PATRIOT NATIONAL BANCORP INC 10-K

ITEM 8. Financial Statements and Supplementary Data The Financial Statements required by this item are presented in the order shown below: - Report of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) - Consolidated Balance Sheets as of December 31, 2023 and 2022 - Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2023 - Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 31, 2023 - Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended December 31, 2023 - Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2023 - Notes to Consolidated Financial Statements 38 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Patriot National Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Patriot National Bancorp, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 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. 39 Table of Contents 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. 40 Table of Contents - 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 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. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. We identified the impairment assessment of goodwill as a critical audit matter due to the high degree of auditor judgment and subjectivity in order to evaluate the fair value of the reporting unit due to the judgments made by management in the estimation of the Company’s reporting unit fair value, including those related to future cash flows, the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate. In addition, the increased audit effort involved the use of internal professionals with specialized skill and knowledge in the field of business valuation. Our audit procedures related to goodwill impairment assessment included the following for the impairment test performed for the year: - We 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. - We used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology. This included: – Testing the fair value of the reporting unit through testing of the completeness and accuracy of the data used by management to develop the estimate. – Evaluating the reasonableness of the cash flow projection calculations used to develop the estimate. – Evaluating the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate by assessing the reasonableness, comparability and appropriateness of the market-based information used by agreeing the components to independent source data. /s/ RSM US LLP We have served as the Company’s auditor since 2017. Hartford, Connecticut April 1, 2024 41 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share data) 2023 2022 Assets Cash and due from banks: Noninterest bearing deposits and cash $ 2,195 $ 5,182 Interest bearing deposits 50,322 33,311 Restricted cash 14,019 — Total cash, cash equivalents and restricted cash 66,536 38,493 Investment securities: Available-for-sale securities, at fair value 89,187 84,520 Other investments, at cost 4,450 4,450 Total investment securities 93,637 88,970 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: 2023: $ 15,925 and 2022: $ 10,310 ) 832,934 838,006 Loans held for sale 20,767 5,211 Accrued interest and dividends receivable 7,219 7,267 Premises and equipment, net 29,875 30,641 Other real estate owned 2,843 — Deferred tax asset 24,134 15,527 Goodwill — 1,107 Core deposit intangible, net 203 249 Other assets 8,985 11,387 Total assets $ 1,093,425 $ 1,043,359 Liabilities Deposits: Noninterest bearing deposits $ 110,056 $ 269,636 Interest bearing deposits 730,255 590,810 Total deposits 840,311 860,446 FHLB, FRB and correspondent bank borrowings 171,000 85,000 Senior notes, net 11,723 11,640 Subordinated debt, net 9,869 9,840 Junior subordinated debt owed to unconsolidated trust, net 8,137 8,128 Note payable 376 585 Advances from borrowers for taxes and insurance 1,164 886 Accrued expenses and other liabilities 6,462 7,251 Total liabilities 1,049,042 983,776 Commitments and Contingencies Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding — — Common stock, $ .01 par value, 100,000,000 shares authorized; As of December 31, 2023: 4,049,814 shares issued; 3,976,073 shares outstanding; As of December 31, 2022: 4,038,927 shares issued; 3,965,186 shares outstanding; 106,670 106,565 Accumulated deficit ( 47,026 ) ( 31,337 ) Accumulated other comprehensive loss ( 15,261 ) ( 15,645 ) Total shareholders' equity 44,383 59,583 Total liabilities and shareholders' equity $ 1,093,425 $ 1,043,359 See Accompanying Notes to Consolidated Financial Statements. 42 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In thousands, except per share amounts) 2023 2022 2021 Interest and Dividend Income Interest and fees on loans $ 54,310 $ 40,823 $ 30,115 Interest on investment securities 2,653 2,307 1,924 Dividends on investment securities 504 384 223 Other interest income 1,490 498 89 Total interest and dividend income 58,957 44,012 32,351 Interest Expense Interest on deposits 21,668 5,300 2,243 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 8 12 15 Total interest expense 30,457 10,753 7,090 Net interest income 28,500 33,259 25,261 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 Loan application, inspection and processing fees 694 386 257 Deposit fees and service charges 285 256 251 Gains on sales of loans 169 1,461 1,886 Rental income 395 566 543 Gain on sale of investment securities 24 — 76 Digital Payments income 2,294 683 103 Other income 2,144 253 1,307 Total non-interest income 6,005 3,605 4,423 Non-interest Expense Salaries and benefits 17,598 15,506 11,089 Occupancy and equipment expense 3,410 3,428 3,430 Data processing expense 1,228 1,185 1,451 Professional and other outside services 3,369 2,664 3,155 Project expenses, net 93 133 1,882 Advertising and promotional expense 269 232 235 Loan administration and processing expense 259 234 134 Regulatory assessments 1,176 817 907 Insurance expense, net 277 271 280 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 (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 43 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS See Accompanying Notes to Consolidated Financial Statements. (In thousands) Year Ended December 31, 2023 2022 2021 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 Reclassification for realized gain on sale of investment securities ( 24 ) — ( 76 ) Income tax effect 6 — 20 Impact of update to effective tax rate 270 — — 384 ( 14,008 ) ( 1,119 ) Derivative instruments: Unrealized holding gain on cash flow hedge — — 149 Income tax effect — — ( 39 ) Reclassification adjustment for net gain included in net income — — ( 149 ) Income tax effect — — 39 — — — Total other comprehensive income (loss) 384 ( 14,008 ) ( 1,119 ) Comprehensive (loss) income $ ( 3,795 ) $ ( 7,847 ) $ 3,975 See Accompanying Notes to Consolidated Financial Statements. 44 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (In thousands, except shares) Number of Shares Common Stock Accumulated Deficit Accumulated Other Comprehensive (Loss) Income Total Balance at January 1, 2021 3,943,572 $ 106,329 $ ( 42,592 ) $ ( 518 ) $ 63,219 Comprehensive loss: Net income — — 5,094 — 5,094 Unrealized holding loss on available-for-sale securities, net of tax — — — ( 1,119 ) ( 1,119 ) Total comprehensive income (loss) — — 5,094 ( 1,119 ) 3,975 Share-based compensation expense — 150 — — 150 Vesting of restricted stock 12,920 — — — — Balance at December 31, 2021 3,956,492 106,479 ( 37,498 ) ( 1,637 ) 67,344 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 ) Share-based compensation expense — 86 — — 86 Vesting of restricted stock 8,694 — — — — Balance at December 31, 2022 3,965,186 106,565 ( 31,337 ) ( 15,645 ) 59,583 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 Vesting of restricted stock 10,887 — — — — Balance at December 31, 2023 3,976,073 $ 106,670 $ ( 47,026 ) $ ( 15,261 ) $ 44,383 See Accompanying Notes to Consolidated Financial Statements. 45 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2023 2022 2021 Cash Flows from Operating Activities: 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 Amortization of debt issuance costs 177 38 111 Amortization of core deposit intangible 46 47 47 Amortization of servicing assets of sold SBA loans 114 98 67 Impairment of intangible assets 1,107 — — Provision (credit) for credit losses 7,429 1,885 ( 500 ) Depreciation and amortization 1,193 1,325 1,521 Gain on sales of available-for-sale securities ( 24 ) — ( 76 ) Gain on sale of premises and equipment — — ( 550 ) Share-based compensation 105 86 150 (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: 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 (used in) provided by operating activities ( 10,715 ) 7,036 7,596 Cash Flows from Investing Activities: Proceeds from maturity or sales on available-for-sale securities 1,780 3,600 77,690 Principal repayments on available-for-sale securities 4,324 6,723 11,667 Purchases of available-for-sale securities ( 10,415 ) ( 19,330 ) ( 136,135 ) Redemptions (purchases) of Federal Reserve Bank stock 537 216 ( 60 ) (Purchases) redemptions of Federal Home Loan Bank stock ( 328 ) 310 319 Origination of loans receivable ( 145,531 ) ( 211,383 ) ( 220,349 ) Purchases of loans receivable ( 21,108 ) ( 141,412 ) ( 89,338 ) Payments received on loans receivable 143,977 239,639 298,059 Purchases of premises and equipment ( 412 ) ( 414 ) ( 430 ) Proceeds from sale of premises and equipment — — 1,464 Proceeds from sale of other real estate owned — — 1,908 Net cash used in investing activities ( 27,176 ) ( 122,051 ) ( 55,205 ) Cash Flows from Financing Activities: (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 ) — Proceeds from issuance of senior notes — 12,000 — Principal repayments of note payable ( 209 ) ( 206 ) ( 203 ) Increase (decrease) in advances from borrowers for taxes and insurance 278 ( 215 ) ( 2,685 ) 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 46 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) Year Ended December 31, 2023 2022 2021 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 29,631 $ 10,472 $ 7,210 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 OREO $ 2,843 $ — $ — Capitalized servicing assets $ 85 $ 400 $ 335 Operating lease right-of-use assets $ 16 $ 80 $ 373 (Decrease) increase in interest rate swaps $ ( 129 ) $ ( 535 ) $ 449 Deferred cost for capital raise $ — $ ( 825 ) $ 825 Deferred debt issuance costs $ 56 $ 360 $ — Increase in premises and equipment $ — $ — $ 10 Reclassification of premises and equipment to implementation cost $ — $ — $ 52 Increase in accrued expense and other liabilities $ — $ — $ ( 62 ) 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. 47 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 1. Nature of Operations and Summary of Significant Accounting Policies Patriot National Bancorp, Inc. (the "Company" or "PNBK"), a Connecticut corporation, is a bank holding company that was organized in 1999. Patriot Bank, N.A. (the "Bank") (collectively, “Patriot”) is a wholly owned subsidiary of the Company. The Bank is a nationally chartered commercial bank whose deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank provides a full range of banking services to commercial and consumer customers through its main office in Stamford, Connecticut, eight branch offices in Connecticut and one branch office in New York. The Bank's customers are concentrated in Fairfield and New Haven Counties in Connecticut and Westchester County in New York. On March 11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities and investing the proceeds in subordinated debentures issued by the Company, and on March 26, 2003, the first series of trust preferred securities were issued. In accordance with accounting principles generally accepted in the United States of America (“US GAAP”), the Trust is not included in the Company’s consolidated financial statements. On May 10, 2018, the Bank completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT (“Prime Bank”). The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut. The results of Prime Bank’s operations are included in the Company’s consolidated financial statements from the date of acquisition. The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for 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. 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: Principles of consolidation and basis of financial statement presentation The consolidated financial statements include the accounts of Patriot, and the Bank's wholly owned subsidiaries, PinPat Acquisition Corporation and have been prepared in conformity with US GAAP. All significant intercompany balances and transactions have been eliminated. Cash, 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. Cash and due from banks, federal funds sold, and short-term investments are recognized as cash equivalents in the consolidated balance sheets. Patriot maintains amounts due from banks which, at times, may exceed federally insured limits. Patriot has not experienced any losses from such concentrations. 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. 