of the Company’s loan held for investment portfolio as of December 31, for each of the years shown:         December 31,   (In thousands)   2021     2020     2019     2018     2017       Amount     %     Amount     %     Amount     %     Amount     %     Amount     %   Loan portfolio segment:                                                                                 Commercial Real Estate   $ 365,247       49.38 %   $ 282,378       38.68 %   $ 314,414       38.71 %   $ 274,938       35.23 %   $ 299,925       41.68 % Residential Real Estate     158,591       21.45 %     153,851       21.07 %     175,489       21.61 %     157,300       20.16 %     146,377       20.34 % Commercial and Industrial     122,810       16.61 %     144,297       19.76 %     173,875       21.41 %     191,852       24.58 %     131,161       18.23 % Consumer and Other     59,364       8.03 %     67,635       9.26 %     85,934       10.58 %     94,569       12.12 %     87,707       12.19 % Construction     21,781       2.95 %     66,984       9.17 %     48,388       5.96 %     46,040       5.90 %     47,619       6.62 % Construction to permanent - CRE     11,695       1.58 %     15,035       2.06 %     14,064       1.73 %     15,677       2.01 %     6,858       0.94 % Loans receivable, gross     739,488       100.00 %     730,180       100.00 %     812,164       100.00 %     780,376       100.00 %     719,647       100.00 % Allowance for loan losses     (9,905 )             (10,584 )             (10,115 )             (7,609 )             (6,297 )         Loans receivable, net   $ 729,583             $ 719,596             $ 802,049             $ 772,767             $ 713,350             The gross loans receivable increased $9.3 million or 1.3%, from $730.2 million at December 31, 2020 to $739.5 million at December 31, 2021. The increase in loans was primarily attributable to $89.3 million in purchases of loans receivable which was partially offset by a net decrease in internal loan originations of $77.7 million for the year ended December 31, 2021.   Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75% of the principal balance. However, during the COVID-19 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 held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As of December 31, 2021 and 2020, SBA loans included in the commercial real estate loans were $9.7 million and $5.7 million, respectively. SBA loans included in the commercial and industrial loan were $17.4 million and $15.9 million as of December 31, 2021 and 2020, respectively.   At December 31, 2021, the net loan to deposit ratio was 97% and the net loan to total assets ratio was 77%. At December 31, 2020, these ratios were 105% and 82%, respectively.   22     Maturities and Sensitivities of Loans to Changes in Interest Rates The following table presents loans receivable, gross by portfolio segment, by contractual maturity as of December 31, 2021:       Contractual Maturity of Loan Balance           (In thousands)   One year or less     One through Five Years     After Five Years     Total   Loan portfolio segment:                                 Commercial Real Estate   $ 13,342     $ 169,238     $ 182,667     $ 365,247   Residential Real Estate     -       10,012       148,579       158,591   Commercial and Industrial     308       76,151       46,351       122,810   Consumer and Other     -       19,891       39,473       59,364   Construction     -       21,781       -       21,781   Construction to permanent - CRE     -       -       11,695       11,695   Total   $ 13,650     $ 297,073     $ 428,765     $ 739,488                                                                       Fixed rate loans   $ 8,884     $ 88,575     $ 152,851     $ 250,310   Variable rate loans     4,766       208,498       275,914       489,178   Total   $ 13,650     $ 297,073     $ 428,765     $ 739,488     All variable rate loans account for 66.2% of the total loan portfolio. Approximately 29.6% of the variable rate loan portfolio reprices with changes in interest rates within three months of the rate change. The balance of the loan portfolio has an initial rate for a fixed period, for example 1, 3 or 5 years and then reprice annually after the initial fixed period. These repricing characteristics are reflected in the Bank’s aggregate analysis of net interest sensitivity included in Item 7A. of this report.   As a community bank, the Bank is invested in a local economy, which may be subject to the vagaries of general economic conditions. As of December 31, 2021, the investments in Commercial Real Estate and Commercial and Industrial were approximately 66.0% of total loans receivable. These loans generally are collateralized by the underlying real estate and supported by personal guarantees of the borrowers.   Allowance for loan and lease losses The allowance for loan and lease losses decreased $679,000 from $10.6 million at December 31, 2020 to $9.9 million at December 31, 2021. The decrease was primarily attributable to a credit to provision for loan losses of $500,000 due to improvements in the economy and improvement in classified loans in 2021.   