PATRIOT NATIONAL BANCORP INC 10-K

ITEM 8. Financial Statements and Supplementary Data   The Financial Statements required by this item are presented in the order shown below: - Report of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) - 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   38     Report of Independent Registered Public Accounting Firm     To the Shareholders and the Board of Directors of Patriot National Bancorp, Inc.     Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Patriot National Bancorp, Inc. 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. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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.   Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.   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 $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.   For loans that are collectively evaluated for impairment, the Company segregates loans into pools based on homogeneous risk characteristics. The non-specific allowance is established through historical loss experience of the loan pools over their respective loss emergence periods adjusted for qualitative factors. The qualitative factors are additional reserves applied to the segmented loan pools to reflect the inherent risk of loss that exists in the portfolio as of the balance sheet date. The Company has determined qualitative factors to include: 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; 4) changes in the experience, ability, and depth of lending management and staff; 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; 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.   We identified the qualitative factors adjustments applied to the non-specific allowance as a critical audit matter due to the high degree of auditor judgment in order to evaluate the subjective assumptions made by management within the calculation.   Our audit procedures related to the qualitative factor adjustments applied to the non-specific allowance included the following:     - 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.   39     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, 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 used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology. This included:     o Testing the fair value of the reporting unit through testing of the completeness and accuracy of the data used by management to develop the estimate.   o Evaluating the reasonableness of the cash flow projections calculations used to develop the estimate.   o Evaluating the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate by assessing the reasonableness, comparability and appropriateness of the market-based information used by agreeing the components to independent source data.   Realizability of the Deferred Tax Assets   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 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.     - 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.     - 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:     o Testing the completeness and accuracy of the data used by management in their analyses.   o Evaluating the reasonableness of management’s evaluation of whether tax planning strategies were prudent and feasible.   o 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.   Hartford, Connecticut March 24, 2022   40       PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS       December 31,   (In thousands, except share data)   2021     2020                     Assets                 Cash and due from banks:                 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     4,450       4,450   Total investment securities     98,791       53,712                     Federal Reserve Bank stock, at cost     2,843       2,783   Federal Home Loan Bank stock, at cost     4,184       4,503   Loans receivable (net of allowance for loan losses: 2021: $ 9,905 and 2020: $ 10,584 )     729,583       719,596   Loans held for sale     3,129       1,217   Accrued interest and dividends receivable     5,822       6,620   Premises and equipment, net     31,500       33,423   Other real estate owned     -       1,906   Deferred tax asset     12,146       11,496   Goodwill     1,107       1,107   Core deposit intangible, net     296       343   Other assets     12,035       9,387   Total assets   $ 948,481     $ 880,729                     Liabilities                 Deposits:                 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       90,000   Senior notes, net     12,000       11,927   Subordinated debt, net     9,811       9,782   Junior subordinated debt owed to unconsolidated trust, net     8,119       8,110   Note payable     791       994   Advances from borrowers for taxes and insurance     1,101       3,786   Accrued expenses and other liabilities     10,753       7,255   Total liabilities     881,137       817,510                     Commitments and Contingencies                                       Shareholders' equity                 Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding     -       -   Common stock, $ .01 par value, 100,000,000 shares authorized; As of December 31, 2021: 4,030,233 shares issued; 3,956,492 shares outstanding; As of December 31, 2020: 4,017,313 shares issued; 3,943,572 shares outstanding;     106,479       106,329   Accumulated deficit     ( 37,498 )     ( 42,592 ) Accumulated other comprehensive loss     ( 1,637 )     ( 518 ) Total shareholders' equity     67,344       63,219   Total liabilities and shareholders' equity   $ 948,481     $ 880,729     See Accompanying Notes to Consolidated Financial Statements.   41       PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS       Year Ended December 31,   (In thousands, except per share amounts)   2021     2020     2019                             Interest and Dividend Income                         Interest and fees on loans   $ 30,115     $ 35,835     $ 40,568   Interest on investment securities     1,924       1,460       1,667   Dividends on investment securities     223       399       453   Other interest income     89       209       956   Total interest and dividend income     32,351       37,903       43,644                             Interest Expense                         Interest on deposits     2,243       9,154       13,985   Interest on Federal Home Loan Bank borrowings     2,986       2,671       2,175   Interest on senior debt     913       915       915   Interest on subordinated debt     933       991       1,118   Interest on note payable and other     15       19       25   Total interest expense     7,090       13,750       18,218                             Net interest income     25,261       24,153       25,426                             (Credit) provision for loan losses     ( 500 )     2,170       4,971                             Net interest income after (credit) provision for loan losses     25,761       21,983       20,455                             Non-interest Income                         Loan application, inspection and processing fees     257       223       113   Deposit fees and service charges     251       321       492   Gains on sales of loans     1,886       566       891   Rental income     543       523       589   Gain on sale of investment securities     76       -       -   Other income     1,410       346       398   Total non-interest income     4,423       1,979       2,483                             Non-interest Expense                         Salaries and benefits     11,089       14,323       13,681   Occupancy and equipment expense     3,430       3,513       3,521   Data processing expense     1,451       1,571       1,463   Professional and other outside services     3,155       2,828       3,010   Project expenses, net     1,882       818       465   Advertising and promotional expense     235       454       380   Loan administration and processing expense     134       174       155   Regulatory assessments     907       1,477       1,233   Insurance expense, net     280       285       136   Communications, stationary and supplies     604       476       518   Other operating expense     2,004       2,199       2,092   Total non-interest expense     25,171       28,118       26,654                             Income (loss) before income taxes     5,013       ( 4,156 )     ( 3,716 )                           Benefit for income taxes     ( 81 )     ( 337 )     ( 899 )                           Net income (loss)   $ 5,094     $ ( 3,819 )   $ ( 2,817 )                           Basic earnings (loss) per share   $ 1.29     $ ( 0.97 )   $ ( 0.72 ) Diluted earnings (loss) per share   $ 1.29     $ ( 0.97 )   $ ( 0.72 )   See Accompanying Notes to Consolidated Financial Statements.   42       PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME   (In thousands)   Year Ended December 31,       2021     2020     2019                             Net income (loss)   $ 5,094     $ ( 3,819 )   $ ( 2,817 )                           Other comprehensive (loss) income                         Unrealized holding (loss) gain on securities     ( 1,432 )     ( 155 )     571   Income tax effect     369       40       ( 148 ) Reclassification for realized gain on sale of investment securities     ( 76 )     -       -   Income tax effect     20       -       -         ( 1,119 )     ( 115 )     423   Derivative instruments:                         Unrealized holding gain on cash flow hedge     149       -       -   Income tax effect     ( 39 )     -       -   Reclassification adjustement for net gain included in net income     ( 149 )     -       -   Income tax effect     39       -       -         -       -       -                             Total other comprehensive (loss) income     ( 1,119 )     ( 115 )     423                             Comprehensive income (loss)   $ 3,975     $ ( 3,934 )   $ ( 2,394 )   See Accompanying Notes to Consolidated Financial Statements.   43       PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY   (In thousands, except shares)   Number of Shares     Common Stock     Accumulated Deficit     Accumulated Other Comprehensive (Loss) Income     Total   Balance at January 1, 2019     3,910,674     $ 105,956     $ ( 35,790 )   $ ( 826 )   $ 69,340   Comprehensive (loss) income:                                         Net loss     -       -       ( 2,817 )     -       ( 2,817 ) Unrealized holding gain on available-for-sale securities, net of tax     -       -       -       423       423   Total comprehensive (loss) income     -       -       ( 2,817 )     423       ( 2,394 ) Common stock dividends     -       -       ( 155 )     -       ( 155 ) Share-based compensation expense     -       214       -       -       214   Transition adjustment related to adoption of ASC 842, net of tax     -       -       ( 11 )     -       ( 11 ) Vesting of restricted stock     19,995       -       -       -       -   Balance at December 31, 2019     3,930,669     $ 106,170     $ ( 38,773 )   $ ( 403 )   $ 66,994   Comprehensive loss:                                         Net loss     -       -       ( 3,819 )     -       ( 3,819 ) Unrealized holding loss on available-for-sale securities, net of tax     -       -       -       ( 115 )     ( 115 ) Total comprehensive loss     -       -       ( 3,819 )     ( 115 )     ( 3,934 ) Share-based compensation expense     -       159       -       -       159   Vesting of restricted stock     12,903       -       -       -       -   Balance at December 31, 2020     3,943,572     $ 106,329     $ ( 42,592 )   $ ( 518 )   $ 63,219   Comprehensive income (loss):                                         Net income     -       -       5,094       -       5,094   Unrealized holding loss on available-for-sale securities, net of tax     -       -       -       ( 1,119 )     ( 1,119 ) Total comprehensive income (loss)     -       -       5,094       ( 1,119 )     3,975   Share-based compensation expense     -       150       -       -       150   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.   44       PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS   (In thousands)   Year Ended December 31,       2021     2020     2019   Cash Flows from Operating Activities:                         Net income (loss)   $ 5,094     $ ( 3,819 )   $ ( 2,817 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                         Amortization and accretion of investment premiums and discounts, net     267       269       7   Amortization and accretion of purchase loan premiums and discounts, net     2,087       816       997   Amortization of debt issuance costs     111       112       112   Amortization of core deposit intangible     47       74       75   Amortization of servicing assets of sold SBA loans     67       22       16   Impairment of intangible assets     -       206       -   Purchase price adjustment expense related to acquisition activity     -       556       -   (Credit) provision for loan losses     ( 500 )     2,170       4,971   Depreciation and amortization     1,521       1,505       1,600   Gain on sales of available-for-sale securities     ( 76 )     -       -   Gain on sale of premises and equipment     ( 550 )     -       -   Share-based compensation     150       159       214   Increase in deferred income taxes, net     ( 261 )     ( 323 )     ( 1,136 ) Originations of SBA loans held for sale     ( 16,574 )     ( 2,049 )     ( 26,947 ) 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     ( 1,886 )     ( 566 )     ( 891 ) Net (gain) loss on sale and write-down of other real estate owned     ( 2 )     69       94   Changes in assets and liabilities:                         Decrease (increase) in accrued interest and dividends receivable     798       ( 3,017 )     163   Increase in other assets     ( 2,124 )     ( 331 )     ( 1,180 ) Increase (decrease) in accrued expenses and other liabilities     3,160       ( 1,732 )     251   Net cash provided by (used in) operating activities     7,596       6,281       ( 11,915 )                           Cash Flows from Investing Activities:                         Proceeds from maturity or sales on available-for-sale securities     77,690       -       6,500   Principal repayments on available-for-sale securities     11,667       9,879       3,893   Purchases of available-for-sale securities     ( 136,135 )     ( 11,248 )     ( 