48 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Federal Reserve Bank and Federal Home Loan Bank stock The Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLB-B”), as collateral, in an amount equal to a percentage of its outstanding mortgage loans and loans secured by residential properties, including mortgage-backed securities. Additionally, the Bank is required to maintain an investment in the capital stock of the Federal Reserve Bank (“FRB”), as collateral, in an amount equal to one percent of 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. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost, and evaluated for impairment in accordance with relevant accounting guidance. In accordance with this guidance, the stocks’ values are determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as: (a) the significance of any decline in net assets of the FHLB-B or FRB, as applicable, compared to its capital stock amount, and the length of time this situation has persisted; (b) commitments by either the FHLB-B or FRB to make payments required by law or regulation and the level of such payments in relation to their operating performance; (c) the potential impact of any legislative or regulatory changes; and (d) the regulatory capital ratios and liquidity position of the FHLB-B or FRB, as applicable. Included in the Bank’s investment portfolio are shares in the FHLB-B and FRB of $ 6.3 million and $ 6.5 million as of December 31, 2023 and 2022, respectively. Management has evaluated its investment in the capital stock of the FHLB-B and FRB for impairment, based on the aforementioned criteria, and has determined that as of December 31, 2023 and 2022 there is no impairment of its investment in either the FHLB-B or FRB. Investment Securities Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date. Debt securities, if any, that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost. “Trading” securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method of accounting, in order to achieve a constant effective yield over the contractual term of the securities. 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. 49 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Securities transactions are recorded on the trade date. Realized gains and losses on the sale of securities are determined using the specific identification method, recorded on the trade date, and reported in non-interest income for the period. At December 31, 2023 and 2022, the Bank’s investment portfolio includes a $ 4.5 million investment in the Solomon Hess SBA Loan Fund (“SBA Fund”). The Bank uses this investment to satisfy its Community Reinvestment Act lending requirements. At December 31, 2023 and 2022, the investment in the SBA Fund is reported in the consolidated balance sheets at cost, which management believes approximates fair value. Loans receivable Loans that Patriot has the intent and ability to hold until maturity or for the foreseeable future generally are reported at their outstanding unpaid principal balances adjusted for deferred costs, an allowance for loan and lease losses, if any, and any unamortized discount, premium and deferred fees. Interest income is accrued based on unpaid principal balances. Loan application fees are reported as non-interest income, while other certain direct origination costs, or for purchased loans, any discounts or premiums are deferred and amortized to interest income as a level yield adjustment over the respective term of the loan. Loans are placed on non-accrual status or charged off when collection of principal or interest is considered doubtful. The accrual of interest on loans is discontinued no later than when the loan is 90 days past due for payment, unless the loan is well secured and in process of collection. Consumer installment loans are typically charged off no later than when they become 180 days past due. Past due status is based on the contractual terms of the loan. Accrued uncollected interest income on loans that are placed on non-accrual status or have been charged off is reversed against interest income. Interest income on such non-performing loans is accounted for on the cash-basis of accounting until qualifying for return to accrual status. Any cash received on non-accrual or charged off loans is first applied against unpaid and past-due principal and then to interest, unless the loan is in a cure period. If in a cure period, and management believes there will be a loss, cash receipts are applied to principal until the balance at risk and collateral value, if any, is equal to the amount management believes will ultimately be collected. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Patriot’s real estate loans are collateralized by real estate located principally in Fairfield and New Haven Counties in Connecticut, and Westchester County and New York City in New York. Accordingly, the ultimate collectability of a substantial portion of Patriot’s loan portfolio is susceptible to regional real estate market conditions. 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. 50 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements January 1, 2023 (In thousands) Post ASC 326 Adoption Pre-ASC 326 Adoption Pre-tax impact of ASC 326 Adoption Assets: Allowance 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 Liabilities: 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. 51 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements 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. Risk ratings are assigned based upon the recommendation of the credit analyst and the originating loan officer. The risk ratings are reviewed and confirmed by the management loan committee of the Board of Directors (the “Loan Committee”). Risk ratings are established at the initiation of transactions and are reviewed and changed, when necessary, during the life of the loan. Loans assigned a risk rating of six or above are monitored more closely by the credit administration officers and the Loan Committee. 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 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. 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. 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. 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. 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. 52 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Patriot -- put presumptively beyond the reach of Patriot and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for Patriot, and (3) Patriot does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates it to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call. Loans Held for Sale 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 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 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 Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance. Other real estate owned Assets acquired through, loan foreclosure or in lieu of, are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. In addition, when Patriot acquires other real estate owned (“OREO”), it obtains a current appraisal to substantiate the net carrying value of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the results of operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in non-interest expenses upon disposal. 53 Table of Contents 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. These losses are included in non-interest expenses in the consolidated statements of operations. Premises and equipment Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation is charged to operations for buildings, furniture, equipment and software using the straight-line method over the estimated useful lives of the related assets which range from three to forty years . Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized. 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 Long-lived assets, which are held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense. Intangible Assets Intangible assets include core deposit intangibles (“CDI”) and goodwill arising from acquisitions. The initial and ongoing carrying value of intangible assets is based upon modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators. CDI is amortized on straight-line basis over a 10-year period because that is managements’ estimate of the period Patriot will benefit from Prime Bank’s deposit base comprised of funds associated with long-term customer relationships. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The annual impairment test is conducted annually as of October 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated. 54 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Derivatives Derivatives are recognized at fair value and included in other assets and other liabilities in the accompanying consolidated balance sheets. The value of exchange-traded contracts is based on quoted market prices while non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities. Cash flows from derivative financial instruments are included in net cash provided by operating activities in the accompanying consolidated statements of cash flows. Derivatives Not Designated in Hedge Relationships: Patriot enters into interest rate swap agreements (“swaps”), to provide a facility to mitigate for the borrower the fluctuations in the variable rate on the respective loan. The customer swaps are simultaneously hedged by offsetting derivatives that Patriot entered into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. These swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other non-interest income. The credit risk associated with derivatives executed with customers is similar as that involved in extending loans and is subject to normal credit policies. Collateral is obtained based on management’s assessment of the customer. The positions of customer derivatives are recorded at fair value and changes in value are included in non-interest income on the consolidated statement of operations. Derivatives Designated in Hedge Relationships: The Company uses derivatives to hedge exposures, or to modify interest rate characteristics, for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships as cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge and remain highly effective in offsetting changes in the cash flows attributable to the risk being hedged both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship were no longer highly effective, hedge accounting would be discontinued. The gain or loss on a derivative designated and qualifying as a cash flow hedge is initially recorded as a component of accumulated other comprehensive income or loss, net of tax and subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made in the same period during which the hedged transaction affects earnings. Income taxes Patriot recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and loss carry forwards. Deferred tax assets (“DTA”s) and liabilities (“DTL”s) are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on DTAs and DTLs of a change in tax rates is recognized in income in the period that includes the enactment date. In certain circumstances DTAs are subject to reduction by a valuation allowance. A valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited to the deferred tax component of the income tax provision or benefit. Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and net operating loss carry-forwards that do not begin to expire until the year 2030. As of December 31, 2023, no valuation allowance was recorded. See Note 14 for more information on the deferred tax valuation allowance. Management will continue to evaluate its ability to realize the net deferred tax asset. Future evidence may indicate that it is more likely than not that a portion of the net deferred tax asset will not be realized at which point the valuation allowance may need to be increased. Patriot had a net deferred tax asset of $ 24.1 million at December 31, 2023 as compared to a net deferred tax asset of $ 15.5 million at December 31, 2022. 55 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Unrecognized tax benefits Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Patriot’s returns for tax years 2020 through 2023 are subject to examination by the Internal Revenue Service (“IRS”) for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance. As of December 31, 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. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. Earnings per Share Basic earnings per share represent earnings accruing to common shareholders and are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive securities had been converted to common stock, as well as any adjustments to earnings resulting from the assumed conversion, unless such effect is anti-dilutive. Potential common shares that may be issued by Patriot include any unvested restricted stock awards, stock options, and stock warrants and are determined using the treasury stock method. Share-based compensation plan Incentive and compensatory share-based compensation granted to employees is accounted for at the grant date fair value of the award and recognized in the results of operations as compensation expense with an off-setting entry to equity on a straight-line basis over the requisite service period, which is the vesting period. Non-employee members of the Board of Directors are treated as employees for any share-based compensation granted in exchange for their service on the Board of Directors. Patriot does not currently have, nor has it had in the past, any grants of share-based compensation to non-employees. However, should such awards exist in the future, the value of the goods or services received shall be measured at the grant date fair value of the award or the goods or services to be received, if determined to be a more reliable measurement of fair value. A liability will be recognized for the award, which will periodically be adjusted to reflect the then current fair value, and compensation expense will be recognized over the requisite period during which the goods or services are received, so that the fair value at the date of settlement is the compensation expense recognized. The Compensation Committee of the Board of Directors establishes terms and conditions applicable to the vesting of restricted stock awards and stock options. Restricted stock grants generally vest in quarterly or annual installments over a three -, four - or five-year period from the date of grant. All restricted stock awards are non- participating grants. Comprehensive income Accounting principles generally require that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of shareholders' equity in the consolidated balance sheets, such items, along with net income, are components of comprehensive income. Segment reporting Patriot’s only business segment is Community Banking. During the years ended December 31, 2023, 2022 and 2021, this segment represented all the revenues and income of Patriot. 56 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Related Party Transactions Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such people will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. See Note 20: Related Party Transactions for further information. Fair value Patriot uses fair value measurements to record adjustments to the carrying amounts of certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate sale or settlement of the asset or liability, respectively. Provided in these notes to the consolidated financial statements is a detailed summary of Patriot’s application of fair value measurements and the effect on the assets and liabilities presented in the consolidated financial statements. Advertising Costs Patriot's policy is to expense advertising costs in the period in which they are incurred. Revenue Recognition ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows: • Service charges on deposit accounts 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. 57 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Recently Adopted and Issued Accounting Standards Accounting Standards Adopted During 2023 ASU 2016-13 In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: 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 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 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. 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. ASU 2020-02 In January 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU adds and amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. The Company adopted ASU 2016-13 and ASU 2020-02 effective January 1, 2023. ASU 2020-03 In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments . This ASU clarifies various financial instruments topics, including the CECL standard issued in 2016. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Other amendments are effective upon issuance of this ASU. See the discussion regarding the adoption of ASU 2016-13 above. ASU 2022-02 In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326) : Troubled Debt Restructurings ("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 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. 58 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements ASU 2022-06 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 did not have a material impact on the Company's Consolidated Financial Statements. Accounting Standards Issued But Not Yet Adopted ASU 2023-06 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. ASU 2023-09 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. Note 2. Restrictions on Cash and Due from Banks Federal Reserve System regulations require depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The Board of Governors of the Federal Reserve System generally makes annual adjustments to the tiered cash reserve requirements. In March of 2020, the Federal Reserve Bank eliminated reserve requirements for all depository institution. Therefore, the Company was not required to have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements as of December 31, 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. 59 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 3. 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 Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value December 31, 2023: U. S. Government agency and mortgage-backed securities $ 80,500 $ — $ ( 14,829 ) $ 65,671 Corporate bonds 17,995 — ( 4,229 ) 13,766 Subordinated notes 5,000 — ( 773 ) 4,227 SBA loan pools 6,002 — ( 965 ) 5,037 Municipal bonds 559 — ( 73 ) 486 $ 110,056 $ — $ ( 20,869 ) $ 89,187 December 31, 2022: U. S. Government agency and mortgage-backed securities $ 73,480 $ — $ ( 14,434 ) $ 59,046 Corporate bonds 19,773 7 ( 5,125 ) 14,655 Subordinated notes 5,000 — ( 398 ) 4,602 SBA loan pools 6,791 — ( 1,073 ) 5,718 Municipal bonds 561 — ( 62 ) 499 $ 105,605 $ 7 $ ( 21,092 ) $ 84,520 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 Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) Fair Value Unrealized (Loss) December 31, 2023: U. S. Government agency and mortgage-backed securities $ 9,984 $ ( 286 ) $ 55,687 $ ( 14,543 ) $ 65,671 $ ( 14,829 ) Corporate bonds — — 13,766 ( 4,229 ) 13,766 ( 4,229 ) Subordinated notes — — 4,227 ( 773 ) 4,227 ( 773 ) SBA loan pools — — 5,037 ( 965 ) 5,037 ( 965 ) Municipal bonds — — 486 ( 73 ) 486 ( 73 ) $ 9,984 $ ( 286 ) $ 79,203 $ ( 20,583 ) $ 89,187 $ ( 20,869 ) December 31, 2022: U. S. Government agency and mortgage-backed securities $ 11,126 $ ( 633 ) $ 47,920 $ ( 13,801 ) $ 59,046 $ ( 14,434 ) Corporate bonds 1,959 ( 64 ) 10,934 ( 5,061 ) 12,893 ( 5,125 ) Subordinated notes 4,602 ( 398 ) — — 4,602 ( 398 ) SBA loan pools 1,437 ( 12 ) 4,280 ( 1,061 ) 5,717 ( 1,073 ) Municipal bonds — — 498 ( 62 ) 498 ( 62 ) $ 19,124 $ ( 1,107 ) $ 63,632 $ ( 19,985 ) $ 82,756 $ ( 21,092 ) 60 Table of Contents 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. government. 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. Government agency. The contractual terms of the subordinated notes do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. 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. 61 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements The following summarizes, by class and contractual maturity, the amortized cost and estimated fair value of available-for-sale debt securities held at December 31, 2023 and 2022. The mortgages underlying the mortgage-backed securities are not due at a single maturity date. Additionally, these mortgages often are and generally may be pre-paid without penalty, creating a degree of uncertainty that such investments can be held until maturity. For convenience, mortgage-backed securities have been included in the summary as a separate line item. (In thousands) Amortized Cost Fair Value Due Within 5 years Due After 5 years through 10 years Due After 10 years Total Due Within 5 years Due After 5 years through 10 years Due After 10 years Total December 31, 2023: Corporate bonds $ 2,000 $ 15,995 $ — $ 17,995 $ 1,947 $ 11,819 $ — $ 13,766 Subordinated notes 3,000 2,000 — 5,000 2,527 1,700 — 4,227 SBA loan pools — 1,096 4,906 6,002 — 1,084 3,953 5,037 Municipal bonds 153 406 — 559 140 346 — 486 Available-for-sale securities with stated maturity dates 5,153 19,497 4,906 29,556 4,614 14,949 3,953 23,516 U. S. Government agency and mortgage-backed securities — 5,222 75,278 80,500 — 4,237 61,434 65,671 $ 5,153 $ 24,719 $ 80,184 $ 110,056 $ 4,614 $ 19,186 $ 65,387 $ 89,187 December 31, 2022: Corporate bonds $ 3,778 $ 15,995 $ — $ 19,773 $ 3,721 $ 10,934 $ — $ 14,655 Subordinated notes 3,000 2,000 — 5,000 2,830 1,772 — 4,602 SBA loan pools — 1,449 5,342 6,791 — 1,438 4,280 5,718 Municipal bonds 154 407 — 561 139 360 — 499 Available-for-sale securities with stated maturity dates 6,932 19,851 5,342 32,125 6,690 14,504 4,280 25,474 U. S. Government agency and mortgage-backed securities — 5,276 68,204 73,480 — 4,129 54,917 59,046 $ 6,932 $ 25,127 $ 73,546 $ 105,605 $ 6,690 $ 18,633 $ 59,197 $ 84,520 62 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 4. Loans Receivables and Allowance for Credit Losses As of December 31, 2023 and 2022, loans receivable, net, consisted of the following: December 31, (In thousands) 2023 2022 Loan portfolio segment: Commercial Real Estate $ 472,093 $ 437,443 Residential Real Estate 106,783 124,140 Commercial and Industrial 163,565 138,787 Consumer and Other 99,688 141,091 Construction 4,266 4,922 Construction to Permanent - CRE 2,464 1,933 Loans receivable, gross 848,859 848,316 Allowance for credit losses ( 15,925 ) ( 10,310 ) Loans receivable, net $ 832,934 $ 838,006 Patriot's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. Patriot originates commercial real estate loans, commercial business loans, a variety of consumer loans, and construction loans, and has purchased residential loans since 2016. All commercial and residential real estate loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions. Patriot has established credit policies applicable to each type of lending activity in which it engages and evaluates the creditworthiness of each borrower. Unless extenuating circumstances exist, Patriot limits the extension of credit on commercial real estate loans to 75 % of the market value of the underlying collateral. Patriot’s loan origination policy for multi-family residential real estate is limited to 80 % of the market value of the underlying collateral. In the case of construction loans, the maximum loan-to-value is 75 % of the “as completed” appraised value of the real estate project. Management monitors the appraised value of collateral on an on-going basis and additional collateral is requested when warranted. Real estate is the primary form of collateral, although other forms of collateral do exist and may include such assets as accounts receivable, inventory, marketable securities, time deposits, and other business assets. Risk characteristics of the Company ’ s portfolio classes include the following: Commercial Real Estate Loans In underwriting commercial real estate loans, Patriot evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default, the value of the property collateralizing the loan substantially decline, or there are declines in general economic conditions. Where the owner occupies the property, Patriot also evaluates the business’ ability to repay the loan on a timely basis and may require personal guarantees, lease assignments, and/or the guarantee of the operating company. 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 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. 63 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Commercial and Industrial Loans Patriot’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are generally for the financing of accounts receivable, purchases of inventory, purchases of new or used equipment, or for other short- or long-term working capital purposes. These loans are generally secured by business assets but are also occasionally offered on an unsecured basis. In granting these types of loans, Patriot considers the borrower’s cash flow as the primary source of repayment, supported by the value of collateral, if any, and personal guarantees, as applicable. Repayment of commercial and industrial loans may be negatively impacted by adverse changes in economic conditions, ineffective management, claims on the borrower’s assets by others that are superior to Patriot’s claims, a loss of demand for the borrower’s products or services, or the death or disability of the borrower or other key management personnel. Patriot’s syndicated and leveraged loan portfolios totaled $ 5.7 million and $ 5.8 million at December 31, 2023 and 2022, respectively. The syndicated and leveraged loans are included in the commercial and industrial loan classification and are primarily comprised of loan transactions led by major financial institutions and regional banks, which are the Agent Bank or Lead Arranger, and are referred to as syndicated loans or "Shared National Credits (SNC)". SNC loans were determined to be complementary to the Bank’s existing commercial and industrial loan portfolio and product offerings. Further originations in this loan class are not expected. Consumer and Other Loans Patriot offers individual consumers various forms of credit including installment loans, credit cards, overdraft protection, auto loans, and reserve lines of credit. Repayments of such loans are generally dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans. The Company 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 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 Construction loans are of a short-term nature, generally of eighteen months or less, that are secured by land and improvements intended for commercial, residential, or mixed-use development. Loan proceeds may be used for the acquisition of or improvements to the land under development and funds are generally disbursed as phases of construction are completed. Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and financial strength of the builder, the type and location of the property, and other factors. Construction loans tend to be personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by an inability to complete construction, a downturn in the market for new construction, by a significant increase in interest rates, or by decline in general economic conditions. The construction loans outstanding at December 31, 2023 and 2022 totaled $ 4.3 million and $ 4.9 million, respectively. 64 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Construction to Permanent - Commercial Real Estate (“CRE”) 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. Close of the permanent facility typically occurs when events dictate, such as receipt of a certificate of occupancy and property stabilization, which is defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio and other conditions and covenants particular to the loan. Construction facilities are typically variable rate instruments that, upon conversion to an amortizing mortgage loan, reset to a fixed rate instrument that is the greater of the in-force variable rate plus a predetermined spread over a reference rate (e.g., prime) or a minimum interest rate. SBA Loans Patriot originates SBA 7(a) loans, on which the SBA has historically provided guarantees of 75 % of the principal balance. However, during the pandemic in 2021, the SBA temporarily increased the guarantees to 90 % and reverted to 75 % on October 1, 2021. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the unguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. SBA loans held for investment are included in the commercial real estate loans and commercial and industrial loan classifications, which totaled $ 30.0 million and $ 32.5 million at December 31, 2023 and 2022, respectively. Small Business Administration Paycheck Protection Program 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. The Bank participated in the SBA’s Paycheck Protection Program in 2021. 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. 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 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. 65 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements 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. 66 Table of Contents 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 and Industrial Consumer and Other Construction Construction to Permanent - CRE Unallocated Total As of and for the year ended December 31, 2023 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 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 As of and for the year ended December 31, 2022 Allowance for loan and lease losses: December 31, 2021 $ 5,063 $ 1,700 $ 2,532 $ 253 $ 78 $ 41 $ 238 $ 9,905 Charge-offs — — ( 70 ) ( 1,690 ) ( 68 ) — — ( 1,828 ) Recoveries 154 4 69 121 — — — 348 (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 As of and for the year ended December 31, 2021 Allowance for loan and lease losses: December 31, 2020 $ 4,485 $ 1,379 $ 3,284 $ 295 $ 739 $ 162 $ 240 $ 10,584 Charge-offs ( 51 ) ( 3 ) ( 212 ) ( 23 ) ( 69 ) — — ( 358 ) Recoveries — 3 65 111 — — — 179 Provisions (credits) 629 321 ( 605 ) ( 130 ) ( 592 ) ( 121 ) ( 2 ) ( 500 ) December 31, 2021 $ 5,063 $ 1,700 $ 2,532 $ 253 $ 78 $ 41 $ 238 $ 9,905 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. 67 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements The following tables summarize, by loan portfolio segment, the amount of loans receivable evaluated individually and collectively for allowance for credit losses as of December 31, 2023: (In thousands) Commercial Real Estate Residential Real Estate Commercial and Industrial Consumer and Other Construction Construction to Permanent - CRE Unallocated Total December 31, 2023 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 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 Real Estate Residential Real Estate Commercial and Industrial Consumer and Other Construction Construction to Permanent - CRE Unallocated Total December 31, 2022 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 losses $ 6,966 $ 665 $ 1,403 $ 1,207 $ 24 $ 10 $ 35 $ 10,310 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 Total loans receivable, gross $ 437,443 $ 124,140 $ 138,787 $ 141,091 $ 4,922 $ 1,933 $ — $ 848,316 68 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. At origination, credit officers are required to assign a risk rating to each loan in their portfolio, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. If financial developments occur on a loan in the credit officer’s portfolio of responsibility, the risk rating is reviewed and adjusted, as applicable. In carrying out its oversight responsibilities, the Loan Committee can adjust a risk rating based on available information. In addition, the risk ratings on all commercial loans over $250,000 are reviewed by the Credit Department either annually or biannually, 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 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. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories: • Substandard: An asset is classified “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that the Company will sustain some loss, if noted deficiencies are not corrected. • Doubtful: Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard”, with the added characteristic that the identified weaknesses make collection or liquidation-in-full improbable, on the basis of currently existing facts, conditions, and values. Charge-offs of loans to reduce the loan to its recoverable value that are solely collateral dependent, generally occur immediately upon confirmation of the partial loss amount. Loans that are cash flow dependent are modeled to reflect the expected cash flows through expected loan maturity, including any proceeds from refinancing or principal curtailment. A specific reserve is established for the amount by which the net investment in the loan exceeds the present value of discounted cash flows. Charge-offs on cash flow dependent loans also generally occur immediately upon confirmation of the partial loss amount. If either type of loan is classified as “Loss”, meaning full loss on the loan is expected, the full balance of the loan receivable is charged off, regardless of the potential recovery from a sale of the underlying collateral. Any amount that may be recovered on the sale of collateral underlying a loan is recognized as a “recovery” in the period in which the collateral is sold. In accordance with Federal Financial Institutions Examination Council published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” and “Closed-end” credits are charged off when 180 days and 90 days delinquent, respectively. 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 credit losses may increase to reflect the decline in the performance of the loan portfolio and the higher level of incurred losses. 69 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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 Receivable Gross 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 70 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Loan Portfolio Aging Analysis The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2023. (In thousands) Performing (Accruing) Loans As of December 31, 2023: 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Performing Loans Non- accruing Loans Loans Receivable Gross Loan portfolio segment: Commercial Real Estate: Pass $ 2,274 $ 231 $ — $ 2,505 $ 448,707 $ 451,212 $ 1,629 $ 452,841 Special mention — — — — 6,482 6,482 — 6,482 Substandard — — — — 1,624 1,624 11,146 12,770 2,274 231 — 2,505 456,813 459,318 12,775 472,093 Residential Real Estate: Pass 1,439 — — 1,439 105,344 106,783 — 106,783 1,439 — — 1,439 105,344 106,783 — 106,783 Commercial and Industrial: Pass 420 10 — 430 157,335 157,765 2,983 160,748 Special mention — 348 — 348 158 506 — 506 Substandard 526 — — 526 847 1,373 938 2,311 946 358 — 1,304 158,340 159,644 3,921 163,565 Consumer and Other: Pass 1,327 1,015 341 2,683 96,028 98,711 — 98,711 Substandard — — — — — — 977 977 1,327 1,015 341 2,683 96,028 98,711 977 99,688 Construction: Pass — — — — 3,812 3,812 — 3,812 Substandard — — — — — — 454 454 — — — — 3,812 3,812 454 4,266 Construction to Permanent - CRE: Special mention — — — — 2,464 2,464 — 2,464 — — — — 2,464 2,464 — 2,464 Total $ 5,986 $ 1,604 $ 341 $ 7,931 $ 822,801 $ 830,732 $ 18,127 $ 848,859 Loans receivable, gross: Pass 5,460 1,256 341 7,057 811,226 818,283 4,612 822,895 Special mention — 348 — 348 9,104 9,452 — 9,452 Substandard 526 — — 526 2,471 2,997 13,515 16,512 Loans receivable, gross $ 5,986 $ 1,604 $ 341 $ 7,931 $ 822,801 $ 830,732 $ 18,127 $ 848,859 71 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements The following tables summarize performing and non-performing (i.e., non-accruing) loans receivable by portfolio segment, by aging category, by delinquency status as of December 31, 2022. (In thousands) Performing (Accruing) Loans As of December 31, 2022: 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Performing Loans Non- accruing Loans Loans Receivable Gross Loan portfolio segment: Commercial Real Estate: Pass $ — $ — $ — $ — $ 401,313 $ 401,313 $ — $ 401,313 Special mention — — — — 24,559 24,559 — 24,559 Substandard 330 — — 330 — 330 11,241 11,571 330 — — 330 425,872 426,202 11,241 437,443 Residential Real Estate: Pass 330 — — 330 120,715 121,045 — 121,045 Special mention — — — — 625 625 — 625 Substandard — — — — — — 2,470 2,470 330 — — 330 121,340 121,670 2,470 124,140 Commercial and Industrial: Pass 2 — 230 232 131,092 131,324 — 131,324 Special mention — — — — 597 597 — 597 Substandard 1,488 412 — 1,900 133 2,033 4,833 6,866 1,490 412 230 2,132 131,822 133,954 4,833 138,787 Consumer and Other: Pass 929 3,175 925 5,029 135,990 141,019 — 141,019 Substandard — — — — 23 23 49 72 929 3,175 925 5,029 136,013 141,042 49 141,091 Construction: Pass 895 — — 895 3,503 4,398 — 4,398 Special mention — — — — 524 524 — 524 895 — — 895 4,027 4,922 — 4,922 Construction to Permanent - CRE: Pass — — — — 1,933 1,933 — 1,933 — — — — 1,933 1,933 — 1,933 Total $ 3,974 $ 3,587 $ 1,155 $ 8,716 $ 821,007 $ 829,723 $ 18,593 $ 848,316 Loans receivable, gross: Pass $ 2,156 $ 3,175 $ 1,155 $ 6,486 $ 794,546 $ 801,032 $ — $ 801,032 Special mention — — — — 26,305 26,305 — 26,305 Substandard 1,818 412 — 2,230 156 2,386 18,593 20,979 Loans receivable, gross $ 3,974 $ 3,587 $ 1,155 $ 8,716 $ 821,007 $ 829,723 $ 18,593 $ 848,316 72 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements The following tables summarize non-performing (i.e., non-accruing) loans by aging category and status, within the applicable loan portfolio segment as of December 31, 2023 and 2022: (In thousands) Non-accruing Loans 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Non-accruing Loans As of December 31, 2023: Loan portfolio segment: Commercial 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 Consumer and Other: Substandard — 16 887 903 74 977 Construction: Substandard — — — — 454 454 Total non-accruing loans $ — $ 1,157 $ 5,544 $ 6,701 $ 11,426 $ 18,127 As of December 31, 2022: Loan portfolio segment: Commercial Real Estate: Substandard $ — $ — $ 11,241 $ 11,241 $ — $ 11,241 Residential Real Estate: Substandard 657 — 1,796 2,453 17 2,470 Commercial and Industrial: Substandard 46 395 3,196 3,637 1,196 4,833 Consumer and Other: Substandard — — 27 27 22 49 Total non-accruing loans $ 703 $ 395 $ 16,260 $ 17,358 $ 1,235 $ 18,593 If non-accrual loans had been performing in accordance with the original contractual terms, additional interest income (net of cash collected) of approximately $ 938,000 , $ 372,000 , and $ 802,000 would have been recognized in income for the years ended December 31, 2023, 2022, and 2021, respectively. Interest income collected and recognized on non-accruing loans for the year ended December 31, 2023, 2022 and 2021 was $ 255,000 , $ 329,000 and $ 377,000 , respectively. The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged-off, at an earlier date, if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on non-accrual status or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, after at least six months of timely payment history. 