Based upon the overall assessment and evaluation of the loan portfolio at December 31, 2021, management believes the allowance for loan and lease losses of $9.9 million, which represents 1.34% of gross loans outstanding, was adequate under prevailing economic conditions to absorb existing losses in the loan portfolio.   23     The following table provides detail of activity in the allowance for loan and lease losses:         Year ended December 31,   (In thousands)   2021     2020     2019     2018     2017                                             Balance at beginning of the period   $ 10,584     $ 10,115     $ 7,609     $ 6,297     $ 4,675   Charge-offs:                                         Commercial Real Estate     (51 )     (1,032 )     -       -       -   Residential Real Estate     (3 )     (24 )     (118 )     (2 )     -   Commercial and Industrial     (212 )     (677 )     (2,418 )     -       (265 ) Consumer and Other     (23 )     (45 )     (123 )     (33 )     (39 ) Construction     (69 )     -       -       -       -   Total charge-offs     (358 )     (1,778 )     (2,659 )     (35 )     (304 ) Recoveries:                                         Commercial Real Estate     -       -       2       7       10   Residential Real Estate     3       1       10       2       -   Commercial and Industrial     65       70       172       34       2,769   Consumer and Other     111       6       10       1       4   Total recoveries     179       77       194       44       2,783                                             Net (charge-offs) recoveries     (179 )     (1,701 )     (2,465 )     9       2,479   (Credit) provision for loan losses     (500 )     2,170       4,971       1,303       (857 ) Balance at end of the period   $ 9,905     $ 10,584     $ 10,115     $ 7,609     $ 6,297                                             Ratios:                                         Net (charge-offs) recoveries to average loans     (0.025 )%     (0.215 )%     (0.305 )%     0.001 %     0.374 % Allowance for loan losses to total loans     1.34 %     1.45 %     1.25 %     0.98 %     0.88 %   The following table provides an allocation of allowance for loan and lease losses by portfolio segment and the percentage of the loans to total loans:       December 31,   (In thousands)   2021     2020     2019     2018     2017       Allowance for loan losses     Percent of loans in each category to total loans     Allowance for loan losses     Percent of loans in each category to total loans     Allowance for loan losses     Percent of loans in each category to total loans     Allowance for loan losses     Percent of loans in each category to total loans     Allowance for loan losses     Percent of loans in each category to total loans   Commercial Real Estate   $ 5,063       49.38 %   $ 4,485       38.68 %   $ 3,789       38.71 %   $ 1,866       35.23 %   $ 2,212       41.68 % Residential Real Estate     1,700       21.45 %     1,379       21.07 %     1,038       21.61 %     1,059       20.16 %     959       20.34 % Commercial and Industrial     2,532       16.61 %     3,284       19.76 %     4,340       21.41 %     3,558       24.58 %     2,023       18.23 % Consumer and Other     253       8.03 %     295       9.26 %     341       10.58 %     641       12.12 %     568       12.19 % Construction     78       2.95 %     739       9.17 %     477       5.96 %     350       5.90 %     481       6.62 % Construction to permanent - CRE     41       1.58 %     162       2.06 %     130       1.73 %     108       2.01 %     54       0.94 % Unallocated     238       N/A       240       N/A       -       N/A       27       N/A       -       N/A   Total Allowance for loan losses   $ 9,905       100.00 %   $ 10,584       100.00 %   $ 10,115       100.00 %   $ 7,609       100.00 %   $ 6,297       100.00 %   24     Nonperforming Assets The following table presents non-accrual and accruing loans which were past due by over 90 days for the dates indicated:   (In thousands)   December 31,       2021     2020     2019     2018     2017   Non-accruing loans:                                         Commercial Real Estate   $ 15,704     $ 14,534     $ 11,961     $ 3,525     $ -   Residential Real Estate     3,148       3,854       3,228       2,006       3,028   Commercial and Industrial     4,101       700       2,094       4,681       748   Consumer and Other     142       917       766       174       2   Construction     -       -       -       8,800       -   Total non-accruing loans     23,095       20,005       18,049       19,186       3,778                                             Loans past due over 90 days and still accruing     2       16       19       1,316       1,356   Other real estate owned     -       1,906       2,400       2,945       -   Total nonperforming assets   $ 23,097     $ 21,927     $ 20,468     $ 23,447     $ 5,134                                             Nonperforming assets to total assets     2.44 %     2.49 %     2.09 %     2.46 %     0.60 % Nonperforming loans to total loans, net     3.17 %     2.78 %     2.25 %     2.65 %     0.72 %   Non-accrual loans increased $3.1 million, from $20.0 million at December 31, 2020 to $23.1 million at December 31, 2021. The $23.1 million of non-accrual loans at December 31, 2021 was comprised of 30 borrowers. Three TDR loans totaling $9.7 million were included in the non-accrual loans. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank’s experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Bank evaluated the impaired loans individually and established a specific reserve of $2.3 million as of December 31, 2021.   As of December 31, 2020, the $20.0 million of non-accrual loans was comprised of 21 borrowers, for which a specific reserve of $1.4 million had been established. Six TDR loans of total $11.5 million were included in the non-accrual loans as of December 31, 2020.   Loans held for sale Loans held for sale are made up of SBA loans which totaled $3.1 million and $1.2 million at December 31, 2021 and 2020, respectively.   Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.   Under the SBA 7(a) program the loans generally carry an SBA guaranty for 75% of the loan. The Bank can sell the guaranteed portion in the secondary market and retain and hold for investment the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications. As a result of the COVID-19 pandemic, in 2021, the SBA increased the guaranteed percentage to 90% during one of the rounds of stimulus. As of October 1, 2021, he guaranteed percentage reverted back to 75% of the loan.   Patriot sells the guaranteed portion of SBA loans for liquidity purposes and to generate non-interest income. Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. Loans held for sale at December 31, 2021, consisted of $2.6 million SBA commercial and industrial loans and $562,000 SBA commercial real estate, respectively. SBA loans held for sale at December 31, 2020, consisted entirely of $1.2 million SBA commercial and industrial loans. The Company sold $14.3 million SBA loans during the year ended December 31, 2021, compared to $6.6 million for the year ended December 31, 2020.   25     During 2021, no loans held for investment were transferred to loans held for sale. 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.   Premises and equipment As of December 31, 2021 and 2020, Patriot recorded premises and equipment, net of $31.5 million and $33.4 million, respectively. The decrease was primarily due to a sale of the Bank owned building in New Haven, Connecticut. The Bank recognized proceeds from the sale of $1.5 million in December 2021. Other decreases in premises and equipment were normal depreciation of the active premises and equipment during the year ended December 31, 2021.   Management continuously reviews its branch locations and corporate offices evaluating operating efficiencies and market share as well as effective customer service and delivery.   Other Real Estate Owned ( “ OREO ” ) As of December 31, 2020, Patriot recorded OREO of $1.9 million on the consolidated balance sheet. In 2021, Patriot sold the OREO of $1.9 million and recognized a gain of $2,000. In 2020, Patriot sold one OREO of $425,000 and recognized a loss of $69,000. Patriot did not have any OREO as of December 31, 2021.   Goodwill The Company completed its acquisition of Prime Bank in May 2018, and recorded $1.1 million of goodwill after adjustments as of May 10, 2019. In December 2020, a purchase price adjustment of $556,000 was recognized to project expenses on the consolidated statements of operations. The charge represented an adjustment to the earlier estimate of the final purchase price upon preliminary settlement of the litigation related to a dispute over the final purchase price in 2020. No further adjustment to goodwill was made as of December 31, 2021. The Company performed its annual review of goodwill as of December 31, 2021 and determined that there was no impairment of goodwill.   Core deposit intangible ( “ CDI ” ) Core deposit intangible (“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. In 2020, an impairment charge of $206,000 was recorded for the year ended December 31, 2020, due to the decline in interest rates in 2020. The Company performed a review of the CDI as of October 31, 2021 and determined that there was no impairment of the CDI as of December 31, 2021. The decrease in CDI of $47,000 from $343,000 at December 31, 2020 to $296,000 at December 31, 2021, was solely due to the amortization of the CDI for the year ended December 31, 2021.   