18,072 ) Proceeds from maturity of other investments     -       -       513   (Purchases) redemptions of Federal Reserve Bank stock     ( 60 )     114       ( 31 ) Redemptions (purchases) of Federal Home Loan Bank stock     319       ( 26 )     451   Decrease in originated loans receivable, net     77,710       116,635       18,728   Purchases of loans receivable     ( 89,338 )     ( 32,785 )     ( 54,604 ) Purchases of premises and equipment     ( 430 )     ( 70 )     ( 552 ) Proceeds from sale of premises and equipment     1,464       -       -   Proceeds from sale of other real estate owned     1,908       425       897   Refund of escrow deposit related to acquisition activity     -       -       500   Net cash (used in) provided by investing activities     ( 55,205 )     82,924       ( 41,777 )                           Cash Flows from Financing Activities:                         Increase (decrease) in deposits, net     62,906       ( 133,877 )     26,254   Purchases of deposits     -       49,998       -   Repayments of FHLB borrowings     -       ( 10,000 )     -   Principal repayments of note payable     ( 203 )     ( 199 )     ( 195 ) (Increase) decrease in advances from borrowers for taxes and insurance     ( 2,685 )     105       755   Dividends paid on common stock     -       -       ( 155 ) 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 )     ( 27,033 )                           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     45     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)   (In thousands)   Year Ended December 31,       2021     2020     2019   Supplemental Disclosures of Cash Flow Information:                         Cash paid for interest   $ 7,210     $ 15,037     $ 17,740   Cash paid (refund) for income taxes, net   $ 140     $ ( 659 )   $ 22                             Non-cash transactions:                         Increase in premises and equipment   $ 10     $ 290     $ 181   Reclass of premises and equipment to implementation cost   $ 52     $ -     $ -   Increase in accrued expense and other liabilities   $ ( 62 )   $ ( 290 )   $ ( 181 )                           Purchases of available-for-sale securities   $ -     $ -     $ 578   Increase in accrued expense and other liabilities   $ -     $ -     $ ( 578 )                           Transfers of loans receivable to other real estate owned   $ -     $ -     $ 446                             Transfers of SBA loans held for sale to loans receivable   $ 281     $ 9,542     $ -                             Transfers of loans receivable to loans held for sale   $ -     $ 5,022     $ -                             Operating lease right-of-use assets   $ 373     $ 40     $ 3,160   Operating lease liabilities   $ ( 373 )   $ ( 40 )   $ ( 3,364 )                           Accrued rent payable - adoption ASC 842   $ -     $ 22     $ 93                             Capitalized servicing assets   $ 335     $ 137     $ 180                             (Decrease) increase in interest rate swaps assets   $ ( 449 )   $ 493     $ -   Decrease (increase) in interest rate swaps liabilities   $ 449     $ ( 493 )   $ -                             Deferred cost related to capital raise   $ 825     $ -     $ -   Accrued expense related to capital raise   $ 825     $ -     $ -                             Business Combination Non-Cash Disclosures:                         Contingent liability assumed in business combination   $ -     $ -     $ 621   Decrease in escrow deposit related to acquisition activity   $ -     $ ( 657 )   $ -   Decrease in liabilities related to acquisition activity   $ -     $ 15     $ -   Decrease in contingent consideration related to acquisition activity   $ -     $ 86     $ -     See Accompanying Notes to Consolidated Financial Statements.   46     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 1. Nature of Operations and Summary of Significant Accounting Policies   Patriot National Bancorp, Inc. (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. The Bank provides a full range of banking services to commercial and consumer customers through its main office in Stamford, Connecticut, seven branch offices in Connecticut and two branch offices in New York. 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”). 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.   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:   Principles of consolidation and basis of financial statement presentation The consolidated financial statements include the accounts of Patriot, and the Bank's wholly owned subsidiaries, PinPat Acquisition Corporation and have been prepared in conformity with US GAAP. All significant intercompany balances and transactions have been eliminated.   Cash and cash equivalents Patriot considers all short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and due from banks, federal funds sold, and short-term investments are recognized as cash equivalents in the consolidated balance sheets.   Patriot maintains amounts due from banks which, at times, may exceed federally insured limits. Patriot has not experienced any losses from such concentrations.   47     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.   Shares in the FHLB-B and FRB are purchased and redeemed based upon their $ 100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost, 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. The determination of whether the par value will ultimately be recovered is influenced by criteria such as: (a) the significance of any decline in net assets of the FHLB-B or FRB, as applicable, compared to its capital stock amount, and the length of time this situation has persisted; (b) commitments by either the FHLB-B or FRB to make payments required by law or regulation and the level of such payments in relation to their operating performance; (c) the potential impact of any legislative or regulatory changes; and (d) the regulatory capital ratios and liquidity position of the FHLB-B or FRB, as applicable.   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  31,   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  31,   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. 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. If such decline is deemed to be an OTTI, the security is written down to its fair value, which becomes its new cost basis, and the resulting loss is charged to earnings as a component of non-interest income. Other than the credit loss portion, OTTI on a debt security that we have the intent and ability to hold until recovery of its amortized cost is recognized in other comprehensive income/loss, net of applicable taxes. The credit loss portion of OTTI (i.e., any losses resulting from an inability to collect on the instrument) is charged against earnings.   Securities transactions are recorded on the trade date. 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,   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,   2021 and 2020, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value.   48     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Loans receivable Loans that Patriot has the intent and ability to hold until maturity or for the foreseeable future generally are reported at their outstanding unpaid principal balances adjusted for unearned income, an allowance for loan and lease losses, if any, and any unamortized discount, premium and deferred fees.   Interest income is accrued based on unpaid principal balances. Loan application fees are reported as non-interest income, while other certain direct origination costs, or for purchased loans, any discounts or premiums are deferred and amortized to interest income as a level yield adjustment over the respective term of the loan.   Loans are placed on non-accrual status or charged off when collection of principal or interest is considered doubtful. The accrual of interest on loans is discontinued no later than when the loan is 90 days past due for payment, unless the loan is well secured and in process of collection. Consumer installment loans are typically charged off no later than when they become 180 days past due. Past due status is based on the contractual terms of the loan.   Accrued uncollected interest income on loans that are placed on non-accrual status or have been charged off is reversed against interest income. Interest income on such non-performing loans is accounted for on the cash-basis of accounting until qualifying for return to accrual status. Any cash received on non-accrual or charged off loans is first applied against unpaid and past-due principal and then to interest, unless the loan is in a cure period. If in a cure period, and management believes there will be a loss, cash receipts are applied to principal until the balance at risk and collateral value, if any, is equal to the amount management believes will ultimately be collected. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. 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 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.   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. 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. TDRs are generally placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated compliance with the restructured terms of the loan agreement and have performed for a minimum of six months.   Lower balance lending arrangements, such as consumer installment loans, are evaluated for impairment by pooling the loans into homogenous groupings. 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.   49     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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 Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan and lease losses is prohibited as any credit losses in the acquired loans are included in the determination of the fair value of the loans at the acquisition date. 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.   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. 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. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses and other contractually required payments that the Company does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan and lease losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan and lease losses or a reversal of a corresponding amount of the non-accretable discount, which the Company then reclassifies as an accretable discount that is accreted into interest income over the remaining life of the loans using the interest method.   PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date.   Acquired loans that met the criteria for non-accrual of interest prior to acquisition were not considered performing upon acquisition. When the customers resume payments, to make the nonaccrual loans current, the loans may return to accrual status, including the impact of any accretable discounts, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans.   Acquired Non-impaired Loans Acquired loans that do not meet the requirements under ASC 310 - 30 are considered acquired non-impaired loans. 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. Term loans are accreted (or amortized) using the constant effective yield method.   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.   50     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.   The non-specific ALLL by loan segment is calculated using a systematic methodology, consisting of a quantitative and qualitative analytical component, applied on a quarterly basis to homogeneous loans. 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”). 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.   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.   After considering the historic loss calculations, management applies additional qualitative adjustments to the ALLL to reflect the inherent risk of loss that exists in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in economic conditions, loan portfolio and asset quality data, and credit process changes, such as credit policies or underwriting standards. 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.   In 2021, the Company refined its methodology in determining the qualitative factors within the allowance for loan losses. Qualitative adjustments are aggregated into nine categories described in the Interagency Policy Statement (“Interagency Statement”) issued by the bank regulators. Within the statement, the following qualitative factors are considered:   ● Changes in lending policies and procedures, including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; ● Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; ● Changes in the nature and volume of the loan portfolio and terms of loans; ● Changes in the experience, ability and depth of lending management and staff; ● Changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; ● Changes in the quality of the loan review system; ● Changes in the value of the underlying collateral for collateral-dependent loans; ● The existence and effect of any concentrations of credit and changes in the level of such concentrations; ● The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio.   51     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. Generally, Patriot will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less costs to sell, for collateral dependent loans. Subsequent recoveries, if any, are credited to the ALLL. 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.   The allowance for loan and lease losses consists primarily of the following three components:     ( 1 ) 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). 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. Impaired loans that have no discounted cash flow or collateral deficiency, if applicable, are not considered for general valuation allowances described below.     ( 2 ) 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. 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 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. Under this system, management assigns risk ratings between one and eleven. 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. Loans assigned a risk rating of six or above are monitored more closely by the credit administration officers and the Loan Committee.     ( 3 ) An unallocated component of the ALLL is considered when necessary to cover uncertainties that could affect management's estimate of probable losses. 