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. 73 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements 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 Recorded Investment Principal Outstanding Related Allowance Recorded Investment Principal Outstanding Related Allowance With no related allowance recorded: Commercial Real Estate $ 2,838 $ 5,879 $ — $ 2,435 $ 2,428 $ — Residential Real Estate — — — 2,402 2,224 — Commercial and Industrial 2,266 2,899 — 1,939 2,424 — Consumer and Other — — — 514 514 — Construction 454 461 — — — — 5,558 9,239 — 7,290 7,590 — With a related allowance recorded: Commercial Real Estate $ 9,937 $ 10,137 $ 3,813 $ 8,806 $ 8,656 $ 5,430 Residential Real Estate — — — 106 105 5 Commercial and Industrial 1,638 3,159 392 2,714 2,863 608 11,575 13,296 4,205 11,626 11,624 6,043 Individually evaluated loans, Total: Commercial Real Estate $ 12,775 $ 16,016 $ 3,813 $ 11,241 $ 11,084 $ 5,430 Residential Real Estate — — — 2,508 2,329 5 Commercial and Industrial 3,904 6,058 392 4,653 5,287 608 Consumer and Other — — — 514 514 — Construction 454 — 461 — — — — — — — Total $ 17,133 $ 22,535 $ 4,205 $ 18,916 $ 19,214 $ 6,043 74 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements For each year in the three-year period ended December 31, 2023, the average recorded investment in and interest income recognized on impaired loans without and with a related allowance, by loan portfolio segment, was as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Real Estate $ 1,164 $ 181 $ 5,702 $ 87 $ 7,636 $ 103 Residential Real Estate 534 — 2,925 35 4,014 51 Commercial and Industrial 2,580 5 748 63 2,548 12 Consumer and Other 158 — 464 23 702 16 Construction 753 34 — — — — 5,189 220 9,839 208 14,900 182 With a related allowance recorded: Commercial Real Estate $ 12,957 $ 696 $ 8,307 $ 113 $ 8,869 $ 66 Residential Real Estate 1,156 — 107 6 109 5 Commercial and Industrial 3,359 214 3,348 28 2,234 126 17,472 910 11,762 147 11,212 197 Individually evaluated loans, Total: Commercial Real Estate $ 14,121 $ 877 $ 14,009 $ 200 $ 16,505 $ 169 Residential Real Estate 1,690 — 3,032 41 4,123 56 Commercial and Industrial 5,939 219 4,096 91 4,782 138 Consumer and Other 158 — 464 23 702 16 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. 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 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. 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. 75 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES 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. 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 loan, the loan continues accruing interest. 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. Note 5. 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, 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. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income. Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance. Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $ 47.5 million and $ 47.3 million at December 31, 2023 and 2022, 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. 76 Table of Contents 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: (In thousands) Year Ended December 31, 2023 2022 2021 Beginning balance $ 886 $ 584 $ 316 Servicing rights capitalized 85 400 335 Servicing rights amortized ( 67 ) ( 87 ) ( 22 ) Servicing rights disposed ( 47 ) ( 11 ) ( 45 ) Ending balance $ 857 $ 886 $ 584 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. Note 6. Premises and Equipment At December 31, 2023 and 2022, premises and equipment consisted of the following: (In thousands) December 31, 2023 2022 Land $ 12,819 $ 12,819 Buildings 19,046 19,046 Leasehold Improvements 3,077 3,058 Furniture, equipment, and software 13,031 12,674 Construction-in-progress 65 69 Premises and equipment, gross 48,038 47,666 Accumulated depreciation and amortization ( 18,163 ) ( 17,025 ) Premises and equipment, net $ 29,875 $ 30,641 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. 77 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 7. Other Real Estate Owned ( “ OREO ” ) The OREO balance consists of foreclosed residential properties from loans receivable that were marketed for sale. The following table presents an analysis of the activity in OREO for the years ended December 31, 2023, 2022 and 2021: (In thousands) Year Ended December 31, 2023 2022 2021 Beginning balance $ — $ — $ 1,906 Additions 2,843 — — Sold — — ( 1,906 ) Write-downs — — — Ending balance $ 2,843 $ — $ — 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. Note 8. Business Combination, Goodwill and Other Intangible Assets Acquisition of Prime Bank The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. At date of acquisition fair values are generally preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available. Information on goodwill for the year ended December 31, 2023, 2022 and 2021 is as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Balance, beginning of period $ 1,107 $ 1,107 $ 1,107 Impairment $ ( 1,107 ) $ — $ — Balance, end of period $ — $ 1,107 $ 1,107 Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts. Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated. The Company performed a quantitative assessment as of October 31, 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. 78 Table of Contents 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. The CDI is amortized over a 10-year period using the straight-line method. For the year ended December 31, 2023, 2022 and 2021 the amortization was $ 46,000 , $ 47,000 and 47,000 , respectively. The Company performed a quantitative assessment for CDI as of October 31, 2023, and concluded that the CDI was not impaired as of December 31, 2023. The amortization expense and impairment charge were included in the other operating expenses on the Consolidated Statements of Operations. The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below. (In thousands) As of December 31, 2023 2022 Gross carrying amount $ 748 $ 748 Accumulated amortization ( 339 ) ( 293 ) Impairment ( 206 ) ( 206 ) Net carrying amount $ 203 $ 249 Merger and acquisition with American Challenger On November 15, 2021, the Company and American Challenger Development Corp., a Delaware corporation (“American Challenger”), entered into an Agreement and Plan of Merger (the “Original Merger Agreement”), which was subsequently amended on January 26, 2022 and February 28, 2022 (the Original Merger Agreement, as amended, referred to as the “Merger Agreement”). On July 18, 2022, Patriot and American Challenger entered into a Termination and Release Agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement. 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 year ended December 31, 2021, $ 112,000 for the year ended December 31, 2022 and zero for the year ended December 31, 2023. 79 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 9. Deposits The following table presents the balance of deposits held, by category, and the related weighted average stated interest rate as of December 31, 2023 and 2022. December 31, 2023 December 31, 2022 (In thousands) Balance Weighted Avg. Stated Interest Rate Balance Weighted Avg. Stated Interest Rate Non-interest bearing $ 110,056 — $ 269,636 — Interest bearing: Negotiable order of withdrawal accounts 42,416 0.94 % 34,440 0.07 % 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 % Certificates of deposit, less than $250,000 175,988 4.16 % 165,793 1.72 % Certificates of deposit, $250,000 or greater 64,745 4.63 % 59,877 1.72 % Brokered deposits 40,526 5.34 % 48,698 2.07 % Interest bearing, Total 730,255 2.89 % 590,810 1.40 % Total Deposits $ 840,311 2.51 % $ 860,446 0.96 % 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. (In thousands) Year ended December 31, 2023 2022 2021 Interest Expense Weighted Avg. Effective Interest Rate Interest Expense Weighted Avg. Effective Interest Rate Interest Expense Weighted Avg. Effective Interest Rate Negotiable order of withdrawal accounts $ 198 0.57 % $ 23 0.07 % $ 24 0.07 % 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 % Certificates of deposit, less than $250,000 5,226 2.83 % 1,411 0.79 % 899 0.61 % Certificates of deposit, $250,000 or greater 1,987 3.14 % 400 0.68 % 270 0.49 % Brokered deposits 3,199 4.02 % 465 1.39 % 363 1.83 % $ 21,668 3.05 % $ 5,300 0.93 % $ 2,243 0.43 % 80 Table of Contents 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: (In thousands) CDs less than $250,000 CDs $250,000 or greater Brokered Deposits Total 1 year or less $ 145,322 $ 54,856 $ 33,853 $ 234,031 More than 1 year through 2 years 24,010 8,637 251 32,898 More than 2 years through 3 years 6,320 1,252 6,422 13,994 More than 3 years through 4 years 145 — — 145 More than 4 years through 5 years 191 — — 191 $ 175,988 $ 64,745 $ 40,526 $ 281,259 Note 10. Borrowings As of December 31, 2023 and 2022, total borrowings were $ 201.1 million and $ 115.2 million, respectively. 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: maintain its and its subsidiaries’ legal entity and tax status, pay its income tax obligations on a timely basis, and comply with SEC and FDIC reporting requirements. Federal Home Loan Bank borrowings The Company is a member of the Federal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. As of December 31, 2023, the Bank had $ 71.4 million of available borrowing capacity from the FHLB-B. FHLB-B advances are structured to facilitate the Bank’s management of its balance sheet and liquidity requirements. At December 31, 2023 and 2022, outstanding advances from the FHLB-B aggregated $ 101.0 million and $ 85.0 million, respectively. At December 31, 2023, FHLB-B advances of $ 101.0 million outstanding bore fixed rates of interest ranging from 2.40 % to 5.56 % with maturities ranging from 2 days to 0.8 years, and have a weighted average interest rate of 4.62 %. At December 31, 2023, collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of $ 263.4 million. Remaining borrowing capacity under this line totaled $ 71.4 million at December 31, 2023. In addition, Patriot has a $ 2.0 million revolving line of credit with the FHLB-B. 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 years ended December 31, 2023, 2022 and 2021 were $ 4.2 million, $ 3.5 million and $ 3.0 million, respectively. 81 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Correspondent Bank - Lines of Credit Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent Banks. As of December 31, 2023 and 2022, borrowings available under the agreements totaled $ 17.0 million and $ 24.5 million, respectively. The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, ACH, and other clearinghouse transactions. There was no outstanding balance under the agreements at December 31, 2023 and 2022. 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 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. Senior notes 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. On June 22, 2022, the Company amended and restated the Senior Notes. The maturity date of the Senior Notes were further extended to December 31, 2022, and the interest rate increases from (i) 7 % to 7.25 % from July 1, 2022 until September 30, 2022 and (ii) from 7.25 % to 7.50 % thereafter. The Senior Notes were repaid in December 2022. On December 21, 2022, the Company completed an issuance and sale of $ 12 million in aggregate principal amount of 8.50 % fixed rate Senior Notes due January 15, 2026 (“2022 Senior Notes”). In connection with the issuance of the Senior Notes, the Company incurred $ 360,000 of costs, which are being amortized over the term of the 2022 Senior Notes to recognize a constant rate of interest expense. As of December 31, 2023, unamortized debt issuance cost of $ 277,000 was deducted from the face amount of the Senior Notes included in the Consolidated Balance Sheet. The 2022 Senior Note Purchase Agreement contains certain customary representations, warranties, and covenants made by each of the Company and the Purchasers. The 2022 Senior Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2022 Senior Notes are not subject to redemption at the option of the holders. Principal and interest on the 2022 Senior Notes are subject to acceleration only in limited circumstances. The 2022 Senior Notes are an unsecured, unsubordinated obligation and ranks equally in right of payment to all of the Company’s existing and future unsecured indebtedness, liabilities and other obligations that are not subordinated in right of payment to the Senior Note, and will be effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. 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, 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. 