Deferred Taxes As of December 31, 2021, Patriot had available approximately $17.2 million of Federal net operating loss carryforwards (“NOL”) that are offset by $15.5 million in Internal Revenue Code §382 limitations. Of the NOL of $17.2 million, approximately $15.8 million will expire between 2030 and 2033 and $1.4 million does not expire. For the year ended December 31, 2021 and 2020, the Bank did not record any uncertain tax position (“UTP”) related to the utilization of certain federal net operating losses   Additionally, Patriot has approximately $53.5 million of NOLs available for Connecticut tax purposes at December 31, 2021, which may be used to offset up to 50% of taxable income in any year. The NOLs expire between 2030 and 2040.   As of December 31, 2021, Patriot had a $12.1 million deferred tax asset, comprised of multiple temporary differences, in addition to the previously aforementioned NOLs. The assessment of the potential realizability of the deferred tax assets is based on observation of the condition and future of the Bank, including:   ● Cumulative pre-tax profit over the last four years;   ● Forecasted taxable income for 2022 and future periods;   ● Historical average pre-tax income over the last four years adjusted for a fraud loss and other non-recurring expenses relating to merger and acquisition activity, Employee Retention Credits recognized in 2021, and a reduced cost of funds now reflected in its most recent results;   ● Improvements in operations and cost management; and   ● Net operating loss carry-forwards that do not begin to expire until 2030.   26     As of December 31, 2021, after weighing both positive and negative evidence, Patriot fully reversed the valuation allowance of $1.9 million recorded in 2020. Patriot will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that a portion of the deferred tax assets will not be realized, a valuation allowance will be established.   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.   Derivatives Patriot had entered into four interest rate swaps (“swaps”) in 2018 and 2019. Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third-party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot’s swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized $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, 2021 and 2020.   In April 2021, Patriot entered into a receive fixed/pay variable interest rate swap, intended to reduce the Company’s exposure to interest rate movements. This contractual agreement was designated as a cash flow hedge. Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid float swap for a 7-year rolling period beginning April 29, 2021.   In August 2021, the cash flow hedge interest rate swap contract was terminated. During the year ended December 31, 2021, the Company recognized $149,000 of accumulated other comprehensive income that was reclassified into interest income. The interest swap interest income is included in interest and fees on loans on the consolidated statements of operations. A gain of $512,000 was recognized from the termination of the interest rate swap cash flow hedge for the year ended December 31, 2021, which is included in other income on the consolidated statements of operations.   Further discussion of the final derivatives is set forth in Note 11 and Note 21 to the consolidated financial statements.   27     Deposits   The following table is a summary of the Company’s deposits at the dates shown:   (In thousands)   December 31,       2021     2020     2019   Non-interest bearing:                         Non-interest bearing   $ 140,384     $ 99,344     $ 88,135   Prepaid DDA     86,329       59,332       -   Total non-interest bearing     226,713       158,676       88,135                             Interest bearing:                         Negotiable order of withdrawal accounts     34,741       30,529       26,864   Savings     109,744       98,635       64,020   Money market     111,957       131,378       99,115   Money market - prepaid deposits     52,561       15,011       -   Certificates of deposit, less than $250,000     142,246       160,968       193,942   Certificates of deposit, $250,000 or greater     53,584       49,172       67,550   Brokered deposits     17,016       41,287       229,909   Total Interest bearing     521,849       526,980       681,400                             Total Deposits   $ 748,562     $ 685,656     $ 769,535     The Bank has substantially improved its deposit and funding mix over the past year, while reducing its aggregate cost of funds. As of December 31, 2021, total deposits increased $62.9 million, primarily due to growth in prepaid deposits of $64.5 million, which was partially offset by decline of $38.6 million in brokered deposits and certificates of deposits. Excluding brokered deposits, total deposits increased 13.5% during 2021.   Borrowings As of December 31, 2021 and 2020, total borrowings were $120.7 million and $120.8 million, respectively. Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, senior notes, junior subordinated debentures, and a note payable to the seller from whom the Fairfield branch building was purchased in 2015.   