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.   52     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. All appraisals are reviewed by qualified independent parties to the firm preparing the appraisals. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new 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 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.   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.   While Patriot uses the best information available to evaluate the ALLL, future adjustments to the ALLL may be necessary if conditions differ or substantially change from the information used in making the evaluation. In addition, as an integral part of its regulatory examination process, the OCC will periodically review the ALLL. The OCC may require Patriot to adjust the ALLL based on its analysis of information available at the time of its examination.   Transfers of financial assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from Patriot -- put presumptively beyond the reach of Patriot and its creditors, even in bankruptcy or other receivership, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for Patriot, and ( 3 ) Patriot does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates it to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.   Loans Held for Sale 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. The amount of loan origination fees is included in the carrying value of loans sold and in the calculation of the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income. 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.   53     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Servicing Assets Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.   Other real estate owned 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. Revenue and expenses from operations and changes in the valuation allowance are included in the results of operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in non-interest expenses upon disposal.   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.   Premises and equipment Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation is charged to operations for buildings, furniture, equipment and software using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.   Impairment of long-lived assets Long-lived assets, which are held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense.   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 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.   The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The annual impairment test is conducted 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. 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.   54     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Contingent Consideration Contingent consideration represents an estimate of the additional amount of purchase price consideration and is measured based on the probability that certain loans are restructured in accordance with the related acquisition agreement. Resolution of the contingent consideration was finalized as of December 31, 2020 and no further adjustments are expected.   Derivatives 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. 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.   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.   Income taxes 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.   55     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and net operating loss carry-forwards that do not begin to expire until the year 2030. As of December 31, 2021, based upon this evidence, management fully reversed the valuation allowance of $ 1.9 million recorded at December  31,   2020. See Note 14 for more information on the deferred tax valuation allowance.   Management will continue to evaluate its ability to realize the net deferred tax asset. 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 $ 12.1  million at December  31,   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.   Unrecognized tax benefits Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. 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 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,   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 Basic earnings per share represents earnings accruing to common shareholders and are computed by dividing net income by the weighted average number of common shares outstanding.   Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive securities had been converted to common stock, as well as any adjustments to earnings resulting from the assumed conversion, unless such effect is anti-dilutive. Potential common shares that may be issued by Patriot include any unvested restricted stock awards, stock options, and stock warrants and are determined using the treasury stock method.   Share-based compensation plan Incentive and compensatory share-based compensation granted to employees is accounted for at the grant date fair value of the award and recognized in the results of operations as compensation expense with an off-setting entry to equity on a straight-line basis over the requisite service period, which is the vesting period. 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.   56     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. However, should such awards exist in the future, the value of the goods or services received shall be measured at the grant date fair value of the award or the goods or services to be received, if determined to be a more reliable measurement of fair value. A liability will be recognized for the award, which will periodically be adjusted to reflect the then current fair value, and compensation expense will be recognized over the requisite period during which the goods or services are received, so that the fair value at the date of settlement is the compensation expense recognized.   The Compensation Committee of the Board of Directors establishes terms and conditions applicable to the vesting of restricted stock awards and stock options. Restricted stock grants generally vest in quarterly or annual installments over a three, four or five year period from the date of grant. All restricted stock awards are non- participating grants.   Comprehensive income Accounting principles generally require that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of shareholders' equity in the consolidated balance sheets, such items, along with net income, are components of comprehensive income.   Segment reporting Patriot’s only business segment is Community Banking. During the years ended December  31,   2021, 2020 and 2019, this segment represented all the revenues and income of Patriot.   Reserve for Unfunded Commitments The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for our loan portfolio as well as a draw down factor applied to the various commitments. 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  18: Financial Instruments with Off-Balance-Sheet Risk for further information.   Related Party Transactions Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. See Note 20: Related Party Transactions for further information.   Fair value Patriot uses fair value measurements to record adjustments to the carrying amounts of certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. 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.   57     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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   ASC 606, Revenue from Contracts with Customers ("ASC 606" ), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. 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 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:     ● Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.   58     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Recently Adopted and Issued Accounting Standards   Accounting Standards Adopted During 2021   Effective January 1, 2021, the following new Accounting Standards Updates (ASUs) were adopted by the Company:   ASU 2019 - 12   ASU 2019 - 12, “ Income Taxes (Topic 740 ) - Simplifying the Accounting for Income Taxes. ” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019 - 12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU is effective for the Company on January 1, 2021. The adoption of ASU 2019 - 12 did not have any impact on our consolidated financial statements.   ASU Update 2020 - 04   ASU No. 2020 - 04, Reference Rate Reform (Topic 848 ): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships, to continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848 - 50 - 35 - 17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. The application of this guidance did not have a material impact on the Company's financial statements.   ASU 2021 - 01   In January 2021, the FASB issued ASU 2021 - 01, “ Reference Rate Reform (Topic 848 ) ”. This ASU clarifies certain optional expedients and exceptions in Topic 848 when accounting for derivative contracts and certain hedging relationships affected by changes in interest rates. The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021. The Company adopted the Update on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.   59     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to 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. The ASU also changes the existing impairment model for available-for-sale debt securities. In cases where there is neither the intent nor a more-likely-than- not requirement to sell the debt security, an entity will record credit losses as an allowance rather than a direct write-down of the amortized cost basis. Additionally, ASU 2016 - 13 notes that credit losses related to available-for-sale debt securities and purchased credit impaired loans should be recorded through an allowance for credit losses. ASU 2016 - 13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019 - 10, which amends the effective date of ASC 326 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delays the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a small reporting company, the delay will be applicable to the Company. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.   ASU Update 2020 - 02   In January 2020, the FASB issued ASU No. 2020 - 02, “ Financial Instruments - Credit Losses (Topic 326 ) and Leases (Topic 842 ): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016 - 02, Leases (Topic 842 ). ” This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. See the discussion regarding the adoption of ASU 2016 - 13 above.   ASU Update 2020 - 03   In March 2020, the FASB issued ASU No. 2020 - 3, “ Codification Improvements to Financial Instruments. ” This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016 - 13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016 - 13. Early adoption is not permitted before an entity’s adoption of ASU 2016 - 13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016 - 13 above.   60     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 2. Restrictions on Cash and Due from Banks   Federal Reserve System regulations require depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The Board of Governors of the Federal Reserve System generally makes annual adjustments to the tiered cash reserve requirements. 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, 2021 and 2020.       Note 3. Available-for-sale securities   At December  31,   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)   Amortized Cost     Gross Unrealized Gains     Gross Unrealized (Losses)     Fair Value   December 31, 2021:                                 U. S. Government agency and mortgage-backed securities   $ 67,850     $ 24     $ ( 1,245 )   $ 66,629   Corporate bonds     17,754       118       ( 951 )     16,921   Subordinated notes     4,608       35       ( 17 )     4,626   SBA loan pools     5,772       -       ( 169 )     5,603   Municipal bonds     563       1       ( 2 )     562       $ 96,547     $ 178     $ ( 2,384 )   $ 94,341                                     December 31, 2020:                                 U. S. Government agency and mortgage-backed securities   $ 16,719     $ 131     $ ( 17 )   $ 16,833   Corporate bonds     18,014       260       ( 984 )     17,290   Subordinated notes     9,036       97       ( 128 )     9,005   SBA loan pools     5,627       -       ( 60 )     5,567   Municipal bonds     564       3       -       567       $ 49,960     $ 491     $ ( 1,189 )   $ 49,262     61     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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,   2021 and 2020:   (In thousands)   Less than 12 Months     12 Months or More     Total       Fair Value     Unrealized (Loss)     Fair Value     Unrealized (Loss)     Fair Value     Unrealized (Loss)   December 31, 2021:                                                 U. S. Government agency and mortgage-backed securities   $ 60,606     $ ( 1,196 )   $ 1,610     $ ( 49 )   $ 62,216     $ ( 1,245 ) Corporate bonds     15,042       ( 951 )     -       -       15,042       ( 951 ) Subordinated notes     -       -       1,092       ( 17 )     1,092       ( 17 ) SBA loan pools     5,603       ( 169 )     -       -       5,603       ( 169 ) Municipal bonds     406       ( 2 )     -       -       406       ( 2 )     $ 81,657     $ ( 2,318 )   $ 2,702     $ ( 66 )   $ 84,359     $ ( 2,384 )                                                   December 31, 2020:                                                 U. S. Government agency and mortgage-backed securities   $ 5,797     $ ( 14 )   $ 1,476     $ ( 3 )   $ 7,273     $ ( 17 ) Corporate bonds     -       -       13,015       ( 984 )     13,015       ( 984 ) Subordinated notes     1,878       ( 122 )     1,103       ( 6 )     2,981       ( 128 ) SBA loan pools     1,533       ( 12 )     4,034       ( 48 )     5,567       ( 60 )     $ 9,208     $ ( 148 )   $ 19,628     $ ( 1,041 )   $ 28,836     $ ( 1,189 )   At December  31,   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. The noted losses are considered temporary due to market fluctuations in available interest rates on U.S. Government agency debt, mortgage-backed securities issued by U.S. Government agencies, subordinated notes, corporate debt, and municipal bonds. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. SBA government guaranteed loan pools securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the U.S. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Since Patriot is not more-likely-than- not to be required to sell the investments before recovery of the amortized cost basis and does not intend to sell the securities at a loss, none of the available-for-sale securities noted are considered to be OTTI as of December 31, 2021.   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”).   62     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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,   2021 and 2020. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item.   (In thousands)   Amortized Cost     Fair Value       Due Within 5 years     Due After 5 years through 10 years     Due After 10 years     Total     Due Within 5 years     Due After 5 years through 10 years     Due After 10 years     Total   December 31, 2021:                                                                 Corporate bonds   $ 17,754     $ -     $ -     $ 17,754     $ 16,921     $ -     $ -     $ 16,921   Subordinated notes     -       4,608       -       4,608       -       4,626       -       4,626   SBA loan pools     -       -       5,772       5,772       -       -       5,603       5,603   Municipal bonds     -       563       -       563       -       562       -       562   Available-for-sale securities with stated maturity dates     17,754       5,171       5,772       28,697       16,921       5,188       5,603       27,712   U. S. Government agency and mortgage-backed securities     13,876       -       53,974       67,850       13,835       -       52,794       66,629       $ 31,630     $ 5,171     $ 59,746     $ 96,547     $ 30,756     $ 5,188     $ 58,397     $ 94,341                                                                     December 31, 2020:                                                                 Corporate bonds   $ 4,014     $ 14,000     $ -     $ 18,014     $ 4,274     $ 13,016     $ -     $ 17,290   Subordinated notes     2,000       7,036       -       9,036       2,003       7,002       -       9,005   SBA loan pools     1,921       3,706       -       5,627       1,899       3,668       -       5,567   Municipal bonds     -       564       -       564       -       567       -       567   Available-for-sale securities with stated maturity dates     7,935       25,306       -       33,241       8,176       24,253       -       32,429   U. S. Government agency and mortgage-backed securities     3,364       1,466       11,889       16,719       3,363       1,491       11,979       16,833       $ 11,299     $ 26,772     $ 11,889     $ 49,960     $ 11,539     $ 25,744     $ 11,979     $ 49,262     63     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 4. Loan Receivables and Allowance for Loan and Lease Losses   As of December  31,   2021 and 2020, loans receivable, net, consisted of the following:       December 31,   (In thousands)   2021     2020   Loan portfolio segment:                 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   Construction     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 )     ( 10,584 ) Loans receivable, net   $ 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. Patriot originates commercial real estate loans, commercial business loans, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.   Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75 % of the market value of the underlying collateral. Patriot’s loan origination policy for multi-family residential real estate is limited to 80 % of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75 % of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets.   In May 2018, loans were acquired in connection with the Prime Bank merger. 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,   2021 and 2020. The loans were evaluated for impairment through the periodic reforecasting of expected cash flows.   Income is recognized on PCI loans pursuant to ASC Topic 310 - 30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.   There were no PCI loans transactions in 2021. A summary of changes in the accretable discount for PCI loans for the year ended December  31,   2020 and 2019 follows:   (In thousands)   Year Ended December 31,       2020     2019   Accretable discount, beginning of period   $ ( 47 )   $ ( 792 ) Accretion     2       47   Other changes, net     45       698   Accretable discount, end of period   $ -     $ ( 47 )   64     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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.   Residential Real Estate Loans   In 2013, Patriot discontinued offering primary mortgages on personal residences. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be declines in general economic conditions.   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 $ 19.6 million and $ 55.0 million at December  31,   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. Further originations in this loan class are not expected.   Consumer and Other Loans   Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans, and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.   The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories that are typically characterized by payment delinquencies, previous charge-offs, judgments against the consumer, a history of bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.   During 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.   65     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Construction Loans   Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed.   Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions.   Construction to Permanent - Commercial Real Estate (“CRE”)   Loans in this category represent a one -time close of a construction facility with simultaneous conversion to an amortizing mortgage loan. Construction to Permanent loans combine a short-term period similar to a construction loan, generally with a variable rate, and a longer term CRE loan typically 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.   SBA Loans   Patriot originates SBA 7 (a) loans, on which the SBA has historically provided guarantees of 75 % of the principal balance. However, during the pandemic in 2021, the SBA temporarily increased the guarantees to 90 % and reverted to 75 % on October 1, 2021. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $ 27.1 million and $ 21.6 million at December  31,   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.   66     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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,   2021:   (In thousands)   Commercial Real Estate     Residential Real Estate     Commercial and Industrial     Consumer and Other     Construction     Construction to Permanent - CRE     Unallocated     Total   As of and for the year ended December 31, 2021                                                   Allowance for loan and lease losses:                                                           December 31, 2020   $ 4,485     $ 1,379     $ 3,284     $ 295     $ 739     $ 162     $ 240     $ 10,584   Charge-offs     ( 51 )     ( 3 )     ( 212 )     ( 23 )     ( 69 )     -       -       ( 358 ) Recoveries     -       3       65       111       -       -       -       179   Provisions (credits)     629       321       ( 605 )     ( 130 )     ( 592 )     ( 121 )     ( 2 )     ( 500 ) December 31, 2021   $ 5,063     $ 1,700     $ 2,532     $ 253     $ 78     $ 41     $ 238     $ 9,905                                                                     As of and for the year ended December 31, 2020                                                   Allowance for loan and lease losses:                                                           December 31, 2019   $ 3,789     $ 1,038     $ 4,340     $ 341     $ 477     $ 130     $ -     $ 10,115   Charge-offs     ( 1,032 )     ( 24 )     ( 677 )     ( 45 )     -       -       -       ( 1,778 ) Recoveries     -       1       70       6       -       -       -       77   Provisions (credits)     1,728       364       ( 449 )     ( 7 )     262       32       240       2,170   December 31, 2020   $ 4,485     $ 1,379     $ 3,284     $ 295     $ 739     $ 162     $ 240     $ 10,584                                                                     As of and for the year ended December 31, 2019                                                   Allowance for loan and lease losses:                                                           December 31, 2018   $ 1,866     $ 1,059     $ 3,558     $ 641     $ 350     $ 108     $ 27     $ 7,609   Charge-offs     -       ( 118 )     ( 2,418 )     ( 123 )     -       -       -       ( 2,659 ) Recoveries     2       10       172       10       -       -       -       194   Provisions (credits)     1,921       87       3,028       ( 187 )     127       22       ( 27 )     4,971   December 31, 2019   $ 3,789     $ 1,038     $ 4,340     $ 341     $ 477     $ 130     $ -     $ 10,115     67     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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,   2021 and 2020:   (In thousands)   Commercial Real Estate     Residential Real Estate     Commercial and Industrial     Consumer and Other     Construction     Construction to Permanent - CRE     Unallocated     Total   December 31, 2021                                                                 Allowance for loan and lease losses:                                                           Individually evaluated for impairment   $ 1,567     $ 3     $ 722     $ -     $ -     $ -     $ -     $ 2,292   Collectively evaluated for impairment     3,496       1,697       1,810       253       78       41       238       7,613   Total allowance for loan and lease losses   $ 5,063     $ 1,700     $ 2,532     $ 253     $ 78     $ 41     $ 238     $ 9,905                                                                     Loans receivable, gross:                                                                 Individually evaluated for impairment   $ 15,704     $ 2,954     $ 4,031     $ 523     $ -     $ -     $ -     $ 23,212   Collectively evaluated for impairment     349,543       155,637       118,779       58,841       21,781       11,695       -       716,276                                                                     Total loans receivable, gross   $ 365,247     $ 158,591     $ 122,810     $ 59,364     $ 21,781     $ 11,695     $ -     $ 739,488       (In thousands)   Commercial Real Estate     Residential Real Estate     Commercial and Industrial     Consumer and Other     Construction     Construction to Permanent - CRE     Unallocated     Total   December 31, 2020                                                                 Allowance for loan and lease losses:                                                           Individually evaluated for impairment   $ 1,398     $ 4     $ -     $ 10     $ -     $ -     $ -     $ 1,412   Collectively evaluated for impairment     3,087       1,375       3,284       285       739       162       240       9,172   Total allowance for loan losses   $ 4,485     $ 1,379     $ 3,284     $ 295     $ 739     $ 162     $ 240     $ 10,584                                                                     Loans receivable, gross:                                                                 Individually evaluated for impairment   $ 14,534     $ 3,962     $ 4,700     $ 1,187     $ -     $ -     $ -     $ 24,383   Collectively evaluated for impairment     267,844       149,889       139,597       66,448       66,984       15,035       -       705,797                                                                     Total loans receivable, gross   $ 282,378     $ 153,851     $ 144,297     $ 67,635     $ 66,984     $ 15,035     $ -     $ 730,180     Patriot monitors the credit quality of its loans receivable on an ongoing basis. Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.   68     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Patriot employs a risk rating system as part of the risk assessment of its loan portfolio. At origination, credit officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the credit officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed by the Credit Department either annually or biannually, depending upon the amount of the bank’s exposure.   Additionally, Patriot retains an independent third -party loan review expert to perform a quarterly analysis of the results of its risk rating process. The semi-annual review is based on a randomly selected sample of loans within established parameters (e.g., value, concentration), in order to assess and validate the risk ratings assigned to individual loans. Any changes to the assigned risk ratings, based on the semi-annual review, are required to be reported to the Board Audit Committee.   When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven -point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:   ● Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected. ● Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard”, with the added characteristic that the identified weaknesses make collection or liquidation-in-full improbable, on the basis of currently existing facts, conditions, and values.   Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount.   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.   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.   69     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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,   2021.   (In thousands)   Performing (Accruing) Loans                   As of December 31, 2021:   30 - 59 Days Past Due     60 - 89 Days Past Due     90 Days or Greater Past Due     Total Past Due     Current     Total Performing Loans     Non- accruing Loans     Loans Receivable Gross   Loan portfolio segment:                                                                 Commercial Real Estate:                                                                 Pass   $ 696     $ -     $ -     $ 696     $ 324,858     $ 325,554     $ -     $ 325,554   Special mention     -       -       -       -       16,625       16,625       -       16,625   Substandard     -       -       -       -       7,364       7,364       15,704       23,068         696       -       -       696       348,847       349,543       15,704       365,247   Residential Real Estate:                                                                 Pass   $ -     $ -     $ -       -     $ 154,044       154,044       -       154,044   Special mention     -       -       -       -       1,399       1,399       -       1,399   Substandard     -       -       -       -       -       -       3,148       3,148         -       -       -       -       155,443       155,443       3,148       158,591   Commercial and Industrial:                                                                 Pass   $ 243     $ -     $ -       243     $ 114,306       114,549       -       114,549   Special mention     -       -       -       -       1,951       1,951       -       1,951   Substandard     -       -       -       -       2,209       2,209       4,101       6,310         243       -       -       243       118,466       118,709       4,101       122,810   Consumer and Other:                                                                 Pass   $ -     $ 26     $ 2       28     $ 59,171       59,199       -       59,199   Substandard     -       -       -       -       23       23       142       165         -       26       2       28       59,194       59,222       142       59,364   Construction:                                                                 Pass   $ -     $ -     $ -       -     $ 21,781       21,781       -       21,781         -       -       -       -       21,781       21,781       -       21,781   Construction to Permanent -CRE:                                                           Pass   $ -     $ -     $ -       -     $ 11,695       11,695       -       11,695         -       -       -       -       11,695       11,695       -       11,695                                                                     Total   $ 939     $ 26     $ 2     $ 967     $ 715,426     $ 716,393     $ 23,095     $ 739,488                                                                     Loans receivable, gross:                                                                 Pass   $ 939     $ 26     $ 2     $ 967     $ 685,855     $ 686,822     $ -     $ 686,822   Special mention     -       -       -       -       19,975       19,975       -       19,975   Substandard     -       -       -       -       9,596       9,596       23,095       32,691   Loans receivable, gross   $ 939     $ 26     $ 2     $ 967     $ 715,426     $ 716,393     $ 23,095     $ 739,488     70     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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.   (In thousands)   Performing (Accruing) Loans                   As of December 31, 2020:   30 - 59 Days Past Due     60 - 89 Days Past Due     90 Days or Greater Past Due     Total Past Due     Current     Total Performing Loans     Non-accruing Loans     Loans Receivable Gross   Loan portfolio segment:                                                                 Commercial Real Estate:                                                                 Pass   $ -     $ -     $ -     $ -     $ 230,824     $ 230,824     $ -     $ 230,824   Special mention     -       -       -       -       25,658       25,658       -       25,658   Substandard     354       -       9       363       10,999       11,362       14,534       25,896         354       -       9       363       267,481       267,844       14,534       282,378   Residential Real Estate:                                                                 Pass     478       361       -       839       145,298       146,137       -       146,137   Special mention     -       -       -       -       3,860       3,860       -       3,860   Substandard     -       -       -       -       -       -       3,854       3,854         478       361       -       839       149,158       149,997       3,854       153,851   Commercial and Industrial:                                                                 Pass     -       209       -       209       102,131       102,340       -       102,340   Special mention     -       4,000       -       4,000       8,881       12,881       -       12,881   Substandard     603       113       -       716       27,660       28,376       700       29,076         603       4,322       -       4,925       138,672       143,597       700       144,297   Consumer and Other:                                                                 Pass     1       -       7       8       66,589       66,597       -       66,597   Substandard     -       -       -       -       121       121       917       1,038         1       -       7       8       66,710       66,718       917       67,635   Construction:                                                                 Pass     -       2,351       -       2,351       64,633       66,984       -       66,984         -       2,351       -       2,351       64,633       66,984       -       66,984   Construction to Permanent - CRE:                                                           Pass     -       -       -       -       15,035       15,035       -       15,035         -       -       -       -       15,035       15,035       -       15,035                                                                     Total   $ 1,436     $ 7,034     $ 16     $ 8,486     $ 701,689     $ 710,175     $ 20,005     $ 730,180                                                                     Loans receivable, gross:                                                                 Pass   $ 479     $ 2,921     $ 7     $ 3,407     $ 624,510     $ 627,917     $ -     $ 627,917   Special mention     -       4,000       -       4,000       38,399       42,399       -       42,399   Substandard     957       113       9       1,079       38,780       39,859       20,005       59,864   Loans receivable, gross   $ 1,436     $ 7,034     $ 16     $ 8,486     $ 701,689     $ 710,175     $ 20,005     $ 730,180     71     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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,   2021 and 2020:   (In thousands)   Non-accruing Loans               30 - 59 Days Past Due     60 - 89 Days Past Due     90 Days or Greater Past Due     Total Past Due     Current     Total Non-accruing Loans   As of December 31, 2021:                                                 Loan portfolio segment:                                                 Commercial Real Estate:                                                 Substandard   $ -     $ -     $ 15,704     $ 15,704     $ -     $ 15,704   Residential Real Estate:                                                 Substandard     -       -       2,419       2,419       729       3,148   Commercial and Industrial:                                                 Substandard     -       491       2,458       2,949       1,152       4,101   Consumer and Other:                                                 Substandard     -       94       28       122       20       142   Total non-accruing loans   $ -     $ 585     $ 20,609     $ 21,194     $ 1,901     $ 23,095                                                     As of December 31, 2020:                                                 Loan portfolio segment:                                                 Commercial Real Estate:                                                 Substandard   $ -     $ -     $ 5,723     $ 5,723     $ 8,811     $ 14,534   Residential Real Estate:                                                 Substandard     -       -       2,884       2,884       970       3,854   Commercial and Industrial:                                                 Substandard     -       -       700       700       -       700   Consumer and Other:                                                 Substandard     22       -       91       113       804       917   Total non-accruing loans   $ 22     $ -     $ 9,398     $ 9,420     $ 10,585     $ 20,005     If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $ 802,000 , $ 904,000 , and $ 302,000 would have been recognized in income for the years ended December  31,   2021, 2020, and 2019, respectively.   Interest income collected and recognized on non-accruing loans for the year ended December  31,   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. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful.   72     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. Management considers all non-accrual loans and Trouble Debt Restructurings (“TDR”) for impaired loans. In most cases, loan payments that are past due less than 90 days, well-secured, and in the process of collection are not considered impaired. The Bank considers 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. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a TDR.   Substantially all TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of adjusting these two contractual attributes. TDR loan modifications may also result in the forgiveness of principal or accrued interest. In addition, when modifying commercial loans, Patriot frequently obtains additional collateral or guarantor support. If the borrower has performed under the existing contractual terms of the loan and Patriot’s underwriters determine that the borrower has the capacity to continue to perform under the terms of the TDR, the loan continues accruing interest. Non-accruing TDRs may be returned to accrual status when there has been a sustained period of performance (generally six consecutive months of payments) and both principal and interest are reasonably assured of collection.   The following table summarizes the recorded investment in TDRs as of December 31, 2021 and 2020:   (In thousands)   December 31, 2021     December 31, 2020   Loan portfolio segment:   Number of Loans     Recorded Investment     Number of Loans     Recorded Investment   Commercial Real Estate     1     $ 8,884       2     $ 9,884   Residential Real Estate     3       870       3       928   Commercial and Industrial     0       -       1       4,000   Consumer and Other     3       640       5       1,074   Total TDR Loans     7       10,394       11       15,886   Less:                                 TDRs included in non-accrual loans     3       ( 9,688 )     6       ( 11,508 ) Total accrual TDR Loans     4     $ 706       5     $ 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  31,   2020 and 2019.                       Outstanding Recorded Investment           (In thousands)   Number of Loans     Pre-Modification     Post-Modification   Year Ended December 31,   2020     2019     2020     2019     2020     2019   Loan portfolio segment:                                                 Commercial Real Estate     2       2     $ 822     $ 8,912     $ 819     $ 8,911   Commercial and Industrial     1       -       4,000       -       4,000       -   Consumer and Other     3       -       413       -     $ 414       -                                                     Total TDR Loans     6       2     $ 5,235     $ 8,912     $ 5,233     $ 8,911     73     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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.   (In thousands)   Year Ended December 31,       2020     2019   Rate reduction   $ 4,819     $ 111   Extension of interest only period     121       -   Payment deferral     293       -   Maturity and rate reduction     -       8,800   Total   $ 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,   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. In addition, on April 7, 2020, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID- 19 loan modifications are TDRs. The Bank had modified $ 232.7 million of loans to borrowers to defer the payment of interest and/or principal for up to 180 days. The vast majority all of those loans deferred have now resumed normal payments. 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,   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  31,   2021, exposure to the impaired loans was related to thirty-four borrowers. Twenty- three out of thirty-four impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $100,000, totaling $ 590,000 , with a general reserve of $ 7,000 were collectively evaluated, and not individually evaluated for impairment.   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 5.8 % discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8 % in selling costs, in order to estimate the potential loss, if any, that may eventually be realized. Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.   Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any. Once a borrower is in default, Patriot is under no obligation to advance additional funds on unused commitments.   