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Item 8. Financial Statements and Supplementary Data

2024-04-01 compared with 2023-03-29 · 677 added, 609 removed, 1528 unchanged (46% of the section changed)

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses in 2023 due to the adoption of Accounting Standard Codification Topic 326, Financial Instruments ‑ Credit Losses.

Basis for Opinion

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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 $10.3 million as of December 31, 2022.

The recorded allowance was established based on an allowance of $4.3 million related to loans collectively evaluated for impairment and on an allowance of $6.0 million relating to loans individually evaluated for impairment as of December 31, 2022.

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 factor 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 the 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.

Allowance for Credit Losses for Loans

As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for credit losses (allowance) totaled $15.9 million as of December 31, 2023.

The recorded allowance was established based on an allowance of $11.7 million related to loans collectively evaluated and on an allowance of $4.2 million relating to loans individually evaluated as of December 31, 2023.

For loans that are collectively evaluated for impairment, the Company evaluates loans with similar risk characteristics in pools and uses a model and methodology that forecasts the probability of default (PD), loss given default (LGD), and exposure at default (EAD) for loans in a given pool over their remaining life, thereby deriving an allowance capable of absorbing estimated losses over the remaining life of the portfolio.

For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long-term historical averages.

The reasonable and supportable forecasts used in the model are influenced by changes in real Gross Domestic Product (GDP), State of Connecticut unemployment rate, New York Fed recession indicator, CoStar composite index, New York Case Schiller index, Coincident activity index, Michigan consumer activity index, S&P's BBB credit spreads, and the Company's loan delinquencies and charge off data.

The PD model employs a quarterly risk-rating transition method to estimate the probability of default by simulating loan downgrades and assigning increasing default probabilities to each loan.

This captures the likelihood that borrowers will be unable to repay their loans according to the original terms.

The LGD calculation considers characteristics such as collateral value and vintage, underlying collateral characteristics (e.g., commercial real estate vs.

residential, owner-occupied vs.

investment), a floor for the LGD calculation (minimum loss in event of default regardless of collateral protection), and other relevant underwriting characteristics.

Also calculated is the exposure at default.

The probability of default is multiplied by the loss given default and the exposure at default.

This calculation is forecasted for every year remaining in the life of each loan, and the results are aggregated to determine the necessary level of ACL for the pooled loans.

Forecasted exposure at default can be influenced by prepayments speeds.

An additional component of the allowance is determined by management based on a qualitative analysis of certain factors related to portfolio risks that are not incorporated in the calculated model.

The factors include lending practices, the ability and experience of the credit staff, the overall lending environment and external factors such as the regulatory environment and competition.

Credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis (individually evaluated loans).

Individual evaluations are performed for nonaccrual loans and loans rated substandard that are in excess of $100,000.

Specific allowances were estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

We identified the assessment of certain inputs and assumptions used in the allowance for collectively evaluated loans as a critical audit matter because auditing certain underlying assumptions involved a high degree of complexity and auditor judgment given the high degree of subjectivity exercised by management.

Specifically, our assessment encompassed the evaluation of management’s determination of reasonable and supportable forecasts, prepayment speeds, the LGD floor, and qualitative factors applied to the quantitative model.

In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

Our audit procedures related to management’s determination of reasonable and supportable forecasts, prepayment speeds, the LGD floor, and qualitative factors applied to the quantitative model included the following:

- We obtained an understanding of the relevant controls related to management’s determination of reasonable and supportable forecasts, prepayment speeds, the LGD floor, and qualitative factors applied to the quantitative model.

- We tested the completeness and accuracy of data used by management in determining the selection and weighting of reasonable and supportable economic forecast scenarios by agreeing on a sample basis the underlying data and components to their appropriate internal or external sources.

- We evaluated the completeness and accuracy of data used by management in determining the prepayment speeds used in its calculation of PD and LGD by agreeing the underlying data to internal sources.

- We evaluated the completeness and accuracy of data used by management in determining the application of a minimum LGD floor in the calculation of LGD by agreeing the underlying data to internal sources.

- We tested the completeness and accuracy of data used by management in determining the qualitative factor adjustments to the quantitative model by agreeing the underlying data to appropriate internal and external sources.

- We evaluated management’s determination of the magnitude and extent of qualitative factors applied to the model for reasonableness in relation to the underlying data tested.

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, 2022.

As described in Notes 1 and 8 of the consolidated financial statements, the Company recognized goodwill impairment of $1.1 million and had no goodwill balance as of December 31, 2023.

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.

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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 obtained an understanding of the relevant controls relating to 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.

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Hartford, Connecticut

March 29, 2023

April 1, 2024

PATRIOT NATIONAL BANCORP, INC.

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Interest bearing deposits 50,322 33,311

Total cash and cash equivalents 38,493 47,045

Restricted cash 14,019 —

Total cash, cash equivalents and restricted cash 66,536 38,493

Investment securities:

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Total investment securities 93,637 88,970

Federal Reserve Bank stock, at cost 2,627 2,843

Federal Home Loan Bank stock, at cost 3,874 4,184

Loans receivable (net of allowance for loan and lease losses:

Federal Reserve Bank (FRB) stock, at cost 2,090 2,627

Federal Home Loan Bank (FHLB) stock, at cost 4,202 3,874

Loans receivable (net of allowance for credit losses:

$ 15,925 and 2022:

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Premises and equipment, net 29,875 30,641

Other real estate owned 2,843 —

Deferred tax asset 24,134 15,527

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Total deposits 840,311 860,446

Federal Home Loan Bank and correspondent bank borrowings 85,000 90,000

FHLB, FRB and correspondent bank borrowings 171,000 85,000

Senior notes, net 11,723 11,640

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Interest on deposits 21,668 5,300 2,243

Interest on Federal Home Loan Bank borrowings 3,475 2,986 2,671

Interest on FHLB, FRB and correspondent bank borrowings 6,141 3,509 2,986

Interest on senior debt 1,159 866 913

Interest on subordinated debt 1,481 1,066 933

Interest on note payable and other 46 15 19

Interest on note payable 8 12 15

Total interest expense 30,457 10,753 7,090

Net interest income 28,500 33,259 25,261

Provision (credit) for loan losses 1,885 ( 500 ) 2,170

Net interest income after provision (credit) for loan losses 31,374 25,761 21,983

Provision (credit) for credit losses 7,429 1,885 ( 500 )

Net interest income after provision (credit) for credit losses 21,071 31,374 25,761

Non-interest Income

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Gain on sale of investment securities 24 — 76

Digital Payments income 2,294 683 103

Other income 2,144 253 1,307

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Communications, stationary and supplies 870 616 604

Intangible asset impairment 1,107 — —

Other operating expense 3,053 2,136 2,004

Total non-interest expense 32,709 27,222 25,171

Income (loss) before income taxes 7,757 5,013 ( 4,156 )

Provision (benefit) for income taxes 1,596 ( 81 ) ( 337 )

Net income (loss) $ 6,161 $ 5,094 $ ( 3,819 )

Basic earnings (loss) per share $ 1.56 $ 1.29 $ ( 0.97 )

Diluted earnings (loss) per share $ 1.55 $ 1.29 $ ( 0.97 )

See Accompanying Notes to Consolidated Financial Statements.

(Loss) Income before income taxes ( 5,633 ) 7,757 5,013

(Benefit) provision for income taxes ( 1,454 ) 1,596 ( 81 )

Net (loss) income $ ( 4,179 ) $ 6,161 $ 5,094

Basic (loss) earnings per share $ ( 1.05 ) $ 1.56 $ 1.29

Diluted (loss) earnings per share $ ( 1.05 ) $ 1.55 $ 1.29

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Consolidated Financial Statements.

(In thousands) Year Ended December 31,

2023 2022 2021

Net income (loss) $ 6,161 $ 5,094 $ ( 3,819 )

Other comprehensive (loss) income

Unrealized holding loss on securities ( 18,879 ) ( 1,432 ) ( 155 )

Net (loss) income $ ( 4,179 ) $ 6,161 $ 5,094

Other comprehensive income (loss)

Unrealized holding gain (loss) on securities 240 ( 18,879 ) ( 1,432 )

Income tax effect ( 108 ) 4,871 369

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Income tax effect 6 — 20

Impact of update to effective tax rate 270 — —

384 ( 14,008 ) ( 1,119 )

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Income tax effect — — 39

Total other comprehensive loss ( 14,008 ) ( 1,119 ) ( 115 )

Total other comprehensive income (loss) 384 ( 14,008 ) ( 1,119 )

Comprehensive (loss) income $ ( 3,795 ) $ ( 7,847 ) $ 3,975

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Comprehensive loss:

Net loss — — ( 3,819 ) — ( 3,819 )

Net income — — 5,094 — 5,094

Unrealized holding loss on available-for-sale securities, net of tax — — — ( 1,119 ) ( 1,119 )

Total comprehensive loss — — ( 3,819 ) ( 115 ) ( 3,934 )

Total comprehensive income (loss) — — 5,094 ( 1,119 ) 3,975

Share-based compensation expense — 150 — — 150

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Balance at December 31, 2022 3,965,186 106,565 ( 31,337 ) ( 15,645 ) 59,583

Comprehensive income (loss):

Net income — — 6,161 — 6,161

Unrealized holding loss on available-for-sale securities, net of tax — — — ( 14,008 ) ( 14,008 )

Total comprehensive income (loss) — — 6,161 ( 14,008 ) ( 7,847 )

Transition adjustment related to adoption of ASC326, net of tax — — ( 11,510 ) — ( 11,510 )

Comprehensive (loss) income:

Net loss — — ( 4,179 ) — ( 4,179 )

Unrealized holding gain on available-for-sale securities, net of tax — — — 384 384

Total comprehensive (loss) income — — ( 4,179 ) 384 ( 3,795 )

Share-based compensation expense — 105 — — 105

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Cash Flows from Operating Activities:

Net income (loss) $ 6,161 $ 5,094 $ ( 3,819 )

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

Amortization and accretion of investment premiums and discounts, net ( 51 ) 267 269

Net (loss) income $ ( 4,179 ) $ 6,161 $ 5,094

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

(Accretion) amortization of investment premiums and discounts, net ( 116 ) ( 51 ) 267

Amortization and accretion of purchase loan premiums and discounts, net 1,902 2,722 2,087

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Impairment of intangible assets 1,107 — —

Purchase price adjustment expense related to acquisition activity — — 556

Provision (credit) for loan losses 1,885 ( 500 ) 2,170

Provision (credit) for credit losses 7,429 1,885 ( 500 )

Depreciation and amortization 1,193 1,325 1,521

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Share-based compensation 105 86 150

Decrease (increase) in deferred income taxes, net 1,490 ( 261 ) ( 323 )

Originations of SBA loans held for sale ( 23,972 ) ( 16,574 ) ( 2,049 )

Proceeds from sale of SBA loans held for sale 23,077 16,267 12,160

Gains on sale of SBA loans held for sale, net ( 1,461 ) ( 1,886 ) ( 566 )