82 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Subordinated notes On June 29, 2018, the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of $ 10 million of fixed-to-floating rate subordinated notes with the maturity date of September 30, 2028 (the “Subordinated Notes”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. The Subordinated Notes initially bear interest at 6.25 % per annum, from and including June 29, 2018, to but excluding, June 30, 2023, payable semi-annually in arrears. From and including June 30, 2023, until but excluding June 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR, 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. Interest on the Subordinated Notes is payable beginning on December 30, 2018. In connection with the issuance of the Subordinated Notes, the Company incurred $ 291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. At December 31, 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 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 In 2003, the Patriot National Statutory Trust I (“the Trust”), which has no independent assets and is wholly-owned by the Company, issued $ 8.0 million of trust preferred securities. The proceeds, net of a $ 240,000 placement fee, were invested in junior subordinated debentures issued by the Company, which invested the proceeds in the Bank. The Bank used the proceeds to fund its operations. Trust preferred securities currently qualify for up to 25 % of the Company’s Tier I Capital, with the excess qualifying as Tier 2 Capital. The junior subordinated debentures are unsecured obligations of the Company. The debentures are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. In addition to its obligations under the junior subordinated debentures and in conjunction with the Trust, the Company issued an unconditional guarantee of the trust preferred securities. The junior subordinated debentures bear interest at three-month LIBOR (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. In June of 2014, the Company brought the debt current by paying approximately $ 1.7 million of interest in arrears to the holders of the junior subordinated debentures. On bringing the debt current and, as permitted under the terms of the junior subordinated debentures, the Company again opted to defer payment of quarterly interest through September 2016, when a $ 0.7 million payment was made to bring the debt current. The placement fee of $ 240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. For the years ended December 31, 2023, 2022 and 2021, $ 9,000 , $ 9,000 and $ 9,000 of debt placement fee amortization has been included in interest expense recognized of $ 695,000 , $ 412,000 and $ 279,000 , respectively. As of December 31, 2023 and 2022, the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to $ 111,000 and $ 120,000 , respectively, and accrued interest on the junior subordinated debentures was $ 12,000 and $ 9,000 , respectively. At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities. 83 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note Payable In September 2015, the Bank purchased the property in which its Fairfield, Connecticut branch is located for approximately $ 2.0 million, a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a $ 2.0 million, nine-year , promissory note bearing interest at a fixed rate of 1.75 % per annum. As of December 31, 2023 and 2022, the note had a balance outstanding of $ 376,000 and $ 585,000 , respectively. The note matures in August 2024 and requires a balloon payment of approximately $ 234,000 . The note is secured by a first Mortgage Deed and Security Agreement on the purchased property. Interest expense incurred for the years ended December 31, 2023, 2022 and 2021 was $ 8,000 , $ 12,000 and $ 15,000 , respectively. Maturity of borrowings At December 31, 2023, the contractual maturities of the Company’s borrowings in future periods were as follows: (In thousands) Year ending December 31, FHLB and FRB Borrowings Senior Notes Subordinated Notes Junior Subordinated Debt Note Payable Total 2024 $ 171,000 $ — $ — $ — $ 376 $ 171,376 2025 — — — — — — 2026 — 12,000 — — — 12,000 2027 — — — — — — 2028 — — 10,000 — — 10,000 Thereafter — — — 8,248 — 8,248 Total contractual maturities of borrowings 171,000 12,000 10,000 8,248 376 201,624 Unamortized debt issuance costs — ( 277 ) ( 131 ) ( 111 ) — ( 519 ) Balance of borrowings as of December 31, 2023 $ 171,000 $ 11,723 $ 9,869 $ 8,137 $ 376 $ 201,105 84 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 11. Derivatives Derivatives Not Designated in Hedge Relationships Patriot is a party to interest rate swaps; derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. 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. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. 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 Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which was designated as a cash flow hedge that effectively converted variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cash flows associated with a pool of 1-month LIBOR floating rate loans by converting a $ 50 million portion of that pool of loans into fixed rates with the swap. The Bank received fixed and paid floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. In August 2021, the cash flow hedge interest rate swap contract was terminated. During the year ended December 31, 2021, the Company recognized $ 149,000 of accumulated other comprehensive income that was reclassified into interest income. The swap interest income 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 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. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 21 to the Consolidated Financial Statements. 85 Table of Contents 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): (In thousands) Notional Amount Maturity (Years) Fixed Rate Variable Rate Fair Value December 31, 2023 Classified in Other Assets: 3rd party interest rate swap 1,327 5.5 4.38 % 1 Mo. SOFR + 2.00 % 74 Classified in Other Liabilities: Customer interest rate swap 1,327 5.5 4.38 % 1 Mo. SOFR + 2.00 % ( 74 ) December 31, 2022 Classified in Other Assets: 3rd party interest rate swap $ 4,736 6.3 5.25 % 1 Mo. LIBOR + 1.96 % $ 106 3rd party interest rate swap 1,363 6.5 4.38 % 1 Mo. LIBOR + 2.00 % 97 Classified in Other Liabilities: Customer interest rate swap $ 4,736 6.3 5.25 % 1 Mo. LIBOR + 1.96 % $ ( 106 ) Customer interest rate swap 1,363 6.5 4.38 % 1 Mo. LIBOR + 2.00 % ( 97 ) For the year ended December 31, 2021, changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows: (In thousands) Year Ended December 31, 2021 Interest rate swap designated as cash flow hedge: Unrealized gain recognized in accumulated other comprehensive income before reclassifications $ 149 Amounts reclassified from accumulated other comprehensive income ( 149 ) Other comprehensive income $ — The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income. 86 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 12. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. 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. Most of the leases contain rent escalation provisions, as well as renewal options for one or more periods. The last potential year the leases can be extended through 2037. All of our leases are classified as operating leases, 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. The Company has no finance leases (previously referred to as a capital lease). ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of December 31, 2023 and 2022, the Company recognized ROU assets of $ 1.7 million and $ 2.2 million, respectively, and lease liabilities of $ 1.9 million and $ 2.4 million, respectively. ROU lease assets are included in other assets on the consolidated balance sheet. The lease liabilities are included in accrued expenses and other liabilities on the consolidated balance sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the standard. The Company elected to separate lease and non-lease components. The fixed lease costs are recognized as ROU lease assets and Lease liability. The variable lease cost primarily represents variable payments such as common area maintenance and utilities, which are included in the occupancy and equipment expenses on the consolidated statements of operations. For the year ended December 31, 2023, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 581,000 and $ 39,000 , respectively. For the year ended December 31, 2022, the fixed lease costs and variable lease costs for the non-cancelable operating leases were $ 582,000 and $ 39,000 , respectively. 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. The following is a maturity analysis of the operating lease liabilities as of December 31, 2023: (in thousands) Operating lease Obligation Years ending December 31, 2024 $ 457 2025 335 2026 299 2027 252 2028 151 Thereafter 679 Total undiscounted lease payments $ 2,173 Less imputed interest ( 308 ) Present value of operating lease liabilities $ 1,865 Operating lease right-of-use asset $ 1,744 87 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Year Ended December 31, 2023 2022 2021 Lease cost Operating lease cost $ 581 $ 582 $ 571 Short-term lease cost 12 12 12 Total lease cost $ 593 $ 594 $ 583 Other information Operating cash flows from operating leases $ 583 $ 582 $ 552 December 31, 2023 2022 Weighted -average remaining lease term - operating leases (in years) 8 8 Weighted -average discount rate - operating leases 3.48 % 3.35 % As of December 31, 2023 and 2022, the undiscounted lease payments were $ 2.2 million and $ 2.7 million, respectively. The lease payments were not reduced by minimum sublease rentals of $ 313,000 and $ 964,000 due in the future under non-cancelable subleases, respectively. Rent expense for operating leases is recognized in earnings on a straight-line basis over the base term of the respective lease and is included in the consolidated statement of operations as a component of Occupancy and Equipment expense. For the years ended December 31, 2023, 2022 and 2021, total rent expense for cancellable and non-cancellable operating leases was $ 593,000 , $ 594,000 , and $ 583,000 , respectively. 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. Note 13. Commitments and Contingencies Employment Agreements The Company has a severance agreement for two Executive Vice Presidents that provides for severance equal to 12 months of current salary, if the 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 Patriot does not have any pending legal proceedings, other than ordinary routine litigation, incidental to its business, to which Patriot is a party or any of its property is subject. Management is of the opinion that the ultimate disposition of these routine legal matters will not have a material adverse effect on the consolidated financial condition, results of operations, or liquidity of Patriot. 88 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 14. Income Taxes Following is a summary of the components of the federal and state income tax expense (benefit) for each of the years in the three-year period ended December 31, 2023. (In thousands) Year Ended December 31, 2023 2022 2021 Current: Federal $ 2,283 $ 44 $ — State 474 62 180 2,757 106 180 Deferred: Federal ( 3,347 ) 1,117 1,860 State ( 864 ) 373 ( 2,121 ) ( 4,211 ) 1,490 ( 261 ) 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: (In thousands) Year Ended December 31, 2023 2022 2021 Income taxes at statutory Federal rate $ ( 1,183 ) $ 1,629 $ 1,053 State taxes, net of Federal benefit ( 309 ) 343 404 Project expenses for merger and acquisition — ( 383 ) 383 Deferred tax valuation allowance — — ( 1,938 ) Reversal UTP on Federal DTA — — — Nondeductible expenses 13 ( 3 ) ( 10 ) Other 25 10 27 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. 89 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Deferred Tax Assets and Liabilities The significant components of Patriot’s net deferred tax assets at December 31, 2023 and 2022 are presented below. (In thousands) December 31, 2023 2022 Deferred tax assets: Federal NOL carryforward benefit $ 3,247 $ 3,321 NOL write-off for Sec 382 Limit ( 3,247 ) ( 3,258 ) Capitalized cost temporary item 10,237 3,023 State NOL carryforward benefit 2,803 3,128 Unrealized loss AFS securities 5,608 5,440 CECL transition 4,228 — Allowance for credit loss 799 2,793 Lease liabilities 501 634 Non-accrual interest 671 907 Merger and acquisition 154 171 Accrued expenses 82 80 Goodwill and intangible 369 104 Depreciation of premises and equipment 158 120 Other 12 25 Gross deferred tax assets 25,622 16,488 Total deferred tax assets $ 25,622 $ 16,488 Deferred tax liabilities: Expected credit loss for unfunded commitments ( 663 ) — Right-of-use assets ( 469 ) ( 597 ) Prepaid Expenses ( 343 ) ( 337 ) Other ( 13 ) ( 27 ) Gross deferred tax liabilities ( 1,488 ) ( 961 ) Net deferred tax asset $ 24,134 $ 15,527 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 $ 15.5 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. The NOLs will expire between 2030 and 2040. Valuation Allowance against net Deferred Tax Assets Patriot uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date. 90 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and prudent and feasible tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed. 