74     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   The following table reflects information about the impaired loans by class as of December  31,   2021 and 2020:   (In thousands)   December 31, 2021     December 31, 2020       Recorded Investment     Principal Outstanding     Related Allowance     Recorded Investment     Principal Outstanding     Related Allowance   With no related allowance recorded:                                                 Commercial Real Estate   $ 6,820     $ 7,776     $ -     $ 5,723     $ 6,644     $ -   Residential Real Estate     2,847       2,763       -       3,853       3,900       -   Commercial and Industrial     630       758       -       4,700       4,816       -   Consumer and Other     523       523       -       1,177       1,332       -         10,820       11,820       -       15,453       16,692       -   With a related allowance recorded:                                                 Commercial Real Estate   $ 8,884     $ 8,811     $ 1,567       8,811       8,811       1,398   Residential Real Estate     461       488       8       109       109       4   Commercial and Industrial     3,471       3,916       723       -       -       -   Consumer and Other     166       201       1       10       10       10         12,982       13,416       2,299       8,930       8,930       1,412                                                     Impaired Loans, Total:                                                 Commercial Real Estate     15,704       16,587       1,567       14,534       15,455       1,398   Residential Real Estate     3,308       3,251       8       3,962       4,009       4   Commercial and Industrial     4,101       4,674       723       4,700       4,816       -   Consumer and Other     689       724       1       1,187       1,342       10   Impaired Loans, Total   $ 23,802     $ 25,236     $ 2,299     $ 24,383     $ 25,622     $ 1,412     For each year in the three -year period ended December  31,   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,   (In thousands)   2021     2020     2019       Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized   With no related allowance recorded:                                           Commercial Real Estate   $ 7,636     $ 103     $ 5,859     $ 39     $ 9,829     $ 95   Residential Real Estate     4,014       51       3,681       28       2,531       104   Commercial and Industrial     2,548       12       2,111       79       1,800       45   Consumer and Other     702       16       1,132       47       901       35   Construction     -       -       -       -       4,062       -         14,900       182       12,783       193       19,123       279   With a related allowance recorded:                                           Commercial Real Estate     8,869       66       8,861       35       888       415   Residential Real Estate     428       21       34       7       952       -   Commercial and Industrial     2,239       126       -       -       1,714       -   Consumer and Other     106       7       39       -       18       -         11,642       220       8,934       42       3,572       415   Impaired Loans, Total:                                                 Commercial Real Estate     16,505       169       14,720       74       10,717       510   Residential Real Estate     4,442       72       3,715       35       3,483       104   Commercial and Industrial     4,787       138       2,111       79       3,514       45   Consumer and Other     808       23       1,171       47       919       35   Construction     -       -       -       -       4,062       -   Impaired Loans, Total   $ 26,542     $ 402     $ 21,717     $ 235     $ 22,695     $ 694     75     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 5. Loans Held for Sale   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. 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. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.   Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.   Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $ 29.6 million and $ 19.4 million at December  31,   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,   2021, 2020 and 2019:   (In thousands)   Year Ended December 31,       2021     2020     2019   Beginning balance   $ 316     $ 201     $ 37   Servicing rights capitalized     335       137       180   Servicing rights amortized     ( 22 )     ( 22 )     ( 16 ) Servicing rights disposed     ( 45 )     -       -   Ending balance   $ 584     $ 316     $ 201     The servicing assets are included in the other assets on the consolidated balance sheet.   76     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 6. Premises and Equipment   At December  31,   2021 and 2020, premises and equipment consisted of the following:   (In thousands)   December 31,       2021     2020   Land   $ 12,819     $ 12,819   Buildings     19,046       20,287   Leasehold Improvements     3,058       4,024   Furniture, equipment, and software     12,264       12,010   Construction-in-progress     65       62   Premises and equipment, gross     47,252       49,202   Accumulated depreciation and amortization     ( 15,752 )     ( 15,779 ) Premises and equipment, net   $ 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  31,   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.       Note 7. 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  31,   2021, 2020 and 2019:   (In thousands)   Year Ended December 31,       2021     2020     2019   Beginning balance   $ 1,906     $ 2,400     $ 2,945   Additions     -       -       446   Sold     ( 1,906 )     ( 446 )     ( 991 ) Write-downs     -       ( 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.   77     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 8. 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. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. At date of acquisition fair values are generally preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.   On May 10, 2018, the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.   The assets acquired and liabilities assumed from Prime Bank were recorded at their estimated fair value as of the closing date of the acquisition. Goodwill of $ 2.1 million was recorded at the time of the acquisition, and was adjusted to $ 1.7 million as of December 31, 2018, primarily due to updating of fair value of the core deposit intangibles and adjustment of cash and contingent considerations. The goodwill was further adjusted to $ 1.1 million as a result of reducing the estimated amount to be paid pursuant to certain problem loans pending resolution by $ 621,000 as of May 10, 2019.   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 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.   Information on goodwill for the year ended December  31,   2021, 2020 and 2019 is as follows:       Year Ended December 31,   (In thousands)   2021     2020     2019   Balance, beginning of period   $ 1,107     $ 1,107     $ 1,728   Measurement period adjustments     -       -       ( 621 ) Balance, end of period   $ 1,107     $ 1,107     $ 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. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.   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. 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 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  31,   2021.   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,   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.   78     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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)   As of December 31,       2021     2020   Gross carrying amount   $ 748     $ 748   Accumulated amortization     ( 246 )     ( 199 ) Impairment     ( 206 )     ( 206 ) Net carrying amount   $ 296     $ 343     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.       Note 9. Deposits   The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December  31,   2021 and 2020.       December 31, 2021     December 31, 2020   (In thousands)   Balance     Weighted Avg. Stated Interest Rate     Balance     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       0.07 % Savings     109,744       0.13 %     98,635       0.36 % Money market     164,518       0.23 %     146,389       0.45 % Certificates of deposit, less than $250,000     142,246       0.35 %     160,968       0.78 % Certificates of deposit, $250,000 or greater     53,584       0.40 %     49,172       0.79 % Brokered deposits     17,016       1.05 %     41,287       1.93 %                                   Interest bearing, Total     521,849       0.27 %     526,980       0.66 %                                   Total Deposits   $ 748,562       0.19 %   $ 685,656       0.51 %     On July 22, 2020, the Company completed the purchase of prepaid debit card deposits of $ 50.0 million from a prominent national provider and processor of prepaid debit cards for corporate, consumer and government clients. The prepaid debit card deposits are included in the non-interest-bearing deposits and money market deposits, which totaled approximately $ 138.9  million and $ 74.3  million as of December 31, 2021 and 2020, respectively.   79     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  31,   2021.   (In thousands)   Year ended December 31,       2021     2020     2019       Interest Expense     Weighted Avg. Effective Interest Rate     Interest Expense     Weighted Avg. Effective Interest Rate     Interest Expense     Weighted Avg. Effective Interest Rate   Negotiable order of withdrawal accounts   $ 24       0.07 %   $ 23       0.07 %   $ 18       0.07 % Savings     238       0.22 %     426       0.54 %     429       0.63 % Money market     449       0.30 %     1,451       1.05 %     2,048       2.00 % Certificates of deposit, less than $250,000     899       0.61 %     3,227       1.75 %     4,986       2.38 % Certificates of deposit, $250,000 or greater     270       0.49 %     1,188       1.95 %     1,546       2.01 % Brokered deposits     363       1.83 %     2,839       1.88 %     4,958       2.47 %     $ 2,243       0.43 %   $ 9,154       1.43 %   $ 13,985       2.05 %   As of December  31,   2021, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:   (In thousands)   CDs less than $250,000     CDs $250,000 or greater     Brokered Deposits     Total                                     1 year or less   $ 104,971     $ 28,050     $ 15,023     $ 148,044   More than 1 year through 2 years     23,259       24,274       996       48,529   More than 2 years through 3 years     4,622       250       748       5,620   More than 3 years through 4 years     3,806       1,010       249       5,065   More than 4 years through 5 years     5,588       -       -       5,588                                         $ 142,246     $ 53,584     $ 17,016     $ 212,846         Note 10. Borrowings   As of December  31,   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.   Federal Home Loan Bank borrowings   The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. As of December  31,   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  31,   2021 and 2020, outstanding advances from the FHLB-B aggregated $ 90.0 million and $ 90.0 million, respectively.   80     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   At December  31,   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  31,   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  31,   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  31,   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,   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,   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. 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.   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,   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,   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  31,   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.   81     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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.   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,   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  31,   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. The proceeds, net of a $ 240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations.   Trust preferred securities currently qualify for up to 25 % of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital.   The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities.   The junior subordinated debentures bear interest at three -month LIBOR plus 3.15 % ( 3.37 % at December  31,   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. In June of 2014, the Company brought the debt current by paying approximately $ 1.7 million of interest in arrears to the holders of the junior subordinated debentures. On bringing the debt current and, as permitted under the terms of the junior subordinated debentures, the Company again opted to defer payment of quarterly interest through September 2016, when a $ 0.7 million payment was made to bring the debt current.   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,   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  31,   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.   82     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Note Payable   In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $ 2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $ 2.0 million, nine -year, promissory note bearing interest at a fixed rate of 1.75 % per annum. As of December  31,   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,   2021, 2020 and 2019 were $ 15,000 , $ 19,000 and $ 23,000 , respectively.   Maturity of borrowings   At December  31,   2021, the contractual maturities of the Company’s borrowings in future periods were as follows:   (In thousands)                                                 Year ending December 31,   FHLB Borrowings     Senior Notes     Subordinated Notes     Junior Subordinated Debt     Note Payable     Total   2022   $ -     $ 12,000     $ -     $ -       206       12,206   2023     60,000       -       -       -       210       60,210   2024     30,000       -       -       -       375       30,375   2025     -       -       -       -       -       -   2026     -       -       -       -       -       -   Thereafter     -       -       10,000       8,248       -       18,248                                                     Total contractual maturities of borrowings     90,000       12,000       10,000       8,248       791       121,039                                                     Unamortized debt issuance costs     -       -       ( 189 )     ( 129 )     -       ( 318 )                                                   Balance of borrowings as of December 31, 2021   $ 90,000     $ 12,000     $ 9,811     $ 8,119     $ 791     $ 120,721         Note 11. Derivatives   Derivatives Not Designated in Hedge Relationships   Patriot is a party to interest rate swaps; derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.   Patriot entered the two initial interest rate swaps under the program in November 2018; and another two swaps were entered into in May 2019. As of December  31,   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. 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.    