Net (gain) loss on sale and write-down of other real estate owned — ( 2 ) 69

(Increase) decrease in deferred income taxes, net ( 4,211 ) 1,490 ( 261 )

Originations of loans held for sale, net ( 189,453 ) ( 23,972 ) ( 16,574 )

Proceeds from sale of loans held for sale 174,066 23,077 16,267

Gains on sale of loans held for sale, net ( 169 ) ( 1,461 ) ( 1,886 )

Net gain on sale and write-down of other real estate owned — — ( 2 )

Changes in assets and liabilities:

(Increase) decrease in accrued interest and dividends receivable ( 1,445 ) 798 ( 3,017 )

Increase in other assets ( 879 ) ( 2,124 ) ( 331 )

Decrease (increase) in accrued interest and dividends receivable 48 ( 1,445 ) 798

Decrease (increase) in other assets 1,750 ( 879 ) ( 2,124 )

(Decrease) increase in accrued expenses and other liabilities ( 500 ) ( 2,085 ) 3,160

Net cash provided by operating activities 7,036 7,596 6,281

Net cash (used in) provided by operating activities ( 10,715 ) 7,036 7,596

Cash Flows from Investing Activities:

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Redemptions (purchases) of Federal Reserve Bank stock 537 216 ( 60 )

Redemptions (purchases) of Federal Home Loan Bank stock 310 319 ( 26 )

(Purchases) redemptions of Federal Home Loan Bank stock ( 328 ) 310 319

Origination of loans receivable ( 145,531 ) ( 211,383 ) ( 220,349 )

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Proceeds from sale of other real estate owned — — 1,908

Net cash (used in) provided by investing activities ( 122,051 ) ( 55,205 ) 82,924

Net cash used in investing activities ( 27,176 ) ( 122,051 ) ( 55,205 )

Cash Flows from Financing Activities:

Increase (decrease) in deposits, net 111,884 62,906 ( 133,877 )

Increase in purchased deposits — — 49,998

Repayments of FHLB borrowings ( 5,000 ) — ( 10,000 )

(Decrease) increase in deposits, net ( 20,135 ) 111,884 62,906

Increase (decrease) in FHLB, FRB and correspondent bank borrowings 86,000 ( 5,000 ) —

Repayments of senior notes — ( 12,000 ) —

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Increase (decrease) in advances from borrowers for taxes and insurance 278 ( 215 ) ( 2,685 )

Net cash provided by (used in) financing activities 106,463 60,018 ( 93,973 )

Net (decrease) increase in cash and cash equivalents ( 8,552 ) 12,409 ( 4,768 )

Cash and cash equivalents at beginning of period 47,045 34,636 39,404

Cash and cash equivalents at end of period $ 38,493 $ 47,045 $ 34,636

Net cash provided by financing activities 65,934 106,463 60,018

Net increase (decrease) in cash, cash equivalents and restricted cash 28,043 ( 8,552 ) 12,409

Cash, cash equivalents and restricted cash at beginning of period 38,493 47,045 34,636

Cash, cash equivalents and restricted cash at end of period $ 66,536 $ 38,493 $ 47,045

PATRIOT NATIONAL BANCORP, INC.

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Cash paid for interest $ 29,631 $ 10,472 $ 7,210

Cash paid (refund) for income taxes, net $ 102 $ 140 $ ( 659 )

Cash paid for income taxes, net $ 3,536 $ 102 $ 140

Non-cash transactions:

Net change in unrealized (gain) loss on available-for-sale securities $ ( 384 ) $ 14,008 $ 1,119

Transfers of SBA loans held for sale to loans receivable $ — $ 274 $ 281

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

Transfers of loans receivable to OREO $ 2,843 $ — $ —

Capitalized servicing assets $ 85 $ 400 $ 335

Operating lease right-of-use assets $ 16 $ 80 $ 373

Accrued rent payable - adoption ASC 842 $ — $ — $ 22

Interest rate swaps $ ( 535 ) $ 449 $ ( 493 )

(Decrease) increase in interest rate swaps $ ( 129 ) $ ( 535 ) $ 449

Deferred cost for capital raise $ — $ ( 825 ) $ 825

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Increase in accrued expense and other liabilities $ — $ — $ ( 62 )

Business Combination Non-Cash Disclosures:

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

Expected credit loss for loans - ASC 326 adoption $ 13,001 $ — $ —

Expected credit loss for unfunded loan commitments - ASC 326 adoption $ 2,737 $ — $ —

Deferred tax assets - ASC 326 adoption $ ( 4,228 ) $ — $ —

Retained earnings adjustment - ASC 326 adoption $ 11,510 $ — $ —

See Accompanying Notes to Consolidated Financial Statements.

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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.

Management has identified accounting for the allowance for credit 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.

Certain prior period amounts have been reclassified to conform to current year presentation.

Reclassification

Certain prior period amounts have been reclassified to conform to current year financial statement presentation.

These reclassifications only change the reporting categories and do not affect the consolidated results of operations or consolidate financial position of the Company.

Summary of Significant Accounting Policies:

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All significant intercompany balances and transactions have been eliminated.

Cash and cash equivalents

Cash, Cash Equivalents and Restricted Cash

Patriot considers all short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

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Patriot has not experienced any losses from such concentrations.

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 Company maintains cash on deposit at another depository institution as collateral for the Bank’s Digital Payments business, which is considered as restricted cash.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

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.

Federal Reserve Bank and Federal Home Loan Bank stock

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 five 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.

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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.

For available-for-sale debt securities in an unrealized loss position, the Company will first assess whether i) it intends to sell or ii) it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis.

If either case is applicable, any previously recognized allowances are charged off and the debt security’s amortized cost is written down to fair value through income.

If neither case is applicable, the debt security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the debt security by a rating agency and any adverse conditions specifically related to the debt security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the debt security are compared to the amortized cost basis of the debt security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an Allowance for Credit Losses (“ACL”) is recorded for the credit loss, limited by the amount by which the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through allowance for credit losses is recognized in other comprehensive income, net of tax.

Adjustments to the allowance are reported in the income statement as a component of credit loss expense.

Debt securities are charged off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by the Company or when either of the aforementioned criteria regarding intent or requirement to sell is met specifically for available-for-sale debt securities.

The Company excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on debt securities and does not record an ACL on accrued interest receivable.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Securities transactions are recorded on the trade date.

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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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Loans are placed on non-accrual status or charged off when collection of principal or interest is considered doubtful.

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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.

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

Allowance for credit losses

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASC 326”).

ASC 326 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities.

ASC 326 eliminates the probable initial recognition threshold in current US GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

ASC 326 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses.

In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

The Company adopted ASC 326 using the modified retrospective approach.

Results for the periods beginning after January 1, 2023 are presented under Accounting Standards Codification 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP.

The Company recorded a net reduction of retained earnings of $ 11.5 million upon adoption.

The transition adjustment includes an increase in credit related reserves of $ 13.0 million and the recording of an unfunded commitment reserve of $ 2.7 million, respectively, net of the corresponding increase in deferred tax assets of $ 4.2 million.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

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.

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.

January 1, 2023

(In thousands) Post ASC 326 Adoption Pre-ASC 326 Adoption Pre-tax impact of ASC 326 Adoption

Commercial Real Estate $ 8,592 $ 6,966 $ 1,626

Residential Real Estate 854 665 189

Commercial and Industrial 1,622 1,403 219

Consumer and Other 12,184 1,207 10,977

Construction 20 24 ( 4 )

Construction to permanent - CRE 39 10 29

Unallocated — 35 ( 35 )

Total Allowance for credit losses $ 23,311 $ 10,310 $ 13,001

Unfunded commitment reserve $ 2,745 $ 8 $ 2,737

The allowance for credit losses (“ACL”) is based on the Company’s evaluation of the loan portfolios, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

The process is inherently subjective and subject to significant change as it requires material estimates.

The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses.

Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums and deferred loan fees and costs.

Accrued interest receivable on loans is excluded from the estimate of credit losses because these balances are written off or reversed when a loan is placed in non-accrual status.

The Company evaluates loans with similar risk characteristics in pools using a probability of default/loss given default ("PD/LGD") method.

Unlike the previous allowance for loan losses approach, which applied historical loss rates to similar loan pools, the current expected credit loss ("CECL") methodology forecasts the probability of default, loss given default, and exposure at default for loans in a given pool over their remaining life, thereby deriving an ACL capable of absorbing estimated losses over the remaining life of the portfolio.

Under this framework, qualitative factors play a diminished role, with reserve rates influenced by change in real domestic Gross Domestic Product ("GDP"), State of Connecticut unemployment rate, New York Fed recession indicator, CoStar composite index, New York Case Schiller index, Coincident activity index, Michigan consumer activity index, S&P's BBB credit spreads, and the Company's loan delinquencies and charge off data.

An additional component of the allowance is determined by management based on a qualitative analysis of certain factors related to portfolio risks that are not incorporated in the calculated model.

The factors include lending practices, the ability and experience of the credit staff, the overall lending environment and external factors such as the regulatory environment and competition.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

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, to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments.

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.

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.

In addition, a risk rating system is utilized to evaluate the collectively evaluated component of the ACL.

Under this system, management assigns risk ratings between one and eleven.

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Loans assigned a risk rating of six or above are monitored more closely by the credit administration officers and the Loan Committee.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

(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.

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.

In the underwriting of loans secured by real property, property appraisals are required to be performed by independent licensed appraisers that have 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.

Generally, management obtains updated appraisals when a loan is under nonaccrual status and evaluated individually.

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.

Additionally, the Bank hires an outside engineering consultant perform the inspection on properties.

Management reviews and inspection reports before disbursing funds, particularly during the term of a construction loan.

The Bank’s SBA loan portfolio consists of both whole loans and 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.

As discussed further in the section titled “Accounting Standards Issued but not yet adopted”, the current ALLL methodology will be replaced by the measurement of losses under a current expected cumulative loss (CECL) model beginning January 1, 2023 in accordance with new accounting standard ASU 2016-13.

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.

Individually Evaluated Loans

Credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis.

Individual evaluations are performed for nonaccrual loans and loans rated substandard that are in excess of $100,000.

The Company's credit officers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans.

While the Company uses the best information available to evaluate the ACL, future adjustments to the ACL 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 ACL.

The OCC may require Patriot to adjust the ACL based on its analysis of information available at the time of its examination.

Loan modifications

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (ASU 326) :

Troubled Debt Restructurings and Vintage Disclosures.

ASU 2022-02 eliminated the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

The Company adopted ASU 2022-02 effective January 1, 2023 and the impact was immaterial.

Accrued Interest Receivable

Upon adoption of ASC 326 and its related amendments on January 1, 2023, the Company made the following elections regarding accrued interest receivable:

• Presenting accrued interest receivable balances separately on the Consolidated Balance Sheet.