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. 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. Unrecognized tax benefits Patriot recognizes a benefit from its tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2023 and 2022, the Bank did not record any uncertain tax position related to the utilization of certain federal net operating losses. 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. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. Patriot’s returns for tax years 2020 through 2023 are subject to examination by the IRS for U.S. Federal tax purposes and, for State tax purposes, by the Department of Revenue Services for the State of Connecticut and the State of New York Department of Taxation and Finance. 91 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 15. Share-based Compensation In 2011, the Company adopted the Patriot National Bancorp, Inc. 2012 Stock Plan (the “2012 Plan”). The 2012 Plan was amended in 2020 and renamed as the Patriot National Bancorp, Inc. 2020 Restricted Stock Award Plan (the “2020 Plan”). A copy of the 2020 Plan was filed as Exhibit 10.1 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on April 30, 2021. The 2020 Plan provides an incentive to directors and employees of the Company by the grant of restricted stock awards (“RSA”). On November 10, 2022, the Board of Directors approved the Amendment and Restatement of the 2020 Plan (the “Amended and Restated 2020 Plan”), which was approved and ratified by shareholders of the Company on December 14, 2022. The 2020 Plan was amended primarily to (i) reduce the total number of shares authorized for issuance thereunder from 3,000,000 shares to 400,000 shares; and (ii) limit the maximum number of shares of Company’s Common Stock granted during a single fiscal year to any non-employee director, together with any cash fees paid to such director, to be no more than a total value of $ 300,000 . As of December 31, 2023, 218,998 shares of stock are available for issuance under the Plan. In accordance with the terms of the Plan, the vesting of RSAs may be accelerated at the discretion of the Compensation Committee of the Board of Directors. The Compensation Committee sets the terms and conditions applicable to the vesting of RSAs. RSAs granted to directors and employees generally vest in quarterly or annual installments over a three , four or five year period from the date of grant. The following is a summary of the status of the Company’s restricted share awards as of and for each of the years in the three-year period ended December 31, 2023. Number of Shares Awarded Weighted Average Grant Date Fair Value Unvested at December 31, 2020 18,498 $ 7.29 Granted 20,476 $ 10.48 Vested ( 12,920 ) $ 12.95 Forfeited ( 4,586 ) $ 9.39 Unvested at December 31, 2021 21,468 $ 6.48 Granted 9,886 $ 11.94 Vested ( 8,694 ) $ 11.05 Unvested at December 31, 2022 22,660 $ 7.11 Granted 5,733 $ 8.76 Vested ( 10,887 ) $ 9.63 Unvested at December 31, 2023 17,506 $ 6.09 The Company recognizes compensation expense for all director and employee share-based compensation awards on a straight-line basis over the requisite service period, which is equal to the vesting schedule of each award, for each vesting portion of an award equal to its grant date fair value. For the years ended December 31, 2023, 2022 and 2021, the Company recognized share-based compensation expense of $ 105,000 , $ 86,000 , and $ 150,000 , respectively. For the years ended December 31, 2023, 2022 and 2021, share-based compensation attributable to employees of Patriot amounted to $ 56,000 , $ 32,000 , and $ 90,000 , respectively. The share-based compensation expense attributable to Patriot’s external Directors for the years ended December 31, 2023, 2022, and 2021 was $ 49,000 , $ 54,000 , and $ 60,000 , respectively. 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. 92 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 16 . Shareholders ’ Equity Earnings per Share The Company is required to present basic earnings per share and diluted earnings per share in its consolidated statements of operations. Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to the outstanding unvested RSAs granted to directors and employees. The dilutive effect resulting from these potential shares is determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted earnings per share. 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. (Net income in thousands) Year ended December 31, 2023 2022 2021 Basic (loss) earnings per share: Net (loss) income attributable to Common shareholders $ ( 4,179 ) $ 6,161 $ 5,094 Divided by: Weighted average shares outstanding 3,965,324 3,957,097 3,946,384 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 Effect of potentially dilutive restricted common shares — (1) 5,801 6,270 Divided by: Weighted average diluted shares outstanding 3,965,324 3,962,898 3,952,654 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. Dividends The Company did not pay any dividends for the year ended December 31, 2023, 2022, and 2021, and has suspended dividend payments. 93 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 17. 401(k) Savings Plan Patriot offers employees participation in the Patriot Bank, N.A. 401(k) Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue Code, along with the ROTH feature to the Plan. The 401(k) Plan covers substantially all employees who have completed one month of service, are 21 years of age and who elect to participate. Under the terms of the 401(k) Plan, participants can contribute up to the maximum amount allowed, subject to Federal limitations. At its discretion, Patriot may match eligible participating employee contributions at the rate of 50 % of the first 6 % of the participants’ salary contributed to the 401(k) Plan. Eligibility for matching contributions is dependent on an employee’s completing 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. Note 18. Financial Instruments with Off-Balance-Sheet Risk In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement Patriot has in particular classes of financial instruments. The contractual amounts of commitments to extend credit and standby letters of credit represent the maximum amount of potential accounting loss should: the contract be fully drawn upon; the customer default; and the value of any existing collateral becomes worthless. Patriot applies its credit policies to entering commitments and conditional obligations and, as with its lending activities, evaluates each customer's creditworthiness on a case-by-case basis. Management believes that it effectively mitigates the credit risk of these financial instruments through its credit approval processes, establishing credit limits, monitoring the on-going creditworthiness of recipients and grantees, and the receipt of collateral as deemed necessary. At December 31, 2023 and 2022 , financial instruments with credit risk are as follows: December 31, (In thousands) 2023 2022 Commitments to extend credit: Unused lines of credit $ 63,435 $ 100,986 Undisbursed construction loans 2,607 12,000 Home equity lines of credit 26,488 26,878 Future loan commitments — 14,365 Financial standby letters of credit — 78 $ 92,530 $ 154,307 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon extending credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include commercial property, residential property, deposits, and securities. The Bank has established 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. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded at fair value and included in the Consolidated Balance Sheet. 94 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 19. Regulatory and Operational Matters Federal and state regulatory authorities have adopted standards requiring financial institutions to maintain increased levels of capital. Effective January 1, 2015, federal banking agencies imposed four minimum capital requirements on a community bank’s risk-based capital ratios consisting of Total Capital, Tier 1 Capital, Common Equity Tier 1 (“CET1”) Capital, and a Tier 1 Leverage Capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its on- and off-balance sheet assets and activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure, liquidity, funding and market risks, quality and level of earnings, concentrations of credit, quality of loans and investments, nontraditional activity risk, policy effectiveness, and management's overall ability to monitor and control risk. In September 2019, the community bank leverage ratio (CBLR) framework was jointly issued by the FDIC, OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with their March 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the CBLR ratio to 8% which the agencies did with a transition back to 9% beginning January 1, 2022. Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system. A community bank which meets the leverage ratio requirement, and other CBLR framework requirements will not be subject to other capital and leverage requirements and will be considered “well capitalized.” 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. 95 Table of Contents 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. (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): Actual 73,282 6.76 % 94,238 8.70 % 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. Amount Ratio 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. 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. 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. 96 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 20. Related Party Transactions In the normal course of business, the Company grants loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10 % equity ownership. 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. Note 21. Fair Value and Interest Rate Risk Patriot measures the carrying value of certain financial assets and liabilities at fair value, as required by its policies as a financial institution and by US GAAP. The carrying values of certain assets and liabilities are measured at fair value on a recurring basis, such as available-for-sale securities; while other assets and liabilities are measured at fair value on a non-recurring basis due to external factors requiring management’s judgment to estimate potential losses of value resulting in asset impairments or the establishment of valuation reserves. Measuring assets and liabilities at fair value may result in fluctuations to carrying value that have a significant impact on the results of operations or other comprehensive income for the period and period over period. Following is a detailed summary of the guidance provided by US GAAP regarding the application of fair value measurements and Patriot’s application thereof. Additionally, the following information includes detailed summaries of the effects fair value measurements have on the carrying amounts of asset and liabilities presented in the consolidated financial statements. The objective of fair value measurement is to value an asset that may be sold or a liability that may be transferred at the estimated value which might be obtained in a transaction between unrelated parties under current market conditions. US GAAP establishes a framework for measuring assets and liabilities at fair value, as well as certain financial instruments classified in equity. The framework provides a fair value hierarchy, which prioritizes quoted prices in active markets for identical assets and liabilities and minimizes unobservable inputs, which are inputs for which market data are not available and that are developed by management using the best information available to develop assumptions about the value market participants might place on the asset to be sold or liability to be transferred. The three levels of the fair value hierarchy consist of: Level 1 Unadjusted quoted market prices for identical assets or liabilities in active markets that the entity has ability to access at the measurement date (such as active exchange-traded equity securities and certain U.S. and government agency debt securities). Level 2 Observable inputs other than quoted prices included in Level 1, such as: - Quoted prices for similar assets or liabilities in active markets (such as U.S. agency and government sponsored mortgage-backed securities) - Quoted prices for identical or similar assets or liabilities in less active markets (such as certain U.S. and government agency debt securities, and corporate and municipal debt securities that trade infrequently) - Other inputs that are observable for substantially the full term of the asset or liability (i.e. interest rates, yield curves, prepayment speeds, default rates, etc.). Level 3 Valuation techniques that require unobservable inputs that are supported by little or no market activity and are significant to the fair value measurement of the asset or liability (such as pricing and discounted cash flow models that typically reflect management’s estimates of the assumptions a market participant would use in pricing the asset or liability). 