83     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):   (In thousands)   Notional Amount     Maturity (Years)     Fixed Rate   Variable Rate   Fair Value   December 31, 2021                                   Classified in Other Assets:                                   Customer interest rate swap   $ 4,843       7.3       5.25 % 1 Mo. LIBOR + 1.96%   $ 638   Customer interest rate swap     1,398       7.5       4.38 % 1 Mo. LIBOR + 2.00%     100                                       Classified in Other Liabilities:                                   3rd party interest rate swap   $ 4,843       7.3       5.25 % 1 Mo. LIBOR + 1.96%   $ ( 638 ) 3rd party interest rate swap     1,398       7.5       4.38 % 1 Mo. LIBOR + 2.00%     ( 100 )                                     December 31, 2020                                   Classified in Other Assets:                                   Customer interest rate swap   $ 4,911       8.3       5.25 % 1 Mo. LIBOR + 1.96%   $ 997   Customer interest rate swap     1,431       8.5       4.38 % 1 Mo. LIBOR + 2.00%     190                                       Classified in Other Liabilities:                                   3rd party interest rate swap   $ 4,911       8.3       5.25 % 1 Mo. LIBOR + 1.96%   $ ( 997 ) 3rd party interest rate swap     1,431       8.5       4.38 % 1 Mo. LIBOR + 2.00%     ( 190 )   84     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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:       Year Ended   (In thousands)   December 31, 2021   Interest rate swap designated as cash flow hedge:         Unrealized gain recognized in accumulated other comprehensive income before reclassifications   $ 149   Amounts reclassified from accumulated other comprehensive income     ( 149 ) 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.       Note 12. Leases   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. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.   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. Most of the leases contain rent escalation provisions, as well as renewal options for one or more periods. 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. 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).   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,   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. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the standard. The Company elected to separate lease and non-lease components. The fixed lease costs are recognized as ROU lease assets and Lease liability. 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,   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  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 31, 2019, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 517,000 and $ 27,000 , respectively.   85     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   The following is a maturity analysis of the operating lease liabilities as of December  31,   2021:   (in thousands)   Operating lease   Years ending December 31,   Obligation   2022   $ 541   2023     547   2024     440   2025     329   2026     299   Thereafter     1,082   Total undiscounted lease payments   $ 3,238             Less imputed interest     ( 461 )           Present value of operating lease liabilities   $ 2,777             Operating lease right-of-use asset   $ 2,639         Year Ended December 31,       2021     2020     2019   Lease cost                         Operating lease cost   $ 571     $ 565     $ 517   Short-term lease cost     12       18       119   Total lease cost   $ 583     $ 583     $ 636                             Other information                         Operating cash flows from operating leases   $ 552     $ 543     $ 459         December 31,       2021     2020   Weighted -average remaining lease term - operating leases (in years)     8       9   Weighted -average discount rate - operating leases     3.30 %     3.48 %   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 $ 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,   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  31,   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.   86     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 13. Commitments and Contingencies   Employment Agreements   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   Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.       Note 14. Income Taxes   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,   2021.   (In thousands)   Year Ended December 31,       2021     2020     2019   Current:                         Federal   $ -     $ ( 100 )   $ 88   State     180       86       149         180       ( 14 )     237                             Deferred:                         Federal     1,860       ( 2,448 )     ( 698 ) State     ( 2,121 )     2,125       ( 438 )       ( 261 )     ( 323 )     ( 1,136 )                           Income tax benefit   $ ( 81 )   $ ( 337 )   $ ( 899 )   For each of the years in the three -year period ended December  31,   2021, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:   (In thousands)   Year Ended December 31,       2021     2020     2019                             Income taxes at statutory Federal rate   $ 1,053     $ ( 873 )   $ ( 780 ) State taxes, net of Federal benefit     404       ( 191 )     ( 228 ) Deferred tax valuation allowance     ( 1,938 )     1,938       -   Reversal UTP on Federal DTA     -       ( 1,132 )     -   Nondeductible expenses     ( 10 )     8       14   Project expenses for merger and acquisition     383       -       -   Other     27       ( 87 )     95                             Income tax benefit   $ ( 81 )   $ ( 337 )   $ ( 899 )   The effective tax rate for the years ended December  31,   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.   87     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Deferred Tax Assets and Liabilities The significant components of Patriot’s net deferred tax assets at December  31,   2021 and 2020 are presented below.   (In thousands)   December 31,       2021     2020   Deferred tax assets:                 Federal NOL carryforward benefit   $ 3,605     $ 4,576   NOL write-off for Sec 382 Limit     ( 3,258 )     ( 3,258 ) Capitalized cost temporary item     3,325       3,627   State NOL carryforward benefit     3,168       3,306   Allowance for loan loss     3,017       3,869   Lease liabilities     746       775   Non-accrual interest     827       558   Merger and acquisition     187       204   Accrued expenses     421       201   Unrealized loss AFS securities     569       180   Goodwill and intangible     137       170   Depreciation of premises and equipment     98       -   Share based compensation     3       8   Other     17       15   Gross deferred tax assets     12,862       14,231   Less deferred taxasset valuation allowance     -       ( 1,937 ) Total deferred tax assets   $ 12,862     $ 12,294                                       Deferred tax liabilities:                 Right-of-use assets     ( 709 )     ( 736 ) Depreciation of premises and equipment     -       ( 32 ) Other     ( 7 )     ( 30 ) Gross deferred tax liabilities     ( 716 )     ( 798 )                   Net deferred tax asset     12,146       11,496     As of December  31,   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  31,   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 Patriot 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.   88     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. 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 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.   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 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 Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. 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.   As of December  31,   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.   A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:   (In thousands)   Year Ended December 31,       2021     2020     2019   Balance, beginning of year   $ -     $ 1,220     $ 1,132   Increases due to tax positions related to a prior year     -       65       88   Decreases to tax positions as a result of a lapse of statute     -       ( 1,285 )     -   Balance, end of year   $ -     $ -     $ 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.   89     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 15. Share-based Compensation   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  31,   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,   2021.       Number of Shares Awarded     Weighted Average Grant Date Fair Value   Unvested at December 31, 2018     31,790     $ 14.06   Granted     9,675     $ 15.52   Vested     ( 19,995 )   $ 15.99   Unvested at December 31, 2019     21,470     $ 12.91   Granted     12,484     $ 6.12   Vested     ( 12,903 )   $ 13.82   Forfeited     ( 2,553 )   $ 15.86   Unvested at December 31, 2020     18,498     $ 7.29   Granted     20,476     $ 10.48   Vested     ( 12,920 )   $ 12.95   Forfeited     ( 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,   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  31,   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  31,   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,   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.   90     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 16. Shareholders ’  Equity   Common Stock 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”). 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. 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.   Dividends   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  31,   2019, the Company paid cash dividends of $.01 per share of common stock, or an aggregate of $ 155,000 .   Earnings per Share The Company is required to present basic earnings per share and diluted earnings per share in its consolidated statements of operations. Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to the outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings per share.   91     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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,   2021.   (Net income in thousands)   Year ended December 31,       2021     2020     2019   Basic earnings (loss) per share:                         Net income (loss) attributable to Common shareholders   $ 5,094     $ ( 3,819 )   $ ( 2,817 ) Divided by:                         Weighted average shares outstanding     3,946,384       3,934,886       3,921,783                             Basic earnings (loss) per common share   $ 1.29     $ ( 0.97 )   $ ( 0.72 )                           Diluted earnings (loss) per share:                         Net income (loss) attributable to Common shareholders     5,094       ( 3,819 )     ( 2,817 )                           Weighted average shares outstanding     3,946,384       3,934,886       3,921,783                             Effect of potentially dilutive restricted common shares     6,270       -   (1)     -   (2)                           Divided by:                         Weighted average diluted shares outstanding     3,952,654       3,934,886       3,921,783                             Diluted earnings (loss) per common share   $ 1.29     $ ( 0.97 )   $ ( 0.72 )   ( 1 ) The weighted average diluted shares outstanding does not include 3,039 anti-dilutive restricted common shares for the year ended December 31, 2020. ( 2 ) The weighted average diluted shares outstanding does not include 3,555 anti-dilutive restricted common shares for the year ended December 31, 2019.       Note 17. 401 (k) Savings Plan   Patriot offers employees participation in the Patriot Bank, N.A. 401 (k) Savings Plan (the "401 (k) Plan") under Section 401 (k) of the Internal Revenue Code, along with the ROTH feature to the Plan. The 401 (k) Plan covers substantially all employees who have completed one month of service, are 21 years of age and who elect to participate. 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,   2021, 2020, and 2019, Patriot made matching contributions to the 401 (k) Plan of $ 215,000 , $ 253,000 , and $ 251,000 , respectively.   92     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 18. Financial Instruments with Off-Balance-Sheet Risk   In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments.   The contractual amounts of commitments to extend credit and standby letters of credit represent the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral becomes worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activities, evaluates each customer's creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary.   At December  31,   2021 and 2020, financial instruments with credit risk are as follows:       December 31,   (In thousands)   2021     2020   Commitments to extend credit:                 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     164       604       $ 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. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits, and securities. The Bank has established a reserve for credit loss of $ 8,000 and $ 8,000 as of December  31,   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 sheet.   93     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 19. 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.  The Bank provided the documents and policies requested in the Agreement. 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. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk.   In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9 %, less than $ 10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9 % beginning January 1, 2022. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.”   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” status.   The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at December  31,   2021 and 2020 are summarized as follows:   (In thousands)   Decenber 31,         2021     2020     Patriot Bank, N.A.   Amount     Ratio     Amount     Ratio     Tier 1 Leverage Capital (to average assets):                                   Actual   $ 93,923       9.86 %   $ 87,844       9.79 %   To be Well Capitalized     85,773       9.00 %   (1)   80,721       9.00 %   (1)   ( 1 ) Leverage Capital Ratio greater than 9% is considered well-capitalized under the CBLR Framework.   Designation as "Well Capitalized" does not apply to bank holding companies - the Company. Such categorization of capital adequacy only applies to insured depository institutions - the Bank.   94     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 20. Related Party Transactions   In the normal course of business, the Company grants loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10 % equity ownership. The transactions are completed under the same terms applied to transaction with unrelated third parties. 