• Continuing our policy to fully reserve accrued interest receivable by reversing interest income.

For commercial loans, the reserve is established upon becoming 90 days past due except for instances where it can be clearly documented that the loan is both well secured and in the process of collection.

For consumer loans, the charge-off typically occurs upon becoming 120 days past due.

Historically, the Company has not experienced uncollectible accrued interest receivable on its investment securities.

• Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of fully reserving uncollectible accrued interest receivable balances in a timely manner, as described above.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

ACL for Unfunded Commitments

The ACL for unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit.

However, a liability is not recognized for commitments that are unconditionally cancellable by the Company.

The ACL for unfunded commitment is recognized as a liability (within other liabilities on the Consolidated Balance Sheets), with adjustments to the unfunded commitment reserve recognized as a provision for credit loss expense in the Consolidated Statements of Operations.

The Unfunded Commitment Reserve is determined by estimating expected future funding, under each segment, and applying the expected loss rates.

Transfers of financial assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

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.

SBA 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, historically providing for SBA guarantees of 75% of the principal balance of each loan.

Due to 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.

Patriot typically sells the guaranteed portion of its SBA loans to third parties 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;

When sales of SBA loans 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 for the loan sales to occur;

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

Loans held for sale are carried at the lower of amortized cost or estimated fair value.

The estimated fair value for SBA loans held for sale is based on pricing information from secondary markets and brokers, when available.

Patriot originates various types of consumer loans include credit card loans that are marketed by the buyer.

The credit card loans are expected to be held for no longer than three days before being sold to the buyer.

The credit card loans are fully cash-secured by deposits at Patriot.

The credit card loans are sold to the buyer as a whole loan sale transaction, priced at par;

thus, there is no servicing asset or gain or loss on sale.

Servicing Assets

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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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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

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

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Maintenance and repairs are expensed as incurred and improvements are capitalized.

Lease Accounting

The Company adopted FASB ASU No.

2016-02, “Leases (Topic 842)” (“ASU 2016-02”), including the adoption of the practical expedients, effective January 1, 2019.

Leases (Topic 842) establishes a right of use model that requires a lessee to record a right of use (“ROU”) asset and a lease liability for all leases with terms longer than 12 months.

The Company enters into operating leases in the normal course of business primarily for several of its branch and parking locations, and one equipment lease.

The Company's lease agreements include options to renew at the Company's discretion.

If the extensions are reasonably certain to be exercised, they are considered in the calculation of the ROU asset and lease liability.

The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) in the Company's Consolidated Balance Sheets.

The ROU assets are included in other assets and the lease obligations are included in other liabilities in the Consolidated Balance Sheets.

Impairment of long-lived assets

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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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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.

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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

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

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.

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Patriot had a net deferred tax asset of $ 24.1 million at December 31, 2023 as compared to a net deferred tax asset of $ 15.5 million at December 31, 2022.

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.

The CARES Act did not have a material impact on the Company’s income taxes or related disclosures.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Unrecognized tax benefits

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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, 2022 and 2021, the Bank did not record any uncertain tax position (“UTP”).

As of December 31, 2023 and 2022, the Bank did not record any uncertain tax positions (“UTP”).

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

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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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The Compensation Committee of the Board of Directors establishes terms and conditions applicable to the vesting of restricted stock awards and stock options.

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During the years ended December 31, 2023, 2022 and 2021, 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 expenses in the accompanying consolidated statements of operations.

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Related Party Transactions

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

Project expenses

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

The project expenses consist of material non-recurring costs related to the previously planned merger with American Challenger in 2021 and 2022.

However, the merger was terminated in July 2022.

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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 was included as a reduction to salaries and benefits non-interest expense on the consolidated statements of operations.

No employee retention credit was recorded for the year ended December 31, 2022.

Revenue Recognition

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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.

• Service charges on deposit accounts and Digital Payments division activities - 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.

Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted During 2022

There were no applicable material accounting pronouncements adopted by the Company during 2022.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Accounting Standards Issued But Not Yet Adopted

Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted During 2023

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.

Measurement of Credit Losses on Financial Instruments (Topic 326).

The ASU changes the methodology for measuring credit losses on financial instruments measured at amortized cost to a CECL model.

Under the CECL model, entities are required to 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.

In cases where there is neither the intent nor a more-likely-than-not requirement to sell the debt security, an entity should 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.

In November 2019, the FASB issued ASU 2019-10, which amended the effective date of ASU 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, and delayed 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 was applicable to the Company.

Upon adoption on January 1, 2023, the Company will record a pre-tax adjustment in the range of $ 2.0 million to $ 4.0 million to the allowance for loan losses and a pre-tax adjustment in the range of $ 0.5 million to $ 1.0 million to reserve for unfunded commitments (which will be reflected in other liabilities on the Company’s consolidated balance sheets), and a cumulative-effect adjustment to increase the opening balance of accumulated deficit of $ 1.8 million to $ 3.7 million.

These impacts will be reflected in the Company's first quarter 2023 financial statements.

ASU Update 2020-02

The Company adopted ASU 2016-13 effective January 1, 2023.

For further discussion regarding the impact of ASU 2016-13 adoption, see section “Allowance for Credit Losses” under Summary of Significant Accounting Policies in Note 1 above.

In January 2020, the FASB issued ASU No.

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This ASU is effective upon issuance.

See the discussion regarding the adoption of ASU 2016-13 above.

ASU Update 2020-03

The Company adopted ASU 2016-13 and ASU 2020-02 effective January 1, 2023.

In March 2020, the FASB issued ASU No.

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2022-02, Financial Instruments—Credit Losses (Topic 326) :

Troubled Debt Restructurings and Vintage Disclosures" .

Troubled Debt Restructurings ("TDR") and Vintage Disclosures .

ASU 2022-02 updates guidance in Topic 326, to eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty and to require entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost .

ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.

if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period.

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

See the discussion regarding the adoption of ASU 2016-13 above.

ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted if an entity has adopted the amendments in ASU 2016-03, including adoption in an interim period.

The Company adopted ASU 2016-13 effective January 1, 2023.

The adoption of this guidance did not have any material impact on the Company's Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) “Deferral of the Sunset Date of Topic 848” This ASU defers the sunset date of the temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other interbank offered rates to alternative reference rates.

On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 .

This ASU defers the sunset date of the temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other interbank offered rates to alternative reference rates.

In response to the United Kingdom’s Financial Conduct Authority's extension of the cessation date of LIBOR in the United States to June 30, 2023, the FASB has deferred the expiration date of these optional expedients to December 31, 2024.

The ASU became effective upon issuance and affords the Company an extended period to utilize the currently available optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other inter-bank offered rates.

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

The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.

Accounting Standards Issued But Not Yet Adopted

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.

The amendments in this Update modify the disclosure or presentation requirements of a variety of Topics in the Codification.

Certain of the amendments represent clarifications to or technical corrections of the current requirements.

For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

For all other entities, the amendments will be effective two years later.

The amendments in this Update should be applied prospectively.

For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity.

The adoption of ASU 2023-06 is not expected to have an impact on the Company’s financial condition or results of operations but could change certain disclosures.

The Company will continue to monitor for SEC action, and plan accordingly for adoption.

In December 2023, the FASB issued ASU 2023‑09 Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which requires more detailed disclosures of income taxes paid net of refunds received, income from continuing operations before income tax expense or benefit, and income tax expense from continuing operations.

This standard is to be applied on a prospective basis, with retrospective application permitted, and will be effective for the Company for annual periods beginning on January 1, 2025.

We do not expect adoption of this standard to have a material impact on the Company’s Consolidated Financial Statements.

Restrictions on Cash and Due from Banks

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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, 2023 and 2022.

The Company maintains restricted cash on deposit with another depository institution as collateral for the Bank’s Digital Payments business.

The collateral serves to protect a payment processor in the event of the Bank’s inability to fulfill its obligations regarding transactions processed through the payment processor on behalf of Digital Payments.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Available-for-sale securities

At December 31, 2023 and 2022, the amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of available-for-sale securities was as follows:

(In thousands) Amortized

(Losses) Fair

(In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value

December 31, 2023:

12 unchanged sentences

$ 105,605 $ 7 $ ( 21,092 ) $ 84,520

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, 2023 and 2022:

(In thousands) Less than 12 Months 12 Months or More Total

Value Unrealized

Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) Fair Value Unrealized (Loss)

December 31, 2023:

12 unchanged sentences

$ 19,124 $ ( 1,107 ) $ 63,632 $ ( 19,985 ) $ 82,756 $ ( 21,092 )

At December 31, 2022 and 2021, forty-six of forty-seven and thirty-two of thirty-nine available-for-sale securities had unrealized losses with an aggregate depreciation of 20.3 % and 2.7 % 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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

At December 31, 2023 and 2022, fifty of fifty and forty-six of forty-seven available-for-sale securities had unrealized losses with an aggregate depreciation of ( 19.0 )% and ( 20.3 )% from amortized cost, respectively.

As of December 31, 2023, no allowance for credit losses has been recognized on available for sale debt securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired.

This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to available for sale debt securities.

The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities.

The Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity.

The unrealized losses are due to increases in market interest rates over the yields available at the time the debt securities were purchased.

With regard to U.S.

mortgage-backed securities and municipal bonds issued by the U.S.

government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S.

Accordingly, no allowance for credit losses has been recorded for these securities.

With regard to corporate bonds, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, and (iv) internal forecasts.

Securities under the U.S.

Small Business Administration (“SBA”) government guaranteed loan pools program were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds.

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

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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, 2022.

As of December 31, 2022 and 2021, available-for-sale securities of $ 30.8 million and $ 36.6 million were pledged primarily to secure municipal deposits and FHLB borrowing, respectively.

Furthermore, as of December 31, 2023, there were no past due principal or interest payments associated with these securities.

Based upon (i) the issuer’s strong bond ratings and (ii) a zero historical loss rate, no allowance for credit losses has been recorded for available-for-sale securities.

All debt securities in an unrealized loss position continue to perform as scheduled and the Company does not believe there is a possible credit loss or that an allowance for credit loss on these debt securities is necessary.

As of December 31, 2023 and 2022, available-for-sale securities of $ 68.5 million and $ 30.8 million, respectively, were pledged primarily to secure municipal deposits, and as collateral for FRB and FHLB borrowings.

The securities were pledged to the FRB and FHLB.

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Notes to consolidated financial statements

Loans Receivables and Allowance for Loan and Lease Losses

Loans Receivables and Allowance for Credit Losses

As of December 31, 2023 and 2022, loans receivable, net, consisted of the following:

8 unchanged sentences

Loans receivable, gross 848,859 848,316

Allowance for loan and lease losses ( 10,310 ) ( 9,905 )

Allowance for credit losses ( 15,925 ) ( 10,310 )

Loans receivable, net $ 832,934 $ 838,006

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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, 2022 and 2021.

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 2022 and 2021.