Shareholders’ Equity Equity increased $4.1 million from $63.2 million at December 31, 2020 to $67.3 million at December 31, 2021. The increase was primarily due to $5.1 million of net income for the year ended December 31, 2021 and $150,000 of equity compensation, which was partially offset by $1.1 million unrealized loss in investment portfolio for the year ended December 31, 2021.   28     Average Balances The following table presents average balance sheets, interest income, interest expense and the corresponding yields earned, and rates paid for each of the years in the three-year period ended December 31, 2021.   (In thousands)   Year ended December 31,       2021     2020     2019       Average Balance     Interest     Yield     Average Balance     Interest     Yield     Average Balance     Interest     Yield   ASSETS                                                                         Interest Earning Assets:                                                                         Loans   $ 705,353     $ 30,115       4.27 %   $ 791,626     $ 35,835       4.51 %   $ 807,162     $ 40,568       5.03 % Investments     102,466       2,147       2.10 %     59,668       1,859       3.12 %     56,897       2,120       3.73 % Cash equivalents and other     57,753       89       0.15 %     49,071       209       0.42 %     45,276       956       2.11 %                                                                           Total interest earning assets     865,572       32,351       3.74 %     900,365       37,903       4.20 %     909,335       43,644       4.80 %                                                                           Cash and due from banks     4,016                       2,357                       5,024                   Allowance for loan losses     (10,384 )                     (10,896 )                     (8,087 )                 OREO     893                       2,259                       2,551                   Other assets     61,182                       62,086                       59,318                                                                                             Total Assets   $ 921,279                     $ 956,171                     $ 968,141                                                                                             Liabilities                                                                         Interest bearing liabilities:                                                                         Deposits   $ 525,537     $ 2,243       0.43 %   $ 641,981     $ 9,154       1.42 %   $ 682,826     $ 13,985       2.05 % Borrowings     94,511       2,986       3.16 %     92,469       2,671       2.88 %     94,084       2,175       2.31 % Senior notes     11,963       913       7.63 %     11,888       915       7.70 %     11,814       915       7.75 % Subordinated debt     17,910       933       5.21 %     17,872       991       5.53 %     17,834       1,118       6.27 % Note Payable and other     881       15       1.70 %     1,086       19       1.74 %     1,364       25       1.83 %                                                                           Total interest bearing liabilities     650,802       7,090       1.09 %     765,296       13,750       1.79 %     807,922       18,218       2.25 %                                                                           Demand deposits     196,287                       116,519                       81,754                   Other liabilities     8,485                       8,760                       8,965                                                                                             Total Liabilities     855,574                       890,575                       898,641                                                                                             Shareholders' equity     65,705                       65,596                       69,500                                                                                             Total Liabilities and Shareholders' Equity   $ 921,279                     $ 956,171                     $ 968,141                                                                                             Net interest income           $ 25,261                     $ 24,153                     $ 25,426                                                                                     Interest margin                     2.92 %                     2.68 %                     2.80 % Interest spread                     2.65 %                     2.41 %                     2.55 %   29     The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the years ended December 31, 2021 to 2020 and December 31, 2020 to 2019.       