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  31,   2021 and 2020, deposits by related parties aggregated $ 58,000 and $ 189,000 , respectively.       Note 21. Fair Value and Interest Rate Risk   Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period.   Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements.   The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred.   The three levels of the fair value hierarchy consist of:     Level 1 Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities).     Level 2 Observable inputs other than quoted prices included in Level 1, such as:   - Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities)   - Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently)   - Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.).     Level 3 Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability).   95     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.   Cash and due from banks and accrued interest receivable and payable The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1. These financial instruments are not recorded at fair value on a recurring basis.   Available-for-sale securities The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1 ), or matrix pricing (Level 2 ), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3 ).   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,   2021 and 2020 due to its short-term nature.   Federal Reserve Bank Stock and Federal Home Loan Bank Stock Shares in the FRB and FHLB are purchased and redeemed based upon their $ 100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost.   Loans The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment.   Loans Held for Sale The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy.   SBA Servicing Asset Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy.   Other Real Estate Owned The fair value of OREO the Bank may obtain is based on current appraised property value less estimated costs to sell. When fair value is based on unadjusted current appraised value, OREO is classified within Level  2 of the fair value hierarchy. Patriot classifies OREO within Level 3 of the fair value hierarchy when unobservable inputs are used to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value on a non-recurring basis and then monitors property and market conditions that may indicate a change in value is warranted.   96     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   Derivative asset (liability) - Interest Rate Swaps The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third -party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Notes 1 and 11 for additional disclosures on derivatives.   Deposits The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date.   The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis.   Senior Notes, Subordinated Notes, Junior Subordinated Debt and Note Payable Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.   Patriot does not record subordinated notes issued in June 2018 at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value.   Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value.   The Company considers its own credit worthiness in determining the fair value of its Senior Notes, Subordinated Notes, Notes Payable and Junior Subordinated Debt.   Federal Home Loan Bank Borrowings The fair value of FHLB advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. Patriot does not record FHLB advances at fair value on a recurring basis.   Off-balance-sheet financial instruments Off-balance-sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis.   97     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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,   2021 and 2020:   (In thousands)     December 31, 2021     December 31, 2020     Fair Value Hierarchy   Carrying Amount     Estimated Fair Value     Carrying Amount     Estimated Fair Value   Financial Assets:                                   Cash and noninterest bearing balances due from banks Level 1   $ 3,264     $ 3,264     $ 3,006     $ 3,006   Interest-bearing deposits due from banks Level 1     43,781       43,781       31,630       31,630   Available-for-sale securities Level 2     81,161       81,161       49,262       49,262   Available-for-sale securities Level 3     13,180       13,180       -       -   Other investments Level 2     4,450       4,450       4,450       4,450   Federal Reserve Bank stock Level 2     2,843       2,843       2,783       2,783   Federal Home Loan Bank stock Level 2     4,184       4,184       4,503       4,503   Loans receivable, net Level 3     729,583       727,733       719,596       716,822   Loans held for sale Level 2     3,129       3,506       1,217       1,343   SBA servicing assets Level 3     584       617       316       375   Other real estate owned Level 2     -       -       1,906       1,906   Accrued interest receivable Level 2     5,822       5,822       6,620       6,620   Interest rate swap receivable Level 2     738       738       1,187       1,187                                       Financial assets, total   $ 892,719     $ 891,279     $ 826,476     $ 823,887                                       Financial Liabilities:                                   Demand deposits Level 2   $ 226,713     $ 226,713     $ 158,676     $ 158,676   Savings deposits Level 2     109,744       109,744       98,635       98,635   Money market deposits Level 2     164,518       164,518       146,389       146,389   NOW accounts Level 2     34,741       34,741       30,529       30,529   Time deposits Level 2     195,830       195,048       210,140       210,882   Brokered deposits Level 1     17,016       17,003       41,287       41,643   FHLB borrowings Level 2     90,000       93,643       90,000       97,293   Senior notes Level 2     12,000       12,045       11,927       12,028   Subordinated debt Level 2     9,811       9,947       9,782       10,125   Junior subordinated debt owed to unconsolidated trust Level 2     8,119       8,119       8,110       8,110   Note payable Level 3     791       775       994       997   Accrued interest payable Level 2     343       343       572       572   Interest rate swap liability Level 2     738       738       1,187       1,187                                       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. These amounts are included in the table above for informational purposes.   98     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   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. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy.   The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of December  31,   2021 and 2020.   (In thousands)   Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)     Total   December 31, 2021:                                 U. S. Government agency and mortgage-backed securities   $ -     $ 66,629     $ -     $ 66,629   Corporate bonds     -       3,741       13,180       16,921   Subordinated notes     -       4,626       -       4,626   SBA loan pools     -       5,603       -       5,603   Municipal bonds     -       562       -       562                                     Available-for-sale securities   $ -     $ 81,161     $ 13,180     $ 94,341                                     Interest rate swap receivable   $ -     $ 738     $ -     $ 738                                     Interest rate swap liability   $ -     $ 738     $ -     $ 738                                     December 31, 2020:                                 U. S. Government agency and mortgage-backed securities   $ -     $ 16,833     $ -     $ 16,833   Corporate bonds     -       17,290       -       17,290   Subordinated notes     -       9,005       -       9,005   SBA loan pools     -       5,567       -       5,567   Municipal bonds     -       567       -       567                                     Available-for-sale securities   $ -     $ 49,262     $ -     $ 49,262                                     Interest rate swap receivable   $ -     $ 1,187     $ -     $ 1,187                                     Interest rate swap liability   $ -     $ 1,187     $ -     $ 1,187     Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate.   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  31,   2021 and 2020, the Company had no transfers into or out of Levels 1, 2 or 3.   99     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   The reconciliation of the beginning and ending balances during 2021 for Level 3 available-for-sale securities is as follows:   (In thousands)             Year Ended December 31, 2021   Level 3 fair value, beginning of year   $ -   Purchases     14,000   Realized gain (loss)     -   Unrealized loss     ( 820 ) 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  31,   2021 and 2020:   (In thousands)   Fair Value   Valuation Methodology   Unobservable Inputs   Range of Inputs   December 31, 2021:                                                   Impaired loans, net   $ 20,920   Real Estate Appraisals   Discount for appraisal type   5.8 % - 20 %                             SBA servicing assets     617   Discounted Cash Flows   Market discount rates   14.73 % - 14.90 %                             December 31, 2020:                                                   Impaired loans, net   $ 22,971   Real Estate Appraisals   Discount for appraisal type   5.8 % - 20 %                             Other Real Estate Owned     1,906   Real Estate Appraisals   Discount for appraisal type     5.84 %                               SBA servicing assets     375   Discounted Cash Flows   Market discount rates   14.73 % - 14.90 %     Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements.   The estimated fair value amounts have been measured as of December  31,   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.   100     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 22. Parent Company-only Financial Statements   The following represent the condensed stand-alone financial statements of the Company, which is the sole owner and parent company of the Bank, its operating bank subsidiary.   CONDENSED BALANCE SHEETS                 December 31, 2021 and 2020                                   (In thousands)   As of December 31,       2021     2020   ASSETS                 Cash and due from banks   $ 377     $ 548   Investment in subsidiary     96,799       91,836   Other assets     149       1,104                     Total assets   $ 97,325     $ 93,488                     LIABILITIES AND SHAREHOLDERS' EQUITY                 Borrowings   $ 29,930     $ 29,819   Accrued expenses and other liabilities     51       450   Shareholders' equity     67,344       63,219   Total liabilities and shareholders' equity   $ 97,325     $ 93,488     CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME                   Years Ended December 31, 2021, 2020 and 2019                                                   (In thousands)   Year ended December 31,       2021     2020     2019   Expenses:                         Interest on subordinated debt   $ 287     $ 347     $ 476   Interest on senior debt     1,567       1,569       1,571   Total interest expense     1,854       1,916       2,047   Other expenses     173       159       214   Loss before benefit for income taxes     2,027       2,075       2,261                             Benefit for income taxes     ( 540 )     ( 532 )     ( 504 )                           Loss before equity in undistributed net income of subsidiary     1,487       1,543       1,757                             Equity in undistributed net income (loss) of subsidiary     6,581       ( 2,276 )     ( 1,060 )                           Net income (loss)     5,094       ( 3,819 )     ( 2,817 ) Equity in subsidiary other comprehensive income, net of subsidiary     ( 1,119 )     ( 115 )     423                             Total comprehensive income (loss)   $ 3,975     $ ( 3,934 )   $ ( 2,394 )   101     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements   CONDENSED STATEMENTS OF CASH FLOWS                         Years Ended December 31, 2021, 2020 and 2019                                                   (In thousands)   Year ended December 31,       2021     2020     2019   Cash Flows from Operating Activities:                         Net income (loss)   $ 5,094     $ ( 3,819 )   $ ( 2,817 ) Adjustments to reconcile net income to net cash provided by (used in) operating activities:                         Equity in undistributed income of subsidiary     ( 6,581 )     2,276       1,060   Dividends received from Patriot Bank, N.A.     500       2,000       -   Share-based compensation expense     150       159       214   Amortization of debt issuance costs     111       112       112   Change in assets and liabilities:                         Decrease (increase) in other assets     955       ( 540 )     ( 505 ) (Increased) decrease in accrued expenses and other liabilities     ( 399 )     ( 315 )     315   Net cash used in operating activities     ( 170 )     ( 127 )     ( 1,621 )                           Cash Flows from Investing Activities:                         Net (increase) decrease in investment in Patriot Bank N.A.     ( 1 )     8       -   Net cash (used in) provided by investing activities     ( 1 )     8       -                             Cash Flows from Financing Activities:                         Dividends paid on common stock     -       -       ( 155 ) Net cash used in financing activities     -       -       ( 155 )                           Net decrease in cash and cash equivalents     ( 171 )     ( 119 )     ( 1,776 )                           Cash and cash equivalents at beginning of year     548       667       2,443                             Cash and cash equivalents at end of year   $ 377     $ 548     $ 667                                                       Supplemental Disclosures of Cash Flow Information:                         Cash paid for interest   $ 1,570     $ 1,776     $ 1,593                             Cash paid for income taxes   $ -     $ -     $ -     102     PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements     Note 23. Subsequent Event   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. 1” ) 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. For U.S. 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.   103       ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.