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

(In thousands) Year Ended December 31, 2020

Accretable discount, beginning of period $ ( 47 )

Other changes, net 45

Accretable discount, end of period $ —

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 was $ 2,000 .

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:

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Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company.

During 2022, Patriot purchased $ 20.7 million of commercial real estate loans.

There were no commercial real estate loans purchased during 2021.

In 2023, Patriot did not purchase any commercial real estate loans.

There were $ 20.7 million commercial real estate loans purchased during 2022.

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 2022 and 2021, Patriot purchased $ 0 and $ 72.3 million of residential real estate loans, respectively.

Patriot’s residential real estate loan portfolio consists primarily of purchased residential loans.

The repayment of residential real estate loans, as well as the loans secured by residential real estate, may be negatively impacted if borrowers experience financial difficulties, if there is a significant decline in the value of the property securing the loan, or if there are declines in general economic conditions.

In 2023 and 2022, Patriot did not purchase any residential real estate loans.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Commercial and Industrial Loans

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The Company does not place a high emphasis on originating these types of loans.

The Company has purchased unsecured consumer loans from a third party which are higher yielding loans of 2 - 5 year terms that are expected to incur an increased level of charge-offs.

Loans purchased under this program totaled $ 15.4 million and $ 90.1 million for the year ended December 31, 2023 and 2022, respectively.

Loans outstanding under this program totaled $ 48.5 million and $ 78.9 million as of December 31, 2023 and 2022, respectively.

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

During 2022 and 2021, Patriot purchased unsecured consumer loans of $ 90.1 million and $ 17.0 million, respectively.

Total outstanding from this program totaled $ 78.9 million and $ 15.7 million as of December 31, 2022 and 2021, respectively.

These loans carry higher rates of return than the Bank’s commercial portfolio, with an overall yield of 8.70 % , and incurred net charge-offs of $ 1.6 million for the year ended December 31, 2022.

No charge-off was recorded in 2021.

Patriot purchased home equity line of credit loans (“HELOC”) of $ 30.6 million for the year ended December 31, 2022.

No HELOC loan was purchases in 2021.

Patriot purchased home equity line of credit loans (“HELOC”) of $ 5.7 million and $ 30.6 million for the year ended December 31, 2023 and 2022, respectively.

Construction Loans

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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.

The construction loans outstanding at December 31, 2023 and 2022 totaled $ 4.3 million and $ 4.9 million, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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 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.

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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.

Under the Paycheck Protection Program of the CARES Act, small business loans were authorized for 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.

1 unchanged sentence

Paycheck Protection Program loans totaled $ 133,000 and $ 157,000 as of December 31, 2023 and 2022, respectively, which are included in the commercial and industrial loan classifications.

Allowance for Credit Losses

As described in Note 1, “Summary of Significant Accounting Policies,” the Company adopted ASU 2016-13 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset.

Under the CECL methodology, the ACL is measured on a collective basis for pools of loans with similar risk characteristics.

For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.

The estimated credit losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses.

The Company estimates expected credit losses for pooled loans using a modeling method that incorporates probability of default and loss given default.

The PD model employs a quarterly risk-rating transition method to estimate the probability of default by simulating loan downgrades and assigning increasing default probabilities to each loan.

This captures the likelihood that borrowers will be unable to repay their loans according to the original terms.

The LGD calculation considers characteristics such as collateral value and vintage, underlying collateral characteristics (e.g., CRE vs.

residential, owner-occupied vs.

investment), a floor for the LGD calculation (minimum loss in event of default regardless of collateral protection), and other relevant underwriting characteristics.

Also calculated is the exposure at default.

The probability of default is multiplied by the loss given default and the exposure at default.

This calculation is forecasted for every year remaining in the life of each loan, and the results are aggregated to determine the necessary level of ACL for the pooled loans.

Forecasted exposure at default can be influenced by prepayments speeds, which management elected to discount in part to reflect the expectation of slower voluntary prepayments in the face of an increasing interest rate environment.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

Allowance for Loan and Lease Losses

Commercial and industrial loans include risks associated with borrower’s cash flow, debt service coverage and management’s expertise.

These loans are subject to the risk that the Company may have difficulty converting collateral to a liquid asset if necessary, as well as risks associated with degree of specialization, mobility and general collectability in a default situation.

These commercial loans may be subject to many different types of risks, including fraud, bankruptcy, economic downturn, deteriorated or non-existent collateral, and changes in interest rates.

Real estate construction loans include risks associated with the borrower’s credit-worthiness, contractor’s qualifications, borrower and contractor performance, and the overall risk and complexity of the proposed project.

Construction lending is also subject to risks associated with sub-market dynamics, including population, employment trends and household income.

During times of economic stress, this type of loan has typically had a greater degree of risk than other loan types.

Real estate mortgage loans consist of loans secured by commercial and residential real estate.

Commercial real estate lending is divided into Investment CRE and Owner-Occupied CRE.

Investment CRE is dependent upon successful management, marketing and expense supervision necessary to maintain the property.

Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy.

Owner-Occupied CRE is utilized by a business for the purpose of providing the space needs for that business and the running of its operations.

Repayment is dependent on the cash flow and successful operations of the business.

Repayment of these loans may be adversely affected by conditions in the specific owner’s industry.

Also, commercial real estate loans typically involve relatively large loan balances to a single borrower.

Residential real estate lending risks are generally less significant than those of other loans.

Real estate lending risks include fluctuations in the value of real estate, bankruptcies, economic downturn and customer financial problems.

Consumer loans carry a moderate degree of risk compared to other loans.

They are generally more risky than traditional residential real estate loans, and carry generally low relative balances across a diverse borrowing pool.

Risk of default is assessed based on FICO scores, debt to income ratios, historical loss rates other common consumer loan metrics.

For the pool of purchased unsecured consumer loans, the risk of default and necessary ACL is assessed on an individual loan basis using a customized model that heavily weights payment/delinquency status, FICO scores, and remaining loan life until maturity.

The Company maintains an ACL for credit losses on unfunded lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a drawdown on the commitment.

The ACL on unfunded loan commitments is classified as a liability account on the Consolidated Balance Sheets within other liabilities, while the corresponding provision for these credit losses is recorded as a component of provision for credit losses.

The allowance for credit losses on unfunded commitments was $ 271,000 at December 31, 2023.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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, 2023:

(In thousands) Commercial

Real Estate Residential

Real Estate Commercial

Real Estate Residential Real Estate Commercial

Industrial Consumer

Other Construction Construction to

Other Construction Construction

- CRE Unallocated Total

As of and for the year ended December 31, 2023

Allowance for loan and lease losses:

Allowance for credit losses:

December 31, 2022 $ 6,966 $ 665 $ 1,403 $ 1,207 $ 24 $ 10 $ 35 $ 10,310

Impact of ASC 326 Adoption 1,626 189 219 10,977 ( 4 ) 29 ( 35 ) 13,001

Charge-offs ( 6,346 ) ( 515 ) ( 927 ) ( 10,479 ) ( 150 ) — — ( 18,417 )

Recoveries — 14 34 1,080 — — — 1,128

Provisions (credits) 1,749 ( 1,039 ) ( 1,128 ) 2,523 14 ( 31 ) ( 203 ) 1,885

Provisions 3,843 254 540 5,058 134 74 — 9,903 (1)

December 31, 2023 $ 6,089 $ 607 $ 1,269 $ 7,843 $ 4 $ 113 $ — $ 15,925

4 unchanged sentences

Recoveries 154 4 69 121 — — — 348

Provisions (credits) 629 321 ( 605 ) ( 130 ) ( 592 ) ( 121 ) ( 2 ) ( 500 )

(Credits) provisions 1,749 ( 1,039 ) ( 1,128 ) 2,523 14 ( 31 ) ( 203 ) 1,885

December 31, 2022 $ 6,966 $ 665 $ 1,403 $ 1,207 $ 24 $ 10 $ 35 $ 10,310

6 unchanged sentences

December 31, 2021 $ 5,063 $ 1,700 $ 2,532 $ 253 $ 78 $ 41 $ 238 $ 9,905

The allowance and provision for the year ended December 31, 2023 are not comparable to prior periods due to the adoption of CECL.

(1) The provision on credit losses included in the above table for the year ended December 31, 2023 does not include the credit on unfunded loan commitments of $( 2.5 ) million for the year ended December 31, 2023.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

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

The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for allowance for credit losses as of December 31, 2023:

(In thousands) Commercial

5 unchanged sentences

December 31, 2023

Allowance for loan and lease losses:

Individually evaluated for impairment $ 5,430 $ 5 $ 608 $ — $ — $ — $ — $ 6,043

Collectively evaluated for impairment 1,536 660 795 1,207 24 10 35 4,267

Total allowance for loan and lease losses $ 6,966 $ 665 $ 1,403 $ 1,207 $ 24 $ 10 $ 35 $ 10,310

Allowance for credit losses:

Individually evaluated loans $ 3,813 $ — $ 392 $ — $ — $ — $ — $ 4,205

Collectively evaluated loans 2,276 607 877 7,843 4 113 — 11,720

Total allowance for credit losses $ 6,089 $ 607 $ 1,269 $ 7,843 $ 4 $ 113 $ — $ 15,925

Loans receivable, gross:

Individually evaluated for impairment $ 11,241 $ 2,508 $ 4,653 $ 514 $ — $ — $ — $ 18,916

Collectively evaluated for impairment 426,202 121,632 134,134 140,577 4,922 1,933 — 829,400

Individually evaluated loans $ 12,775 $ — $ 3,904 $ — $ 454 $ — $ — $ 17,133

Collectively evaluated loans 459,318 106,783 159,661 99,688 3,812 2,464 — 831,726

Total loans receivable, gross $ 472,093 $ 106,783 $ 163,565 $ 99,688 $ 4,266 $ 2,464 $ — $ 848,859

The following tables presents the balance in the allowance for loan and lease losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2022:

(In thousands) Commercial

13 unchanged sentences

Total loans receivable, gross $ 437,443 $ 124,140 $ 138,787 $ 141,091 $ 4,922 $ 1,933 $ — $ 848,316

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

Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

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

Credit quality is monitored by reviewing certain indicators, including cash flow from business operations, loan to value ratios, debt service coverage ratios, and credit scores.

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

2 unchanged sentences

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.

In addition, the risk ratings on all commercial loans over $250,000 are reviewed by the Credit Department either annually or biannually, or every 4 years, depending upon the amount of the bank’s exposure and other credit metrics.

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.

Any changes to the assigned risk ratings, based on the semi-annual review, are required to be reported to the Audit Committee of the Board of Directors.

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

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Loans receivable that are part of the unsecured loan purchase program are charged-off in full when the loan is 90 days past due.

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.

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

PATRIOT NATIONAL BANCORP, INC.