97 Table of Contents 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, 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. These financial instruments are not recorded at fair value on a recurring basis. Available-for-sale securities The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices, or using unobservable inputs employing various techniques and assumptions (Level 3). Other Investments The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund, which is utilized by the Bank to satisfy its Community Reinvestment Act (“CRA”) lending requirements. As this fund operates as a private fund, shares in the fund are not publicly traded but may be redeemed with 60 days’ notice at cost. For that reason, the carrying amount was considered comparable to fair value at both December 31, 2023 and 2022 due to its short-term nature. Federal Reserve Bank Stock and Federal Home Loan Bank Stock Shares in the FRB and FHLB are purchased and redeemed based upon their $ 100 par value. The stocks are non-marketable equity securities, and as such, are considered restricted securities that are carried at cost. Loans The fair value of loans are estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We estimate the fair value of our loan portfolio using an exit price notion. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment. Loans Held for Sale The fair value of loans held for sale is estimated by using a market approach that includes prices for loans sold awaiting settlement and other observable inputs. The Company has determined that the inputs used to value the loans held for sale fall within Level 2 of the fair value hierarchy. SBA Servicing Asset Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds. Due to the significant unobservable input related to the servicing rights, the SBA servicing asset is classified within Level 3 of the valuation hierarchy. Other Real Estate Owned The fair value of OREO the Bank may obtain is based on current appraised property value less estimated costs to sell. When fair value is based on unadjusted current appraised value, OREO is classified within Level 2 of the fair value hierarchy. Patriot classifies OREO within Level 3 of the fair value hierarchy when unobservable inputs are used to determine adjustments to appraised values. Patriot does not record OREO at fair value on a recurring basis, but rather initially records OREO at fair value on a non-recurring basis and then monitors property and market conditions that may indicate a change in value is warranted. 98 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Derivative asset (liability) - Interest Rate Swaps The Company’s derivative assets and liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of interest rate swap agreements does not contain any counterparty risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. See Notes 1 and 11 for additional disclosures on derivatives. Deposits The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. Patriot does not record deposits at fair value on a recurring basis. Senior Notes, Subordinated Notes, Junior Subordinated Debt and Note Payable Patriot does not record senior notes at fair value on a recurring basis. The fair value of the senior notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value. Patriot does not record subordinated notes at fair value on a recurring basis. The fair value of the subordinated notes was estimated by discounting future cash flows at rates at which similar notes would be made. The carrying value is considered comparable to fair value. Patriot does not record junior subordinated debt at fair value on a recurring basis. Junior subordinated debt reprices quarterly, as a result, the carrying amount is considered a reasonable estimate of fair value. The Company considers its own credit worthiness in determining the fair value of its senior Notes, subordinated notes, notes payable and junior subordinated debt. Federal Home Loan Bank 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 Off-balance-sheet financial instruments are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The off-balance-sheet financial instruments (i.e., commitments to extend credit) are insignificant and are not recorded on a recurring basis. 99 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements The following table provides a comparison of the carrying amounts and estimated fair values of Patriot’s financial assets and liabilities as of December 31, 2023 and 2022: (In thousands) December 31, 2023 December 31, 2022 Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial Assets: Cash and noninterest bearing balances due from banks Level 1 $ 2,195 $ 2,195 $ 5,182 $ 5,182 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 Available-for-sale securities Level 3 10,262 10,262 9,427 9,427 Other investments Level 2 4,450 4,450 4,450 4,450 Federal Reserve Bank stock Level 2 2,090 2,090 2,627 2,627 Federal Home Loan Bank stock Level 2 4,202 4,202 3,874 3,874 Loans receivable, net Level 3 832,934 812,856 838,006 818,960 Loans held for sale Level 2 20,767 21,557 5,211 5,534 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 Interest rate swap receivable Level 2 74 74 203 203 Financial assets, total $ 1,031,159 $ 1,011,946 $ 985,537 $ 966,941 Financial Liabilities: 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 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, 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 Subordinated debt Level 2 9,869 10,102 9,840 9,680 Junior subordinated debt owed to unconsolidated trust Level 2 8,137 8,137 8,128 8,128 Note payable Level 3 376 362 585 544 Accrued interest payable Level 2 1,235 1,235 585 585 Interest rate swap liability Level 2 74 74 203 203 Financial liabilities, total $ 1,042,725 $ 1,040,638 $ 976,427 $ 969,211 100 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements 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. In the normal course of its operations, Patriot assumes interest rate risk (i.e., the risk that general interest rate levels will fluctuate). As a result, the fair value of Patriot’s financial assets and liabilities are affected when interest market rates change, which change may be either favorable or unfavorable. Management attempts to mitigate interest rate risk by matching the maturities of its financial assets and liabilities. However, borrowers with fixed rate obligations are less likely to prepay their obligations in a rising interest rate environment and more likely to prepay their obligations in a falling interest rate environment. Conversely, depositors receiving fixed rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors market rates of interest and the maturities of its financial assets and financial liabilities, adjusting the terms of new loans and deposits in an attempt to minimize interest rate risk. Additionally, management mitigates its overall interest rate risk through its available funds investment strategy. The following tables detail the financial assets measured at fair value on a recurring basis and the valuation techniques utilized relative to the fair value hierarchy, as of December 31, 2023 and 2022. (In thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total December 31, 2023: U. S. Government agency and mortgage-backed securities $ — $ 65,671 $ — $ 65,671 Corporate bonds — 3,504 10,262 13,766 Subordinated notes — 4,227 — 4,227 SBA loan pools — 5,037 — 5,037 Municipal bonds — 486 — 486 Available-for-sale securities $ — $ 78,925 $ 10,262 $ 89,187 Interest rate swap receivable $ — $ 74 $ — $ 74 Interest rate swap liability $ — $ 74 $ — $ 74 December 31, 2022: U. S. Government agency and mortgage-backed securities $ — $ 59,046 $ — $ 59,046 Corporate bonds — 5,228 9,427 14,655 Subordinated notes — 4,602 — 4,602 SBA loan pools — 5,718 — 5,718 Municipal bonds — 499 — 499 Available-for-sale securities $ — $ 75,093 $ 9,427 $ 84,520 Interest rate swap receivable $ — $ 203 $ — $ 203 Interest rate swap liability $ — $ 203 $ — $ 203 Patriot measures certain financial assets and financial liabilities at fair value on a non-recurring basis. When circumstances dictate (e.g., impairment of long-lived assets, other than temporary impairment of collateral value), the carrying values of such financial assets and financial liabilities are adjusted to fair value or fair value less costs to sell, as may be appropriate. 101 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements 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. The discount rate assumed was determined based on unobservable inputs in a pricing model. During the years ended December 31, 2023, 2022 and 2021, the Company had no transfers into or out of Levels 1, 2 or 3. 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: Year Ended December 31, 2023 2022 2021 Level 3 fair value, beginning of year $ 9,427 $ 13,180 $ — Purchases — — 14,000 Realized gain (loss) — — — Unrealized gain (loss) 835 ( 3,753 ) ( 820 ) Transfers in and /or out of Level 3 — — — Level 3 fair value, end of year $ 10,262 $ 9,427 $ 13,180 The table below presents the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis as of December 31, 2023 and 2022: (In thousands) Fair Value Valuation Methodology Unobservable Inputs Range of Inputs December 31, 2023: 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 % December 31, 2022: Impaired loans, net $ 12,873 Real Estate Appraisals Discount for appraisal type 5.8 % - 20 % SBA servicing assets 1,013 Discounted Cash Flows Market discount rates 14.73 % - 14.90 % Patriot discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not necessarily represent the complete underlying value of financial instruments included in the consolidated financial statements. The estimated fair value amounts have been measured as of December 31, 2023 and 2022 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of the financial instruments measured may be different than if they had been subsequently valued. The information presented should not be interpreted as an estimate of the total fair value of Patriot’s assets and liabilities, since only a portion of Patriot’s assets and liabilities are required to be measured at fair value for financial reporting purposes. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Patriot’s fair value disclosures and those of other bank holding companies may not be meaningful. 102 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 22. Parent Company-only Financial Statements The following represent the condensed stand-alone financial statements of the Company, which is the sole owner and parent company of the Bank, its operating bank subsidiary. CONDENSED BALANCE SHEETS December 31, 2023 and 2022 (In thousands) As of December 31, 2023 2022 ASSETS Cash and due from banks $ 997 $ 11 Investment in subsidiary 73,757 89,533 Other assets 64 50 Total assets $ 74,818 $ 89,594 LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings $ 29,729 $ 29,608 Accrued expenses and other liabilities 706 403 Shareholders' equity 44,383 59,583 Total liabilities and shareholders' equity $ 74,818 $ 89,594 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 2023, 2022 and 2021 (In thousands) Year ended December 31, 2023 2022 2021 Expenses: Interest on subordinated debt $ 1,502 $ 1,078 $ 941 Interest on senior debt 1,159 866 913 Total interest expense 2,661 1,944 1,854 Other expenses 105 87 173 Loss before benefit for income taxes 2,766 2,031 2,027 Benefit for income taxes ( 737 ) ( 550 ) ( 540 ) Loss before equity in undistributed net income of subsidiary 2,029 1,481 1,487 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 ) $ 3,975 103 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2023, 2022 and 2021 (In thousands) Year ended December 31, 2023 2022 2021 Cash Flows from 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 ) Dividends received from Patriot Bank, N.A. 2,500 900 500 Share-based compensation expense 105 86 150 Amortization of debt issuance costs 177 38 111 Change in assets and liabilities: (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 in investment in Patriot Bank N.A. — — ( 1 ) Net cash used in investing activities — — ( 1 ) Cash Flows from Financing Activities: Proceeds from issuance of senior notes — 12,000 — — Repayments of senior notes — ( 12,000 ) — — Net cash used in financing activities — — — Net increase (decrease) in cash and cash equivalents 986 ( 366 ) ( 171 ) Cash and cash equivalents at beginning of year $ 11 $ 377 $ 548 Cash and cash equivalents at end of year $ 997 $ 11 $ 377 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 2,034 $ 1,897 $ 1,570 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 $ — $ — 104 Table of Contents PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARIES Notes to consolidated financial statements Note 23. Subsequent Event 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. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.