Year ended December 31,     Year ended December 31,       2021 compared to 2020     2020 compared to 2019   (In thousands)   Increase/(Decrease)     Increase/(Decrease)       Volume     Rate     Total     Volume     Rate     Total   Interest Earning Assets:                                                 Loans   $ (3,816 )   $ (1,904 )   $ (5,720 )   $ (744 )   $ (3,989 )   $ (4,733 ) Investments     1,252       (964 )     288       97       (358 )     (261 ) Cash equivalents and other     36       (156 )     (120 )     82       (829 )     (747 )                                                   Total interest earning assets     (2,528 )     (3,024 )     (5,552 )     (565 )     (5,176 )     (5,741 )                                                   Interest bearing liabilities:                                                 Deposit     (2,762 )     (4,149 )     (6,911 )     (1,366 )     (3,465 )     (4,831 ) Borrowings     58       257       315       (35 )     531       496   Senior notes     (2 )     -       (2 )     -       -       -   Subordinated debt     -       (58 )     (58 )     -       (127 )     (127 ) Note payable and other     (4 )     -       (4 )     (6 )     -       (6 )                                                   Total interest bearing liabilities     (2,710 )     (3,950 )     (6,660 )     (1,407 )     (3,061 )     (4,468 )                                                   Net interest income   $ 182     $ 926     $ 1,108     $ 842     $ (2,115 )   $ (1,273 )   RESULTS OF OPERATIONS   A discussion regarding the financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented below. Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2020 and fiscal 2019 that are not included in this Form 10-K can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 30, 2021.   Comparison of Results of Operations for the years 2021 and 2020   For the year ended December 31, 2021, the Company recorded net income of $5.1 million ($1.29 basic and diluted earnings per share) compared to net loss of $3.8 million ($0.97 basic and diluted loss per share) for the year ended December 31, 2020.   Pre-tax income was $5.0 million for the year ended December 31, 2021, compared to pre-tax loss of $4.2 million for the year ended December 31, 2020. Significant variances are summarized below and discussed in detail subsequently:     • Interest and dividend income decreased $5.5 million;   • Interest expense decreased $6.7 million;   • Net interest income increased $1.1 million;   • Provision for loan losses decreased $2.7 million;   • Non-interest income increased $2.4 million; and   • Non-interest expense decreased $2.9 million.   30     Net interest income   Net interest income is the difference between interest income on interest earning assets and interest expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively.   For the year ended December 31, 2021, interest income decreased to $32.4 million, as compared to $37.9 million for the year ended December 31, 2020, which was primarily attributable to a decrease of $86.3 million in average loan balances, along with a decline in rates earned on loans reflecting the decline in interest rates during 2021.   For the year ended December 31, 2021, total interest expense decreased to $7.1 million, as compared to $13.8 million for the year ended December 31, 2020, primarily due to a decrease in average deposits balance of $116.4 million. The decline in deposit interest expense reflects a change in the composition of deposits as higher cost brokered deposits were allowed to mature without replacement to match the overall decline in average earning assets. In addition, retail deposit rates declined as market rates declined nationally as well as in Patriot’s local retail deposit market.   Net interest income for the years ended December 31, 2021 and 2020 was $25.3 million and $24.2 million, respectively. The Bank’s net interest margin showed improvement, which increased to 2.9% for the year ended December 31, 2021, compared with 2.7% for the year ended December 31, 2020.   (Credit) Provision for loan losses   For the year ended December 31, 2021, the Bank recorded a credit for loan losses of $500,000 as a result of the improvements in the economy and in classified loans in 2021. For the year ended December 31, 2020, a provision for loan losses of $2.2 million was recorded. The provision for loan losses in 2020 was primarily due to a $900,000 loan charge-off on a single borrower and additional reserves attributable to the COVID-19 pandemic.   Non-interest income   For the year ended December 31, 2021, non-interest income increased to $4.4 million, as compared to $2.0 million in 2020. The increase was primarily attributable to net realized gains on sale of SBA loans totaled $1.8 million.   Non-interest expense   For the year ended December 31, 2021, non-interest expense decreased to $25.2 million, as compared to $28.1 million for 2020. The decrease in non-interest expenses was primarily driven by the Employee Retention Credits of $2.9 million recognized during 2021. In the fourth quarter of 2021, the Company recorded material, non-recurring project expenses of $1.9 million in connection with the proposed merger transaction with American Challenger.   