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Notes to consolidated financial statements

Loan Portfolio Vintage Analysis

The following tables summarize loan amortized cost by vintage, credit quality indicator and class of loans based on year of origination:

Term of Loans by Origination

As of December 31, 2023:

2023 2022 2021 2020 2019 Prior Revolving Total Loans

Loan portfolio segment:

Commercial Real Estate:

Pass $ 104,683 $ 138,091 $ 111,308 $ 3,401 $ 31,832 $ 63,526 $ — $ 452,841

Special mention — 6,482 — — — — — 6,482

Substandard — 1,799 — 280 10,000 691 — 12,770

104,683 146,372 111,308 3,681 41,832 64,217 — 472,093

Residential Real Estate:

Pass — 1,251 2,975 11,577 15,770 74,596 614 106,783

— 1,251 2,975 11,577 15,770 74,596 614 106,783

Commercial and Industrial:

Pass 2,696 13,916 23,099 8,004 9,578 7,024 96,431 160,748

Special mention 6 348 — — 37 11 104 506

Substandard 16 — 801 — 401 1,093 — 2,311

2,718 14,264 23,900 8,004 10,016 8,128 96,535 163,565

Consumer and Other:

Pass 6,470 36,668 4,724 — 5,590 14,314 30,945 98,711

Substandard 197 645 61 — — — 74 977

6,667 37,313 4,785 — 5,590 14,314 31,019 99,688

Construction:

Pass — — 3,812 — — — — 3,812

Substandard — — — — 454 — — 454

— — 3,812 — 454 — — 4,266

Construction to Permanent - CRE:

Special mention — — 2,464 — — — — 2,464

— — 2,464 — — — — 2,464

Total $ 114,068 $ 199,200 $ 149,244 $ 23,262 $ 73,662 $ 161,255 $ 128,168 $ 848,859

Loans receivable, gross:

Pass 113,849 189,926 145,918 22,982 62,770 159,460 127,990 822,895

Special mention 6 6,830 2,464 — 37 11 104 9,452

Substandard 213 2,444 862 280 10,855 1,784 74 16,512

Loans receivable, gross $ 114,068 $ 199,200 $ 149,244 $ 23,262 $ 73,662 $ 161,255 $ 128,168 $ 848,859

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Loan Portfolio Aging Analysis

2 unchanged sentences

As of December 31, 2023:

Past Due 60 - 89

Past Due 90 Days

Past Due Total

Past Due Current Total

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:

6 unchanged sentences

Pass 1,439 — — 1,439 105,344 106,783 — 106,783

Special mention — — — — 625 625 — 625

Substandard — — — — — — 2,470 2,470

1,439 — — 1,439 105,344 106,783 — 106,783

10 unchanged sentences

Pass — — — — 3,812 3,812 — 3,812

Special mention — — — — 524 524 — 524

Substandard — — — — — — 454 454

— — — — 3,812 3,812 454 4,266

Construction to Permanent - CRE:

Pass — — — — 1,933 1,933 — 1,933

Special mention — — — — 2,464 2,464 — 2,464

— — — — 2,464 2,464 — 2,464

11 unchanged sentences

As of December 31, 2022:

Past Due 60 - 89 Days

Past Due 90 Days

Past Due Current Total

Loans Non-accruing

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:

7 unchanged sentences

Special mention — — —

— 625 625 — 625

Substandard — — — — — — 2,470 2,470

11 unchanged sentences

Pass 895 — — 895 3,503 4,398 — 4,398

Special mention — — — — 524 524 — 524

895 — — 895 4,027 4,922 — 4,922

19 unchanged sentences

Commercial Real Estate:

Substandard $ — $ — $ 11,241 $ 11,241 $ — $ 11,241

Residential Real Estate:

Pass $ — $ — $ 1,629 $ 1,629 $ — $ 1,629

Substandard — 770 439 1,209 9,937 11,146

Commercial and Industrial:

Pass — — 2,054 2,054 929 2,983

Substandard — 371 535 906 32 938

1 unchanged sentence

Substandard — 16 887 903 74 977

Construction:

Substandard — — — — 454 454

Total non-accruing loans $ — $ 1,157 $ 5,544 $ 6,701 $ 11,426 $ 18,127

16 unchanged sentences

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.

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.

1 unchanged sentence

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, 2022 and 2021:

(In thousands) December 31, 2022 December 31, 2021

Loan portfolio segment:

Loans Recorded

Investment Number of

Loans Recorded

Commercial Real Estate 1 $ 8,806 1 $ 8,884

Residential Real Estate 3 814 3 870

Consumer and Other 2 537 3 640

Total TDR Loans 6 10,157 7 10,394

TDRs included in non-accrual loans 2 ( 9,464 ) 3 ( 9,688 )

Total accrual TDR Loans 4 $ 693 4 $ 706

During the year ended December 31, 2022 and 2021, no loans were modified as TDRs, and there were no defaults of TDRs.

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

Outstanding Recorded Investment

(In thousands) Pre-Modification Post-Modification

Year Ended December 31, 2020 2020 2020

Loan portfolio segment:

Commercial Real Estate 2 $ 822 $ 819

Commercial and Industrial 1 4,000 4,000

Consumer and Other 3 413 414

Total TDR Loans 6 $ 5,235 $ 5,233

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.

(In thousands) Year Ended December 31,

Rate reduction $ 4,819

Extension of interest only period 121

Payment deferral 293

Total $ 5,233

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, 2022 and 2021, there were no commitments to advance additional funds under TDRs.

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

Impaired Loans

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

As of December 31, 2022 and 2021, based on the on-going monitoring and analysis of the loan portfolio, impaired loans of $ 19.3 million and $ 23.8 million, respectively, were identified, for which $ 6.0 million and $ 2.3 million specific reserves were established, respectively.

At December 31, 2022, exposure to the impaired loans was related to thirty-two borrowers.

Twenty-one out of thirty-two impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $ 100,000 , totaling $ 371,000 , with a general reserve of $ 2,000 were collectively evaluated, and not individually evaluated for impairment.

At December 31, 2021, exposure to the impaired loans was related to thirty-four borrowers.

Twenty-three out of thirty-four impaired loans were individually evaluated for impairment, and the remaining eleven impaired loans with balances under $ 100,000 , totaling $ 590,000 , with a general reserve of $ 7,000 were collectively evaluated, and not individually evaluated for impairment.

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

For non-performing loans, the independently determined appraised values were first reduced by a 5.8 % discount to reflect the Bank’s experience selling Other Real Estate Owned (OREO) properties, and were further reduced by 8 % in selling costs, in order to estimate the potential loss, if any, that may eventually be realized.

Performing loans are monitored to determine when, if at all, additional loan loss reserves may be required for a loss of underlying collateral value.

For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate.

Loans not requiring specific reserves had fair values exceeding the total recorded investment, supporting the net investment in the loan which includes principal balance, unamortized fees and costs and accrued interest, if any.

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

The Bank considers loans under $100,000 and consumer installment loans to be pools of smaller homogeneous loan balances, which are collectively evaluated for credit losses.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

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

Individually Evaluated Loans

The following table reflects information about the individually evaluated loans by class as of December 31, 2023 and 2022:

(In thousands) December 31, 2023 December 31, 2022

1 unchanged sentence

Outstanding Related

Allowance Recorded

Investment Principal

Outstanding Related

Allowance Recorded Investment Principal Outstanding Related Allowance

With no related allowance recorded:

3 unchanged sentences

Consumer and Other — — — 514 514 —

Construction 454 461 — — — —

5,558 9,239 — 7,290 7,590 —

3 unchanged sentences

Commercial and Industrial 1,638 3,159 392 2,714 2,863 608

Consumer and Other 73 74 — 166 201 1

11,575 13,296 4,205 11,626 11,624 6,043

Impaired Loans, Total:

Individually evaluated loans, Total:

Commercial Real Estate $ 12,775 $ 16,016 $ 3,813 $ 11,241 $ 11,084 $ 5,430

2 unchanged sentences

Consumer and Other — — — 514 514 —

Impaired Loans, Total $ 19,287 $ 19,593 $ 6,045 $ 23,802 $ 25,236 $ 2,299

Construction 454 — 461 — — — — — — —

Total $ 17,133 $ 22,535 $ 4,205 $ 18,916 $ 19,214 $ 6,043

PATRIOT NATIONAL BANCORP, INC.

4 unchanged sentences

(In thousands) 2023 2022 2021

Investment Interest

Recognized Average

Investment Interest

Recognized Average

Investment Interest

Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded:

3 unchanged sentences

Consumer and Other 158 — 464 23 702 16

Construction 753 34 — — — —

5,189 220 9,839 208 14,900 182

3 unchanged sentences

Commercial and Industrial 3,359 214 3,348 28 2,234 126

Consumer and Other 342 4 106 7 39 —

17,472 910 11,762 147 11,212 197

Impaired Loans, Total:

Individually evaluated loans, Total:

Commercial Real Estate $ 14,121 $ 877 $ 14,009 $ 200 $ 16,505 $ 169

2 unchanged sentences

Consumer and Other 158 — 464 23 702 16

Impaired Loans, Total $ 22,301 $ 361 $ 26,542 $ 402 $ 21,717 $ 235

Construction 753 34 — —

Total $ 22,661 $ 1,130 $ 21,601 $ 355 $ 26,112 $ 379

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

Performing loans are monitored to determine when, if at all, additional credit 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.

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

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

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.

Substantially all 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.

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.

Non-accruing modified loans 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.

During the year ended December 31, 2023, 2022 and 2021, the Company had no modified loans made to borrowers experiencing financial difficulty.

There were no modified loans that had a payment default during the years ended December 31, 2023, 2022 and 2021 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

As of December 31, 2023 and 2022, there were no commitments to advance additional funds under the modified loans.

Loans Held for Sale

SBA 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 $ 9.9 million of SBA loans held for sale at December 31, 2023, consisting of $ 3.5 million SBA commercial and industrial loans and $ 6.4 million SBA commercial real estate loans.

As of December 31, 2021, SBA loans held for sale totaled $ 3.1 million, consisting of $ 2.6 million of SBA commercial and industrial loans and $ 562,000 SBA commercial real estate loans.

During 2022 and 2021, $ 274,000 and $ 281,000 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 reclassified 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 reclassified to held of sale during 2022 and 2021.

As of December 31, 2022, SBA loans held for sale totaled $ 5.2 million, consisting of $ 3.1 million of SBA commercial and industrial loans and $ 2.1 million SBA commercial real estate loans.

During 2023 and 2022, zero and $ 274,000 SBA loans previously classified as held for sale were transferred to held for investment, respectively.

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.

7 unchanged sentences

The total amount of such loans serviced, but owned by third party, amounted to approximately $ 47.5 million and $ 47.3 million at December 31, 2023 and 2022, respectively.

As of December 31, 2022 and 2021, the servicing asset has a carrying value of $ 886,000 and $ 584,000 , respectively, and fair value of $ 1.0 million and $ 617,000 respectively.

As of December 31, 2023 and 2022, the servicing asset has a carrying value of $ 857,000 and $ 886,000 , respectively, and fair value of $ 932,000 and $ 1.0 million, respectively.

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

The servicing asset is included in other assets on the Consolidated Balance Sheets.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2023, 2022 and 2021:

6 unchanged sentences

Ending balance $ 857 $ 886 $ 584

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Loans held for sale - Consumer Loans

Patriot Bank's Digital Payments Group has entered into a Program Management Agreement with a Buyer.

Under the agreement, Patriot originates various types of consumer loans that are marketed by the buyer.

As of December 31, 2023, the Bank had credit card loans held for sale totaling $ 10.8 million.

The credit card loans are expected to be held for no longer than three days before being sold to the buyer.

The credit card loans are fully cash-secured by deposits at Patriot.

The credit card loans are sold to the buyer as a whole loan sale transaction, priced at par, thus there is no servicing asset or gain or loss on sale.

Premises and Equipment

9 unchanged sentences

Premises and equipment, net $ 29,875 $ 30,641

In 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.

No property was sold in 2022.

For the years ended December 31, 2023, 2022 and 2021, depreciation and amortization expense related to premises and equipment totaled $ 1.2 million, $ 1.3 million, and $ 1.4 million, respectively.

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

No property was sold in 2023 and 2022.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Other Real Estate Owned ( “ OREO ” )

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

As of December 31, 2022 and 2021, no OREO was recorded.

The following table presents an analysis of the activity in OREO for the years ended December 31, 2023, 2022 and 2021:

6 unchanged sentences

Ending balance $ 2,843 $ — $ —

All OREO were sold prior to 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, Patriot recorded losses on sales of OREO properties of $ 69,000 .

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2023, the Bank acquired one OREO property of $ 2.8 million.

The OREO balance represents the lower of the carrying value of loan receivable due from the mortgage of the foreclosed residential property or the estimated net realized value of the underlying property acquired through foreclosure.

As of December 31, 2022, no OREO balance was recorded.

For the year ended December 31, 2021, the Bank sold one OREO property of $ 1.9 million for a gain on sales of OREO properties of $ 2,000 , which was included as a reduction to the other operating expenses on the Consolidated Statements of Operations.

There was no sale in 2022 and 2023.

Business Combination, Goodwill and Other Intangible Assets

4 unchanged sentences

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.

Information on goodwill for the year ended December 31, 2023, 2022 and 2021 is as follows:

2 unchanged sentences

Balance, beginning of period $ 1,107 $ 1,107 $ 1,107

Impairment $ ( 1,107 ) $ — $ —

Balance, end of period $ — $ 1,107 $ 1,107

3 unchanged sentences

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

The Company performed a quantitative assessment as of October 31, 2022, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was no t impaired as of December 31, 2022.

The Company performed a quantitative assessment as of October 31, 2023, the Company’s annual goodwill impairment measurement date.

The analysis determined that the estimated fair value of the reporting unit was less than its carrying value as of October 31, 2023.

As a result, the goodwill was considered impaired, leading to a $ 1.1 million impairment charge recorded in the other non-interest expense on the Consolidated Statements of Operations for the year ended December 31, 2023.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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

9 unchanged sentences

Net carrying amount $ 203 $ 249

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Merger and acquisition with American Challenger

2 unchanged sentences

The parties mutually determined that not all closing conditions of the Merger Agreement could be satisfied under the current structure and agreement.

In connection with the merger, the Company has recognized expenses of $ 1.9 million for the full year ended December 31, 2021 and $ 112,000 for the year ended December 31, 2022.

In connection with the merger, the Company has recognized expenses of $ 1.9 million for the year ended December 31, 2021, $ 112,000 for the year ended December 31, 2022 and zero for the year ended December 31, 2023.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December 31, 2023 and 2022.

7 unchanged sentences

Savings 44,104 0.83 % 71,002 0.61 %

Interest bearing DDA 162,196 2.46 % — — %

Money market 200,280 1.92 % 211,000 1.38 %

4 unchanged sentences

Total Deposits $ 840,311 2.51 % $ 860,446 0.96 %

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 $ 197.3 million and $ 150.4 million as of December 31, 2022 and 2021, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The Company’s total deposits includes digital payment deposits of prepaid debit cards for corporate, consumer and government clients.

The digital payment deposits are included in the non-interest-bearing deposits, negotiable order of withdrawal accounts and money market deposits, which totaled approximately $ 213.4 million and $ 197.3 million as of December 31, 2023 and 2022, respectively.

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, 2023.

9 unchanged sentences

Savings 2,290 3.92 % 1,028 1.02 % 238 0.22 %

Interest bearing DDA 1,002 3.37 % — — % — — %

Money market 7,766 2.74 % 1,973 1.09 % 449 0.30 %

3 unchanged sentences

$ 21,668 3.05 % $ 5,300 0.93 % $ 2,243 0.43 %

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2023, contractual maturities of Certificates of Deposit (“CDs”) and brokered deposits are summarized as follows:

8 unchanged sentences

$ 175,988 $ 64,745 $ 40,526 $ 281,259

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2023 and 2022, total borrowings were $ 201.1 million and $ 115.2 million, respectively.

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

Borrowings consist primarily of FHLB advances, FRB borrowing, 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:

12 unchanged sentences

At December 31, 2023 and 2022, no funds had been borrowed under the line of credit.

Interest expense incurred for FHLB-B borrowing for the year ended December 31, 2022, 2021 and 2020 were $ 3.5 million, $ 3.0 million and $ 2.7 million, respectively.

Interest expense incurred for FHLB-B borrowing for the years ended December 31, 2023, 2022 and 2021 were $ 4.2 million, $ 3.5 million and $ 3.0 million, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Correspondent Bank - Lines of Credit

3 unchanged sentences

There was no outstanding balance under the agreements at December 31, 2023 and 2022.

No interest expense incurred in 2022, 2021 and 2020.

Interest expense incurred for the year ended December 31, 2023 was $ 117,000 and no interest expense was incurred in 2022 and 2021.

Other Borrowing

In August 2020, Patriot was approved to pledge commercial and industrial loans and leases, commercial real estate, construction loans and one-to-four family first lien loans under the Federal Reserve Bank of New York’s (“FRBNY”) Borrower-in-Custody program.

As of December 31, 2022, Patriot had pledged eligible loans with a book value of $ 19.9 million and a collateral value of $ 13.7 million as collateral to support borrowing capacity at the FRBNY.

The Federal Reserve Bank of New York (“FRBNY”) accepts loan pledges from qualifying depository institutions to secure borrowings from the Discount Window.

Patriot has pledged eligible loans as collateral to support its borrowing capacity at the FRBNY.

As of December 31, 2023, Patriot had pledged eligible loans with a book value of $ 15.5 million, with a collateral value of $ 11.4 million.

A total of $ 12.0 million was borrowed from the Discount Window under the FRBNY's Borrower-in-Custody ('BIC") program and fully repaid during 2023.

There was no outstanding balance under the agreements as of December 31, 2023.

Interest expense incurred for the year ended December 31, 2023 was $ 48,000 .

In 2022 and 2021, no funds was borrowed under the BIC program, and no interest expense was incurred.

In July 2023, the Bank established a collateralized funding line of $ 80.0 million at par value under the Federal Reserve's newly established Bank Term Funding Program ("BTFP").

The program provides additional funding to eligible depository institutions, assuring they can meet the needs of all their depositors.

The program serves as an additional source of liquidity against high-quality securities, eliminating the need of an institution to quickly sell those securities in times of stress.

The line allows for a fixed rate borrowing for up to one year, with repayment permitted at any time without penalty.

As of December 31, 2023, the collateral value of the pledged securities was $ 72.4 million.

Patriot had borrowed a total of $ 70.0 million under the BTFP, which remained outstanding and carried a fixed rate of 4.89 % as of December 31, 2023 .

Interest expense incurred was $ 1.8 million for the year ended December 31, 2023.

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

On November 17, 2021, the original maturity date of the Senior Notes were extended from December 22, 2021 to June 30, 2022.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

On June 22, 2022, the Company amended and restated the Senior Notes.

10 unchanged sentences

The 2022 Senior Notes are the obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s affiliates.

For the year ended December 31, 2022, 2021 and 2020, the Company recognized interest expense of $ 866,000 , $ 913,000 and $ 915,000 , respectively, and the debt issuance cost amortization expense was $ 0 , $ 73,000 and $ 75,000 , respectively.

As of December 31, 2022 and 2021, $ 28,000 and $ 23,000 of interest has been included in the consolidated balance sheet in accrued expenses and other liabilities, respectively.

For the year ended December 31, 2023, 2022 and 2021, the Company recognized interest expense of $ 1.2 million, $ 866,000 and $ 913,000 , respectively, and the debt issuance cost amortization expense was $ 139,000 , $ 0 and $ 73,000 , respectively.

As of December 31, 2023 and 2022, $ 470,000 and $ 28,000 of interest was included in accrued expenses and other liabilities on the Consolidated Balance Sheet, respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Subordinated notes

1 unchanged sentence

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.

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, which was replaced by SOFR in 2023 (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.

2 unchanged sentences

At December 31, 2023 and 2022, $ 131,000 and $ 160,000 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, 2022, 2021 and 2020, the Company recognized interest expense of $ 654,000 , $ 654,000 and $ 654,000 , respectively.

For the years ended December 31, 2023, 2022 and 2021, the Company recognized interest expense of $ 786,000 , $ 654,000 and $ 654,000 , respectively.

Junior subordinated debt owed to unconsolidated trust

3 unchanged sentences

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The junior subordinated debentures are unsecured obligations of the Company.

1 unchanged sentence

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

The junior subordinated debentures bear interest at three-month LIBOR plus 3.15 % ( 7.79 % at December 31, 2022) and mature on March 26, 2033, at which time the principal amount borrowed will be due.

The junior subordinated debentures bear interest at three-month LIBOR (replaced by SOFR) plus 3.15 % ( 8.77 % at December 31, 2023) 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.

5 unchanged sentences

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $ 2.0 million, a property it had been leasing until that date.

3 unchanged sentences

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, 2022, 2021 and 2020 were $ 12,000 , $ 15,000 and $ 19,000 , respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Interest expense incurred for the years ended December 31, 2023, 2022 and 2021 was $ 8,000 , $ 12,000 and $ 15,000 , respectively.

Maturity of borrowings

1 unchanged sentence

(In thousands)

Year ending December 31, FHLB

Year ending December 31, FHLB and FRB

Borrowings Senior

10 unchanged sentences

Balance of borrowings as of December 31, 2023 $ 171,000 $ 11,723 $ 9,869 $ 8,137 $ 376 $ 201,105

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Derivatives Not Designated in Hedge Relationships

2 unchanged sentences

Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies.

Patriot entered into total four interest rate swaps (“swaps”) in November 2018 and May 2019.

Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan.

The other two swaps are with an outside third party.

The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps, such that Patriot minimizes its net risk exposure resulting from such transactions.

As of December 31, 2023, there were two interest rate swaps (“swaps”) outstanding.

One swap is with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan.