Pending acquisition   On November 14, 2021, the Company and American Challenger entered into a merger agreement, which was subsequently amended on January 28, 2022 and February 28, 2022, under which American Challenger will merge with and into PNBK. Following the Merger, Patriot Bank will adopt a consolidated business plan and will operate as one company with two divisions. The Patriot Division will continue to operate under the existing business model. The American Challenger Division will execute the high-growth component of the 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.   Other financial measures and ratios:       As of and for the year ended December 31,       2021     2020     2019                             Return on average assets     0.55 %     (0.40 )%     (0.29 )% Return on average equity     7.75 %     (5.82 )%     (4.05 )% Average equity to average assets     7.13 %     6.86 %     7.18 %   We derived the selected balance sheet measures as of December 31, 2021, 2020 and 2019 and the selected statement of income measures for the years ended December 31, 2021, 2020 and 2019 from our audited consolidated financial statements included elsewhere in this annual report. Average balances have been computed using daily averages.    31     Selected Quarterly Financial Data:   The following tables present the summarized quarterly results of operations (unaudited) to the Consolidated Financial Statements for the calendar years 2021 and 2020:   (In thousands, except per share amounts)                                       First Quarter     Second Quarter     Third Quarter     Fourth Quarter     2021:                                   Interest and dividend income   $ 8,111     $ 7,767     $ 7,960     $ 8,513     Interest expense     1,985       1,829       1,670       1,606     Net interest income     6,126       5,938       6,290       6,907     Provision for loan losses     -       -       (300 )     (200 )   Non-interest income     442       753       923       2,305   (1) Non-interest expense     5,395       5,286       5,711       8,779   (2) Income before income taxes     1,173       1,405       1,802       633     Provision (benefit) for income taxes     319       383       479       (1,262 ) (3) Net income   $ 854     $ 1,022     $ 1,323     $ 1,895   (4)                                     Earnings per share                                   Basic   $ 0.22     $ 0.26     $ 0.34     $ 0.48   (5) Diluted   $ 0.22     $ 0.26     $ 0.34     $ 0.48   (5)                                     Weighted average shares outstanding - Basic     3,943,580       3,946,544       3,947,284       3,948,069     Weighted average shares outstanding - Diluted     3,945,120       3,957,895       3,948,425       3,952,251         (1) During the fourth quarter of 2021, the increase in non-interest income was primarily attributable to gains from sales of SBA loans totaled $1.5 million.     (2) During the fourth quarter of 2021, Patriot announced a merger transaction with 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.     (3) In the fourth quarter of 2021, the benefit for income taxes includes a full reversal of valuation allowance for deferred tax assets of $1.9 million recorded in 2020, which reduced the provision for income tax of $1.9 million.     (4) Due to significant changes above, the net income was increased from $1.8 million to $1.9 million for the fourth quarter of 2021.     (5) The sum of Earnings (loss) per share - Basic and Diluted of each of the quarters in the year ended December 31, 2021 does not agree to the amount of Basic and Diluted earnings per share presented on the Consolidated Statement of Operations for the year ended December 31, 2021, due to the impact of rounding to the nearest cent on the amount of Earnings per share - Basic and Diluted for the three months ended December 31, 2021 (i.e., the "Fourth Quarter").   32     (In thousands, except per share amounts)                               First Quarter     Second Quarter     Third Quarter     Fourth Quarter     2020:                                   Interest and Dividend Income   $ 10,722     $ 9,603     $ 9,031     $ 8,547     Interest expense     4,399       3,916       3,125       2,310     Net Interest Income     6,323       5,687       5,906       6,237     Provision for loan losses     804       910       85       371     Non-interest income     421       389       704       465     Non-interest expense     7,371       6,890       6,618       7,239     Income before income taxes     (1,431 )     (1,724 )     (93 )     (908 )   (Benefit) provision for income taxes     (359 )     (446 )     (6 )     474     Net loss   $ (1,072 )   $ (1,278 )   $ (87 )   $ (1,382 )                                       Earnings per share                                   Basic   $ (0.27 )   $ (0.32 )   $ (0.02 )   $ (0.35 ) (6) Diluted (7)   $ (0.27 )   $ (0.32 )   $ (0.02 )   $ (0.35 ) (6)                                     Weighted average shares outstanding - Basic     3,931,388       3,935,109       3,935,898       3,937,112     Weighted average shares outstanding - Diluted     3,931,388       3,935,109       3,935,898       3,937,112         (6) The sum of Earnings (loss) per share - Basic and Diluted of each of the quarters in the year ended December 31, 2020 does not agree to the amount of Basic and Diluted earnings per share presented on the Consolidated Statement of Operations for the year ended December 31, 2020, due to the impact of rounding to the nearest cent on the amount of Earnings per share - Basic and Diluted for the three months ended December 31, 2020 (i.e., the "Fourth Quarter").     (7) The weighted average diluted shares outstanding did not include 10,112, 15,587, 13,093, and 5,721 anti-dilutive restricted common shares as of March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020, respectively.   33     LIQUIDITY AND CAPITAL RESOURCES   As of December 31, 2021, the Company’s balance sheet liquidity was $108.4 million, which was 11.4% to total assets of $948.5 million. At December 31, 2020, the balance sheet liquidity was $79.5 million, which was 9.0% to total assets of $880.7 million. Liquidity including readily available off-balance sheet funding sources was 21.7% at December 31, 2021 compared to 21.7% at December 31, 2020.   The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any), unpledged available-for-sale securities, and loans held for sale. In addition, off-balance sheet funding sources include collateral based borrowing available from the FHLB, and correspondent bank borrowing lines.   Liquidity is a measure of the Company’s ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company’s liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements for next 12 months and beyond.   The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). At December 31, 2021, the outstanding advances from the FHLB-B aggregated $90.0 million. The additional borrowing capacity available from FHLB-B is $75.6 million, which is comprised of $73.6 million of advances and a $2.0 million overnight line of credit. Additionally, the Bank retains a collateralized borrowing line with the Federal Reserve Bank which totaled $25.1 million at December 31, 2021.   As of December 31, 2021, the maturities of Patriot’s contractual obligations are as follows:   (In thousands)   Contractual Obligations Due   Contractual Obligation Category     Less than One Year     One to Three Years     Three to Five Years     Over Five Years     Total   Certificates of deposit   $ 133,021     $ 52,405     $ 10,404     $ -     $ 195,830   Brokered deposits     15,023       1,744       249       -       17,016   Federal Home Loan Bank borrowings     -       90,000       -       -       90,000   Senior notes     12,000       -       -       -       12,000   Subordinated debt     -       -       -       10,000       10,000   Junior subordinated debt     -       -       -       8,248       8,248   Note payable     206       585       -       -       791   Operating lease obligations     541       987       628       1,082       3,238                                             Total contractual obligations   $ 160,791     $ 145,721     $ 11,281     $ 19,330     $ 337,123     Management manages its capital resources by seeking to maintain a capital structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses while effectively leveraging capital to enhance profitability and return to shareholders. Due to prior year losses, dividends have not been paid to shareholders over the most recent three year period, but may resume in future periods with a return to consistent profitability.   The primary source of liquidity at the Company is returns of capital from the Bank. These capital returns are subject to OCC approval and are needed periodically to provide funds needed to service debt payments at the Company. Return of Capital payments from the Bank to the Company totaled $500,000 for the year ended December 31, 2021, $2.0 million for the year ended December 31, 2020, and none for the year ended December 31, 2019.   34     OFF-BALANCE SHEET ARRANGEMENTS   The Bank’s off-balance sheet commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon or are contingent upon the customer adhering to the terms of the agreements, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 2021 and 2020, the Bank’s off-balance sheet commitments were $127.0 million and $122.4 million, respectively.   REGULATORY CAPITAL REQUIREMENTS   In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk-based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. In September 2021, the Bank adopted the CBLR framework. The Bank’s Tier 1 leverage ratio as of December 31, 2021 and 2020 was 9.9% and 9.8%, respectively, which is above the well-capitalized required level of 9.0%.   Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.   35