The other swap is with an outside third party.

The customer interest rate swaps is matched in offsetting terms to the third party interest rate swaps, such that Patriot minimizes its net risk exposure resulting from such transactions.

Because the interest rate swaps associated with the 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.

1 unchanged sentence

The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets.

As of December 31, 2022 and 2021, Patriot had cash pledged for collateral on its interest rate swaps of $ 0.0 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 non-interest income on the consolidated statements of operations during the year ended December 31, 2022, 2021 and 2020.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

As of December 31, 2023 and 2022, Patriot did not have any cash pledged for collateral on its interest rate swaps.

No net gain or loss was recognized in other non-interest income on the consolidated statements of operations during the year ended December 31, 2023, 2022 and 2021.

Derivatives Designated in Hedge Relationships

8 unchanged sentences

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.

The swap interest income was 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 was included in other income on the Consolidated Statements of Operations.

In 2022, no interest income was recognized.

In 2023 and 2022, no interest income was recognized.

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.

1 unchanged sentence

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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

5 unchanged sentences

Classified in Other Assets:

Customer interest rate swap $ 4,736 6.3 5.25 % 1 Mo.

LIBOR + 1.96 %

Customer interest rate swap 1,363 6.5 4.38 % 1 Mo.

LIBOR + 2.00 %

3rd party interest rate swap 1,327 5.5 4.38 % 1 Mo.

SOFR + 2.00 %

Classified in Other Liabilities:

Customer interest rate swap 1,327 5.5 4.38 % 1 Mo.

SOFR + 2.00 %

December 31, 2022

Classified in Other Assets:

3rd party interest rate swap $ 4,736 6.3 5.25 % 1 Mo.

2 unchanged sentences

LIBOR + 2.00 %

December 31, 2021

Classified in Other Assets:

Classified in Other Liabilities:

Customer interest rate swap $ 4,736 6.3 5.25 % 1 Mo.

2 unchanged sentences

LIBOR + 2.00 %

Classified in Other Liabilities:

3rd party interest rate swap $ 4,843 7.3 5.25 % 1 Mo.

LIBOR + 1.96 %

3rd party interest rate swap 1,398 7.5 4.38 % 1 Mo.

LIBOR + 2.00 %

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:

7 unchanged sentences

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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 an Interactive Teller Machine (“ITM”) and an automated teller machine (“ATM”), and one equipment lease.

Patriot has ten non-cancelable operating leases, including four Bank branch locations and four for administrative and operational space, one location for an automated teller machine (“ATM”), and one equipment lease.

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

1 unchanged sentence

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

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

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

All of our leases are classified as operating leases, 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 cash flows for purposes of calculating the ROU and lease liability.

16 unchanged sentences

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.

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, 2023:

6 unchanged sentences

Operating lease right-of-use asset $ 1,744

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Year Ended December 31,

12 unchanged sentences

For the years ended December 31, 2023, 2022 and 2021, Patriot recognized gross rental income of $ 395,000 , $ 566,000 , and $ 543,000 offset by rental costs of $ 3,000 , $ 5,000 , and $ 5,000 , respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Commitments and Contingencies

1 unchanged sentence

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

The Company has a retention agreement with another executive officer which provides for an agreed upon payment if that executive remains current position for six months following a retirement announcement.

Legal Matters

1 unchanged sentence

Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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, 2023.

7 unchanged sentences

( 4,211 ) 1,490 ( 261 )

Income tax expense (benefit) $ 1,596 $ ( 81 ) $ ( 337 )

Income tax (benefit) expense $ ( 1,454 ) $ 1,596 $ ( 81 )

For each of the years in the three-year period ended December 31, 2023, the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:

8 unchanged sentences

Other 25 10 27

Income tax expense (benefit) $ 1,596 $ ( 81 ) $ ( 337 )

Income tax (benefit) expense $ ( 1,454 ) $ 1,596 $ ( 81 )

The effective tax rate for the years ended December 31, 2023, 2022 and 2021 was 25.8 %, 20.6 %, and ( 1.6 )%, respectively.

The effective tax rate for 2023 increased over 2022 because 2022 included a $ 1.8 million reduction to taxable income for the reversal of previously capitalized merger and acquisition costs.

The effective tax rate for 2022 was greater than 2021 because 2022 included an increase to taxable income for the $ 1.8 million capitalized merger and acquisition costs and because 2021 included the full reversal of $ 1.9 million deferred tax asset valuation allowance recorded at December 31, 2020.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

The effective tax rate for the years ended December 31, 2022, 2021 and 2020 was 20.6 %, ( 1.6 )%, and 8.1 %, respectively.

The effective tax rate for 2022 was decreased by the reversal of project expenses.

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 2020.

Deferred Tax Assets and Liabilities

6 unchanged sentences

State NOL carryforward benefit 2,803 3,128

Allowance for loan loss 2,793 3,017

Unrealized loss AFS securities 5,608 5,440

CECL transition 4,228 —

Allowance for credit loss 799 2,793

Lease liabilities 501 634

2 unchanged sentences

Accrued expenses 82 80

Unrealized loss AFS securities 5,440 569

Goodwill and intangible 369 104

Depreciation of premises and equipment 158 120

Share based compensation — 3

Gross deferred tax assets 25,622 16,488

1 unchanged sentence

Deferred tax liabilities:

Expected credit loss for unfunded commitments ( 663 ) —

Right-of-use assets ( 469 ) ( 597 )

4 unchanged sentences

As of December 31, 2023, Patriot had available approximately $ 15.5 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 $ 15.8 million, approximately $ 15.5 million will expire between 2030 and 2033 and $ 0.3 million do not expire.

Of the NOL of $ 15.5 million, approximately $ 15.5 million will expire between 2030 and 2033.

Patriot has approximately $ 47.3 million of NOLs available for Connecticut tax purposes at December 31, 2023, which may be used to offset up to 50 % of taxable income in any year.

12 unchanged sentences

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.

For the year ended December 31, 2022, 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 a 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.

For the year ended December 31, 2023, Patriot was in a cumulative income position for the current and prior two-year periods.

Patriot reviewed the ability to remain in a cumulative income position and to utilize net operating losses by using the most recent forecast for the next three years and including a conservative growth rate for the years after.

In addition, 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.

As of December 31, 2022, no valuation allowance was recorded.

Based on the analyses of cumulative income position and future profitability combined with the potential tax planning strategy, it was determined that a valuation allowance is not required.

Patriot will continue to evaluate the need for a valuation allowances.

In 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.

As of December 31, 2023 and 2022, no valuation allowance was recorded.

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

3 unchanged sentences

As of December 31, 2023 and 2022, the Bank did not record any uncertain tax position related to the utilization of certain federal net operating losses.

At December 31, 2022 and 2021, Patriot no longer has a liability for unrecognized tax benefits.

As of December 31, 2023 and 2022, 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,

2022 2021 2020

Balance, beginning of year $ — $ — $ 1,220

Increases due to tax positions related to a prior year — — 65

Decreases to tax positions as a result of a lapse of statute — — ( 1,285 )

Balance, end of year $ — $ — $ —

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

28 unchanged sentences

Vested ( 8,694 ) $ 11.05

Forfeited ( 4,586 ) $ 9.39

Unvested at December 31, 2022 22,660 $ 7.11

7 unchanged sentences

For each of those years, the Directors received total compensation of $ 259,000 , $ 248,000 , and $ 325,000 , 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, 2023 amounted to $ 182,000 , which amount is expected to be recognized over the weighted average remaining life of the awards of 2.14 years.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

Unrecognized compensation expense attributable to the unvested restricted shares outstanding as of December 31, 2022 amounted to $ 236,000 , which amount is expected to be recognized over the weighted average remaining life of the awards of 2.78 years.

Shareholders ’ Equity

On December 16, 2009, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with PNBK Holdings, LLC, a limited liability company controlled by Michael Carrazza (“Holdings”).

Pursuant to the Securities Purchase Agreement, on October 15, 2010, the Company issued 3,360,000 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 100,000,000 .

Pursuant to its Operating Agreement, on March 31, 2021, Holdings completed a pro-rata in-kind distribution of shares of restricted common stock of Patriot.

Following these distributions, Holdings no longer owns any shares of Patriot.

The Company did not pay any dividends for the year ended December 31, 2022, 2021, and 2020, and has suspended dividend payments.

Earnings per Share

5 unchanged sentences

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.

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, 2023.

1 unchanged sentence

2023 2022 2021

Basic earnings (loss) per share:

Net income (loss) attributable to Common shareholders $ 6,161 $ 5,094 $ ( 3,819 )

Basic (loss) earnings per share:

Net (loss) income attributable to Common shareholders $ ( 4,179 ) $ 6,161 $ 5,094

Weighted average shares outstanding 3,965,324 3,957,097 3,946,384

Basic earnings (loss) per common share $ 1.56 $ 1.29 $ ( 0.97 )

Diluted earnings (loss) per share:

Net income (loss) attributable to Common shareholders $ 6,161 $ 5,094 $ ( 3,819 )

Basic (loss) earnings per common share $ ( 1.05 ) $ 1.56 $ 1.29

Diluted (loss) earnings per share:

Net (loss) income attributable to Common shareholders $ ( 4,179 ) $ 6,161 $ 5,094

Weighted average shares outstanding 3,965,324 3,957,097 3,946,384

1 unchanged sentence

Weighted average diluted shares outstanding 3,965,324 3,962,898 3,952,654

Diluted earnings (loss) per common share $ 1.55 $ 1.29 $ ( 0.97 )

Diluted (loss) earnings per common share $ ( 1.05 ) $ 1.55 $ 1.29

(1) The weighted average diluted shares outstanding does not include 11,438 anti-dilutive restricted common shares for the year ended December 31, 2023.

The Company did not pay any dividends for the year ended December 31, 2023, 2022, and 2021, and has suspended dividend payments.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

401(k) Savings Plan

4 unchanged sentences

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.

Eligibility for matching contributions is dependent on an employee’s completing six 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, 2023, 2022, and 2021, Patriot made matching contributions to the 401(k) Plan of $ 278,000 , $ 251,000 , and $ 215,000 , respectively.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Financial Instruments with Off-Balance-Sheet Risk

22 unchanged sentences

Collateral held varies, but may include commercial property, residential property, deposits, and securities.

The Bank has established a reserve for credit loss of $ 8,000 and $ 8,000 as of December 31, 2022 and 2021, respectively.

The Bank has established an allowance for credit loss of $ 271,000 and $ 8,000 as of December 31, 2023 and 2022, respectively, which is included in accrued expenses and other liabilities on the Consolidated Balance Sheet.

The increase in allowance for credit loss in 2023 is primarily due to the adoption of CECL.

Standby letters of credit are written commitments issued by the Bank to guarantee the performance of a customer to a third party.

16 unchanged sentences

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, 2022 and 2021 was 9.3 % and 9.9 %, 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, 2022 and 2021 are summarized as follows:

(In thousands) December 31,

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system.

From September 2021 to September 30, 2023, the Company elected to adopt the CBLR framework.

In the fourth quarter of 2023, the Company elected to use the instituted regulatory risk-based capital approach.

Under the instituted regulatory framework, to be considered “well capitalized”, a financial institution must generally have a Total Capital ratio of at least 10%, a Tier 1 Capital ratio of at least 8.0%, a CET1 Capital ratio at least 6.5%, and a Tier 1 Leverage Capital ratio of at least 5%.

However, regardless of a financial institution’s ratios, the OCC may require increased capital ratios or impose dividend restrictions based on the other factors it considers in assessing a bank’s capital adequacy.

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule.

Institutions that do not maintain this required capital buffer become subject to progressively more stringent limitations on the percentage of earnings that may be distributed to shareholders or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital conversation buffer of 2.5% has been included in the minimum capital adequacy ratios as of December 31, 2023.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

The Company and Bank’s regulatory capital amounts and ratios at December 31, 2023 are summarized as follows:

December 31, 2023

Patriot National Bancorp, Inc.

Patriot Bank, N.A.

Amount Ratio Amount Ratio

(Dollar amounts in thousands) Amount Ratio Amount Ratio

Total Capital (to risk weighted assets):

Actual $ 89,727 10.00 % $ 100,683 11.22 %

To be Well Capitalized — — 89,732 10.00 %

For capital adequacy with Capital Buffer (1) — — 94,218 10.50 %

For capital adequacy (2) 71,788 8.00 % 71,785 8.00 %

Tier 1 Capital (to risk weighted assets):

Actual 73,282 8.17 % 94,238 10.50 %

To be Well Capitalized (1) — — 71,785 8.00 %

For capital adequacy with Capital Buffer (2) — — 76,272 8.50 %

For capital adequacy — 6.00 % 53,839 6.00 %

Common Equity Tier 1 Capital

(to risk weighted assets):

Actual 65,282 7.27 % 94,238 10.50 %

To be Well Capitalized (1) — — 58,325 6.50 %

For capital adequacy with Capital Buffer (2) — — 62,812 7.00 %

For capital adequacy — 4.50 % 40,379 4.50 %

Tier 1 Leverage Capital (to average assets):

1 unchanged sentence

To be Well Capitalized (1) — — 54,170 5.00 %

For capital adequacy — 4.00 % 43,336 4.00 %

(1) 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.

(2) The Capital Conservation Buffer implemented by the FDIC began to be phased in beginning January 1, 2016.

It was not applicable to periods prior to that date and does not apply to bank holding companies - the Company.

The Bank’s Community Bank Leverage Ratio regulatory capital amounts and ratios at December 31, 2022 are summarized as follows:

December 31, 2022

Patriot Bank, N.A.

Tier 1 Leverage Capital (to average assets):

Actual $ 100,267 9.27 %

To be Well Capitalized 97,388 9.00 % (3)

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

1 unchanged sentence

Such categorization of capital adequacy only applies to insured depository institutions - the Bank.

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.

No related party loans were outstanding as of December 31, 2022 and 2021.

As of December 31, 2022 and 2021, deposits from related parties aggregated $ 64,000 and $ 58,000 , respectively.

As of December 31, 2023 and 2022, Patriot satisfies all regulatory capital adequacy requirements.

Management continuously assesses the adequacy of the Bank’s capital in order to maintain its “well capitalized” status.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

Related Party Transactions

No related party loans were outstanding as of December 31, 2023 and 2022.

As of December 31, 2023 and 2022, deposits from related parties aggregated approximately $ 64,000 for both years.

Fair Value and Interest Rate Risk

19 unchanged sentences

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).

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

Cash and due from banks, restricted cash, and accrued interest receivable and payable

The carrying amount is a reasonable estimate of fair value and accordingly these are classified as Level 1.

2 unchanged sentences

The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3).

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Other Investments

16 unchanged sentences

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.

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

Derivative asset (liability) - Interest Rate Swaps

8 unchanged sentences

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

PATRIOT NATIONAL BANCORP, INC.

AND SUBSIDIARIES

Notes to consolidated financial statements

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

8 unchanged sentences

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.

Federal Home Loan Bank and Correspondent Bank Borrowings

The fair value of FHLB advances and other correspondent bank borrowings are estimated using a discounted cash flow calculation that applies current interest rates for advances of similar maturity to a schedule of maturities of such advances.

Patriot does not record FHLB advances and other correspondent bank borrowings at fair value on a recurring basis.

Off-balance-sheet financial instruments

13 unchanged sentences

Interest-bearing deposits due from banks Level 1 50,322 50,322 33,311 33,311

Restricted cash Level 1 14,019 14,019 — —

Available-for-sale securities Level 2 78,925 78,925 75,093 75,093

6 unchanged sentences

SBA servicing assets Level 3 857 932 886 1,013

Other real estate owned Level 2 2,843 2,843 — —

Accrued interest receivable Level 2 7,219 7,219 7,267 7,267

3 unchanged sentences

Demand deposits Level 2 $ 110,056 $ 110,056 $ 269,636 $ 269,636

Negotiable order of withdrawal accounts Level 2 42,416 42,416 34,440 34,440

Savings deposits Level 2 44,104 44,104 71,002 71,002

Interest bearing DDA Level 2 162,196 162,196 — —

Money market deposits Level 2 200,280 200,280 211,000 211,000

Negotiable order of withdrawal accounts Level 2 34,440 34,440 34,741 34,741

Time deposits Level 2 240,733 239,655 225,670 221,353

Brokered deposits Level 1 40,526 40,453 48,698 47,684

FHLB borrowings Level 2 85,000 83,853 90,000 93,643

FHLB, FRB and correspondent bank borrowings Level 2 171,000 170,171 85,000 83,853

Senior notes Level 2 11,723 11,397 11,640 11,103

5 unchanged sentences

Financial liabilities, total $ 1,042,725 $ 1,040,638 $ 976,427 $ 969,211

The carrying amount of cash and non-interest-bearing balances due from banks, interest-bearing deposits due from banks, and demand deposits approximates fair value, due to the short-term nature and high turnover of these balances.

These amounts are included in the table above for informational purposes.

PATRIOT NATIONAL BANCORP, INC.

1 unchanged sentence

Notes to consolidated financial statements

These amounts are included in the table above for informational purposes.

In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate).

37 unchanged sentences

Notes to consolidated financial statements

As of December 31, 2022, four corporate bonds purchased in 2021, were classified as Level 3 instruments.

As of December 31, 2023, four corporate bonds were classified as Level 3 instruments.

The fair values of these securities were determined using a present value approach.

2 unchanged sentences

The reconciliation of the beginning and ending balances for Level 3 available-for-sale securities for the years ended December 31, 2023, 2022 and 2021 is as follows:

(In thousands) Year Ended December 31,

Year Ended December 31,

2023 2022 2021

Level 3 fair value, beginning of year $ 9,427 $ 13,180 $ —

1 unchanged sentence

Realized gain (loss) — — —

Unrealized loss ( 3,753 ) ( 820 )

Unrealized gain (loss) 835 ( 3,753 ) ( 820 )

Transfers in and /or out of Level 3 — — —

4 unchanged sentences

December 31, 2023:

Impaired loans, net $ 12,873 Real Estate Appraisals Discount for appraisal type 5.8 % - 20 %

Individually evaluated loans, net $ 12,928 Real Estate Appraisals Discount for appraisal type 5.8 % - 20 %

SBA servicing assets 932 Discounted Cash Flows Market discount rates 14.73 % - 14.90 %

36 unchanged sentences

Loss before equity in undistributed net income of subsidiary 2,029 1,481 1,487

Equity in undistributed net income (loss) of subsidiary 7,642 6,581 ( 2,276 )

Net income (loss) 6,161 5,094 ( 3,819 )

Equity in subsidiary other comprehensive loss, net of subsidiary ( 14,008 ) ( 1,119 ) ( 115 )

Equity in undistributed net (loss) income of subsidiary ( 2,150 ) 7,642 6,581

Net (loss) income ( 4,179 ) 6,161 5,094

Equity in subsidiary other comprehensive income (loss), net of subsidiary 384 ( 14,008 ) ( 1,119 )

Total comprehensive (loss) income $ ( 3,795 ) $ ( 7,847 ) $ 3,975

7 unchanged sentences

Cash Flows from Operating Activities:

Net income (loss) $ 6,161 $ 5,094 $ ( 3,819 )

Adjustments to reconcile net income to net cash used in operating activities:

Net (loss) income $ ( 4,179 ) $ 6,161 $ 5,094

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

Equity in undistributed net income (loss) of subsidiary 2,150 ( 7,642 ) ( 6,581 )

4 unchanged sentences

Change in assets and liabilities:

Decrease (increase) in other assets 99 955 ( 540 )

Decrease in accrued expenses and other liabilities ( 8 ) ( 399 ) ( 315 )

Net cash used in operating activities ( 366 ) ( 170 ) ( 127 )

(Increase) decrease in other assets ( 14 ) 99 955

Increase (decrease) in accrued expenses and other liabilities 247 ( 8 ) ( 399 )

Net cash provided by (used in) operating activities 986 ( 366 ) ( 170 )

Cash Flows from Investing Activities:

Net (increase) decrease in investment in Patriot Bank N.A.

Net cash (used in) provided by investing activities — ( 1 ) 8

Net increase in investment in Patriot Bank N.A.

Net cash used in investing activities — — ( 1 )

Cash Flows from Financing Activities:

2 unchanged sentences

Net cash used in financing activities — — —

Net decrease in cash and cash equivalents ( 366 ) ( 171 ) ( 119 )

Net increase (decrease) in cash and cash equivalents 986 ( 366 ) ( 171 )

Cash and cash equivalents at beginning of year $ 11 $ 377 $ 548

3 unchanged sentences

Supplemental Disclosure of Non-cash Activity:

Net change in unrealized (gain) loss on available-for-sale securities $ ( 384 ) $ 14,008 $ 1,119

Deferred debt issuance costs $ 56 $ 360 $ —

Retained earnings adjustment - ASC 326 adoption $ 11,510 $ — $ —

PATRIOT NATIONAL BANCORP, INC.

2 unchanged sentences

Subsequent Event

On March 10, 2023, Silicon Valley Bank Santa Clara, CA was closed by the California Department of Financial Protection & Innovation which appointed the Federal Deposit Insurance Corporation (FDIC) as Receiver.

To protect depositors, on March 13, 2023, the FDIC transferred all the deposits, both insured and uninsured, of Silicon Valley Bank to Silicon Valley Bridge Bank, N.A.

a full-service 'bridge bank' that will be operated by the FDIC as it markets the institution to potential bidders.

The initial FDIC actions created concerns among depositors, investors, and other bank stakeholders that the banking system could be subject to an overall drain on liquidity.

The Company has no current direct investment in or contractual relationships with Silicon Valley Bank or its holding company.

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements.

During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data